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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(MARK ONE)
[x] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2004
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 Identification No.)
Incorporation or Organization)
One Parker Plaza
Fort Lee, New Jersey 07024
(Address of Principal Executive Offices) (Zip code)
201 944-2200
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on which
Title of each class registered
Common Stock, par value $0.01 per share American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) Yes [_] No [X]
The aggregate market value of the voting and non-voting common stock of the
registrant held by non-affiliates as of June 30, 2004 (the last business day of
the registrant's most recently completed second fiscal quarter) was $15.5
million. Based upon the closing price of the registrant's common stock on the
American Stock Exchange as of such date. This calculation excludes shares held
by each officer and director of the registrant and any person that owns 5% or
more of the registrant's outstanding common stock. This determination of
affiliate status is not necessarily a conclusive determination for all other
purposes.
The number of shares of common stock outstanding as of March 28, 2005, was
9,599,251 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain information required in response to Items 10, 11, 12, 13 and 14 of Part
III of this Form 10-K are incorporated by reference from the registrant's
Definitive Proxy Statement for the 2005 Annual Meeting of Shareholders to be
filed with the Commission prior to April 29, 2005 pursuant to Regulation 14A of
the General Rules and Regulations of the Commission.
EMPIRE RESOURCES, INC.
FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
INDEX
10-K Part and Item No. Page
- ---------------------- ----
Part I
Item 1 Business 4
Item 2 Properties 9
Item 3 Legal Proceedings 9
Item 4 Submission of Matters to a Vote of Security Holders 9
Part II
Item 5 Market for Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 10
Item 6 Selected Financial Data 12
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operation 13
Item 7A Quantitative and Qualitative Disclosures
About Market Risk 20
Item 8 Financial Statements and Supplementary Data 21
Item 9 Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure 21
Item 9A Controls and Procedures 21
Item 9B Other Information 21
Part III
Item 10. Directors and Executive Officers of the Registrant 22
Item 11. Executive Compensation 22
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters 22
Item 13. Certain Relationships and Related Transactions 22
Item 14. Principal Accountant Fees and Services 22
Part IV
Item 15. Exhibits and Financial Statement Schedules 23
Signatures 26
2
PART I
When used in this report, the terms "Company," "we," "our," and "us" refers
to Empire Resources, Inc. and its' subsidiaries, consolidated for purposes of
the Company's financial statements.
Important Information Regarding Forward Looking Statements
Certain matters discussed under the captions "Business", "Management's
Discussion and Analysis of Financial Condition and Results of Operations",
"Quantitative and Qualitative Disclosures About Market Risk" and elsewhere in
this Annual Report on Form 10-K and the information incorporated by reference in
this report may constitute forward-looking statements for purposes of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended.
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; an act of war or
terrorism, or a natural catastrophe that disrupts international shipping;
changes in laws, regulations and tariffs; changes in the size and nature of the
Company's competition; the imposition of anti-dumping duties on the products
imported by the Company; changes in interest rates, foreign currencies or spot
prices of aluminum; loss of one or more of the Company's principal 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 "Certain Factors Affecting Future Operating
Results," beginning on page [14]. Readers should carefully review the factors
described under "Certain Factors Affecting Future Operating Results" 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 undertake no obligation to update any
forward-looking statement to reflect changes in underlying assumptions or
factors, new information, future events or other changes.
3
ITEM 1. BUSINESS
Background
The Company was incorporated in the State of Delaware in 1990 under the
name Integrated Technology USA, Inc. Until September 17, 1999, the Company was
in the business of designing, developing and marketing products for emerging
computer related markets.
On September 17, 1999, the Company merged with Empire Resources, Inc.
("Empire"), a distributor of value added, semi-finished aluminum products. Since
the merger, the Company has continued the aluminum business of Empire under the
name of Empire Resources, Inc.
In conjunction with the merger, Empire Resources Pacific Ltd.
("Empire-Pacific"), then an affiliate of Empire operating in Australia, became a
wholly owned subsidiary of the Company. Empire-Pacific acts as the Company's
sales agent in Australia and New Zealand.
The Company is engaged in the purchase, sale and distribution of
principally nonferrous metals to a diverse customer base located throughout the
United States and Canada, Australia and New Zealand. The Company sells its
products through its own marketing and sales personnel and its independent sales
agents located in North America who receive commissions on sales. The Company
purchases its products from suppliers located throughout the world; however, one
supplier, Hulett Aluminium Ltd., furnished approximately 54% of the Company's
products in 2004. The Company does not typically purchase inventory for stock;
rather, it places orders with its suppliers based upon orders that it has
received from its customers.
In the fall of 2004, the Company entered into an agreement to purchase a
used aluminum extrusion press. The Company intends to modernize and install the
press in a new warehouse/distribution facility that the Company purchased in
Baltimore, Maryland. The Company expects to begin manufacturing extrusions in
the new facility in late 2005. The Company expects that its current customers
are potential customers for its extrusions production.
Strategy
The Company's strategy for growth involves the following key elements:
Provide Customers with a High Level of Service and Cost Effective, Quality
Products. The Company places great emphasis on providing customers with a high
level of service. In particular, the Company works closely with its customers to
understand their specific requirements. This enables the Company to provide each
customer with cost-effective, quality materials matching the customer's
particular needs. The Company also provides various ancillary services to its
customers, including (1) arranging for products to be stored in warehouse
facilities for release to the customer on a just-in-time delivery basis, (2)
providing customers with timely information concerning market trends and product
development, and (3) upon request by customers, arranging for subsequent metal
processing or finishing services.
Expand Volumes and Product Breadth with Existing Suppliers and Customers.
The Company strives to lever its existing long-standing relationships with
suppliers and customers through increased volume with existing product lines and
by adding new product lines that are within the suppliers' range of production
and/or within the customers ranges of usage that are
4
saleable in the Company's marketing area. The Company believes that by pursuing
this strategy it will increase its volume with its existing suppliers while at
the same time establishing new markets resulting in increased volume and market
presence.
Expand Sources of Supply and Serve as Effective Marketing Channel for
Suppliers. The Company seeks to increase its supply sources by expanding its
relationships with existing suppliers and by seeking new suppliers. The Company
strives to build its supply relationships by serving as an effective marketing
channel for its suppliers. The Company believes if it is able to increase its
supply sources it will be in a position to offer its customers greater
quantities and a wider range of products.
Acquire Capability to Provide Additional Value Added Services. On November
4, 2004 the Company entered into an agreement to purchase a used aluminum
extrusion press. The press will be modernized and installed in a new
warehouse/distribution facility in Baltimore, Maryland that the Company
purchased in late 2004. It is anticipated that the press will become operational
during the third quarter of 2005. The Company may also seek to acquire the
capability to provide its customers with additional value-added services (such
as various processing, manufacturing, finishing, and or distribution services).
The Company may accomplish this through establishing joint venture arrangements
with existing service providers or by selectively making acquisitions.
Provide Increasingly Efficient and Cost-Competitive Handling and Delivery
Services. The Company's warehouse and distribution facility in Baltimore serves
the dual purpose of: (1) providing depot/warehousing capacity for just-in-time
delivery and (2) providing handling capability and inventory control at the
Baltimore port of entry, the Company's most active import location. This
arrangement reduces freight and handling expenses while concurrently increasing
efficiency, and enables the Company to monitor deliveries and serve customers
more effectively. At the end of 2004, the Company purchased a distribution and
warehouse facility at 6900 Quad Avenue, Baltimore, Maryland. This building is
being upgraded and is expected to be available for occupancy in the third
quarter of 2005, prior to the expiration of the Company's lease for its current
warehouse in Baltimore.
The Industry
Semi-finished aluminum products are produced by processing primary aluminum
and or aluminum scrap. A product is considered "semi-finished" if it has not yet
been converted into a final end-product. Semi-finished aluminum products include
aluminum sheet, plate and foil, rod, bar and wire, extruded and cast products,
and aluminum powder and paste. The Company offers most of these forms of
semi-finished aluminum products to its customers.
Although demand for aluminum products in the United States has been
cyclical, over the longer-term demand has continued to increase. The Company
believes that this growth reflects (1) general population and economic growth
and (2) the advantages of aluminum products, including light weight, high degree
of formability, resistance to corrosion and recyclability. According to CRU
Monitor, an industry publication, shipments in North America for mill aluminum
products during 2004 increased approximately 7% from shipments in 2003.
5
Products
During the last three fiscal years, the Company has derived substantially
all of its revenues from the sale of semi-finished aluminum products. Demand for
the Company's product is not seasonal.
Sales, Marketing and Services
The Company endeavors to build its distribution within the aluminum
industry by providing customers with quality products, access to alternative
sources of supply, and comprehensive customer service. The Company offers
customers a full range of services including:
o sourcing aluminum products from the appropriate supplier in order to
meet pricing and delivery requirements;
o handling foreign exchange transactions for sales in local currency;
o assuming responsibility for the shipment and timely delivery of the
product to the customer;
o assisting customers in identifying materials and matching their
particular needs;
o where necessary, arranging for subsequent metal processing and/or
finishing services which may be required by the customer;
o arranging for materials that have been ordered by a customer (and are
subject to a firm purchase commitment) be stored at an appropriate
warehouse for release to the customers on a just-in-time delivery
basis, and
o providing customers with information concerning market trends and
product development.
The Company carefully monitors the timing and processing of orders to meet
customers' needs and commits to deliver orders within a time-period mutually
agreed with the customer, generally within a 30-day window. The Company
maintains constant and ongoing communication with its suppliers in order to
ensure that these delivery dates are met and that customers are apprised of the
delivery status of their orders.
The Company primarily sells its products through its own marketing and
sales personnel. In addition, the Company sells its products through independent
sales agents located in North America who receive a commission on sales. The
Company's inventory generally represents material that has been ordered by
customers and is in transit or is being held pending delivery to such customers.
Backlog
As of December 31, 2004, the Company had a backlog of firm orders
aggregating approximately $80 million (as compared to $53 million as of December
31, 2003), which represents orders received from customers and placed into
production with the Company's suppliers. The Company expects to fill and invoice
substantially all of the orders backlogged as of December 31, 2004 by June 30,
2005.
6
Suppliers
The Company enjoys exclusive representation arrangements with several
foreign mills; however, one supplier, Hulett Aluminium Ltd, furnished
approximately 54% of the Company's product in 2004. See Item 7 beginning on page
12 for information about the Company's relationship with Hulett. The Company
provides important services to its suppliers in various ways, including:
o serving as an integrated marketing, distribution, and service channel
for export volume;
o purchasing manufacturing capacity from suppliers in bulk;
o assuming responsibility for transporting the products that it
purchases;
o eliminating foreign currency risks for suppliers; and
o ensuring prompt payment to suppliers for materials purchased.
The Company strives to maintain long-term relationships with its suppliers
and to be a significant distributor for them. By being a significant distributor
for its suppliers, the Company is able to obtain competitive pricing and to
influence quality standards and delivery practices.
During 2004, the Company continued to work with existing suppliers and
continued to explore other sources to underpin its position in the market.
Customers
The Company serves approximately 200 customers in diverse industries,
including transportation, automobile, housing, appliances and packaging. In
2004, the top ten customers of the Company represented approximately 47% of its
sales, with one customer, Ryerson Tull, accounting for 17% of total revenues.
These customers included six full-service distribution centers (i.e.,
distributors that have the capacity to provide additional processing services),
as well as producers of various consumer and industrial products.
The Company's customers are located throughout the United States and Canada
and, to a lesser extent, Australia and New Zealand. The Company's U.S. customer
base is not regional.
The following table summarizes the Company's revenues for the past three
years by geographic region.
- --------------------------------------------------
Net Revenues (In thousands)
- --------------------------------------------------
2004 2003 2002
- --------------------------------------------------
United States 175,836 148,108 127,327
- --------------------------------------------------
Canada & Pacific Rim 36,714 36,308 31,411
- --------------------------------------------------
- --------------------------------------------------
Total 212,550 184,416 158,738
- --------------------------------------------------
The Company insures its accounts receivable against credit risk by
purchasing credit insurance. This insurance is generally subject to a 10%
co-insurance provision with respect to each claim and there are limits on the
amount of credit that the Company's insurance carrier will
7
underwrite with respect to each customer. The Company may decide based on its
own judgments to exceed the limits granted by the credit insurance provider.
Transportation
The Company arranges for transportation and delivery of the products
purchased by each customer. When the Company purchases products from an overseas
supplier, it accepts delivery either at the port in the supplier's home country
or at the port of destination. If the Company takes delivery at a foreign port,
it will generally arrange for transportation to the port of destination on
regularly scheduled port-to-port sea-going transportation. Upon delivery of the
products at the destination port, the Company uses trucking and rail services to
deliver the products to its customers.
Competition
The Company's principal competitors are North American aluminum producers,
including Alcoa Inc. and Alcan Aluminum Limited, which dominate the aluminum
industry in North America. These companies are significantly larger, have
significantly greater financial resources than the Company, and are active in
significantly more areas of the aluminum products business than the Company,
including mining, refining, smelting and recycling. The Company also competes
with other importers and agents that act for foreign aluminum producers. The
Company's principal means of competition is customer service, including
providing value-added services to its customers and providing a range of product
offerings. The Company believes that agents of foreign mills are generally less
capable of providing the same value-added services to North American customers
because these agents are generally captive to a single foreign source and often
lack the flexibility and range of product offerings that the Company offers its
customers.
Employees
As of December 31, 2004, the Company had approximately 30 employees, all of
whom were full-time employees. The Company also has independent sales
representatives located in the United States. None of these employees are
represented under a collective bargaining agreement.
Empire-Pacific, a wholly-owned subsidiary of the Company, has eight
employees in Australia.
Available Information
We maintain a website at www.empireresources.com. We make copies of our
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K and any amendments to those reports filed with or furnished to the
Securities and Exchange Commission ("SEC") available to investors on or through
our website free of charge as soon as reasonably practicable after we have
electronically filed them with or furnished them to the SEC. Our code of
business conduct and ethics is available on our website. The contents of our
website do not constitute a portion of this report.
8
The public may read and copy any materials filed by us with the SEC at the
SEC's Public Reference Room, located at 450 Fifth Street, NW, Washington, DC
20549. The public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC
maintains a website at which reports, proxy and information statements and other
information regarding issuers that file electronically with the SEC are a
available. This website may be accessed at http://www.sec.gov.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company's corporate headquarters are located in Fort Lee, New Jersey,
where the Company leases office space pursuant to a lease expiring in March
2015. The lease provides for a minimum annual rental payment of $274,000.
The Company leases a warehouse and distribution facility in Baltimore,
Maryland pursuant to a lease expiring in October 2005.
At the end of 2004, the Company purchased a distribution and warehouse
facility at 6900 Quad Avenue, Baltimore, Maryland. This building is being
upgraded and is expected to be available for occupancy in the third quarter of
2005, prior to the expiration of the Company's lease for its current warehouse
in Baltimore, Maryland.
Management believes that the Company's facilities are adequate to meet its
current and proposed needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is party from time to time to certain legal proceedings and
claims that arise in the ordinary course of business. The Company does not
believe that any of these actions will have a material adverse effect on its
results of operation or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to shareholders during the fourth quarter for
their approval.
9
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market for Common Stock
The Company's common stock is listed and trades on the American Stock
Exchange ("AMEX") under the symbol ERS.
The table below sets forth the high and low sales per share prices for our
common stock as reported by AMEX for the periods indicated and sets forth the
Company's dividend payments for the periods indicated.
- ------------------------------------------------------------------------
Common Stock Common Stock
- ------------------------------------------------------------------------
2004 2003
- ------------------------------------------------------------------------
Cash Cash
Period High Low Dividend High Low Dividend
- ------------------------------------------------------------------------
1st Quarter... $4.550 $3.000 $0.04 $1.590 $1.050
- ------------------------------------------------------------------------
2nd Quarter... $5.000 $3.380 $0.04 $2.230 $1.090 $0.04
- ------------------------------------------------------------------------
3rd Quarter... $3.930 $3.020 $0.04 $3.240 $2.000 $0.04
- ------------------------------------------------------------------------
4th Quarter... $4.930 $3.250 $0.10 $4.230 $2.470 $0.08
- ------------------------------------------------------------------------
On March 28, 2005, the closing price of our common stock on the American
Stock Exchange was $4.65 and there were 38 holders of record of our common
stock, and approximately 1,000 beneficial holders of our common stock.
The Company did not sell any unregistered equity securities in 2004.
Dividends
During 2004, the Board of Directors of the Company declared quarterly
dividends on its common stock. The Company determined that it was able to return
some of its cash to stockholders without impacting future revenue and earnings
growth or restricting strategic opportunities. The Board of Directors declared a
regular cash dividend of $0.04 per share on March 23rd, June 15th and September
10th. On December 9, 2004, the Board of Directors of the Company declared a
regular cash dividend of $0.04 per share and a special dividend of $.06 per
share. The Board of Directors intends to review its dividend policy on a
quarterly basis and make a determination with respect to a dividend
distribution, subject to profitability, free cash flow and the other
requirements of the business. There can be no assurance that dividends will be
paid in the future.
Share Repurchase
In November 1999, the Board of Directors authorized the Company to
repurchase up to 1.0 million shares of its common stock. In December 2000, the
Board of Directors authorized an increase in the share repurchase program from 1
million shares to 1.5 million shares. On June 18, 2002, the Board of Directors
authorized an additional increase in the share repurchase program of 1.0 million
shares. This brought the total authorized number of shares available under the
repurchase program to 2.5 million. As of December 31, 2004, the Company had
10
repurchased a total of 2,267,400 shares for an aggregate cost of $2,731,049. The
Company also had acquired 50,000 shares for a cost of $50,000 in connection with
the reverse merger in September 1999.
The Company did not complete any repurchases of equity securities in the
fourth quarter of fiscal 2004.
Equity Compensation Plan Information
The following table provides information as of December 31, 2004 regarding
our only compensation plan, the Company's 1996 Stock Option Plan (the "1996
Plan"), under which our common stock is authorized for issuance.
----------------------------------------------------------------------------
Equity Compensation Plan Information
----------------------------------------------------------------------------
Number of securities
remaining available for
future issuance under
Number of securities to be Weighted Average equity compensation plans
issued upon exercise of exercise price of (excluding securities
Plan category outstanding options outstanding options reflected in column (a))
- ---------------------------------- -------------------------- ------------------- -------------------------
(a) (b) (c)
Equity compensation plans approved 403,000 1.64 658,933
by security holders
Equity compensation plans not
approved by security holders -- -- --
Total 403,000 1.64 658,933
11
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth for the periods indicated selected
consolidated financial and operating data for the Company. The consolidated
balance sheet data and consolidated statement of operations data as of and for
the years ended December 31, 2004, 2003, 2002, 2001, and 2000 have been derived
from our Consolidated Financial Statements. The following selected consolidated
financial and operating data are qualified by and should be read in conjunction
with our more detailed Consolidated Financial Statements and notes thereto and
the discussion under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included in Part II, Items 7 and 8 of this
Form 10-K.
- ------------------------------------------------------------------------------
Years Ended December 31,
- ------------------------------------------------------------------------------
In thousands, except per share information
- ------------------------------------------------------------------------------
2004 2003 2002 2001 2000
- ------------------------------------------------------------------------------
Operating Results:
- ------------------------------------------------------------------------------
Net Sales $212,550 $184,416 $158,738 $143,235 $165,328
- ------------------------------------------------------------------------------
Operating Income $ 8,827 $ 6,775 $ 4,992 $ 4,083 $ 5,041
- ------------------------------------------------------------------------------
Net Income $ 4,810 $ 3,544 $ 2,370 $ 1,296 $ 1,041
- ------------------------------------------------------------------------------
Share Data:
- ------------------------------------------------------------------------------
Weighted average shares
outstanding
- ------------------------------------------------------------------------------
Basic 9,574 9,466 10,049 10,956 11,346
- ------------------------------------------------------------------------------
Diluted 9,913 9,702 10,189 11,091 11,445
- ------------------------------------------------------------------------------
Earnings Per Share:
- ------------------------------------------------------------------------------
Basic $ .50 $ .37 $ .24 $ .12 $ .09
- ------------------------------------------------------------------------------
Diluted $ .49 $ .37 $ .23 $ .12 $ .09
- ------------------------------------------------------------------------------
- ----------------------------------------------------------------------
Balance Sheet Data: As of December 31,
- ----------------------------------------------------------------------
2004 2003 2002 2001 2000
- ----------------------------------------------------------------------
Total Assets $93,915 $74,504 $54,469 $52,762 $69,110
- ----------------------------------------------------------------------
Working Capital $17,459 $14,962 $12,871 $11,823 $10,946
- ----------------------------------------------------------------------
Stockholders' Equity $17,948 $15,119 $12,922 $11,944 $11,101
- ----------------------------------------------------------------------
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Introduction
The following discusses Empire Resources, Inc.'s results of operations and
liquidity and capital resources. The discussion should be read in conjunction
with the consolidated financial statements and related notes. Certain statements
in this report under this caption and elsewhere relate to future events and
expectations and, as such, constitute forward-looking statements.
Forward-looking statements also include those containing such words as
"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. Such forward-looking
statements involve known and unknown risks, uncertainties, and other factors
that may cause actual results, performance, or achievements of the Company to be
different from those expressed or implied in the forward-looking statements. For
additional information on forward-looking statements, see Part I of this Form
10-K.
Our Business
The Company is a distributor of value added, semi-finished aluminum product
and is engaged in the purchase and sale of principally nonferrous metals to a
diverse customer base located throughout the United States and in Canada,
Australia and New Zealand. The Company was founded in 1990 and focused on
designing, developing and marketing products for emerging computer related
markets. In 1999, the Company merged with a distributor of value added,
semi-finished aluminum products and continued in the aluminum business.
For 2005, the Company intends to modernize and install a used aluminum
extrusion press in a new warehouse/distribution facility that the Company
purchased in Baltimore, Maryland. The Company expects to begin manufacturing
extrusions in the new facility in late 2005. The Company expects that its
current customers are potential customers for its extrusions production.
Critical Accounting Policies and Estimates
The following discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. Certain accounting policies have a
significant impact on amounts reported in the financial statements. A summary of
those significant accounting policies can be found in Note B to the Company's
financial statements. The Company has not adopted any significant new accounting
policies during the period ended December 31, 2004.
Among the significant judgments made by management in the preparation of
the Company's financial statements are the determination of the allowance for
doubtful accounts and accruals for inventory claims.
13
Allowance for Doubtful Accounts
As of December 31, 2004, the Company had $30,558,000 in trade receivables.
Additionally, the Company had recorded an allowance for doubtful accounts of
$191,000. The Company reports accounts receivable, net of an allowance for
doubtful accounts, to represent its estimate of the amount that ultimately will
be realized in cash. The Company reviews the adequacy of its allowance for
doubtful accounts on an ongoing basis, using historical collection trends, aging
of receivables, as well as review of specific accounts, and makes adjustments in
the allowance as it believes necessary. The Company maintains a credit insurance
policy on the majority of its customers. In general, this policy has a 10%
co-insurance. Changes in economic conditions could have an impact on the
collection of existing receivable balances or future allowance considerations.
In addition, changes in the credit insurance environment could affect the
availability of credit insurance and the Company's ability to secure same.
Accruals for Inventory Claims
Generally, the Company's exposure on claims for defective material is small
as the company refers all claims on defects back to the Mill supplying the
material. In the event that the Company does not believe the Mill will honor a
claim, the Company will record an allowance for inventory adjustments.
Results of Operations
Comparison of Fiscal Years Ended December 31, 2004 and 2003 (in thousands)
The Company's success during 2004 was in part due to continued customer
satisfaction, supplier and customer loyalty and the ability to manage the
competitive economic environment through the expansion and upgrading of its
service to its suppliers and customers. This includes the ability to ship
material on a just in time basis from both private and public warehouses, and
the use of proprietary on-line service modules for customers to track their
shipments. This bolstered the Company's commitment to service and customer
satisfaction. The Company has also used its excellent customer relationships to
leverage sales per employee by developing long term relationships with its
customer and understanding their needs. In addition, due in part to its
long-term customers, the Company has been able to build sales volume without a
similar increase in selling, general and administrative expenses that would
otherwise accompany customer turn-over. The stable customer and supplier base
has also enabled the Company to increase its purchases from its suppliers and to
sell the majority of these quantities to its existing customer base. While this
does expose the Company to concentration risks, it has provided the foundation
of the Company's growth and performance. The Company' success in 2004 was also
due to higher aluminum pricing, and to an increase of approximately 10% in
volumes shipped to its customers.
During 2004, the Company's net sales increased by $28,134 to $212,550, or
15% above net sales in 2003. The increase in net sales was primarily due to
increases in the prices of products and the steady availability of supply
shipments from the Company's existing supplier base. The Company's top ten
customers represented 45% of the sales in 2004, compared to 36% in 2003.
14
The Company'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 supplier accounted for approximately 54% of the Company's purchases
for the year ended December 31, 2004, and the three largest suppliers accounted
for 79% of 2004 purchases. As a result, the termination or limitation by one or
more of the Company's largest suppliers of their relationship with the Company
could have a material adverse effect on the Company's business and results of
operations.
The Company's inventory increased by $16,921 to $58,969 during 2004 as
compared to inventories of $42,048 in 2003. This increase in inventory supported
the Company's increased sales by allowing the Company to be increasingly
sensitive to timely shipments to its customers. In addition, due to having
inventory on hand, the Company was able to extend its customer service efforts
by allowing additional time to stage material in its private or public
warehouses to achieve timely customer deliveries. Some of the Company's
customers do not accept deliveries in the last two weeks of the fiscal year
which also increased the inventory levels at year end.
The Company's net income grew during this same period by 36%. Net income
for 2004 was $4,810 compared with net income for 2003 of $3,544. The Company
through long term planning and customer relationships, and use of technology did
not have to increase selling, general and administrative expenses by the same
percentage as its sales increased to serve its customers. In 2004, the Company's
selling, general and administrative expenses increased by $1,038 to $7,457, or
16% above selling, general and administrative expenses in 2003. The Company's
strategy of maintaining long-term relationships with its customers, while
allowing for sales growth, also exposes the Company to concentration risks.
In 2004, the Company's interest expense increased by $127 to $1,140, or
less than 1% above interest expense in 2003. As a result of historically low
interest rates, the Company has been able to minimize its interest expense and
as a result its net income has increased. In the current changing interest rate
environment, the Company's profitability could be adversely affected if the
interest rates increase.
Comparison of Fiscal Years Ended December 31, 2003 and 2002 (in thousands)
Net sales increased $26,000 or 16% during 2003, due to expanded shipments
from the Company's existing supplier base. The Company's ability to increase its
supply was the main factor for its success in 2003. The ability to obtain
additional product from its suppliers was the main factor for its growth in 2003
and is the primary reason for the increase in sales. The Company successfully
placed increased volumes primarily within its existing customer base. The
Company's top ten customers represented 36% of sales in 2003 as compared to 35%
in 2002. Prices of aluminum for most of 2003 were essentially flat.
The Company's net income grew during this same period by 50%. The Company
through long term planning and use of technology did not have to increase
selling, general and administrative expenses by the same percentage as its sales
increased to serve its customers. This strategy, while allowing for growth, also
exposes the Company to customer concentration risks.
15
The Company benefited from the low interest rate environment. Should the
interest rate environment change, the results of the Company could be adversely
affected.
The Company's inventory increased by $14,216 for the year ended December
2003. The Company's increase in inventory supported its increased sales. In
addition, as the Company's customers became increasingly sensitive to timely
shipments the Company extended its efforts by allowing additional time to stage
material in its private or public warehouses to achieve timely customer
deliveries. This effort increased inventories to ensure customer satisfaction.
Liquidity and Capital Resources (in thousands)
The Company's cash balance decreased by $1,190 in the year ended December
31, 2004. Net cash of $(4,992) was used in operating activities, while $6,617 of
net cash was provided by financing activities. Increase in inventories at year
end was the most significant contributor to the increased use of cash. The
increase in inventories supports the Company's increased volume of shipments.
The $6,617 of net cash provided by financing activities was primarily the
result of borrowings under the Company's line of credit.
The Company currently operates under a revolving line of credit, including
a commitment to issue letters of credit, with four commercial banks. The maximum
availability of this facility is $75,000. Borrowings under these lines of credit
are collateralized by security interests in substantially all of the Company's
assets. Under these credit agreements, the Company is required to maintain
working capital and net worth ratios. These facilities expire on June 30, 2006.
As of December 31, 2004, the amount outstanding under the Company's revolving
lines of credit was $57,300 (including letters of credit of approximately
$17,000). 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. The Company may
require additional debt or equity financing in connection with the future
expansion of its operations.
The table below provides a summary of our commitments and contractual
obligations arrangements as of December 31, 2004:
Commitments and Contingencies (in thousands)
- ------------------------------------------------------------------------------------------
Total Less than 1 Year 1-3 Years 4-5 Years More than 5 Years
- ------------------------------------------------------------------------------------------
Bank Debt $42,800 $40,394 $349 $272 $1,785
- ------------------------------------------------------------------------------------------
Operating Leases 2,030 449 $823 $549 209
- ------------------------------------------------------------------------------------------
Letters of Credit 17,042 17,042 -- -- --
- ------------------------------------------------------------------------------------------
Total $61,872 $57,885 $823 $549 $2,615
- ------------------------------------------------------------------------------------------
The Company has contingent liabilities in the form of letters of credit to
some of its suppliers.
16
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
The Company is Highly Dependent on a Few Suppliers.
The Company purchased approximately 54% of its products from one supplier
in 2004 and approximately 79% from its three largest suppliers. As a result, the
termination or limitation by one or more of the Company's largest suppliers of
their relationship with the Company could have a material adverse effect on the
Company's business and results of operations. In addition, the Company's loss of
any one of its other suppliers (or material default by any such supplier in its
obligations to the Company) due to bankruptcy, financial difficulties,
expropriation, social unrest, destruction, sabotage, strikes, acquisition by a
person or entity unwilling to provide products to the Company, or for any other
reason, could have a material adverse effect on the Company's business.
Consolidation of Suppliers may Materially Affect the Company's Operations.
During the last several years, consolidations have been taking place among
aluminum suppliers. Although the Company has in the past successfully replaced
any suppliers lost as a result of industry consolidations, there can be no
assurance that the Company would be able to replace the volume of production or
the type of products supplied by any of its current vendors, if they were
acquired or their operations terminated or were interrupted.
The Company is Highly Dependent on a Few Significant Customers.
The Company's sales are highly concentrated to a few customers. In 2004,
47% of the Company's revenues were derived from sales to ten customers. One
major customer accounted for approximately 17% of the Company's consolidated net
sales for the year ended December 31, 2004. Two large customers, RyersonTull and
Integris Metals merged during 2004. Further consolidation may increase the sales
concentration of the Company. As a result, any material reduction in sales to
any of these customers could have a material adverse effect on the Company's
business.
An Act of War or Terrorism or Natural Catastrophes Could Disrupt the Company's
Supply of Products.
The Company purchases its aluminum products primarily from foreign
suppliers. An act of war or terrorism could disrupt international shipping
schedules, cause additional delays in importing the Company's products into the
United States or increase the costs required to do so.
The Company's Supply Sources are Subject to Substantial Risks.
The Company generally purchases aluminum products from foreign suppliers.
Thus, its operations could be materially and adversely affected by changes in
economic, political and social conditions in the countries where the Company
currently purchases or may in the future purchase such products. Among other
things, changes in laws, regulations, or the interpretation thereof, or
restrictions on currency conversions and exports, could negatively affect the
Company's business. Although the trend in the markets in which the Company
operates for its sourcing has been towards open markets and trade policies and
the fostering of private economic activity, no assurance can be given that the
governments will continue to pursue these policies or
17
that such policies may not be significantly altered, especially in the event of
a change in the leadership, or as a result of social or political upheaval or
unforeseen circumstances affecting economic, political or social life.
Changing Aluminum Prices Could Impact the Company's Profit Margins.
The Company relies on long-term relationships with its suppliers, but
generally has no long-term, fixed-price purchase contracts; it purchases at
prevailing market prices at the time orders are placed, typically with discounts
for quantity purchases. The aluminum industry is highly cyclical, and the prices
that the Company pays for aluminum and the prices it charges will be influenced
by a variety of factors outside of its control, including general economic
conditions (both domestic and international), competition, production levels,
import duties and other trade restrictions, and currency fluctuations.
Risk of Counterparty Defaults.
The Company hedges metal pricing and foreign currency as it deems
appropriate for a portion of its purchase and sales contracts. The risk of a
counterparty default exists in fulfilling the hedge contract. Should there be a
counterparty default, the Company could be exposed to losses on the original
hedged contract.
If Suppliers Fail to Provide Products of Sufficient Quality Customer
Relationships and Prices Could be Negatively Affected.
The Company's relationships with its customers depend, in part, on its
ability to deliver products of the quality specified by those customers. The
Company obtains certifications from its suppliers as to the quality of the
products being supplied. However, if the product is not of the quality certified
or if a supplier fails to deliver products ordered by the Company, the Company
may be forced to buy product of the specified quality from another source to
fulfill the customer's order. While the Company would then be left with a claim
against the supplier for any loss sustained by the Company, the Company may not
be able to successfully prosecute these claims, particularly in foreign
jurisdictions.
The Company is Exposed to Credit Risk from its Customers.
The Company does not require collateral for customer receivables. The
Company has significant balances owing from customers that operate in cyclical
industries and under leveraged conditions, which may impair the collectability
of these receivables. The Company carries credit insurance with a 10% co-pay
provision covering the majority of its customers and the Company has set
specific limits on each customer's receivables. However, the Company sometimes
elects to exceed these specific credit limits. The Company's failure to collect
a significant portion of the amount due on its receivables directly from
customers or through insurance claims (or other material default by customers)
could have a material adverse effect on the Company's financial condition and
results of operations. In selected instances the co-pay may be increased.
18
Rising Interest Rates may Increase Our Borrowing Costs
Our borrowings are primarily short-term Libor based loans. If interest
rates rise, our cost of borrowing will increase and lower our profitability.
Higher interest rates may also adversely affect some of the markets for our
products, such as transportation, housing and commercial construction.
Increased Tariffs Could Adversely Affect the Company's Financial Condition.
During 2004, approximately 70% of sales of the Company represented sales of
aluminum products from countries that were considered developing countries whose
exports were eligible for preferential tariff treatment upon import into the
United States under the generalized system of preferences (GSP). There can be no
assurance that any of our suppliers will continue to be eligible for such
preferential tariff treatment or that the generalized system of preference will
be renewed after it expires on December 31, 2006. If the preferential tariff
treatment of any of our suppliers that are currently eligible for such treatment
becomes unavailable, then imports from such supplier may be subjected to a
tariff, instead of the duty-free treatment those imports now enjoy. To the
extent these increased costs could not be passed on to its customers, the
Company's profit margins could be negatively affected. This could result in
higher costs to us and have a material adverse effect on our business, financial
condition and results of operations.
Antidumping and Other Duties Could be Imposed on the Company, its Suppliers and
their Products.
The imposition of an antidumping or other increased duty on any products
imported by the Company could have a material adverse effect on the Company's
financial condition. For example, under United States' law, an antidumping duty
may be imposed on any imports if two conditions are met. First, the Department
of Commerce must decide that the imports are being sold in the United States at
less than fair value. Second, the International Trade Commission (the "ITC")
must determine that the United States' industry is materially injured or
threatened with material injury by reason of the imports. The ITC's
determination of injury involves a two-prong inquiry: first, whether the
industry is materially injured, and second, whether the dumping, not other
factors, caused the injury. The ITC is required to analyze the volume of
imports, the effect of imports on United States prices for like merchandise, and
the effects the imports have on United States producers of like products, taking
into account many factors, including lost sales, market share, profits,
productivity, return on investment, and utilization of production capacity.
On October 16, 2003, Alcoa, Inc. filed a petition with the Department of
Commerce ("DOC") and the International Trade Commission ("ITC") for the
imposition of anti-dumping duties on imports of certain aluminum rolled plate
from Hulett Aluminium Ltd, the Company's major supplier of aluminum products.
The petition related to one specific product produced by Hulett - Series 6000
Aluminum Rolled Plate. Hulett also produces numerous other products that the
Company imports.
After a year long investigation, the ITC on November 5, 2004 voted that
there had been no material injury to the domestic industry as a result of the
shipments of series 6000 aluminum rolled plate produced by Hulett. As a result
of this vote the case did not proceed further and no other action is currently
pending.
19
If the Company Fails to Deliver Products on a Timely Basis, it may Suffer
Losses.
Interruption of shipping schedules upon which the Company relies for
foreign purchases could result in untimely deliveries to the Company's customers
or cause the Company to purchase the products in the United States at a higher
cost in order to meet delivery schedules. Consequently, the Company's profit
margins could be reduced or it could suffer losses. The Company guarantees its
customers that it will deliver products within the period specified in their
purchase orders. Any interruption of the means of transportation used by the
Company to transport products could cause delays in delivery of products, could
force the Company to buy the products from domestic suppliers at a higher cost
in order to fulfill its commitments, and also could result in the loss of
customers.
The Company Competes with Companies with Captive Sources of Supply.
Many of the Company's competitors are significantly larger than the Company
and many have captive sources of supply and significantly greater access to
capital and other resources. Thus, if the Company's sources of supply are
interrupted, its competitors could be in a position to capture the Company's
customers.
The Company is Dependent on its Executive Officers.
The Company is highly dependent on its executive officers, the loss of any
of one of which could have a significant adverse impact on the Company's
business. The Company does maintain key man life insurance on certain of its
executives.
The Company is Exposed to Increased Energy Costs.
To the extent that the Company utilizes both over-the-road and ocean
transportation, the imposition of any additional fuel or bunker surcharges may
adversely affect the Company's results. Should the Company be unable to pass
along any such changes to its customers, the Company's results would be
adversely affected.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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 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. In cases
where the Company enters into fixed price contracts with its supplier and
variable priced sales with its customers the Company will utilize the futures
market to match the terms of the purchase and sale. 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.
In situations where the Company enters into purchase or sales denominated in
foreign currency the foreign exchange market will be utilized to hedge foreign
exchange risk exposure. 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.
20
At December 31, 2004, net unrealized losses on the Company's foreign
exchange forward contracts amounted to approximately $543,000 as compared to a
net unrealized gain of $2,176,000 at December 31, 2003 and net unrealized losses
on aluminum futures contracts amounted to approximately $803,000 as compared to
$1,613,000 in 2003. These unrealized amounts were offset by like amounts on the
underlying commitments which were hedged, and are reflected in the accompanying
2004 and 2003 balance sheet in other current assets ($543,000), inventory
($803,000) and accrued expenses ($1,346,00). Unrealized amounts are reflected on
the 2003 balance sheet in other current assets ($3,129,000), inventory
($563,000) and accrued expenses ($2,566,000).
ITEM 8. FINANCIAL STATEMENTS
Furnished at end of report commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), the Company's management conducted an evaluation
with the participation of the Company's Chief Executive Officer and Chief
Financial Officer, regarding the effectiveness of the Company's disclosure
controls and procedures, as of the end of the last fiscal year. In designing and
evaluating the Company's disclosure controls and procedures, the Company and its
management recognize that any controls and procedures, no matter how well
designed and operated, can provide only a reasonable assurance of achieving the
desired control objectives, and management necessarily was required to apply its
judgment in evaluating and implementing possible controls and procedures. Based
upon that evaluation, the Chief Executive Officer and the Chief Executive
Officer concluded that, as of the evaluation date, the Company's disclosure
controls and procedures are reasonably effective to ensure that material
information required to be disclosed by the Company in the reports it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission's
rules and forms. We intend to continue to review and document our disclosure
controls and procedures, including our internal controls and procedures for
financial reporting, and we may from time to time make changes to the disclosure
controls and procedures to enhance their effectiveness and to ensure that our
systems evolve with our business.
There was no change in our internal control over financial reporting that
occurred during the period covered by this Annual Report on Form 10-K that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
21
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference from the
material responsive to such item in the Company's definitive proxy statement
relating to the 2005 Annual Meeting of Shareholders to be filed with the
Securities and Exchange Commission (the "Commission") prior to April 29, 2005.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
material responsive to such item in the Company's definitive proxy statement
relating to the 2005 Annual Meeting of Shareholders to be filed with the
Commission prior to April 29, 2005.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated by reference from the
material responsive to such item in the Company's definitive proxy statement
relating to the 2005 Annual Meeting of Shareholders to be filed with the
Commission prior to April 29, 2005.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
material responsive to such item in the Company's definitive proxy statement
relating to the 2005 Annual Meeting of Shareholders to be filed with the
Commission prior to April 29, 2005.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference from the
material responsive to such item in the Company's definitive proxy statement
relating to the 2005 Annual Meeting of Shareholders to be filed with the
Commission prior to April 29, 2005.
22
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) 1. Index to Financial Statements:
The consolidated financial statements of the Company and report of the Company's
independent public accountants incorporated herein are included in Item 8 of
this Report, as follows:
Report of Independent Certified Public Accountants F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Income F-3
Consolidated Statements of Changes in Stockholders' Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6
2. Financial Statement Schedules:
A statement regarding the computation of per share earnings is attached as
Exhibit 11.1 Other schedules have been omitted because they are not applicable
or are not required under the instructions contained in Regulation S-X or
because the information required to be set forth therein is included in the
consolidated financial statements or notes thereto.
3. Exhibits:
2.1 Agreement and Plan of Merger among the Registrant, Empire Resources Inc.,
Empire Resource Pacific, Ltd., Nathan Kahn and Sandra Kahn, dated 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 from the correspondingly numbered exhibit
in the Company's Annual Report on Form 10-KSB for the year ended December 31,
1999).
3.2 Amended and Restated Certificate of Incorporation of the Registrant
(incorporated by reference from the correspondingly numbered exhibit in the
Company'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 from the correspondingly numbered exhibit in the
Company's Annual Report on Form 10-K for the year ended December 31, 2001).
3.4 Amended and Restated By-Laws of the Registrant (incorporated by reference
from the correspondingly numbered exhibit in the Company'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 the correspondingly numbered exhibit in the
Company's Annual Report on Form 10-K for the year ended December 31, 2002).
23
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 Current Report on
Form 8-K dated May 11, 1997).
10.1 Employment Agreement dated September 15, 1999 entered into by Registrant
with Nathan Kahn (incorporated by reference from the correspondingly numbered
exhibit in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1999).
10.2 Amendment No. 1 to Employment Agreement and Noncompetition Agreement
entered into by Registrant with Nathan Kahn (incorporated by reference from
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2002).
10.3 Employment Agreement dated September 15, 1999 entered into by Registrant
with Sandra Kahn (incorporated by reference from the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1999).
10.4 Employment Agreement dated September 15, 1999 entered into by Registrant
with Harvey Wrubel (incorporated by reference from the Company's Annual Report
on Form 10-KSB for the year ended December 31, 1999).
10.5 Restricted Stock Agreement dated September 15, 1999 entered into by
Registrant with Harvey Wrubel (incorporated by reference from the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1999).
10.6 Third Modification and Extension of Lease for office space, dated as of the
17th of February, 2000, to the Lease between 400 Kelby Associates, as Landlord,
and Registrant as Tenant (incorporated by reference from the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1999).
10.7 Registrant's 1996 Stock Option Plan (incorporated by reference from the
Company's Registration Statement on Form SB-2 (No. 333-9697).
10.8 Form of Indemnification Agreement entered into by the Registrant with
executive officers and directors (incorporated by reference from the Company's
Annual Report on Form 10-KSB for the year ended December 31, 2000).
10.9 Credit Facility dated December 21, 2000 between the Registrant and The
Chase Manhattan Bank, as Lead Arranger and Administrative Agent (incorporated by
reference from the Company's Annual Report on Form 10-KSB for the year ended
December 31, 2000).
10.10 Amendment No. 1 to Credit Facility, dated July 16, 2002 between the
Registrant and The Chase Manhattan Bank, as Lead Arranger and Administrative
Agent (incorporated by reference to Exhibit 10.1 from the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2002).
10.11 Amendment No. 2 to Credit Facility, dated May 8, 2003 between the
Registrant and The Chase Manhattan Bank, as Lead Arranger and Administrative
Agent (incorporated by reference from the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 2003).
24
10.12 Amendment No. 3 to Credit Facility, dated June 19, 2003 between the
Registrant and The Chase Manhattan Bank, as Lead Arranger and Administrative
Agent (incorporated by reference from the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2003).
10.13 Agreement of Lease for warehouse facility dated September 27, 2000 between
Townsend Properties, Inc. and Registrant (incorporated by reference from the
Company's Annual Report on Form 10-KSB for the year ended December 31, 2000).
10.14 Amendment No. 4 to Credit Facility, dated December 13, 2004 between the
Registrant and JP Morgan Chase Bank, N.A. as Lead Arranger and Administrative
Agent.*
10.15 Agreement of purchase and sale of 6900 Quad Avenue dated May 31, 2004
between Dale W. Brougher, Trustee and Registrant.*
10.16 Loan Agreement dated December 27, 2004 between 6900 Quad Avenue a
subsidiary of the Registrant and JP MORGAN CHASE BANK, N.A. *
10.17 Agreement of purchase and sale of extrusion equipment dated November 4,
2004 between Werner Co., and Registrant. *
10.18 Fourth Modification and Extension of Lease for office space, dated as of
the 17th of November 2004, to the Lease between 400 Kelby Associates, as
Landlord, and Registrant as Tenant .*
11.1 Statement regarding computation of per share earnings.*
21.1 List of subsidiaries of the Registrant.*
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934.*
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934.*
32.1 Certifications of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*
* Filed Herewith
25
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
Empire Resources, Inc.
By: /s/ Nathan Kahn
---------------------------
Nathan Kahn
Chief Executive Officer
March 31, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the persons on behalf of the Registrant and in the
capacities and on the dates indicated.
/s/ Nathan Kahn
- -------------------------------
Nathan Kahn
Chief Executive Officer and Director (Principal Executive Officer)
March 31, 2005
/s/ Sandra Kahn
- -------------------------------
Sandra Kahn, Chief Financial Officer and Director
(Principal Financial and Principal Accounting Officer)
March 31, 2005
/s/ William Spier
- -------------------------------
William Spier, Director
March 31, 2005
/s/ Jack Bendheim
- -------------------------------
Jack Bendheim, Director
March 31, 2005
/s/ Barry L. Eisenberg
- -------------------------------
Barry L. Eisenberg, Director
March 31, 2005
26
/s/ Peter G. Howard
- -------------------------------
Peter G. Howard, Director
March 31, 2005
/s/ Nathan Mazurek
- -------------------------------
Nathan Mazurek, Director
March 31, 2005
/s/ Morris J. Smith
- -------------------------------
Morris J. Smith, Director
March 31, 2005
/s/ Harvey Wrubel
- -------------------------------
Harvey Wrubel, Director
March 31, 2005
27
Exhibit 31.1
CERTIFICATION PURSUANT TO SECTION 302(a)
OF THE SARBANES-OXLEY ACT OF 2002
I, Nathan Kahn, certify that:
1. I have reviewed this annual report on Form 10-K of Empire Resources, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: March 31, 2005
By: /s/ Nathan Kahn
-------------------------------------
Nathan Kahn
Chief Executive Officer
Exhibit 31.2
CERTIFICATION PURSUANT TO SECTION 302(a)
OF THE SARBANES-OXLEY ACT OF 2002
I, Sandra Kahn, certify that:
1. I have reviewed this annual report on Form 10-K of Empire Resources, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
i. designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information
relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this
annual report is being prepared;
ii. evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
iii. disclosed in this report any change in the registrant's
internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the
registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably
likely to affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
i. all significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect
the registrant's ability to record, process, summarize and
report financial information; and
ii. any fraud whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: March 31, 2005
By: /s/ Sandra Kahn
-------------------------------------
Sandra Kahn
Chief Financial Officer
Exhibit 32
CERTIFICATIONS
The undersigned officer of Empire Resources, Inc. (the "Company") hereby
certifies that the Company's annual report on Form 10-K for the period ended
December 31, 2004 (the "Report"), as filed with the Securities and Exchange
Commission on the date hereof, fully complies with the requirements of Section
13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as
amended, and that the information contained in the Report fairly presents, in
all material respects, the financial condition and results of operations of the
Company. This certification is provided solely pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and
shall not be deemed to be a part of the Report or "filed" for any purpose
whatsoever.
Date: March 31, 2005 By: /s/ Nathan Kahn
-------------------------------------
Nathan Kahn,
Chief Executive Officer and President
The undersigned officer of Empire Resources, Inc. (the "Company") hereby
certifies that the Company's annual report on Form 10-K for the period ended
December 31, 2003 (the "Report"), as filed with the Securities and Exchange
Commission on the date hereof, fully complies with the requirements of Section
13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as
amended, and that the information contained in the Report fairly presents, in
all material respects, the financial condition and results of operations of the
Company. This certification is provided solely pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and
shall not be deemed to be a part of the Report or "filed" for any purpose
whatsoever.
Date: March 31, 2005 By: /s/ Sandra Kahn
-------------------------------------
Sandra Kahn,
Chief Financial Officer
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Empire Resources, Inc.
Fort Lee, New Jersey
We have audited the accompanying consolidated balance sheets of Empire
Resources, Inc. and subsidiaries as of December 31, 2004 and 2003, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the years in the three-year period ended December 31,
2004. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Empire Resources,
Inc. and subsidiaries as of December 31, 2004 and 2003, and the consolidated
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2004, in conformity with accounting
principles generally accepted in the United States of America.
Eisner LLP
New York, New York
March 11, 2005
EMPIRE RESOURCES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands except share amounts)
December 31,
-----------------
2004 2003
------- -------
ASSETS
Current assets:
Cash $ 287 $ 1,477
Trade accounts receivable (less allowance for
doubtful accounts of $191 and $191) 30,367 25,723
Inventories 58,969 42,048
Other current assets 1,397 5,100
------- -------
Total current assets 91,020 74,348
Property and Equipment (less accumulated depreciation of
$472 and $396) 2,895 156
------- -------
93,915 74,504
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable - banks $40,300 $34,400
Current maturities of long-term debt 94
Trade accounts payable 25,411 16,895
Accrued expenses 6,796 7,328
Dividends Payable 960 762
------- -------
Total current liabilities 73,561 59,386
------- -------
Long-term debt, net of current maturities 2,406 0
Commitments and contingencies
Stockholders' equity:
Common stock $.01 par value, 20,000,000 shares
authorized and 11,749,651 shares issued at
December 31, 2004 and 2003 $ 117 117
Additional paid-in capital 10,827 10,803
Retained earnings 9,547 6,848
Accumulated other comprehensive income--
cumulative translation adjustment 14 14
Treasury stock (2,150,400 shares and 2,221,400 shares) (2,557) (2,663)
------- -------
Total stockholders' equity 17,948 15,119
------- -------
93,915 74,504
======= =======
See notes to consolidated financial statements F-2
EMPIRE RESOURCES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(In thousands except per share amounts)
Year Ended December 31,
-----------------------------
2004 2003 2002
-------- ------- --------
Net sales $212,550 184,416 $158,738
Cost of goods sold 196,266 171,222 147,714
-------- ------- --------
Gross profit 16,284 13,194 11,024
Selling, general and administrative expenses 7,457 6,419 6,032
-------- ------- --------
Operating income 8,827 6,775 4,992
Interest expense 1,140 1,013 1,046
-------- ------- --------
Income before income taxes 7,687 5,762 3,946
Income taxes 2,877 2,218 1,576
-------- ------- --------
Net income $ 4,810 3,544 $ 2,370
======== ======= ========
Weighted average shares outstanding:
Basic 9,574 9,466 10,049
======== ======= ========
Diluted 9,913 9,702 10,189
======== ======= ========
Earnings per share:
Basic $ .50 $ .37 $ .24
======== ======= ========
Diluted $ .49 $ .37 $ .23
======== ======= ========
See notes to consolidated financial statements F-3
EMPIRE RESOURCES, INC. AND SUBSIDIARES
Consolidated Statements of Changes in Stockholders' Equity
(In thousands)
Common Stock
------------------
Number of Additional Paid- Retained
Shares Amount in Capital Earnings
--------- ------ ---------------- --------
Balance at December 31, 2001 11,750 $117 $10,681 $ 2,454
Transfer of restricted shares to key employee 46
Purchase of treasury stock (1,127 shares)
Net change in cumulative translation adjustment
Net income for 2002 2,370
------ ---- ------- -------
Balance at December 31, 2002 11,750 $117 $10,727 $4,824
Purchase of treasury stock (10 shares)
Stock options exercised 21
Tax Benefit from exercise of options 55
Net change in cumulative translation adjustment
Dividends ($.16 per share) (1,520)
Net income for 2003 3,544
------ ---- ------- -------
Balance at December 31, 2003 11,750 $117 $10,803 $ 6,848
Stock options exercised 24
Dividends ($.22 per share) (2,111)
Net income for 2004 4,810
------ ---- ------- -------
Balance at December 31, 2004 11,750 117 10,827 9,547
------ ---- ------- -------
Acumulated Other
Comprehensive
Income- Cumulative Total Total
Translation Treasury Stockholders' Comprehensive
Adjustment Stock Equity Income
------------------ -------- ------------- -------------
Balance at December 31, 2001 $30 ($1,338) $11,944
Transfer of restricted shares to key employee 46
Purchase of treasury stock (1,127 shares) (1,429) (1,429)
Net change in cumulative translation adjustment (9) (9) (9)
Net income for 2002 2,370 2,370
------
$2,361
--- ------- ------- ------
Balance at December 31, 2002 $21 ($2,767) $12,922
Purchase of treasury stock (10 shares) (14) (14)
Stock options exercised 118 139
Tax Benefit from exercise of options 55
Net change in cumulative translation adjustment (7) (7) (7)
Dividends ($.16 per share) (1,520)
Net income for 2003 3,544 3,544
------
$3,537
--- ------- ------- ------
Balance at December 31, 2003 $14 ($2,663) $15,119
Stock options exercised 106 130
Dividends ($.22 per share) (2,111)
Net income for 2004 4,810 4,810
------
$4,810
--- ------- ------- ------
Balance at December 31, 2004 14 (2,557) 17,948
--- ------- -------
See notes to consolidated financial statements F-4
EMPIRE RESOURCES, INC. AND SUBSIDIARES
Consolidated Statements of Cash Flows
(In thousands)
Year Ended December 31,
-----------------------------
2004 2003 2002
-------- -------- -------
Cash flows from operating activities:
Net income $ 4,810 $ 3,544 $ 2,370
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 76 76 89
Deferred income taxes (22) (27) 34
Translation adjustment 0 (7) (9)
Transfer of restricted shares to key employee 0 0 46
Tax benefit from stock options exercised 0 55 0
Changes in:
Trade accounts receivable (4,644) (1,468) (1,466)
Inventories (16,921) (14,216) (50)
Other current assets 3,725 (3,814) (370)
Trade accounts payable 8,516 3,859 37
Accrued expenses (532) 4,417 1,792
-------- -------- -------
Net cash (used in) provided by operating activities (4,992) (7,581) 2,473
-------- -------- -------
Cash flows used in investing activities:
Purchases of property and equipment (2,815) (181) (19)
-------- -------- -------
Cash flows from financing activities:
Proceeds from (repayments of) notes payable - banks 5,900 8,800 (1,100)
Proceeds from mortgage payable 2,500
Dividends Paid (1,913) (758) 0
Stock options exercised 130 139 0
Purchase of treasury stock 0 (14) (1,429)
-------- -------- -------
Net cash provided by (used in) financing activities 6,617 8,167 (2,529)
-------- -------- -------
Net (decrease) increase in cash (1,190) 405 (75)
Cash at beginning of period 1,477 1,072 1,147
-------- -------- -------
Cash at end of period $ 287 $ 1,477 $ 1,072
======== ======== =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,066 $ 1,024 $ 998
Income taxes $ 3,106 $ 2,233 $ 1,396
Non Cash Financing Activities:
Dividend Declared but not yet paid $ 960 $ 762 $ 0
See notes to consolidated financial statements F-5
NOTE A - BUSINESS
Empire Resources, Inc ("the Company") is engaged principally in the purchase,
sale and distribution of value added semi finished aluminum products 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 several suppliers located throughout the
world. See B [14]
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
[1] Principles of consolidation:
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All intercompany balances have been
eliminated in consolidation.
[2] Revenue recognition:
Revenue on product sales is recognized at the point in time when the
product has been shipped, title and risk of loss has been transferred to
the customer, and the following conditions are met: persuasive evidence of
an arrangement exists, the price is fixed and determinable, and
collectibility of the resulting receivable is reasonably assured.
[3] Inventories:
Inventories which consist of purchased semi-finished aluminum products are
stated at the lower of cost or market. Cost is determined by the
specific-identification method. Inventory has generally been purchased for
specific customer orders.
[4] Property and equipment:
Property and equipment are stated at cost and depreciated by the
straight-line method over their estimated useful lives.
[5] Deferred financing costs:
Deferred financing costs include fees and costs incurred to obtain long
term financing and are being amortized over the terms of the respective
loans. Unamortized deferred financing costs are charged to expense when
debt is retired before the maturity date.
[6] Commodity futures and foreign currency hedging activities:
The Company uses derivative 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
recognizes in the balance sheet derivative contracts at fair value, as well
as changes in the fair value of the related hedged firm purchase and sales
commitments attributable to the hedged risk and reflects any net gains and
losses currently in earnings (See Note D).
[7] Foreign currency translation:
The functional currency of Empire Resources Pacific Ltd., a wholly-owned
subsidiary which acts as a sales agent in Australia and New Zealand, is the
Australian dollar. Cumulative translation adjustments, which are charged or
credited to accumulated other comprehensive income, represent translation
of Australian dollar amounts into U.S. dollars.
F-6
EMPIRE RESOURCES, INC. AND SUBSIDIARES
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[8] Income taxes:
The Company follows the asset and liability approach for deferred income
taxes. This method provides that deferred tax assets and liabilities are
recorded, using currently enacted tax rates, based upon the difference
between the tax bases of assets and liabilities and their carrying amounts
for financial statement purposes.
Deferred tax asset valuation allowances are recorded when management does
not believe that it is more likely than not that the related deferred tax
assets will be realized.
[9] Earnings per share:
Basic earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding during the year. Diluted
earnings per share gives effect to all dilutive potential common shares
outstanding during the year. The dilutive effect of the outstanding stock
warrants and options was computed using the treasury stock method. For the
year ended December 31, 2002, diluted earnings per share did not include
the effect of approximately 544,000 options outstanding at such date as
their effect would be anti-dilutive.
[10] Stock - based compensation:
At December 31, 2004 the Company had a stock option plan which is described
more fully in Note F. The Company accounts for stock-based employee
compensation under the recognitions and measurement principles of
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees", and related interpretations. No stock-based employee
compensation cost is reflected in net income as all options granted under
the Plan had an exercise price equal to the market value of the underlying
common stock on the date of grant. The Company has adopted the
disclosure-only provisions of Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation." The following
table illustrates the effect on net income and earnings per share if the
fair value based method had been applied to all awards.
Year Ended December 31,
(In thousands)
------------------------
2004 2003 2002
------ ------ ------
Reported net income $4,810 $3,544 $2,370
Stock-based employee compensation determined
under the fair value based method (net of tax) (18) (7) (5)
------ ------ ------
Pro forma net income $4,792 $3,537 $2,365
====== ====== ======
Earnings per share (basic and diluted):
As reported
Basic $ .50 $ .37 $ .24
Diluted $ .49 $ .37 $ .23
Pro-forma
Basic $ .50 $ .37 $ .24
Diluted $ .48 $ .37 $ .23
The fair value of each option grant on the date of grant is estimated using the
Black-Scholes option-pricing model which included the following assumptions
stated on a weighted average basis:
2004 2003 2002
---- ---- ----
Dividend yield 4% 4.78% 0%
Volatility .59 0.59 0.40
Risk free interest rate 4.24% 2.08% 4.23%
Expected life in years 5 5 5
F-7
EMPIRE RESOURCES, INC. AND SUBSIDIARES
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The weighted average fair values of options granted during the years ended
December 31, 2004, 2003 and 2002 were $1.59, $0.67 and $0.47, respectively.
[11] Deferred stock based compensation:
The expense relating to deferred stock based compensation is based on the
fair market value of the stock as of the grant date and is amortized over
the vesting period of three years. This resulted in amortization expense of
$46,000 for the year ended December 31, 2002. The amount has been fully
amortized as of December 31, 2002.
[12] Recent accounting pronouncements
In November 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 151, "Inventory Costs--an amendment of ARB No. 43," which is the
result of its efforts to converge U.S. accounting standards for inventories
with International Accounting Standards. SFAS No. 151 requires idle
facility expenses, freight, handling cost and wasted material (spoilage)
costs to be recognized as current-period charges. It also requires that
allocation of fixed production overhead to the costs of conversion be based
on the normal capacity of the production facilities. SFAS No. 151 will be
effective for us beginning January 1, 2006. We are evaluating the impact of
this standard on our financial statements.
In December 2004, the FASB issued SFAS No. 123 (Revised 2004) "Share-Based
Payment" that prescribes the accounting for share-based payment
transactions in which a company receives employee services in exchange for
(a) equity instruments of the company or (b) liabilities that are based on
the fair value of the company's equity instruments or that may be settled
by the issuance of such equity instruments. SFAS No. 123R addresses all
forms of share-based payment awards, including shares issued under employee
stock purchase plans, stock options, restricted stock and stock
appreciation rights. SFAS No. 123R eliminates the ability to account for
share-based compensation transactions using APB Opinion No. 25, "Accounting
for Stock Issued to Employees," that was previously allowed under SFAS No.
123 as originally issued. Under SFAS No. 123R, companies are required to
record compensation expense for all share based payment award transactions
measured at fair value. This statement is effective for us beginning July
1, 2005. As permitted by Statement 123, the Company currently accounts for
share-based payments to employees using Opinion 25's intrinsic value method
and, as such recognizes no compensation cost for employee stock options.
Accordingly, the adoption of Statement 123(R)'s fair value method could
have a significant impact on the Company's result of operations if we were
to grant additional options although it will have no impact on the
Company's overall financial position. The impact of adoption of Statement
123(R) cannot be predicted at this time because it will depend on levels of
share-based payments granted in the future. However, had the Company
adopted Statement 123(R) in prior periods, the impact of that standard
would have approximated the impact of Statement 123 as described in the
disclosure of proforma net income and earnings per share. (See Note B (10)
above.)
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets--an amendment of APB Opinion No. 29" that amends Opinion No. 29 to
eliminate the exception for nonmonetary exchanges of similar productive
assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. A nonmonetary
exchange has commercial substance if the future cash flows of the entity
are expected to change significantly as a result of the exchange. The
provisions of this statement are effective for non-monetary asset exchanges
for us beginning July 1, 2005. We believe the adoption of SFAS 153 will not
have an impact on our results of operations or financial position.
[13] 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 and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of income and expenses during the reporting period. The principle
estimate made relates to the allowance for doubtful accounts. Actual
results could differ from these estimates.
F-8
EMPIRE RESOURCES, INC. AND SUBSIDIARES
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[14] Significant customers and concentration of suppliers:
One major customer accounted for approximately 17%, 14% and 11% of the
Company's consolidated net sales for the years ended December 31, 2004,
2003 and 2002, respectively.
The Company's purchase of nonferrous metal is from a limited number of
suppliers located throughout the world. One supplier, Hulett Aluminium
Ltd., accounted for 54% and 55% of total purchases during the years ended
December 31, 2004 and 2003, respectively, and four other suppliers
accounted for 35% and 32%, respectively, of total purchases. Three
suppliers accounted for 54% of total purchases during the year ended
December 31, 2002. The Company's loss of any of its three largest suppliers
or a material default by any such supplier in its obligations to the
Company would have at least a short-term material adverse effect on the
Company's business.
On October 16, 2003, Alcoa, Inc. filed a petition with the Department of
Commerce ("DOC") and the International Trade Commission ("ITC") for the
imposition of anti-dumping duties on imports of certain aluminum rolled
plate from Hulett Aluminium Ltd, the Company's major supplier of aluminum
products. The petition related to one specific product produced by Hulett -
Series 6000 Aluminum Rolled Plate. Hulett also produces numerous other
products that the Company imports.
After a year long investigation, the ITC on November 5, 2004 voted that
there had been no material injury to the domestic industry as a result of
the shipments of series 6000 aluminum rolled plate produced by Hulett. As a
result of this vote the case did not proceed further and no other action is
currently pending.
NOTE C - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of notes payable to the banks approximate fair value as of
December 31, 2004 and 2003 because the interest rates on such debt approximate
the market rate for the Company given the appropriate risk factors. The carrying
amount of the mortgage payable issued in December 2004 approximates fair value
at December 31, 2004. Derivative financial instruments are carried at fair
value. (See Note E)
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
Estimated Useful Life
December 31, 2004 December 31, 2003 (Years)
----------------- ----------------- ---------------------
Land and improvements $ 375,000
Building and improvements 2,125,000 15
Equipment 255,000
Office equipment 612,000 552,000 3
---------- --------
3,367,000 552,000
Less Accumulated depreciation 472,000 396,000
---------- --------
$2,895,000 $156,000
========== ========
Building and improvements consist of a warehouse facility purchased in December
2004, which is being upgraded and is expected to be available for occupancy in
the third quarter of 2005, prior to the expiration of the Company's lease for
its current warehouse. Depreciation of property and equipment was $76,000,
$49,000, and $34,000 for the years ended December 31, 2004, 2003 and 2002
respectively.
NOTE E - DERIVATIVE FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting For
Derivative Instruments and Hedging Activities", issued by the Financial
Accounting Standards Board. 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
F-9
EMPIRE RESOURCES, INC. AND SUBSIDIARES
NOTE E - DERIVATIVE FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED)
offset against the change in fair value of the hedged assets, liabilities or
firm commitments through earnings (fair value hedge), or recognized in other
comprehensive income until the hedged item is recognized in earnings (cash flow
hedge). The ineffective portion of a derivative's change in fair value, if any,
is immediately recognized in earnings.
At December 31, 2004, net unrealized losses on the Company's foreign exchange
forward contracts amounted to approximately $543,000 as compared to a net
unrealized gain of $2,176,000 at December 31, 2003. Net unrealized losses on
aluminum futures contracts amounted to approximately $803,000 as compared to
$1,613,000 in 2003. These unrealized amounts, which represent the fair value of
the derivative contracts, were offset by like amounts for the changes in the
fair value of the underlying commitments which were hedged. Such amounts are
reflected in the accompanying 2004 and 2003 balance sheet in other current
assets ($543,000), inventory ($803,000) and accrued expenses ($1,346,000) and
are reflected on the 2003 balance sheet in other current assets ($3,129,000)
inventory ($563,000) and accrued expenses ($2,566,000).
For the years ended December 31, 2004, and 2003 and 2002, hedge ineffectiveness
associated with derivatives designated as fair value hedges was insignificant,
and no fair value hedges were derecognized.
As discussed in Note F, the Company has entered into an interest rate swap to
convert a mortgage from a variable rate to a fixed rate obligation which has
been designated as a cash flow hedge. At December 31, 2004, the fair value of
the swap was not significant to the accompanying balance sheet.
NOTE F - MORTGAGE PAYABLE
In December 2004, the Company entered into a mortgage in connection with the
purchase of a warehouse. The mortgage, which requires monthly payments of
approximately $21,000 including interest, bears interest at Libor + 1.75% and
matures in December 2014.
In connection with the mortgage, the Company entered into an interest rate
swap with a bank which has been designated as a cash flow hedge. Effective
2004 through December 29, 2014 each month the Company will pay a fixed
interest rate of 6.37% to the bank on a notional principal equal to the
outstanding principal balance of the mortgage. In return, the bank will pay
to the Company a floating rate, namely, LIBOR, to the reset monthly plus
1.75% on the same notional principal amount.
The following are the future maturities of the mortgage at December 31, 2004 (in
thousands):
Year ending December 31,
- ------------------------
2005 $ 94
2006 109
2007 116
2008 124
2009 132
Thereafter 1,925
------
2,500
======
NOTE G - NOTES PAYABLE - BANKS
As of December 31, 2004, the Company operated under a $60,000,000 committed
credit facility with three commercial banks. This facility as amended, expires
on June 30, 2006. Borrowings by the Company under this line of credit are
collateralized by security interests in substantially all its assets. Under the
agreement, the Company is required to maintain working capital and net worth
ratios as defined by the loan agreement. As of December 31, 2004 and 2003
respectively, the credit utilized under this facility amounted to $57.3 million
and $38.9 million (including approximately $17.0 million and $4.5 million of
outstanding letters of credit). Interest on borrowings is either (i) the federal
funds rate, (ii) the prime rate of JP Morgan Chase or (iii) LIBOR, plus the
applicable margins defined in the loan agreement. At December 31, 2004 and 2003,
the interest rate charged approximated 4.4% and 3.1%, respectively. On February
23, 2005, the Company amended its credit facility to increase its availability
to $75,000,000 and to include a fourth bank.
NOTE H - STOCK OPTIONS
The Company's 1996 Stock Option Plan (the "1996 Plan"), as amended, provides for
the granting of options to purchase not more than an aggregate of 1,129,000
shares of common stock. All officers, directors and employees of the Company and
other persons who perform services for the Company are eligible to participate
in the 1996 Plan. Some or all of the options may be "incentive stock options"
within the meaning of the Internal Revenue Code of 1986, as amended.
F-10
EMPIRE RESOURCES, INC. AND SUBSIDIARES
NOTE H - STOCK OPTIONS (CONTINUED)
The 1996 Plan provides that it is to be administered by the Board of Directors,
or by a committee appointed by the Board, which will be responsible for
determining, subject to the provisions of the 1996 Plan, to whom the options are
granted, the number of shares of common stock subject to an option, whether an
option shall be incentive or non-qualified, the exercise price of each option
(which, other than in the case of incentive stock options, may be less than the
fair market value of the shares on the date of grant), the period during which
each option may be exercised and the other terms and conditions of each option.
No options may be granted under the 1996 Plan after July 29, 2006.
The following is a summary of stock option activity for the years ended December
31, 2004, 2003 and 2002:
Weighted
Average
Number Exercise
of shares Price
--------- --------
Options outstanding at December 31, 2001 750,933 $1.36
Options granted 18,000 $1.13
Options forfeited (85,000) $1.49
-------
Options outstanding at December 31, 2002 683,933 $1.33
Options granted 18,000 $1.87
Options exercised (96,000) $1.44
Options forfeited (50,000) $0.81
-------
Options outstanding at December 31, 2003 555,933 $1.30
Options granted 18,000 $3.64
Options exercised (71,000) $1.82
Options forfeited (99,933) $0.01
-------
Options outstanding and exercisable at
December 31, 2004 403,000 $1.64
=======
Options available for grant under 1996 Plan
at December 31, 2004 658,933
=======
At December 31, 2004, the weighted average years remaining for outstanding and
exercisable options is 4.9 years.
NOTE I - COMMON STOCK
The Board of Directors has authorized the Company to repurchase up to 2,500,000
shares of its common stock at prices not to exceed $1.50 per share. As of
December 31, 2004, the Company had repurchased a total of 2,267,400 shares under
the repurchase program for an aggregate cost of $2,731,049.
F-11
EMPIRE RESOURCES, INC. AND SUBSIDIARES
NOTE J - INCOME TAXES
Income tax expense (benefit) consists of the following (In Thousands):
Year Ended December 31,
------------------------
2004 2003 2002
------ ------ ------
Current $2,899 $2,245 $1,542
Deferred $ (22) $ (27) 34
------ ------ ------
$2,877 $2,218 $1,576
====== ====== ======
The U.S. statutory rate of 34% can be reconciled to the effective tax rate as
follows (In Thousands):
Year Ended December 31,
------------------------
2004 2003 2002
------ ------ ------
Provision for taxes at statutory rate $2,614 $1,959 $1,342
State and local taxes, net of federal
tax benefit $ 220 $ 265 154
Permanent differences and other 43 (6) 80
------ ------ ------
$2,877 $2,218 $1,576
====== ====== ======
Deferred tax assets and liabilities are composed of the following:
December 31,
-----------
2004 2003
---- ----
Deferred tax assets
Allowance for doubtful accounts 74 74
Accrued expenses 23 15
Hedge commitments 520 390
---- ----
617 479
---- ----
Deferred tax liabilities
Property and equipment (32) (46)
Derivative contracts (520) (390)
---- ----
(552) (436)
---- ----
Net deferred tax assets
(included in other current assets) $ 65 $ 43
==== ====
F-12
EMPIRE RESOURCES, INC. AND SUBSIDIARES
NOTE K - EMPLOYEE RETIREMENT BENEFITS
The Company has implemented a salary reduction employee benefit plan, a
qualified plan adopted to conform to Internal Revenue Code Section 401(k).
Employees may contribute up to 15% of their eligible compensation, and the
Company will provide a matching contribution of 50% of employee contributions
limited to 2% of employee compensation. The plan covers all employees who have
attained age 18, and substantially all eligible employees have elected to
participate.
Each employee's pre-tax contributions are immediately vested upon participation
in the plan. The employees' vesting of the Company's matching contribution is
based upon length of service as follows:
Years of service Vested %
- ---------------- --------
1 25%
2 50%
3 75%
4 100%
Employees who terminate prior to 100% vesting forfeit their non-vested portion
of the Company's matching contribution, and those funds are used to reduce
future matching contributions. Employees in active service on the effective date
of the plan were granted retroactive service credit for the purpose of
determining their vested percentage. Company matching contributions amounted to
$32,000 in 2004, $28,000 in 2003, and $25,000 in 2002.
NOTE L - EARNINGS PER SHARE
The following is the reconciliation of the numerators and denominators of the
basic and diluted earnings per share:
Year Ended December 31,
(In thousands except per share amounts)
---------------------------------------
2004 2003 2002
------ ------ -------
Numerator:
Net Income $4,810 $3,544 $ 2,370
Denominator:
Computation of basic earnings per share:
Weighted average shares outstanding - basic 9,574 9,466 10,049
Basic earnings per share $ 0.50 $ 0.37 $ 0.24
Computation of diluted earnings per share:
Weighted average shares outstanding - basic 9,574 9,466 10,049
Potentially dilutive shares:
Shares issuable upon exercise of
dilutive options 339 236 140
------ ------ -------
Weighted average shares outstanding - diluted 9,913 9,702 10,189
Diluted earnings per share $ 0.49 $ 0.37 $ 0.23
F-13
EMPIRE RESOURCES, INC. AND SUBSIDIARES
NOTE M - BUSINESS SEGMENT AND GEOGRAPHIC AREA INFORMATION
The Company operates in one business segment-the purchase, sale and distribution
of non-ferrous metals. Sales to domestic and foreign customers were as follows:
------------------------------
Year Ended December 31,
(In thousands)
------------------------------
2004 2003 2002
-------- -------- --------
United States $175,836 $148,108 $127,327
Canada and Pacific Rim 36,714 36,308 31,411
-------- -------- ------
$212,550 $184,416 $158,738
======== ======== ========
NOTE N - SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
2004
----------------------------------------
March June September December
31 30 30 31
------- ------- --------- --------
(In thousands except per share amounts)
----------------------------------------
Net sales $54,185 $51,605 $53,809 $52,951
Gross profit 3,836 3,823 4,313 4,312
Operating income 2,145 1,994 2,568 2,120
Net income 1,135 1,064 1,415 1,196
Income per common share-
Basic and diluted
Basic $ 0.12 $ 0.11 $ 0.15 $ 0.12
Diluted $ 0.11 $ 0.11 $ 0.14 $ 0.12
Weighted average shares outstanding
Basic 9,530 9,553 9,553 9,599
Diluted 9,885 9,903 9,864 9,913
2003
----------------------------------------
March June September December
31 30 30 31
------- ------- --------- --------
(In thousands except per share amounts)
----------------------------------------
Net sales $44,937 $46,873 $46,645 $45,961
Gross profit 3,196 3,317 3,272 3,409
Operating income 1,674 1,828 1,758 1,515
Net income 870 990 887 797
Income per common share-
Basic and diluted
Basic $ .09 $ .10 $ .09 $ .08
Diluted $ .09 $ .10 $ .09 $ .08
Weighted average shares outstanding
Basic 9,435 9,432 9,469 9,528
Diluted 9,541 9,587 9,784 9,839
F-14
EMPIRE RESOURCES, INC. AND SUBSIDIARES
NOTE O - COMMITMENTS AND CONTINGENCIES
[1] Lease:
The Company leases office facilities under leases expiring through
March 31, 2015, and leases warehouse and distribution facilities under a
lease expiring on October 31, 2005. The minimum non-cancelable scheduled
rentals under these leases are as follows (in thousands):
Year Ending
December 31,
------------
2005 449
2006 274
2007 274
2008 274
2009 274
Thereafter 1,481
------
$3,026
======
Rent expense for the years ended December 31, 2004, 2003, and 2002 was
$479,000, $452,000 and $437,000 respectively.
[2] Letters of credit:
Outstanding letters of credit at December 31, 2004 amounting to $17.0
million expire from January through August of 2005.
[3] Employment agreements:
The Company has an employment agreement with one of its executive officers
expiring in December 2006. The agreement provides that the Company may
terminate the agreement upon the disability of the executive or for cause
(as such terms are defined in the agreement). Base salary under this
agreement is $450,000 per annum. The amount may be increased, but not
decreased, by the Board of Directors.
The Company has an employment agreement with another officer, expiring in
December 2006. The minimum base salary is $220,000 and is subject to
possible upward annual adjustments based upon changes in a designated cost
of living index.
[4] Purchase commitments:
Under the terms of some of its supply contracts, the Company may be
required to purchase certain minimum tonnages over the term of the
contracts.
In the fall of 2004, the Company entered into an agreement to purchase a
used aluminum extrusion press for $850,000. The Company intends to
modernize and install the press in the new warehouse/distribution facility
that the Company purchased in Baltimore, Maryland. At signing the Company
gave the seller a deposit of $255,000 which is included in property and
equipment.
NOTE P -ALLOWANCE FOR DOUBTFUL ACCOUNTS
- -----------------------------------------------------------------------------------------
In thousands
- -----------------------------------------------------------------------------------------
Additions
- -----------------------------------------------------------------------------------------
Balance at Charged to Costs Charged to
Beginning of And Other Deductions from Balance at End of
Period Expenses Accounts Reserves Period
- -----------------------------------------------------------------------------------------
2004 $191 $191
- -----------------------------------------------------------------------------------------
2003 $191 $191
- -----------------------------------------------------------------------------------------
2002 $189 $2 $191
- -----------------------------------------------------------------------------------------
F-15
EMPIRE RESOURCES, INC. AND SUBSIDIARES
EXHIBIT 21.1 List of subsidiaries
Name of subsidiary Jurisdiction
------------------ ------------
Empire Resources Pacific Ltd. Delaware
I.T.I. Innovative Technology, Ltd. Israel
CompuPrint Ltd. Israel
6900 Quad Avenue LLC Delaware
Empire Resources Extrusions LLC Delaware
EXHIBIT 11.1 Statement re computation of per share earnings
Earnings per share - basic, are based upon the Company's weighted average number
of common shares outstanding.
2004 2003 2002
------ ------ -------
(In thousands - except per share data)
Net Income $4,810 $3,544 $ 2,370
====== ====== =======
Weighted average shares outstanding - basic 9,574 9,466 10,049
Shares issuable upon exercise of dilutive options 503 567 209
Less: shares assumed repurchased (164) (331) (69)
------ ------ -------
Weighted average shares outstanding - diluted 9,913 9,702 10,189
====== ====== =======
Earnings per share - basic $ 0.50 $ 0.37 $ 0.24
Earnings per share - diluted $ 0.49 $ 0.37 $ 0.23
F-16