ITEM 1.
|
FINANCIAL STATEMENTS.
|
CATHAY MERCHANT GROUP, INC. AND SUBSIDIARIES
|
CONSOLIDATED BALANCE SHEETS
|
(DOLLARS IN THOUSANDS)
|
|
|
SEPTEMBER 30,
|
|
|
DECEMBER 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(UNAUDITED)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
3,797
|
|
$
|
4,610
|
|
Restricted cash
|
|
75
|
|
|
73
|
|
Receivables
|
|
784
|
|
|
1,060
|
|
Due from affiliates
|
|
1,614
|
|
|
632
|
|
Inventories
|
|
12,146
|
|
|
15,212
|
|
Prepaid expenses and other
|
|
45
|
|
|
90
|
|
Total current assets
|
|
18,461
|
|
|
21,677
|
|
Non-current Assets:
|
|
|
|
|
|
|
Deferred credit facility costs
|
|
-
|
|
|
183
|
|
Property, plant and equipment
|
|
1,693
|
|
|
1,566
|
|
Purchase option agreements
|
|
17,460
|
|
|
16,204
|
|
Goodwill
|
|
3,243
|
|
|
3,243
|
|
Deferred tax benefits
|
|
570
|
|
|
811
|
|
Total non-current
assets
|
|
22,966
|
|
|
22,007
|
|
Total assets
|
$
|
41,427
|
|
$
|
43,684
|
|
|
|
|
|
|
|
|
LIABILITIES & STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
$
|
17,535
|
|
$
|
13,694
|
|
Due to affiliates
|
|
997
|
|
|
9,248
|
|
Debt
|
|
12,320
|
|
|
-
|
|
Total current liabilities
|
|
30,852
|
|
|
22,942
|
|
Long-term Liabilities:
|
|
|
|
|
|
|
Debt
|
|
-
|
|
|
11,434
|
|
Other liabilities
|
|
8
|
|
|
26
|
|
Total long-term liabilities
|
|
8
|
|
|
11,460
|
|
Total liabilities
|
|
30,860
|
|
|
34,402
|
|
Stockholders' Equity:
|
|
|
|
|
|
|
Common stock
|
|
2,038
|
|
|
2,038
|
|
Additional paid-in capital
|
|
28,031
|
|
|
28,031
|
|
Accumulated deficit
|
|
(16,431
|
)
|
|
(16,613
|
)
|
Treasury stock, at cost
|
|
(5,313
|
)
|
|
(5,313
|
)
|
Accumulated other comprehensive income
|
|
2,242
|
|
|
1,139
|
|
Total stockholders' equity
|
|
10,567
|
|
|
9,282
|
|
Total liabilities and stockholders'
equity
|
$
|
41,427
|
|
$
|
43,684
|
|
See accompanying notes.
3
CATHAY MERCHANT GROUP, INC. AND SUBSIDIARIES
|
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
|
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
|
|
|
NINE MONTHS ENDED
|
|
|
|
SEPTEMBER 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(UNAUDITED)
|
|
Product sales, net
|
$
|
84,629
|
|
$
|
72,997
|
|
Cost of goods sold
|
|
79,954
|
|
|
69,482
|
|
|
|
4,675
|
|
|
3,515
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
4,262
|
|
|
3,837
|
|
Depreciation and amortization
|
|
25
|
|
|
29
|
|
|
|
4,287
|
|
|
3,866
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
388
|
|
|
(351
|
)
|
Other income (expense):
|
|
|
|
|
|
|
Interest and financing charges, net
|
|
(474
|
)
|
|
(455
|
)
|
Gain on sale of marketable securities
|
|
51
|
|
|
-
|
|
Miscellaneous
|
|
483
|
|
|
147
|
|
|
|
60
|
|
|
(308
|
)
|
Income (loss) before income tax
|
|
448
|
|
|
(659
|
)
|
Income tax - current
|
|
(1
|
)
|
|
(6
|
)
|
Income tax deferred
|
|
(265
|
)
|
|
-
|
|
Net income (loss)
|
$
|
182
|
|
$
|
(665
|
)
|
Earning (loss) per common share, basic and
diluted
|
$
|
0.01
|
|
$
|
(0.04
|
)
|
See accompanying notes.
4
CATHAY MERCHANT GROUP, INC. AND SUBSIDIARIES
|
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
|
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
|
|
|
THREE MONTHS ENDED
|
|
|
|
SEPTEMBER 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(UNAUDITED)
|
|
Product sales, net
|
$
|
27,678
|
|
$
|
27,407
|
|
Cost of goods sold
|
|
26,283
|
|
|
25,928
|
|
|
|
1,395
|
|
|
1,479
|
|
General and administrative expenses
|
|
1,353
|
|
|
1,045
|
|
Depreciation and amortization
|
|
9
|
|
|
16
|
|
|
|
1,362
|
|
|
1,061
|
|
|
|
|
|
|
|
|
Operating income
|
|
33
|
|
|
418
|
|
Other income (expense):
|
|
|
|
|
|
|
Interest and financing charges, net
|
|
(108
|
)
|
|
(138
|
)
|
Gain on sale of marketable securities
|
|
51
|
|
|
-
|
|
Miscellaneous
|
|
76
|
|
|
49
|
|
|
|
19
|
|
|
(89
|
)
|
Income before income tax
|
|
52
|
|
|
329
|
|
Income tax current
|
|
2
|
|
|
4
|
|
Income tax deferred
|
|
(59
|
)
|
|
-
|
|
Net income (loss)
|
$
|
(5
|
)
|
$
|
333
|
|
Earning (loss) per common share, basic and diluted
|
$
|
0.00
|
|
$
|
0.02
|
|
See accompanying notes.
5
CATHAY MERCHANT GROUP, INC. AND SUBSIDIARIES
|
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
(DOLLARS IN THOUSANDS)
|
|
|
NINE MONTHS ENDED
|
|
|
|
SEPTEMBER 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(UNAUDITED)
|
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
182
|
|
$
|
(665
|
)
|
Other comprehensive income,
|
|
|
|
|
|
|
foreign currency translation
adjustment
|
|
1,103
|
|
|
974
|
|
|
|
|
|
|
|
|
Comprehensive income
|
$
|
1,285
|
|
$
|
309
|
|
See accompanying notes.
6
CATHAY MERCHANT GROUP, INC. AND SUBSIDIARIES
|
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
(DOLLARS IN THOUSANDS)
|
|
|
THREE MONTHS ENDED
|
|
|
|
SEPTEMBER 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(UNAUDITED)
|
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
(5
|
)
|
$
|
333
|
|
Other comprehensive income,
|
|
|
|
|
|
|
foreign currency translation
adjustment
|
|
759
|
|
|
(103
|
)
|
|
|
|
|
|
|
|
Comprehensive income
|
$
|
754
|
|
$
|
230
|
|
See accompanying notes.
7
CATHAY MERCHANT GROUP, INC. AND SUBSIDIARIES
|
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
(DOLLARS IN THOUSANDS)
|
|
|
NINE MONTHS ENDED
|
|
|
|
SEPTEMBER 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(UNAUDITED)
|
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net income (loss)
|
$
|
182
|
|
$
|
(665
|
)
|
Adjustments to reconcile net loss to net cash
|
|
|
|
|
|
|
provided by (used in)
operating activities:
|
|
|
|
|
|
|
Depreciation and amortization
|
|
435
|
|
|
274
|
|
Foreign exchange
|
|
662
|
|
|
599
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
Restricted cash
|
|
4
|
|
|
-
|
|
Receivables
|
|
336
|
|
|
(538
|
)
|
Due from affiliates
|
|
(898
|
)
|
|
(1,241
|
)
|
Inventories
|
|
4,013
|
|
|
(2,527
|
)
|
Prepaid expenses and
other current assets
|
|
49
|
|
|
(18
|
)
|
Deferred tax
|
|
191
|
|
|
-
|
|
Accounts payable and
accrued expenses
|
|
2,677
|
|
|
(2,020
|
)
|
Due to affiliates
|
|
(8,404
|
)
|
|
7,745
|
|
Net cash
provided by operating activities
|
|
(753
|
)
|
|
1,609
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
Purchase of fixed assets
|
|
(308
|
)
|
|
(421
|
)
|
Net cash used in
investing activities
|
|
(308
|
)
|
|
(421
|
)
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
-
|
|
|
32
|
|
Investment subsidies and
grants
|
|
162
|
|
|
56
|
|
Net cash provided by financing
activities
|
|
162
|
|
|
88
|
|
|
|
|
|
|
|
|
Effects of foreign exchange on cash and cash equivalents
|
|
86
|
|
|
92
|
|
Changes in cash and cash equivalents
|
|
(813
|
)
|
|
1,368
|
|
Cash and cash equivalents, beginning of period
|
|
4,610
|
|
|
3,843
|
|
Cash and cash equivalents, end
of period
|
$
|
3,797
|
|
$
|
5,211
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION:
|
|
|
|
|
|
|
Income taxes paid
|
$
|
--
|
|
$
|
--
|
|
Interest expenses paid
|
$
|
421
|
|
$
|
392
|
|
See accompanying notes.
8
CATHAY MERCHANT GROUP, INC. AND SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
The notes to these consolidated
financial statements are presented in United States Dollars (unless otherwise
indicated), as rounded to the nearest thousands (except per share amounts).
Description of Business
Cathay Merchant Group, Inc. (the
Company or Cathay) is primarily an aluminium manufacturing
company.
On June 30, 2005, the Company,
acting through its wholly-owned subsidiary, Cathay Merchant Group Limited
(CMG), acquired all of the shares of AWP Aluminium Walzprodukte GmbH (AWP)
and AFM Aluminiumfolie Merseburg GmbH (AFM). AWP and AFM are incorporated
under the laws of Germany.
Basis of Presentation
The unaudited interim period
consolidated financial statements have been prepared by the Company pursuant to
the rules and regulations of the U.S. Securities and Exchange Commission (the
"SEC"). Certain information and footnote disclosure normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States have been condensed or omitted pursuant to such
SEC rules and regulations. The interim period consolidated financial statements
should be read together with the audited consolidated financial statements and
accompanying notes included in the Company's latest annual report on Form 10-KSB
for the year ended December 31, 2006. In the opinion of the Company, the
unaudited consolidated financial statements contained herein contain all
adjustments (which are of a normal recurring nature) necessary to present a fair
statement of the results of the interim periods presented. The results for the
periods presented herein may not be indicative of the results for any subsequent
period or the entire year.
2. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share
is determined by dividing net income applicable to common shares by the weighted
average number of common shares outstanding during the period. Diluted earnings
(loss) per share is determined using the same method as basic earnings per share
except that the weighted average number of common shares outstanding includes
potential dilutive effect of stock options.
The following table sets forth
the computation of basic and diluted earnings (loss) per share:
|
NINE MONTHS ENDED
|
THREE MONTHS ENDED
|
|
SEPTEMBER 30,
|
SEPTEMBER 30,
|
|
2007
|
2006
|
2007
|
2006
|
|
(UNAUDITED)
|
(UNAUDITED)
|
|
|
|
|
|
Net income (loss)
|
$182
|
$(665)
|
$(5)
|
$333
|
Earnings (loss) per share, basic and diluted
|
$0.01
|
$(0.04)
|
$0.00
|
$0.02
|
Number of weighted average shares
|
|
|
|
|
outstanding, basic (in thousands)
|
18,891
|
18,872
|
18,891
|
18,891
|
Number of weighted average shares
|
|
|
|
|
outstanding, diluted (in thousands)
|
18,918
|
18,873
|
18,909
|
18,895
|
9
CATHAY MERCHANT GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. INVENTORIES
Inventories consist of raw
materials, work-in-process, and finished goods. Inventories are recorded at the
lower of cost (specific identification and first-in first out methods) or market
and consist of the following at September 30, 2007:
Raw materials
|
$
|
4,536
|
|
Work in progress
|
|
5,420
|
|
Finished goods
|
|
2,190
|
|
|
$
|
12,146
|
|
4. BUSINESS SEGMENT INFORMATION
During the nine and three months
ended September 30, 2007, the Company operated in one reportable business
segment: manufacturing and trading of aluminium products, and all sales revenues
were derived from Europe.
The following tables disclose the
Companys sales by product types for the nine and three months ended September
30, 2007 and 2006:
|
|
|
NINE MONTHS ENDED
|
|
|
THREE MONTHS ENDED
|
|
|
|
|
SEPTEMBER 30,
|
|
|
SEPTEMBER 30,
|
|
|
SEPTEMBER 30,
|
|
|
SEPTEMBER 30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
By product types
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sheets
|
$
|
3,623
|
|
$
|
8,122
|
|
$
|
1,392
|
|
$
|
3,334
|
|
|
Strips
|
|
22,264
|
|
|
18,749
|
|
|
6,947
|
|
|
6,077
|
|
|
Blanks
|
|
14,786
|
|
|
10,885
|
|
|
5,202
|
|
|
4,397
|
|
|
Foils
|
|
32,637
|
|
|
32,241
|
|
|
10,678
|
|
|
11,651
|
|
|
Other
|
|
11,319
|
|
|
3,000
|
|
|
3,459
|
|
|
1,948
|
|
|
|
$
|
84,629
|
|
$
|
72,997
|
|
$
|
27,678
|
|
$
|
27,407
|
|
As of September 30, 2007, there was no
material change in total assets from December 31, 2006.
5. RELATED PARTIES TRANSACTIONS
During the nine months ended September
30, 2007, the Company had the following transactions with MFC Corporate Services
AG, formerly MFC Merchant Bank S.A., (MFC Bank), MFC Commodities GmbH and its
parent company Mass Financial Corp. (Mass).
|
a)
|
Interest income from MFC Bank on the deposit was
$25.
|
|
|
|
|
b)
|
Sold $66,575 (representing 79% of total sales of
products) and paid marketing cost of $1,899 to MFC Commodities
GmbH.
|
|
|
|
|
c)
|
Accrued or paid interest of $375 to
Mass.
|
10
CATHAY MERCHANT GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the FASB issued
Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
An
Interpretation of FASB Statement No. 109
(FIN 48). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an entitys financial
statements in accordance with FASB Statement No. 109,
Accounting for Income
Taxes
, and prescribes a recognition threshold and measurement attributes for
financial statement disclosure of tax positions taken or expected to be taken an
a tax return. Under FIN 48, the impact of an uncertain income tax position on
the income tax return must be recognized at the largest amount that is more
likely than not to be sustained upon audit by the relevant taxing authority. An
uncertain income tax position will not be recognized if it has less than a 50%
likelihood of being sustained. Additionally, FIN 48 provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006.
The Company adopted the
provisions of FIN 48 on January 1, 2007 and the implementation of FIN 48 does
not have any impact on the Companys financial statements.
The Company recognizes interest
and penalties related to an underpayment of income taxes, if any, in interest
expense. During the nine months ended September 30, 2007, the Company did not
recognize any penalties and interest.
The Company and/or one or more of its subsidiaries file income
tax returns in the United States and Germany.
11
ITEM 2.
|
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
OF OPERATION.
|
Overview
Our primary business involves the
manufacturing of aluminium products. Our wholly-owned subsidiary, Cathay
Merchant Group Ltd., a company incorporated under the laws of Samoa ("Cathay
Ltd."), acquired all of the shares of AWP Aluminium Walzprodukte GmbH and AFM
Aluminiumfolie Merseburg GmbH on June 30, 2005. The companies were acquired for
a combined purchase price of $18.5 million (€15,300,000). AWP Aluminium
Walzprodukte was based in Berlin, Germany, and operated an aluminium rolling
mill through its wholly-owned subsidiary, MAW Mansfelder Aluminiumwerke GmbH. In
2006, AWP Aluminium Walzprodukte merged with and into MAW Mansfelder
Aluminiumwerke, with MAW Mansfelder Aluminiumwerke continuing on as the
surviving corporation. Its products include aluminium sheets, foils, strips and
blanks for use by industrial and commercial fabricators of aluminium products.
On the same date, we also acquired AFM Aluminiumfolie Merseburg, which operates
an aluminium rolling mill factory in Merseburg, Germany and produces aluminium
foil for flexible (food and beverage) packaging, pharmaceutical packaging and
other technical applications.
We hold interests in certain
land, buildings and capital property where the two aluminium mills are located
pursuant to the terms of two lease agreements with Grundstuckfonds
Sachsen-Anhalt GmbH, a company wholly-owned by the State of Saxony-Anhalt,
Germany ("GSA").
Total combined production from
the two mills during the year ended December 31, 2006 was 28,892 metric tonnes
of finished products. The maximum total combined annual production from the two
mills is 40,000 metric tonnes. The principal market for all of our aluminium
products is primarily Europe.
We, through Cathay Ltd., acquired
all of the outstanding shares of AFM Aluminiumfolie Merseburg, pursuant to a
share purchase agreement dated June 30, 2005, from an unrelated third party
for a purchase price of $8.5 million. We paid $4.8 million in cash at closing
on June 30, 2005 and the balance of the purchase price is evidenced by an unsecured
promissory note in the principal amount of $3.7 million (€3,020,000), maturing
on June 30, 2008. The note bears interest at the rate of 4.2% per annum, payable
annually, and calculated on the basis of the actual number of days elapsed and
on the basis of a 365-day year. The note was issued by Cathay Ltd. and is guaranteed
by us.
We acquired all of the outstanding
shares of AWP Aluminium Walzprodukte pursuant to a share purchase agreement
dated June 30, 2005, between Cathay Ltd. and Blake International, a former wholly-owned
subsidiary of KHD Humboldt Wedag International Ltd., for a purchase price of
$10.0 million. We paid $4.8 million in cash at closing on June 30, 2005 and
the balance of the purchase price is evidenced by an unsecured promissory note
in the principal amount of $5.2 million (€4,280,000), maturing on June
30, 2008. The note bears interest at the rate of 4.2% per annum, payable annually,
and calculated on the basis of the actual number of days elapsed and on the
basis of a 365-day year. The note was issued by Cathay Ltd. and is guaranteed
by us. KHD Humboldt Wedag was an affiliate and significant shareholder of our
company at the time of the transaction.
Our aluminium rolled products are
semi-finished products including sheets, foils, strips and blanks that
constitute the raw materials for the manufacture of finished goods which are
completed by our customers. Our aluminium rolling mills produce products for
industrial and commercial purposes. The process of producing semi-finished
aluminium products requires subsequent rolling, or cold rolling, and finishing
steps such as annealing, coating, leveling or slitting to achieve the desired
thicknesses and metal properties.
Aluminium has several
characteristics that provide value for diverse applications. Compared to
substitute metals, aluminium is light-weight, has a high strength-to-weight
ratio and is resistant to corrosion. Aluminium's greatest advantage, however, is
that it can be recycled repeatedly without any material decline in performance
or quality. Recycling of aluminium provides significant energy savings compared
to the production of aluminium from other primary sources with significantly
lower capital equipment costs.
We generally purchase primary
aluminium at prices set on the London Metal Exchange plus a premium that varies
by geographic region of delivery, form and alloy.
12
Industrial and commercial
fabricators in the construction and automotive supply industry represent the
largest customers for MAW Mansfelder Aluminiumwerke's products. Aluminium rolled
products developed for this market segment are often decorative, offer
insulating properties, are durable and corrosion resistant, and have a high
strength-to-weight ratio. Aluminium siding, gutters, and downspouts comprise a
significant amount of construction volume. Other applications include doors,
windows, awnings, canopies, façades, roofing and ceilings. Most of the customers
of MAW Mansfelder Aluminiumwerke receive shipments in the form of aluminium
sheets, foils, strips and blanks which are later fabricated according to our
customers' specifications. Demand for most of MAW Mansfelder Aluminiumwerke's
products is seasonal, with higher demand occurring in the spring, summer and
fall months and lower demand in the winter months. Accordingly, our aluminium
mills typically generate higher revenues in the spring, summer and fall
months.
The majority of our products are
sold to two subsidiaries of Mass Financial Corp., which provide services and
sell the products. Mass Financial currently holds 5,256,844, or 27.8%, of our
common shares as of November 5, 2007.
The aluminium rolled products
market is highly competitive. We face competition from a number of companies in
Germany and from European companies selling their products to our markets. Our
primary competitors in Europe are Norsk Hydro A.S.A., Alcan, Alcoa, Novelis and
Corus. We compete based on our price, product quality, the ability to meet
customers' specifications, short delivery times and range of products offered.
We also use sophisticated technical equipment and focus on high-end niche
markets in order to maintain our competitive advantage.
In addition to competition from
within the aluminium rolled products industry, we face competition from
non-aluminium materials, as fabricators and end-users have, in the past,
demonstrated a willingness to substitute other materials for aluminium.
Aluminium competes with plastic and steel in building products applications.
Factors affecting competition with substitute materials include price, ease of
manufacture, consumer preference and performance characteristics.
The following discussion and
analysis of the results of operations and financial condition of our company for
the three months ended September 30, 2007 should be read in conjunction with the
consolidated financial statements and related notes included in this quarterly
report, as well as our most recent annual report on Form 10-KSB for the year
ended December 31, 2006 filed with the United States Securities and Exchange
Commission.
Results Of Operations Nine Months Ended September 30,
2007
Net product sales for the nine
months ended September 30, 2007 were $84.6 million, compared to $73.0 million in
the same period in 2006. Cost of goods for the nine months ended September 30,
2007 were $80.0 million, compared to $69.5 million in the same period in
2006.
AFM Aluminiumfolie Merseburg's
products include those that utilize aluminium foil because of its light weight,
recyclability and formability and because it has a wide variety of uses in
packaging. Aluminium foil can be processed to create a very thin foil that can
be plain or printed and is typically laminated to plastic or paper to form an
internal seal for a variety of packaging applications including flexible (food
and beverage) packaging, pharmaceutical packaging and other technical
applications. Customers typically order coils of such foil in a range of
thicknesses from 6 microns to 50 microns. AFM Aluminiumfolie Merseburg enters
into annual supply agreements with a majority of its larger customers that are
typically concluded during the fall and winter months to cover the customers'
requirements for the following year. This makes AFM Aluminiumfolie Merseburg's
revenues relatively predictable at an early time in the year.
The aluminium products of MAW
Mansfelder Aluminiumwerke are sold to distributors, as well as end-users,
principally for use by industrial and commercial fabricators of aluminium
products whereas the aluminium products of AFM Aluminiumfolie Merseburg are sold
exclusively to industrial fabricators.
General and administrative
expenses for the nine months ended September 30, 2007 were $4.3 million,
compared to $3.8 million in the same period in 2006.
In July 2007, the German tax
authority announced a change of the Corporation tax rate, effective January 1,
2008, whereby the total tax rate will be reduced approximately from 39% to 29%.
We reduced our deferred tax assets by $0.3 million partially because of this
change.
We reported a net income of $0.2
million, or $0.01 per common share, for the nine months ended September 30,
2007, compared to a net loss of $0.7 million, or $0.04 per common share, in the
same period in 2006.
13
Results of Operations Three Months Ended September 30,
2007
Net product sales for the three
months ended September 30, 2007 were $27.7 million, compared to $27.4 million in
the same period in 2006. Cost of goods sold for the three months ended September
30, 2007 were $26.3 million, compared to $25.9 million in the same period in
2006.
All of our revenues during the
quarter ended September 30, 2007 were generated by our two aluminium rolling
mills.
General and administrative
expenses were $1.4 million for the three months ended September 30, 2007,
compared to $1.0 million in the same period ended September 30, 2006.
We reported a net loss of $5,000,
or $0.00 per common share, for the three months ended September 30, 2007,
compared to a net income of $0.3 million, or $0.02 per common share, in the same
period in 2006.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2007, we had a
working capital deficiency of $12.4 million, compared to a working capital deficiency
of $1.3 million at December 31, 2006.
We anticipate that cash generated
from our operations will not be able to cover all of our projected operating
expenses and projected expenditures in the following twelve months. We may try
to raise funds to meet our future cash requirements by extension of debt or
equity financing or we may sell some of our investments. However, we can offer
no assurance that we will be successful in raising cash in such methods.
Operating Activities
Operating activities used cash of
$0.8 million for the nine months ended September 30, 2007, and provided cash of
$1.6 million in the same period ended 2006.
Investing Activities
Investing activities used cash of
$0.3 million for the nine months ended September 30, 2007, compared to $0.4
million in the same period ended 2006, as a result of the purchase of fixed
assets.
Financing Activities
Financing activities provided
cash of $0.2 million for the nine months ended September 30, 2007, compared to
$88,000 in the same period ended 2006.
14
Foreign currency
All of our operations are
conducted in Europe and our consolidated financial results are subject to
foreign currency exchange rate fluctuations.
We translate assets and
liabilities of our foreign subsidiaries whose functional currencies are other
than United States dollars into United States dollars at the rate of exchange on
the balance sheet date. Revenues and expenses are translated at the average rate
of exchange prevailing during the period. Unrealized gains or losses from these
translations, or currency translation adjustments, are recorded under the
shareholders equity section on the balance sheet and do not affect the net
earnings as reported in our consolidated statements of income. As our revenues
are received in Euros, our financial position for any given period, when
reported in United States dollars, can be significantly affected by the
fluctuation of the exchange rates for Euros during that period.
Based upon the average exchange
rates for the nine months ended September 30, 2007, the United States dollar
decreased by approximately 7.5% in value against the Euro, compared to the
average exchange rates for the nine months ended September 30, 2006. As at
September 30, 2007, the United States dollar decreased by approximately 7.2% in
value against the Euro since December 31, 2006.
For the nine months ended
September 30, 2007, we reported approximately a net $1.1 million currency
translation adjustment gain and, as a result, our cumulative currency
translation adjustment gain at September 30, 2007 was $2.2 million, compared to
a cumulative gain of $1.1 million at December 31, 2006.
Off-Balance Sheet Arrangements
Our company has no outstanding
derivative financial instruments, off-balance sheet guarantees, interest rate
swap transactions or foreign currency contracts. Our company does not engage in
trading activities involving non-exchange traded contracts.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The preparation of financial
statements in conformity with generally accepted accounting principles requires
management of our company to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting periods.
Our management routinely makes
judgments and estimates about the effects of matters that are inherently
uncertain. As the number of variables and assumptions affecting the probable
future resolution of the uncertainties increase, these judgments become even
more subjective and complex. We are currently in the aluminium manufacturing and
trading business and have identified certain accounting policies, described
below, that are the most important to the portrayal of our current financial
condition and results of operations.
Revenue Recognition
Our primary business is aluminium
manufacturing and trading and our revenue primarily comes from the sale of
aluminium products produced and sold. We receive orders from customers, process
and convert the raw materials into finished goods, and ship the finished goods
at the instructions of our customers. It is a simple manufacturing and trading
process. The revenue is recognized when the finished goods are delivered, the
terms of the sales are known and complied with and no significant obligations
remain. Management believes that the risk of misstating the revenue is very
remote and the only major misstatement, if any, comes from the period-end
cut-off.
Our return policy is governed by
the provisions of the German Civil Code and the German Commercial Code. It
stipulates that the seller has to transfer the product free from defects in
materials and workmanship to the purchaser. To be deemed free from defects, the
product has to be of the quality the two parties agreed on in their contract,
when being transferred. If the product is not free from defects during the
warranty period of two years, German law offers four possible claims to the
purchaser:
15
-
Subsequent improvements or subsequent delivery to
the choice of the purchaser. Other options for the purchaser only arise if the
seller subsequently fails to perform his contractual duty.
-
After unsuccessfully requesting improvements of the
product, the purchaser may withdraw from the contract, in which case a full
cash refund is mandatory and the product has to be returned to the seller.
-
Instead of withdrawing, the purchaser may keep the
product and consider a reduction of the purchase price.
-
The purchaser might claim compensation for the
non-performance of the sale.
Once an order has been placed by
the purchaser and accepted by the seller the purchaser has no legal right to
withdraw from the contract, unless the seller fails to perform his duties. A
mutual cancellation is subject to the acceptance of the seller and depends on
the individual situation.
Goodwill Impairment
A goodwill impairment loss should
be recognized when the carrying amount of the goodwill exceeds the fair value of
the goodwill. An impairment loss should not be reversed if the fair value
subsequently increases. We consider, but such consideration is not limited to,
the following factors to determine the goodwill impairment:
-
a significant adverse change in legal factors or in
the business climate;
-
an adverse action or assessment by a regulator;
-
unanticipated competition;
-
loss of key personnel;
-
a more-likely-than-not expectation that a
significant portion or all of a reporting unit will be sold or otherwise
disposed of;
-
the testing for write-down or impairment of a
significant asset group within a reporting unit; or
-
the recognition of a goodwill impairment loss in
its separate financial statements by a subsidiary that is a component of the
reporting unit.
Impairment of Long-Lived Assets
We periodically evaluate
long-lived assets whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In performing the review of
recoverability, we estimate future cash flows expected to result from the use of
the asset and its eventual disposition. The estimates of future cash flows,
based on reasonable and supportable assumptions and projections, require our
management to make subjective judgments. In addition, the time periods for
estimating future cash flows is often lengthy, which increases the sensitivity
of the assumptions made. Depending on the assumptions and estimates used, the
estimated future cash flows projected in the evaluation of long-lived assets can
vary within a wide range of outcomes. Our management considers the likelihood of
possible outcomes in determining the best estimate of future cash flows.