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U.S. 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, 2001
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from ---- to ----
Commission file number 001-12127
EMPIRE RESOURCES, INC.
(Exact Name of Registrant as Specified in Its Charter)
- ------------------------------------------------------------------- ---------------------------------------------------
DELAWARE 22-3136782
- ------------------------------------------------------------------- ---------------------------------------------------
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
- ------------------------------------------------------------------- ---------------------------------------------------
ONE PARKER PLAZA
FORT LEE, NJ 07024
(Address of Principal Executive Offices)
201 944-2200
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
------------------- ------------------------------
registered
----------
COMMON STOCK, PAR VALUE $0.01 PER SHARE AMERICAN STOCK EXCHANGE
Securities registered pursuant to Section 12 (g) of the Act: NONE
Check whether the registrant: (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if disclosure of delinquent filers in response to Item 405 of
regulation S-B is not contained in this form, and no disclosure will 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 K. [x]
State registrant's revenues for its most recent fiscal
year: $143,235,385.
As of March 15, 2002, the aggregate market value of the voting stock of
the registrant held by non-affiliates was approximately $3.5 million. Such
market value was calculated based upon the closing price of the stock on the
American Stock Exchange as of such date and 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.
State the number of shares outstanding of each of the registrant 's
classes of common equity, as of the latest practicable date: 10,569,051 shares
of common stock outstanding as of March 15, 2002.
DOCUMENTS INCORPORATED BY REFERENCE:
None.
EMPIRE RESOURCES, INC.
FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
INDEX
10-K Part and Item No. Page
- ---------------------- ----
PART I
Item 1 Business. 4
Item 2 Property. 8
Item 3 Legal Proceedings. 9
Item 4 Submission of Matters to a Vote of Security Holders. 10
PART II
Item 5 Market for Common Equity and Related
Stockholder Matters. 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. 19
Item 8 Financial Statements and Supplementary Data. 20
Item 9 Changes In and Disagreements With Accountants
On Accounting and Financial Disclosure. 20
PART III
Item 10 Directors and Executive Officers 21
Item 11 Executive Compensation. 23
Item 12 Certain Relationships and Related Transactions 27
Item 13 Security Ownership of Certain Beneficial Owners
And Management. 28
Item 14 Exhibits and Reports on Form 8K 30
PART I
ITEM 1. BUSINESS
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; changes in laws,
regulations and tariffs; changes in the size and nature of the Company's
competition; changes in interest rates, foreign currencies or spot prices of
aluminum; loss of one or more foreign suppliers or key executives; increased
credit risk from customers; failure of the government to renew the generalized
system of preference, which provides preferential tariff treatment for certain
of the Company's imports; failure of the Company to grow internally or by
acquisition and to integrate acquired businesses; failure to improve operating
margins and efficiencies; and changes in the assumptions used in making such
forward-looking statements.
You should carefully review all of these factors, and you should be aware that
there may be other factors that could cause these differences, including, among
others, the factors listed under "Certain Factors Affecting Future Operating
Results," beginning on page [16]. 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 do not promise to update any forward-looking
statements to reflect changes in underlying assumptions or factors, new
information, future events or other changes.
HISTORY
Empire Resources, Inc. (the "Company") was incorporated in the State of
Delaware in 1990 under the name Integrated Technology USA, Inc. ("Integrated").
Until September 17, 1999, the Company was in the business of designing,
developing and marketing products for emerging computer related markets. During
this period, the Company had generated limited revenues from the sale of its
computer related products. On November 6, 1997, the Company announced its
decision to discontinue its existing operations in their entirety by December
31, 1997. The Company sought a merger/acquisition opportunity that would enable
it to deploy its cash into a new operating business.
4
On February 22, 1999, the Company signed an agreement to merge (the
"Merger") 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. In this report, the Company refers to Empire
Resources, Inc., after the effective date of the Merger. Empire refers to Empire
Resources, Inc. as it existed prior to the effective date of the Merger.
References to the Company include all subsidiaries, consolidated for purposes of
the Company's financial statements.
Under the terms of the Agreement and Plan of Merger (the "Merger
Agreement"), effective September 17, 1999, Empire was merged with and into the
Company, and the name of the Company was changed to Empire Resources, Inc. In
connection with the Merger, the Company issued to the then current stockholders
of Empire 9,384,761 shares of common stock, of which 3,824,511 shares of common
stock were placed in escrow. Some or all of the escrowed shares were eligible
for release to the former stockholders of Empire after March 31, 2001 based on a
two-year earn-out formula; however, none of the escrowed shares were released as
a result of the formula and the shares were retired.
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 Empire.
The Company has two other wholly owned subsidiaries, I.T.I. Innovative
Technology, Ltd. ("Innovative") and CompuPrint Ltd. ("CompuPrint"), both of
which are incorporated in Israel and are presently inactive.
For accounting and other financial reporting purposes, the merger has
been treated as a "reverse acquisition." Under this treatment, the surviving
corporation has been treated as a continuation of Empire, and the merger has
been treated as an issuance of shares by Empire to the stockholders of
Integrated in exchange for Integrated's cash. Accordingly, the accompanying
financial statements are the historical financial statements of Empire and
Empire Resources Pacific Ltd., and include the results of operations of
Integrated and its subsidiaries (which have been minimal) only from September
17, 1999.
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 in Canada, Australia and New Zealand. The Company sells its
products through its own marketing and sales personnel and through its
independent sales agents located in the U.S. who receive commissions on sales.
Empire-Pacific acts as the Company's sales agent in Australia and New Zealand.
The Company purchases from suppliers located throughout the world. 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.
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 learn the specific requirements of each customer. 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 required by the customer.
5
Expand Volumes and Product Breadth with Existing Suppliers. The Company
strives to lever its existing long-standing relationships with suppliers through
increased volume with existing product lines and by adding new product lines
that are within the suppliers' range of production and that are saleable in the
Company's marketing area. The Company believes that by pursuing this strategy it
will increase its volume to its existing suppliers while at the same time
establishing new markets serving to increase 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. The
Company may seek to acquire the capability to provide its customers with
additional value-added services (such as various processing, 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. During 2000, the Company finalized a five-year lease on a
property in Baltimore. This facility serves the dual purpose of: (a) providing
depot/warehousing capacity for just-in-time delivery for its 4 metals division
(see "Competition", below) and (b) providing handling capability and inventory
control at the Baltimore port of entry, the Company's most active import
location. The Company anticipates that this arrangement may reduce freight and
handling expenses while concurrently increasing efficiency, and enable the
Company to monitor deliveries and serve customers more effectively. The Company
is currently reviewing the possibility of adding additional facilities in other
locations.
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.
According to Brook Hunt, in 2000, the following industries accounted
for the indicated percentages of western world consumption of aluminum:
transportation (35%), packaging (19%), building (19%), machinery and equipment
(9%), electrical (7%), consumer durables (5%), and other industries (6%).
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 The
Aluminum Association Inc., demand for mill aluminum products in the United
States in 2001 declined approximately 13% from shipments in 2000.
6
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) to 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 fill orders within a time-period mutually
agreed with the customer -- generally within a 30 day period. 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 the United States 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.
In 1996, the Company extended its distribution territory by
establishing Empire-Pacific to distribute Empire's products in Australia and New
Zealand.
BACKLOG
At December 31, 2001, the amount of backlog of firm orders was
approximately $50 million, (as compared to $45 million at December 31, 2000)
representing 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 in the December 31, 2001 backlog by June 30, 2002.
SUPPLIERS
The Company enjoys exclusive representation arrangements with several
foreign mills. The Company provides important services to its suppliers by:
o serving as an integrated marketing and distribution 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.
7
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 2001 the Company continued to work with existing suppliers and
continued to seek new long-term sources to underpin its position in the market.
CUSTOMERS
The Company serves over 150 customers in diverse industries, including
transportation, automobile, housing, appliances and packaging. In 2001, the top
ten customers of the Company represented approximately 46% of its sales. 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 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 underwrite with
respect to each customer.
TRANSPORTATION
The Company arranges for the transportation to customers of the
products that they purchase from the Company. 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 rail and trucking 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 and
have significantly greater financial resources than the Company. The Company
also competes with other importers and agents that act for foreign aluminum
producers. The Company believes that agents of foreign mills are generally less
capable of serving the needs of 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.
ITEM 2. DESCRIPTION OF PROPERTY
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 2005. The lease provides for an annual rental payment of $215,881.
8
The Company leases a warehouse and distribution facility in Baltimore,
Maryland pursuant to a lease expiring in October 2005. The lease provides for
annual rental payments of $138,125 to $161,587 over the term of the lease.
Management believes that the Company's facilities are adequate to meet its
current needs.
EMPLOYEES
As of December 31, 2001, the Company had 25 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 five
employees in Australia.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings involving the Company.
9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders of Empire Resources, Inc.
was held on October 5, 2001. At the annual meeting, the stockholders voted on
three proposals 1) to elect directors to the board of directors of Empire, 2) to
approve and adopt an amendment to the Company's Amended and Restated Certificate
of Incorporation, as amended, to reduce the number of authorized shares of
Common Stock of the Company from 40,000,000 shares to 20,000,000 shares and to
eliminate the 5,000,000 authorized shares of preferred stock, and 3) to ratify
the appointment of Richard A. Eisner & Company, LLP as independent auditors for
the fiscal year ending December 31, 2001.
The following table sets forth the number of votes for, against or
withheld, as well as the number of abstentions and broker non-votes, as to each
matter voted upon at the annual meeting and each nominee to the board of
directors.
- -------------------------------- -------------------- ------------------- ------------------- ------------------- ------------------
MATTER VOTES FOR VOTES AGAINST VOTES WITHHELD BROKER NON-VOTES ABSTENTIONS
- -------------------------------- -------------------- ------------------- ------------------- ------------------- ------------------
- -------------------------------- -------------------- ------------------- ------------------- ------------------- ------------------
ELECTION OF:
- -------------------------------- -------------------- ------------------- ------------------- ------------------- ------------------
WILLIAM SPIER 10,177,192 83,524 -0- -0- -0-
- -------------------------------- -------------------- ------------------- ------------------- ------------------- ------------------
NATHAN KAHN 10,177,192 83,524 -0- -0- -0-
- -------------------------------- -------------------- ------------------- ------------------- ------------------- ------------------
SANDRA KAHN 10,177,192 83,524 -0- -0- -0-
- -------------------------------- -------------------- ------------------- ------------------- ------------------- ------------------
JACK BENDHEIM 10,177,192 83,524 -0- -0- -0-
- -------------------------------- -------------------- ------------------- ------------------- ------------------- ------------------
BARRY L. EISENBERG 10,177,192 83,524 -0- -0- -0-
- -------------------------------- -------------------- ------------------- ------------------- ------------------- ------------------
PETER G. HOWARD 10,177,192 83,524 -0- -0- -0-
- -------------------------------- -------------------- ------------------- ------------------- ------------------- ------------------
NATHAN MAZUREK 10,177,192 83,524 -0- -0- -0-
- -------------------------------- -------------------- ------------------- ------------------- ------------------- ------------------
MORRIS J. SMITH 10,177,192 83,524 -0- -0- -0-
- -------------------------------- -------------------- ------------------- ------------------- ------------------- ------------------
HARVEY WRUBEL 10,177,192 83,524 -0- -0- -0-
- -------------------------------- -------------------- ------------------- ------------------- ------------------- ------------------
- -------------------------------- -------------------- ------------------- ------------------- ------------------- ------------------
ADOPTION OF AMENDMENT TO
REDUCE NUMBER OF AUTHORIZED
SHARES 6,960,505 26,150 -0- 3,273,661 400
- -------------------------------- -------------------- ------------------- ------------------- ------------------- ------------------
- -------------------------------- -------------------- ------------------- ------------------- ------------------- ------------------
APPOINTMENT OF RICHARD A.
EISNER & COMPANY LLP AS
INDEPENDENT AUDITORS 10,253,816 5,400 -0- -0- 1,500
- -------------------------------- -------------------- ------------------- ------------------- ------------------- ------------------
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET FOR COMMON STOCK
The Company's common stock commenced trading on the American Stock
Exchange ("AMEX") on October 1, 1996, under the symbol ITH. In conjunction with
the Merger on September 17, 1999, the symbol was changed to ERS.
10
The table below sets forth the high and low sales prices for the
common stock as reported on the AMEX for the periods indicated.
COMMON STOCK
-----------------------------------------------------------
2001 2000
---- ----
PERIOD HIGH LOW HIGH LOW
------ ---- --- ---- ---
1st Quarter ........... $1.188 $ 0.875 $1.563 $ 1.313
2nd Quarter ........... $1.180 $ 0.900 $1.500 $ 0.938
3rd Quarter ........... $1.100 $.0900 $1.250 $ 0.875
4th Quarter ........... $1.070 $ 0.850 $1.188 $ 0.813
On March 15, 2002, the closing price of the common stock on AMEX was
$.90 and there were 46 holders of record of the Common Stock.
DIVIDENDS
The Company has never paid any dividends on its common stock and
expects for the foreseeable future to retain all of its earnings from operations
for use in expanding and developing its business. Any future decision as to the
payment of dividends will be at the discretion of the board of directors and
will depend upon earnings, receipt of dividends from subsidiaries, financial
position, capital requirements, plans for expansion and such other factors as
the board of directors deems relevant. In addition, covenants contained in
agreements with commercial banks require the Company to maintain working capital
and net worth ratios that restrict the Company's ability to declare or pay
dividends.
SHARE REPURCHASE
In November 1999, the Board of Directors authorized the Company to
repurchase up to one million shares of its common stock at prices not to exceed
$1.50 per share. In December 2000, the Board of Directors authorized an increase
in the share repurchase program from 1 million shares to 1.5 million shares. As
of December 31, 2001, the Company had repurchased a total of 1,130,600 shares
for an aggregate cost of $1,288,495. The Company also had acquired 50,000 shares
for a cost of $50,000 in connection with the reverse merger in September 1999.
WARRANTS
In connection with the a bridge financing during the year ended
December 31, 1996, the Company issued warrants to purchase an aggregate of
199,174 shares of common stock at an exercise price of $0.60 per share. As of
December 31, 2001, 90,838 of such warrants remain outstanding.
In connection with its initial public offering in October 1996 (the
"IPO"), the Company issued warrants to acquire 3,360,082 shares of its common
stock at an exercise price of $9.00 per share, subject to adjustment under
certain circumstances. These warrants expired on October1, 2001.
In connection with the IPO, Integrated sold to an underwriter of the IPO,
for nominal consideration, warrants to purchase up to 300,000 shares of its
common stock and/or 300,000 warrants to acquire 300,000 shares of common stock
(the "Representative Warrants"). These warrants expired on October 1, 2001.
11
ITEM 6 SELECTED FINANCIAL DATA
The following table sets forth for the periods indicated selected
consolidated financial and operating data for the Company. As a result of the
reverse merger completed on September 17, 1999, the Company has been treated as
a continuation of the business of Empire, and accordingly, the accompanying
financial data are the financial data of Empire and Empire Resources Pacific
Ltd., and include the results of operations of Integrated and its subsidiaries
(which have been minimal) only from September 17, 1999. Pro forma net income and
pro forma earnings per share reflect provisions for income taxes as if Empire,
which was taxed as an S corporation until September 17, 1999, had been treated
as a C corporation for all of 1999, 1998 and 1997. The consolidated balance
sheet data and consolidated statement of operations data as of and for the years
ended December 31, 2001, 2000, 1999, 1998, and 1997 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,
- ----------------------------------------- ------------------ ----------------- ------------------ ------------------ -------------
2001 2000 1999 1998 1997
- ----------------------------------------- ------------------ ----------------- ------------------ ------------------ -------------
- ----------------------------------------- ------------------ ----------------- ------------------ ------------------ -------------
Operating Data:
- ----------------------------------------- ------------------ ----------------- ------------------ ------------------ -------------
Net Sales $143,235,385 $165,327,827 $107,112,064 $101,163,278 111,169,339
- ----------------------------------------- ------------------ ----------------- ------------------ ------------------ -------------
Operating Income $4,082,519 $5,040,994 $4,273,336 $3,858,905 5,074,256
- ----------------------------------------- ------------------ ----------------- ------------------ ------------------ -------------
Net Income $1,295,419 $1,040,787
- ----------------------------------------- ------------------ ----------------- ------------------ ------------------ -------------
Pro Forma Net Income $1,308,676 $1,571,912 $2,345,236
- ----------------------------------------- ------------------ ----------------- ------------------ ------------------ -------------
Per Share Data:
- ----------------------------------------- ------------------ ----------------- ------------------ ------------------ -------------
Weighted average shares outstanding
- ----------------------------------------- ------------------ ----------------- ------------------ ------------------ -------------
Basic 10,956,001 11,346,347 7,327,663* 5,560,250* 5,560,250*
- ----------------------------------------- ------------------ ----------------- ------------------ ------------------ -------------
Diluted 11,091,047 11,445,432 7,356,186* 5,560,250* 5,560,250*
- ----------------------------------------- ------------------ ----------------- ------------------ ------------------ -------------
- ----------------------------------------- ------------------ ----------------- ------------------ ------------------ -------------
Earnings Per Share:
- ----------------------------------------- ------------------ ----------------- ------------------ ------------------ -------------
Basic $.12 $.09
- ----------------------------------------- ------------------ ----------------- ------------------ ------------------ -------------
Diluted $.12 $.09
- ----------------------------------------- ------------------ ----------------- ------------------ ------------------ -------------
- ----------------------------------------- ------------------ ----------------- ------------------ ------------------ -------------
Pro Forma earnings per share:
- ----------------------------------------- ------------------ ----------------- ------------------ ------------------ -------------
Basic $.18 $.28 $.42
- ----------------------------------------- ------------------ ----------------- ------------------ ------------------ -------------
Diluted $.18 $.28 $.42
- ----------------------------------------- ------------------ ----------------- ------------------ ------------------ -------------
- ------------------------------------------------ ---------------------------------------------------------------------------------
Balance Sheet Data:
- ------------------- As of December 31,
- ------------------------------------------------ ----------------- ---------------- ---------------- ---------------- ------------
2001 2000 1999 1998 1997
- ------------------------------------------------ ----------------- ---------------- ---------------- ---------------- ------------
Total Assets $52,763,600 $69,109,730 $46,397,823 $34,739,456 47,165,047
- ------------------------------------------------ ----------------- ---------------- ---------------- ---------------- ------------
Working Capital $11,823,708 $10,945,805 $10,064,593 $10,476,011 11,678,692
- ------------------------------------------------ ----------------- ---------------- ---------------- ---------------- ------------
Stockholders' Equity $11,944,950 $11,100,821 $10,175,731 $10,734,978 11,544,288
- ------------------------------------------------ ----------------- ---------------- ---------------- ---------------- ------------
* pro forma
12
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company is a distributor of value added, semi-finished aluminum
products. Consequently, 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 60% of the
Company's purchases for the year ended December 31, 2001, and three suppliers
accounted for 74% of 2001 purchases.
RESULTS OF OPERATIONS
The Merger between Integrated and Empire was completed on September 17,
1999. For accounting and other financial reporting purposes, the Merger has been
treated as a "reverse acquisition." Under this treatment, the Company has been
treated as a continuation of Empire, and the Merger has been treated as an
issuance of shares by Empire to the stockholders of Integrated in exchange for
Integrated's cash. Accordingly, the accompanying financial statements include
the historical financial statements of Empire and Empire-Pacific, and include
the results of operations of Integrated only from September 17, 1999, the
effective date of the Merger.
Fiscal Years Ended December 31, 2001 and 2000
Net sales decreased by $22.1 million or 13.4% from $165 million in 2000
to $143 million in 2001. The weaker economy and weaker demand for industrial
products coupled with declining prices resulted in this reduction in sales. This
decline in sales was also reflected in lower gross profit for the year 2001.
Gross profit declined by 12.8% from $10.7 million to $9.4 million. Gross profit
as a percentage of sales was relatively constant at approximately 6.5%.
Selling, general and administrative expenses declined by $.4 million or
approximately 7% as the result of cost saving measures instituted during the
year, including legal fees, travel and entertainment. Non cash compensation was
also lower as a result of a reduced number of shares vesting.
Interest expense declined $1.1 million or 35% from $3.1 million to $2.0
million as a result of reduced interest rates and reductions in loan balances
from a high of $40 million in 2000 to $26.7 million at the end of 2001.
Income taxes in 2000 included $0.2 million of state taxes, net of
federal tax benefits, pertaining to periods prior to the Merger (as described
under "Market for Common Equity and Related Stockholder Matters - Capital
Contribution by Stockholders"). Adjusting for this prior period tax, taxes for
the period 2001 increased by approximately $.1 million as a result of the
increase in income before taxes for the year 2001. Net Income was $1.3 million
for 2001 compared to $1.0 million for 2000.
Fiscal Years Ended December 31, 2000 and 1999
Net sales increased $58.2 million or 54% from $107.1 million in 1999 to
$165.3 million in 2000. The increase in sales in 2000 resulted from the
increased availability of material from a principal supplier after this supplier
completed a mill expansion.
13
Gross profit increased $2.6 million or 32% from $8.2 million in 1999 to
$10.7 million in 2000 as a result of the increase in sales. Gross profit as a
percentage of sales declined from 7.6% to 6.5% as a result of higher purchasing
costs, more favorable sales terms and operating inefficiencies relating to
material handling and product staging associated with the sharply increased
sales volume.
Selling, general and administrative expenses increased $1.8 million or
46% from $3.9 million in 1999 to $5.7 million in 2000 as a result of a non-cash
compensation charge of $0.3 million (see "Accounting Treatment of Restricted
Stock Agreement", below), increased staffing costs associated with customer
service, costs related to employment contracts with certain executive officers
(see "Certain Agreements Entered into with Executive Officers"), professional
fees and costs of operating as a public company.
Interest expense increased $0.9 million or 41% from $2.2 million in
1999 to $3.1 million in 2000. The increase in interest expense is related to
higher levels of outstanding bank indebtedness required in order to fund the
Company's higher inventory and other working capital needs.
Income taxes increased $0.7 million from $0.2 in 1999 to $0.9 million
in 2000 due to the change in the tax status of the Company and because of a
state tax assessment for prior years recorded in 2000. Prior to the Merger,
Empire had been taxed as an S corporation for Federal income tax purposes. In
general, the income or loss of an S corporation is passed through to its owners
rather than being subject to tax at the entity level. Post Merger the Company
has been taxed as a C corporation. As a result, 1999 income taxes reflect state
and local income tax for the whole year and federal income tax only for the
period from September 17, 1999 to December 31, 1999, while 2000 taxes reflect
federal, state and local taxes for the entire period. Consequently, for
comparative purposes, the Company has presented pro-forma income taxes as if the
Company had been taxed as a C corporation for all of 1999, together with the
resulting pro-forma net income for that year.
In addition, income taxes in 2000 included $0.2 million of state taxes,
net of federal tax benefits, pertaining to periods prior to the Merger (as
described under "Market for Common Equity and Related Stockholder Matters -
Capital Contribution by Stockholders").
The change in the Company's income tax status had a significant impact
on net income. The Company reported net income of $1.0 million for 2000,
compared to net income of $2.0 million for 1999. The net income for 2000 was
$0.3 million or 23% lower than pro forma net income of $1.3 million (net of pro
forma income taxes) for 1999.
ACCOUNTING TREATMENT OF RESTRICTED STOCK AGREEMENT
The Company and Nathan and Sandra Kahn entered into a restricted stock
agreement with Mr. Wrubel on September 15, 1999. Mr. Wrubel is currently Vice
President of Sales of the Company. Pursuant to the restricted stock agreement,
the Kahns transferred to Mr. Wrubel 469,238 shares ("Restricted Shares") of
common stock of the Company which represents a portion of the shares that were
received by the Kahns in the Merger. The Restricted Shares were comprised of (i)
358,327 shares (the "Non-Contingent Restricted Shares") that vest on September
17th of 2000, 2001, and 2002 subject only to the condition that Mr. Wrubel
continue to be employed by the Company as of the vesting date, and (ii) 110,911
shares (the "Contingent Restricted Shares") that were subject to the same
vesting criteria as the Non-Contingent Restricted Shares and, in addition, were
subject to the condition that the number of shares (if any) that will vest will
be a function of the after-tax net income of the Company over a specified
period.
14
Under applicable accounting rules, the share transfer is being treated
as if the Company had issued the shares to Mr. Wrubel as compensation for
services and, accordingly, the Company is required to recognize an expense
relating thereto. The expense relating to the Non-Contingent Restricted Shares
is based on the fair market value of the stock as of the grant date and is being
recognized over the vesting period. The Company recognized $536,453 of such
expense through December 31, 2001, and will recognize $45,830 of expense in
2002. The earnings targets required for issuance of the Contingent Restricted
Shares were not achieved and these shares were retired in 2001.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Intangible Assets." SFAS 141
requires that all business combinations be accounted for by the purchase method
of accounting and changes the criteria for recognition of intangible assets
acquired in a business combination. The provisions of SFAS No. 141 apply to all
business combinations initiated after June 30, 2001. SFAS No. 142 requires that
goodwill and intangible assets with indefinite useful lives no longer be
amortized but tested for impairment at least annually, while intangible assets
with finite useful lives continue to be amortized over their respective useful
lives. The statement also establishes guidance for testing goodwill and
intangible assets with indefinite useful lives for impairment. The provisions of
SFAS 142 will be effective for 2002. However, goodwill and intangible assets
acquired after June 30, 2001 are subject immediately to the provisions of SFAS
142. The Company does not expect that the adoption of SFAS 141 and 142 will have
a material effect on its consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
impairment or Disposal of Long-Lived Assets." This statement supercedes SFAS
No.121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." The statement retains the previously existing
accounting requirements related to the recognition and measurement of the
impairment of long-lived assets to be held and used while expanding the
measurement requirements of long-lived assets to be disposed of by sale to
include discontinued operations. It also expands the previously existing
reporting requirements for discontinued operations to include a component of an
entity that either has been disposed of or is classified as held for sale. The
Company adopted SFAS No. 144 on January 1, 2002. Management does not expect this
statement to have a material impact on the Company's consolidated financial
position or results of operations.
The Company adopted SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities" as of January 1, 2001. The adoption of this standard did
not have a material effect on the Company's results of operations for 2001.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash balance decreased $0.1 million, to $1.1 million, in
the year ended December 31, 2001. Net cash of $11.8 million was provided by
operating activities, while $11.9 million of net cash was used in financing
activities.
The $11.9 million of net cash used in financing activities was
primarily the result of repayment of borrowings of $11.3 million under the
Company's line of credit, and the acquisition of $0.6 million of treasury stock
under its stock buy-back program.
15
The $11.8 million of net cash provided by operating activities was
primarily the result of a decrease in accounts receivable of $14.6 million, a
decrease in inventories of $1.1 million and net income of $1.3 million,
partially offset by a $5.9 million decrease in accounts payable.
Empire currently operates under a revolving line of credit, including a
commitment to issue letters of credit, with three commercial banks. The
available line was $60 million as of December 31, 2001. Borrowings under these
lines of credit are collateralized by security interests in substantially all of
Empire's assets. Under these credit agreements, Empire is required to maintain
working capital and net worth ratios. These facilities expire on June 30, 2003.
As of December 31, 2001, the amount outstanding under the Company's revolving
lines of credit was $26.7 million (excluding letters of credit of approximately
$4.4 million).
Management believes that cash from operations, together with funds
available under its credit facility, will be sufficient to fund the cash
requirements relating to the Company's existing operations for the next twelve
months. Empire may require additional debt or equity financing in connection
with the future expansion of its operations.
COMMITMENTS AND CONTINGENCIES
Empire has contingent liabilities in the form of letters of credit to
some of its suppliers. As of December 31, 2001, Empire's outstanding letters of
credit amounted to approximately $4.4 million.
Under the terms of some of its supply contracts, the Company is
required to take minimum tonnages as specified in those contracts. As a result,
the Company could, under certain circumstances, be forced to sell the required
tonnage at a loss.
CAPITAL CONTRIBUTION BY STOCKHOLDERS
Results of operations for 2000 include a provision for an adjustment to
state income taxes relating to Empire's earnings before the Merger. Pursuant to
the Agreement and Plan of Merger, the former stockholders of Empire have
contributed capital to the Company in an amount sufficient to indemnify it for
these taxes. As a result of this event, total stockholders' equity as of
December 31, 2000 has been increased by $97,158.
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
THE COMPANY IS HIGHLY DEPENDENT ON A FEW SUPPLIERS.
The Company purchased approximately 60% of its products from one
supplier in 2001. As a result, the termination or limitation by this supplier of
its 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.
THE COMPANY IS HIGHLY DEPENDENT ON A FEW SIGNIFICANT CUSTOMERS.
16
The Company's sales are highly concentrated to a few customers. In
2001, 46% of the Company's revenues were derived from sales to ten customers. As
a result, any material reduction in sales to any of these customers could have a
material adverse effect on the Company's business.
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 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.
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.
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, 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. While the
Company hedges metal pricing and foreign currency as it deems appropriate for a
portion of its purchase and sales contracts, there exists the risk of a
counterparty default 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.
17
THE COMPANY MAY BE REQUIRED TO PURCHASE MINIMUM TONNAGES
Under the terms of some of its supply contracts, the Company may be
required to take minimum tonnages which it subsequently finds it is unable to
sell at a profit.
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 and specific limits on each customer's receivables. 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.
INCREASED TARIFFS COULD ADVERSELY AFFECT THE COMPANY'S FINANCIAL CONDITION.
During 2001, in excess of 60% 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 preference(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 in any given year after it expired on September 30, 2001. 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. GSP Legislation has in the past
been renewed either prior to expiration or thereafter, on a retroactive basis to
the date of expiration. This does not guarantee that it will be renewed in the
same manner this year.
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. 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.
Further, the Company as part of its course of business is engaged in the
importation of steel wire rod. Such products are currently subject to import
quota, and all applicable duties. In addition, the U.S. Department of Commerce
is currently investigating whether to levy additional anti-dumping and/or
counterveiling duties. If the final determination is found in the affirmative,
it may adversely affect the Company's ability to expand its business further
into
18
steel products. In addition, should such duties be imposed on a retroactive
basis, the Company may be exposed to significant damage and expense.
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 the
customer.
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 access to greater 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
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 transactions. The Company also enters into foreign exchange
forward contracts to hedge its exposure related to commitments to purchase or
sell non-ferrous metals denominated in international currencies. The Company
records "mark-to-market" adjustments on these futures and forward positions and
on the underlying firm purchase and sales commitments which they hedge, and
reflects the net gains and losses currently in earnings. The Company does not
engage in trading or speculative transactions.
As of January 1, 2001, the Company has adopted Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting For Derivative Instruments and
Hedging Activities", issued by the Financial Accounting Standards Board. SFAS
No. 133 requires the Company to recognize all derivatives in the balance sheet
at fair value. Derivatives that are not hedges must be adjusted to fair value
through earnings. If the derivative is a hedge, depending upon the nature of the
hedge, changes in the fair value of the derivative are either offset against the
change in fair value of the hedged assets, liabilities or firm commitments
through earnings, or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value, if any, is immediately recognized in earnings.
The Company uses financial instruments designated as fair value hedges
to manage its exposure to commodity price risk and foreign currency exchange
risk inherent in its trading activities. It is the Company's policy to hedge
such risks, to the extent practicable. The Company enters into high-grade
aluminum futures contracts to limit its gross margin exposure by hedging the
metals content element of firmly committed purchase and sales commitments. The
Company also enters into foreign exchange forward
19
contracts to hedge its exposure related to commitments to purchase or sell
non-ferrous metals denominated in international currencies. The Company records
"mark-to-market" adjustments on these futures and forward positions, and on the
underlying firm purchase and sales commitments which they hedge, and reflects
the net gains and losses currently in earnings. The gains and losses on futures
and forward positions as of January 1, 2001 offset the gains and losses at that
date on the underlying firm purchase and sales commitments which they hedged,
and accordingly the Company did not record a transition adjustment as of January
1, 2001.
ITEM 8. FINANCIAL STATEMENTS
Furnished at end of report commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON AUDITING AND
FINANCIAL DISCLOSURE
During the past two years, the Company has not made changes in, and has
not had disagreements with, its independent accountants on accounting and
financial disclosures
20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
OFFICERS AND DIRECTORS
The officers and directors of the Company are as follows:
Name Age Position
---- --- --------
William Spier..................... 67 Non-Executive Chairman of the Board and
Director
Nathan Kahn....................... 47 Chief Executive Officer, President and
Director
Sandra Kahn....................... 44 Vice President, CFO and Director
Harvey Wrubel..................... 48 Vice President of Sales and Director
Jack Bendheim..................... 55 Director
Barry L. Eisenberg................ 55 Director
Peter G. Howard................... 66 Director
Nathan Mazurek.................... 39 Director
Morris J. Smith................... 44 Director
William Spier. Mr. Spier has been a director of the Company since
October 1996 and was Acting Chief Executive Officer from November 1997 until
September 1999. Mr. Spier presently serves as non-executive Chairman of the
Board of the Company. Mr. Spier has been a private investor since 1982. He also
served as Chairman of DeSoto, Inc., a manufacturer and distributor of cleaning
products, from May 1991 through September 1996, and as Chief Executive Officer
of DeSoto, Inc., from May 1991 to January 1994 and from September 1995 through
September 1996. From 1980 to 1981, Mr. Spier was Vice Chairman of Phibro-Salomon
Inc. Mr. Spier also serves as a Director of Keystone Consolidated Industries,
Inc.
Nathan Kahn. Mr. Kahn has been the Chief Executive Officer, President
and a director of the Company since September 1999. Prior to the Merger, Mr.
Kahn was the President and a director of Empire from the time of its formation
in 1984. Mr. Kahn has also been the President and a director of Empire-Pacific
since its formation in 1996.
Sandra Kahn. Ms. Kahn has been a Vice President, the Chief Financial
Officer and a director of the Company since September 1999. Prior to the Merger,
Ms. Kahn was the Secretary and Treasurer and a director of Empire from the time
of its formation in 1984. Ms. Kahn has also been the Secretary and Treasurer and
a director of Empire-Pacific since its formation in 1996.
Harvey Wrubel. Mr. Wrubel has been the Vice President of Sales/Director
of Marketing of the Company since September 1999. Prior to the Merger, Mr.
Wrubel was the Vice President of Sales/ Director of Marketing of Empire for more
than the prior five years. Mr. Wrubel has been a director of the Company since
September 2000.
Jack Bendheim. Mr. Bendheim has been a director of the Company since
September 1999. He has also been the President, Chief Executive Officer,
Chairman of the Board and a director of Philipp Brothers Chemicals, Inc. for
more than the prior five years. Mr. Bendheim is also a director of The Berkshire
Bank, CDG Technologies, and Penick Corporation.
21
Barry L. Eisenberg. Mr. Eisenberg has been a director of the Company
since 1990 and was Secretary and Treasurer of the Company from 1993 until
September 1999. Since 1995, Mr. Eisenberg has been an active investor and
director of private companies in Israel. Prior thereto, Mr. Eisenberg was, for a
period of more than five years, a partner in the Roseland, New Jersey law firm
of Lasser, Hochman, Marcus, Guryan & Kuskin.
Peter G. Howard. Mr. Howard has been a director of the Company since
September 1999. He has also been the Managing Director of Empire-Pacific since
1996. From 1961 to 1995, Mr. Howard held various positions within the aluminum
industry, the most recent of which was Divisional General Manager of Comalco
Rolled Products, a unit of Comalco Aluminum Ltd., an aluminum producer.
Nathan Mazurek. Mr. Mazurek has been the President of Provident
Industries, a diversified manufacturer of electrical systems and components for
more than the prior five years. Mr. Mazurek has been a director of the Company
since September 1999.
Morris J. Smith. Mr. Smith has been a director of the Company since
January 1994. Since 1993, Mr. Smith has been a private investor and investment
consultant. Prior thereto, Mr. Smith was employed for a period of more than five
years by Fidelity Investments as a portfolio manager.
FAMILY RELATIONSHIPS
Nathan Kahn and Sandra Kahn are husband and wife. Barry L. Eisenberg
and Jack Bendheim are brothers-in-law.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Officers, directors and greater than ten-percent stockholders are required by
SEC regulations to furnish the Company with copies of all Section 16(a) reports
that they file.
Based solely upon review of the copies of such reports furnished to the
Company and written representations from certain of the Company's executive
officers and directors that no other such reports were required, the Company
believes that during the period from January 1, 2001 through December 31, 2001
all Section 16(a) filing requirements applicable to its officers, directors and
greater than ten-percent beneficial owners were complied with on a timely basis.
22
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth for the periods indicated information
concerning the compensation earned by the Company's Chief Executive Officer and
each of the Company's most highly compensated executive officers.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
LONG-TERM
COMPENSATION AWARDS
SECURITIES ALL OTHER
UNDERLYING COMPENSATION
OPTIONS ($)
(#)
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($)
William Spier 2001 -- -- 2,000 $25,000(2)
Non-Executive Chairman of 2000 -- -- 2,000 $25,000(2)
the Board (1) 1999 -- -- 2,000 $11,333(3)
Nathan Kahn 2001 $350,000 $75,000 2,000 $2,000(4)
Chief Executive Officer and 2000 $300,000 $50,000 2,000 $2,000(4)
President 1999 $176,875 -- 2,000 $1,000(4)
Sandra Kahn 2001 $150,000 $25,000 2,000 $2,000(4)
Vice President, 2000 $100,000 -- 2,000 $2,000(4)
Chief Financial Officer,
Treasurer and Secretary 1999 $82,000 -- 2,000 $1,000(4)
Harvey Wrubel 2001 $214,316 $300,000 2,000 $117,218(5)
Vice President of Sales 2000 $207,872 $277,000 2,000 $139,142(6)
1999 $203,000 $300,000 200,000 --
(1) Served as Acting Chief Executive Officer of the Company prior to the merger.
(2) Mr. Spier receives $25,000 per annum as consideration for his services as
non-executive Chairman of the Board.
(3) Of this amount, $3,000 represents director fees for attending board
meetings and $8,333 represents amounts paid to Mr. Spier in 1999 for serving
as non-executive Chairman of the Board.
(4) Represents directors' fees.
(5) Of this amount, $2,000 represents director fees and $115,218 represents
non-cash taxable compensation charged to Mr. Wrubel upon the vesting of
non-contingent restricted shares, as discussed in item 7, Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Accounting Treatment of Restricted Stock Agreement.
(6) Of this amount, $1,000 represents director fees and $138, 142 represents
non-cash taxable compensation charged to Mr. Wrubel upon the vesting of
non-contingent restricted shares, as discussed in item 6, Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Accounting Treatment of Restricted Stock Agreement.
23
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning the stock option
grants made to each of the officers and employees named in the Summary
Compensation Table during 2001. No stock appreciation rights were granted to
these individuals during such year.
(INDIVIDUAL GRANTS) (1)
NUMBER OF PERCENT OF EXERCISE EXPIRATION DATE POTENTIAL
SECURITIES TOTAL OPTIONS PRICE REALIZABLE VALUE
UNDERLYING GRANTED TO ($/SH) AT ASSUMED ANNUAL
OPTIONS GRANTED EMPLOYEES IN (2) RATES OF STOCK
(#) FISCAL YEAR PRICE
NAME APPRECIATION FOR
OPTION TERM
5% 10%
($) ($)
$ $
William Spier 2,000 11.1% $0.98 10/05/11 1,220 3,120
Nathan Kahn 2,000 11.1% $0.98 10/05/11 1,220 3,120
Sandra Kahn 2,000 11.1% $0.98 10/05/11 1,220 3,120
Harvey Wrubel 2,000 11.1% $0.98 10/05/11 1,220 3,120
- ---------------------------
(1) All options granted to the named officers and employees are
non-statutory under federal tax laws and were granted on October 5, 2001.
Pursuant to the option agreement underlying these options, the options became
exercisable immediately upon grant.
(2) The exercise price may be paid in cash or, under certain
circumstances, in shares of the Company's common stock.
YEAR-END OPTION VALUES
The following table provides certain information concerning the options
held by the officers and employees named in the Summary Compensation Table,
above, as of December 31, 2001.
OPTIONS AS OF DECEMBER 31, 2001
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-MONEY
UNEXERCISED OPTIONS AT YEAR END OPTIONS AT YEAR END
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
William Spier 151,000 ............ ............ ............
Nathan Kahn 6,000 ............ ............ ............
Sandra Kahn 6,000 ............ ............ ............
Harvey Wrubel 204,000 ............ ............ ............
- ---------------------------
The closing price of the Company's common stock on December 28, 2001, the last
day of trading in 2001, was $0.90.
24
COMPENSATION OF DIRECTORS
The non-executive Chairman of the Board is paid $25,000 per annum as
consideration for his services. Each other director is paid $500 for attendance
(in person or by telephone) at meetings of the Board, and all directors are
reimbursed for out-of-pocket expenses incurred in connection with attendance at
Board meetings during the year ended December 31, 2001. In addition, pursuant to
the Company's 1996 stock option plan, the Company granted the following options
to its directors.
NUMBER OF
NAME SHARES UNDERLYING OPTION EXERCISE PRICE PER SHARE
- ---- ------------------------ ------------------------
Jack Bendheim 2,000 $0.98
Barry Eisenberg 2,000 $0.98
Peter Howard 2,000 $0.98
Nathan Kahn 2,000 $0.98
Sandra Kahn 2,000 $0.98
Nathan Mazurek 2,000 $0.98
Morris Smith 2,000 $0.98
William Spier 2,000 $0.98
Harvey Wrubel 2,000 $0.98
CERTAIN AGREEMENTS WITH OFFICERS OF THE COMPANY
EMPLOYMENT AGREEMENTS WITH THE KAHNS
Concurrently with the Merger on September 17, 1999, the Company entered
into employment agreements with each of Nathan Kahn and Sandra Kahn. Certain
information regarding these agreements is set forth below. The forms of these
agreements are attached hereto as exhibits.
Term. The scheduled term of each agreement is three years. Each
agreement provides that the term will be extended automatically for successive
two-year periods unless either party gives written notice of termination at
least 180 days prior to the end of the original term or the then additional
term, as the case may be. Each agreement provides that the Company may terminate
the agreement upon the Disability of the executive or for Cause (as such terms
are defined the agreement).
Base Salary. Nathan Kahn was paid at a rate of $350,000 per annum and
Sandra Kahn was paid at a rate of $175,000 per annum. These amounts may be
increased, but not decreased, by the Board of Directors. The base salary
provided for by each agreement is subject to possible upward annual adjustments
based upon changes in a designated cost of living index.
Bonus. The agreement with Nathan Kahn provides for an annual bonus
equal to 5% of the amount by which the Company's earnings before taxes for such
year exceed $4,000,000. The agreement with Sandra Kahn provides for an annual
bonus equal to 2% of the amount by which the Company's earnings before taxes for
such year exceed $4,000,000. For the purpose of calculating the annual bonus
amounts, earnings before taxes shall be calculated excluding (1) charges to
earnings for extraordinary items and (2) the annual bonus amounts payable to
Nathan Kahn and Sandra Kahn.
Non-Compete. Each agreement provides that during the Specified Period
(as defined below) the employee will not, among other things, directly or
indirectly, be engaged as a principal in any other business activity or conduct
which competes with the business of the Company or be an employee, consultant,
director, principal, stockholder, advisor of, or otherwise be affiliated with,
any such business, activity or
25
conduct. The "Specified Period" means the employee's period of employment and
the four year period thereafter, provided that if the employee's employment is
terminated for Disability or without Cause (or the employee voluntarily
terminates his employment following a breach by the Company), the Specified
Period will terminate two years after the employee's employment terminates.
EMPLOYMENT AGREEMENT WITH HARVEY WRUBEL
Concurrently with the Merger, the Company entered into an employment
agreement with Harvey Wrubel. Certain information regarding this agreement is
set forth below.
Term. The scheduled term of the agreement is until December 31, 2002.
The agreement provides that the term will be extended automatically for
successive two-year periods unless either party gives written notice of
termination at least 90 days prior to the end of the original term or the then
additional term, as the case may be. The agreement provides that the Company may
terminate the agreement any time with or without Cause (as such term is defined
in the agreement). However, if the Company terminates the agreement without
Cause, the employee is entitled to continue receiving his base salary until the
scheduled end of the term.
Base Salary. The agreement provides for an initial base salary to be
paid at a rate of $203,000 per annum. This amount may be increased, but not
decreased, by the Board of Directors. The base salary is subject to possible
upward annual adjustments based upon changes in a designated cost of living
index. Mr. Wrubel's current base salary is $214,316.
Performance-Based Compensation. In addition to base salary, the
agreement provides that the Company shall pay the employee performance-based
compensation in accordance with a formula provided for in the agreement.
Non-Compete. The agreement provides that, during the employment term
and for 12 months thereafter, the employee will not, among other things, be
engaged in, or be, an employee, director, partner, principal, stockholder or
advisor of any business, activity or conduct which competes with the business of
the Company. During any period following termination of the employee's
employment the foregoing will only apply to competition with regard to aluminum
and such other commodities as were being sold by the Company within six months
prior to such termination.
Restricted Stock Arrangements. The Company, Nathan Kahn and Sandra Kahn
entered into a restricted stock agreement dated September 14, 1999 with Mr.
Wrubel. Pursuant to this agreement, the Kahns transferred to Mr. Wrubel 469,238
shares ("Restricted Shares") of common stock of the Company effective as of the
date of the Merger. The Restricted Shares are subject to the vesting
requirements described below. If Mr. Wrubel's employment with the Company is
terminated for Cause (as defined in his employment agreement) or if Mr. Wrubel
terminates employment with the Company for any reason, Mr. Wrubel will forfeit
to the Kahns any Restricted Shares that have not then vested.
The vesting of 358,327 of the Restricted Shares is determined in
accordance with the following vesting schedule: (i) 33.33% of such shares vested
on the first anniversary of the grant date, (ii) 33.33% will vest on the second
anniversary of the grant date (provided Mr. Wrubel has been continuously
employed by the Company until such date) and (iii) 33.34% will vest on the third
anniversary of the grant date (provided Mr. Wrubel has been continuously
employed by the Company until such date). A total of 238,861 shares of common
stock have vested to date.
26
The vesting of the remaining 110,911 of the Restricted Shares (the
"Contingent Restricted Shares") was subject to a formula dependant on the
Company achieving a minimum cumulative after-tax net income (subject to certain
adjustments) of $4.4 million during the two-year period commencing April 1, 1999
and ending March 31, 2001. No shares vested in accordance with these provisions.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 2001, the Compensation Committee consisted of William Spier,
Nathan Kahn and Jack Bendheim. In addition to being a member of the Compensation
Committee, Mr. Kahn is also our Chief Executive Officer and President. None of
the other members of the Compensation Committee serve, or previously served as
officers or employees of the Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
27
ITEM 13. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of March 19, 2002, certain
information with respect to beneficial ownership (as defined in Rule 13d-3 of
the Securities and Exchange Act of 1934) of the common stock of the Company by
(i) each person that is a director of the Company, (ii) each person named in the
Summary compensation Table under item 10 "Executive Compensation," (iii) all
such persons as a group and (iv) each person known to the Company to be the
owner of more than 5% of the common stock of the Company.
LEFT OFF HERE
NUMBER OF SHARES PERCENT OF COMMON
NAME AND ADDRESS(1) BENEFICIALLY OWNED (2) STOCK OWNED
- ------------------------------------------ ---------------------- -----------------
DIRECTORS AND OFFICERS:
William Spier 255,669(3) 2.4%
Nathan Kahn and Sandra Kahn 5,213,923(4) 49.3%
Harvey Wrubel 582,327(5) 5.5%
Jack Bendheim 26,000(6) *
Barry L. Eisenberg 369,706(7) 3.5%
Peter G. Howard 6,000(8) *
Nathan Mazurek 6,000(9) *
Morris J. Smith 79,467(10) *
All officers and directors as a group
(9 persons) 6,539,092(11) 58.9%
OTHER STOCKHOLDERS:
Alan P. Haber 433,390(12) 4.1%
* Less than 1%
(1) The address of all listed persons is c/o the Company, except for Mr.
Haber, whose address is 11/1 Mishol Uzrad, Ramot, Israel 91230.
(2) Unless otherwise indicated, each person has sole investment and voting
power with respect to the shares indicated. For purposes of this table,
a person or group of persons is deemed to have "beneficial ownership"
of any shares as of a given date which such person has the right to
acquire within 60 days after such date. For purposes of computing the
percentage of outstanding shares held by each person or group of
persons named above on a given date, any security which such person or
persons has the right to acquire within 60 days after such date is
deemed to be outstanding for the purpose of computing the percentage
ownership of such person or persons, but is not deemed to be
outstanding for the purpose of computing the percentage ownership of
any other person.
The information in this table was prepared by the Company in reliance
on filings made with the Securities and Exchange Commission on Schedule
13D and Forms 4 or 5.
(3) Consists of (i) 104,669 currently outstanding shares held by Mr. Spier
and (ii) 151,000 shares underlying currently exercisable options held
by Mr. Spier.
(4) Consists (i) of 5,201,923 currently outstanding (9,384,761 shares
received in the merger less 3,824,511 contingent shares which have been
retired and less 358,327 non-contingent shares transferred to Mr.
Wrubel, as described under "Compensation Arrangements") and (ii) 12,000
shares underlying currently exercisable options held by Nathan and
Sandra Kahn.
28
(5) Consists of (i) 358,327 shares transferred from Nathan and Sandra Kahn
to Mr. Wrubel, (ii) 20,000 currently outstanding shares held by Mr.
Wrubel, and (iii) 204,000 shares underlying currently exercisable
options held by Mr. Wrubel.
(6) Consists of (i) 20,000 outstanding shares held by the Bendheim
Foundation, an affiliate of Mr. Bendheim, and (ii) 6,000 shares
underlying currently exercisable options held by Mr. Bendheim.
(7) Consists of (i) 700 currently outstanding shares held by Mr. Eisenberg,
(ii) 82,667 shares underlying currently exercisable options held by Mr.
Eisenberg, (iii) 500 shares owned by Mr. Eisenberg's wife and (iv)
284,839 currently outstanding shares held by 241 Associates LLC, a
limited liability company. Noam Eisenberg is the sole manager of 241
Associates LLC and as such has voting and investment power with respect
to the shares held by 241 Associates LLC. Noam Eisenberg is the son of
Barry L. Eisenberg. A majority of the ownership interest of 241
Associates LLC is owned by Mr. Eisenberg and his wife and, as a result
of such ownership interests, Mr. Eisenberg may influence the voting and
disposition of the shares of common stock held by 241 Associates LLC.
Mr. Eisenberg disclaims beneficial ownership of such shares and of the
shares owned by his wife.
(8) Consists of 6,000 shares underlying currently exercisable options held
by Mr. Howard.
(9) Consists of 6,000 shares underlying currently exercisable options held
by Mr. Mazurek.
(10) Consists of (i) 15,800 currently outstanding shares held by Mr. Smith
and (ii) 63,667 shares underlying currently exercisable options held by
Mr. Smith. The Brook Road Nominee Trust, nominee for the Morris Smith
Family Trust, is the owner of 163,653 outstanding shares of Common
Stock. Esther Smith, the mother of Morris J. Smith, is the sole trustee
of the Morris Smith Family Trust and as such has voting and investment
power with respect to such shares. The Morris Smith Family Trust is a
discretionary trust, the potential beneficiaries of which are Mr. Smith
and members of his family. Mr. Smith disclaims any beneficial ownership
of any and all shares owned by the Brook Road Nominee Trust.
(11) Consists of 6,006,758 currently outstanding shares and 531,334 shares
underlying currently exercisable options and warrants. Does not include
163,653 shares that Mr. Smith disclaims beneficial ownership of as
described in footnote 10 above.
(12) Consists of (i) 400,000 shares held by Mr. Haber, and/or his wife (ii)
10,000 shares underlying currently exercisable options held by Mr.
Haber, and (iii) 23,390 shares held by Mr. Haber's wife. Mr. Haber
disclaims any beneficial ownership of any stock owned by his wife.
RETIREMENT OF CONTINGENT SHARES ISSUED TO EMPIRE STOCKHOLDERS
Upon the merger, Nathan and Sandra Kahn ("the Empire Stockholders")
received an aggregate of 9,384,761 shares of common stock of the
Company in exchange for the outstanding stock of Empire owned by them
prior to the merger. Pursuant to the merger agreement, 3,824,511 of
these shares (the "Contingent Shares") were deposited into escrow
subject to an earn-out formula dependant on the Company achieving a
minimum cumulative after-tax net income (subject to certain
adjustments) of $4.4 million during the two-year period commencing
April 1, 1999 and ending March 31, 2001. No shares were released from
escrow in accordance with this formula and all of the 3,824,511 shares
placed in escrow were retired on June 13, 2001.
29
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a) 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.***
3.2 Amended and Restated Certificate of Incorporation of the Registrant*
3.3 Amendment No. 1 to the Amended and Restated Certificate of
Incorporation.*****
3.4 Amended and Restated By-Laws of the Registrant*
3.5 Amendment No. 1 to Amended and Restated By-Laws of the Registrant
(incorporated by reference to Exhibit 3.3 to the Registrant's Report on
Form 10-KSB for the year ended December 31, 1996)
3.6 Amendment No. 2 to Amended and Restated By-Laws of the Registrant
(incorporated by reference to Exhibit 3.1 to the Registrant's Report on
Form 8-K dated May 11, 1997)
10.1 Employment Agreement dated September 15, 1999 entered into by
Registrant with Nathan Kahn***
10.2 Employment Agreement dated September 15, 1999 entered into by
Registrant with Sandra Kahn***
10.3 Employment Agreement dated September 15, 1999 entered into by
Registrant with Harvey Wrubel***
10.4 Restricted Stock Agreement dated September 15, 1999 entered into by
Registrant with Harvey Wrubel***
10.8 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 ***
10.9 Form of the Subscription Agreement entered into by the Registrant with
each person or entity that provided funds to the Company in connection
with the bridge financing referred to in Note H of Notes to Condensed
Consolidated Financial Statements included under Item 7 of this Report,
having attached thereto the form of the notes and warrants issued in
connection with such financing*
10.10 Registrant's 1996 Stock Option Plan*
30
10.11 Form of Representative's Warrant Agreement dated as of October 1, 1996,
between the Registrant and National Securities Corporation**
10.12 Form of Warrant Agreement dated as of October 1, 1996, between the
Registrant and American Stock Transfer & Trust Company**
10.14 Form of Indemnification Agreement entered into by the Registrant with
executive officers and directors ****
10.15 Form of Rights Agreement, dated as of July 23, 1997, between the
Registrant and American Stock Transfer & Trust Co., as Rights Agent,
including all exhibits thereto (incorporated by reference to Exhibit 4
to the Registrant's Report on Form 8-K dated July 23, 1997)
10.16 Amendment to Rights Agreement, dated February 19, 1999, between the
Registrant and American Stock Transfer & Trust Co., as Rights Agent
(incorporated by reference to Exhibit 4.1 to the Registrant's Report on
Form 8-K dated March 9, 1999)
10.17 Credit Facility dated December 21, 2000 between the Registrant and The
Chase Manhattan Bank , as Lead Arranger and Administrative Agent****
10.18 Agreement of Lease for warehouse facility dated September 27, 2000
between Townsend Properties, Inc. and Registrant****
11.1 Statement re computation of per share earnings ****
21.1 List of subsidiaries of the Registrant ****
- --------------------------------------
* Incorporated by reference from the correspondingly numbered Exhibit in the
Company' s Registration statement on Form SB-2 (No. 333-9697)
** Incorporated by reference from the correspondingly numbered Exhibit in the
Company's Report on Form 10-QSB for the quarterly period ended September 30,
1996 (File No. 001-12127)
*** Incorporated by reference from the correspondingly numbered Exhibit in the
Company's Report on Form 10-KSB for the year ended December 31, 1999 (File No.
001-12127)
**** Incorporated by reference from the Company's Annual Report on Form 10-KSB
for the year ended December 31, 2000.
***** Filed herewith
(b) REPORTS ON FORM 8-K
None
31
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 27, 2002
/s/ Nathan Kahn
- ---------------------------
Nathan Kahn
Chief Executive Officer and Director (Principal Executive Officer)
March 27, 2002
/s/ Sandra Kahn
- ---------------------------
Sandra Kahn, Chief Financial Officer and Director
(Principal Financial and Principal Accounting Officer)
March 27, 2002
/s/ William Spier
- ---------------------------
William Spier, Director
March 27, 2002
/s/ Jack Bendheim
- ---------------------------
Jack Bendheim, Director
March 27, 2002
32
/s/ Barry L. Eisenberg
- ---------------------------
Barry L. Eisenberg, Director
March 27, 2002
/s/ Peter G. Howard
- ---------------------------
Peter G. Howard, Director
March 27, 2002
/s/ Nathan Mazurek
- ---------------------------
Nathan Mazurek, Director
March 27, 2002
/s/ Morris J. Smith
- ---------------------------
Morris J. Smith, Director
March 27, 2002
/s/ Harvey Wrubel
- ---------------------------
Harvey Wrubel, Director
March 27, 2002
33
INDEPENDENT AUDITORS' REPORT
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, 2001 and 2000, 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,
2001. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 consolidated financial statements enumerated above present
fairly, in all material respects, the consolidated financial position of Empire
Resources, Inc. and subsidiaries as of December 31, 2001 and 2000, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States of America.
Richard A. Eisner & Company, LLP
New York, New York
March 13, 2002
F-1
EMPIRE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------------------
ASSETS: (Note F) 2001 2000
--------------- ---------------
Current assets:
Cash $ 1,147,195 $ 1,207,926
Trade accounts receivable (less allowance for doubtful accounts of $189,398
and $202,788 at December 31, 2001 and 2000) 22,789,406 37,405,445
Inventories 27,782,408 28,921,678
Due from stockholders 285,760
Other current assets 923,349 1,133,905
--------------- ---------------
Total current assets 52,642,358 68,954,714
Furniture and equipment (less accumulated depreciation of $313,121 and
$275,501) 38,914 56,137
Deferred financing costs, net 82,328 98,879
--------------- ---------------
$ 52,763,600 $ 69,109,730
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable - banks $ 26,700,000 $ 38,000,000
Trade accounts payable 13,000,012 18,939,119
Accrued expenses 1,118,638 1,069,790
--------------- ---------------
Total current liabilities 40,818,650 58,008,909
--------------- ---------------
Commitments and contingencies
Stockholders' equity:
Preferred stock $.01 par value, 5,000,000 shares authorized at December 31,
2000, none authorized at December 31, 2001; none issued
Common stock $.01 par value, 20,000,000 shares authorized and 11,749,651
shares issued at December 31, 2001; 40,000,000 shares authorized and
15,574,162 shares issued at December 31, 2000, including
3,824,511 shares held in escrow at December 31, 2000 117,497 155,742
Additional paid-in capital 10,681,336 10,509,649
Retained earnings 2,454,480 1,159,061
Accumulated other comprehensive income--cumulative translation adjustment 30,132 67,685
Treasury stock (1,180,600 shares and 646,500 shares) (1,338,495) (791,316)
---------------- ---------------
Total stockholders' equity 11,944,950 11,100,821
--------------- ---------------
$ 52,763,600 $ 69,109,730
=============== ===============
F-2
EMPIRE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
2001 2000 1999
---------------- ---------------- ----------------
Net sales 143,235,385 165,327,827 107,112,064
Cost of goods sold 133,862,469 154,579,092 98,925,131
---------------- ---------------- ----------------
Gross profit 9,372,916 10,748,735 8,186,933
Selling, general and administrative expenses 5,290,397 5,707,741 3,913,597
---------------- ---------------- ----------------
Operating income 4,082,519 5,040,994 4,273,336
Interest expense 2,032,460 3,123,084 2,162,568
---------------- ---------------- ----------------
Income before income taxes 2,050,059 1,917,910 2,110,768
Income taxes 754,640 877,123 154,553
---------------- ---------------- ----------------
NET INCOME $ 1,295,419 $ 1,040,787 $ 1,956,215
================ ================ ================
Income before income taxes 2,110,768
Pro forma income taxes 802,092
----------------
PRO FORMA NET INCOME $ 1,308,676
================
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC 10,956,001 11,346,347 7,327,663
=========== =========== =========
DILUTED 11,091,047 11,445,432 7,356,186
=========== =========== =========
EARNINGS PER SHARE:
BASIC $.12 $.09
==== ====
DILUTED $.12 $.09
==== ====
PRO FORMA EARNINGS PER SHARE:
BASIC $.18
====
DILUTED $.18
====
See notes to consolidated financial statements F-3
EMPIRE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
COMMON STOCK
-----------------------
NUMBER ADDITIONAL
OF PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
----------- ----------- -------------- ---------------
BALANCE AT JANUARY 1, 1999 9,384,761 $50,000 $10,635,274
Exchange of shares - reverse
acquisition 6,189,401 155,742 $9,829,170
Payments of merger costs -
Integrated (58,292)
Payment of merger costs - Empire (569,258)
Distributions to stockholders of
Empire (50,000) (11,903,957)
Transfer of restricted shares to key
employee 103,786
Treasury stock acquired in merger
(50,000 shares) 50,000
Purchase of treasury stock
(6,700 shares)
Net change in cumulative translation
adjustment
Net income for 1999 1,956,215
--------- --------- ------------ ------------
BALANCE AT DECEMBER 31, 1999 15,574,162 155,742 9,924,664 118,274
Transfer of restricted shares to key
employee 299,225
Capital contribution by stockholders 285,760
Purchase of treasury stock
(589,800 shares)
Net change in cumulative translation
adjustment
Net income for 2000 1,040,787
---------- --------- ------------ ------------
BALANCE AT DECEMBER 31, 2000 15,574,162 155,742 10,509,649 1,159,061
Transfer of restricted shares to key
employee 133,442
Purchase of treasury stock
(534,100 shares)
Net change in cumulative translation
adjustment
Retirement of common stock (3,824,511) (38,245) 38,245 1,295,419
Net income for 2001 ---------- ----------- ----------- ------------
BALANCE AT DECEMBER 31, 2001 11,749,651 $117,497 $10,681,336 $ 2,454,480
========== ======== =========== ============
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME-
CUMULATIVE TOTAL TOTAL
TRANSLATION TREASURY STOCKHOLDERS' COMPREHENSIVE
ADJUSTMENT STOCK EQUITY INCOME
----------------- ----------- ---------------- ----------------
BALANCE AT JANUARY 1, 1999 $ 49,704 $ 10,734,978
Exchange of shares - reverse
acquisition 9,984,912
Payments of merger costs -
Integrated (58,292)
Payment of merger costs - Empire (569,258)
Distributions to stockholders of
Empire (11,953,957)
Transfer of restricted shares to key
employee 103,786
Treasury stock acquired in merger
(50,000 shares) $(50,000)
Purchase of treasury stock
(6,700 shares) (9,101) (9,101)
Net change in cumulative translation
adjustment (13,552) (13,552) (13,552)
Net income for 1999 1,956,215 1,956,215
----------
$1,942,663
------------ --------- ----------- ==========
BALANCE AT DECEMBER 31, 1999 36,152 (59,101) 10,175,731
Transfer of restricted shares to key
employee 299,225
Capital contribution by stockholders 285,760
Purchase of treasury stock
(589,800 shares) (732,215) (732,215)
Net change in cumulative translation
adjustment 31,533 31,533 31,533
Net income for 2000 1,040,787 1,040,787
----------
$1,072,320
------------ --------- ---------- ==========
BALANCE AT DECEMBER 31, 2000 67,685 (791,316) 11,100,821
Transfer of restricted shares to key
employee 133,442
Purchase of treasury stock (547,179) (547,179)
(534,100 shares)
Net change in cumulative translation
adjustment (37,553) (37,553) (37,553)
Retirement of common stock 1,295,419 1,295,419
Net income for 2001 ------------ ------------ --------- ---------
BALANCE AT DECEMBER 31, 2001 $ 30,132 $(1,338,495) $11,944,950 1,257,866
============ =========== =========== =========
F-4
EMPIRE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31,
--------------------------------------------------------
2001 2000 1999
----------------- ----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,295,419 $ 1,040,787 $ 1,956,215
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 84,348 77,856 55,511
Deferred income taxes 62,998 (113,706)
Translation adjustment (37,553) 31,533 (13,552)
Transfer of restricted shares to key employee 133,442 299,225 103,786
Changes in:
Trade accounts receivable 14,616,039 (11,449,721) (5,516,924)
Inventories 1,139,270 (9,559,470) (5,357,035)
Due from stockholders 285,760 (285,760)
Other current assets 147,557 (251,237) (445,000)
Deferred financing costs (98,879) (58,462)
Trade accounts payable (5,939,107) 10,834,974 269,300
Accrued expenses 48,848 (701,675) 1,242,865
---------------- ---------------- ----------------
Net cash provided by (used in) operating activities 11,837,021 (10,176,073) (7,763,296)
---------------- ---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to fixed assets (20,396) (22,855) (25,418)
---------------- ---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable - banks 11,700,000 10,400,000
Repayment of notes payable - banks (11,300,000)
Capital contribution by stockholders 285,760
Distributions to stockholders (11,953,957)
Distribution payable to former stockholders (46,482) 46,482
Net cash acquired upon merger 9,926,620
Payment of merger costs (569,258)
Cost related to financing (30,177)
Purchase of treasury stock (547,179) (732,215) (9,101)
---------------- ---------------- ----------------
Net cash (used in ) provided by financing activities (11,877,356) 11,207,063 7,840,786
----------------- ---------------- ----------------
NET (DECREASE) INCREASE IN CASH (60,731) 1,008,135 52,072
Cash at beginning of year 1,207,926 199,791 147,719
---------------- ---------------- ----------------
CASH AT END OF YEAR $ 1,147,195 $ 1,207,926 $ 199,791
================ ================ ================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 2,087,347 $ 3,317,096 $ 1,868,047
Income taxes $ 1,033,455 $ 1,064,629 $ 33,213
See notes to consolidated financial statements F-5
EMPIRE RESOURCES, INC. AND SUBSIDIARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE A - ORGANIZATION AND BASIS OF PRESENTATION
Empire Resources, Inc ("the Company") is the result of a 1999 reverse merger
with Integrated Technology USA, Inc. ("Integrated"), a company incorporated in
1990 to design, develop and market products for emerging computer related
markets which had discontinued its existing operations in their entirety and
sought a merger/acquisition opportunity that would enable it to deploy its cash
into a new operating business.
Under terms of an agreement and plan of merger ("the Merger Agreement"),
effective September 17,1999, Empire Resources, Inc ("Empire"), a distributor of
value added semi-finished aluminum products, was merged with and into
Integrated. Upon completion of the merger, the merged company was renamed Empire
Resources, Inc. The merged company is continuing the business of Empire.
For accounting and other financial purposes, the merger has been treated as a
"reverse acquisition." Under this treatment, the surviving corporation has been
treated as a continuation of Empire, and the merger has been treated as an
issuance of shares by Empire to the stockholders of Integrated in exchange for
Integrated's cash. Accordingly, the accompanying financial statements are the
historical financial statements of Empire and Empire-Pacific and include the
results of operations of Integrated and its subsidiaries, which have been
minimal, only from September 17, 1999, the merger date.
The Company is engaged principally in the purchase, sale and distribution of
nonferrous metals to a diverse customer base located throughout North America
and Australia. The Company sells its products through its own marketing and
sales personnel and through its independent sales agents located in the U.S. who
receive commissions on sales. Empire Resources-Pacific LTD.("Empire-Pacific"),
an affiliate of Empire operating in Australia, became a wholly-owned subsidiary
of the company and acts as its sales agent in Australia. The Company purchases
from an array of suppliers located throughout the world.
F-6
EMPIRE RESOURCES, INC. AND SUBSIDIARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
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 is recognized when title to the goods passes to the customers.
[3] INVENTORIES:
Inventories are stated at the lower of cost or market. Cost is determined
by the specific-identification method. Inventory consists of purchased
semi-finished aluminum products.
[4] FURNITURE AND EQUIPMENT:
Furniture and equipment are stated at cost. Depreciation of furniture and
equipment is calculated on the straight-line method over their estimated
useful lives of five years.
[5] COMMODITY FUTURES AND FOREIGN CURRENCY HEDGING ACTIVITIES:
For periods beginning January 1, 2001, the Company has adopted Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities" The adoption of SFAS No.
133 did not have a material effect on the Company's results of operations
for the year ended December 31, 2001 (see Note E).
[6] FOREIGN CURRENCY TRANSLATION:
Empire-Pacific's functional currency is the Australian dollar.
Cumulative translation adjustments represent translation of Australian
dollar amounts into U.S. dollars.
[7] INCOME TAXES AND PRO FORMA INCOME TAXES:
Empire had elected S corporation status for federal income tax purposes,
and accordingly was not subject to federal tax on its income for the
period prior to the merger with Integrated on September 17,1999.
Integrated paid taxes on a C corporation basis, and subsequent to the
merger, the Company continues to pay taxes on a C corporation basis. As a
result, 1999 income taxes represent state and local income tax for the
whole year and federal income tax only for the period from September 17,
1999 to December 31, 1999, while for subsequent years income taxes
represent federal, state and local taxes for the entire year. Pro-forma
income tax expense represents the provision for income taxes as if Empire
had been taxed as a C corporation for all of 1999.
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.
F-7
EMPIRE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[8] EARNINGS PER SHARE:
The Company has adopted Statement of Financial Accounting Standards No.
128, Earnings per Share ("FAS 128"), which requires the presentation of
basic earnings per share ("Basic EPS") and diluted earnings per share
("Diluted EPS"). Basic EPS is computed by dividing income available to
common shareholders by the weighted average number of common shares
outstanding during the period. Diluted EPS gives effect to all dilutive
potential common shares outstanding during the period. The computation of
Diluted EPS does not assume conversion, exercise or contingent issuance
of securities that would have an anti-dilutive effect on earnings. The
dilutive effect of the outstanding stock warrants and options was
computed using the treasury stock method.
Basic and Diluted EPS shown in the accompanying financial statements for
the year ended December 31, 1999 are based on pro forma income taxes and
pro forma net income since historical earnings per share presentation
would not be meaningful.
[9] STOCK - BASED COMPENSATION:
The Company measures compensation cost using the methodology prescribed
by Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"). Accordingly, no compensation costs have
been recognized for nonvariable options because the exercise prices of
the stock options on the dates of grant equal the market values of the
common stock. However, the Company has adopted the disclosure
requirements of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation" ("SFAS 123") (see Note G).
[10] USE OF ESTIMATES:
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amount of assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from these estimates.
[11] CONCENTRATION OF SUPPLIERS:
The Company's purchase of nonferrous metal is from a limited number of
suppliers located throughout the world. Three suppliers accounted for
74%, 62%, and 56% of total purchases during the years ended December 31,
2001, 2000 and 1999, respectively. One such supplier accounted for 60% of
these purchases in 2001. 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.
[12] NEW ACCOUNTING STANDARDS:
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Intangible Assets." SFAS
No. 141 requires that all business combinations be accounted for by the
purchase method of accounting and changes the criteria for recognition of
intangible assets acquired in a business combination. The provisions of
SFAS No. 141 apply to all business combinations initiated after June 30,
2001. SFAS No. 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized but tested for impairment
at least annually, while intangible assets with finite useful lives
continue to be amortized over their respective useful lives. The
statement also establishes guidance for testing goodwill and intangible
assets with indefinite useful lives for impairment. The provisions of
SFAS No. 142 will be effective for 2002. However, goodwill and intangible
assets acquired after June 30, 2001 are subject
F-8
EMPIRE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
immediately to the provisions of SFAS No. 142. The Company does not
expect that the adoption of SFAS No. 141 and SFAS No. 142 will have a
material effect on its consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
impairment or Disposal of Long-Lived Assets." This statement supercedes
SFAS No.121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." The statement retains the
previously existing accounting requirements related to the recognition
and measurement of the impairment of long-lived assets to be held and
used while expanding the measurement requirements of long-lived assets to
be disposed of by sale to include discontinued operations. It also
expands the previously existing reporting requirements for discontinued
operations to include a component of an entity that either has been
disposed of or is classified as held for sale. The Company adopted SFAS
No. 144 on January 1, 2002. Management does not expect this statement to
have a material impact on the Company's consolidated financial position
or results of operations.
F-9
EMPIRE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE C - INVENTORIES
Inventories consist of the following semi finished aluminum products:
December 31,
2001 2000
---- ----
Stored in warehouses $13,190,058 $ 25,761,763
In transit 14,592,350 3,159,915
--------------- ---------------
$27,782,408 $ 28,921,678
=========== ===============
Substantially all of the Company's inventories have been purchased for specific
customer orders.
NOTE D - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of notes payable to the banks approximate fair value as of
December 31, 2001 and 2000 because the interest rates on such debt approximate
the market rate for the Company given the appropriate risk factors.
F-10
EMPIRE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE E - DERIVATIVE FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
As of January 1, 2001, the Company has adopted Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting For Derivative Instruments and Hedging
Activities", issued by the Financial Accounting Standards Board. SFAS No. 133
requires the Company to recognize all derivatives in the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
earnings. If the derivative is a hedge, depending upon the nature of the hedge,
changes in the fair value of the derivative are either offset against the change
in fair value of the hedged assets, liabilities or firm commitments through
earnings, or recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's change in fair
value, if any, is immediately recognized in earnings.
The Company uses financial instruments designated as fair value hedges to manage
its exposure to commodity price risk and foreign currency exchange risk inherent
in its trading activities. It is the Company's policy to hedge such risks, to
the extent practicable. The Company enters into high-grade aluminum futures
contracts to limit its gross margin exposure by hedging the metals content
element of firmly committed purchase and sales commitments. The Company also
enters into foreign exchange forward contracts to hedge its exposure related to
commitments to purchase or sell non-ferrous metals denominated in international
currencies. The Company records "mark-to-market" adjustments on these futures
and forward positions, and on the underlying firm purchase and sales commitments
which they hedge, and reflects the net gains and losses currently in earnings.
The gains and losses on futures and forward positions as of January 1, 2001
offset the losses and gains at that date on the underlying firm purchase and
sales commitments which they hedged, and accordingly the Company did not record
a transition adjustment as of January 1, 2001, upon the adoption of SFAS No.
133. For periods prior to January 1, 2001, gains and losses on aluminum futures
contracts and on foreign exchange forward contracts were deferred and recognized
in earnings as the aluminum products were sold. Accordingly, the adoption of
SFAS No. 133 did not have a material effect on the Company's results of
operations for the year ended December 31, 2001.
At December 31, 2001, net unrealized gains on the Company's fair value hedges of
foreign currency exposure amounted to approximately $26,800, and net unrealized
losses on fair value hedges of aluminum prices amounted to approximately
$300,316. These unrealized amounts were offset by like amounts on the underlying
commitments which were hedged, and are reflected in the accompanying 2001
Balance Sheet in inventory and accrued expenses.
For the year ended December 31, 2001, hedge ineffectiveness associated with
derivatives designated as fair value hedges was insignificant, and no fair value
hedges were derecognized.
NOTE F - NOTES PAYABLE - BANKS
On December 21, 2000, the Company entered into a revolving credit agreement with
two commercial banks which provided for a line of credit of $50,000,000. In
January 2001 a third commercial bank joined the facility and the credit line was
increased to $60,000,000. Borrowings by the Company under this line of credit
are collateralized by security interests in substantially all assets of Empire.
Under the agreement, Empire is required to maintain working capital and net
worth ratios, as defined by the loan agreement. The facility expires on June 30,
2003. As of December 31, 2001 and 2000, respectively, the amounts outstanding
under this credit facility were $31.1 million and 40.1 million, (including
approximately $4.4 million and $2.1 million of outstanding letters of credit).
Interest on borrowings is the higher of (i) the federal funds rate plus 1/2% and
(ii) the prime rate of Chase Bank, plus the applicable margin defined in the
loan agreement. At December 31, 2001 and 2000, the interest rate charged
approximated 4% and 8.65% respectively.
F-11
EMPIRE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE G - 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.
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.
As of December 31, 2001, the Company had granted options to purchase 1,393,944
shares under the 1996 Plan (742,944 of which had been forfeited), including an
aggregate of 308,000 options granted to officers and directors of the Company
subsequent to the merger.
On the effective date of the merger, September 17, 1999, options issued by
Integrated which remained outstanding were substantially vested. These options
are considered as part of the reverse acquisition for accounting purposes. Prior
to the merger, Empire Resources, Inc. and its affiliate had no stock option plan
and had not issued any options.
F-12
EMPIRE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE G - STOCK OPTIONS (CONTINUED)
The following is a summary of stock option activity for the years ended December
31, 2001, 2000 and 1999:
NUMBER EXERCISE PRICE WEIGHTED AVERAGE
OF SHARES PER SHARE EXERCISE PRICE
------------- ----------------- -------------------
Options outstanding at September 17, 1999,
the effective date of the merger, including
233,044 options outside the 1996 Plan 1,021,712 $0.01-$6.00 $3.34
Granted subsequent to the merger 218,000 $1.625 $1.625
Options outstanding at December 31, 1999
including 233,044 options outside the
1996 Plan 1,239,712 $0.01-$6.00 $3.04
Options granted 72,000 $1.19-$1.63 $1.50
Options forfeited (4,000) $1.19-$1.63 $1.41
Options outstanding at December 31, 2000
including 233,044 options outside the
1996 Plan 1,307,712 $0.01-$6.00 $2.96
Options granted 18,000 $0.98 $0.98
Options forfeited (574,779) $1.64-$6.00 $4.99
Options outstanding at December 31, 2001
including 99,933 options outside the
1996 Plan 750,933 $0.01-$2.00 $1.36
Options exercisable at December 31, 2001 750,933 $1.36
Options available for grant under 1996 Plan
at December 31, 2001 478,000
As permitted by SFAS 123, the Company continues to account for its stock plans
in accordance with APB 25 and its related interpretations. Had the compensation
cost for the options issued on or after September 17, 1999 to officers,
directors and employees been determined based upon the fair value at the grant
date in accordance with the methodology prescribed under SFAS No. 123, the
Company's net income in each of the years in the three-year period ended
December 31, 2001 would have been as follows:
F-13
EMPIRE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE G - STOCK OPTIONS (CONTINUED)
2001 2000 1999
---- ---- ----
Net income:
As reported (net of pro forma income taxes, in 1999) $ 1,295,419 $ 1,040,787 $ 1,308,676
Pro forma $ 1,290,938 $ 1,019,687 $ 1,206,993
Net income per share (basic and diluted):
As reported (net of pro forma income taxes, in 1999) $0.12 $0.09 $0.18
Pro forma $0.12 $0.09 $0.16
The weighted average remaining contractual life of options outstanding at
December 31, 2001, December 31, 2000 and December 31, 1999 was 5.7, 6.3, and 7.1
years, respectively. The weighted average fair value of the options granted in
2001 was estimated at $0.40 on the date of grant, the weighted average fair
value of the options granted in 2000 was estimated at $0.47 on the date of
grant, and the weighted average fair value of the options granted in 1999 after
the September 17, 1999 merger was estimated at $0.72 on the date of grant, using
the Black-Scholes option-pricing model which included the following assumptions
stated on a weighted average basis:
2001 2000 1999
---- ---- ----
Dividend yield 0% 0% 0%
Volatility 0.40 0.40 0.40
Risk free interest rate 3.87% 5.96%-6.20% 5.76%
Expected life in years 5 5 5
NOTE H - COMMON STOCK
[1] STOCK REPURCHASE PLAN:
In November 1999, the Board of Directors authorized the Company to
repurchase up to one million shares of its common stock at prices not to
exceed $1.50 per share. In December 2000, the number of shares authorized
for repurchase was increased to 1.5 million. As of December 31, 2001, the
Company had repurchased a total of 1,130,600 shares under the repurchase
program for an aggregate cost of $1,288,495. The Company had also
acquired 50,000 shares for a cost of $50,000 in connection with the
reverse merger in September 1999.
[2] WARRANTS:
In connection with a bridge financing during the year ended December 31,
1996, Integrated issued warrants to purchase an aggregate of 199,174
shares of common stock at an exercise price of $0.60 per share. As of
December 31, 2001, 90,838 of such warrants were outstanding.
In connection with its initial public offering in October 1996 (the
"IPO"), Integrated issued warrants to acquire 3,360,082 shares of its
common stock at an exercise price of $9.00 per share, subject to
adjustment under certain circumstances. These warrants expired on October
1, 2001.
F-14
EMPIRE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE H - COMMON STOCK (CONTINUED)
[2] WARRANTS: (CONTINUED)
In connection with the IPO, Integrated sold to an underwriter of the IPO,
for nominal consideration, warrants to purchase up to 300,000 shares of
its common stock and/or 300,000 warrants to acquire 300,000 shares of
common stock (the "Representative Warrants"). These warrants expired on
October 1, 2001.
[3] CAPITAL CONTRIBUTION BY STOCKHOLDERS
Results of operations for 2000 include a provision for an adjustment to
state income taxes of $285,760 relating to the years 1996 through 1998.
This tax assessment pertains to Empire's earnings before the merger and
was subject to indemnification by the former stockholders of Empire. Net
income for 2000 was reduced by $188,602, net of the related federal
income tax benefit, while the balance sheet as of December 31, 2000
includes a receivable from the former stockholders for a contribution of
capital in the amount of $285,760 which was paid during 2001. As a result
of this event, total stockholders' equity as of December 31, 2000 was
increased by $97,158.
(4) RETIREMENT OF CONTINGENT SHARES ISSUED TO EMPIRE STOCKHOLDERS
Upon the merger, Nathan and Sandra Kahn ("the Empire Stockholders")
received an aggregate of 9,384,761 shares of common stock of the Company
in exchange for the outstanding stock of Empire owned by them prior to
the merger. Pursuant to the merger agreement, 3,824,511 of these shares
(the "Contingent Shares") were deposited into escrow subject to an
earn-out formula dependant on the Company achieving a minimum cumulative
after-tax net income (subject to certain adjustments) of $4.4 million
during the two-year period commencing April 1, 1999 and ending March 31,
2001. No shares were released from escrow in accordance with this formula
and all of the 3,824,511 shares placed in escrow were retired on June 13,
2001.
NOTE I - INCOME TAXES
As discussed in Note B[8], Empire was an S corporation for income tax purposes
for periods prior to the merger on September 17, 1999. Income tax expense
consists of the following:
YEAR ENDED DECEMBER 31,
----------------------------------------
2001 2000 1999
--------- -------- -----------
Current $691,642 $ 990,829 $ 119,553
Deferred expense (benefit) 62,998 (113,706) 35,000
-------- ----------- ------------
$754,640 $ 877,123 $ 154,553
======== =========== ===========
Temporary differences arise due to the difference between reporting for
financial reporting purposes and for tax purposes. A deferred tax asset at
December 31, 2001 and at December 31, 2000 of $50,708 and $113,706 respectively
was attributable to stock based compensation.
The Company's income subject to tax as an S corporation and as a C corporation
in 1999 was as follows:
Income subject to tax as S corporation $ 1,798,721
Income subject to tax as C corporation 312,047
--------------
Total income before income taxes $ 2,110,768
==============
F-15
EMPIRE RESOURCES, INC. AND SUBSIDIARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
NOTE I - INCOME TAXES (CONTINUED)
The U.S. statutory rate of 34% can be reconciled to the effective tax rate
as follows:
YEAR ENDED
DECEMBER 31,
----------------------------------------------------------
2001 2000 1999 1999 PRO FORMA
----------- ------------ ------------ ----------------
Provision for taxes at statutory rate $697,020 $ 652,089 $ 93,843 $ 726,000
State and local taxes, net of federal tax 57,620 71,719 60,710 104,000
benefit
State taxes pertaining to prior years, net
of federal tax benefit 188,602
Permanent differences and other (35,287) (27,908)
-------- ------------- ------------ -------------
$754,640 $ 877,123 $ 154,553 $ 802,092
======== ============= ============ =============
Prior to the merger, Integrated had net operating loss carryforwards. Under
Section 382 of the Internal Revenue Code, due to a lack of continuity of
business enterprise by Integrated, there is no net operating loss carryover
utilization. Hence, such net operating loss carryforwards have lapsed.
No valuation allowance has been provided for U.S. deferred tax assets of $50,708
and $113,706 at December 31, 2001 and December 31, 2000 respectively, since
management is of the opinion that it is more likely than not that such assets
will be realized.
NOTE J - EMPLOYEE RETIREMENT BENEFITS
Effective November 1, 1999, the Company 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
$29,942 in 2001, and $24,006 in 2000.
F-16
EMPIRE RESOURCES, INC. AND SUBSIDIARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
Note K- 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,
----------------------------------------------
2001 2000 1999
--------------- -------------- ---------------
Numerator:
Net Income $ 1,295,419 $ 1,040,787
Pro forma net income $ 1,308,676
Denominator:
Computation of basic earnings per share:
Weighted average shares outstanding - basic 10,956,001 11,346,347 7,327,663
Basic earnings per share $0.12 $0.09
Pro forma basic earnings per share $0.18
Computation of diluted earnings per share:
Weighted average shares outstanding - basic 10,956,001 11,346,347 7,327,663
Potentially dilutive shares:
Shares issuable upon exercise of
dilutive options 135,046 99,085 28,523
Weighted average shares outstanding - diluted 11,091,047 11,445,432 7,356,186
Diluted earnings per share $0.12 $0.09
Pro forma diluted earnings per share $0.18
NOTE L - 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:
----------------------------------------------
2001 2000 1999
--------------- -------------- ---------------
United States (in thousands) $ 113,915 $ 128,174 $ 98,106
Foreign (primarily Canada) (in thousands) 29,320 37,154 9,006
------ ------ -----
$ 143,235 $ 165,328 $ 107,112
========= ========= =========
NOTE M - SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
2001
-------------------------------------------------------------------
MARCH JUNE SEPTEMBER DECEMBER
31 30 30 31
---------------- ---------------- ---------------- ----------------
Net sales $ 44,283,027 $ 41,191,499 $ 31,040,712 $ 26,720,147
Gross profit 2,766,261 2,516,011 2,228,436 1,862,208
Operating income 1,395,667 1,265,659 949,209 471,984
Net income 412,167 416,941 351,547 114,764
Income per common share-
Basic and diluted
Basic $.04 $.04 $.03 $.01
Diluted $.04 $.04 $.03 $.01
F-17
EMPIRE RESOURCES, INC. AND SUBSIDIARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
Weighted average shares outstanding
Basic 11,037,280 11,024,505 11,023,951 10,740,721
Diluted 11,136,244 11,159,327 11,159,660 10,875,767
2000
----------------------------------------------------------------
MARCH JUNE SEPTEMBER DECEMBER
31 30 30 31
--------------- ---------------- --------------- ---------------
Net sales $31,101,411 $38,610,235 $52,383,189 $43,232,992
Gross profit 2,392,604 2,851,905 2,967,724 2,536,502
Operating income 1,206,747 1,510,713 1,666,899 656,635
Net income (loss) 409,084 462,315 478,351 (308,963)
Income(loss) per common share-
Basic and diluted
Basic $0.04 $0.04 $0.04 ($0.03)
Diluted $0.04 $0.04 $0.04 ($0.03)
Weighted average shares outstanding
Basic 11,388,751 11,382,015 11,291,435 11,220,715
Diluted 11,489,387 11,481,090 11,390,451 11,319,800
NOTE N - COMMITMENTS AND CONTINGENCIES
[1] LEASE:
The Company leases its office facilities under a lease expiring
on March 31, 2005, and leases warehouse and distribution facilities under
a lease expiring on October 31, 2005. The Company also leases equipment
and vehicles under leases which run through November 2005. The minimum
noncancelable scheduled rentals under these leases are as follows:
YEAR ENDING
DECEMBER 31,
------------
2002 $ 372,536
2003 376,574
2004 382,600
2005 198,079
----------
$1,329,789
==========
Rent expense for the years ended December 31, 2001, and 2000 and 1999 was
$376,498, $254,783, and $185,448, respectively.
F-18
EMPIRE RESOURCES, INC. AND SUBSIDIARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
NOTE N - COMMITMENTS AND CONTINGENCIES (CONTINUED)
[2] LETTERS OF CREDIT:
Outstanding letters of credit at December 31, 2001 amounting to
$4,393,781 expire from January through March of 2002.
[3] EMPLOYMENT AGREEMENTS:
In September 1999, the Company entered into three-year employment
agreements with two of its executive officers. Each agreement provides
that the term will be extended automatically for successive two-year
periods unless either party gives written notice of termination at least
180 days prior to the end of the original term or the then additional
term, as the case may be. Each 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 salaries under these agreements cumulatively are being paid at a
rate of $500,000 per annum. The amount may be increased, but not
decreased, by the Board of Directors. The base salary provided for by
each agreement is subject to possible upward annual adjustments based
upon changes in a designated cost of living index.
The agreements also provide for annual bonuses equal to 7%, on a combined
basis, of the amount by which the Company's earnings before taxes (as
defined in the agreements) for such year exceed $4,000,000.
The Company also entered into an employment agreement with another
officer. The scheduled term of the agreement is until December 31, 2002.
The agreement provides for base salary to be paid at a rate of $203,000
per annum which may be increased, but not decreased, by the Board of
Directors. The base salary is subject to possible upward annual
adjustments based upon changes in a designated cost of living index. In
addition to base salary, the agreement provides that the Company shall
pay the employee performance-based compensation in accordance with a
formula provided for in the agreement.
[4] OTHER:
The Company is presently involved in litigation matters in the normal
course of business. Management does not expect that these matters will
have a material adverse effect on the Company's consolidated financial
statements.
NOTE O - VALUATION AND QUALIFYING ACCOUNTS FOR YEARS ENDED DECEMBER 31,
2001, 2000, AND 1999 RESERVES AND ALLOWANCES FOR DOUBTFUL ACCOUNTS
------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------
Additions
------------------------------------------------------------------------------------------------------------------------------
Balance at Charged to Costs Charged to Deductions from Balance at End of
Beginning of And Other Reserves Period
Period Expenses Accounts
------------------------------------------------------------------------------------------------------------------------------
2001 $202,788 $13,390 $189,398
------------------------------------------------------------------------------------------------------------------------------
2000 $125,788 $77,000 $202,788
------------------------------------------------------------------------------------------------------------------------------
1999 $125,788 $125,788
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F-19
EMPIRE RESOURCES, INC. AND SUBSIDIARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
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
EXHIBIT 11.1 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
Pro forma earnings per share - basic, are based upon the Company's weighted
average number of common shares outstanding. The shares issued to the former
Empire stockholders in the merger, excluding the 3,824,511 contingent shares
which were placed in escrow and subsequently retired, were considered
outstanding for all periods presented. The shares of the former Integrated
shareholders were considered outstanding only from the September 17, 1999 merger
date.
2001 2000 1999
Net Income $1,295,419 $1,040,787
========== ==========
Pro forma net income $1,308,676
==========
Weighted average shares outstanding - basic 10,956,001 11,346,347 7,327,663
Shares issuable upon exercise of dilutive options 190,771 99,933 28,741
Less: shares assumed repurchased (55,725) (848) (218)
-------- ----- -----
Weighted average shares outstanding - diluted 11,091,047 11,445,432 7,356,186
========== ========== =========
Earnings per share - basic $0.12 $0.09
Earnings per share - diluted $0.12 $0.09
Pro forma earnings per share - basic $0.18
Pro forma earnings per share - diluted $0.18
F-20