10-K 1 a34874.txt EMPIRE RESOURCES, INC. 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, 2002 [ ] Transition report under Section 13 or 15(d) of the Exchange Act For the transition period from ---- to ---- Commission file number 001-12127 EMPIRE RESOURCES, INC. (Exact Name of Registrant as Specified in Its Charter) Delaware 22-3136782 -------------------------------------------------------------------------------- (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification No.) One Parker Plaza Fort Lee, NJ 07024 (Address of Principal Executive Offices) 201 944-2200 (Registrant's Telephone Number, Including Area Code) 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-K 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 10-K. [x] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12(b)-2) Yes [ ] No [X] The aggregate market value of the voting stock of the registrant held by non-affiliates as of the last business day of the registrant's most recently completed second fiscal quarter was approximately $4.1 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. The number of shares of common stock outstanding as of March 14, 2003, was 9,432,251. DOCUMENTS INCORPORATED BY REFERENCE: None. EMPIRE RESOURCES, INC. FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002 INDEX 10-K Part and Item No. Page ---------------------- ---- Part I Item 1 Business. 1 Item 2 Properties. 5 Item 3 Legal Proceedings. 5 Item 4 Submission of Matters to a Vote of Security Holders. 5 Part II Item 5 Market for Common Equity and Related Stockholder Matters. 6 Item 6 Selected Financial Data 8 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operation 9 Item 7A Quantitative and Qualitative Disclosures About Market Risk 14 Item 8 Financial Statements and Supplementary Data 15 Item 9 Changes In and Disagreements With Accountants On Accounting and Financial Disclosure 15 Part III Item 10 Directors and Executive Officers 15 Item 11 Executive Compensation. 17 Item 12 Security Ownership of Certain Beneficial Owners And Management 21 Item 13 Certain Relationships and Related Transactions 22 Item 14 Controls and Procedures 22 Item 15 Exhibits and Reports on Form 8K 23 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; an act of war or terrorism that disrupts international shipping; 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 of the Company's principal supplier 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. Background 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. On September 17, 1999, the Company merged with Empire Resources, Inc. ("Empire"), a distributor of value added, semi-finished aluminum products. Since the merger, the Company has continued the aluminum business of Empire under the name of Empire Resources, Inc. References to the Company include its' subsidiaries, consolidated for purposes of the Company's financial statements. 1 In conjunction with the merger, Empire Resources Pacific Ltd. ("Empire-Pacific"), then an affiliate of Empire operating in Australia, became a wholly owned subsidiary of the Company. 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. 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; however, one supplier furnished approximately 58% of the Company's products in 2002. 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. 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 resulting in increased volume and market presence. Expand Sources of Supply and Serve as Effective Marketing Channel for Suppliers. The Company seeks to increase its supply sources by expanding its relationships with existing suppliers and by seeking new suppliers. The Company strives to build its supply relationships by serving as an effective marketing channel for its suppliers. The Company believes if it is able to increase its supply sources it will be in a position to offer its customers greater quantities and a wider range of products. Acquire Capability to Provide Additional Value Added Services. 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. The Company's warehouse and distribution facility in Baltimore serves the dual purpose of: (a) providing depot/warehousing 2 capacity for just-in-time delivery and (b) providing handling capability and inventory control at the Baltimore port of entry, the Company's most active import location. This arrangement reduces freight and handling expenses while concurrently increasing efficiency, and enables the Company to monitor deliveries and serve customers more effectively. 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. 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 2002 increased approximately 5% from shipments in 2001. Products During the last three fiscal years Empire Resources has derived substantially all of its revenues from the sale of semi-finished aluminum products. Demand for the Company's product is not seasonal. Sales, Marketing and Services The Company endeavors to build its distribution within the aluminum industry by providing customers with quality products, access to alternative sources of supply, and comprehensive customer service. The Company offers customers a full range of services including: o sourcing aluminum products from the appropriate supplier in order to meet pricing and delivery requirements; o handling foreign exchange transactions for sales in local currency; o assuming responsibility for the shipment and timely delivery of the product to the customer; o assisting customers in identifying materials and matching their particular needs; o where necessary, arranging for subsequent metal processing and/or finishing services which may be required by the customer; o arranging for materials that have been ordered by a customer (and are subject to a firm purchase commitment) be stored at an appropriate warehouse for release to the customers on a just-in-time delivery basis, and o providing customers with information concerning market trends and product development. The Company carefully monitors the timing and processing of orders to meet customers' needs and commits to 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. 3 Backlog At December 31, 2002, the amount of backlog of firm orders was approximately $52 million, (as compared to $50 million at December 31, 2001) 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, 2002 backlog by June 30, 2003. Suppliers The Company enjoys exclusive representation arrangements with several foreign mills; however one supplier furnished approximately 58% of the Company's product in 2002. 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. 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 2002 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 180 customers in diverse industries, including transportation, automobile, housing, appliances and packaging. In 2002, the top ten customers of the Company represented approximately 35% of its sales, with one customer accounting for 11% of total sales. These customers included seven full-service distribution centers (i.e., distributors that have the capacity to provide additional processing services), as well as producers of various consumer and industrial products. The Company's customers are located throughout the United States and Canada and, to a lesser extent, Australia and New Zealand. The Company's U.S. customer base is not regional. The following table summarizes the Company's revenues for the past three years by geographic region.
Net Sales (In thousands) 2002 2001 2000 ---- ---- ---- United States 127,327 113,915 128,174 Canada & Pacific Rim 31,411 29,320 37,154 Total 158,738 143,235 165,328
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. 4 Transportation The Company arranges for the transportation to customers of the products that they purchase. 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's principal means of competition is customer service, including the provision of value-added services to its customer. 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. Employees As of December 31, 2002, the Company had 21 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 six employees in Australia. ITEM 2. DESCRIPTION OF PROPERTIES The Company's corporate headquarters are located in Fort Lee, New Jersey, where the Company leases office space pursuant to a lease expiring in March 2005. The lease provides for a minimum annual rental payment of $225,000. The Company leases a warehouse and distribution facility in Baltimore, Maryland pursuant to a lease expiring in October 2005. The lease provides for minimum annual rental payments of $205,000 over the term of the lease. Management believes that the Company's facilities are adequate to meet its current needs. ITEM 3. LEGAL PROCEEDINGS One of the Company's suppliers asserted a claim against the Company alleging non-payment of various invoices. Kangartec Aluminum Products Sdn Bhd filed suit on August 20, 2002 in the Superior Court of New Jersey, Union County: Law Division alleging total damages of approximately $500,000. The Company counter sued for an amount in excess of the claim, alleging shipment of defective merchandise. The case has been settled and the costs associated with the suit have been charged to operations during 2002. The Company is also party from time to time to ordinary litigation incidental to its business. The Company does not presently believe that any such litigation would have a material adverse effect on its results of operation or financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to shareholders during the fourth quarter for their approval. 5 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market for Common Stock The Company's common stock trades on the American Stock Exchange ("AMEX") under the symbol ERS. The table below sets forth the high and low sales prices for the common stock as reported by AMEX for the periods indicated.
Common Stock ------------------------------------------------- 2002 2001 ---- ---- Period High Low High Low ------ ---- --- ---- --- 1st Quarter ........... $1.000 $0.800 $1.188 $0.875 2nd Quarter ........... $1.450 $0.800 $1.180 $0.900 3rd Quarter ........... $1.300 $0.950 $1.100 $0.900 4th Quarter ........... $1.700 $0.950 $1.070 $0.850
On March 14, 2003, the closing price of the common stock on AMEX was $1.15 and there were 47 holders of record of the Common Stock, and approximately 500 beneficial holders of common stock. The Company did not sell any unregistered equity securities in 2002. 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. On June 18, 2002 the Board of Directors authorized an additional increase in the share repurchase program of 1 million shares. This brought the total authorized number of shares available under the repurchase program to 2.5 million. As of December 31, 2002, the Company had repurchased a total of 2,257,400 shares for an aggregate cost of $2,716,749. The Company also had acquired 50,000 shares for a cost of $50,000 in connection with the reverse merger in September 1999. 6 Equity Compensation Plan Information The following table provides information as of December 31, 2002 regarding shares of common stock of the Company that may be issued under our existing equity compensation plans, including the Company's 1996 Stock Option Plan (the "1996 Plan").
------------------------------------------------------------------------------ Equity Compensation Plan Information ------------------------------------------------------------------------------ Number of securities to be issued upon exercise of Weighted Average Number of securities outstanding options as of exercise price of remaining available for Plan category December 31, 2002 outstanding options future issuance ---------------------------------- --------------------------- ------------------- ----------------------- (a) (b) (c) Equity compensation plans approved 683,933 1.33 545,000 by security holders Equity compensation plans not approved by security holders - - - Total 683,933 1.33 545,000
7 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 and 1998. The consolidated balance sheet data and consolidated statement of operations data as of and for the years ended December 31, 2002, 2001, 2000, 1999, and 1998 have been derived from our Consolidated Financial Statements. The following selected consolidated financial and operating data are qualified by and should be read in conjunction with our more detailed Consolidated Financial Statements and notes thereto and the discussion under "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Part II, Items 7 and 8 of this Form 10-K.
Years Ended December 31, In thousands, except per share information --------------------------------------------------------------------------- 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- Operating Data: --------------- Net Sales $158,738 $143,235 $165,328 $107,112 $101,163 Operating Income $4,992 $4,083 $5,041 $4,273 $3,859 Net Income $2,370 $1,296 $1,041 Pro Forma Net Income $1,309 $1,572 Share Data: ----------- Weighted average shares outstanding Basic 10,049 10,956 11,346 7,328* 5,560* Diluted 10,189 11,091 11,445 7,356* 5,560* Earnings Per Share: ------------------- Basic $.24 $.12 $.09 Diluted $.23 $.12 $.09 Pro Forma earnings per share: ----------------------------- Basic $.18* $.28* Diluted $.18* $.28* Balance Sheet Data: As of December 31, ------------------- ------------------ 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- Total Assets $54,469 $52,762 $69,110 $46,398 $34,739 Working Capital $12,871 $11,823 $10,946 $10,065 $10,476 Stockholders' Equity $12,922 $11,944 $11,101 $10,176 $10,735 * pro forma
8 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 58% of the Company's purchases for the year ended December 31, 2002, and three suppliers accounted for 75% of 2002 purchases. Critical Accounting Policies The Company's consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Certain accounting policies have a significant impact on amounts reported in the financial statements. A summary of those significant accounting policies can be found in Note B to the Company's financial statements. The Company has not adopted any significant new accounting policies during the period ended December 31, 2002. Among the significant judgments made by management in the preparation of the Company's financial statements are the determination of the allowance for doubtful accounts and accruals for inventory claims. Allowance for Doubtful Accounts As of December 31, 2002, the Company had $24,446,000 in trade receivables. Additionally, the Company had recorded an allowance for doubtful accounts of $191,000. The Company reports accounts receivable, net of an allowance for doubtful accounts, to represent its estimate of the amount that ultimately will be realized in cash. The Company reviews the adequacy of its allowance for doubtful accounts on an ongoing basis, using historical collection trends, aging of receivables, as well as review of specific accounts, and makes adjustments in the allowance as it believes necessary. The Company maintains a credit insurance policy on the majority of its customers. This policy has a 10% co-insurance. Changes in economic conditions could have an impact on the collection of existing receivable balances or future allowance considerations. Accruals for Inventory Claims Generally, the Company's exposure on claims for defective material is small as the company refers all claims on defects back to the Mill supplying the material. In the event, that the Company does not believe the Mill will honor a claim, the Company will record an allowance for inventory adjustments. Comparison of Fiscal Years Ended December 31, 2002 and 2001 (in thousands) Net sales increased by $15,503 or 10.8% from $143,235 in 2001 to $158,738 in 2002. The Company has pursued additional volumes from its principal suppliers which resulted in the higher sales volume for the year. The Company's product line since inception has consisted primarily of semi-finished aluminum products. Gross profit increased by 18% from $9,373 to $11,024. The Company expanded its value added sales program, which has contributed to the overall increase in gross margin. In addition, the Company has operated more efficiently in purchasing and managing freight costs. The gross profit margin was increased from 6.5% to 6.9%. 9 Selling, general and administrative expenses increased by $742 or approximately 14% as the result of increases in payroll, sales commissions, severance costs, professional fees and insurance costs. Interest expense declined $986 or 49% from $2,032 to $1,046. The decrease in interest expense is due to continued decreases in the variable rate of interest on the Company's revolving line of credit. The decline is also due, in part, to the reduction in the outstanding balance on the Company's line of credit. The effective income tax rate increased from 36.8% to 39.9% as a result of changes in state income tax allocation factors. Net income was $2,370 for 2002 as compared to $1,296 for 2001. The primary reason for the increase in net income was due to the significant reduction in interest expense. Comparison of Fiscal Years Ended December 31, 2001 and 2000 (in thousands) Net sales decreased by $22,093 or 13.4% from $165,328 in 2000 to $143,235 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 $10,749 to $9,373. Gross profit as a percentage of sales was relatively constant at approximately 6.5%. Selling, general and administrative expenses declined by $418 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 $1,091 or 35% from $3,123 to $2,032 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 $189 of state taxes, net of federal tax benefits, pertaining to periods prior to the merger. Results of operations for 2000 include a provision for an adjustment to state income taxes relating to the Company's earnings prior to the merger. Pursuant to the merger agreement, the former stockholders of Empire had 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 was increased by $97. Adjusting for this prior period tax, taxes for the period 2001 increased by approximately $122 as a result of the increase in income before taxes for the year 2001. Net Income was $1,296 for 2001 compared to $1,041 for 2000. 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 vested 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. 10 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 has been recognized over the vesting period. The Company recognized $536,000 of such expense through December 31, 2001, and recognized $46,000 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. Liquidity and Capital Resources (in thousands) The Company's cash balance decreased by $75 from $1,147 to $1,072 in the year ended December 31, 2002. Net cash of $2,473 was provided by operating activities, while $2,529 of net cash was used in financing activities. The $2,529 of net cash used in financing activities was primarily the result of repayment of borrowings of $1,100 under the Company's line of credit, and the purchase of $1,429 of treasury stock under the Company's previously announced stock buy-back program. The $2,473 of net cash provided by operating activities was primarily the result of a decrease in accounts receivable of $1,466, increase in accrued expenses of $1,792 and net income of $2,370. Empire currently operates under a revolving line of credit, including a commitment to issue letters of credit, with three commercial banks. The maximum availability of this facility is $60 million. 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, 2002, the amount outstanding under the Company's revolving lines of credit was $31.6 million (including letters of credit of approximately $6.0 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. The Company is currently negotiating a renewal of its line of credit. While there can be no assurances that the Company will be successful in renewing its line of credit, the Company currently expects that the line of credit will be renewed prior to June 30, 2003. Empire may require additional debt or equity financing in connection with the future expansion of its operations.
Commitments and Contingencies (in thousands) Less than 1 Year 1-3 Years 4-5 Years After 5 years Bank Debt 25,600 - - - Operating leases 430 657 - - Letters of credit 6,000 - - -
Empire has contingent liabilities in the form of letters of credit to some of its suppliers. 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 11 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 $97,000. CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS The Company is Highly Dependent on a Few Suppliers. The Company purchased approximately 58% of its products from one supplier in 2002 and approximately 75% from its three largest suppliers. As a result, the termination or limitation by one or more of the Company's largest suppliers of their relationship with the Company could have a material adverse effect on the Company's business and results of operations. In addition, the Company's loss of any one of its other suppliers (or material default by any such supplier in its obligations to the Company) due to bankruptcy, financial difficulties, expropriation, social unrest, destruction, sabotage, strikes, acquisition by a person or entity unwilling to provide products to the Company, or for any other reason, could have a material adverse effect on the Company's business. The Company is Highly Dependent on a Few Significant Customers. The Company's sales are highly concentrated to a few customers. In 2002, 35% of the Company's revenues were derived from sales to ten customers. One major customer accounted for approximately 11% of the Company's consolidated net sales for the year ended December 31, 2002. As a result, any material reduction in sales to any of these customers could have a material adverse effect on the Company's business. An Act of War or Terrorism Could Disrupt the Company's Supply of Products. The Company purchases its aluminum products exclusively from foreign suppliers. An act of war or terrorism could disrupt international shipping schedules, cause additional delays in importing the Company's products into the United States or increase the costs required to do so. The Company's Supply Sources are Subject to Substantial Risks. The Company generally purchases aluminum products from foreign suppliers. Thus, its operations could be materially and adversely affected by changes in economic, political and social conditions in the countries where the Company currently purchases or may in the future purchase such products. Among other things, changes in laws, regulations, or the interpretation thereof, or restrictions on currency conversions and exports, could negatively affect the Company's business. Although the trend in the markets in which the Company operates for its sourcing has been towards open markets and trade policies and the fostering of private economic activity, no assurance can be given that the governments will continue to pursue these policies or 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. 12 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. 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. In selected instances the co-pay may be increased to 15%. Increased Tariffs Could Adversely Affect the Company's Financial Condition. During 2002, 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 after it expires on December 31, 2006. If the preferential tariff treatment of any of our suppliers that are currently eligible for such treatment becomes unavailable, then imports from such supplier may be subjected to a tariff, instead of the duty-free treatment those imports now enjoy. To the extent these increased costs could not be passed on to its customers, the Company's profit margins could be negatively affected. This could result in higher costs to us and have a material adverse effect on our business, financial condition and results of operations. Antidumping and Other Duties Could be Imposed on the Company, its Suppliers and their Products. The imposition of an antidumping or other increased duty on any products imported by the Company could have a material adverse effect on the Company's financial condition. Under United States' law, an 13 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. If the Company Fails to Deliver Products on a Timely Basis, it May Suffer Losses. Interruption of shipping schedules upon which the Company relies for foreign purchases could result in untimely deliveries to the Company's customers or cause the Company to purchase the products in the United States at a higher cost in order to meet delivery schedules. Consequently, the Company's profit margins could be reduced or it could suffer losses. The Company guarantees its customers that it will deliver products within the period specified in their purchase orders. Any interruption of the means of transportation used by the Company to transport products could cause delays in delivery of products, could force the Company to buy the products from domestic suppliers at a higher cost in order to fulfill its commitments, and also could result in the loss of customers. The Company Competes with Companies with Captive Sources of Supply. Many of the Company's competitors are significantly larger than the Company and many have captive sources of supply and significantly greater access to capital and other resources. Thus, if the Company's sources of supply are interrupted, its competitors could be in a position to capture the Company's customers. The Company is Dependent on its Executive Officers. The Company is highly dependent on its executive officers, the loss of any of one of which could have a significant adverse impact on the Company's business. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company uses financial instruments designated as fair value hedges to manage its exposure to commodity price risk and foreign currency exchange risk inherent in its trading activities. It is the Company's policy to hedge such risks, to the extent practicable. The Company enters into high-grade aluminum futures contracts to limit its gross margin exposure by hedging the metals content element of firmly committed purchase and sales commitments. In cases where the Company enters into fixed price contracts with its supplier and variable priced sales with its customers the Company will utilize the futures market to match the terms of the purchase and sale. The Company also enters into foreign exchange forward contracts to hedge its exposure related to commitments to purchase or sell non-ferrous metals denominated in international currencies. In situations where the Company enters into purchase or sales denominated in foreign currency the foreign exchange market will be utilized to hedge foreign exchange risk exposure. The Company records "mark-to-market" adjustments on these futures and forward positions, and on the underlying firm purchase and sales commitments which they hedge, and reflects the net gains and losses currently in earnings. At December 31, 2002, net unrealized gains on the Company's foreign exchange forward contracts amounted to approximately $1,067,000 as compared to $27,000 at December 31, 2001 and net unrealized losses on aluminum futures contracts amounted to approximately $133,000 as compared to $300,000 in 2001. 14 These unrealized amounts were offset by like amounts on the underlying commitments which were hedged, and are reflected in the accompanying 2002 and 2001 balance sheet in other current assets ($1,067,000), inventory ($133,000) and accrued expenses ($1,200,000). Unrealized amounts are reflected on the 2001 balance sheet in inventory ($273,000) and accrued expenses ($273,000). 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. 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..................... 68 Non-Executive Chairman of the Board and Director Nathan Kahn....................... 48 Chief Executive Officer, President and Director Sandra Kahn....................... 45 Vice President, CFO and Director Harvey Wrubel..................... 49 Vice President of Sales and Director Jack Bendheim..................... 56 Director Barry L. Eisenberg................ 56 Director Peter G. Howard................... 67 Director Nathan Mazurek.................... 40 Director Morris J. Smith................... 45 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 15 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. 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 16 required, the Company believes that during the period from January 1, 2002 through December 31, 2002 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. 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($) Bonus($) Nathan Kahn 2002 $450,000 -- 2,000 $1,000(1) Chief Executive Officer and 2001 $350,000 $75,000 2,000 $2,000(1) President 2000 $300,000 $50,000 2,000 $2,000(1) Sandra Kahn 2002 $175,000 -- 2,000 $1,000(1) Vice President, 2001 $150,000 $25,000 2,000 $2,000(1) Chief Financial Officer, Treasurer and Secretary 2000 $100,000 -- 2,000 $2,000(1) Harvey Wrubel 2002 $219,890 $298,000 2,000 $125,173(2) Vice President of Sales 2001 $214,316 $300,000 2,000 $117,218(3) 2000 $207,872 $277,000 2,000 $139,142(4)
(1) Represents directors' fees. (2) Of this amount $1,000 represents director fees and $124,173 represents non-cash taxable compensation charged to Mr. Wrubel upon the vesting of non-contingent restricted shares as discussed in Item 7, Management Discussion and Analysis of Financial Condition and Results of Operations - Accounting Treatment of Restricted Stock Agreement. (3) 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. (4) Of this amount, $1,000 represents director fees and $138,142 represents non-cash taxable compensation charged to Mr. Wrubel upon the vesting of non-contingent restricted shares, as discussed in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations--Accounting Treatment of Restricted Stock Agreement. 17 Option Grants in Last Fiscal Year The following table contains information concerning the stock option grants made to each of the officers and employees named in the Summary Compensation Table during 2002. No stock appreciation rights were granted to these individuals during such year.
(Individual Grants) (1) Number of Percent of Exercise Expiration Potential securities total options price date realizable value underlying granted to ($/Sh) at assumed annual options granted employees in (2) rates of stock (#) fiscal year price Name appreciation for option term 5% 10% ($) ($) $ $ Nathan Kahn 2,000 11.1% $1.13 06/18/12 1,421 3,602 Sandra Kahn 2,000 11.1% $1.13 06/18/12 1,421 3,602 Harvey Wrubel 2,000 11.1% $1.13 06/18/12 1,421 3,602 ---------------------------
(1) All options granted to the named officers and employees are non-statutory under federal tax laws and were granted on June 18, 2002. 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, 2002.
Options as of December 31, 2002 Number of Securities Underlying Value of Unexercised In-the-Money Unexercised Options at Year End Options at Year End Name Exercisable Unexercisable Exercisable Unexercisable Nathan Kahn 8,000 ............ $1,804 ............ Sandra Kahn 8,000 ............ $1,804 ............ Harvey Wrubel 206,000 ............ $1,804 ............ ---------------------------
The closing price of the Company's common stock on December 31, 2002, the last day of trading in 2002, was $1.40. 18 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, 2002. 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 $1.13 Barry Eisenberg 2,000 $1.13 Peter Howard 2,000 $1.13 Nathan Kahn 2,000 $1.13 Sandra Kahn 2,000 $1.13 Nathan Mazurek 2,000 $1.13 Morris Smith 2,000 $1.13 William Spier 2,000 $1.13 Harvey Wrubel 2,000 $1.13
Certain Agreements with Officers of the Company Employment Agreements with Officers 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 incorporated by reference to this report as exhibits. Term. The initial term of each agreement was three years. Each agreement provided 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 initial 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). Nathan Kahn's contract was extended for an additional two years by an amendment in July 2002, and a copy of which has been filed as an exhibit to this report. Sandra Kahn's contract was extended automatically for an additional two year period pursuant to the terms of her agreement. Base Salary. The Company has agreed to pay Nathan Kahn a base salary of $450,000 per annum and Sandra Kahn a base salary 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. 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 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. 19 Employment Agreement with Harvey Wrubel On September 17, 1999, the Company entered into an employment agreement with Harvey Wrubel. Certain information regarding this agreement is set forth below. The form of this agreement is incorporated by reference as an exhibit to this report. Term. The initial term of this agreement was 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. Mr. Wrubel's contract extended automatically for an additional two year period pursuant to the terms of his agreement. Base Salary. The agreement provided 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 $219,890. 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. Compensation Committee Interlocks and Insider Participation During 2002, 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. Mr. Spier previously served as our Acting Chief Executive Officer from November 1997 until September 1999. Other than described above, none of the other members of the Compensation Committee serve, or previously served as officers or employees of the Company. In addition, there were no interlocks with other companies within the meaning of the Securities and Exchange Commission's proxy rules during 2002. 20 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth as of March 14, 2003, 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.
Number of Shares Percent of Common Name and Address(1) Beneficially Owned (2) Stock Owned --------------------------------------- ---------------------- ----------------- Directors and Officers: William Spier 257,669(3) 2.7% Nathan Kahn and Sandra Kahn 5,217,923(4) 55.3% Harvey Wrubel 584,327(5) 6.2% Jack Bendheim 28,000(6) * Barry L. Eisenberg 371,706(7) 3.9% Peter G. Howard 8,000(8) * Nathan Mazurek 8,000(9) * Morris J. Smith 81,467(10) * All officers and directors as a group (9 persons) 6,557,092(11) 66%
* Less than 1% (1) The address of all listed persons is c/o the Company. (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) 153,000 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) 16,000 shares underlying currently exercisable options held by Nathan and Sandra Kahn. (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) 206,000 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) 8,000 shares underlying currently exercisable options held by Mr. Bendheim. 21 (7) Consists of (i) 700 currently outstanding shares held by Mr. Eisenberg, (ii) 84,667 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. Miriam Mark 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. Miriam Mark is the daughter 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 8,000 shares underlying currently exercisable options held by Mr. Howard. (9) Consists of 8,000 shares underlying currently exercisable options held by Mr. Mazurek. (10) Consists of (i) 15,800 currently outstanding shares held by Mr. Smith and (ii) 65,667 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. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. ITEM 14. CONTROLS AND PROCEDURES As required by new Rule 13a-15 under the Securities Exchange Act of 1934, within the 90 days prior to the date of this report, the Company carried out an evaluation under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. In connection with the new rules, the Company is further reviewing and documenting disclosure controls and procedures, including internal controls and procedures for financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that systems evolve with the business. 22 ITEM 15. 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. (incorporated by reference from the correspondingly numbered exhibit in the Company's Annual Report on Form 10-KSB for the year ended December 31, 1999). 3.2 Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference from the correspondingly numbered exhibit in the Company's Registration Statement on Form SB-2 (No. 333-9697). 3.3 Amendment No. 1 to the Amended and Restated Certificate of Incorporation (incorporated by reference from the correspondingly numbered exhibit in the Company's Annual Report on Form 10-K for the year ended December 31, 2001). 3.4 Amended and Restated By-Laws of the Registrant (incorporated by reference from the correspondingly numbered exhibit in the Company's Registration Statement on Form SB-2 (No. 333-9697). 3.5 Amendment No. 1 to Amended and Restated By-Laws of the Registrant* 3.6 Amendment No. 2 to Amended and Restated By-Laws of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K dated May 11, 1997). 10.1 Employment Agreement dated September 15, 1999 entered into by Registrant with Nathan Kahn (incorporated by reference from the correspondingly numbered exhibit in the Company's Annual Report on Form 10-KSB for the year ended December 31, 1999). 10.2 Employment Agreement dated September 15, 1999 entered into by Registrant with Sandra Kahn (incorporated by reference from the correspondingly numbered exhibit in the Company's Annual Report on Form 10-KSB for the year ended December 31, 1999). 10.3 Employment Agreement dated September 15, 1999 entered into by Registrant with Harvey Wrubel (incorporated by reference from the correspondingly numbered exhibit in the Company's Annual Report on Form 10-KSB for the year ended December 31, 1999). 10.4 Restricted Stock Agreement dated September 15, 1999 entered into by Registrant with Harvey Wrubel (incorporated by reference from the correspondingly numbered exhibit in the Company's Annual Report on Form 10-KSB for the year ended December 31, 1999). 10.8 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 (incorporated by reference from the correspondingly numbered exhibit in the Company's Annual Report on Form 10-KSB for the year ended December 31, 1999). 23 10.9 Registrant's 1996 Stock Option Plan (incorporated by reference from the correspondingly numbered exhibit in the Company's Registration Statement on Form SB-2 (No. 333-9697). 10.10 Form of Indemnification Agreement entered into by the Registrant with executive officers and directors (incorporated by reference from the Company's Annual Report on Form 10-KSB for the year ended December 31, 2000). 10.11 Credit Facility dated December 21, 2000 between the Registrant and The Chase Manhattan Bank, as Lead Arranger and Administrative Agent (incorporated by reference from the Company's Annual Report on Form 10-KSB for the year ended December 31, 2000). 10.12 Agreement of Lease for warehouse facility dated September 27, 2000 between Townsend Properties, Inc. and Registrant (incorporated by reference from the Company's Annual Report on Form 10-KSB for the year ended December 31, 2000). 11.1 Statement regarding computation of per share earnings.* 21.1 List of subsidiaries of the Registrant.* -------------------------------------- * Filed herewith (b) Reports on Form 8-K None 24 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Empire Resources, Inc. By: /s/ Nathan Kahn --------------------------- Nathan Kahn Chief Executive Officer March 31, 2003 /s/ Nathan Kahn --------------------------- Nathan Kahn Chief Executive Officer and Director (Principal Executive Officer) March 31, 2003 /s/ Sandra Kahn --------------------------- Sandra Kahn, Chief Financial Officer and Director (Principal Financial and Principal Accounting Officer) March 31, 2003 /s/ William Spier --------------------------- William Spier, Director March 31, 2003 /s/ Jack Bendheim --------------------------- Jack Bendheim, Director March 31, 2003 25 /s/ Barry L. Eisenberg --------------------------- Barry L. Eisenberg, Director March 31, 2003 /s/ Peter G. Howard --------------------------- Peter G. Howard, Director March 31, 2003 /s/ Nathan Mazurek --------------------------- Nathan Mazurek, Director March 31, 2003 /s/ Morris J. Smith --------------------------- Morris J. Smith, Director March 31, 2003 /s/ Harvey Wrubel --------------------------- Harvey Wrubel, Director March 31, 2003 26 CERTIFICATION PURSUANT TO SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002 I, Nathan Kahn, certify that: 1. I have reviewed this annual report on Form 10-K of Empire Resources, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 31, 2003 By: /s/ Nathan Kahn ----------------------------- Nathan Kahn Chief Executive Officer 27 CERTIFICATION PURSUANT TO SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002 I, Sandra Kahn, certify that: 1. I have reviewed this annual report on Form 10-K of Empire Resources, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 31, 2003 By: /s/ Sandra Kahn ----------------------------- Sandra Kahn Chief Financial Officer 28 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, 2002 and 2001, 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, 2002. 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, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. Eisner LLP (formerly Richard A. Eisner & Company, LLP) New York, New York March 7, 2003 F-1 EMPIRE RESOURCES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands except share amounts)
December 31, -------------------------------- 2002 2001 -------------------------------- ASSETS Current assets: Cash $ 1,072 $ 1,147 Trade accounts receivable (less allowance for doubtful accounts of $191 and $189 at December 31, 2002 and 2001) 24,255 22,789 Inventories 27,832 27,782 Other current assets 1,259 923 ---------- ----------- Total current assets 54,418 52,641 Furniture and equipment (less accumulated depreciation of $347 and $313) 24 39 Deferred financing costs, net 27 82 ---------- ----------- $ 54,469 $ 52,762 ========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable - banks $ 25,600 $ 26,700 Trade accounts payable 13,036 13,000 Accrued expenses 2,911 1,118 ---------- ----------- Total current liabilities 41,547 40,818 ---------- ----------- Commitments and contingencies Stockholders' equity: Common stock $.01 par value, 20,000,000 shares authorized and 11,749,651 shares issued at December 31, 2002 and 2001 117 117 Additional paid-in capital 10,727 10,681 Retained earnings 4,824 2,454 Accumulated other comprehensive income-- cumulative translation adjustment 21 30 Treasury stock (2,307,400 shares and 1,180,600 shares) (2,767) (1,338) ---------- ----------- Total stockholders' equity 12,922 11,944 ---------- ----------- $ 54,469 $ 52,762 ========== ===========
See notes to consolidated financial statements F-2 EMPIRE RESOURCES, INC. AND SUBSIDIARES Consolidated Statements of Income (In thousands except per share amounts)
Year Ended December 31, --------------------------------------- 2002 2001 2000 --------------------------------------- Net sales $ 158,738 $ 143,235 $ 165,328 Cost of goods sold 147,714 133,862 154,579 --------- --------- --------- Gross profit 11,024 9,373 10,749 Selling, general and administrative expenses 6,032 5,290 5,708 --------- --------- --------- Operating income 4,992 4,083 5,041 Interest expense 1,046 2,032 3,123 --------- --------- --------- Income before income taxes 3,946 2,051 1,918 Income taxes 1,576 755 877 --------- --------- --------- Net income $ 2,370 $ 1,296 $ 1,041 ========= ========= ========= Weighted average shares outstanding: Basic 10,049 10,956 11,346 ========= ========= ========= Diluted 10,189 11,091 11,445 ========= ========= ========= Earnings per share: Basic $.24 $.12 $.09 ========= ========= ========= Diluted $.23 $.12 $.09 ========= ========= =========
See notes to consolidated financial statements F-3 EMPIRE RESOURCES, INC. AND SUBSIDIARES Consolidated Statements of Changes in Stockholders' Equity (In thousands)
Common Stock Acumulated Other Comprehensive Income- Additional Cumulative Total Total Number of Paid-in Retained Translation Treasury Stockholders' Comprehensive Shares Amount Capital Earnings Adjustment Stock Equity Income -------------------------------------------------------------------------------------------------- Balance at December 31, 1999 15,575 $ 155 $ 9,925 $ 117 $ 36 $ (59) $ 10,174 Transfer of restricted 299 299 shares to key employee Capital contribution by 286 286 stockholders Purchase of treasury stock (732) (732) (590 shares) Net change in cumulative 32 32 32 translation adjustment Net income for 2000 1,041 1,041 1,041 -------- $1,073 -------- -------- --------- -------- -------- -------- --------- -------- Balance at December 31, 2000 15,575 $ 155 $ 10,510 $ 1,158 $ 68 $ (791) $ 11,100 Transfer of restricted 133 133 shares to key employee Purchase of treasury stock (547) (547) (534 shares) Net change in cumulative (38) (38) (38) translation adjustment Retirement of common stock (3,825) (38) 38 Net income for 2001 1,296 1,296 1,296 -------- -------- --------- -------- -------- -------- --------- -------- Balance at December 31, 2001 11,750 $ 117 $ 10,681 $ 2,454 $ 30 $(1,338) $ 11,944 $ 1,258 -------- Transfer of restricted 46 46 shares to key employee Purchase of treasury stock (1,429) (1,429) (1,127 shares) Net change in cumulative (9) (9) (9) translation adjustment Net income for 2002 2,370 2,370 2,370 -------- $2,361 -------- -------- --------- -------- -------- -------- --------- -------- Balance at December 31, 2002 11,750 $ 117 $ 10,727 $ 4,824 $ 21 $(2,767) $ 12,922 -------- -------- --------- -------- -------- -------- ---------
See notes to consolidated financial statements F-4 EMPIRE RESOURCES, INC. AND SUBSIDIARES Consolidated Statements of Cash Flows (In thousands)
Year Ended December 31, ------------------------------------- 2002 2001 2000 ------------------------------------- Cash flows from operating activities: Net income $ 2,370 $ 1,296 $ 1,041 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 89 84 78 Deferred income taxes 34 63 (114) Translation adjustment (9) (38) 32 Transfer of restricted shares to key employee 46 133 299 Changes in: Trade accounts receivable (1,466) 14,616 (11,450) Inventories (50) 1,139 (9,559) Due from stockholders 286 (286) Other current assets (370) 148 (251) Deferred financing costs (99) Trade accounts payable 37 (5,939) 10,835 Accrued expenses 1,792 49 (702) -------- --------- -------- Net cash provided by (used in) operating activities 2,473 11,837 (10,176) --------- --------- --------- Cash flows used in investing activities: Additions to furniture and equipment (19) (21) (23) --------- --------- --------- Cash flows from financing activities: (Repayments of) proceeds from notes payable - banks (1,100) (11,300) 11,700 Capital contribution by stockholders 286 Distribution payable to former stockholders (47) Cost related to financing (30) Purchase of treasury stock (1,429) (547) (732) --------- --------- --------- Net cash (used in) provided by financing activities (2,529) (11,877) 11,207 --------- --------- --------- Net (decrease) increase in cash (75) (61) 1,008 Cash at beginning of period 1,147 1,208 200 --------- --------- --------- Cash at end of period $ 1,072 $ 1,147 $ 1,208 ========= ========== ========= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 998 $ 2,087 $ 3,317 Income taxes $ 1,396 $ 1,033 $ 1,065
See notes to consolidated financial statements F-5 NOTE A - BUSINESS Empire Resources, Inc ("the Company") is engaged principally in the purchase, sale and distribution of 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"),a wholly-owned subsidiary of the Company acts as its sales agent in Australia. The Company purchases from an array of suppliers located throughout the world. 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 three to five years. [5] Deferred financing costs: Deferred financing costs include fees and costs incurred to obtain long term financing and are being amortized over the terms of the respective loans. Unamortized deferred financing costs are charged to expense when debt is retired before the maturity date. [6] Commodity futures and foreign currency hedging activities: The Company uses financial instruments designated as fair value hedges to manage its exposure to commodity price risk and foreign currency exchange risk inherent in its operations. It is the Company's policy to hedge such risks, to the extent practicable. The Company enters into high-grade aluminum futures contracts to limit its gross margin exposure by hedging the metals content element of firmly committed purchase and sales commitments. The Company also enters into foreign exchange forward contracts to hedge its exposure related to commitments to purchase or sell non-ferrous metals denominated in international currencies. The Company records "mark-to-market" adjustments on these futures and forward positions, and on the underlying firm purchase and sales commitments which they hedge, and reflects the net gains and losses currently in earnings (See Note E). [7] 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. [8] Income taxes: The Company follows the asset and liability approach for deferred income taxes. This method provides that deferred tax assets and liabilities are recorded, using currently enacted tax rates, based upon the difference between the tax bases of assets and liabilities and their carrying amounts for financial statement purposes. Deferred tax asset valuation allowances are recorded when management does not believe that it is more likely than not that the related deferred tax assets will be realized. F-6 EMPIRE RESOURCES, INC. AND SUBSIDIARES NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) [9] Earnings per share: Basic earning per share is computed by dividing net income by the weighted average number of common shares outstanding during the year. Diluted earnings per share gives effect to all dilutive potential common shares outstanding during the year. The dilutive effect of the outstanding stock warrants and options was computed using the treasury stock method. For the years ended December 31, 2002, 2001 and 2000, diluted earnings per share did not include the effect of approximately 544,000, 616,000 and 1,209,000 options outstanding at such dates as this effect would be anti-dilutive. [10] Stock-based compensation: At December 31, 2002, the Company had a stock option plan which is described more fully in Note G. The Company accounts for stock-based employee compensation under the recognitions and measurement principles of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. No stock-based employee compensation cost is reflected in net income as all options granted under the Plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all awards.
Year Ended December 31, (In thousands) -------------------------------------------- 2002 2001 2000 ---- ---- ---- Reported net income $ 2,370 $ 1,296 $ 1,041 Stock-based employee compensation determined under the fair value based method (5) (5) (21) --------- --------- --------- Pro forma net income $ 2,365 $ 1,291 $ 1,020 ========= ========= ========= Earnings per share (basic and diluted): As reported Basic $ .24 $ .12 $ .09 Diluted $ .23 $ .12 $ .09 Pro-forma Basic $ .24 $ .12 $ .09 Diluted $ .23 $ .12 $ .09
The fair value of each option grant on the date of grant is estimated using the Black-Scholes option-pricing model which included the following assumptions stated on a weighted average basis:
2002 2001 2000 ---- ---- ---- Dividend yield 0% 0% 0% Volatility 0.40 0.40 0.40 Risk free interest rate 4.23% 3.87% 5.96%-6.20% Expected life in years 5 5 5
The weighted average fair values of options granted during the years ended December 31, 2002, 2001 and 2000 were $0.47, $0.40 and $0.47, respectively. F-7 EMPIRE RESOURCES, INC. AND SUBSIDIARES NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) [11] Deferred stock based compensation: The expense relating to deferred stock based compensation is based on the fair market value of the stock as of the grant date and is amortized over the vesting period of three years. This resulted in amortization expense of $46,000, $133,000 and $299,000 for the years ended December 31, 2002, 2001 and 2000, respectively. The amount has been fully amortized as of December 31, 2002. [12] Use of estimates: The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. [13] Significant customers and concentration of suppliers: One major customer accounted for approximately 11% of the Company's consolidated net sales for the year ended December 31, 2002. No customers accounted for more than 10% of the Company's consolidated net sales for the years ended December 31, 2001 and 2000. The Company's purchase of nonferrous metal is from a limited number of suppliers located throughout the world. Three suppliers accounted for 75%, 74%, and 62% of total purchases during the years ended December 31,2002, 2001 and 2000, respectively. One such supplier accounted for 58% of these purchases in 2002. The Company's loss of any of its three largest suppliers or a material default by any such supplier in its obligations to the Company would have at least a short-term material adverse effect on the Company's business. NOTE C - INVENTORIES Inventories consist of the following semi finished aluminum products:
December 31, 2002 2001 ---- ---- Stored in warehouses $13,879,000 $13,190,000 In transit 13,953,000 14,592,000 ----------- ----------- $27,832,000 $27,782,000 =========== ===========
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, 2002 and 2001 because the interest rates on such debt approximate the market rate for the Company given the appropriate risk factors. Derivative financial instruments are carried at fair value. (See Note E) 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, F-8 EMPIRE RESOURCES, INC. AND SUBSIDIARES NOTE E - DERIVATIVE FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED) 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 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, 2002, net unrealized gains on the Company's foreign exchange forward contracts amounted to approximately $1,067,000 as compared to $27,000 at December 31, 2001 and net unrealized losses on aluminum futures contracts amounted to approximately $133,000 as compared to $300,000 in 2001. These unrealized amounts were offset by like amounts on the underlying commitments which were hedged, and are reflected in the accompanying 2002 balance sheet in other current assets ($1,067,000), inventory ($133,000) and accrued expenses ($1,200,000). Unrealized amounts are reflected on the 2001 balance sheet in inventory ($273,000) and accrued expenses ($273,000). For the years ended December 31, 2002, and 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 its assets. Under the agreement, the Company 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, 2002 and 2001 respectively, the credit utilized under this facility amounted to $31.6 million and $31.1 million (including approximately $6 million and $4.4 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, 2002 and 2001 respectively, the interest rate charged approximated 3.4% and 4%, respectively. 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. F-9 EMPIRE RESOURCES, INC. AND SUBSIDIARES NOTE G - STOCK OPTIONS (CONTINUED) The following is a summary of stock option activity for the years ended December 31, 2002, 2001 and 2000:
Number Exercise price Weighted Average of shares per share Exercise Price --------- --------- -------------- Options outstanding at December 31, 1999 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 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 750,933 $0.01-$2.00 $1.36 Options granted 18,000 $1.13 $1.13 Options forfeited (85,000) $1.37 - $1.50 $1.49 -------- Options outstanding at December 31, 2002 683,933 $.01 - $2.00 $1.33 ======= Options exercisable at December 31, 2002 683,933 $.01 - $2.00 $1.33 ======= Options available for grant under 1996 Plan at December 31, 2002 545,000 =======
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. In June 2002, the Board of Directors increased the number of shares authorized to a total of 2,500,000. As of December 31, 2002, the Company had repurchased a total of 2,257,400 shares under the repurchase program for an aggregate cost of $2,717,000. The Company had also acquired 50,000 shares for a cost of $50,000 in September 1999. [2] Capital contribution by stockholders: Results of operations for 2000 include a provision for an adjustment to state income taxes of $286,000 relating to the years 1996 through 1998. This tax assessment was subject to indemnification by the former stockholders of the Company which was received in 2001. Net income for 2000 was reduced by $189,000, net of the related federal income tax benefit. As a result of this event, total stockholders' equity as of December 31, 2000 was increased by $97,000. [3] Retirement of Contingent Shares Issued to Empire Stockholders: In connection with a merger of the Company in 1999, 3,824,511 of the Company's 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. F-10 EMPIRE RESOURCES, INC. AND SUBSIDIARES NOTE I - INCOME TAXES Income tax expense (benefit) consists of the following:
Year Ended December 31, ------------------------------------------ 2002 2001 2000 ---- ---- ---- Current $1,542,000 $692,000 $ 991,000 Deferred 34,000 63,000 (114,000) ------ -------- ----------- $1,576,000 $755,000 $ 877,000 ========== ======== ===========
The U.S. statutory rate of 34% can be reconciled to the effective tax rate as follows:
Year Ended December 31, ------------------------------------------ 2002 2001 2000 ---- ---- ---- Provision for taxes at statutory rate $1,342,000 $697,000 $652,000 State and local taxes, net of federal tax benefit 154,000 58,000 71,000 State taxes pertaining to prior years, net of federal tax benefit 189,000 Permanent differences and other 80,000 (35,000) ---------- -------- -------- $1,576,000 $755,000 $877,000 ========== ======== ========
No valuation allowance has been provided for U.S. deferred tax assets of $16,000 and $51,000 at December 31, 2002 and December 31, 2001 respectively, since management is of the opinion that it is more likely than not that such assets will be realized. The major temporary difference that gives rise to the deferred tax asset at December 31, 2002 is the allowance for doubtful accounts. The major temporary differences that give rise to the deferred tax asset at December 31, 2001 is the allowance for doubtful accounts and the stock based compensation. In addition, deferred tax assets and liabilities of equal amounts of approximately $355,000 and $104,000 at December 31, 2002 and 2001, respectively related to derivative contracts and related hedged commitments. 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%
F-11 EMPIRE RESOURCES, INC. AND SUBSIDIARES NOTE J - EMPLOYEE RETIREMENT BENEFITS (CONTINUED) 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 $25,000 in 2002, $30,000 in 2001, and $24,000 in 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, (In thousands except per share amounts) ------------------------------------------- 2002 2001 2000 ---- ---- ---- Numerator: Net Income $ 2,370 $ 1,296 $ 1,041 Denominator: Computation of basic earnings per share: Weighted average shares outstanding - basic 10,049 10,956 11,346 Basic earnings per share $ 0.24 $ 0.12 $ 0.09 Computation of diluted earnings per share: Weighted average shares outstanding - basic 10,049 10,956 11,346 Potentially dilutive shares: Shares issuable upon exercise of dilutive options and warrants 140 135 99 Weighted average shares outstanding - diluted 10,189 11,091 11,445 Diluted earnings per share $ 0.23 $ 0.12 $ 0.09
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:
---------------------------------------------- Year Ended December 31, (In thousands) ---------------------------------------------- 2002 2001 2000 --------------- -------------- --------------- United States $ 127,327 $ 113,915 $ 128,174 Canada and Pacific Rim 31,411 29,320 37,154 --------- --------- --------- $ 158,738 $ 143,235 $ 165,328 ========= ========= =========
F-12 EMPIRE RESOURCES, INC. AND SUBSIDIARES NOTE M - SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
2002 ------------------------------------------------------ March June September December 31 30 30 31 ----------- ----------- ---------------- ------------- (In thousands except per share amounts) ------------------------------------------------------ Net sales $ 40,417 $ 37,838 $ 40,567 $ 39,916 Gross profit 2,838 2,678 2,804 2,704 Operating income 1,460 1,289 1,343 836 Net income 734 637 658 341 Income per common share- Basic and diluted Basic $.07 $.06 $.07 $.04 Diluted $.07 $.06 $.07 $.04 Weighted average shares outstanding Basic 10,569 10,564 9,676 9,442 Diluted 10,699 10,699 9,819 9,588 2001 ------------------------------------------------------ March June September December 31 30 30 31 ----------- ----------- ---------------- ------------- (In thousands except per share amounts) ------------------------------------------------------ Net sales $ 44,283 $ 41,191 $ 31,041 $ 26,720 Gross profit 2,766 2,516 2,228 1,862 Operating income 1,396 1,266 949 472 Net income 412 417 352 115 Income per common share- Basic and diluted Basic $.04 $.04 $.03 $.01 Diluted $.04 $.04 $.03 $.01 Weighted average shares outstanding Basic 11,037 11,025 11,024 10,741 Diluted 11,136 11,159 11,160 10,876
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, ------------ 2003 430,000 2004 430,000 2005 227,000 ------------ $1,087,000 ============
Rent expense for the years ended December 31, 2002, 2001, and 2000 was $437,000, $376,000 and $255,000 respectively. F-13 EMPIRE RESOURCES, INC. AND SUBSIDIARES NOTE N - COMMITMENTS AND CONTINGENCIES (CONTINUED) [2] Letters of credit: Outstanding letters of credit at December 31, 2002 amounting to $6.0 million expire from January through March of 2003. [3] Employment agreements: In September 1999, the Company entered into three year employment agreements with two of its executive officers. The scheduled term of each agreement was three years. Each agreement provided 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). In July 2002, the Company entered into a two year employment agreement with one of its executive officers. The agreement provides that the Company may terminate the agreement upon the disability of the executive or for cause (as such terms are defined in the agreement).Base salary under this agreement is being paid at a rate of $450,000 per annum. The amount may be increased, but not decreased, by the Board of Directors. The base salary provided for by this agreement is subject to possible upward annual adjustments based upon changes in a designated cost of living index. The Company also entered into an employment agreement with another officer. The scheduled term of the agreement was until December 31, 2002 and was extended for a two year period. The base salary is $220,000 and is subject to possible upward annual adjustments based upon changes in a designated cost of living index. [4] Purchase commitments: Under the terms of some of its supply contracts, the Company may be required to purchase certain minimum tonnages over the term of the contracts. NOTE O - VALUATION AND QUALIFYING ACCOUNTS FOR YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000 RESERVES AND ALLOWANCES FOR DOUBTFUL ACCOUNTS
In thousands ------------------------------------------------------------------------------------------------------------------------ Additions ------------------------------------ Balance at Charged to Costs Charged to Beginning of And Other Deductions from Balance at End of Period Expenses Accounts Reserves Period ------ -------- -------- -------- ------ 2002 $189 $2 $191 2001 $202 $13 $189 2000 $125 $77 $202
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