10-K 1 file001.txt FORM 10-K U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K (Mark One) [x] Annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2001 [ ] Transition report under Section 13 or 15(d) of the Exchange Act For the transition period from ---- to ---- Commission file number 001-12127 EMPIRE RESOURCES, INC. (Exact Name of Registrant as Specified in Its Charter)
------------------------------------------------------------------- --------------------------------------------------- DELAWARE 22-3136782 ------------------------------------------------------------------- --------------------------------------------------- (State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.) ------------------------------------------------------------------- ---------------------------------------------------
ONE PARKER PLAZA FORT LEE, NJ 07024 (Address of Principal Executive Offices) 201 944-2200 (Registrant's Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which ------------------- ------------------------------ registered ---------- COMMON STOCK, PAR VALUE $0.01 PER SHARE AMERICAN STOCK EXCHANGE
Securities registered pursuant to Section 12 (g) of the Act: NONE Check whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Check if disclosure of delinquent filers in response to Item 405 of regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form K. [x] State registrant's revenues for its most recent fiscal year: $143,235,385. As of March 15, 2002, the aggregate market value of the voting stock of the registrant held by non-affiliates was approximately $3.5 million. Such market value was calculated based upon the closing price of the stock on the American Stock Exchange as of such date and excludes shares held by each officer and director of the registrant and any person that owns 5% or more of the registrant's outstanding common stock. This determination of affiliate status is not necessarily a conclusive determination for all other purposes. State the number of shares outstanding of each of the registrant 's classes of common equity, as of the latest practicable date: 10,569,051 shares of common stock outstanding as of March 15, 2002. DOCUMENTS INCORPORATED BY REFERENCE: None. EMPIRE RESOURCES, INC. FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 INDEX
10-K Part and Item No. Page ---------------------- ---- PART I Item 1 Business. 4 Item 2 Property. 8 Item 3 Legal Proceedings. 9 Item 4 Submission of Matters to a Vote of Security Holders. 10 PART II Item 5 Market for Common Equity and Related Stockholder Matters. 10 Item 6 Selected Financial Data 12 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operation. 13 Item 7A Quantitative and Qualitative Disclosures About Market Risk. 19 Item 8 Financial Statements and Supplementary Data. 20 Item 9 Changes In and Disagreements With Accountants On Accounting and Financial Disclosure. 20 PART III Item 10 Directors and Executive Officers 21 Item 11 Executive Compensation. 23 Item 12 Certain Relationships and Related Transactions 27 Item 13 Security Ownership of Certain Beneficial Owners And Management. 28 Item 14 Exhibits and Reports on Form 8K 30
PART I ITEM 1. BUSINESS IMPORTANT INFORMATION REGARDING FORWARD LOOKING STATEMENTS Certain matters discussed under the captions "Business", "Management's Discussion and Analysis of Financial Condition and Results of Operations", "Quantitative and Qualitative Disclosures About Market Risk" and elsewhere in this Annual Report on Form 10-K and the information incorporated by reference in this report may constitute forward-looking statements for purposes of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. You can identify forward-looking statements by the use of the words "believe," "expect," "anticipate," "intend," estimate," "assume," "will," "should," and other expressions which predict or indicate future events or trends and which do not relate to historical matters. You should not rely on forward-looking statements, because they involve known and unknown risks, uncertainties and other factors, some of which are beyond the control of the Company. These risks, uncertainties and other factors may cause the actual results, performance or achievements of the Company to be materially different from the anticipated future results, performance or achievements expressed or implied by the forward-looking statements. Some of the factors that might cause these differences include the following: changes in general, national or regional economic conditions; changes in laws, regulations and tariffs; changes in the size and nature of the Company's competition; changes in interest rates, foreign currencies or spot prices of aluminum; loss of one or more foreign suppliers or key executives; increased credit risk from customers; failure of the government to renew the generalized system of preference, which provides preferential tariff treatment for certain of the Company's imports; failure of the Company to grow internally or by acquisition and to integrate acquired businesses; failure to improve operating margins and efficiencies; and changes in the assumptions used in making such forward-looking statements. You should carefully review all of these factors, and you should be aware that there may be other factors that could cause these differences, including, among others, the factors listed under "Certain Factors Affecting Future Operating Results," beginning on page [16]. Readers should carefully review the factors described under "Certain Factors Affecting Future Operating Results" and should not place undue reliance on our forward-looking statements. These forward-looking statements were based on information, plans and estimates at the date of this report, and we do not promise to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes. HISTORY Empire Resources, Inc. (the "Company") was incorporated in the State of Delaware in 1990 under the name Integrated Technology USA, Inc. ("Integrated"). Until September 17, 1999, the Company was in the business of designing, developing and marketing products for emerging computer related markets. During this period, the Company had generated limited revenues from the sale of its computer related products. On November 6, 1997, the Company announced its decision to discontinue its existing operations in their entirety by December 31, 1997. The Company sought a merger/acquisition opportunity that would enable it to deploy its cash into a new operating business. 4 On February 22, 1999, the Company signed an agreement to merge (the "Merger") with Empire Resources, Inc. ("Empire"), a distributor of value added, semi-finished aluminum products. Since the merger, the Company has continued the aluminum business of Empire. In this report, the Company refers to Empire Resources, Inc., after the effective date of the Merger. Empire refers to Empire Resources, Inc. as it existed prior to the effective date of the Merger. References to the Company include all subsidiaries, consolidated for purposes of the Company's financial statements. Under the terms of the Agreement and Plan of Merger (the "Merger Agreement"), effective September 17, 1999, Empire was merged with and into the Company, and the name of the Company was changed to Empire Resources, Inc. In connection with the Merger, the Company issued to the then current stockholders of Empire 9,384,761 shares of common stock, of which 3,824,511 shares of common stock were placed in escrow. Some or all of the escrowed shares were eligible for release to the former stockholders of Empire after March 31, 2001 based on a two-year earn-out formula; however, none of the escrowed shares were released as a result of the formula and the shares were retired. In conjunction with the Merger, Empire Resources Pacific Ltd. ("Empire-Pacific"), then an affiliate of Empire operating in Australia, became a wholly owned subsidiary of Empire. The Company has two other wholly owned subsidiaries, I.T.I. Innovative Technology, Ltd. ("Innovative") and CompuPrint Ltd. ("CompuPrint"), both of which are incorporated in Israel and are presently inactive. For accounting and other financial reporting purposes, the merger has been treated as a "reverse acquisition." Under this treatment, the surviving corporation has been treated as a continuation of Empire, and the merger has been treated as an issuance of shares by Empire to the stockholders of Integrated in exchange for Integrated's cash. Accordingly, the accompanying financial statements are the historical financial statements of Empire and Empire Resources Pacific Ltd., and include the results of operations of Integrated and its subsidiaries (which have been minimal) only from September 17, 1999. The Company is engaged in the purchase, sale and distribution of principally nonferrous metals to a diverse customer base located throughout the United States and in Canada, Australia and New Zealand. The Company sells its products through its own marketing and sales personnel and through its independent sales agents located in the U.S. who receive commissions on sales. Empire-Pacific acts as the Company's sales agent in Australia and New Zealand. The Company purchases from suppliers located throughout the world. The Company does not typically purchase inventory for stock; rather, it places orders with its suppliers based upon orders that it has received from its customers. STRATEGY The Company's strategy for growth involves the following key elements: Provide Customers with a High Level of Service and Cost Effective, Quality Products. The Company places great emphasis on providing customers with a high level of service. In particular, the Company works closely with its customers to learn the specific requirements of each customer. This enables the Company to provide each customer with cost-effective, quality materials matching the customer's particular needs. The Company also provides various ancillary services to its customers, including (1) arranging for products to be stored in warehouse facilities for release to the customer on a just-in-time delivery basis, (2) providing customers with timely information concerning market trends and product development, and (3) upon request by customers, arranging for subsequent metal processing or finishing services required by the customer. 5 Expand Volumes and Product Breadth with Existing Suppliers. The Company strives to lever its existing long-standing relationships with suppliers through increased volume with existing product lines and by adding new product lines that are within the suppliers' range of production and that are saleable in the Company's marketing area. The Company believes that by pursuing this strategy it will increase its volume to its existing suppliers while at the same time establishing new markets serving to increase volume and market presence. Expand Sources of Supply and Serve as Effective Marketing Channel for Suppliers. The Company seeks to increase its supply sources by expanding its relationships with existing suppliers and by seeking new suppliers. The Company strives to build its supply relationships by serving as an effective marketing channel for its suppliers. The Company believes if it is able to increase its supply sources it will be in a position to offer its customers greater quantities and a wider range of products. Acquire Capability to Provide Additional Value Added Services. The Company may seek to acquire the capability to provide its customers with additional value-added services (such as various processing, finishing, and or distribution services). The Company may accomplish this through establishing joint venture arrangements with existing service providers or by selectively making acquisitions. Provide Increasingly Efficient and Cost-Competitive Handling and Delivery Services. During 2000, the Company finalized a five-year lease on a property in Baltimore. This facility serves the dual purpose of: (a) providing depot/warehousing capacity for just-in-time delivery for its 4 metals division (see "Competition", below) and (b) providing handling capability and inventory control at the Baltimore port of entry, the Company's most active import location. The Company anticipates that this arrangement may reduce freight and handling expenses while concurrently increasing efficiency, and enable the Company to monitor deliveries and serve customers more effectively. The Company is currently reviewing the possibility of adding additional facilities in other locations. THE INDUSTRY Semi-finished aluminum products are produced by processing primary aluminum and or aluminum scrap. A product is considered "semi-finished" if it has not yet been converted into a final end-product. Semi-finished aluminum products include aluminum sheet, plate and foil, rod, bar and wire, extruded and cast products, and aluminum powder and paste. According to Brook Hunt, in 2000, the following industries accounted for the indicated percentages of western world consumption of aluminum: transportation (35%), packaging (19%), building (19%), machinery and equipment (9%), electrical (7%), consumer durables (5%), and other industries (6%). Although demand for aluminum products in the United States has been cyclical, over the longer-term demand has continued to increase. The Company believes that this growth reflects (1) general population and economic growth and (2) the advantages of aluminum products, including light weight, high degree of formability, resistance to corrosion and recyclability. According to The Aluminum Association Inc., demand for mill aluminum products in the United States in 2001 declined approximately 13% from shipments in 2000. 6 SALES, MARKETING AND SERVICES The Company endeavors to build its distribution within the aluminum industry by providing customers with quality products, access to alternative sources of supply, and comprehensive customer service. The Company offers customers a full range of services including: o sourcing aluminum products from the appropriate supplier in order to meet pricing and delivery requirements; o handling foreign exchange transactions for sales in local currency; o assuming responsibility for the shipment and timely delivery of the product to the customer; o assisting customers in identifying materials and matching their particular needs; o where necessary, arranging for subsequent metal processing and/or finishing services which may be required by the customer; o arranging for materials that have been ordered by a customer (and are subject to a firm purchase commitment) to be stored at an appropriate warehouse for release to the customers on a just-in-time delivery basis, and o providing customers with information concerning market trends and product development. The Company carefully monitors the timing and processing of orders to meet customers' needs and commits to fill orders within a time-period mutually agreed with the customer -- generally within a 30 day period. The Company maintains constant and ongoing communication with its suppliers in order to ensure that these delivery dates are met and that customers are apprised of the delivery status of their orders. The Company primarily sells its products through its own marketing and sales personnel. In addition, the Company sells its products through independent sales agents located in the United States who receive a commission on sales. The Company's inventory generally represents material that has been ordered by customers and is in transit or is being held pending delivery to such customers. In 1996, the Company extended its distribution territory by establishing Empire-Pacific to distribute Empire's products in Australia and New Zealand. BACKLOG At December 31, 2001, the amount of backlog of firm orders was approximately $50 million, (as compared to $45 million at December 31, 2000) representing orders received from customers and placed into production with the Company's suppliers. The Company expects to fill and invoice substantially all of the orders in the December 31, 2001 backlog by June 30, 2002. SUPPLIERS The Company enjoys exclusive representation arrangements with several foreign mills. The Company provides important services to its suppliers by: o serving as an integrated marketing and distribution channel for export volume; o purchasing manufacturing capacity from suppliers in bulk; o assuming responsibility for transporting the products that it purchases; o eliminating foreign currency risks for suppliers; and o ensuring prompt payment to suppliers for materials purchased. 7 The Company strives to maintain long-term relationships with its suppliers and to be a significant distributor for them. By being a significant distributor for its suppliers, the Company is able to obtain competitive pricing and to influence quality standards and delivery practices. During 2001 the Company continued to work with existing suppliers and continued to seek new long-term sources to underpin its position in the market. CUSTOMERS The Company serves over 150 customers in diverse industries, including transportation, automobile, housing, appliances and packaging. In 2001, the top ten customers of the Company represented approximately 46% of its sales. These customers included six full-service distribution centers (i.e., distributors that have the capacity to provide additional processing services), as well as producers of various consumer and industrial products. The Company's customers are located throughout the United States and Canada and, to a lesser extent, Australia and New Zealand. The Company's U.S. customer base is not regional. The Company insures its accounts receivable against credit risk by purchasing credit insurance. This insurance is generally subject to a 10% co-insurance provision with respect to each claim and there are limits on the amount of credit that the Company's insurance carrier will underwrite with respect to each customer. TRANSPORTATION The Company arranges for the transportation to customers of the products that they purchase from the Company. When the Company purchases products from an overseas supplier, it accepts delivery either at the port in the supplier's home country or at the port of destination. If the Company takes delivery at a foreign port, it will generally arrange for transportation to the port of destination on regularly scheduled port-to-port sea-going transportation. Upon delivery of the products at the destination port, the Company uses rail and trucking services to deliver the products to its customers. COMPETITION The Company's principal competitors are North American aluminum producers, including Alcoa Inc. and Alcan Aluminum Limited which dominate the aluminum industry in North America. These companies are significantly larger and have significantly greater financial resources than the Company. The Company also competes with other importers and agents that act for foreign aluminum producers. The Company believes that agents of foreign mills are generally less capable of serving the needs of North American customers because these agents are generally captive to a single foreign source and often lack the flexibility and range of product offerings that the Company offers its customers. ITEM 2. DESCRIPTION OF PROPERTY The Company's corporate headquarters are located in Fort Lee, New Jersey, where the Company leases office space pursuant to a lease expiring in March 2005. The lease provides for an annual rental payment of $215,881. 8 The Company leases a warehouse and distribution facility in Baltimore, Maryland pursuant to a lease expiring in October 2005. The lease provides for annual rental payments of $138,125 to $161,587 over the term of the lease. Management believes that the Company's facilities are adequate to meet its current needs. EMPLOYEES As of December 31, 2001, the Company had 25 employees, all of whom were full-time employees. The Company also has independent sales representatives located in the United States. None of these employees are represented under a collective bargaining agreement. Empire-Pacific, a wholly-owned subsidiary of the Company, has five employees in Australia. ITEM 3. LEGAL PROCEEDINGS There are no material pending legal proceedings involving the Company. 9 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The annual meeting of stockholders of Empire Resources, Inc. was held on October 5, 2001. At the annual meeting, the stockholders voted on three proposals 1) to elect directors to the board of directors of Empire, 2) to approve and adopt an amendment to the Company's Amended and Restated Certificate of Incorporation, as amended, to reduce the number of authorized shares of Common Stock of the Company from 40,000,000 shares to 20,000,000 shares and to eliminate the 5,000,000 authorized shares of preferred stock, and 3) to ratify the appointment of Richard A. Eisner & Company, LLP as independent auditors for the fiscal year ending December 31, 2001. The following table sets forth the number of votes for, against or withheld, as well as the number of abstentions and broker non-votes, as to each matter voted upon at the annual meeting and each nominee to the board of directors.
-------------------------------- -------------------- ------------------- ------------------- ------------------- ------------------ MATTER VOTES FOR VOTES AGAINST VOTES WITHHELD BROKER NON-VOTES ABSTENTIONS -------------------------------- -------------------- ------------------- ------------------- ------------------- ------------------ -------------------------------- -------------------- ------------------- ------------------- ------------------- ------------------ ELECTION OF: -------------------------------- -------------------- ------------------- ------------------- ------------------- ------------------ WILLIAM SPIER 10,177,192 83,524 -0- -0- -0- -------------------------------- -------------------- ------------------- ------------------- ------------------- ------------------ NATHAN KAHN 10,177,192 83,524 -0- -0- -0- -------------------------------- -------------------- ------------------- ------------------- ------------------- ------------------ SANDRA KAHN 10,177,192 83,524 -0- -0- -0- -------------------------------- -------------------- ------------------- ------------------- ------------------- ------------------ JACK BENDHEIM 10,177,192 83,524 -0- -0- -0- -------------------------------- -------------------- ------------------- ------------------- ------------------- ------------------ BARRY L. EISENBERG 10,177,192 83,524 -0- -0- -0- -------------------------------- -------------------- ------------------- ------------------- ------------------- ------------------ PETER G. HOWARD 10,177,192 83,524 -0- -0- -0- -------------------------------- -------------------- ------------------- ------------------- ------------------- ------------------ NATHAN MAZUREK 10,177,192 83,524 -0- -0- -0- -------------------------------- -------------------- ------------------- ------------------- ------------------- ------------------ MORRIS J. SMITH 10,177,192 83,524 -0- -0- -0- -------------------------------- -------------------- ------------------- ------------------- ------------------- ------------------ HARVEY WRUBEL 10,177,192 83,524 -0- -0- -0- -------------------------------- -------------------- ------------------- ------------------- ------------------- ------------------ -------------------------------- -------------------- ------------------- ------------------- ------------------- ------------------ ADOPTION OF AMENDMENT TO REDUCE NUMBER OF AUTHORIZED SHARES 6,960,505 26,150 -0- 3,273,661 400 -------------------------------- -------------------- ------------------- ------------------- ------------------- ------------------ -------------------------------- -------------------- ------------------- ------------------- ------------------- ------------------ APPOINTMENT OF RICHARD A. EISNER & COMPANY LLP AS INDEPENDENT AUDITORS 10,253,816 5,400 -0- -0- 1,500 -------------------------------- -------------------- ------------------- ------------------- ------------------- ------------------
PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET FOR COMMON STOCK The Company's common stock commenced trading on the American Stock Exchange ("AMEX") on October 1, 1996, under the symbol ITH. In conjunction with the Merger on September 17, 1999, the symbol was changed to ERS. 10 The table below sets forth the high and low sales prices for the common stock as reported on the AMEX for the periods indicated.
COMMON STOCK ----------------------------------------------------------- 2001 2000 ---- ---- PERIOD HIGH LOW HIGH LOW ------ ---- --- ---- --- 1st Quarter ........... $1.188 $ 0.875 $1.563 $ 1.313 2nd Quarter ........... $1.180 $ 0.900 $1.500 $ 0.938 3rd Quarter ........... $1.100 $.0900 $1.250 $ 0.875 4th Quarter ........... $1.070 $ 0.850 $1.188 $ 0.813
On March 15, 2002, the closing price of the common stock on AMEX was $.90 and there were 46 holders of record of the Common Stock. DIVIDENDS The Company has never paid any dividends on its common stock and expects for the foreseeable future to retain all of its earnings from operations for use in expanding and developing its business. Any future decision as to the payment of dividends will be at the discretion of the board of directors and will depend upon earnings, receipt of dividends from subsidiaries, financial position, capital requirements, plans for expansion and such other factors as the board of directors deems relevant. In addition, covenants contained in agreements with commercial banks require the Company to maintain working capital and net worth ratios that restrict the Company's ability to declare or pay dividends. SHARE REPURCHASE In November 1999, the Board of Directors authorized the Company to repurchase up to one million shares of its common stock at prices not to exceed $1.50 per share. In December 2000, the Board of Directors authorized an increase in the share repurchase program from 1 million shares to 1.5 million shares. As of December 31, 2001, the Company had repurchased a total of 1,130,600 shares for an aggregate cost of $1,288,495. The Company also had acquired 50,000 shares for a cost of $50,000 in connection with the reverse merger in September 1999. WARRANTS In connection with the a bridge financing during the year ended December 31, 1996, the Company issued warrants to purchase an aggregate of 199,174 shares of common stock at an exercise price of $0.60 per share. As of December 31, 2001, 90,838 of such warrants remain outstanding. In connection with its initial public offering in October 1996 (the "IPO"), the Company issued warrants to acquire 3,360,082 shares of its common stock at an exercise price of $9.00 per share, subject to adjustment under certain circumstances. These warrants expired on October1, 2001. In connection with the IPO, Integrated sold to an underwriter of the IPO, for nominal consideration, warrants to purchase up to 300,000 shares of its common stock and/or 300,000 warrants to acquire 300,000 shares of common stock (the "Representative Warrants"). These warrants expired on October 1, 2001. 11 ITEM 6 SELECTED FINANCIAL DATA The following table sets forth for the periods indicated selected consolidated financial and operating data for the Company. As a result of the reverse merger completed on September 17, 1999, the Company has been treated as a continuation of the business of Empire, and accordingly, the accompanying financial data are the financial data of Empire and Empire Resources Pacific Ltd., and include the results of operations of Integrated and its subsidiaries (which have been minimal) only from September 17, 1999. Pro forma net income and pro forma earnings per share reflect provisions for income taxes as if Empire, which was taxed as an S corporation until September 17, 1999, had been treated as a C corporation for all of 1999, 1998 and 1997. The consolidated balance sheet data and consolidated statement of operations data as of and for the years ended December 31, 2001, 2000, 1999, 1998, and 1997 have been derived from our Consolidated Financial Statements. The following selected consolidated financial and operating data are qualified by and should be read in conjunction with our more detailed Consolidated Financial Statements and notes thereto and the discussion under "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Part II, Items 7 and 8 of this Form 10-K.
----------------------------------------- ---------------------------------------------------------------------------------------- Years Ended December 31, ----------------------------------------- ------------------ ----------------- ------------------ ------------------ ------------- 2001 2000 1999 1998 1997 ----------------------------------------- ------------------ ----------------- ------------------ ------------------ ------------- ----------------------------------------- ------------------ ----------------- ------------------ ------------------ ------------- Operating Data: ----------------------------------------- ------------------ ----------------- ------------------ ------------------ ------------- Net Sales $143,235,385 $165,327,827 $107,112,064 $101,163,278 111,169,339 ----------------------------------------- ------------------ ----------------- ------------------ ------------------ ------------- Operating Income $4,082,519 $5,040,994 $4,273,336 $3,858,905 5,074,256 ----------------------------------------- ------------------ ----------------- ------------------ ------------------ ------------- Net Income $1,295,419 $1,040,787 ----------------------------------------- ------------------ ----------------- ------------------ ------------------ ------------- Pro Forma Net Income $1,308,676 $1,571,912 $2,345,236 ----------------------------------------- ------------------ ----------------- ------------------ ------------------ ------------- Per Share Data: ----------------------------------------- ------------------ ----------------- ------------------ ------------------ ------------- Weighted average shares outstanding ----------------------------------------- ------------------ ----------------- ------------------ ------------------ ------------- Basic 10,956,001 11,346,347 7,327,663* 5,560,250* 5,560,250* ----------------------------------------- ------------------ ----------------- ------------------ ------------------ ------------- Diluted 11,091,047 11,445,432 7,356,186* 5,560,250* 5,560,250* ----------------------------------------- ------------------ ----------------- ------------------ ------------------ ------------- ----------------------------------------- ------------------ ----------------- ------------------ ------------------ ------------- Earnings Per Share: ----------------------------------------- ------------------ ----------------- ------------------ ------------------ ------------- Basic $.12 $.09 ----------------------------------------- ------------------ ----------------- ------------------ ------------------ ------------- Diluted $.12 $.09 ----------------------------------------- ------------------ ----------------- ------------------ ------------------ ------------- ----------------------------------------- ------------------ ----------------- ------------------ ------------------ ------------- Pro Forma earnings per share: ----------------------------------------- ------------------ ----------------- ------------------ ------------------ ------------- Basic $.18 $.28 $.42 ----------------------------------------- ------------------ ----------------- ------------------ ------------------ ------------- Diluted $.18 $.28 $.42 ----------------------------------------- ------------------ ----------------- ------------------ ------------------ ------------- ------------------------------------------------ --------------------------------------------------------------------------------- Balance Sheet Data: ------------------- As of December 31, ------------------------------------------------ ----------------- ---------------- ---------------- ---------------- ------------ 2001 2000 1999 1998 1997 ------------------------------------------------ ----------------- ---------------- ---------------- ---------------- ------------ Total Assets $52,763,600 $69,109,730 $46,397,823 $34,739,456 47,165,047 ------------------------------------------------ ----------------- ---------------- ---------------- ---------------- ------------ Working Capital $11,823,708 $10,945,805 $10,064,593 $10,476,011 11,678,692 ------------------------------------------------ ----------------- ---------------- ---------------- ---------------- ------------ Stockholders' Equity $11,944,950 $11,100,821 $10,175,731 $10,734,978 11,544,288 ------------------------------------------------ ----------------- ---------------- ---------------- ---------------- ------------
* pro forma 12 ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company is a distributor of value added, semi-finished aluminum products. Consequently, the Company's sales volume has been, and will continue to be, a function of its ongoing ability to secure quality aluminum products from its suppliers. While the Company maintains long-term supply relationships with several foreign mills, one supplier accounted for approximately 60% of the Company's purchases for the year ended December 31, 2001, and three suppliers accounted for 74% of 2001 purchases. RESULTS OF OPERATIONS The Merger between Integrated and Empire was completed on September 17, 1999. For accounting and other financial reporting purposes, the Merger has been treated as a "reverse acquisition." Under this treatment, the Company has been treated as a continuation of Empire, and the Merger has been treated as an issuance of shares by Empire to the stockholders of Integrated in exchange for Integrated's cash. Accordingly, the accompanying financial statements include the historical financial statements of Empire and Empire-Pacific, and include the results of operations of Integrated only from September 17, 1999, the effective date of the Merger. Fiscal Years Ended December 31, 2001 and 2000 Net sales decreased by $22.1 million or 13.4% from $165 million in 2000 to $143 million in 2001. The weaker economy and weaker demand for industrial products coupled with declining prices resulted in this reduction in sales. This decline in sales was also reflected in lower gross profit for the year 2001. Gross profit declined by 12.8% from $10.7 million to $9.4 million. Gross profit as a percentage of sales was relatively constant at approximately 6.5%. Selling, general and administrative expenses declined by $.4 million or approximately 7% as the result of cost saving measures instituted during the year, including legal fees, travel and entertainment. Non cash compensation was also lower as a result of a reduced number of shares vesting. Interest expense declined $1.1 million or 35% from $3.1 million to $2.0 million as a result of reduced interest rates and reductions in loan balances from a high of $40 million in 2000 to $26.7 million at the end of 2001. Income taxes in 2000 included $0.2 million of state taxes, net of federal tax benefits, pertaining to periods prior to the Merger (as described under "Market for Common Equity and Related Stockholder Matters - Capital Contribution by Stockholders"). Adjusting for this prior period tax, taxes for the period 2001 increased by approximately $.1 million as a result of the increase in income before taxes for the year 2001. Net Income was $1.3 million for 2001 compared to $1.0 million for 2000. Fiscal Years Ended December 31, 2000 and 1999 Net sales increased $58.2 million or 54% from $107.1 million in 1999 to $165.3 million in 2000. The increase in sales in 2000 resulted from the increased availability of material from a principal supplier after this supplier completed a mill expansion. 13 Gross profit increased $2.6 million or 32% from $8.2 million in 1999 to $10.7 million in 2000 as a result of the increase in sales. Gross profit as a percentage of sales declined from 7.6% to 6.5% as a result of higher purchasing costs, more favorable sales terms and operating inefficiencies relating to material handling and product staging associated with the sharply increased sales volume. Selling, general and administrative expenses increased $1.8 million or 46% from $3.9 million in 1999 to $5.7 million in 2000 as a result of a non-cash compensation charge of $0.3 million (see "Accounting Treatment of Restricted Stock Agreement", below), increased staffing costs associated with customer service, costs related to employment contracts with certain executive officers (see "Certain Agreements Entered into with Executive Officers"), professional fees and costs of operating as a public company. Interest expense increased $0.9 million or 41% from $2.2 million in 1999 to $3.1 million in 2000. The increase in interest expense is related to higher levels of outstanding bank indebtedness required in order to fund the Company's higher inventory and other working capital needs. Income taxes increased $0.7 million from $0.2 in 1999 to $0.9 million in 2000 due to the change in the tax status of the Company and because of a state tax assessment for prior years recorded in 2000. Prior to the Merger, Empire had been taxed as an S corporation for Federal income tax purposes. In general, the income or loss of an S corporation is passed through to its owners rather than being subject to tax at the entity level. Post Merger the Company has been taxed as a C corporation. As a result, 1999 income taxes reflect state and local income tax for the whole year and federal income tax only for the period from September 17, 1999 to December 31, 1999, while 2000 taxes reflect federal, state and local taxes for the entire period. Consequently, for comparative purposes, the Company has presented pro-forma income taxes as if the Company had been taxed as a C corporation for all of 1999, together with the resulting pro-forma net income for that year. In addition, income taxes in 2000 included $0.2 million of state taxes, net of federal tax benefits, pertaining to periods prior to the Merger (as described under "Market for Common Equity and Related Stockholder Matters - Capital Contribution by Stockholders"). The change in the Company's income tax status had a significant impact on net income. The Company reported net income of $1.0 million for 2000, compared to net income of $2.0 million for 1999. The net income for 2000 was $0.3 million or 23% lower than pro forma net income of $1.3 million (net of pro forma income taxes) for 1999. ACCOUNTING TREATMENT OF RESTRICTED STOCK AGREEMENT The Company and Nathan and Sandra Kahn entered into a restricted stock agreement with Mr. Wrubel on September 15, 1999. Mr. Wrubel is currently Vice President of Sales of the Company. Pursuant to the restricted stock agreement, the Kahns transferred to Mr. Wrubel 469,238 shares ("Restricted Shares") of common stock of the Company which represents a portion of the shares that were received by the Kahns in the Merger. The Restricted Shares were comprised of (i) 358,327 shares (the "Non-Contingent Restricted Shares") that vest on September 17th of 2000, 2001, and 2002 subject only to the condition that Mr. Wrubel continue to be employed by the Company as of the vesting date, and (ii) 110,911 shares (the "Contingent Restricted Shares") that were subject to the same vesting criteria as the Non-Contingent Restricted Shares and, in addition, were subject to the condition that the number of shares (if any) that will vest will be a function of the after-tax net income of the Company over a specified period. 14 Under applicable accounting rules, the share transfer is being treated as if the Company had issued the shares to Mr. Wrubel as compensation for services and, accordingly, the Company is required to recognize an expense relating thereto. The expense relating to the Non-Contingent Restricted Shares is based on the fair market value of the stock as of the grant date and is being recognized over the vesting period. The Company recognized $536,453 of such expense through December 31, 2001, and will recognize $45,830 of expense in 2002. The earnings targets required for issuance of the Contingent Restricted Shares were not achieved and these shares were retired in 2001. RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Intangible Assets." SFAS 141 requires that all business combinations be accounted for by the purchase method of accounting and changes the criteria for recognition of intangible assets acquired in a business combination. The provisions of SFAS No. 141 apply to all business combinations initiated after June 30, 2001. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized but tested for impairment at least annually, while intangible assets with finite useful lives continue to be amortized over their respective useful lives. The statement also establishes guidance for testing goodwill and intangible assets with indefinite useful lives for impairment. The provisions of SFAS 142 will be effective for 2002. However, goodwill and intangible assets acquired after June 30, 2001 are subject immediately to the provisions of SFAS 142. The Company does not expect that the adoption of SFAS 141 and 142 will have a material effect on its consolidated financial statements. In August 2001, the FASB issued SFAS No. 144, "Accounting for the impairment or Disposal of Long-Lived Assets." This statement supercedes SFAS No.121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." The statement retains the previously existing accounting requirements related to the recognition and measurement of the impairment of long-lived assets to be held and used while expanding the measurement requirements of long-lived assets to be disposed of by sale to include discontinued operations. It also expands the previously existing reporting requirements for discontinued operations to include a component of an entity that either has been disposed of or is classified as held for sale. The Company adopted SFAS No. 144 on January 1, 2002. Management does not expect this statement to have a material impact on the Company's consolidated financial position or results of operations. The Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" as of January 1, 2001. The adoption of this standard did not have a material effect on the Company's results of operations for 2001. LIQUIDITY AND CAPITAL RESOURCES The Company's cash balance decreased $0.1 million, to $1.1 million, in the year ended December 31, 2001. Net cash of $11.8 million was provided by operating activities, while $11.9 million of net cash was used in financing activities. The $11.9 million of net cash used in financing activities was primarily the result of repayment of borrowings of $11.3 million under the Company's line of credit, and the acquisition of $0.6 million of treasury stock under its stock buy-back program. 15 The $11.8 million of net cash provided by operating activities was primarily the result of a decrease in accounts receivable of $14.6 million, a decrease in inventories of $1.1 million and net income of $1.3 million, partially offset by a $5.9 million decrease in accounts payable. Empire currently operates under a revolving line of credit, including a commitment to issue letters of credit, with three commercial banks. The available line was $60 million as of December 31, 2001. Borrowings under these lines of credit are collateralized by security interests in substantially all of Empire's assets. Under these credit agreements, Empire is required to maintain working capital and net worth ratios. These facilities expire on June 30, 2003. As of December 31, 2001, the amount outstanding under the Company's revolving lines of credit was $26.7 million (excluding letters of credit of approximately $4.4 million). Management believes that cash from operations, together with funds available under its credit facility, will be sufficient to fund the cash requirements relating to the Company's existing operations for the next twelve months. Empire may require additional debt or equity financing in connection with the future expansion of its operations. COMMITMENTS AND CONTINGENCIES Empire has contingent liabilities in the form of letters of credit to some of its suppliers. As of December 31, 2001, Empire's outstanding letters of credit amounted to approximately $4.4 million. Under the terms of some of its supply contracts, the Company is required to take minimum tonnages as specified in those contracts. As a result, the Company could, under certain circumstances, be forced to sell the required tonnage at a loss. CAPITAL CONTRIBUTION BY STOCKHOLDERS Results of operations for 2000 include a provision for an adjustment to state income taxes relating to Empire's earnings before the Merger. Pursuant to the Agreement and Plan of Merger, the former stockholders of Empire have contributed capital to the Company in an amount sufficient to indemnify it for these taxes. As a result of this event, total stockholders' equity as of December 31, 2000 has been increased by $97,158. CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS THE COMPANY IS HIGHLY DEPENDENT ON A FEW SUPPLIERS. The Company purchased approximately 60% of its products from one supplier in 2001. As a result, the termination or limitation by this supplier of its relationship with the Company could have a material adverse effect on the Company's business and results of operations. In addition, the Company's loss of any one of its other suppliers (or material default by any such supplier in its obligations to the Company) due to bankruptcy, financial difficulties, expropriation, social unrest, destruction, sabotage, strikes, acquisition by a person or entity unwilling to provide products to the Company, or for any other reason, could have a material adverse effect on the Company's business. THE COMPANY IS HIGHLY DEPENDENT ON A FEW SIGNIFICANT CUSTOMERS. 16 The Company's sales are highly concentrated to a few customers. In 2001, 46% of the Company's revenues were derived from sales to ten customers. As a result, any material reduction in sales to any of these customers could have a material adverse effect on the Company's business. THE COMPANY'S SUPPLY SOURCES ARE SUBJECT TO SUBSTANTIAL RISKS. The Company generally purchases aluminum products from foreign suppliers. Thus, its operations could be materially and adversely affected by changes in economic, political and social conditions in the countries where the Company currently purchases or may in the future purchase such products. Among other things, changes in laws, regulations, or the interpretation thereof, or restrictions on currency conversions and exports, could negatively affect the Company's business. Although the trend in the markets in which the Company operates for its sourcing has been towards open markets and trade policies and the fostering of private economic activity, no assurance can be given that the governments will continue to pursue these policies or that such policies may not be significantly altered, especially in the event of a change in the leadership, or as a result of social or political upheaval or unforeseen circumstances affecting economic, political or social life. CONSOLIDATION OF SUPPLIERS MAY MATERIALLY AFFECT THE COMPANY'S OPERATIONS. During the last several years, consolidations have been taking place among aluminum suppliers. Although the Company has in the past successfully replaced any suppliers lost as a result of industry consolidations, there can be no assurance that the Company would be able to replace the volume of production or the type of products supplied by any of its current vendors, if they were acquired or their operations terminated or were interrupted. CHANGING ALUMINUM PRICES COULD IMPACT THE COMPANY'S PROFIT MARGINS. The Company relies on long-term relationships with its suppliers, but generally has no long-term, fixed-price purchase contracts; it purchases at prevailing market prices at the time orders are placed, with discounts for quantity purchases. The aluminum industry is highly cyclical, and the prices that the Company pays for aluminum and the prices it charges will be influenced by a variety of factors outside of its control, including general economic conditions (both domestic and international), competition, production levels, import duties and other trade restrictions, and currency fluctuations. While the Company hedges metal pricing and foreign currency as it deems appropriate for a portion of its purchase and sales contracts, there exists the risk of a counterparty default in fulfilling the hedge contract. Should there be a counterparty default, the Company could be exposed to losses on the original hedged contract. IF SUPPLIERS FAIL TO PROVIDE PRODUCTS OF SUFFICIENT QUALITY CUSTOMER RELATIONSHIPS AND PRICES COULD BE NEGATIVELY AFFECTED. The Company's relationships with its customers depend, in part, on its ability to deliver products of the quality specified by those customers. The Company obtains certifications from its suppliers as to the quality of the products being supplied. However, if the product is not of the quality certified or if a supplier fails to deliver products ordered by the Company, the Company may be forced to buy product of the specified quality from another source to fulfill the customer's order. While the Company would then be left with a claim against the supplier for any loss sustained by the Company, the Company may not be able to successfully prosecute these claims, particularly in foreign jurisdictions. 17 THE COMPANY MAY BE REQUIRED TO PURCHASE MINIMUM TONNAGES Under the terms of some of its supply contracts, the Company may be required to take minimum tonnages which it subsequently finds it is unable to sell at a profit. THE COMPANY IS EXPOSED TO CREDIT RISK FROM ITS CUSTOMERS. The Company does not require collateral for customer receivables. The Company has significant balances owing from customers that operate in cyclical industries and under leveraged conditions, which may impair the collectability of these receivables. The Company carries credit insurance with a 10% co-pay provision and specific limits on each customer's receivables. The Company's failure to collect a significant portion of the amount due on its receivables directly from customers or through insurance claims (or other material default by customers) could have a material adverse effect on the Company's financial condition and results of operations. INCREASED TARIFFS COULD ADVERSELY AFFECT THE COMPANY'S FINANCIAL CONDITION. During 2001, in excess of 60% of sales of the Company represented sales of aluminum products from countries that were considered developing countries whose exports were eligible for preferential tariff treatment upon import into the United States under the generalized system of preference(GSP). There can be no assurance that any of our suppliers will continue to be eligible for such preferential tariff treatment or that the generalized system of preference will be renewed in any given year after it expired on September 30, 2001. If the preferential tariff treatment of any of our suppliers that are currently eligible for such treatment becomes unavailable, then imports from such supplier may be subjected to a tariff, instead of the duty-free treatment those imports now enjoy. To the extent these increased costs could not be passed on to its customers, the Company's profit margins could be negatively affected. This could result in higher costs to us and have a material adverse effect on our business, financial condition and results of operations. GSP Legislation has in the past been renewed either prior to expiration or thereafter, on a retroactive basis to the date of expiration. This does not guarantee that it will be renewed in the same manner this year. ANTIDUMPING AND OTHER DUTIES COULD BE IMPOSED ON THE COMPANY, ITS SUPPLIERS AND THEIR PRODUCTS. The imposition of an antidumping or other increased duty on any products imported by the Company could have a material adverse effect on the Company's financial condition. Under United States' law, an antidumping duty may be imposed on any imports if two conditions are met. First, the Department of Commerce must decide that the imports are being sold in the United States at less than fair value. Second, the International Trade Commission (the "ITC") must determine that the United States' industry is materially injured or threatened with material injury by reason of the imports. The ITC's determination of injury involves a two-prong inquiry: first, whether the industry is materially injured, and second, whether the dumping, not other factors, caused the injury. The ITC is required to analyze the volume of imports, the effect of imports on United States prices for like merchandise, and the effects the imports have on United States producers of like products, taking into account many factors, including lost sales, market share, profits, productivity, return on investment, and utilization of production capacity. Further, the Company as part of its course of business is engaged in the importation of steel wire rod. Such products are currently subject to import quota, and all applicable duties. In addition, the U.S. Department of Commerce is currently investigating whether to levy additional anti-dumping and/or counterveiling duties. If the final determination is found in the affirmative, it may adversely affect the Company's ability to expand its business further into 18 steel products. In addition, should such duties be imposed on a retroactive basis, the Company may be exposed to significant damage and expense. IF THE COMPANY FAILS TO DELIVER PRODUCTS ON A TIMELY BASIS, IT MAY SUFFER LOSSES. Interruption of shipping schedules upon which the Company relies for foreign purchases could result in untimely deliveries to the Company's customers or cause the Company to purchase the products in the United States at a higher cost in order to meet delivery schedules. Consequently, the Company's profit margins could be reduced or it could suffer losses. The Company guarantees its customers that it will deliver products within the period specified in their purchase orders. Any interruption of the means of transportation used by the Company to transport products could cause delays in delivery of products, could force the Company to buy the products from domestic suppliers at a higher cost in order to fulfill its commitments, and also could result in the loss of the customer. THE COMPANY COMPETES WITH COMPANIES WITH CAPTIVE SOURCES OF SUPPLY. Many of the Company's competitors are significantly larger than the Company and many have captive sources of supply and access to greater capital and other resources. Thus, if the Company's sources of supply are interrupted, its competitors could be in a position to capture the Company's customers. THE COMPANY IS DEPENDENT ON ITS EXECUTIVE OFFICERS. The Company is highly dependent on its executive officers, the loss of any of one of which could have a significant adverse impact on the Company's business. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company enters into high grade aluminum futures contracts to limit its gross margin exposure by hedging the metals content element of firmly committed purchase transactions. The Company also enters into foreign exchange forward contracts to hedge its exposure related to commitments to purchase or sell non-ferrous metals denominated in international currencies. The Company records "mark-to-market" adjustments on these futures and forward positions and on the underlying firm purchase and sales commitments which they hedge, and reflects the net gains and losses currently in earnings. The Company does not engage in trading or speculative transactions. As of January 1, 2001, the Company has adopted Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting For Derivative Instruments and Hedging Activities", issued by the Financial Accounting Standards Board. SFAS No. 133 requires the Company to recognize all derivatives in the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through earnings. If the derivative is a hedge, depending upon the nature of the hedge, changes in the fair value of the derivative are either offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value, if any, is immediately recognized in earnings. The Company uses financial instruments designated as fair value hedges to manage its exposure to commodity price risk and foreign currency exchange risk inherent in its trading activities. It is the Company's policy to hedge such risks, to the extent practicable. The Company enters into high-grade aluminum futures contracts to limit its gross margin exposure by hedging the metals content element of firmly committed purchase and sales commitments. The Company also enters into foreign exchange forward 19 contracts to hedge its exposure related to commitments to purchase or sell non-ferrous metals denominated in international currencies. The Company records "mark-to-market" adjustments on these futures and forward positions, and on the underlying firm purchase and sales commitments which they hedge, and reflects the net gains and losses currently in earnings. The gains and losses on futures and forward positions as of January 1, 2001 offset the gains and losses at that date on the underlying firm purchase and sales commitments which they hedged, and accordingly the Company did not record a transition adjustment as of January 1, 2001. ITEM 8. FINANCIAL STATEMENTS Furnished at end of report commencing on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON AUDITING AND FINANCIAL DISCLOSURE During the past two years, the Company has not made changes in, and has not had disagreements with, its independent accountants on accounting and financial disclosures 20 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT OFFICERS AND DIRECTORS The officers and directors of the Company are as follows:
Name Age Position ---- --- -------- William Spier..................... 67 Non-Executive Chairman of the Board and Director Nathan Kahn....................... 47 Chief Executive Officer, President and Director Sandra Kahn....................... 44 Vice President, CFO and Director Harvey Wrubel..................... 48 Vice President of Sales and Director Jack Bendheim..................... 55 Director Barry L. Eisenberg................ 55 Director Peter G. Howard................... 66 Director Nathan Mazurek.................... 39 Director Morris J. Smith................... 44 Director
William Spier. Mr. Spier has been a director of the Company since October 1996 and was Acting Chief Executive Officer from November 1997 until September 1999. Mr. Spier presently serves as non-executive Chairman of the Board of the Company. Mr. Spier has been a private investor since 1982. He also served as Chairman of DeSoto, Inc., a manufacturer and distributor of cleaning products, from May 1991 through September 1996, and as Chief Executive Officer of DeSoto, Inc., from May 1991 to January 1994 and from September 1995 through September 1996. From 1980 to 1981, Mr. Spier was Vice Chairman of Phibro-Salomon Inc. Mr. Spier also serves as a Director of Keystone Consolidated Industries, Inc. Nathan Kahn. Mr. Kahn has been the Chief Executive Officer, President and a director of the Company since September 1999. Prior to the Merger, Mr. Kahn was the President and a director of Empire from the time of its formation in 1984. Mr. Kahn has also been the President and a director of Empire-Pacific since its formation in 1996. Sandra Kahn. Ms. Kahn has been a Vice President, the Chief Financial Officer and a director of the Company since September 1999. Prior to the Merger, Ms. Kahn was the Secretary and Treasurer and a director of Empire from the time of its formation in 1984. Ms. Kahn has also been the Secretary and Treasurer and a director of Empire-Pacific since its formation in 1996. Harvey Wrubel. Mr. Wrubel has been the Vice President of Sales/Director of Marketing of the Company since September 1999. Prior to the Merger, Mr. Wrubel was the Vice President of Sales/ Director of Marketing of Empire for more than the prior five years. Mr. Wrubel has been a director of the Company since September 2000. Jack Bendheim. Mr. Bendheim has been a director of the Company since September 1999. He has also been the President, Chief Executive Officer, Chairman of the Board and a director of Philipp Brothers Chemicals, Inc. for more than the prior five years. Mr. Bendheim is also a director of The Berkshire Bank, CDG Technologies, and Penick Corporation. 21 Barry L. Eisenberg. Mr. Eisenberg has been a director of the Company since 1990 and was Secretary and Treasurer of the Company from 1993 until September 1999. Since 1995, Mr. Eisenberg has been an active investor and director of private companies in Israel. Prior thereto, Mr. Eisenberg was, for a period of more than five years, a partner in the Roseland, New Jersey law firm of Lasser, Hochman, Marcus, Guryan & Kuskin. Peter G. Howard. Mr. Howard has been a director of the Company since September 1999. He has also been the Managing Director of Empire-Pacific since 1996. From 1961 to 1995, Mr. Howard held various positions within the aluminum industry, the most recent of which was Divisional General Manager of Comalco Rolled Products, a unit of Comalco Aluminum Ltd., an aluminum producer. Nathan Mazurek. Mr. Mazurek has been the President of Provident Industries, a diversified manufacturer of electrical systems and components for more than the prior five years. Mr. Mazurek has been a director of the Company since September 1999. Morris J. Smith. Mr. Smith has been a director of the Company since January 1994. Since 1993, Mr. Smith has been a private investor and investment consultant. Prior thereto, Mr. Smith was employed for a period of more than five years by Fidelity Investments as a portfolio manager. FAMILY RELATIONSHIPS Nathan Kahn and Sandra Kahn are husband and wife. Barry L. Eisenberg and Jack Bendheim are brothers-in-law. COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934 Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officers and directors, and persons who own more than ten percent of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and greater than ten-percent stockholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) reports that they file. Based solely upon review of the copies of such reports furnished to the Company and written representations from certain of the Company's executive officers and directors that no other such reports were required, the Company believes that during the period from January 1, 2001 through December 31, 2001 all Section 16(a) filing requirements applicable to its officers, directors and greater than ten-percent beneficial owners were complied with on a timely basis. 22 ITEM 11. EXECUTIVE COMPENSATION EXECUTIVE COMPENSATION The following table sets forth for the periods indicated information concerning the compensation earned by the Company's Chief Executive Officer and each of the Company's most highly compensated executive officers. SUMMARY COMPENSATION TABLE ANNUAL COMPENSATION
LONG-TERM COMPENSATION AWARDS SECURITIES ALL OTHER UNDERLYING COMPENSATION OPTIONS ($) (#) NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) William Spier 2001 -- -- 2,000 $25,000(2) Non-Executive Chairman of 2000 -- -- 2,000 $25,000(2) the Board (1) 1999 -- -- 2,000 $11,333(3) Nathan Kahn 2001 $350,000 $75,000 2,000 $2,000(4) Chief Executive Officer and 2000 $300,000 $50,000 2,000 $2,000(4) President 1999 $176,875 -- 2,000 $1,000(4) Sandra Kahn 2001 $150,000 $25,000 2,000 $2,000(4) Vice President, 2000 $100,000 -- 2,000 $2,000(4) Chief Financial Officer, Treasurer and Secretary 1999 $82,000 -- 2,000 $1,000(4) Harvey Wrubel 2001 $214,316 $300,000 2,000 $117,218(5) Vice President of Sales 2000 $207,872 $277,000 2,000 $139,142(6) 1999 $203,000 $300,000 200,000 --
(1) Served as Acting Chief Executive Officer of the Company prior to the merger. (2) Mr. Spier receives $25,000 per annum as consideration for his services as non-executive Chairman of the Board. (3) Of this amount, $3,000 represents director fees for attending board meetings and $8,333 represents amounts paid to Mr. Spier in 1999 for serving as non-executive Chairman of the Board. (4) Represents directors' fees. (5) Of this amount, $2,000 represents director fees and $115,218 represents non-cash taxable compensation charged to Mr. Wrubel upon the vesting of non-contingent restricted shares, as discussed in item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations--Accounting Treatment of Restricted Stock Agreement. (6) Of this amount, $1,000 represents director fees and $138, 142 represents non-cash taxable compensation charged to Mr. Wrubel upon the vesting of non-contingent restricted shares, as discussed in item 6, Management's Discussion and Analysis of Financial Condition and Results of Operations--Accounting Treatment of Restricted Stock Agreement. 23 OPTION GRANTS IN LAST FISCAL YEAR The following table contains information concerning the stock option grants made to each of the officers and employees named in the Summary Compensation Table during 2001. No stock appreciation rights were granted to these individuals during such year.
(INDIVIDUAL GRANTS) (1) NUMBER OF PERCENT OF EXERCISE EXPIRATION DATE POTENTIAL SECURITIES TOTAL OPTIONS PRICE REALIZABLE VALUE UNDERLYING GRANTED TO ($/SH) AT ASSUMED ANNUAL OPTIONS GRANTED EMPLOYEES IN (2) RATES OF STOCK (#) FISCAL YEAR PRICE NAME APPRECIATION FOR OPTION TERM 5% 10% ($) ($) $ $ William Spier 2,000 11.1% $0.98 10/05/11 1,220 3,120 Nathan Kahn 2,000 11.1% $0.98 10/05/11 1,220 3,120 Sandra Kahn 2,000 11.1% $0.98 10/05/11 1,220 3,120 Harvey Wrubel 2,000 11.1% $0.98 10/05/11 1,220 3,120
--------------------------- (1) All options granted to the named officers and employees are non-statutory under federal tax laws and were granted on October 5, 2001. Pursuant to the option agreement underlying these options, the options became exercisable immediately upon grant. (2) The exercise price may be paid in cash or, under certain circumstances, in shares of the Company's common stock. YEAR-END OPTION VALUES The following table provides certain information concerning the options held by the officers and employees named in the Summary Compensation Table, above, as of December 31, 2001. OPTIONS AS OF DECEMBER 31, 2001
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-MONEY UNEXERCISED OPTIONS AT YEAR END OPTIONS AT YEAR END NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE William Spier 151,000 ............ ............ ............ Nathan Kahn 6,000 ............ ............ ............ Sandra Kahn 6,000 ............ ............ ............ Harvey Wrubel 204,000 ............ ............ ............
--------------------------- The closing price of the Company's common stock on December 28, 2001, the last day of trading in 2001, was $0.90. 24 COMPENSATION OF DIRECTORS The non-executive Chairman of the Board is paid $25,000 per annum as consideration for his services. Each other director is paid $500 for attendance (in person or by telephone) at meetings of the Board, and all directors are reimbursed for out-of-pocket expenses incurred in connection with attendance at Board meetings during the year ended December 31, 2001. In addition, pursuant to the Company's 1996 stock option plan, the Company granted the following options to its directors.
NUMBER OF NAME SHARES UNDERLYING OPTION EXERCISE PRICE PER SHARE ---- ------------------------ ------------------------ Jack Bendheim 2,000 $0.98 Barry Eisenberg 2,000 $0.98 Peter Howard 2,000 $0.98 Nathan Kahn 2,000 $0.98 Sandra Kahn 2,000 $0.98 Nathan Mazurek 2,000 $0.98 Morris Smith 2,000 $0.98 William Spier 2,000 $0.98 Harvey Wrubel 2,000 $0.98
CERTAIN AGREEMENTS WITH OFFICERS OF THE COMPANY EMPLOYMENT AGREEMENTS WITH THE KAHNS Concurrently with the Merger on September 17, 1999, the Company entered into employment agreements with each of Nathan Kahn and Sandra Kahn. Certain information regarding these agreements is set forth below. The forms of these agreements are attached hereto as exhibits. Term. The scheduled term of each agreement is three years. Each agreement provides that the term will be extended automatically for successive two-year periods unless either party gives written notice of termination at least 180 days prior to the end of the original term or the then additional term, as the case may be. Each agreement provides that the Company may terminate the agreement upon the Disability of the executive or for Cause (as such terms are defined the agreement). Base Salary. Nathan Kahn was paid at a rate of $350,000 per annum and Sandra Kahn was paid at a rate of $175,000 per annum. These amounts may be increased, but not decreased, by the Board of Directors. The base salary provided for by each agreement is subject to possible upward annual adjustments based upon changes in a designated cost of living index. Bonus. The agreement with Nathan Kahn provides for an annual bonus equal to 5% of the amount by which the Company's earnings before taxes for such year exceed $4,000,000. The agreement with Sandra Kahn provides for an annual bonus equal to 2% of the amount by which the Company's earnings before taxes for such year exceed $4,000,000. For the purpose of calculating the annual bonus amounts, earnings before taxes shall be calculated excluding (1) charges to earnings for extraordinary items and (2) the annual bonus amounts payable to Nathan Kahn and Sandra Kahn. Non-Compete. Each agreement provides that during the Specified Period (as defined below) the employee will not, among other things, directly or indirectly, be engaged as a principal in any other business activity or conduct which competes with the business of the Company or be an employee, consultant, director, principal, stockholder, advisor of, or otherwise be affiliated with, any such business, activity or 25 conduct. The "Specified Period" means the employee's period of employment and the four year period thereafter, provided that if the employee's employment is terminated for Disability or without Cause (or the employee voluntarily terminates his employment following a breach by the Company), the Specified Period will terminate two years after the employee's employment terminates. EMPLOYMENT AGREEMENT WITH HARVEY WRUBEL Concurrently with the Merger, the Company entered into an employment agreement with Harvey Wrubel. Certain information regarding this agreement is set forth below. Term. The scheduled term of the agreement is until December 31, 2002. The agreement provides that the term will be extended automatically for successive two-year periods unless either party gives written notice of termination at least 90 days prior to the end of the original term or the then additional term, as the case may be. The agreement provides that the Company may terminate the agreement any time with or without Cause (as such term is defined in the agreement). However, if the Company terminates the agreement without Cause, the employee is entitled to continue receiving his base salary until the scheduled end of the term. Base Salary. The agreement provides for an initial base salary to be paid at a rate of $203,000 per annum. This amount may be increased, but not decreased, by the Board of Directors. The base salary is subject to possible upward annual adjustments based upon changes in a designated cost of living index. Mr. Wrubel's current base salary is $214,316. Performance-Based Compensation. In addition to base salary, the agreement provides that the Company shall pay the employee performance-based compensation in accordance with a formula provided for in the agreement. Non-Compete. The agreement provides that, during the employment term and for 12 months thereafter, the employee will not, among other things, be engaged in, or be, an employee, director, partner, principal, stockholder or advisor of any business, activity or conduct which competes with the business of the Company. During any period following termination of the employee's employment the foregoing will only apply to competition with regard to aluminum and such other commodities as were being sold by the Company within six months prior to such termination. Restricted Stock Arrangements. The Company, Nathan Kahn and Sandra Kahn entered into a restricted stock agreement dated September 14, 1999 with Mr. Wrubel. Pursuant to this agreement, the Kahns transferred to Mr. Wrubel 469,238 shares ("Restricted Shares") of common stock of the Company effective as of the date of the Merger. The Restricted Shares are subject to the vesting requirements described below. If Mr. Wrubel's employment with the Company is terminated for Cause (as defined in his employment agreement) or if Mr. Wrubel terminates employment with the Company for any reason, Mr. Wrubel will forfeit to the Kahns any Restricted Shares that have not then vested. The vesting of 358,327 of the Restricted Shares is determined in accordance with the following vesting schedule: (i) 33.33% of such shares vested on the first anniversary of the grant date, (ii) 33.33% will vest on the second anniversary of the grant date (provided Mr. Wrubel has been continuously employed by the Company until such date) and (iii) 33.34% will vest on the third anniversary of the grant date (provided Mr. Wrubel has been continuously employed by the Company until such date). A total of 238,861 shares of common stock have vested to date. 26 The vesting of the remaining 110,911 of the Restricted Shares (the "Contingent Restricted Shares") was subject to a formula dependant on the Company achieving a minimum cumulative after-tax net income (subject to certain adjustments) of $4.4 million during the two-year period commencing April 1, 1999 and ending March 31, 2001. No shares vested in accordance with these provisions. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During 2001, the Compensation Committee consisted of William Spier, Nathan Kahn and Jack Bendheim. In addition to being a member of the Compensation Committee, Mr. Kahn is also our Chief Executive Officer and President. None of the other members of the Compensation Committee serve, or previously served as officers or employees of the Company. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. 27 ITEM 13. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth as of March 19, 2002, certain information with respect to beneficial ownership (as defined in Rule 13d-3 of the Securities and Exchange Act of 1934) of the common stock of the Company by (i) each person that is a director of the Company, (ii) each person named in the Summary compensation Table under item 10 "Executive Compensation," (iii) all such persons as a group and (iv) each person known to the Company to be the owner of more than 5% of the common stock of the Company. LEFT OFF HERE
NUMBER OF SHARES PERCENT OF COMMON NAME AND ADDRESS(1) BENEFICIALLY OWNED (2) STOCK OWNED ------------------------------------------ ---------------------- ----------------- DIRECTORS AND OFFICERS: William Spier 255,669(3) 2.4% Nathan Kahn and Sandra Kahn 5,213,923(4) 49.3% Harvey Wrubel 582,327(5) 5.5% Jack Bendheim 26,000(6) * Barry L. Eisenberg 369,706(7) 3.5% Peter G. Howard 6,000(8) * Nathan Mazurek 6,000(9) * Morris J. Smith 79,467(10) * All officers and directors as a group (9 persons) 6,539,092(11) 58.9% OTHER STOCKHOLDERS: Alan P. Haber 433,390(12) 4.1%
* Less than 1% (1) The address of all listed persons is c/o the Company, except for Mr. Haber, whose address is 11/1 Mishol Uzrad, Ramot, Israel 91230. (2) Unless otherwise indicated, each person has sole investment and voting power with respect to the shares indicated. For purposes of this table, a person or group of persons is deemed to have "beneficial ownership" of any shares as of a given date which such person has the right to acquire within 60 days after such date. For purposes of computing the percentage of outstanding shares held by each person or group of persons named above on a given date, any security which such person or persons has the right to acquire within 60 days after such date is deemed to be outstanding for the purpose of computing the percentage ownership of such person or persons, but is not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. The information in this table was prepared by the Company in reliance on filings made with the Securities and Exchange Commission on Schedule 13D and Forms 4 or 5. (3) Consists of (i) 104,669 currently outstanding shares held by Mr. Spier and (ii) 151,000 shares underlying currently exercisable options held by Mr. Spier. (4) Consists (i) of 5,201,923 currently outstanding (9,384,761 shares received in the merger less 3,824,511 contingent shares which have been retired and less 358,327 non-contingent shares transferred to Mr. Wrubel, as described under "Compensation Arrangements") and (ii) 12,000 shares underlying currently exercisable options held by Nathan and Sandra Kahn. 28 (5) Consists of (i) 358,327 shares transferred from Nathan and Sandra Kahn to Mr. Wrubel, (ii) 20,000 currently outstanding shares held by Mr. Wrubel, and (iii) 204,000 shares underlying currently exercisable options held by Mr. Wrubel. (6) Consists of (i) 20,000 outstanding shares held by the Bendheim Foundation, an affiliate of Mr. Bendheim, and (ii) 6,000 shares underlying currently exercisable options held by Mr. Bendheim. (7) Consists of (i) 700 currently outstanding shares held by Mr. Eisenberg, (ii) 82,667 shares underlying currently exercisable options held by Mr. Eisenberg, (iii) 500 shares owned by Mr. Eisenberg's wife and (iv) 284,839 currently outstanding shares held by 241 Associates LLC, a limited liability company. Noam Eisenberg is the sole manager of 241 Associates LLC and as such has voting and investment power with respect to the shares held by 241 Associates LLC. Noam Eisenberg is the son of Barry L. Eisenberg. A majority of the ownership interest of 241 Associates LLC is owned by Mr. Eisenberg and his wife and, as a result of such ownership interests, Mr. Eisenberg may influence the voting and disposition of the shares of common stock held by 241 Associates LLC. Mr. Eisenberg disclaims beneficial ownership of such shares and of the shares owned by his wife. (8) Consists of 6,000 shares underlying currently exercisable options held by Mr. Howard. (9) Consists of 6,000 shares underlying currently exercisable options held by Mr. Mazurek. (10) Consists of (i) 15,800 currently outstanding shares held by Mr. Smith and (ii) 63,667 shares underlying currently exercisable options held by Mr. Smith. The Brook Road Nominee Trust, nominee for the Morris Smith Family Trust, is the owner of 163,653 outstanding shares of Common Stock. Esther Smith, the mother of Morris J. Smith, is the sole trustee of the Morris Smith Family Trust and as such has voting and investment power with respect to such shares. The Morris Smith Family Trust is a discretionary trust, the potential beneficiaries of which are Mr. Smith and members of his family. Mr. Smith disclaims any beneficial ownership of any and all shares owned by the Brook Road Nominee Trust. (11) Consists of 6,006,758 currently outstanding shares and 531,334 shares underlying currently exercisable options and warrants. Does not include 163,653 shares that Mr. Smith disclaims beneficial ownership of as described in footnote 10 above. (12) Consists of (i) 400,000 shares held by Mr. Haber, and/or his wife (ii) 10,000 shares underlying currently exercisable options held by Mr. Haber, and (iii) 23,390 shares held by Mr. Haber's wife. Mr. Haber disclaims any beneficial ownership of any stock owned by his wife. RETIREMENT OF CONTINGENT SHARES ISSUED TO EMPIRE STOCKHOLDERS Upon the merger, Nathan and Sandra Kahn ("the Empire Stockholders") received an aggregate of 9,384,761 shares of common stock of the Company in exchange for the outstanding stock of Empire owned by them prior to the merger. Pursuant to the merger agreement, 3,824,511 of these shares (the "Contingent Shares") were deposited into escrow subject to an earn-out formula dependant on the Company achieving a minimum cumulative after-tax net income (subject to certain adjustments) of $4.4 million during the two-year period commencing April 1, 1999 and ending March 31, 2001. No shares were released from escrow in accordance with this formula and all of the 3,824,511 shares placed in escrow were retired on June 13, 2001. 29 ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS 2.1 Agreement and Plan of Merger among the Registrant, Empire Resources Inc., Empire Resource Pacific, Ltd., Nathan Kahn and Sandra Kahn, dated as of February 22, 1999 (incorporated by reference to Exhibit 2.1 to the Registrant's Report on Form 8-K dated March 9, 1999) 3.1 Certificate of Merger of Empire Resources, Inc. into Integrated Technology USA, Inc.*** 3.2 Amended and Restated Certificate of Incorporation of the Registrant* 3.3 Amendment No. 1 to the Amended and Restated Certificate of Incorporation.***** 3.4 Amended and Restated By-Laws of the Registrant* 3.5 Amendment No. 1 to Amended and Restated By-Laws of the Registrant (incorporated by reference to Exhibit 3.3 to the Registrant's Report on Form 10-KSB for the year ended December 31, 1996) 3.6 Amendment No. 2 to Amended and Restated By-Laws of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant's Report on Form 8-K dated May 11, 1997) 10.1 Employment Agreement dated September 15, 1999 entered into by Registrant with Nathan Kahn*** 10.2 Employment Agreement dated September 15, 1999 entered into by Registrant with Sandra Kahn*** 10.3 Employment Agreement dated September 15, 1999 entered into by Registrant with Harvey Wrubel*** 10.4 Restricted Stock Agreement dated September 15, 1999 entered into by Registrant with Harvey Wrubel*** 10.8 Third Modification and Extension of Lease for office space, dated as of the 17th of February, 2000, to the Lease between 400 Kelby Associates, as Landlord, and Registrant as Tenant *** 10.9 Form of the Subscription Agreement entered into by the Registrant with each person or entity that provided funds to the Company in connection with the bridge financing referred to in Note H of Notes to Condensed Consolidated Financial Statements included under Item 7 of this Report, having attached thereto the form of the notes and warrants issued in connection with such financing* 10.10 Registrant's 1996 Stock Option Plan* 30 10.11 Form of Representative's Warrant Agreement dated as of October 1, 1996, between the Registrant and National Securities Corporation** 10.12 Form of Warrant Agreement dated as of October 1, 1996, between the Registrant and American Stock Transfer & Trust Company** 10.14 Form of Indemnification Agreement entered into by the Registrant with executive officers and directors **** 10.15 Form of Rights Agreement, dated as of July 23, 1997, between the Registrant and American Stock Transfer & Trust Co., as Rights Agent, including all exhibits thereto (incorporated by reference to Exhibit 4 to the Registrant's Report on Form 8-K dated July 23, 1997) 10.16 Amendment to Rights Agreement, dated February 19, 1999, between the Registrant and American Stock Transfer & Trust Co., as Rights Agent (incorporated by reference to Exhibit 4.1 to the Registrant's Report on Form 8-K dated March 9, 1999) 10.17 Credit Facility dated December 21, 2000 between the Registrant and The Chase Manhattan Bank , as Lead Arranger and Administrative Agent**** 10.18 Agreement of Lease for warehouse facility dated September 27, 2000 between Townsend Properties, Inc. and Registrant**** 11.1 Statement re computation of per share earnings **** 21.1 List of subsidiaries of the Registrant **** -------------------------------------- * Incorporated by reference from the correspondingly numbered Exhibit in the Company' s Registration statement on Form SB-2 (No. 333-9697) ** Incorporated by reference from the correspondingly numbered Exhibit in the Company's Report on Form 10-QSB for the quarterly period ended September 30, 1996 (File No. 001-12127) *** Incorporated by reference from the correspondingly numbered Exhibit in the Company's Report on Form 10-KSB for the year ended December 31, 1999 (File No. 001-12127) **** Incorporated by reference from the Company's Annual Report on Form 10-KSB for the year ended December 31, 2000. ***** Filed herewith (b) REPORTS ON FORM 8-K None 31 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Empire Resources, Inc. By: /s/ Nathan Kahn --------------------------- Nathan Kahn Chief Executive Officer March 27, 2002 /s/ Nathan Kahn --------------------------- Nathan Kahn Chief Executive Officer and Director (Principal Executive Officer) March 27, 2002 /s/ Sandra Kahn --------------------------- Sandra Kahn, Chief Financial Officer and Director (Principal Financial and Principal Accounting Officer) March 27, 2002 /s/ William Spier --------------------------- William Spier, Director March 27, 2002 /s/ Jack Bendheim --------------------------- Jack Bendheim, Director March 27, 2002 32 /s/ Barry L. Eisenberg --------------------------- Barry L. Eisenberg, Director March 27, 2002 /s/ Peter G. Howard --------------------------- Peter G. Howard, Director March 27, 2002 /s/ Nathan Mazurek --------------------------- Nathan Mazurek, Director March 27, 2002 /s/ Morris J. Smith --------------------------- Morris J. Smith, Director March 27, 2002 /s/ Harvey Wrubel --------------------------- Harvey Wrubel, Director March 27, 2002 33 INDEPENDENT AUDITORS' REPORT Board of Directors Empire Resources, Inc. Fort Lee, New Jersey We have audited the accompanying consolidated balance sheets of Empire Resources, Inc. and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements enumerated above present fairly, in all material respects, the consolidated financial position of Empire Resources, Inc. and subsidiaries as of December 31, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. Richard A. Eisner & Company, LLP New York, New York March 13, 2002 F-1 EMPIRE RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, -------------------------------- ASSETS: (Note F) 2001 2000 --------------- --------------- Current assets: Cash $ 1,147,195 $ 1,207,926 Trade accounts receivable (less allowance for doubtful accounts of $189,398 and $202,788 at December 31, 2001 and 2000) 22,789,406 37,405,445 Inventories 27,782,408 28,921,678 Due from stockholders 285,760 Other current assets 923,349 1,133,905 --------------- --------------- Total current assets 52,642,358 68,954,714 Furniture and equipment (less accumulated depreciation of $313,121 and $275,501) 38,914 56,137 Deferred financing costs, net 82,328 98,879 --------------- --------------- $ 52,763,600 $ 69,109,730 =============== =============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable - banks $ 26,700,000 $ 38,000,000 Trade accounts payable 13,000,012 18,939,119 Accrued expenses 1,118,638 1,069,790 --------------- --------------- Total current liabilities 40,818,650 58,008,909 --------------- --------------- Commitments and contingencies Stockholders' equity: Preferred stock $.01 par value, 5,000,000 shares authorized at December 31, 2000, none authorized at December 31, 2001; none issued Common stock $.01 par value, 20,000,000 shares authorized and 11,749,651 shares issued at December 31, 2001; 40,000,000 shares authorized and 15,574,162 shares issued at December 31, 2000, including 3,824,511 shares held in escrow at December 31, 2000 117,497 155,742 Additional paid-in capital 10,681,336 10,509,649 Retained earnings 2,454,480 1,159,061 Accumulated other comprehensive income--cumulative translation adjustment 30,132 67,685 Treasury stock (1,180,600 shares and 646,500 shares) (1,338,495) (791,316) ---------------- --------------- Total stockholders' equity 11,944,950 11,100,821 --------------- --------------- $ 52,763,600 $ 69,109,730 =============== ===============
F-2 EMPIRE RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, ---------------------------------------------------------- 2001 2000 1999 ---------------- ---------------- ---------------- Net sales 143,235,385 165,327,827 107,112,064 Cost of goods sold 133,862,469 154,579,092 98,925,131 ---------------- ---------------- ---------------- Gross profit 9,372,916 10,748,735 8,186,933 Selling, general and administrative expenses 5,290,397 5,707,741 3,913,597 ---------------- ---------------- ---------------- Operating income 4,082,519 5,040,994 4,273,336 Interest expense 2,032,460 3,123,084 2,162,568 ---------------- ---------------- ---------------- Income before income taxes 2,050,059 1,917,910 2,110,768 Income taxes 754,640 877,123 154,553 ---------------- ---------------- ---------------- NET INCOME $ 1,295,419 $ 1,040,787 $ 1,956,215 ================ ================ ================ Income before income taxes 2,110,768 Pro forma income taxes 802,092 ---------------- PRO FORMA NET INCOME $ 1,308,676 ================ WEIGHTED AVERAGE SHARES OUTSTANDING: BASIC 10,956,001 11,346,347 7,327,663 =========== =========== ========= DILUTED 11,091,047 11,445,432 7,356,186 =========== =========== ========= EARNINGS PER SHARE: BASIC $.12 $.09 ==== ==== DILUTED $.12 $.09 ==== ==== PRO FORMA EARNINGS PER SHARE: BASIC $.18 ==== DILUTED $.18 ====
See notes to consolidated financial statements F-3 EMPIRE RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
COMMON STOCK ----------------------- NUMBER ADDITIONAL OF PAID-IN RETAINED SHARES AMOUNT CAPITAL EARNINGS ----------- ----------- -------------- --------------- BALANCE AT JANUARY 1, 1999 9,384,761 $50,000 $10,635,274 Exchange of shares - reverse acquisition 6,189,401 155,742 $9,829,170 Payments of merger costs - Integrated (58,292) Payment of merger costs - Empire (569,258) Distributions to stockholders of Empire (50,000) (11,903,957) Transfer of restricted shares to key employee 103,786 Treasury stock acquired in merger (50,000 shares) 50,000 Purchase of treasury stock (6,700 shares) Net change in cumulative translation adjustment Net income for 1999 1,956,215 --------- --------- ------------ ------------ BALANCE AT DECEMBER 31, 1999 15,574,162 155,742 9,924,664 118,274 Transfer of restricted shares to key employee 299,225 Capital contribution by stockholders 285,760 Purchase of treasury stock (589,800 shares) Net change in cumulative translation adjustment Net income for 2000 1,040,787 ---------- --------- ------------ ------------ BALANCE AT DECEMBER 31, 2000 15,574,162 155,742 10,509,649 1,159,061 Transfer of restricted shares to key employee 133,442 Purchase of treasury stock (534,100 shares) Net change in cumulative translation adjustment Retirement of common stock (3,824,511) (38,245) 38,245 1,295,419 Net income for 2001 ---------- ----------- ----------- ------------ BALANCE AT DECEMBER 31, 2001 11,749,651 $117,497 $10,681,336 $ 2,454,480 ========== ======== =========== ============ ACCUMULATED OTHER COMPREHENSIVE INCOME- CUMULATIVE TOTAL TOTAL TRANSLATION TREASURY STOCKHOLDERS' COMPREHENSIVE ADJUSTMENT STOCK EQUITY INCOME ----------------- ----------- ---------------- ---------------- BALANCE AT JANUARY 1, 1999 $ 49,704 $ 10,734,978 Exchange of shares - reverse acquisition 9,984,912 Payments of merger costs - Integrated (58,292) Payment of merger costs - Empire (569,258) Distributions to stockholders of Empire (11,953,957) Transfer of restricted shares to key employee 103,786 Treasury stock acquired in merger (50,000 shares) $(50,000) Purchase of treasury stock (6,700 shares) (9,101) (9,101) Net change in cumulative translation adjustment (13,552) (13,552) (13,552) Net income for 1999 1,956,215 1,956,215 ---------- $1,942,663 ------------ --------- ----------- ========== BALANCE AT DECEMBER 31, 1999 36,152 (59,101) 10,175,731 Transfer of restricted shares to key employee 299,225 Capital contribution by stockholders 285,760 Purchase of treasury stock (589,800 shares) (732,215) (732,215) Net change in cumulative translation adjustment 31,533 31,533 31,533 Net income for 2000 1,040,787 1,040,787 ---------- $1,072,320 ------------ --------- ---------- ========== BALANCE AT DECEMBER 31, 2000 67,685 (791,316) 11,100,821 Transfer of restricted shares to key employee 133,442 Purchase of treasury stock (547,179) (547,179) (534,100 shares) Net change in cumulative translation adjustment (37,553) (37,553) (37,553) Retirement of common stock 1,295,419 1,295,419 Net income for 2001 ------------ ------------ --------- --------- BALANCE AT DECEMBER 31, 2001 $ 30,132 $(1,338,495) $11,944,950 1,257,866 ============ =========== =========== =========
F-4 EMPIRE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31, -------------------------------------------------------- 2001 2000 1999 ----------------- ----------------- ----------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,295,419 $ 1,040,787 $ 1,956,215 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 84,348 77,856 55,511 Deferred income taxes 62,998 (113,706) Translation adjustment (37,553) 31,533 (13,552) Transfer of restricted shares to key employee 133,442 299,225 103,786 Changes in: Trade accounts receivable 14,616,039 (11,449,721) (5,516,924) Inventories 1,139,270 (9,559,470) (5,357,035) Due from stockholders 285,760 (285,760) Other current assets 147,557 (251,237) (445,000) Deferred financing costs (98,879) (58,462) Trade accounts payable (5,939,107) 10,834,974 269,300 Accrued expenses 48,848 (701,675) 1,242,865 ---------------- ---------------- ---------------- Net cash provided by (used in) operating activities 11,837,021 (10,176,073) (7,763,296) ---------------- ---------------- ---------------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to fixed assets (20,396) (22,855) (25,418) ---------------- ---------------- ---------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from notes payable - banks 11,700,000 10,400,000 Repayment of notes payable - banks (11,300,000) Capital contribution by stockholders 285,760 Distributions to stockholders (11,953,957) Distribution payable to former stockholders (46,482) 46,482 Net cash acquired upon merger 9,926,620 Payment of merger costs (569,258) Cost related to financing (30,177) Purchase of treasury stock (547,179) (732,215) (9,101) ---------------- ---------------- ---------------- Net cash (used in ) provided by financing activities (11,877,356) 11,207,063 7,840,786 ----------------- ---------------- ---------------- NET (DECREASE) INCREASE IN CASH (60,731) 1,008,135 52,072 Cash at beginning of year 1,207,926 199,791 147,719 ---------------- ---------------- ---------------- CASH AT END OF YEAR $ 1,147,195 $ 1,207,926 $ 199,791 ================ ================ ================ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 2,087,347 $ 3,317,096 $ 1,868,047 Income taxes $ 1,033,455 $ 1,064,629 $ 33,213
See notes to consolidated financial statements F-5 EMPIRE RESOURCES, INC. AND SUBSIDIARES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 NOTE A - ORGANIZATION AND BASIS OF PRESENTATION Empire Resources, Inc ("the Company") is the result of a 1999 reverse merger with Integrated Technology USA, Inc. ("Integrated"), a company incorporated in 1990 to design, develop and market products for emerging computer related markets which had discontinued its existing operations in their entirety and sought a merger/acquisition opportunity that would enable it to deploy its cash into a new operating business. Under terms of an agreement and plan of merger ("the Merger Agreement"), effective September 17,1999, Empire Resources, Inc ("Empire"), a distributor of value added semi-finished aluminum products, was merged with and into Integrated. Upon completion of the merger, the merged company was renamed Empire Resources, Inc. The merged company is continuing the business of Empire. For accounting and other financial purposes, the merger has been treated as a "reverse acquisition." Under this treatment, the surviving corporation has been treated as a continuation of Empire, and the merger has been treated as an issuance of shares by Empire to the stockholders of Integrated in exchange for Integrated's cash. Accordingly, the accompanying financial statements are the historical financial statements of Empire and Empire-Pacific and include the results of operations of Integrated and its subsidiaries, which have been minimal, only from September 17, 1999, the merger date. The Company is engaged principally in the purchase, sale and distribution of nonferrous metals to a diverse customer base located throughout North America and Australia. The Company sells its products through its own marketing and sales personnel and through its independent sales agents located in the U.S. who receive commissions on sales. Empire Resources-Pacific LTD.("Empire-Pacific"), an affiliate of Empire operating in Australia, became a wholly-owned subsidiary of the company and acts as its sales agent in Australia. The Company purchases from an array of suppliers located throughout the world. F-6 EMPIRE RESOURCES, INC. AND SUBSIDIARES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [1] PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of the company and its wholly owned subsidiaries. All intercompany balances have been eliminated in consolidation. [2] REVENUE RECOGNITION: Revenue is recognized when title to the goods passes to the customers. [3] INVENTORIES: Inventories are stated at the lower of cost or market. Cost is determined by the specific-identification method. Inventory consists of purchased semi-finished aluminum products. [4] FURNITURE AND EQUIPMENT: Furniture and equipment are stated at cost. Depreciation of furniture and equipment is calculated on the straight-line method over their estimated useful lives of five years. [5] COMMODITY FUTURES AND FOREIGN CURRENCY HEDGING ACTIVITIES: For periods beginning January 1, 2001, the Company has adopted Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities" The adoption of SFAS No. 133 did not have a material effect on the Company's results of operations for the year ended December 31, 2001 (see Note E). [6] FOREIGN CURRENCY TRANSLATION: Empire-Pacific's functional currency is the Australian dollar. Cumulative translation adjustments represent translation of Australian dollar amounts into U.S. dollars. [7] INCOME TAXES AND PRO FORMA INCOME TAXES: Empire had elected S corporation status for federal income tax purposes, and accordingly was not subject to federal tax on its income for the period prior to the merger with Integrated on September 17,1999. Integrated paid taxes on a C corporation basis, and subsequent to the merger, the Company continues to pay taxes on a C corporation basis. As a result, 1999 income taxes represent state and local income tax for the whole year and federal income tax only for the period from September 17, 1999 to December 31, 1999, while for subsequent years income taxes represent federal, state and local taxes for the entire year. Pro-forma income tax expense represents the provision for income taxes as if Empire had been taxed as a C corporation for all of 1999. The Company follows the asset and liability approach for deferred income taxes. This method provides that deferred tax assets and liabilities are recorded, using currently enacted tax rates, based upon the difference between the tax bases of assets and liabilities and their carrying amounts for financial statement purposes. Deferred tax asset valuation allowances are recorded when management does not believe that it is more likely than not that the related deferred tax assets will be realized. F-7 EMPIRE RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) [8] EARNINGS PER SHARE: The Company has adopted Statement of Financial Accounting Standards No. 128, Earnings per Share ("FAS 128"), which requires the presentation of basic earnings per share ("Basic EPS") and diluted earnings per share ("Diluted EPS"). Basic EPS is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period. The computation of Diluted EPS does not assume conversion, exercise or contingent issuance of securities that would have an anti-dilutive effect on earnings. The dilutive effect of the outstanding stock warrants and options was computed using the treasury stock method. Basic and Diluted EPS shown in the accompanying financial statements for the year ended December 31, 1999 are based on pro forma income taxes and pro forma net income since historical earnings per share presentation would not be meaningful. [9] STOCK - BASED COMPENSATION: The Company measures compensation cost using the methodology prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Accordingly, no compensation costs have been recognized for nonvariable options because the exercise prices of the stock options on the dates of grant equal the market values of the common stock. However, the Company has adopted the disclosure requirements of Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS 123") (see Note G). [10] USE OF ESTIMATES: The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. [11] CONCENTRATION OF SUPPLIERS: The Company's purchase of nonferrous metal is from a limited number of suppliers located throughout the world. Three suppliers accounted for 74%, 62%, and 56% of total purchases during the years ended December 31, 2001, 2000 and 1999, respectively. One such supplier accounted for 60% of these purchases in 2001. The Company's loss of any of its three largest suppliers or a material default by any such supplier in its obligations to the Company would have at least a short-term material adverse effect on the Company's business. [12] NEW ACCOUNTING STANDARDS: In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Intangible Assets." SFAS No. 141 requires that all business combinations be accounted for by the purchase method of accounting and changes the criteria for recognition of intangible assets acquired in a business combination. The provisions of SFAS No. 141 apply to all business combinations initiated after June 30, 2001. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized but tested for impairment at least annually, while intangible assets with finite useful lives continue to be amortized over their respective useful lives. The statement also establishes guidance for testing goodwill and intangible assets with indefinite useful lives for impairment. The provisions of SFAS No. 142 will be effective for 2002. However, goodwill and intangible assets acquired after June 30, 2001 are subject F-8 EMPIRE RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 immediately to the provisions of SFAS No. 142. The Company does not expect that the adoption of SFAS No. 141 and SFAS No. 142 will have a material effect on its consolidated financial statements. In August 2001, the FASB issued SFAS No. 144, "Accounting for the impairment or Disposal of Long-Lived Assets." This statement supercedes SFAS No.121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." The statement retains the previously existing accounting requirements related to the recognition and measurement of the impairment of long-lived assets to be held and used while expanding the measurement requirements of long-lived assets to be disposed of by sale to include discontinued operations. It also expands the previously existing reporting requirements for discontinued operations to include a component of an entity that either has been disposed of or is classified as held for sale. The Company adopted SFAS No. 144 on January 1, 2002. Management does not expect this statement to have a material impact on the Company's consolidated financial position or results of operations. F-9 EMPIRE RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 NOTE C - INVENTORIES Inventories consist of the following semi finished aluminum products:
December 31, 2001 2000 ---- ---- Stored in warehouses $13,190,058 $ 25,761,763 In transit 14,592,350 3,159,915 --------------- --------------- $27,782,408 $ 28,921,678 =========== ===============
Substantially all of the Company's inventories have been purchased for specific customer orders. NOTE D - FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of notes payable to the banks approximate fair value as of December 31, 2001 and 2000 because the interest rates on such debt approximate the market rate for the Company given the appropriate risk factors. F-10 EMPIRE RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 NOTE E - DERIVATIVE FINANCIAL INSTRUMENTS AND RISK MANAGEMENT As of January 1, 2001, the Company has adopted Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting For Derivative Instruments and Hedging Activities", issued by the Financial Accounting Standards Board. SFAS No. 133 requires the Company to recognize all derivatives in the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through earnings. If the derivative is a hedge, depending upon the nature of the hedge, changes in the fair value of the derivative are either offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value, if any, is immediately recognized in earnings. The Company uses financial instruments designated as fair value hedges to manage its exposure to commodity price risk and foreign currency exchange risk inherent in its trading activities. It is the Company's policy to hedge such risks, to the extent practicable. The Company enters into high-grade aluminum futures contracts to limit its gross margin exposure by hedging the metals content element of firmly committed purchase and sales commitments. The Company also enters into foreign exchange forward contracts to hedge its exposure related to commitments to purchase or sell non-ferrous metals denominated in international currencies. The Company records "mark-to-market" adjustments on these futures and forward positions, and on the underlying firm purchase and sales commitments which they hedge, and reflects the net gains and losses currently in earnings. The gains and losses on futures and forward positions as of January 1, 2001 offset the losses and gains at that date on the underlying firm purchase and sales commitments which they hedged, and accordingly the Company did not record a transition adjustment as of January 1, 2001, upon the adoption of SFAS No. 133. For periods prior to January 1, 2001, gains and losses on aluminum futures contracts and on foreign exchange forward contracts were deferred and recognized in earnings as the aluminum products were sold. Accordingly, the adoption of SFAS No. 133 did not have a material effect on the Company's results of operations for the year ended December 31, 2001. At December 31, 2001, net unrealized gains on the Company's fair value hedges of foreign currency exposure amounted to approximately $26,800, and net unrealized losses on fair value hedges of aluminum prices amounted to approximately $300,316. These unrealized amounts were offset by like amounts on the underlying commitments which were hedged, and are reflected in the accompanying 2001 Balance Sheet in inventory and accrued expenses. For the year ended December 31, 2001, hedge ineffectiveness associated with derivatives designated as fair value hedges was insignificant, and no fair value hedges were derecognized. NOTE F - NOTES PAYABLE - BANKS On December 21, 2000, the Company entered into a revolving credit agreement with two commercial banks which provided for a line of credit of $50,000,000. In January 2001 a third commercial bank joined the facility and the credit line was increased to $60,000,000. Borrowings by the Company under this line of credit are collateralized by security interests in substantially all assets of Empire. Under the agreement, Empire is required to maintain working capital and net worth ratios, as defined by the loan agreement. The facility expires on June 30, 2003. As of December 31, 2001 and 2000, respectively, the amounts outstanding under this credit facility were $31.1 million and 40.1 million, (including approximately $4.4 million and $2.1 million of outstanding letters of credit). Interest on borrowings is the higher of (i) the federal funds rate plus 1/2% and (ii) the prime rate of Chase Bank, plus the applicable margin defined in the loan agreement. At December 31, 2001 and 2000, the interest rate charged approximated 4% and 8.65% respectively. F-11 EMPIRE RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 NOTE G - STOCK OPTIONS The Company's 1996 Stock Option Plan (the "1996 Plan"), as amended, provides for the granting of options to purchase not more than an aggregate of 1,129,000 shares of common stock. All officers, directors and employees of the Company and other persons who perform services for the Company are eligible to participate in the 1996 Plan. Some or all of the options may be "incentive stock options" within the meaning of the Internal Revenue Code of 1986, as amended. The 1996 Plan provides that it is to be administered by the Board of Directors, or by a committee appointed by the Board, which will be responsible for determining, subject to the provisions of the 1996 Plan, to whom the options are granted, the number of shares of common stock subject to an option, whether an option shall be incentive or non-qualified, the exercise price of each option (which, other than in the case of incentive stock options, may be less than the fair market value of the shares on the date of grant), the period during which each option may be exercised and the other terms and conditions of each option. No options may be granted under the 1996 Plan after July 29, 2006. As of December 31, 2001, the Company had granted options to purchase 1,393,944 shares under the 1996 Plan (742,944 of which had been forfeited), including an aggregate of 308,000 options granted to officers and directors of the Company subsequent to the merger. On the effective date of the merger, September 17, 1999, options issued by Integrated which remained outstanding were substantially vested. These options are considered as part of the reverse acquisition for accounting purposes. Prior to the merger, Empire Resources, Inc. and its affiliate had no stock option plan and had not issued any options. F-12 EMPIRE RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 NOTE G - STOCK OPTIONS (CONTINUED) The following is a summary of stock option activity for the years ended December 31, 2001, 2000 and 1999:
NUMBER EXERCISE PRICE WEIGHTED AVERAGE OF SHARES PER SHARE EXERCISE PRICE ------------- ----------------- ------------------- Options outstanding at September 17, 1999, the effective date of the merger, including 233,044 options outside the 1996 Plan 1,021,712 $0.01-$6.00 $3.34 Granted subsequent to the merger 218,000 $1.625 $1.625 Options outstanding at December 31, 1999 including 233,044 options outside the 1996 Plan 1,239,712 $0.01-$6.00 $3.04 Options granted 72,000 $1.19-$1.63 $1.50 Options forfeited (4,000) $1.19-$1.63 $1.41 Options outstanding at December 31, 2000 including 233,044 options outside the 1996 Plan 1,307,712 $0.01-$6.00 $2.96 Options granted 18,000 $0.98 $0.98 Options forfeited (574,779) $1.64-$6.00 $4.99 Options outstanding at December 31, 2001 including 99,933 options outside the 1996 Plan 750,933 $0.01-$2.00 $1.36 Options exercisable at December 31, 2001 750,933 $1.36 Options available for grant under 1996 Plan at December 31, 2001 478,000
As permitted by SFAS 123, the Company continues to account for its stock plans in accordance with APB 25 and its related interpretations. Had the compensation cost for the options issued on or after September 17, 1999 to officers, directors and employees been determined based upon the fair value at the grant date in accordance with the methodology prescribed under SFAS No. 123, the Company's net income in each of the years in the three-year period ended December 31, 2001 would have been as follows: F-13 EMPIRE RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 NOTE G - STOCK OPTIONS (CONTINUED)
2001 2000 1999 ---- ---- ---- Net income: As reported (net of pro forma income taxes, in 1999) $ 1,295,419 $ 1,040,787 $ 1,308,676 Pro forma $ 1,290,938 $ 1,019,687 $ 1,206,993 Net income per share (basic and diluted): As reported (net of pro forma income taxes, in 1999) $0.12 $0.09 $0.18 Pro forma $0.12 $0.09 $0.16
The weighted average remaining contractual life of options outstanding at December 31, 2001, December 31, 2000 and December 31, 1999 was 5.7, 6.3, and 7.1 years, respectively. The weighted average fair value of the options granted in 2001 was estimated at $0.40 on the date of grant, the weighted average fair value of the options granted in 2000 was estimated at $0.47 on the date of grant, and the weighted average fair value of the options granted in 1999 after the September 17, 1999 merger was estimated at $0.72 on the date of grant, using the Black-Scholes option-pricing model which included the following assumptions stated on a weighted average basis:
2001 2000 1999 ---- ---- ---- Dividend yield 0% 0% 0% Volatility 0.40 0.40 0.40 Risk free interest rate 3.87% 5.96%-6.20% 5.76% Expected life in years 5 5 5
NOTE H - COMMON STOCK [1] STOCK REPURCHASE PLAN: In November 1999, the Board of Directors authorized the Company to repurchase up to one million shares of its common stock at prices not to exceed $1.50 per share. In December 2000, the number of shares authorized for repurchase was increased to 1.5 million. As of December 31, 2001, the Company had repurchased a total of 1,130,600 shares under the repurchase program for an aggregate cost of $1,288,495. The Company had also acquired 50,000 shares for a cost of $50,000 in connection with the reverse merger in September 1999. [2] WARRANTS: In connection with a bridge financing during the year ended December 31, 1996, Integrated issued warrants to purchase an aggregate of 199,174 shares of common stock at an exercise price of $0.60 per share. As of December 31, 2001, 90,838 of such warrants were outstanding. In connection with its initial public offering in October 1996 (the "IPO"), Integrated issued warrants to acquire 3,360,082 shares of its common stock at an exercise price of $9.00 per share, subject to adjustment under certain circumstances. These warrants expired on October 1, 2001. F-14 EMPIRE RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 NOTE H - COMMON STOCK (CONTINUED) [2] WARRANTS: (CONTINUED) In connection with the IPO, Integrated sold to an underwriter of the IPO, for nominal consideration, warrants to purchase up to 300,000 shares of its common stock and/or 300,000 warrants to acquire 300,000 shares of common stock (the "Representative Warrants"). These warrants expired on October 1, 2001. [3] CAPITAL CONTRIBUTION BY STOCKHOLDERS Results of operations for 2000 include a provision for an adjustment to state income taxes of $285,760 relating to the years 1996 through 1998. This tax assessment pertains to Empire's earnings before the merger and was subject to indemnification by the former stockholders of Empire. Net income for 2000 was reduced by $188,602, net of the related federal income tax benefit, while the balance sheet as of December 31, 2000 includes a receivable from the former stockholders for a contribution of capital in the amount of $285,760 which was paid during 2001. As a result of this event, total stockholders' equity as of December 31, 2000 was increased by $97,158. (4) RETIREMENT OF CONTINGENT SHARES ISSUED TO EMPIRE STOCKHOLDERS Upon the merger, Nathan and Sandra Kahn ("the Empire Stockholders") received an aggregate of 9,384,761 shares of common stock of the Company in exchange for the outstanding stock of Empire owned by them prior to the merger. Pursuant to the merger agreement, 3,824,511 of these shares (the "Contingent Shares") were deposited into escrow subject to an earn-out formula dependant on the Company achieving a minimum cumulative after-tax net income (subject to certain adjustments) of $4.4 million during the two-year period commencing April 1, 1999 and ending March 31, 2001. No shares were released from escrow in accordance with this formula and all of the 3,824,511 shares placed in escrow were retired on June 13, 2001. NOTE I - INCOME TAXES As discussed in Note B[8], Empire was an S corporation for income tax purposes for periods prior to the merger on September 17, 1999. Income tax expense consists of the following:
YEAR ENDED DECEMBER 31, ---------------------------------------- 2001 2000 1999 --------- -------- ----------- Current $691,642 $ 990,829 $ 119,553 Deferred expense (benefit) 62,998 (113,706) 35,000 -------- ----------- ------------ $754,640 $ 877,123 $ 154,553 ======== =========== ===========
Temporary differences arise due to the difference between reporting for financial reporting purposes and for tax purposes. A deferred tax asset at December 31, 2001 and at December 31, 2000 of $50,708 and $113,706 respectively was attributable to stock based compensation. The Company's income subject to tax as an S corporation and as a C corporation in 1999 was as follows:
Income subject to tax as S corporation $ 1,798,721 Income subject to tax as C corporation 312,047 -------------- Total income before income taxes $ 2,110,768 ==============
F-15 EMPIRE RESOURCES, INC. AND SUBSIDIARES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 NOTE I - INCOME TAXES (CONTINUED) The U.S. statutory rate of 34% can be reconciled to the effective tax rate as follows:
YEAR ENDED DECEMBER 31, ---------------------------------------------------------- 2001 2000 1999 1999 PRO FORMA ----------- ------------ ------------ ---------------- Provision for taxes at statutory rate $697,020 $ 652,089 $ 93,843 $ 726,000 State and local taxes, net of federal tax 57,620 71,719 60,710 104,000 benefit State taxes pertaining to prior years, net of federal tax benefit 188,602 Permanent differences and other (35,287) (27,908) -------- ------------- ------------ ------------- $754,640 $ 877,123 $ 154,553 $ 802,092 ======== ============= ============ =============
Prior to the merger, Integrated had net operating loss carryforwards. Under Section 382 of the Internal Revenue Code, due to a lack of continuity of business enterprise by Integrated, there is no net operating loss carryover utilization. Hence, such net operating loss carryforwards have lapsed. No valuation allowance has been provided for U.S. deferred tax assets of $50,708 and $113,706 at December 31, 2001 and December 31, 2000 respectively, since management is of the opinion that it is more likely than not that such assets will be realized. NOTE J - EMPLOYEE RETIREMENT BENEFITS Effective November 1, 1999, the Company implemented a salary reduction employee benefit plan, a qualified plan adopted to conform to Internal Revenue Code Section 401(k). Employees may contribute up to 15% of their eligible compensation, and the Company will provide a matching contribution of 50% of employee contributions limited to 2% of employee compensation. The plan covers all employees who have attained age 18, and substantially all eligible employees have elected to participate. Each employee's pre-tax contributions are immediately vested upon participation in the plan. The employees' vesting of the Company's matching contribution is based upon length of service as follows:
YEARS OF SERVICE VESTED % ---------------- -------- 1 25% 2 50% 3 75% 4 100%
Employees who terminate prior to 100% vesting forfeit their non-vested portion of the Company's matching contribution, and those funds are used to reduce future matching contributions. Employees in active service on the effective date of the plan were granted retroactive service credit for the purpose of determining their vested percentage. Company matching contributions amounted to $29,942 in 2001, and $24,006 in 2000. F-16 EMPIRE RESOURCES, INC. AND SUBSIDIARES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 Note K- EARNINGS PER SHARE The following is the reconciliation of the numerators and denominators of the basic and diluted earnings per share:
YEAR ENDED DECEMBER 31, ---------------------------------------------- 2001 2000 1999 --------------- -------------- --------------- Numerator: Net Income $ 1,295,419 $ 1,040,787 Pro forma net income $ 1,308,676 Denominator: Computation of basic earnings per share: Weighted average shares outstanding - basic 10,956,001 11,346,347 7,327,663 Basic earnings per share $0.12 $0.09 Pro forma basic earnings per share $0.18 Computation of diluted earnings per share: Weighted average shares outstanding - basic 10,956,001 11,346,347 7,327,663 Potentially dilutive shares: Shares issuable upon exercise of dilutive options 135,046 99,085 28,523 Weighted average shares outstanding - diluted 11,091,047 11,445,432 7,356,186 Diluted earnings per share $0.12 $0.09 Pro forma diluted earnings per share $0.18
NOTE L - BUSINESS SEGMENT AND GEOGRAPHIC AREA INFORMATION The Company operates in one business segment-the purchase, sale and distribution of non-ferrous metals. Sales to domestic and foreign customers were as follows:
---------------------------------------------- 2001 2000 1999 --------------- -------------- --------------- United States (in thousands) $ 113,915 $ 128,174 $ 98,106 Foreign (primarily Canada) (in thousands) 29,320 37,154 9,006 ------ ------ ----- $ 143,235 $ 165,328 $ 107,112 ========= ========= =========
NOTE M - SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
2001 ------------------------------------------------------------------- MARCH JUNE SEPTEMBER DECEMBER 31 30 30 31 ---------------- ---------------- ---------------- ---------------- Net sales $ 44,283,027 $ 41,191,499 $ 31,040,712 $ 26,720,147 Gross profit 2,766,261 2,516,011 2,228,436 1,862,208 Operating income 1,395,667 1,265,659 949,209 471,984 Net income 412,167 416,941 351,547 114,764 Income per common share- Basic and diluted Basic $.04 $.04 $.03 $.01 Diluted $.04 $.04 $.03 $.01
F-17 EMPIRE RESOURCES, INC. AND SUBSIDIARES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000
Weighted average shares outstanding Basic 11,037,280 11,024,505 11,023,951 10,740,721 Diluted 11,136,244 11,159,327 11,159,660 10,875,767 2000 ---------------------------------------------------------------- MARCH JUNE SEPTEMBER DECEMBER 31 30 30 31 --------------- ---------------- --------------- --------------- Net sales $31,101,411 $38,610,235 $52,383,189 $43,232,992 Gross profit 2,392,604 2,851,905 2,967,724 2,536,502 Operating income 1,206,747 1,510,713 1,666,899 656,635 Net income (loss) 409,084 462,315 478,351 (308,963) Income(loss) per common share- Basic and diluted Basic $0.04 $0.04 $0.04 ($0.03) Diluted $0.04 $0.04 $0.04 ($0.03) Weighted average shares outstanding Basic 11,388,751 11,382,015 11,291,435 11,220,715 Diluted 11,489,387 11,481,090 11,390,451 11,319,800
NOTE N - COMMITMENTS AND CONTINGENCIES [1] LEASE: The Company leases its office facilities under a lease expiring on March 31, 2005, and leases warehouse and distribution facilities under a lease expiring on October 31, 2005. The Company also leases equipment and vehicles under leases which run through November 2005. The minimum noncancelable scheduled rentals under these leases are as follows:
YEAR ENDING DECEMBER 31, ------------ 2002 $ 372,536 2003 376,574 2004 382,600 2005 198,079 ---------- $1,329,789 ==========
Rent expense for the years ended December 31, 2001, and 2000 and 1999 was $376,498, $254,783, and $185,448, respectively. F-18 EMPIRE RESOURCES, INC. AND SUBSIDIARES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 NOTE N - COMMITMENTS AND CONTINGENCIES (CONTINUED) [2] LETTERS OF CREDIT: Outstanding letters of credit at December 31, 2001 amounting to $4,393,781 expire from January through March of 2002. [3] EMPLOYMENT AGREEMENTS: In September 1999, the Company entered into three-year employment agreements with two of its executive officers. Each agreement provides that the term will be extended automatically for successive two-year periods unless either party gives written notice of termination at least 180 days prior to the end of the original term or the then additional term, as the case may be. Each agreement provides that the Company may terminate the agreement upon the disability of the executive or for cause (as such terms are defined in the agreement). Base salaries under these agreements cumulatively are being paid at a rate of $500,000 per annum. The amount may be increased, but not decreased, by the Board of Directors. The base salary provided for by each agreement is subject to possible upward annual adjustments based upon changes in a designated cost of living index. The agreements also provide for annual bonuses equal to 7%, on a combined basis, of the amount by which the Company's earnings before taxes (as defined in the agreements) for such year exceed $4,000,000. The Company also entered into an employment agreement with another officer. The scheduled term of the agreement is until December 31, 2002. The agreement provides for base salary to be paid at a rate of $203,000 per annum which may be increased, but not decreased, by the Board of Directors. The base salary is subject to possible upward annual adjustments based upon changes in a designated cost of living index. In addition to base salary, the agreement provides that the Company shall pay the employee performance-based compensation in accordance with a formula provided for in the agreement. [4] OTHER: The Company is presently involved in litigation matters in the normal course of business. Management does not expect that these matters will have a material adverse effect on the Company's consolidated financial statements. NOTE O - VALUATION AND QUALIFYING ACCOUNTS FOR YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999 RESERVES AND ALLOWANCES FOR DOUBTFUL ACCOUNTS
------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------ Additions ------------------------------------------------------------------------------------------------------------------------------ Balance at Charged to Costs Charged to Deductions from Balance at End of Beginning of And Other Reserves Period Period Expenses Accounts ------------------------------------------------------------------------------------------------------------------------------ 2001 $202,788 $13,390 $189,398 ------------------------------------------------------------------------------------------------------------------------------ 2000 $125,788 $77,000 $202,788 ------------------------------------------------------------------------------------------------------------------------------ 1999 $125,788 $125,788 ------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------
F-19 EMPIRE RESOURCES, INC. AND SUBSIDIARES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 EXHIBIT 21.1 LIST OF SUBSIDIARIES
NAME OF SUBSIDIARY JURISDICTION Empire Resources Pacific Ltd. Delaware I.T.I. Innovative Technology, Ltd. Israel CompuPrint Ltd. Israel
EXHIBIT 11.1 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS Pro forma earnings per share - basic, are based upon the Company's weighted average number of common shares outstanding. The shares issued to the former Empire stockholders in the merger, excluding the 3,824,511 contingent shares which were placed in escrow and subsequently retired, were considered outstanding for all periods presented. The shares of the former Integrated shareholders were considered outstanding only from the September 17, 1999 merger date.
2001 2000 1999 Net Income $1,295,419 $1,040,787 ========== ========== Pro forma net income $1,308,676 ========== Weighted average shares outstanding - basic 10,956,001 11,346,347 7,327,663 Shares issuable upon exercise of dilutive options 190,771 99,933 28,741 Less: shares assumed repurchased (55,725) (848) (218) -------- ----- ----- Weighted average shares outstanding - diluted 11,091,047 11,445,432 7,356,186 ========== ========== ========= Earnings per share - basic $0.12 $0.09 Earnings per share - diluted $0.12 $0.09 Pro forma earnings per share - basic $0.18 Pro forma earnings per share - diluted $0.18
F-20