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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant [X]
Filed by a party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material pursuant to sec. 240.14a-11(c) or sec.240.14a-12
Integrated Technology USA, Inc.
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(Name of Registrant as Specified in Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is
calculated and show how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[X] Fee paid previously with preliminary materials.
Fee was $0
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the form or schedule and the date of its filing.
(1) Amount previously paid:
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(4) Date filed:
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Integrated Technology USA, Inc.
444 Madison Avenue, 38th Floor
New York, New York 10022
Dear stockholders of Integrated Technology USA, Inc.:
You are invited to attend the annual meeting of stockholders of
Integrated Technology USA, Inc. ("Integrated") to be held on September 15, 1999,
at 9:30 a.m., local time, at 1585 Broadway, 26th Floor, New York, New York
10036.
At the meeting, you will be asked to consider and vote upon a proposal
to approve and adopt the Agreement and Plan of Merger dated as of February 22,
1999 (the "Merger Agreement"), among Integrated, Empire Resources, Inc., a
Delaware corporation ("Empire"), Empire Resources Pacific Ltd., a Delaware
corporation ("Empire-Pacific"), and the stockholders of Empire and
Empire-Pacific. The Merger Agreement provides for, among other things, that:
o Integrated will merge with Empire;
o the certificate of incorporation of the surviving corporation will
be amended to change the name of the surviving corporation to
"Empire Resources, Inc.";
o there will be issued to the stockholders of Empire an aggregate of
9,384,761 shares of common stock of the surviving corporation, of
which 3,824,511 shares will be deposited into escrow and be
subject to an earn-out formula described herein; and
o the board of directors of the surviving corporation will have nine
members, comprised of four current directors of Integrated and
five new directors that have been designated by Empire.
The Integrated board of directors believes that the merger is fair to
you, and is in your best interests, and recommends a vote "for" the proposal to
approve and adopt the Merger Agreement.
At the meeting, you will also be asked to elect directors and ratify
the appointment of KPMG LLP (effective upon completion of the merger) as
independent auditors for the fiscal year ending December 31, 1999.
It is important that your shares be represented at the meeting,
regardless of the number of shares you own. Therefore, please sign, date and
return your proxy card as soon as possible, whether or not you plan to attend
the meeting. If you do attend the meeting and wish to vote in person, you may
withdraw your proxy and vote in person.
Sincerely,
William Spier
Acting Chief Executive Officer
This proxy statement is dated August 6, 1999, and is expected to be
first mailed to stockholders on August 12, 1999.
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Integrated Technology USA, Inc.
444 Madison Avenue, 38th Floor
New York, New York 10022
Notice of Annual Meeting of Stockholders
To be held on September 15, 1999
To the stockholders of Integrated Technology USA, Inc.:
The annual meeting of stockholders of Integrated Technology USA, Inc.,
a Delaware corporation ("Integrated"), will be held on September 15, 1999, at
9:30 a.m., local time, at 1585 Broadway, 26th Floor, New York, New York 10036,
for the following purposes:
1. You will be asked to consider and vote upon a proposal to approve
and adopt the Agreement and Plan of Merger dated as of February 22, 1999 (the
"Merger Agreement"), among Integrated, Empire Resources, Inc., a Delaware
corporation ("Empire"), Empire Resources Pacific Ltd., a Delaware corporation
("Empire-Pacific"), and the stockholders of Empire and Empire-Pacific. The
Merger Agreement provides for, among other things, that:
o Integrated will merge with Empire;
o the certificate of incorporation of the surviving corporation will
be amended to change the name of the surviving corporation to
"Empire Resources, Inc.";
o there will be issued to the stockholders of Empire an aggregate of
9,384,761 shares of common stock of the surviving corporation, of
which 3,824,511 shares will be deposited into escrow and be
subject to an earn-out formula described herein; and
o the board of directors of the surviving corporation will have nine
members, comprised of four current directors of Integrated and
five new directors that have been designated by Empire.
2. You will be asked to elect as directors the nominees identified
herein.
3. You will be asked to ratify the appointment of KPMG LLP (effective
upon completion of the merger) as independent auditors for the
fiscal year ending December 31, 1999.
The Integrated board of directors believes that the merger is fair to
you, and is in your best interests, and recommends a vote "for" the proposal to
approve and adopt the Merger Agreement. The Integrated board also recommends a
vote "for" each of the other proposals.
The board of directors of Integrated has fixed the close of business on
July 19, 1999, as the record date for the determination of stockholders entitled
to notice of, and to vote at, the meeting and any adjournment thereof. Only
holders of record of shares of Integrated common stock at the close of business
on the record date are entitled to notice of, and to vote at, the meeting.
Your vote is important. Even if you plan to attend the meeting in
person, we request that you sign and return the enclosed proxy to ensure that
your shares will be represented at the meeting if you are unable to attend. If
you do attend the meeting and wish to vote in person, you may withdraw your
proxy and vote in person.
By Order of the Board of Directors,
William Spier
Acting Chief Executive Officer
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TABLE OF CONTENTS
QUESTIONS AND ANSWERS ABOUT THE MERGER................................1
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS................4
WHERE YOU CAN FIND MORE INFORMATION...................................4
INCORPORATION BY REFERENCE............................................4
SUMMARY...............................................................5
INTEGRATED SELECTED HISTORICAL FINANCIAL DATA........................16
EMPIRE COMPANIES SELECTED HISTORICAL FINANCIAL DATA..................17
UNAUDITED PRO FORMA FINANCIAL STATEMENTS.............................20
CAPITALIZATION.......................................................27
MARKET PRICE DATA AND DIVIDEND POLICY................................28
COMPARATIVE UNAUDITED PER SHARE DATA.................................29
THE COMPANIES........................................................31
RISK FACTORS.........................................................31
THE MEETING..........................................................34
THE MERGER AND RELATED TRANSACTIONS..................................37
MATERIAL TERMS OF THE MERGER AGREEMENT...............................45
MANAGEMENT FOLLOWING THE MERGER......................................53
BUSINESS OF EMPIRE...................................................59
EMPIRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS...............................................62
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
FOLLOWING THE MERGER................................................69
ELECTION OF DIRECTORS................................................71
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS..................71
STOCKHOLDER PROPOSALS FOR THE 2000 ANNUAL MEETING....................72
LEGAL MATTERS........................................................72
INDEPENDENT AUDITORS.................................................72
EMPIRE RESOURCES, INC. FINANCIAL STATEMENTS.........................F-1
List of Annexes
Annex A-Agreement and Plan of Merger
Annex B-Voting Agreement
Annex C-Employment Agreement with Nathan Kahn
Annex D-Employment Agreement with Sandra Kahn
Annex E-Escrow Agreement
Annex F-Opinion of Seidman & Co., Inc.
Annex G-Annual Report on Form 10-KSB of Integrated Technology USA, Inc. for the
year ended December 31, 1998.
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: Why are we proposing to merge?
A: Integrated was formerly in the business of designing and marketing
certain computer-related products. We completely discontinued these
operations at the end of 1997 due to our inability to achieve
profitability. Since that time, our only activity has been seeking a
business combination opportunity that would enable us to redeploy our
remaining cash ($10.1 million at June 30, 1999) into a new operating
business. We believe that the merger with Empire, a distributor of
value added, semi-finished aluminum products, will enable our
stockholders to obtain an interest in an established operating business
with a track record of earnings over many years and the potential for
future growth.
Q: When is the stockholder meeting relating to the merger and what
specific proposals will I be asked to consider?
A: The Integrated annual meeting will take place on September 15, 1999 at
9:30 a.m. At the meeting, Integrated stockholders will be asked to
approve and adopt the Agreement and Plan of Merger dated as of February
22, 1999, among Integrated, Empire, Empire- Pacific, and the
stockholders of Empire and Empire Pacific.
Q: What will happen to Integrated if the merger is approved?
A: If the merger is approved, Empire will be merged with and into
Integrated, and Integrated will be the surviving corporation.
The surviving corporation will continue the business of Empire.
Q: What will the name of the surviving corporation be?
A: Following the merger, the surviving corporation will continue the
business of Empire under the name "Empire Resources, Inc."
Q: What will the stockholders of Empire receive in the Merger?
A: The surviving corporation in the merger will issue to the stockholders
of Empire an aggregate of 9,384,761 shares of common stock of the
surviving corporation. However, the stockholders of Empire will be
required to deposit 3,824,511 of these shares into escrow. Some or all
of the escrowed shares may be released to the stockholders of Empire
based on a two-year earn-out formula described herein. Any escrowed
shares not required to be released to the stockholders of Empire based
on the earn-out formula will be returned to the surviving corporation
and canceled. The stockholders of Empire will have the right to vote
the shares held in escrow.
Q: What percentage of the surviving corporation will the stockholders of
Empire own following the merger?
A: The stockholders of Empire will own approximately 47.5% of the
outstanding common stock of the surviving corporation after the merger,
assuming none of the escrowed shares are released to the stockholders
of Empire, and approximately 60.5%, assuming all of the escrowed shares
are released. Such percentages would be reduced to approximately 44.9%
and 57.9%, respectively, assuming exercise of certain outstanding
options and warrants that provide for an exercise price of $2.00 per
share or less.
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Q: Who will control the surviving corporation following the merger?
A: Following the merger, Nathan Kahn and Sandra Kahn, the sole
stockholders of Empire, will have effective control of the surviving
corporation.
Q: Who will be on the board of directors of the surviving corporation?
A: Following the merger, the board of directors will have nine members.
The nine members will include (1) Nathan Kahn and Sandra Kahn, the sole
stockholders of Empire, (2) three other directors designated by Empire
and (3) four current directors of Integrated.
Q: Who will the executive officers of the surviving corporation be?
A: Following the merger, (1) Nathan Kahn (currently President of Empire)
will become Chief Executive Officer of the Surviving Corporation, (2)
Sandra Kahn (currently Secretary and Treasurer of Empire) will become
Chief Financial Officer of the Surviving Corporation and (3) Harvey
Wrubel (currently an Empire employee) will become Vice President of
Sales of the Surviving Corporation.
Q: Will the stockholders of Integrated receive any shares or other
payments in connection with the merger?
A: No. The current stockholders of Integrated will not receive any
shares or other payments in connection with the merger.
Q: What will happen to the currently outstanding shares of Integrated
common stock as a result of the merger?
A: Nothing. These shares will remain outstanding and will not be affected
by the merger.
Q: Should I send in my stock certificates?
A: No. You should keep your stock certificates. They will not be a
ffected by the merger.
Q: What do I need to do now?
A: Just mail your signed proxy card in the enclosed return envelope as
soon as possible so that your shares can be voted at the September 15,
1999 meeting of Integrated.
Q: If my shares are held in "street name" by my broker, will my broker
vote my shares for me?
A: Your broker will only vote your shares if you provide instructions on
how to vote. Without instructions, your shares will not be voted. You
should instruct your broker to vote your shares by following the
directions provided by your broker. If you do not instruct your broker
to vote your shares, this will have the effect of a vote against the
proposal relating to approval and adoption of the Merger Agreement and
approval of the merger.
Q: Can I change my vote after I have mailed my signed proxy card?
A: Yes. You can change your vote at any time before your proxy card is
voted at the meeting. You can do this in one of three ways. First, you
can send Integrated a written notice stating that you would like to
revoke your proxy. Second, you can complete and submit a new proxy
card. Third, you can attend the meeting and vote in person. Your
attendance alone will not, however, revoke your proxy. If you have
instructed a broker to
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vote your shares, you must follow the procedure provided by your broker
to change those instructions.
Q: What are the tax consequences of the merger to Integrated stockholders?
A: The merger will not have any effect on Integrated stockholders for
federal income tax purposes.
Q: Do I have dissenters' rights of appraisal in connection with the
merger?
A: No. The stockholders of Integrated do not have any right to an
appraisal of the value of their shares in connection with the merger.
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CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in, or incorporated by reference in, this
Proxy Statement are forward-looking in nature. Such statements can be identified
by the use of forward-looking terminology such as "believes," "expects," "may,"
"will," "should," or "anticipates" or the negative thereof or comparable
terminology, or by discussions of strategy. You are cautioned that the business
and operations of Integrated and Empire are subject to a variety of risks and
uncertainties and, consequently, our actual results may materially differ from
those projected by any forward-looking statements. Certain of such risks and
uncertainties are discussed below under the heading "Risk Factors." We make no
commitment to revise or update any forward-looking statements in order to
reflect events or circumstances after the date such any such statement is made.
WHERE YOU CAN FIND MORE INFORMATION
We file reports, proxy statements, and other information with the SEC.
Such reports, proxy statements, and other information can be read and copied at
the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549. Please call the SEC at 1-800-SEC-0330 for further information on the
Public Reference Room. The SEC maintains an internet site at http://www.sec.gov
that contains reports, proxy and information statements and other information
regarding issuers that file electronically with the SEC, including our company.
INCORPORATION BY REFERENCE
The SEC allows us to "incorporate by reference" the documents that we
file with the SEC. This means that we can disclose important information to you
by referring you to those documents. Any information we incorporate in this
manner is considered part of this Proxy Statement (except for any information
superseded by information in this Proxy Statement). Any information we file with
SEC after the date of this Proxy Statement will automatically update and
supersede the information contained in this Proxy Statement.
We incorporate by reference the following documents that we have filed
with the SEC and any filings that we will make with the SEC in the future under
Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 until
the merger is consummated:
o Annual Report on Form 10-KSB for the year ended December 31,1998;
o Quarterly Reports on Form 10-QSB for the quarters ended March 31,
1999 and June 30, 1999; and
o Current Report on Form 8-K dated March 9, 1999.
We will provide without charge, upon written or oral request, a copy of
any or all of the documents which are incorporated by reference into this Proxy
Statement (other than the Annual Report on Form 10-KSB for the year ended
December 31,1998, which is attached as Annex G to this Proxy Statement).
Requests should be directed to: Integrated Technology USA, Inc., Attention:
Corporate Secretary, 444 Madison Avenue, 38th Floor, New York, New York 10022,
telephone number: (212) 759-3287 (ext. 122).
You should rely only on the information provided or incorporated by
reference in this Proxy Statement. We have authorized no one to provide you with
different information. You should not assume that the information in this Proxy
Statement is accurate as of any date other than the date on the front of this
Proxy Statement.
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SUMMARY
This summary highlights selected information from this proxy statement
and may not contain all of the information that is important to you. To
understand the proposed merger fully and for a more complete description of the
legal terms of the merger, you should read carefully this entire document
(including the appendices) and the documents that we have incorporated by
reference.
The Companies
Integrated
Integrated was formerly in the business of designing and marketing
certain computer-related products. Integrated completely discontinued these
operations at the end of 1997 due to its inability to achieve profitability.
Since that time, Integrated's only activity has been seeking a business
combination opportunity that would enable it to redeploy its remaining cash
($10.1 million at June 30, 1999) into a new operating business. Integrated's
principal executive offices are located at 444 Madison Avenue, 38th Floor, New
York, NY 10022.
Empire Resources and Empire Resources Pacific
Empire is a distributor of value added, semi-finished aluminum
products. Empire-Pacific is an affiliate of Empire that acts as Empire's sales
agent in Australia. Empire-Pacific, which is currently owned by the Empire
Stockholders, will become a subsidiary of Empire before the merger is completed.
The principal executive offices of Empire and Empire-Pacific (the "Empire
Companies") are located at One Parker Plaza, Fort Lee, NJ 07024.
The Integrated Meeting
The Integrated annual meeting will be held on September 15, 1999, at
9:30 a.m., local time, at 1585 Broadway, 26th floor, New York, New York 10036.
At the meeting, you will be asked to consider and vote upon a proposal to
approve and adopt the Merger Agreement. At the meeting, you will also be asked
to elect directors and ratify the appointment of KPMG LLP (effective upon
completion of the merger) as independent auditors for the fiscal year ending
December 31, 1999. You are entitled to vote at the meeting if you owned shares
of Integrated as of the close of business on July 19, 1999, the record date. At
the close of business on the record date, 6,139,401 shares of Integrated common
stock were outstanding and entitled to vote at the meeting. You will have one
vote at the meeting for each share of Integrated common stock that you owned as
of the record date.
Vote Required
The affirmative vote of a majority of the shares of Integrated common
stock entitled to vote at the meeting is required to approve and adopt the
Merger Agreement.
Directors will be elected by a plurality of the votes cast.
Ratification of the appointment of KPMG LLP (effective upon completion
of the merger) as independent auditors for the fiscal year ending December 31,
1999 requires the affirmative vote of a majority of the shares present in person
or represented by proxy at the meeting and entitled to vote on the matter.
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Voting Agreements
The directors of Integrated and certain of their affiliates have agreed
that they will vote their shares of Integrated common stock in favor of approval
of the Merger Agreement. These directors and affiliates beneficially own an
aggregate of 1,761,570 shares of Integrated common stock, which constitutes
approximately 28.69% of the outstanding shares. The form of voting agreement is
attached as Annex B hereto.
Recommendation of the Board of Directors
The Integrated board of directors believes that the merger is fair to
you, and is in your best interests, and recommends a vote "for" the proposal to
approve and adopt the Merger Agreement. This recommendation was made
unanimously, except that Simon Kahn (who is the brother of Nathan Kahn) did not
participate.
Interest of Certain Directors in the Merger
In considering the recommendation of the Integrated board with respect
to the merger, you should be aware that the directors have certain interests in
the merger that are in addition to the interests of the stockholders generally.
These interests include, but are not limited to, the vesting of certain options
and the modification of certain options. These interests are described under
"The Merger and Related Transactions--Conflicts of Interests."
Fairness Opinion
On January 19, 1999, Seidman & Co., Inc. delivered to the Integrated
board of directors its oral opinion to the effect that, as of that date, the
terms of the merger were fair, from a financial point of view, to the
stockholders of Integrated. Seidman & Co. has confirmed such opinion by delivery
of a written opinion dated February 22, 1999 (the date of the Merger Agreement).
The full text of this opinion, which sets forth, among other things, assumptions
made, matters considered and limitations on the review undertaken, is attached
as Annex F hereto.
Form of the Merger
Pursuant to the Merger Agreement, (1) Empire will merge with and into
Integrated, (2) Integrated will be the surviving corporation (the "Surviving
Corporation") and (3) all of the assets and liabilities of Empire will become
the assets and liabilities of the Surviving Corporation. Following the merger,
the Surviving Corporation will continue the business of the Empire Companies.
The Merger Agreement is attached as Annex A hereto.
Empire-Pacific will become a wholly owned subsidiary of Empire before
the merger is completed. As a result, upon completion of the merger,
Empire-Pacific will be a wholly owned subsidiary of the Surviving Corporation.
Name Change
The certificate of incorporation of the Surviving Corporation will be
amended to change the name of the Surviving Corporation to "Empire Resources,
Inc."
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Management of the Surviving Corporation
Board of Directors
Following the merger, the board of directors of the Surviving
Corporation will have nine members. The nine nominees for director are: (1)
Nathan Kahn and Sandra Kahn (the "Kahns" or the "Empire Stockholders"), (2)
three other directors designated by Empire (Jack Bendheim, Peter G. Howard and
Nathan Mazurek), and (3) four current directors of Integrated (Barry W. Blank,
Barry L. Eisenberg, Morris J. Smith, and William Spier).
Officers
Following the merger, (1) Nathan Kahn (currently President of Empire)
will become Chief Executive Officer of the Surviving Corporation, (2) Sandra
Kahn, (currently Secretary and Treasurer of Empire) will become Chief Financial
Officer of the Surviving Corporation and (3) Harvey Wrubel (currently an Empire
employee) will become Vice President of Sales of the Surviving Corporation.
Distribution of Surplus Net Worth of Empire
In February 1999, Empire determined to distribute to the Empire
Stockholders an amount ("Surplus Net Worth") equal to 60% of the
pre-distribution total fair value of Empire's business and net assets inclusive
of good will and going concern value, and in particular the full premium value
of Empire's supply contracts (which total value Empire and the Empire
Stockholders agreed was not less than $19 million), but in no event more than
the total stockholders equity of Empire as shown on the balance sheet of Empire
as of December 31, 1998 (or $10,922,475). Empire carried out the foregoing
through the distribution to the Empire Stockholders of the Asset Backed Notes
described under "--Distribution of Promissory Notes" below.
Empire also determined to recalculate its Surplus Net Worth as of the
effective time of the merger (with Empire's Surplus Net Worth equaling for such
purpose the total stockholders' equity of Empire as shown on its balance sheet
as of the effective time), and to make additional distributions (described under
"--Possible Additional Distributions" below) to the Empire Stockholders to
reduce such Surplus Net Worth to approximately zero.
As a consequence of the foregoing, Empire has made, and expects to
make, certain distributions to the Empire Stockholders as described below.
Distribution of Promissory Notes
On February 19, 1999, Empire distributed to the Empire Stockholders two
promissory notes (the "Asset Backed Notes") in the aggregate principal amount of
$10,922,475. The Asset Backed Notes: (1) bear interest at the rate of 6% per
annum, (2) are due and payable in full on August 31, 1999 (as extended from June
30, 1999) and (3) are secured by all accounts receivable and inventory of Empire
that were in existence on the date the notes were issued and by any proceeds
received in respect of such collateral. Empire is required to deposit any
proceeds constituting collateral into a segregated collateral account. The funds
in this account will be used to repay the notes at maturity.
Possible Additional Distributions
Prior to completion of the merger, Empire expects to make, in
accordance with the provisions of the Merger Agreement, such additional
distributions to the Empire Stockholders as
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is necessary to reduce Empire's Surplus Net Worth, measured as of the effective
time of the merger, to approximately zero. Such distributions may be in the form
of cash or notes.
Expected use of Integrated's Cash
Integrated had $10.1 million of cash as of June 30, 1999, and expects
to have a minimum of $9.8 million of cash as of the effective time of the
merger. Integrated expects that this cash will be used by the Surviving
Corporation for working capital and repayment of indebtedness under Empire's
revolving credit facility.
Issuance of Shares to the Empire Stockholders
Upon completion of the merger, the Surviving Corporation will issue to
the Empire Stockholders an aggregate of 9,384,761 shares of common stock of the
Surviving Corporation. The Empire Stockholders will be required to deposit
3,824,511 of these shares (the "Contingent Shares") into escrow. The Contingent
Shares will be subject to the earn-out described below.
Earn-Out Formula
The number of the Contingent Shares (if any) that will be released to
the Empire Stockholders will depend on the Surviving Corporation's cumulative
after-tax, net income during the two-year period commencing April 1, 1999 and
ending March 31, 2001, as indicated in the table below. Any shares not required
to be released to the Empire Stockholders will be returned to the Surviving
Corporation and canceled. For purposes of this calculation, the net income or
loss of the Surviving Corporation for the measurement period will be adjusted as
follows:
o any extraordinary expenses (within the meaning of the Merger
Agreement) relating to the merger (such as legal and accounting
fees and printing expenses) will be excluded;
o if during any portion of the measurement period, Integrated,
Empire or Empire-Pacific is treated as an S Corporation for
federal or state tax purposes, such-after tax income will be
calculated on a pro forma basis as if all such corporations were
liable for federal and state income taxes as taxable corporate
entities throughout the entire period; and
o such after-tax net income will be based upon the income of Empire
(and not of Integrated) with respect to any portion of the
measurement period that is prior to the effective time of the
merger.
The table below shows (1) the number of Contingent Shares that would be
released to the Empire Stockholders based upon different amounts of cumulative
after-tax, net income of the Surviving Corporation during the period indicated,
(2) the total number of shares of common stock of the Surviving Corporation that
would be outstanding giving effect to the release of a specified number of
Contingent Shares (and the return of any remaining shares to the Surviving
Corporation), (3) the percentage of such outstanding shares that would be owned
by the Empire Stockholders, and (4) the percentage of such outstanding shares
that would be owned by the Empire Stockholders on a pro forma basis assuming the
exercise of all outstanding options and warrants that have been issued by
Integrated and provide for an exercise price per share of $2.00 or less. The
information in the table below is based upon the number of shares of Integrated
common stock that was outstanding as of July 19, 1999, the record date for the
meeting to which this Proxy Statement relates.
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<TABLE>
<CAPTION>
Number of
Contingent Shares Total Shares of Pro Forma
Cumulative After-Tax Income During the Two-Year to Be Released to Surviving Percent Owned Percent Owned
Period Ending March 31, 2001 (in Millions of the Empire Corporation by Empire by Empire
Dollars) Stockholders Outstanding Stockholders Stockholders
- ------------------------------------------------- -------------------- ------------------- ---------------- ---------------
<S> <C> <C> <C> <C>
less than 4.4 0 11,699,651 47.5% 44.9%
4.4 to but excluding 4.8 228,817 11,928,468 48.5% 45.9%
4.8 to but excluding 5.2 466,268 12,165,919 49.5% 46.9%
5.2 to but excluding 5.6 712,853 12,412,504 50.5% 47.9%
5.6 to but excluding 6.0 969,107 12,668,758 51.5% 48.9%
6.0 to but excluding 6.4 1,235,611 12,935,262 52.5% 49.9%
6.4 to but excluding 6.8 1,512,993 13,212,644 53.5% 50.9%
6.8 to but excluding 7.2 1,801,933 13,501,584 54.5% 51.9%
7.2 to but excluding 7.6 2,103,168 13,802,819 55.5% 52.9%
7.6 to but excluding 8.0 2,417,500 14,117,151 56.5% 53.9%
8.0 to but excluding 8.4 2,745,802 14,445,453 57.5% 54.9%
8.4 to but excluding 8.8 3,089,028 14,788,679 58.5% 55.9%
8.8 to but excluding 9.2 3,448,217 15,147,868 59.5% 56.9%
9.2 or greater 3,824,511 15,524,162 60.5% 57.9%
</TABLE>
Escrow Arrangements Relating to the Contingent Shares
The Contingent Shares will be held in escrow, pursuant to an Escrow
Agreement in the form of Annex E hereto, until the earn-out is calculated. While
the Contingent Shares are held in escrow, the Empire Stockholders will have the
right to (1) vote such shares and (2) receive any dividends or distributions
with respect to such shares. The Empire Stockholders have agreed to refund to
the Surviving Corporation any dividends or distributions that are attributable
to any Contingent Shares that are required to be returned to the Surviving
Corporation. The Empire stockholders have also agreed that, as long as any
Contingent Shares remain in escrow, they will not take any action (whether as
stockholders or directors of the Surviving Corporation) to approve any dividends
or distributions with respect to the common stock of the Surviving Corporation,
unless such action is approved by a majority of the directors then in office who
were directors of Integrated prior to the merger.
Closing Date Balance Sheet and Possible Related Adjustments
As soon as reasonably practicable following the date on which the
merger is completed (the "Closing Date"), the Empire Stockholders are required
to provide to the board of directors of the Surviving Corporation an audited
consolidated balance sheet of the Empire Companies as of
9
<PAGE>
the Closing Date (the "Closing Date Balance Sheet"). Based upon the Closing Date
Balance Sheet, certain adjustments may be required as described below.
Adjustment for Net Capital Deficiency. If the Closing Date Balance
Sheet shows that the total stockholders' equity of the Empire Companies
immediately prior to the merger was negative, then the Empire Stockholders are
required to pay to the Surviving Corporation the amount of the net capital
deficiency shown on the Closing Date Balance Sheet.
Adjustment Relating to Receivables. Within 270 days following the
Closing Date, the Empire Stockholders are required to deliver to the board of
directors of the Surviving Corporation a certificate of the chief financial
officer of the Surviving Corporation that shows, as of a date within 180 days of
the Closing Date, the aggregate proceeds (including any insurance proceeds and
credits and refunds from suppliers) that the Surviving Corporation realized from
the collection of the accounts receivable reflected on the Closing Date Balance
Sheet. If the amount realized from these accounts receivable is less than the
aggregate amount of the accounts receivable (less allowance for doubtful
accounts) shown on the Closing Date Balance Sheet, the Empire Stockholders are
required to pay to the Surviving Corporation the shortfall.
Adjustment Relating to Inventory. Within 455 days following the Closing
Date, the Empire Stockholders are required to deliver to the board of directors
of the Surviving Corporation a certificate of the chief financial officer of the
Surviving Corporation that shows, as of a date, within 365 days of the Closing
Date, the aggregate amount of sales proceeds (including any insurance proceeds
and credits and refunds from suppliers) that the Surviving Corporation realized
from the disposition of the inventories reflected on the Closing Date Balance
Sheet. If the amount of such sales proceeds is less than the aggregate book
value of the inventories shown on the Closing Date Balance Sheet, the Empire
Stockholders are required to pay to the Surviving Corporation the shortfall.
Adjustment Relating to Loans to Employees. The Empire Stockholders are
required to pay to the Surviving Corporation the amount of any loans to
employees which are reflected on the Closing Date Balance Sheet and which remain
outstanding as of January 1, 2000.
Employment Agreements
The Surviving Corporation will enter into an employment and non-compete
agreement with each of Nathan Kahn and Sandra Kahn. The forms of these
agreements are attached hereto as Annex C and Annex D, respectively. These
agreements will provide, among other things, that:
o Nathan Kahn will be paid (i) a base salary of $250,000 per annum
(subject to a cost of living adjustment) plus (ii) an annual bonus
with respect to each year equal to 5% of the amount by which the
earnings before taxes of the Surviving Corporation (calculated as
described below) for such year exceeded $4 million; and
o Sandra Kahn will be paid (i) a base salary of $100,000 per annum
(subject to a cost of living adjustment) and (ii) an annual bonus
with respect to each year equal to 2% of the amount by which the
earnings before taxes of the Surviving Corporation (calculated as
described below) for such year exceeded $4 million.
For purposes of calculating the annual bonus amounts payable to the
Kahns, earnings before taxes of the Surviving Corporation shall be calculated
excluding (1) charges to earnings for extraordinary items and (2) the annual
bonus amounts payable to the Kahns.
10
<PAGE>
The Surviving Corporation will also enter into an employment and
non-compete agreement with Mr. Wrubel as described under "Management Following
the Merger--Certain Agreements to be Entered Into by Executive Officers."
Representations and Warranties
Representations and Warranties Relating to Empire
The Merger Agreement contains various representations and warranties
made by the Empire Stockholders with respect to the Empire Companies and the
proposed merger. These include, among others, representations and warranties as
to organization and qualification under applicable law; subsidiaries; execution
of the Merger Agreement; the merger not violating agreements and instruments;
consents and approvals required for the merger; capitalization and share
ownership; officers and directors; books and records; absence of undisclosed
liabilities; absence of certain changes; suppliers and customers; inventory;
accounts receivables; returns; relationships with related parties; offices;
contracts; permits; compliance with laws, permits and instruments; litigation;
assets; bank accounts; powers of attorney; absence of improper payments; taxes;
employee benefit matters; brokers; accredited investor status; and information
supplied for use in this Proxy Statement.
The representations and warranties made by the Empire Stockholders will
survive the merger. However, the obligation of the Empire Stockholders to
indemnify the Surviving Corporation for any inaccuracy or breach of these
representations and warranties is subject to certain limitations described below
under "--Indemnification Obligation of the Empire Stockholders."
Representations and Warranties Relating to Integrated
The Merger Agreement also contains various representations and
warranties made by Integrated. These representations and warranties will not
survive the merger.
Indemnification Obligation of the Empire Stockholders
The Empire Stockholders have agreed to indemnify the Surviving
Corporation and its successors, assigns, officers, directors, partners,
employees, servants and agents against any losses that result from any
inaccuracy or breach of any of the representations, warranties or agreements
made by the Empire Stockholders in the Merger Agreement. This indemnification
obligation of the Empire Stockholders is subject to the following qualifications
and limitations:
Time Limitation. The indemnification obligation of the Empire
Stockholders will generally terminate on the first anniversary of the merger or,
if later, on the 31st day after the Surviving Corporation files with the SEC a
Form 10-KSB in respect of 1999. However, certain indemnification obligations
will continue after such date as follows:
o any indemnification claim that is pending or asserted as of such
date may continue to be asserted and indemnified against;
o any claim based on a violation of the representations and
warranties contained in Section 5.5 of the Merger Agreement
(relating to capitalization and share ownership) may continue to
be asserted and shall be indemnified against at any time; and
o any claim based on a violation of the representations and
warranties contained in Section 5.25 of the Merger Agreement
(relating to taxes) may continue to be asserted
11
<PAGE>
and shall be indemnified against until the 181st day following the
expiration of the applicable statute of limitations (and, if
asserted prior to such time, may continue to be asserted and shall
be indemnified against).
Deductible. An amount of $100,000 is deductible from the aggregate
amount payable by the Empire Stockholders in respect of all inaccuracies and
breaches of the representations and warranties contained in the Merger
Agreement. However, this deductible does not apply with respect to any amount
payable in respect of any inaccuracy or breach of the representations and
warranties set forth in the following Sections of the Merger Agreement: 4.1
(relating to information supplied for use in this Proxy Statement); 5.5
(relating to capitalization and share ownership); 5.25 (relating to taxes); or
5.27 (relating to absence of brokers).
Conditions to the Merger
Completion of the Merger is subject to a number of conditions. These
include, among others, those set forth below. See "Material Terms of the
Merger--Conditions to the Merger."
Conditions Applicable to All Parties
The respective obligations of Integrated and Empire to complete the
merger are subject to a number of conditions, including among others:
o approval of the Merger Agreement by the stockholders of
Integrated as contemplated by this Proxy Statement;
o the shares issuable to the Empire Stockholders in the merger shall
have been authorized for listing on the American Stock Exchange;
and
o certain conditions relating to Empire's existing revolving credit
facility shall have been satisfied, including among others: (1)
the lenders shall have consented to the Merger Agreement and the
assumption of the credit facility by the Surviving Corporation,
(2) the "commitment" provided by the credit facility shall be at
least $25 million, (3) the date on which the facility terminates
shall be no earlier than March 31, 2001 and (4) upon completion of
the merger, there shall not be any default under the agreements
governing the credit facility.
Additional Conditions Applicable to Integrated
The obligation of Integrated to complete the merger is subject to a
number of additional conditions, including among others:
o since the date of the Merger Agreement, there shall not have
occurred any material adverse change in the financial condition,
results of operations, properties, or business of the Empire
Companies taken as a whole;
o there shall be in effect $10 million of key-man life insurance on
the life of Nathan Kahn (with the proceeds being payable to the
Surviving Corporation); and
o all of the issued and outstanding capital stock of Empire-Pacific
shall be owned by Empire, free and clear of all liens.
Additional Conditions Applicable to Empire
The obligation of Empire to complete the merger is subject to a number
of additional conditions, including among others:
12
<PAGE>
o since the date of the Merger Agreement, there shall not have
occurred any material adverse change in the financial condition of
Integrated and at the time of the Merger Integrated shall have (1)
a minimum net worth of at least $9.75 million and (ii) cash and
cash equivalents of at least $9.8 million;
o the Empire Stockholders shall have received evidence from the
American Stock Exchange that Integrated's listing will be
continued following the merger; and
o each of the directors of Integrated shall have executed a general
release in favor of Integrated with respect to all claims arising
prior to the merger, except that such release shall not release
(1) any rights such person may have to acquire securities of
Integrated under existing option or warrant agreements, (2) any
claims under existing indemnification agreements or (3) any claim
under the Merger Agreement.
Effective Time of the Merger
The merger will become effective upon the filing of a Certificate of
Merger with the Secretary of State of the State of Delaware. Such filing will be
made simultaneously with or promptly following the closing of the merger, which
will take place as soon as practicable following approval of the Merger
Agreement by the stockholders of Integrated and the satisfaction or waiver of
the other conditions to each party's obligation to consummate the merger.
Termination of the Merger Agreement
The Merger Agreement may be terminated at any time prior to completion
of the merger, whether before or after the approval by the stockholders of
Integrated, as follows:
o by the mutual consent of Integrated and the Empire Stockholders;
o by either Integrated or the Empire Stockholders, if the merger
shall not have been consummated prior to September 30, 1999,
unless such date is extended by mutual consent of Integrated and
the Empire Stockholders;
o by Integrated, if (1) any other party to the Merger Agreement
materially breaches in any material respect any of its material
obligations under the Merger Agreement and such breach is not
cured by such party within 10 days after being given notice of
such breach or (2) the representations and warranties of the
Empire Stockholders set forth in the Merger Agreement are not true
and correct in all material respects;
o by the Empire Stockholders, if (1) Integrated materially breaches
in any material respect any of its material obligations under the
Merger Agreement and such breach is not cured by Integrated within
10 days after being given notice of such breach, (2) the
representations and warranties of Integrated set forth in the
Merger Agreement are not true and correct in all material respects
or (3) the board of directors of Integrated withdraws its
recommendation of the merger or modifies such recommendation in
any manner adverse to Empire or the Empire Stockholders;
o by Integrated, if any event shall have occurred which renders any
of the conditions to Integrated's obligation to complete the
merger incapable of fulfillment;
o by the Empire Stockholders, if any event shall have occurred which
renders any of the conditions to their obligation to complete the
merger incapable of fulfillment;
13
<PAGE>
o by Integrated or the Empire Stockholders, if the stockholders of
Integrated fail to approve the Merger Agreement at a duly held
meeting of Integrated stockholders (including any adjournment
thereof) called for such purpose; and
o by the Empire Stockholders, if any director of Integrated (1)
becomes a participant in a solicitation in opposition to the
merger or (2) becomes a member of a group which tenders or
announces a tender for Integrated common stock.
Termination Fee
Integrated will be required to pay Empire a termination fee of
$250,000, if (a) any director of Integrated that owns shares of Integrated
common stock fails to vote all such shares in favor of the merger and (b) the
Merger Agreement is terminated because the requisite stockholder approval is not
obtained. Integrated will also be required to pay Empire a termination fee of
$250,000 if the Merger Agreement is terminated as a result of any director of
Integrated becoming a participant in a solicitation in opposition to the merger
or becoming a member of a group which tenders or announces a tender for
Integrated common stock.
Amendment of the Merger Agreement
To the extent permitted by applicable law, the Merger Agreement may be
amended by the parties thereto at any time before or after approval of the
Merger Agreement by the stockholders of Integrated or Empire.
Expenses of the Transaction
Whether or not the merger is consummated, all costs and expenses
incurred in connection with the Merger Agreement and the transactions
contemplated thereby (including, without limitation, investment banking, legal
and accountant fees and printing costs) will be paid by the party incurring such
costs and expenses, except that those costs and expenses incurred in connection
with the printing and filing of this Proxy Statement and the solicitation of
proxies will be shared equally by Integrated and Empire. Empire will bear all
costs and expenses in connection with satisfying the condition relating to its
credit facility described above under "--Conditions to the Merger." Any costs
that Empire is responsible for will be reflected in the Closing Date Balance
Sheet to the extent that such expenses are accrued and unpaid as of the Closing
Date.
Listing and Market Price Data
Integrated's common stock trades on the American Stock Exchange (the
"AMEX"). It is a condition to the merger that the shares of Integrated common
stock to be issued in the merger shall be authorized for listing on the AMEX.
On February 19, 1999, the last trading day prior to the public
announcement of the execution of the Merger Agreement, the closing sales price
of Integrated common stock on the AMEX was $1.625 per share. On August 5, 1999,
the last trading day prior to the date of this Proxy Statement, the closing
sales price of Integrated common stock on the AMEX was $1.938 per share.
Accounting Treatment
For accounting and other financial reporting purposes, the merger will
be treated as a "reverse acquisition." Under this treatment, the Surviving
Corporation will be treated as a
14
<PAGE>
continuation of Empire, and the merger will be treated as an issuance of shares
by Empire to the stockholders of Integrated in exchange for Integrated's cash.
Certain Federal Income Tax Consequences of the Merger
The merger is intended to qualify as a tax-free reorganization for
federal income tax purposes, in which case no gain or loss should be recognized
by Integrated, the Surviving Corporation or the stockholders of Integrated as a
result of the merger.
The tax discussion set forth above is included for general information
only and is based upon present law. No private letter ruling from the Internal
Revenue Service as to the tax consequences of the merger has been or will be
sought or obtained. Each Integrated stockholder should consult his or her tax
advisor as to the specific tax consequences of the merger to him or her,
including the application and effect of federal, state, local and other tax laws
and the possible effects of changes in federal law or other tax laws.
No Appraisal Rights
The stockholders of Integrated are not entitled to any right to an
appraisal of the value of their shares in connection with the merger under the
General Corporation Law of the State of Delaware.
15
<PAGE>
INTEGRATED SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth selected income statement and balance
sheet data of Integrated. The balance sheet data as of December 31, 1998, and
the income statement data for each of the years in the two-year period ended
December 31, 1998 have been derived from the consolidated financial statements
of Integrated, which have been audited by PricewaterhouseCoopers LLP,
independent accountants, and are included in Integrated's Annual Report on Form
10-KSB for the year ended December 31, 1998, which is attached as Annex G
hereto. The balance sheet data as of March 31, 1999, and the income statement
data for the three month periods ended March 31, 1998 and 1999, have not been
audited by independent accountants, but in Integrated's opinion reflect all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the financial condition and results of operations of
Integrated as of the dates and for the periods presented. The results of
operations for the three months ended March 31, 1999 are not necessarily
indicative of the results to be expected for the year ended December 31, 1999.
The data set forth below should be read in conjunction with, and are
qualified by reference to, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
and the notes thereto included in (1) Integrated's Annual Report on Form 10-KSB
for the year ended December 31, 1998, which is attached as Annex G hereto, and
(2) Integrated's Quarterly Report on Form 10-QSB for the quarterly period ended
March 31, 1999, which is incorporated by reference into this Proxy Statement.
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
------------------------------ ------------------------------------
<S> <C> <C> <C> <C>
1997 1998 1998 1999
---- ---- ---- ----
Statement of Operations Data : (unaudited)
Interest income, net $ 622,333 $ 546,920 $ 39,411 $ 123,759
General and administrative expenses - 488,543 92,810 197,957
------------- --------- -------- -----------
Income (loss) from continuing operations 622,333 58,377 46,601 (74,198)
Discontinued operations:
Loss from discontinued operations (3,166,236) (30,336) - -
Loss on disposal of discontinued operations (888,321) - - -
------------- -------- -----------
Loss from discontinued operations (4,054,557) (30,336) - -
------------- --------- -------- -----------
Net (loss) income $ (3,432,224) $ 28,041 $ 46,601 $ (74,198)
============= ========== ======== ===========
Earnings (loss) per share from continuing
operations-basic: $0.10 $0.01 $0.01 $(0.01)
</TABLE>
December 31, 1998 March 31, 1999
----------------- --------------
Balance Sheet Data: (unaudited)
Cash and cash equivalents $10,109,736 $10,115,955
Working capital 10,017,862 10,014,725
Total assets 10,192,526 10,189,530
Total liabilities 174,664 174,805
Stockholders' equity 10,017,862 10,014,725
16
<PAGE>
EMPIRE COMPANIES SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth selected income statement and balance
sheet data for Empire and Empire Pacific.
Empire
The table below sets forth selected income statement and balance sheet
data for Empire. The data (other than the pro forma data) for the years ended
December 31, 1996, 1997 and 1998 and as of December 31, 1997 and 1998 have been
derived from the financial statements of Empire, which have been audited by KPMG
LLP, independent accountants, and are included elsewhere in this Proxy
Statement. The data for the years ended December 31, 1994 and 1995 and as of
December 31, 1994, 1995 and 1996 have been derived from the financial statements
of Empire, which have been audited by KPMG LLP, independent accountants, but are
not contained in or incorporated by reference herein. The data (other than the
pro forma data) for the three months ended March 31, 1998 and 1999, and as of
March 31, 1999, have been derived from the unaudited financial statements of
Empire, and in Empire's opinion include all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation of the financial
condition and results of operations of Empire as of the dates and for the
periods presented. The results of operations for the three months ended March
31, 1999 are not necessarily indicative of results to be expected for the year
ending December 31, 1999. The data set forth below should be read in conjunction
with, and are qualified by reference to, "Empire Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements of Empire and the notes thereto included elsewhere in this Proxy
Statement.
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
------------------------------------------------------- ------------------------
1994 1995 1996 1997 1998 1998 1999
---- ---- ---- ---- ---- ----- ----
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales $100,379 $159,142 $119,716 $111,169 $101,163 $26,773 $21,132
Cost of goods sold 92,115 145,335 107,805 102,607 94,228 25,025 19,526
Selling, general and
administrative expenses 3,530 4,499 4,869 3,438 3,080 667 681
Interest expense, net 701 2,092 1,845 1,229 1,331 378 463
Income taxes 190 128 68 50 39 10 6
-------- -------- -------- -------- -------- ------- -------
Net income $ 3,843 $ 7,088 $ 5,129 $ 3,845 $ 2,485 $ 693 $ 457
======== ======== ======== ======== ======== ======= =======
Earnings per share $ 384 $ 709 $ 513 $ 385 $ 249 $ 69 $ 46
(unaudited)
Pro forma income taxes (1) 1,505 2,503 1,887 1,393 904 246 166
Pro forma net income (1) 2,527 4,713 3,310 2,502 1,621 457 297
Pro forma earnings per
share(1) 253 471 331 250 162 46 30
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------
1994 1995 1996 1997 1998 March 31, 1999
--------- -------- -------- -------- --------- --------------------
(unaudited)
Balance Sheet Data: (in thousands)
<S> <C> <C> <C> <C> <C> <C>
Cash $ 171 $ 553 $ 406 $ 560 $ 147 $ 331
Trade accounts receivable, net 25,768 32,571 20,409 22,975 20,439 18,649
Inventories 6,776 17,561 16,184 23,055 14,005 14,681
Other current assets 112 130 1,351 120 148 211
Furniture and equipment, net 71 84 75 53 80 77
Other assets 29 - - 402 367 352
Total assets 34,302
Notes payable - banks 15,539 25,200 16,100 17,700 15,900 19,050
Notes payable-stockholders - - - - - 10,922(2)
Trade accounts payable 8,810 14,303 10,637 17,276 7,835 4,232
Accrued expenses 1,258 373 481 457 529 190
Stockholders' equity 7,320 11,023 11,207 11,732 10,922 (93)
(unaudited)
Pro forma accrued expenses (1) $ 2,574 $ 4,063 $ 5,990 $ 7,309 $ 8,245 $ 8,091
Pro forma stockholders' equity (1) 6,005 7,333 5,698 4,880 3,206 (7,994)
</TABLE>
- ------------------------------
(1) Empire has heretofore been taxed as a Subchapter S Corporation. In general,
the income or loss of a Subchapter S Corporation is passed through to its
owners rather than being subjected to tax at the entity level. Empire's
status as a Subchapter S Corporation will terminate upon completion of the
merger. Pro forma income taxes reflects a provision for income taxes as if
Empire had been liable for federal and state income taxes as a taxable
corporate entity for all periods presented. Pro forma net income, pro forma
earnings per share, pro forma accrued expenses and pro forma stockholders'
equity reflect such pro forma income taxes.
(2) For information concerning these notes, see "Empire Management's Discussion
and Analysis of Financial Condition and Results of Operations--Distribution
of Surplus Net Worth."
Empire-Pacific
The table below sets forth selected income statement and balance sheet
data for Empire-Pacific. This data as of and for the years ended December 31,
1996, 1997 and 1998 and as of and for the three months ended March 31, 1998 and
1999, have been derived from the unaudited financial statements of
Empire-Pacific. These financial statements were prepared in accordance with
generally accepted accounting principles in Australia. These principles, as they
relate to the selected historical financial data presented below, do not differ
in any material respects from generally accepted accounting principles in the
United States of America.
18
<PAGE>
<TABLE>
<CAPTION>
(unaudited--in thousands)
Three Months Ended
Year Ended December 31, March 31,
-------------------------------------------- --------------------------------------
1996 1997 1998 1998 1998 1999 1999
------ ------ ------ ------------ -------- -------- ------------
(in US (in Australian (in US
(in Australian dollars) dollars)(1) dollars) dollars)(1)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Australian GAAP
Commission income $ 5 $ 283 $ 274 $ 172 $ 50 $ 60 $ 38
General and administrative
expenses 234 365 269 169 61 68 43
Net income (loss) (229) (82) 5 3 (11) (8) (5)
<CAPTION>
December 31,
1996 1997 1998 1998 March 31, 1999
------ ------ ------ ----------- --------------------------
(in
(in US Australian (in US
(in Australian dollars) dollars)(1) dollars) dollars)(1)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Australian GAAP
Cash $ 8 $ 4 $ 1 $ 1 $ 5 $ 3
Other current assets 1 - - - - -
Net, furniture and equipment 5 6 5 3 5 3
Loan from stockholders 208 - - - - -
Loan from Empire - 312 312 191 311 198
Accrued expenses 35 9 - - 13 8
Stockholders' deficit (229) (311) (306) (187) (314) (200)
</TABLE>
- ------------------------------
(1) The translation of Australian dollar amounts into US dollar amounts is
unaudited and included solely for the convenience of readers outside of
Australia and has been performed using the following exchange rates: (i) in
the case of income statement data for the year ended December 31, 1998, the
average exchange rate during such period of Australian dollars 0.6291 to US
dollar 1.00, (ii) in the case of income statement data for the three months
ended March 31, 1999, the average exchange rate during such period of
Australian dollars 0.6330 to US dollar 1.00, (iii) in the case of balance
sheet data as of December 31, 1998, the exchange rate as of such date of
Australian dollars 0.6123 to US dollar 1.00, and (iv) in the case of
balance sheet data as of March 31, 1999, the exchange rate as of such date
of Australian dollars 0.6352 to US dollar 1.00. These translations should
not be construed as a representation that Australian dollar amounts could
be converted to US dollars at these or any other rates.
19
<PAGE>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
For accounting and other financial reporting purposes, the merger will
be treated as a "reverse acquisition." Under this treatment, the Surviving
Corporation will be treated as a continuation of Empire, and the merger will be
treated as an issuance of shares by Empire to the stockholders of Integrated in
exchange for Integrated's cash. In view of this treatment, the following
unaudited pro forma consolidated financial statements do not include the
historical financial position or results of operations of Integrated.
The following unaudited pro forma consolidated financial statements are
based on the financial statements of Empire and the financial statements of
Empire-Pacific included elsewhere in this Proxy Statement and are adjusted to
reflect:
o completion of the merger and Empire-Pacific becoming a subsidiary
of Empire;
o treatment of Empire as a C Corporation for income tax purposes;
o the use of Integrated's cash to repay indebtedness under the
Empire credit facility following the merger;
o compensation to be paid to Nathan Kahn and Sandra Kahn pursuant to
their respective employment agreements that will be entered into
concurrently with the merger; and
o in the case of income statement data, the issuance by Empire of
certain promissory notes to the Empire Stockholders representing
the total stockholders' equity of Empire as of December 31, 1998
and the accrual of interest thereon.
The unaudited pro forma consolidated balance sheet assumes that the
transactions outlined above were consummated on March 31, 1999. The unaudited
pro forma consolidated income statement assumes that the transactions outlined
above were consummated as of January 1, 1998. The unaudited pro forma
consolidated financial statements should be read in conjunction with the
consolidated financial statements of Integrated and the financial statements of
the Empire Companies included elsewhere in, or incorporated by reference in,
this Proxy Statement.
The unaudited pro forma financial statements do not purport to be
indicative of the results that would have actually been obtained had the
transactions outlined above occurred on the dates indicated or of the results
that may be obtained in the future. The unaudited pro forma consolidated
financial statements are provided for informational purposes only.
20
<PAGE>
<TABLE>
<CAPTION>
Surviving Corporation
Unaudited Pro Forma Consolidated Balance Sheet
March 31, 1999
Empire
Empire Pacific Pro Forma
Historical Historical Adjustments Pro Forma
------------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Assets:
Cash $ 331,407 $ 2,840 $ - $ 334,247
Trade accounts receivable 18,649,310 - - 18,649,310
Inventories 14,680,673 - - 14,680,673
Other current assets 210,844 168 (35,403)D 175,609
Total current assets 33,872,234 3,008 (35,403) 33,839,839
Furniture and equipment 284,385 7,763 - 292,148
Less: accumulated depreciation (206,959) (4,291) - (211,250)
Net furniture and equipment 77,426 3,472 - 80,898
Other assets 352,150 - (202,150)A 150,000
------------- ----------- ------------ ------------
Total assets $ 34,301,810 $ 6,480 $ (237,553) $ 34,070,737
============= =========== ============ ============
Liabilities and Stockholders' Equity
Notes payable - banks $ 19,050,000 $ - $ (9,696,150)B $ 9,353,850
Notes payable to stockholders 10,922,475 - (297,256)C 10,625,219
Trade accounts payable 4,232,406 - 319,597 D 4,552,003
Accrued expenses 190,312 8,203 - 198,515
------------- ----------- ------------ ------------
Total current liabilities 34,395,193 8,203 (9,673,809) 24,729,587
------------- ----------- ------------ ------------
Loan from Empire Resources, Inc. - 198,095 (198,095)A -
------------- ----------- ------------ ------------
Total liabilities 34,395,193 206,298 (9,871,904) 24,729,587
------------- ----------- ------------ ------------
Stockholders' Equity:
Preferred stock, $.01 par value, 5,000,000
shares authorized; none issued and
outstanding (historical and pro forma)
Common stock, no par value (Empire), $.01 par
value (Empire-Pacific), $.01 par value
(Surviving Corporation pro forma); 200
shares authorized (Empire), 1,000 shares
authorized (Empire-Pacific), 40,000,000
shares authorized (Surviving Corporation
pro forma);10 shares issued and
outstanding (Empire), 1,000 shares issued
and outstanding (Empire-Pacific),
15,524,162 issued and outstanding
(Surviving Corporation pro forma) 50,000 - (50,000)C -
155,242 B 155,242
Additional paid-in capital - - 9,540,908 B 9,185,908
(355,000)D
Cumulative translation adjustment - 42,673 - 42,673
Accumulated deficit (143,383) (242,491) (4,055)A (42,673)
347,256 C
------------- ----------- ------------ ------------
Total stockholders' equity (deficit) (93,383) (199,818) 9,634,351 9,341,150
------------- ----------- ------------ ------------
Total liabilities and stockholders'
equity $ 34,301,810 $ 6,480 $ (237,553) $ 34,070,737
============ =========== ============ ============
</TABLE>
- -----------------------
21
<PAGE>
A. To record the elimination of the outstanding loan from Empire to
Empire-Pacific. Since the functional currency of Empire-Pacific is the
Australian dollar, the adjustment also eliminates the transaction loss recorded
by Empire-Pacific relating to the translation of the loan, which is denominated
in U.S. dollars.
B. To record the recapitalization of the Surviving Corporation and
issuance of 6,139,401 shares to the Integrated stockholders in exchange for the
net cash of Integrated, which will be used to repay a portion of the outstanding
indebtedness under the Empire credit facility. Net cash reflects Integrated's
cash balance at March 31, 1999, net of accounts payable and accrued expenses as
of such date and expected costs of the merger of $245,000 to be borne by
Integrated.
C. To record a contribution by the Empire Stockholders to the Surviving
Corporation (effected by a reduction in the principal amount of the promissory
notes payable to the Empire Stockholders) in order to eliminate the pro forma
net capital deficiency of Empire and Empire-Pacific at March 31, 1999, as
required by the provisions of the Merger Agreement described under "Material
Terms of the Merger Agreement--Closing Date Balance Sheet and Related
Adjustments."
D. To reflect costs of the merger to be borne by Empire.
22
<PAGE>
Surviving Corporation
Unaudited Pro Forma Consolidated Income Statement
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Empire
Empire Pacific Pro Forma
Historical Historical Adjustments Pro Forma
------------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 101,163,278 $ - $ - $101,163,278
Cost of goods sold 94,227,249 - (172,365)A 94,054,884
------------- ----------- ------------ ------------
Gross profit 6,936,029 - 172,365 7,108,394
------------- ----------- ------------ ------------
Selling, general and administrative expenses 3,079,983 169,506 12,226 B 3,942,669
243,000 C
437,954 J
------------- ----------- ------------ ------------
Operating income (loss) 3,856,046 (169,506) (520,815) 3,165,725
Interest and other (expense) income (1,331,056) 172,365 (172,365)A (1,218,665)
767,740 D
(655,349)E
------------- ----------- ------------ ------------
Income before income taxes 2,524,990 2,859 (580,789) 1,947,060
Income taxes 39,300 - 658,138 F 697,438
------------- ----------- ------------ ------------
Net income $ 2,485,690 $ 2,859 $(1,238,927) $ 1,249,622
============= =========== ============ =============
Pro forma earnings per share:
Basic $ 0.45 $ 0.11
============= =============
Diluted $ 0.45 $ 0.10
============= =============
Shares used in the computation of earnings per share:
Basic 5,560,250 G 11,699,651 H
============== =============
Diluted 5,560,250 G 11,961,279 I
============== =============
</TABLE>
- ----------------------------
A. To eliminate commissions paid by Empire to Empire-Pacific.
B. To record the transaction loss of Empire-Pacific on the conversion
of the dollar denominated loan from Empire.
C. To record pro forma expense for compensation for Nathan and Sandra
Kahn, pursuant to their respective employment agreements that will be entered
into concurrently with the merger, as if such employment agreements had been in
effect since January 1, 1998.
D. To reduce the interest expense recorded by Empire on borrowings
under the Empire credit facility as a result of the pro forma adjustment for the
application of the Integrated cash to reduce outstanding borrowings under the
Empire credit facility, as if such transactions had occurred as of January 1,
1998. Outstanding borrowings under the Empire credit facility accrued interest
at an average annual rate of 7.92% for the year ended December 31, 1998.
23
<PAGE>
E. To record interest expense at a rate of 6% per annum on promissory
notes payable to the Empire Stockholders in the aggregate amount of $10.9
million, as described under "Empire Management's Discussion and Analysis of
Financial Condition and Results of Operations--Distribution of Surplus Net
Worth", as if such notes had been outstanding since January 1, 1998.
F. To record the provision for income taxes as if Empire had been a C
Corporation since January 1, 1998.
G. Shares used in the computation of basic earnings per share were
based on the 10 shares of Empire common stock outstanding as of December 31,
1998 and adjusted for the 938,476.1 exchange ratio contemplated by the merger
and as further adjusted to exclude the 3,824,511 Contingent Shares which will be
placed in escrow, as described under "Material Terms of the Merger
Agreement--Earn-Out Formula." The Contingent Shares were excluded from the
computation of earnings per share, in accordance with the provisions of
Statement of Financial Accounting Standards No. 128, Earnings per Share ("FAS
128").
H. Shares used in the computation of basic earnings per share were
based on the 15,524,162 shares that will be outstanding after the merger,
excluding the 3,824,511 Contingent Shares which will be placed in escrow, as
described under "Material Terms of the Merger Agreement--Earn-Out Formula." The
Contingent Shares were excluded from the computation of earnings per share in
accordance with the provisions of FAS 128.
I . Shares used in the computation of diluted earnings per share
include an additional 261,628 shares assuming the conversion of an aggregate
660,882 outstanding warrants and options with exercise prices per share equal to
or less than $2.00, using the treasury stock method, and an assumed price per
share of $2.00.
J. Concurrently with the merger, the Kahns will transfer to Mr. Wrubel
469,238 shares ("Restricted Shares") of common stock of the Surviving
Corporation, which represents a portion of the shares to be received by the
Kahns in the merger. The transfer of the Restricted Shares from the Kahns to Mr.
Wrubel will not involve the issuance of any shares by the Surviving Corporation
or any cash expenditure by the Surviving Corporation. However, under applicable
accounting rules, the transfer of the Restricted Shares from the Kahns to Mr.
Wrubel will be treated the same as if the Surviving Corporation had issued such
shares to Mr. Wrubel as compensation for services and, accordingly, the
Surviving Corporation will be required to recognize an expense relating thereto.
See "Empire Management's Discussion and Analysis of Financial Condition and
Results of Operations--Accounting Treatment of Restricted Stock Agreement." The
adjustment to selling, general and administrative expenses in the amount of
$437,954 reflects the expenses relating to the Restricted Shares that would have
been recognized during the period had the grant of the Restricted Shares
occurred at January 1, 1998 (assuming a fair market value per share as of the
grant date of $2.00).
24
<PAGE>
Surviving Corporation
Unaudited Pro Forma Consolidated Income Statement
For the Three Months Ended March 31, 1999
<TABLE>
<CAPTION>
Empire
Empire Pacific Pro Forma
Historical Historical Adjustments Pro Forma
------------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 21,132,340 $ - $ - $ 21,132,340
Cost of goods sold 19,525,716 - (40,003)A 19,485,713
------------- ----------- ------------ ------------
Gross profit 1,606,624 - 40,003 1,646,627
Selling, general and administrative expenses 680,870 43,554 1,739 A 845,195
4,055 B
65,209 C
49,768 J
------------- ----------- ------------ ------------
Operating income (loss) 925,754 (43,554) (80,768) 801,432
Interest and other (expense) income (462,723) 38,264 (38,264)A (379,697)
174,046 D
(91,020)E
------------- ----------- ------------ ------------
Income before income taxes 463,031 (5,290) (36,006) 421,735
Income taxes 6,414 - 144,567 F 150,981
------------- ----------- ------------ ------------
Net income $ 456,617 $ (5,290) $ (180,573) $ 270,754
============= =========== ============ ============
Pro forma earnings per share
Basic $ 0.08 $ 0.02
============= ============
Diluted $ 0.08 $ 0.02
============= ============
Shares used in the computation of earnings
per share
Basic 5,560,250 G 11,699,651 H
============= ============
Diluted 5,560,250 G 11,961,279 I
</TABLE>
- --------------------------------
A. To eliminate commissions paid by Empire to Empire-Pacific.
B. To record the transaction loss of Empire-Pacific on the conversion
of the dollar denominated loan from Empire.
C. To record pro forma expense for compensation for Nathan and Sandra
Kahn, pursuant to their respective employment agreements that will be entered
into concurrently with the merger, as if such employment agreements had been in
effect since January 1, 1998.
D. To reduce the interest expense recorded by Empire on borrowings
under the Empire credit facility as a result of the pro forma adjustment for the
application of the $9,696,150 of Integrated cash to reduce outstanding
borrowings under the Empire credit facility, as if such transactions had
occurred as of January 1, 1998. Outstanding borrowings under the Empire credit
facility accrued interest at an average rate of 7.18% for the quarter ended
March 31, 1999.
25
<PAGE>
E. To record interest expense at a rate of 6% per annum on promissory
notes payable to the Empire Stockholders in the aggregate amount of $10.9
million, as described under "Empire Management's Discussion and Analysis of
Financial Condition and Results of Operations--Distribution of Promissory
Notes", as if such notes had been outstanding since January 1, 1998.
F. To record the provision for income taxes as if Empire had been a C
Corporation since January 1, 1998.
G. Shares used in the computation of basic earnings per share were
based on the 10 shares of Empire common stock outstanding as of March 31, 1999
and adjusted for the 938,476.1 exchange ratio contemplated by the merger and as
further adjusted to exclude the 3,824,511 Contingent Shares which will be placed
in escrow, as described under "Material Terms of the Merger Agreement--Earn-Out
Formula." The Contingent Shares were excluded from the computation of earnings
per share, in accordance with the provisions of FAS 128.
H. Shares used in the computation of basic earnings per share were
based on the 15,524,162 shares that will be outstanding after the merger,
excluding the 3,824,511 Contingent Shares which will be placed in escrow, as
described under "Material Terms of the Merger Agreement--Earn-Out-Formula." The
Contingent Shares were excluded from the computation of earnings per share in
accordance with the provisions of FAS 128.
I. Shares used in the computation of diluted earnings per share include
an additional 261,628 shares assuming the conversion of an aggregate 660,882
outstanding warrants and options with exercise prices per share equal to or less
than $2.00, using the treasury stock method, and an assumed price per share of
$2.00.
J. Concurrently with the merger, the Kahns will transfer to Mr. Wrubel
469,238 shares ("Restricted Shares") of common stock of the Surviving
Corporation, which represents a portion of the shares to be received by the
Kahns in the merger. The transfer of the Restricted Shares from the Kahns to Mr.
Wrubel will not involve the issuance of any shares by the Surviving Corporation
or any cash expenditure by the Surviving Corporation. However, under applicable
accounting rules, the transfer of the Restricted Shares from the Kahns to Mr.
Wrubel will be treated the same as if the Surviving Corporation had issued such
shares to Mr. Wrubel as compensation for services and, accordingly, the
Surviving Corporation will be required to recognize an expense relating thereto.
See "Empire Management's Discussion and Analysis of Financial Condition and
Results of Operations--Accounting Treatment of Restricted Stock Agreement." The
adjustment to selling, general and administrative expenses in the amount of
$49,768 reflects the expenses relating to the Restricted Shares that would have
been recognized during the period had the grant of the Restricted Shares
occurred at January 1, 1998 (assuming a fair market value per share as of the
grant date of $2.00).
26
<PAGE>
CAPITALIZATION
The following table shows, as of March 31, 1999, (1) the actual
capitalization of each of Integrated and Empire and (2) the pro forma
capitalization of the Surviving Corporation. The pro forma capitalization gives
effect to following transactions, as if they had occurred as of March 31, 1999:
o completion of the merger and Empire-Pacific becoming a subsidiary
of Empire;
o treatment of Empire as a C Corporation for income tax purposes;
o the use of Integrated's cash to repay indebtedness under the Empire
credit facility following the merger; and
o a contribution by the Empire Stockholders to the Surviving Company
(effected by a reduction in the principal amount of the promissory
notes payable to the Empire Stockholders) in order to eliminate the
pro forma net capital deficiency of Empire and Empire-Pacific, as
required by the provisions of the Merger Agreement described under
"Material Terms of the Merger Agreement--Closing Date Balance Sheet
and Related Adjustments."
The pro forma capitalization shown below does not reflect additional
borrowings made by Empire under its credit facility subsequent to March 31, 1999
in order fund working capital requirements. See "Empire Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources." The information below should be read in conjunction with (1)
the historical financial statements of Integrated and the Empire Companies
appearing elsewhere herein or incorporated by reference herein, (2) the pro
forma financial statements appearing elsewhere herein and (3) "Empire
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Distribution of Surplus Net Worth."
<TABLE>
<CAPTION>
March 31, 1999
------------------------------------------------
Pro Forma
Surviving
Integrated Empire Corporation
------------ ----------- -----------
<S> <C> <C> <C>
Notes payable - banks $ - $19,050,000 $ 9,353,850
Notes payable to stockholders - 10,922,475 10,625,219
Stockholders' equity:
Preferred stock, $0.01 par value, 5,000,000 shares
authorized; none issued and outstanding (historical and
pro forma) - - -
Common stock, $0.01 par value (Integrated), no par value
(Empire), $0.01 par value (Surviving Corporation pro
forma); 40,000,000 shares authorized (Integrated), 200
shares authorized (Empire), 40,000,000 shares authorized
(Surviving Corporation pro forma); 6,139,401 shares issued
and outstanding (Integrated), 10 shares issued and
outstanding (Empire), 15,524,162 shares issued and
outstanding (Surviving Corporation pro forma) 62,425 50,000 155,242
Additional paid-in capital 21,768,888 - 9,185,908
Treasury stock, at cost, 107,048 shares (217,500) - -
Cumulative translation adjustment - - 42,673
Accumulated deficit (11,599,088) (143,383) (42,673)
----------- -------- --------
Total stockholders' equity (deficit) 10,014,725 (93,383) 9,341,150
----------- ----------- -----------
Total capitalization $10,014,725 $29,879,092 $29,320,219
=========== =========== ===========
</TABLE>
27
<PAGE>
MARKET PRICE DATA AND DIVIDEND POLICY
Market Price Data
The Integrated common stock commenced trading on the AMEX on October 1,
1996, under the symbol ITH.
The table below sets forth for the periods indicated the high and low
sales prices for the Integrated common stock as reported on the AMEX.
High Low
1996
Fourth Quarter 5 3/8 2
1997
First Quarter............................... 2 5/8 1 1/8
Second Quarter.............................. 1 7/8 7/8
Third Quarter............................... 1 15/16 1 1/4
Fourth Quarter.............................. 2 1/16 1 1/4
1998
First Quarter............................... 1 13/16 1 1/8
Second Quarter.............................. 1 11/16 1 3/16
Third Quarter............................... 1 5/8 1 1/8
Fourth Quarter.............................. 1 3/4 1 3/16
1999
First Quarter .............................. 1 7/8 1 3/8
Second Quarter ............................. 2 3/4 1 3/8
Third Quarter (through August 5, 1999)...... 2 5/8 1 13/16
On February 19, 1999, the last trading day prior to the public
announcement of the execution of the Merger Agreement, the closing sales price
of Integrated common stock on the AMEX was $1.625 per share. On August 5, 1999,
the last trading day prior to the date of this Proxy Statement, the closing
sales price of Integrated common stock on the AMEX was $1.938 per share.
Empire and Empire-Pacific are privately-held corporations, and no
public trading market exists for their common stock.
28
<PAGE>
Dividend Policy
No cash dividends have ever been declared by Integrated on its common
stock. We expect that following the merger, the Surviving Corporation will
retain its earnings to finance the development and growth of its business.
Accordingly, we do not anticipate that any dividends will be declared on the
common stock for the foreseeable future. Future payment of cash dividends, if
any, will depend on the Surviving Corporation's financial condition and results
of operations, business conditions, capital requirements, restrictions contained
in agreements, future prospects and other factors deemed relevant by the board
of directors of the Surviving Corporation.
COMPARATIVE UNAUDITED PER SHARE DATA
The following table shows for the periods and as of the dates
indicated:
o net income (loss) from continuing operations per share of
Integrated common stock on a historical and pro forma basis;
o net income from continuing operations per share of Empire common
stock on a historical and pro forma equivalent basis;
o book value per share of Integrated common stock on a historical
and pro forma basis; and
o book value per share of Empire common stock on a historical and
pro forma equivalent basis.
The information in the table should be read in conjunction with (1)
the historical financial statements of Integrated and Empire appearing elsewhere
herein or incorporated by reference herein and (2) the pro forma financial
statements appearing elsewhere herein.
The pro forma data for Integrated for the year ended December 31, 1998,
gives effect to the following transactions, as if they had occurred as of the
beginning of the period:
o the issuance by Empire of certain promissory notes to the Empire
Stockholders as described under "Empire Management's Discussion
and Analysis of Financial Condition and Results of
Operations--Distribution of Surplus Net Worth"; and
o completion of the merger and Empire-Pacific becoming a subsidiary
of Empire.
The pro forma data for Integrated for the three months ended March 31,
1999 and as of March 31, 1999, gives effect to completion of the merger and
Empire-Pacific becoming a subsidiary of Empire, as if such transactions had
occurred as of the beginning of the period, in the case of net income data, and
as of the end of the period, in the case of book value data.
The pro forma equivalent data for Empire is equal to the pro forma data
for Integrated multiplied by 556,025. This multiplier represents the exchange
ratio based upon the issuance to the Empire Stockholders of 5,560,250 shares of
common stock of the Surviving Corporation (excluding 3,824,511 Contingent
Shares) in exchange for the 10 shares of Empire common stock that are currently
outstanding.
The pro forma data is provided for your information. However, this data
may not be indicative of the actual results that would have been achieved had
the merger occurred at the beginning or end of the period.
29
<PAGE>
<TABLE>
<CAPTION>
Integrated:
<S> <C>
net income from continuing operations per share for year ended
December 31, 1998.................................................. $0.01
pro forma net income from continuing operations per share for year
ended December 31, 1998............................................ $0.11
net loss from continuing operations per share for three months ended
March 31, 1999..................................................... $(0.01)
pro forma net income from continuing operations per share for three
months ended March 31, 1999........................................ $0.02
book value per share at March 31, 1999............................. $1.63
pro forma book value per share at March 31, 1999................... $0.60
<CAPTION>
Empire:
<S> <C>
net income from continuing operations per share for year ended
December 31, 1998.................................................. $248,569.00
pro forma equivalent net income from continuing operations per share
for year ended December 31, 1998................................... $59,388.19
net income from continuing operations per share for three months
ended March 31, 1999............................................... $45,661.70
pro forma equivalent net income from continuing operations per share
for three months ended March 31, 1999.............................. $12,867.56
book value per share at March 31, 1999............................. $(9,338.30)
pro forma equivalent book value per share at March 31, 1999(1)..... $334,569.62
</TABLE>
- -----------------------
(1) Including the Contingent Shares in the calculation, such pro forma
equivalent book value per share is $564,696.89
30
<PAGE>
THE COMPANIES
Integrated
Integrated was formerly in the business of designing and marketing
certain computer-related products. Integrated completely discontinued these
operations at the end of 1997 because it was unable to achieve profitability.
Since that time, Integrated's only activity has been seeking a business
combination opportunity that would enable it to redeploy its remaining cash
($10.1 million at June 30, 1999) into a new operating business.
Empire Resources and Empire-Pacific
Empire is a distributor of value added, semi-finished aluminum products.
Empire-Pacific is an affiliate of Empire that acts as Empire's sales agent in
Australia. Empire-Pacific will become a subsidiary of Empire before the merger
is completed. The principal executive offices of Empire and Empire-Pacific are
located at One Parker Plaza, Fort Lee, NJ 07024.
RISK FACTORS
Empire's Foreign Supply Sources are Subject to Substantial Risks.
Empire 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 Empire
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
Empire's business. Although the trend in the markets in which Empire operates
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 has Materially Impacted Empire's Operations.
During the last several years, consolidations have been taking place
among aluminum suppliers. As indicated under "Empire Management's Discussion and
Analysis of Financial Condition and Results of Operations," two of Empire's
principal suppliers were acquired in 1996 and 1997, with resultant negative
impact on its sales volume. Although Empire believes that it has effectively
replenished its sources of supply, there can be no assurance that Empire 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.
Empire is Highly Dependent on Supplier Relationships.
Empire's operations and its sales strategy are highly dependent upon
its supplier relationships. Empire's strategy also is based in large part upon
its ability to maintain and increase its supplier base, permitting it to
purchase sufficient materials at competitive prices. As a result, the
termination or limitation by any principal supplier of its relationship with
Empire could have a material adverse effect on Empire's business.
Empire's loss of any one of its material suppliers (or material default
by any such supplier in its obligations to Empire) due to bankruptcy, financial
difficulties, expropriation, social unrest,
31
<PAGE>
destruction, sabotage, strikes, acquisition by a person or entity unwilling to
provide products to Empire, or for any other reason, would have at least a
short-term material adverse effecton Empire's business.
Changing Aluminum Prices Could Impact Empire's Profit Margins.
Empire 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 appropriate
discounts for quantity purchases. The aluminum industry is highly cyclical, and
the prices that Empire 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.
If Suppliers Fail to Provide Products of the Quality They Certify, Customer
Relationships and Prices Could be Negatively Affected.
Empire's relationships with its customers depend, in part, on its
ability to deliver products of the quality specified by those customers. Empire
obtains certifications from its suppliers as to the quality of the products
being supplied. However, if the product is not of the quality certified, Empire
may be forced to buy product of the specified quality from another source to
fulfill the customer's order. While Empire would then be left with a claim
against the supplier for any loss sustained by Empire, Empire may not be able to
successfully prosecute these claims, particularly in foreign jurisdictions.
Empire is Exposed to Credit Risk From its Customers.
Empire does not require collateral for customer receivables. Empire has
significant balances owing from customers that operate in cyclical industries
and under leveraged conditions, which may impair the collectability of these
receivables. Empire carries credit insurance with a 15% co-pay provision and
specific limits on each customer's receivables. Empire'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 in their
obligations to Empire) could have a material adverse effect on Empire's
financial condition.
Increased Tariffs Could Adversely Affect Empire's Financial Condition.
During 1998, in excess of 20% of Empire's sales represented sales of
aluminum products from countries considered developing countries under the
generalized system of preference, which program expired on June 30, 1999.
Although Congress is expected to renew the program in 1999, if it does not take
such action, then imports from developing countries will 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, Empire's
profit margins could be negatively affected.
Antidumping and Other Duties Could be Imposed on Empire, its Suppliers and
Their Products.
The imposition of an antidumping or other increased duty on any
products imported by Empire could have a material adverse effect on Empire's
financial condition. For example, Empire's imports of aluminum products could be
subject to an antidumping duty. Under United States law, an antidumping duty may
be imposed on any imports if two conditions are met. First,
32
<PAGE>
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 must determine that the United States industry is materially injured
or threatened with material injury by reason of the imports. The Commission'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 Commission is required to analyze the volume of
imports, the effect of imports on United States prices for like merchandise, and
the effects the imports have on United States producers of like products, taking
into account many factors, including lost sales, market share, profits,
productivity, return on investment, and utilization of production capacity.
If Empire Fails to Deliver Products on a Timely Basis, it May Suffer Losses.
Interruption of shipping schedules upon which Empire relies for foreign
purchases could result in untimely deliveries to Empire's customers or cause
Empire to purchase the products in the United States at a higher cost in order
to meet delivery schedules. Consequently, Empire's profit margins could be
reduced or it could suffer losses. Empire assures its customers that it will
deliver products within the period specified in their purchase orders. Any
interruption of the means of transportation used by Empire to transport products
could cause delays in delivery of products, could force Empire 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.
Empire is Subject to Competition From Companies With Captive Sources of Supply.
Many of Empire's competitors are significantly larger than Empire and
many have captive sources of supply and access to greater capital and other
resources. Thus, if Empire's sources of supply are interrupted, its competitors
could be in a position to capture Empire's customers.
After the Merger, Integrated will be Controlled by the Current Stockholders of
Empire.
After the merger, the Empire Stockholders will have approximately 61%
of the combined voting power of all outstanding shares of Integrated common
stock. As a result, acting together, they would be able to effectively control
virtually all matters requiring approval by the stockholders of the Surviving
Corporation.
Empire is Dependent on its President.
Empire is highly dependent on the services of its President, Nathan
Kahn, the loss of whom could have a significant adverse impact on Empire's
business.
Third Party Year 2000 Problems Could Affect Empire
Some computer software programs and computer hardware and computer
chips embedded in operating systems may not recognize correctly dates beginning
on and after January 1, 2000. This could result in those programs, hardware or
systems becoming inoperable or experiencing other adverse consequences. Empire
has reviewed its internal computer software programs and hardware and believes
that they will be year 2000 compliant before January 1, 2000. Empire's costs in
connection with this review and making its software and hardware year 2000
compliant have not been and are not expected to be material.
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<PAGE>
Empire has sought assurances from its suppliers, shippers and customers
that their operations are year 2000 compliant, and has received assurances from
many of them. However, Empire has no control over their compliance efforts.
Furthermore, most of Empire's suppliers are located in foreign countries in
which companies may not be as advanced in achieving year 2000 compliance as
companies in the United States. There can be no assurance that year 2000
problems at Empire's suppliers or shippers will not interfere with Empire's
ability to obtain supplies in a timely manner, if at all. Any such occurrence
would have a material adverse effect on Empire's business. Furthermore, year
2000 problems may have a negative impact on the general economy or on the
ability of businesses generally to receive essential services (such as
telecommunications, banking services, etc.).
The Large Number of Integrated Shares Eligible for Future Sale Could Adversely
Affect the Market for those Shares.
Integrated cannot predict the affect, if any, that future sales of
Integrated common stock or the availability of Integrated common stock for
future sales, will have on the market price of Integrated common stock. After
the merger, 15,524,162 shares of Integrated common stock will be issued and
outstanding, of which 9,384,761 shares will be issued to the Empire Stockholders
pursuant to the merger. The shares issued in the merger will be subject to
certain transfer restrictions because (1) they will not be registered under the
Securities Act of 1933 and, therefore, may not be sold unless they are
registered or are sold under an exemption from registration and (2) 3,824,511 of
the shares to be issued to the Empire Stockholders are Contingent Shares and may
not be sold prior to the end of the two-year earn-out period applicable to these
shares. Nevertheless, these shares, other than the Contingent Shares, may be
sold in the public market without registration after a one-year holding period
has elapsed (subject to certain volume and other restrictions on sale in the
case of shares held by affiliates of the Surviving Corporation, which would
include the Empire Stockholders).
THE MEETING
Purposes of the Meeting
The Merger
At the meeting, you will be asked to consider and vote upon the
approval and adoption of the Merger Agreement. The merger will occur only if
this proposal is approved.
The Integrated board of directors believes that the merger is fair to
you, and is in your best interests, and recommends a vote "for" the proposal to
approve and adopt the Merger Agreement. This recommendation was made
unanimously, except that Simon Kahn (who is the brother of Nathan Kahn) did not
participate.
Election of Directors and Ratification of Auditors
At the meeting, you will also be asked to elect directors and ratify
the appointment of KPMG LLP (effective upon completion of the merger) as
independent auditors for the fiscal year ending December 31, 1999.
Date, Time and Place of Meeting
The meeting will be held on September 15, 1999 at 9:30 a.m. local time,
at 1585 Broadway, 26th Floor, New York, New York 10036.
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<PAGE>
Record Date; Voting Rights
The Board has fixed the close of business on July 19, 1999 as the
record date for determining holders of Integrated common stock entitled to
notice of, and to vote at, the meeting. As of the record date, there were
6,139,401 shares of Integrated common stock issued and outstanding. You will
have one vote at the meeting for each share of Integrated common stock that you
owned as of the record date.
Quorum
The presence, in person or by properly executed proxies, of holders of
at least a majority of the issued and outstanding shares of common stock
entitled to vote at the meeting is necessary to constitute a quorum for the
transaction of business at the meeting. If a share is considered present at the
meeting for any matter, it will be considered present for all other matters.
Shares held by a nominee for a beneficial owner ("Broker Shares") that are voted
on any matter and abstentions will be included in determining the number of
shares present. Broker Shares that are not voted on any matter will not be
included in determining the number of shares present.
Required Vote
Approval of the Merger Agreement
Approval of the Merger Agreement requires the affirmative vote of the
holders of at least a majority of the issued and outstanding shares of
Integrated common stock entitled to notice of, and to vote at, the meeting.
Abstentions and broker non-votes will have the same effect as votes cast against
the proposal to approve the Merger Agreement.
Election of Directors
Directors will be elected by a plurality of the votes cast.
Ratification of Appointment of Independent Auditors
Ratification of the appointment of KPMG LLP (effective as of completion
of the merger) as independent auditors for the fiscal year ending December 31,
1999 requires the affirmative vote of a majority of the shares present in person
or represented by proxy at the meeting and entitled to vote on the matter.
Abstentions will have the same effect as a vote against such ratification,
whereas broker non-votes and shares not represented at the meeting will not be
counted for purposes of determining whether such ratification has been approved.
Voting Agreements
The directors of Integrated and certain of their affiliates have agreed
that they will vote their shares of Integrated common stock in favor of approval
of the Merger Agreement. These directors and affiliates beneficially own an
aggregate of 1,761,570 shares of Integrated common stock, which constitutes
approximately 28.69% of the outstanding shares as of the record date. A copy of
the Voting Agreement is attached as Annex B to this Proxy Statement.
Voting and Revocation of Proxies
All properly executed proxies that are not revoked will be voted at the
meeting in accordance with the instructions contained therein. If a holder of
Integrated common stock executes and returns a proxy and does not specify
otherwise, the shares represented by such proxy will be voted (1) "for" approval
of the Merger Agreement, (2) "for" election of the
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<PAGE>
nominees for director identified herein, (3) "for" ratification of the
appointment of KPMG LLP (effective upon completion of the merger) as independent
auditors for the fiscal year ending December 31, 1999 and (4) in the discretion
of the proxy holder with respect to any other matter which may properly come
before the meeting, including any adjournment or postponement thereof.
A stockholder who has executed and returned a proxy may revoke it at
any time before it is voted at the meeting by (1) executing and returning a
proxy bearing a later date, (2) filing written notice of such revocation with
the Secretary of Integrated stating that the proxy is revoked or (3) attending
the meeting and voting in person. Later-dated proxies and written revocations
should be sent to Integrated at 444 Madison Avenue, 38th Floor, New York, New
York 10022, Attention: Secretary. A stockholder's attendance at the meeting will
not, by itself, revoke a proxy. Any stockholder who has instructed a broker to
vote his or her shares must follow the procedure provided by the broker to
revoke those instructions.
Solicitation of Proxies
The accompanying proxy is solicited by the Integrated board of
directors for use at the meeting or any adjournments or postponements thereof,
for the purposes set forth in this Proxy Statement and the attached notice of
meeting. This Proxy Statement and accompanying proxy were first sent to
stockholders on or about August 12, 1999.
We are soliciting proxies by mail. In addition, our directors and
officers may solicit proxies by personal interview, telephone, telegram or
otherwise. We have engaged the services of Mackenzie Partners, Inc. to assist us
in the solicitation of proxies. We expect to pay Mackenzie Partners a fee of
$5,000 plus reimbursement of reasonable out-of-pocket expenses.
We will reimburse brokerage firms, fiduciaries, nominees and others for
their reasonable out-of-pocket expenses in forwarding proxy materials to the
beneficial owners of the shares of Integrated common stock held in their names.
The costs and expenses incurred in connection with the printing and
filing of this Proxy Statement and the solicitation of proxies will be shared
equally by Integrated and Empire.
Other Matters
At the date of this Proxy Statement, the board of directors of
Integrated does not know of any business to be presented at the meeting other
than as set forth in this Proxy Statement. If any other matters should properly
come before the meeting, it is intended that, in the absence of instructions to
the contrary set forth on a proxy, the shares represented by each proxy will be
voted with respect to such matters in accordance with the judgment of the
persons voting such proxies, provided that no proxy which is voted against the
adoption of the Merger Agreement will be voted in favor of any adjournment or
postponement of the meeting.
Independent Accountants
Representatives of PricewaterhouseCoopers LLP, Integrated's
independent auditors, and representatives of KPMG LLP, Empire's independent
auditors, are expected to be present at the meeting. These representatives will
have an opportunity to make statements at the meeting if they so desire and will
be available to respond to appropriate questions.
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<PAGE>
THE MERGER AND RELATED TRANSACTIONS
General Description of the Merger
Empire will merge with and into Integrated, and Integrated will be the
Surviving Corporation. The Surviving Corporation will change its name to "Empire
Resources, Inc." and will continue the business of the Empire Companies.
Upon completion of the merger, the Surviving Corporation will issue to
the Empire Stockholders an aggregate of 9,384,761 shares of common stock of the
Surviving Corporation. However, the Empire Stockholders will be required to
deposit 3,824,511 of these shares into escrow. Some or all of the escrowed
shares may be released to the Empire Stockholders based on a two year earn-out
formula described herein. Any escrowed shares not required to be released to the
Empire Stockholders based on the earn-out formula will be returned to the
Surviving Corporation and canceled.
Background of the Merger
Background of Integrated's Search for a Business Combination
We were formerly in the business of designing and marketing certain
computer-related products. We completely discontinued these operations at the
end of 1997 because we were unable to achieve profitability. Since that time,
our only activity has been seeking a business combination opportunity that would
enable us to redeploy our remaining cash ($10.1 million at June 30, 1999) into a
new operating business.
We estimate that, since November 1997, we have preliminarily reviewed
over 30 potential acquisition candidates. From this group, there were
approximately 10 candidates (other than Empire) that we chose to investigate in
greater depth. Our investigation of these candidates varied from having one or
more meetings to having certain financial and due diligence procedures
performed. These candidates were in diverse industries, including travel,
software, computer distribution and school supply manufacturing and
distribution.
In evaluating potential acquisition candidates, we considered, among
other things, all or a majority of the following factors concerning the target
company:
o valuation;
o quality of management;
o earnings history;
o strategy and potential for future growth;
o capital structure and capital needs;
o competition;
o characteristics of the target's industry; and
o in the case of technology companies, the nature of the technology
and associated proprietary rights.
We ultimately did not pursue a business combination with the candidates
that we chose to investigate (other than Empire) because of one or more of the
following reasons:
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o the parties could not agree on valuation issues;
o the target did not have historical earnings and could not
demonstrate to our satisfaction that it would be able to achieve
profitability in the near-term;
o we were not satisfied with the results of our due diligence
investigation; or
o the target withdrew from consideration.
Integrated's Reasons For Selecting Empire as a Merger Partner
The Integrated board considered, among other things, the following
factors in reaching its decision to approve a merger with Empire:
o the fact that Empire is an established company with a demonstrated
ability to generate profits;
o the significant experience of Empire's management;
o Empire's strategy for future growth as described under "Business
of Empire--Business Strategy;"
o the willingness of Empire's stockholders to agree to the earn-out
formula and related escrow arrangements provided for by the Merger
Agreement, as described under "Material Terms of the Merger
Agreement--Earn-Out Formula" and "--Escrow Arrangements Relating
to the Contingent Shares;"
o the willingness of Empire's stockholders to make certain
representations and warranties concerning Empire's business and to
agree to certain indemnification obligations as described under
"Material Terms of the Merger Agreement--Representations and
Warranties" and "--Indemnification Obligation of the Empire
Stockholders."
o the potential benefits that will accrue to Empire as a result of
its becoming a public company, including: (1) greater access to
capital markets; (2) enhanced ability to use its stock as
consideration for possible future acquisitions and (3) greater
visibility among potential customers and suppliers; and
o the fairness opinion rendered by Seidman & Co., Inc. as described
under "--Opinion of Financial Advisor to Integrated."
The Integrated board also identified and considered a variety of
potentially negative factors in its deliberations concerning the merger,
including, but not limited to, the following:
o the downward trend in Empire's earnings discussed under "Empire
Resources Management's Discussion and Analysis of Financial
Condition and Results of Operations;"
o the fact that Empire's business is highly dependent on the
services of Nathan Kahn;
o the fact that Empire's business is highly dependent on its
relationship with its suppliers; and
o the other risks described under "Risk Factors."
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<PAGE>
The Integrated board concluded that these risks were outweighed by the
potential benefits of the merger.
In view of the wide variety of factors considered by the Integrated
board in connection with its evaluation of the merger, the board did not find it
practical to, and did not, quantify or otherwise attempt to assign relative
weight to the specific factors considered in reaching its determination.
Background of Contacts with Empire
In July of 1998, William Spier (Acting Chief Executive Officer of
Integrated) met with Nathan Kahn (the President of Empire and one of its two
owners) in order to discuss the possibility of a business combination with
Empire. This meeting was arranged by Simon Kahn, who is a director of Integrated
and the brother of Nathan Kahn.
Following the initial meeting between Mr. Spier and Mr. Kahn,
additional meetings took place in July and August between representatives of
both companies at which the terms of a possible merger were discussed. In
addition, in August, Integrated and Empire each commenced their respective due
diligence investigations of the other party. These investigations continued
until the signing of the Merger Agreement.
On August 19, 1998, Nathan Kahn and Sandra Kahn met with the Integrated
board of directors and provided the board with information concerning Empire's
business and plans. Following this meeting with the Kahns, the Integrated board
authorized Mr. Spier to negotiate a letter of intent with Empire that would
outline the general terms of a possible merger with Empire.
On September 23, 1998, the Integrated board approved a draft letter of
intent with Empire. This letter of intent was signed by both Integrated and
Empire at the end of September. The letter of intent contemplated that the
Empire Stockholders would own 58% of the surviving corporation (calculated on a
pro forma basis giving effect to the exercise of 656,460 options and warrants).
The letter of intent was not legally binding on the parties (subject to certain
exceptions). As part of the letter of intent, Integrated agreed that it would
not consider alternative transactions for a 45-day period.
In October of 1998, Empire management informed Mr. Spier that Empire's
earnings for 1998 would be lower in 1998 than in 1997 ($2.5 million in 1998
compared with $3.8 million in 1997). Empire's management explained the reason
for the earnings decline was principally a slower than expected start-up of new
production facilities by one of Empire's suppliers which had been expected to
contribute revenues during the fourth quarter of 1998.
In view of the shortfall in Empire's 1998 earnings, representatives of
both companies met several times in order to determine whether they could
negotiate revised terms for the merger that would be acceptable to both parties.
As a result of these negotiations, the terms of the merger were restructured to
provide that a portion of the merger consideration would be placed in escrow and
be subject to the two-year earn-out formula as described under "Material Terms
of the Merger Agreement--Earn-Out Formula."
In November of 1998, Integrated retained Seidman & Co., Inc., in order
to advise Integrated whether the proposed merger would be fair, from a financial
point of view, to the Integrated stockholders.
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On January 19, 1999, the Integrated board reviewed and approved the
revised merger terms. At this meeting, Seidman & Co., Inc. rendered its oral
opinion to the effect that, as of that date, the terms of the merger were fair,
from a financial point of view, to the existing stockholders of Integrated.
On February 18, 1999, the Integrated Board reviewed and approved the
final terms of the merger.
On February 22, 1999, Integrated and Empire signed the Merger
Agreement, and Integrated made a public announcement concerning the merger.
Recommendation of the Board of Directors of Integrated
The Integrated board of directors believes that the merger is fair to
you, and is in your best interests, and recommends a vote "for" the proposal to
approve and adopt the Merger Agreement. This recommendation was made
unanimously, except that Simon Kahn (who is the brother of Nathan Kahn) did not
participate. The factors considered by the board in making this recommendation
are discussed above under "-- Integrated's Reasons For Selecting Empire as a
Merger Partner."
Opinion of Financial Advisor to Integrated
General
In November 1998, Integrated engaged Seidman & Co., Inc. ("Seidman") to
render an opinion to the Integrated board of directors as to the fairness of the
merger from a financial point of view to the existing stockholders of
Integrated. Seidman is an investment banking firm which has specialized in
financial and market analysis and fair market valuations for approximately the
past 30 years. Integrated chose Seidman to render a fairness opinion on the
basis of Seidman's long-term experience in this area, reputation in the
investment community, and expertise in transactions similar to the merger. There
were no material relationships between Integrated and Seidman and no
compensation paid by Integrated to Seidman during the past two years.
Seidman's engagement was limited to rendering a fairness opinion as to
the terms of the merger. These terms were negotiated between the parties to the
merger. Seidman did not make any recommendation as to these terms. No
limitations were imposed by Integrated on Seidman with respect to the
investigations made or procedures followed by Seidman in rendering its opinion.
As compensation for rendering its fairness opinion, Integrated has
agreed to pay Seidman a fee of approximately $17,000, plus reimbursement of
Seidman's out-of-pocket expenses. Integrated has also agreed to indemnify
Seidman against certain liabilities in connection with its fairness opinion,
including certain liabilities under the federal securities laws.
Rendering of Fairness Opinion
On January 19, 1999, Seidman delivered to the Integrated board of
directors its oral opinion to the effect that, as of that date, the terms of the
merger were fair, from a financial point of view, to the stockholders of
Integrated. Seidman confirmed its oral opinion by delivery of a written opinion
dated February 22, 1999 (the date of the Merger Agreement).
THE FULL TEXT OF SEIDMAN'S WRITTEN OPINION TO THE BOARD DATED AS OF
FEBRUARY 22, 1999 IS ATTACHED HERETO AS APPENDIX F AND IS
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INCORPORATED HEREIN BY REFERENCE. THE FOLLOWING SUMMARY OF SEIDMAN'S OPINION IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE OPINION.
SEIDMAN'S OPINION IS DIRECTED TO THE BOARD AND DOES NOT CONSTITUTE A
RECOMMENDATION TO ANY STOCKHOLDER OF INTEGRATED AS TO HOW SUCH STOCKHOLDER
SHOULD VOTE WITH RESPECT TO THE MERGER. SEIDMAN'S OPINION ADDRESSES ONLY THE
FINANCIAL FAIRNESS OF THE CONSIDERATION TO BE PAID BY INTEGRATED IN THE MERGER
AND DOES NOT ADDRESS THE RELATIVE MERITS OF THE MERGER, THE COMPETITIVENESS OR
PROFITABILITY OF THE COMBINED COMPANY, ANY ALTERNATIVES TO THE MERGER, OR ANY
OTHER ASPECT OF THE MERGER.
In connection with its opinion, Seidman examined and considered all
available information and data deemed relevant by it in connection with
rendering its opinion, including the information and data referred to in the
full opinion attached as Appendix F hereto.
Summary of Analysis Relating to the Opinion
Seidman analyzed separately (1) the portion of the merger consideration
(the "Vested Consideration") that is not contingent on the future earnings of
the Surviving Corporation and (2) the portion of the merger consideration (the
"Contingent Consideration") that is subject to the two-year earn-out formula
described under "Material Terms of the Merger Agreement--Earn-Out Formula."
Analysis Relating to the Vested Consideration
For purposes of its analysis, Seidman viewed the Vested Consideration
as consisting of 5,560,250 shares of Integrated common stock (representing the
shares to be issued in the merger which will not be subject to the earn-out
formula). In addition, Seidman took into account the promissory notes in the
aggregate principal amount of $10.9 million that were distributed by Empire to
the Empire Stockholders on February 19, 1999 as described under "Empire
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Distribution of Surplus Net Worth." Seidman valued the Vested
Consideration and such promissory notes at approximately $19.2 million, based on
(a) an assumed value for the Integrated common stock of a $1.50 per share
(representing the closing price of the common stock on the AMEX on February 12,
1999) and (b) the aggregate principal amount of the notes distributed to the
Empire Stockholders.
The following is a summary of certain of the financial analyses used by
Seidman in connection with providing its opinion with respect to the Vested
Consideration.
Selected Public Company Analysis. Seidman selected six publicly-traded
companies (the "Specified Companies") that Seidman considered to be generally
comparable to Empire on a qualitative or quantitative basis. The Specified
Companies included: (1) A.M. Castle & Co., (2) Central Steel & Wire Co., (3)
Meridian National Corp., (4) Olympic Steel Inc., (5) Reliance Steel & Aluminum
Co., and (6) Russel Metals Inc.
After identifying the Specified Companies, Seidman derived certain
capitalizing ratios for the Specified Companies, including stock price as a
multiple of (1) average revenues over various periods, (2) average operating
income over various periods, and (3) pre-tax income over various periods.
Seidman then derived a range of values for Empire by applying these ratios to
Empire. Seidman then compared these derived values for Empire with the value of
the Vested
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Consideration. This analysis indicated a range of values for Empire that
compared favorably with the value of the Vested Consideration of $19.2 million.
Seidman determined that this was the case whether the capitalizing ratios were
based on the most recent five-years, three-years or one-year of data for the
Specified Companies and Empire.
Seidman noted that, in the context of a merger, it would be appropriate
to apply a 30% control premium to the values for Empire derived by using the
ratios described above. However, Seidman indicated that fairness was indicated
without factoring in any control premium.
None of the Specified Companies is identical to Empire. Accordingly,
the foregoing analysis was not mathematical; rather, it involved complex
considerations and judgments concerning differences in the financial and
operating characteristics of the Specified Companies and Empire and other
factors that could affect the public trading value of the Specified Companies.
Analysis of the Effect of the Merger on Pro Forma Earnings and Book
Value Per Share. Seidman analyzed the pro forma effect of the merger on
Integrated's earnings before taxes per share and book value per share. This
analysis was calculated based on (1) earnings and book value of Integrated for
the 12 months ended September 30, 1998 and as of September 30, 1998, and (2)
earnings and book value of Empire for the 12 months ended December 31, 1998 and
as of December 31, 1998. This analysis indicated that on a pro forma basis (a)
Integrated's earnings before taxes per share would increase from a pre-merger
level of $0.01 to a post-merger level of approximately $0.21 (representing an
increase of more than 2,800%) and (b) Integrated's book value per share would
decrease from a pre-merger level of approximately $1.51 per share to a
post-merger level of approximately $0.96 per share (representing a decrease of
approximately 36%). Seidman concluded that with the material gain in earnings
before taxes per share, and notwithstanding the decrease in book value per
share, this analysis, overall, indicated fairness of the merger to the
Integrated stockholders from a financial point of view.
Analysis Relating to the Contingent Consideration
The following is a summary of certain of the financial analyses used by
Seidman in connection with providing its opinion with respect to the Contingent
Consideration.
Incremental Valuation Analysis. The number of Contingent Shares (if
any) that will be released to the Empire Stockholders will depend on the
Surviving Corporation's after-tax earnings (excluding extraordinary expenses
relating to the merger as defined in the Merger Agreement) over a two-year
period as described under "Material Terms of the Merger Agreement--Earn-Out
Formula." Seidman calculated the number of Contingent Shares that would be
released to the Empire Stockholders based on different levels of average annual
after-tax earnings of the Surviving Corporation during such two-year period.
Seidman then calculated the price of the Contingent Shares to be released as a
multiple of the level of average annual after-tax earnings that would trigger
the release. In calculating such multiple, Seidman considered the value of each
Contingent Share to be $1.50 (representing the closing price of Integrated
common stock on the AMEX on February 12, 1999). The derived multiples ranged
from 1.72x to 2.21x at various levels of average annual after-tax earnings.
Seidman noted that the derived multiples compared favorably with price multiples
of market comparable companies.
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Pro Forma Earnings Per Share Analysis. Seidman calculated the pro forma
effect that the release of the Contingent Shares would have on earnings per
share. In making this calculation, Seidman took into account the level of
average annual after-tax earnings that was required in order to trigger the
release of a specified number of Contingent Shares. Seidman noted that at all
levels pro forma earnings per share would increase in connection with the
release of the Contingent Shares to the Empire Stockholders.
Conflicts of Interest
In considering the recommendation of the Integrated board with respect
to the merger, you should be aware that the directors have certain interests in
the merger that are in addition to the interests of the stockholders generally.
Certain of these interests are described below.
Vesting of Certain Options. In the third quarter of 1997 and the first
quarter of 1998, certain directors were granted options that were intended to
motivate these directors to seek acquisition opportunities for Integrated. These
options provided that the options would become exercisable upon (or in certain
cases a specified period following) completion of an acquisition transaction by
Integrated within 18 months of the grant date (provided that in all events they
would be become exercisable on the day preceding the tenth anniversary of the
grant date). Following the execution of the Merger Agreement with Empire on
February 22, 1999, the board amended these options to provide that they will
become exercisable upon (or in certain cases a specified period following) the
closing of the merger with Empire, even if this closing occurs after the
18-month period originally specified in these options. Certain information
concerning these options is shown in the table below:
<TABLE>
<CAPTION>
Number of shares Exercise
of Common Stock Price Per
Underlying Share
Name of Director Date of Grant Option Vesting
---------------- ------------- ---------------- ----------- --------
<S> <C> <C> <C> <C>
William Spier.............. 10/7/97 20,000 $ 1.4063 completion of merger
12/10/97 50,000 1.4063 completion of merger
180 days following
12/10/97 25,000 2.0000 completion of merger
one year following
12/10/97 25,000 2.0000 completion of merger
Bernard S. Appel........... 10/7/97 16,000 1.4063 completion of merger
Barry W. Blank............. 2/2/98 16,000 1.6563 completion of merger
Nicole R. Kubin............ 10/7/97 16,000 1.4063 completion of merger
Morton L. Landowne......... 10/7/97 16,000 1.4063 completion of merger
Morris J. Smith............ 10/7/97 16,000 1.4063 completion of merger
Michael Yudin.............. 2/2/98 16,000 1.6563 completion of merger
</TABLE>
Modification of Certain Options. The Merger Agreement contemplates that
six of the current 10 directors of Integrated will cease to be directors upon
completion of the merger. The Integrated options held by these directors have
been amended to provide that ceasing to be a
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director as contemplated by the Merger Agreement will not cause such person's
options to terminate. Without this amendment, certain of the options held by
these directors would have terminated three months after they ceased to be
directors.
Extension of Certain Options. At the same meeting at which the
Integrated board approved the merger, the board also approved extending the
expiration date of certain options held by Alan Haber, who is a director of
Integrated. These options were originally granted to Mr. Haber in 1994. The
board agreed to extend these options because Mr. Haber was precluded from
selling the shares underlying these options as a result of trading restrictions
that were imposed during the extended period during which Integrated was engaged
in seeking a business combination opportunity. The table below provides certain
information concerning these options.
<TABLE>
<CAPTION>
Number of shares of Common Exercise Price Original New Expiration Date
Stock Underlying Per Share Expiration
Option Date
-------------------------- -------------- -------------------- -------------------
<S> <C> <C> <C>
66,936 $1.6434 December 31, 1998 July 31, 2001
66,175 $1.6434 December 31, 1999 December 31, 2001
</TABLE>
Granting of Certain Options. The initial contact between Integrated and
Empire was arranged by Simon Kahn, who is a director of the Company and the
brother of Nathan Kahn (one of the Empire Stockholders). See "The Merger and
Related Transactions--Background of Contacts with Empire." In recognition of
Simon Kahn's contribution to the merger transaction, Integrated, in July 1999,
granted to Simon Kahn an option to purchase 10,000 shares of Integrated common
stock at an exercise price of $2.00 per share. This option will become
exercisable with respect to 50% of the shares subject thereto on the 180th day
following the closing of the merger with Empire and with respect to the balance
on the first anniversary of such closing.
Bonus Payment. In July 1999, Integrated paid to William Spier, the
Acting Chief Executive Officer of Integrated, a bonus of $25,000 for his work
relating to the proposed merger with Empire.
Possible Compensation of Continuing Directors. The directors of
Integrated who will continue as directors of the Surviving Corporation may be
compensated by the Surviving Corporation for their services as directors. The
amount of this compensation has not been fixed. It is expected that the issue of
director compensation will be addressed by the board of directors of the
Surviving Corporation following the merger.
Certain Federal Income Tax Consequences
The following is a summary of the material United States federal income
tax consequences of the merger to the Integrated stockholders and Integrated.
The summary is for general information only and does not purport to consider all
aspects of federal income taxation that might be relevant to the merger. The
summary is based on the current provisions of the Internal Revenue Code of 1986,
as amended (the "Code"), existing regulations promulgated
44
<PAGE>
thereunder and administrative and judicial interpretations thereof, all of which
are subject to change.
The merger is intended to qualify as a reorganization within the
meaning of Section 368(a) of the Code and Section 1.368.2 of the Treasury
Regulations. If the merger qualifies as a reorganization, no gain or loss will
be recognized by Integrated, the Surviving Corporation or the stockholders of
Integrated as a result of the merger.
The tax discussion set forth above is included for general information
only and is based upon present law. No private letter ruling from the Internal
Revenue Service as to the tax consequences of the merger has been or will be
sought or obtained. Each Integrated stockholder should consult his or her tax
advisor as to the specific tax consequences of the merger to him or her,
including the application and effect of federal, state, local and other tax laws
and the possible effects of changes in federal law or other tax laws.
Accounting Treatment
For accounting and other financial reporting purposes, the merger will
be treated as a "reverse acquisition." Under this treatment, the Surviving
Corporation will be treated as a continuation of Empire, and the merger will be
treated as an issuance of shares by Empire to the stockholders of Integrated in
exchange for Integrated's cash.
Stock Exchange Listing
Integrated's common stock trades on the AMEX. It is a condition to the
merger that the shares of Integrated common stock to be issued in the merger
shall be authorized for listing on the AMEX. An application to obtain such
authorization has been filed.
No Appraisal Rights
The stockholders of Integrated are not entitled to dissenters' rights
of appraisal in connection with the merger under the General Corporation Law of
the State of Delaware.
MATERIAL TERMS OF THE MERGER AGREEMENT
The following is a summary of material provisions of the Merger
Agreement, a copy of which is attached as Exhibit A to this Proxy Statement and
is incorporated herein by reference. This summary is qualified in its entirety
by reference to the full text of the Merger Agreement. You are encouraged to
read the Merger Agreement carefully and in its entirety.
General Description of the Merger
At the effective time of the merger, Empire will be merged with and
into Integrated. Following the merger, Integrated will continue as the Surviving
Corporation.
Effective Time
The merger will become effective (the "Effective Time") upon the filing
of a Certificate of Merger with the Secretary of State of the State of Delaware.
Such filing will be made simultaneously with or promptly following the closing
of the merger, which will take place as soon as practicable following approval
of the Merger Agreement by the stockholders of Integrated and the satisfaction
or waiver of the other conditions to each party's obligation to consummate the
merger.
45
<PAGE>
Name Change
At the Effective Time, the certificate of incorporation of the
Surviving Corporation will be amended to change the name of the Surviving
Corporation to "Empire Resources, Inc."
Management of the Surviving Corporation
For information concerning the management of the Surviving
Corporation, see "Management Following the Merger."
Issuance of Shares to Empire Stockholders
At the Effective Time, the outstanding shares of Empire common stock
will be converted into an aggregate of 9,384,761 shares of common stock of the
Surviving Corporation. The Empire Stockholders will be required to deposit
3,824,511 of these shares (the "Contingent Shares") into escrow. The Contingent
Shares will subject to the earn-out described below.
Earn-Out Formula
The number of the Contingent Shares (if any) that will be released to
the Empire Stockholders will depend on the Surviving Corporation's cumulative
after-tax, net income during the two-year period commencing April 1, 1999 and
ending March 31, 2001, as indicated in the table below. Any shares not required
to be released to the Empire Stockholders will be returned to the Surviving
Corporation and canceled. For purposes of this calculation, the net income of
the Surviving Corporation for the measurement period will be adjusted as
follows:
o any extraordinary expenses (within the meaning of the Merger
Agreement) relating to the merger (such as legal and accounting
fees and printing expenses) will be excluded;
o if during any portion of the measurement period, Integrated,
Empire or Empire-Pacific is treated as an S Corporation for
federal or state tax purposes, such-after tax income will be
calculated on a pro forma basis as if all such corporations were
liable for federal and state income taxes as taxable corporate
entities throughout the entire period; and
o such after-tax net income will be based upon the income of Empire
(and not of Integrated) with respect to any portion of the
measurement period that is prior to the effective time of the
merger.
The table below shows (1) the number of Contingent Shares that would be
released to the Empire Stockholders based upon different amounts of cumulative
after-tax, net income of the Surviving Corporation during the period indicated,
(2) the total number of shares of common stock of the Surviving Corporation that
would be outstanding giving effect to the release of a specified number of
Contingent Shares (and the return of any remaining shares to the Surviving
Corporation), (3) the percentage of such outstanding shares that would be owned
by the Empire Stockholders, and (4) the percentage of such outstanding shares
that would be owned by the Empire Stockholders on a pro forma basis assuming the
exercise of all outstanding options and warrants that have been issued by
Integrated and provide for an exercise price per share of $2.00 or less. The
information in the table below is based upon the number of shares of Integrated
common stock that were outstanding as of July 19, 1999, the record date for the
meeting to which this Proxy Statement relates.
<PAGE>
<TABLE>
<CAPTION>
Number of
Contingent Shares Total Shares of Pro Forma
Cumulative After-Tax Income During the Two-Year to Be Released to Surviving Percent Owned Percent Owned
Period Ending March 31, 2001 (in Millions of the Empire Corporation by Empire by Empire
Dollars) Stockholders Outstanding Stockholders Stockholders
- ------------------------------------------------- -------------------- ------------------- ---------------- ---------------
<S> <C> <C> <C> <C>
less than 4.4 0 11,699,651 47.5% 44.9%
4.4 to but excluding 4.8 228,817 11,928,468 48.5% 45.9%
4.8 to but excluding 5.2 466,268 12,165,919 49.5% 46.9%
5.2 to but excluding 5.6 712,853 12,412,504 50.5% 47.9%
5.6 to but excluding 6.0 969,107 12,668,758 51.5% 48.9%
6.0 to but excluding 6.4 1,235,611 12,935,262 52.5% 49.9%
6.4 to but excluding 6.8 1,512,993 13,212,644 53.5% 50.9%
6.8 to but excluding 7.2 1,801,933 13,501,584 54.5% 51.9%
7.2 to but excluding 7.6 2,103,168 13,802,819 55.5% 52.9%
7.6 to but excluding 8.0 2,417,500 14,117,151 56.5% 53.9%
8.0 to but excluding 8.4 2,745,802 14,445,453 57.5% 54.9%
8.4 to but excluding 8.8 3,089,028 14,788,679 58.5% 55.9%
8.8 to but excluding 9.2 3,448,217 15,147,868 59.5% 56.9%
9.2 or greater 3,824,511 15,524,162 60.5% 57.9%
</TABLE>
Escrow Arrangements Relating to the Contingent Shares
The Contingent Shares will be held in escrow, pursuant to an Escrow
Agreement in the form of Annex E hereto, until the earn-out is calculated. While
the Contingent Shares are held in escrow, the Empire Stockholders will have the
right to (1) vote such shares and (2) receive any dividends or distributions
with respect to such shares. The Empire Stockholders have agreed to refund to
the Surviving Corporation any dividends or distributions that are attributable
to any Contingent Shares that are required to be returned to the Surviving
Corporation. The Empire Stockholders have also agreed that, as long as any
Contingent Shares remain in escrow, they will not take any action (whether as
stockholders or directors of the Surviving Corporation) to approve any dividends
or distributions with respect to the common stock of the Surviving Corporation,
unless such action is approved by a majority of the directors then in office who
were directors of Integrated prior to the merger.
Closing Date Balance Sheet and Possible Related Adjustments
As soon as reasonably practicable following the date on which the
merger is completed (the "Closing Date"), the Empire Stockholders are required
to provide to the board of directors of the Surviving Corporation an audited
consolidated balance sheet of the Empire Companies as of
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<PAGE>
the Closing Date (the "Closing Date Balance Sheet"). Based upon the Closing Date
Balance Sheet, certain adjustments may be required as described below.
Adjustment for Net Capital Deficiency. If the Closing Date Balance
Sheet shows that the total stockholders' equity of the Empire Companies
immediately prior to the merger was negative, then the Empire Stockholders are
required to pay to the Surviving Corporation the amount of the net capital
deficiency shown on the Closing Date Balance Sheet.
Adjustment Relating to Receivables. Within 270 days following the
Closing Date, the Empire Stockholders are required to deliver to the board of
directors of the Surviving Corporation a certificate of the chief financial
officer of the Surviving Corporation that shows, as of a date within 180 days of
the Closing Date, the aggregate proceeds (including any insurance proceeds and
credits and refunds from suppliers) that the Surviving Corporation realized from
the collection of the accounts receivable reflected on the Closing Date Balance
Sheet. If the amount realized from these accounts receivable is less than the
aggregate amount of the accounts receivable (less allowance for doubtful
accounts) shown on the Closing Date Balance Sheet, the Empire Stockholders are
required to pay to the Surviving Corporation the shortfall.
Adjustment Relating to Inventory. Within 455 days following the Closing
Date, the Empire Stockholders are required to deliver to the board of directors
of the Surviving Corporation a certificate of the chief financial officer of the
Surviving Corporation that shows, as of a date, within 365 days of the Closing
Date, the aggregate amount of sales proceeds (including any insurance proceeds
and credits and refunds from suppliers) that the Surviving Corporation realized
from the disposition of the inventories reflected on the Closing Date Balance
Sheet. If the amount of such sales proceeds is less than the aggregate book
value of the inventories shown on the Closing Date Balance Sheet, the Empire
Stockholders are required to pay to the Surviving Corporation the shortfall.
Adjustment Relating to Loans to Employees. The Empire Stockholders are
required to pay to the Surviving Corporation the amount of any loans to
employees which are reflected on the Closing Date Balance Sheet and which remain
outstanding as of January 1, 2000.
Employment Agreements
For information concerning certain employment and non-compete
agreements to be entered into by the Surviving Corporation, see "Management
Following the Merger--Certain Agreements to be Entered Into with Executive
Officers."
Representations and Warranties
Representations and Warranties Relating to Empire
The Merger Agreement contains various representations and warranties
made by the Empire Stockholders with respect to the Empire Companies and the
proposed merger. These include, among others, representations and warranties as
to organization and qualification under applicable law; subsidiaries; execution
of the Merger Agreement; the merger not violating agreements and instruments;
consents and approvals required for the merger; capitalization and share
ownership; officers and directors; books and records; absence of undisclosed
liabilities; absence of certain changes; suppliers and customers; inventory;
accounts receivables; returns; relationships with related parties; offices;
contracts; permits; compliance with laws, permits and instruments; litigation;
assets; bank accounts; powers of attorney; absence of improper payments;
48
<PAGE>
taxes; employee benefit matters; brokers; accredited investor status; and
information supplied for use in this Proxy Statement.
The representations and warranties made by the Empire Stockholders will
survive the merger. However, the obligation of the Empire Stockholders to
indemnify the Surviving Corporation for any inaccuracy or breach of these
representations and warranties is subject to certain limitations described below
under "--Indemnification Obligation of the Empire Stockholders."
Representations and Warranties Relating to Integrated
The Merger Agreement also contains various representation and
warranties made by Integrated. These representations and warranties will not
survive the merger.
Indemnification Obligation of the Empire Stockholders
The Empire Stockholders have agreed to indemnify the Surviving
Corporation and its successors, assigns, officers, directors, partners,
employees, servants and agents against any losses that result from any
inaccuracy or breach of any of the representations, warranties or agreements
made by the Empire Stockholders in the Merger Agreement. This indemnification
obligation of the Empire Stockholders is subject to the following qualifications
and limitations:
Time Limitation. The indemnification obligation of the Empire
Stockholders will generally terminate on the first anniversary of the merger or,
if later, on the 31st day after the Surviving Corporation files with the SEC a
Form 10-KSB in respect of 1999. However, certain indemnification obligations
will continue after such date as follows:
o any indemnification claim that is pending or asserted as of such
date may continue to be asserted and indemnified against;
o any claim based on a violation of the representations and
warranties contained in Section 5.5 of the Merger Agreement
(relating to capitalization and share ownership) may continue to
be asserted and shall be indemnified against at any time; and
o any claim based on a violation of the representations and
warranties contained in Section 5.25 of the Merger Agreement
(relating to taxes) may continue to be asserted and shall be
indemnified against until the 181st day following the expiration
of the applicable statute of limitations (and, if asserted prior
to such time, may continue to be asserted and shall be indemnified
against).
Deductible. An amount of $100,000 is deductible from the aggregate
amount payable by the Empire Stockholders in respect of all inaccuracies and
breaches of the representations and warranties contained in the Merger
Agreement. However, this deductible does not apply with respect to any amount
payable in respect of any inaccuracy or breach of the representations and
warranties set forth in the following Sections of the Merger Agreement: 4.1
(relating to information supplied for use in this Proxy Statement); 5.5
(relating to capitalization and share ownership); 5.25 (relating to taxes); or
5.27 (relating to absence of Brokers).
Conditions to the Merger
Conditions Applicable to All Parties
The respective obligations of Integrated and Empire to complete the
merger are subject to a number of conditions, including among others:
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<PAGE>
o the Merger Agreement shall have been approved by the stockholders
of Integrated as contemplated by this Proxy Statement;
o the shares issuable to the Empire Stockholders in the merger
shall have been authorized for listing on the AMEX;
o certain conditions relating to Empire's existing revolving credit
facility shall have been satisfied, including among others: (1)
the lenders shall have consented to the Merger Agreement and the
assumption of the credit facility by the Surviving Corporation,
(2) the "commitment" provided by the credit facility shall be at
least $25 million, (3) the date on which the facility terminates
shall be no earlier than March 31, 2001 and (4) upon completion of
the merger, there shall not be any default under the agreements
governing the credit facility;
o there shall not be threatened or pending any litigation or similar
proceeding which challenges or seeks to restrain or prohibit the
merger or which seeks to impose any material restriction on any
party in connection with the merger, and which in the reasonably
exercised opinion of Integrated or the Empire Stockholders makes
it inadvisable to complete the merger; and
o there shall not be in effect any statutes, rules, regulations,
judgments, decrees, injunctions or other orders which prohibit the
merger or impose any material restriction on any party in
connection with completion of the merger.
Additional Conditions Applicable to Integrated
The obligation of Integrated to complete the merger is subject to a
number of additional conditions, including among others:
o the representations and warranties of the Empire Stockholders in
the Merger Agreement shall continue to be true in all material
respects as of the Closing Date (except for any that speak as of a
specific time and except for changes contemplated by the Merger
Agreement);
o the Empire Stockholders and the Empire Companies shall in all
material respects have fulfilled their obligations under the
Merger Agreement;
o since the date of the Merger Agreement, there shall not have
occurred any material adverse change in the financial condition,
results of operations, properties, or business of the Empire
Companies taken a whole;
o Integrated shall have received certain certificates from officers
of Empire and certain opinions from counsel to Empire;
o Integrated shall have received certain evidence that the merger
will not violate the New Jersey Environmental Cleanup
Responsibility Act;
o there shall be in effect $10 million of key-man life insurance on
the life of Nathan Kahn (with the proceeds being payable to the
Surviving Corporation);
o the employment and noncompete agreements and the escrow agreement
contemplated by the Merger Agreement shall have been entered into
by the parties thereto (other than Integrated);
50
<PAGE>
o all of the issued and outstanding capital stock of Empire-Pacific
shall be owned by Empire, free and clear of all liens.
Additional Conditions Applicable to Empire
The obligation of Empire to complete the merger is subject to a number
of additional conditions, including among others:
o the representations and warranties of Integrated in the Merger
Agreement shall continue to be true in all material respects as of
the Closing Date (except for any that speak as of a specific time
and except for changes contemplated by the Merger Agreement);
o Integrated shall in all material respects have fulfilled its
obligations under the Merger Agreement;
o since the date of the Merger Agreement, there shall not have
occurred any material adverse change in the financial condition of
Integrated and at the time of the Merger Integrated shall have (1)
a minimum net worth of at least $9.75 million and (ii) cash and
cash equivalents of at least $9.8 million;
o the Empire Stockholders shall have received certain certificates
from officers of Integrated and certain opinions from counsel to
Integrated;
o the employment and noncompete agreements and the escrow agreement
contemplated by the Merger Agreement shall have been entered into
by Integrated;
o the Empire Stockholders shall have received evidence from the AMEX
that Integrated's listing will be continued following the merger;
and
o each of the directors of Integrated shall have executed a general
release in favor of Integrated with respect to all claims arising
prior to the merger, except that such release shall not release
(1) any rights such person may have to acquire securities of
Integrated under existing option or warrant agreements, (2) any
claims under existing indemnification agreements or (3) any claim
under the Merger Agreement.
Termination of the Merger Agreement; Termination Fee
The Merger Agreement may be terminated at any time prior to completion
of the merger, whether before or after the approval by the stockholders of
Integrated, as follows:
(a) by the mutual consent of Integrated and the Empire Stockholders;
(b) by either Integrated or the Empire Stockholders, if the merger
shall not have been consummated prior to September 30, 1999,
unless such date is extended by mutual consent of Integrated and
the Empire Stockholders;
(c) by Integrated, if (1) any other party to the Merger Agreement
materially breaches in any material respect any of its material
obligations under the Merger Agreement and such breach is not
cured by such party within 10 days after being given notice of
such breach or (2) the representations and warranties of the
Empire Stockholders set forth in the Merger Agreement are not true
and correct in all material respects;
51
<PAGE>
(d) by the Empire Stockholders, if (1) Integrated materially breaches
in any material respect any of its material obligations under the
Merger Agreement and such breach is not cured by Integrated within
10 days after being given notice of such breach, (2) the
representations and warranties of Integrated set forth in the
Merger Agreement are not true and correct in all material respects
or (3) the board of directors of Integrated withdraws its
recommendation of the merger or modifies such recommendation in
any manner adverse to Empire or the Empire Stockholders;
(e) by Integrated, if any event shall have occurred which renders any
of the conditions to Integrated's obligation to complete the
merger incapable of fulfillment;
(f) by the Empire Stockholders, if any event shall have occurred which
renders any of the conditions to their obligation to complete the
merger incapable of fulfillment;
(g) by Integrated or the Empire Stockholders, if the stockholders of
Integrated fail to approve the Merger Agreement at a duly held
meeting of Integrated stockholders (including any adjournment
thereof) called for such purpose; and
(h) by the Empire Stockholders, if any director of Integrated (1)
becomes a participant in a solicitation in opposition to the
merger or (2) becomes a member of a group which tenders or
announces a tender for Integrated common stock.
Integrated will be required to pay Empire a termination fee of
$250,000, if (a) any director of Integrated that owns shares of Integrated
common stock fails to vote all such shares in favor of the merger and (b) the
Merger Agreement is terminated because the requisite stockholder approval is not
obtained. Integrated will also be required to pay Empire a termination fee of
$250,000 if the Merger Agreement is terminated as a result of any director of
Integrated becoming a participant in a solicitation in opposition to the merger
or becoming a member of a group which tenders or announces a tender for
Integrated common stock.
Amendment of the Merger Agreement
To the extent permitted by applicable law, the Merger Agreement may be
amended by the parties thereto at any time before or after approval of the
Merger Agreement by the stockholders of Integrated or Empire.
Expenses of the Transaction
Whether or not the merger is consummated, all costs and expenses
incurred in connection with the Merger Agreement and the transactions
contemplated thereby (including, without limitation, investment banking, legal
and accountant fees and printing costs) will be paid by the party incurring such
costs and expenses, except that those costs and expenses incurred in connection
with the printing and filing of this Proxy Statement and the solicitation of
proxies will be shared equally by Integrated and Empire. Empire will bear all
costs and expenses in connection with satisfying the condition relating to its
credit facility described above under "--Conditions to the Merger." Any costs
that Empire is responsible for will be reflected in the Closing Date Balance
Sheet to the extent that such expenses are accrued and unpaid as of the Closing
Date.
52
<PAGE>
Certain Other Covenants
Conduct of Business Prior to the Merger
Each of Empire and Empire-Pacific has agreed that, until the Effective
Time, it will conduct its business in the usual, regular and ordinary course, in
substantially the same manner as previously conducted, and will use commercially
reasonable efforts to preserve intact its present business organizations, keep
available the services of its present officers and employees and preserve its
relationships with suppliers, customers and others having business dealings with
it.
Integrated has agreed that, until the Effective Time, it will not
engage in any business operations, except as is required in the judgement of its
officers in connection with (1) completing the transactions contemplated by the
Merger Agreement or (2) maintaining its existence as a public company.
Non-Solicitation of Other Offers
Integrated has agreed that it will not, directly or indirectly, through
any officer, director, agent or otherwise (1) solicit, initiate, facilitate or
encourage any inquiries, or the submission of any proposals or offers from any
person relating to any acquisition or purchase of all or a substantial amount of
the assets of, or any equity interest in, or any merger, consolidation or
business combination with Integrated or (2) participate in any discussions or
negotiations, or assist or participate in any effort or attempt by the other
person to do or seek to do any of the foregoing; provided, however, that the
restrictions in clause (2) shall not prohibit any action by Integrated to the
extent that the board of directors of Integrated in good faith believes, based
upon an opinion of counsel, that the failure to take such action would involve
the board of directors in a breach of their fiduciary duties under applicable
law.
Maintenance of Insurance for Directors and Officers
Integrated has agreed that, for a period of six years after the Effective
Time, the Surviving Corporation will cause to be maintained in effect policies
of directors' and officers' liability insurance covering acts or omissions
occurring prior to the Effective Time for the benefit of directors and officers
of Integrated who are currently covered by such policies on terms no less
favorable than the terms of such current insurance coverage. The foregoing
agreement is subject to the qualification that the Surviving Corporation will
not be required to expend in any year an amount in excess of 150% of the annual
aggregate premiums currently paid by Integrated for such insurance. If the
annual premiums for such insurance coverage exceed such amount, the Surviving
Corporation will be obligated to obtain a policy with the best coverage
available, in the reasonable judgment of the board of directors of the Surviving
Corporation, for a cost not exceeding such amount.
MANAGEMENT FOLLOWING THE MERGER
Directors and Officers Following the Merger
The Merger Agreement provides that, upon completion of the merger, the
board of directors of the Surviving Corporation shall have nine members
comprised of (1) four current directors of Integrated and (2) five directors
designated by Empire. The Merger Agreement also provides that, upon completion
of the merger, the officers of the Surviving Corporation will be Nathan Kahn,
Sandra Kahn and Harvey Wrubel.
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<PAGE>
The table below provides certain information concerning the persons
that are expected to serve as directors and officers of the Surviving
Corporation. Each person identified in the table as a director has consented to
serve in such position following the merger. If any such person is unavailable
(which event is not anticipated) to serve as a director at the Effective Time,
then a replacement will be selected. Such replacement will be selected by
Integrated, if the person unavailable is a current director of Integrated, and
by Empire, if the person unavailable is one of the five directors that have been
designated by Empire.
All directors hold office until the next annual meeting of stockholders
or until their successors are elected and qualify. Officers hold office until
their successors are chosen and qualify, subject to earlier removal by the Board
of Directors.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Nathan Kahn(1).................... 44 Chief Executive Officer and Director
Sandra Kahn(1).................... 41 Chief Financial Officer and Director
Harvey Wrubel..................... 45 Vice President of Sales
Jack Bendheim(1).................. 52 Director
Barry Blank(2).................... 59 Director
Barry L. Eisenberg(2)............. 52 Director
Peter G. Howard(1)................ 63 Director
Nathan Mazurek(1)................. 37 Director
Morris J. Smith(2)................ 41 Director
William Spier(2).................. 64 Director
</TABLE>
- -------------------------
(1) Nathan Kahn, Sandra Kahn, Jack Bendheim, Nathan Mazurek and Peter Howard
have been designated by Empire to become directors of the Surviving
Corporation upon completion of the merger.
(2) Barry W. Blank, Barry L. Eisenberg, Morris J. Smith, and William Spier are
currently directors of Integrated and will continue as directors of the
Surviving Corporation.
Nathan Kahn has been the President and a Director of Empire since its
formation in 1984. Mr. Kahn has also been the President and a Director of
Empire-Pacific since its formation in 1996.
Sandra Kahn has been the Secretary and Treasurer and a Director of
Empire since 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 has been the Vice President-Sales/ Director of Marketing
of Empire for more than the prior five years.
Jack Bendheim has been the President, Chief Operating Officer and
Chairman of the Board of Philipp Brothers Chemicals, Inc. for more than the
prior five years. Mr. Bendheim is also a director of The Berkshire Bank, which
is owned by Cooper Life Science.
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<PAGE>
Barry W. Blank became a director of Integrated in December 1997. Mr.
Blank is a stockbroker and has been a member of the New York Stock Exchange
since 1981 and a member of the American Stock Exchange since 1978. Since October
1998, he has served as branch manager of the Phoenix office of Dirks & Co. Prior
thereto, he managed a branch office of Coleman & Co. Securities (1995 to 1997)
and a branch office of RAS Securities (1994 to 1995). Mr. Blank is also a
director of Adrien Arpel, Inc.
Barry L. Eisenberg has been a Director of Integrated since 1990 and
Secretary and Treasurer of Integrated since 1993. 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 has been the General Manager of Empire-Pacific since
1996. For more than five years prior to joining Empire, Mr. Howard held various
positions in the aluminum rolling industry, the most recent of which was
Divisional General Manager Comalco Rolled Products, with Comalco Aluminum Ltd.,
an aluminum producer.
Nathan Mazurek has been the President and Chief Executive Officer of
American Circuit Breaker Corporation, a manufacturer of circuit breaker
protection equipment for more than the prior five years. Since 1995, Mr. Mazurek
has been President and Chief Executive Officer of Pioneer Transformers Ltd., a
manufacturer of liquid filled power and distribution transformers.
William Spier became a director of Integrated in October 1996 and
became Acting Chief Executive Officer in November 1997. Mr. Spier has been a
private investor since 1982 and is, and has been since 1989, the Chairman and
President of Sutton Holding Corp., a private investment company. 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., Moto Guzzi, Inc., Geotek Communications, Inc., and The Trident Rowan
Group, Inc.
Morris J. Smith has been a director of Integrated 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.
Certain Relationships
Nathan Kahn and Sandra Kahn are husband and wife.
Barry L. Eisenberg and Jack Bendheim are brothers-in-law.
Certain Agreements to be Entered Into with Executive Officers
Employment Agreements with the Kahns
Concurrently with the merger, the Surviving Corporation (referred to
below as the "Company") will enter 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 as Annex C and Annex
D to this Proxy Statement.
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<PAGE>
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. The agreements provide for base salary to be paid at a
rate per annum as follows: Nathan Kahn ($250,000) and Sandra Kahn ($100,000).
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, shareholder, advisor of, or otherwise be affiliated with,
any such business, activity or conduct. The "Specified Period" means the
employee's period of employment and the four year period thereafter, provided
that if the employee's employment is terminated for Disability or without Cause
(or the employee voluntarily terminates his employment following a breach by the
Company), the Specified Period will terminate two years after the employee's
employment terminates.
Employment Agreement With Harvey Wrubel
Concurrently with the merger, the Surviving Corporation (referred to
below as the "Company") will enter 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 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.
56
<PAGE>
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. Based
on his performance in 1998, the employee would have been entitled to
approximately $300,000 of performance-based compensation had this agreement been
in effect.
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, shareholder,
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. Concurrently with the merger, the
Company and Nathan and Sandra Kahn will enter into a restricted stock agreement
with Mr. Wrubel. Pursuant to this agreement, the Kahns will transfer to Mr.
Wrubel 469,238 shares ("Restricted Shares") of common stock of the Surviving
Corporation. (These shares will represent a portion of the shares to be received
by the Kahns in the merger.) The Restricted Shares will be 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 Mr.
Wrubel terminates employment with the Company for any reason, Mr. Wrubel will
forfeit to the Kahns any Restricted Shares that are not then vested.
The vesting of 358,327 of the Restricted Shares will be determined in
accordance with the following vesting schedule: (i) 33.33% of such shares will
vest on the first anniversary of the grant date (provided Mr. Wrubel has been
continuously employed by the Company until such 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).
The vesting of 110,911 of the Restricted Shares (the "Contingent
Restricted Shares") will be determined in accordance with the vesting schedule
set forth above and, in addition, will depend on the Surviving Corporation's
cumulative after-tax, net income during the two-year period commencing April 1,
1999 and ending March 31, 2001, as indicated in the table below. (For this
purpose, the Company's net income will be adjusted in the manner described under
"Material Terms of the Merger Agreement--Earn-Out Formula.")
<TABLE>
<CAPTION>
Cumulative After-Tax Income During the Two-Year
Period Ending March 31, 2001 (in Millions of Number of Contingent Restricted Shares
Dollars) that will Vest
- ------------------------------------------------- ----------------------------------------
<S> <C>
less than 4.4 0
4.4 to but excluding 4.8 6,636
4.8 to but excluding 5.2 13,522
5.2 to but excluding 5.6 20,673
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<PAGE>
5.6 to but excluding 6.0 28,104
6.0 to but excluding 6.4 35,833
6.4 to but excluding 6.8 43,877
6.8 to but excluding 7.2 52,256
7.2 to but excluding 7.6 60,992
7.6 to but excluding 8.0 70,108
8.0 to but excluding 8.4 79,628
8.4 to but excluding 8.8 89,582
8.8 to but excluding 9.2 99,999
9.2 or greater 110,911
STOCKHOLDERS OF EMPIRE
As of the date of this Proxy Statement, there are 10 shares of Empire
common stock issued and outstanding. All of these shares are owned by Nathan and
Sandra Kahn. Upon completion of the merger, all of the issued and outstanding
shares of Empire common stock will be converted into shares of common stock of
the Surviving Corporation.
As of the date of this Proxy Statement, there are 1,000 shares of
Empire-Pacific common stock issued and outstanding. All of these shares are
owned by Nathan and Sandra Kahn. Immediately prior to completion of the merger,
Nathan and Sandra Kahn will contribute their shares of Empire-Pacific to Empire.
As a result, upon completion of the merger, Empire-Pacific will become a
wholly-owned subsidiary of the Surviving Corporation.
Following completion of the merger, the Kahns will transfer to Harvey
Wrubel a portion of the Surviving Corporation common stock that they receive in
the merger. This transfer will be made pursuant to the Restricted Stock
Agreement described under "Management Following the Merger--Certain Agreements
to be Entered Into With Executive Officers."
58
<PAGE>
BUSINESS OF EMPIRE
The term "Company" as used in this section of the Proxy Statement
refers to Empire.
General
Empire is a distributor of a broad range of semi-finished aluminum
products. The Company distributes its products to a wide variety of customers in
diverse industries, including transportation, automotive, housing, appliances
and packaging. The Company currently serves customers throughout the United
States and Canada and, to a lesser extent, Australia and New Zealand. Empire, a
Delaware corporation, was founded in 1984 by Nathan Kahn and Sandra Kahn, who
serve as Empire's President and Secretary and Treasurer, respectively.
Strategy
The Company's strategy for growth involves the following key elements:
Provide Customers with 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 in order 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
subsequent metal processing or finishing services required by the customer, (2)
arranging for products to be stored in warehouse facilities for release to the
customer on a just-in-time delivery basis and (3) providing customers with
timely information concerning market trends and product development.
Expand Sources of Supply and Serve as Effective Marketing Channel for
Suppliers. The Company constantly endeavors to increase its supply sources by
expanding its relationships with existing suppliers and forming relationships
with new suppliers. The Company seeks to build its supply relationships by
serving as an effective marketing channel for its suppliers. The Company
believes that, as it increases its supply sources, it will be able to increase
sales to existing customers and attract new customers because it will be in a
position to offer customers greater quantities and a wider range of products.
Expand Geographically. The Company in 1996 expanded geographically by
forming an affiliate to market its products in Australia and New Zealand. The
Company will selectively seek additional opportunities to expand into new
geographic areas.
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 or finishing
services). The Company may accomplish this through establishing joint venture
arrangements with existing service providers or by selectively making
acquisitions.
The Industry
Semi-finished aluminum products are produced by processing primary
aluminum 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.
59
<PAGE>
According to industry sources, an estimated 25,000 companies in the
United States used semi-finished aluminum products in 1997. These users were in
the following industries: transportation (32%); packaging (26%); building (16%);
electrical (8%); consumer durables (8%); and other industries (10%).
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 industry
sources, during the three years ended December 31, 1997, domestic consumption of
aluminum products grew from 6.3 million metric tons to 6.9 million metric tons.
Sales, Marketing and Services
Empire 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. Empire 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;
o assuming responsibility for the shipment and timely delivery of the
product to the customer;
o assisting customers in identifying materials 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 timely information concerning market
trends and product development.
Empire 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. Empire 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.
Empire primarily sells its products through its own marketing and
sales personnel. In addition, Empire sells its products through independent
sales agents located in the United States who receive a commission on sales.
Empire does not typically purchase inventory for stock. Rather, it
places orders with its suppliers based upon orders that it has received from its
customers.
In 1996, Empire extended its distribution territory by establishing an
affiliate to distribute its products in Australia and New Zealand. This
affiliate (Empire Resources Pacific, Ltd.) will become a wholly-owned subsidiary
of Empire prior to the merger.
60
<PAGE>
Backlog
At March 31, 1998 and March 31, 1999, the amount of backlog of firm
orders was approximately $28 million. Empire expects to fill substantially all
of the orders in the March 31, 1999 backlog during the period ending September
30, 1999.
Suppliers
Empire enjoys exclusive representation arrangements with several
foreign mills, as well as close and long-term relationships with a key domestic
vendor. Empire provides important services to its suppliers by:
o serving as an integrated marketing and distribution channel for
the export volume of foreign suppliers;
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.
Empire 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, Empire is able to obtain competitive pricing and to influence
quality standards and delivery practices.
During 1996 and 1997, two of Empire's significant suppliers were
acquired and subsequently discontinued their relationships with Empire. Since
then, Empire has succeeded in expanding its supply sources. Specifically, Empire
in the second quarter of 1999 has been benefiting from a new supply relationship
entered into during 1998. Empire expects that it will further expand its supply
sources later in 1999 when an existing supplier, with whom Empire enjoys an
exclusive, long-term relationship, is scheduled to begin production at a new
facility.
Customers
Empire serves over 150 customers in diverse industries, including
transportation, automobile, housing, appliances and packaging. In 1998, Empire's
top ten customers represented approximately 40% of its sales. These customers
included five 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. In 1998, customers in
the United States accounted for approximately 75% of revenues, customers in
Canada for approximately 15% , and customers in Australia and New Zealand for
approximately 10%. Empire's U.S. customer base is not regional.
Empire insures its account receivables against credit risk by
purchasing credit insurance. This insurance is subject to a 15% co-insurance
provision with respect to each claim and there are limits on the amount of
credit that Empire's insurance carrier will underwrite with respect to each
customer.
61
<PAGE>
Transportation
Empire arranges for the transportation to customers of the products
that they purchase from Empire. When Empire 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 Empire 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, Empire uses rail and trucking services to
deliver the products to its customers.
Empire is generally able to negotiate volume transportation rates with
vendors. As a result, it generally obtains lower rates than its customers or
suppliers could obtain for themselves.
Competition
Empire's principal competitors are North American aluminum producers,
including Alcoa and Alcan which dominate the aluminum industry in North America.
These companies are significantly larger and have greater financial resources
than Empire. Empire also competes with other importers and agents that act for
foreign aluminum producers. Empire 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 Empire offers its customers.
Employees
As of March 31, 1999, Empire had 18 employees in New Jersey. Empire
also has independent sales representatives located in the United States. None of
these employees are represented by a collective bargaining agreement.
Empire Resources Pacific, Ltd. has four employees in Australia.
Properties
Management believes that Empire's facilities are adequate to meet its
current needs. Empire's corporate headquarters are located in Fort Lee, New
Jersey, where Empire leases office space pursuant to a lease expiring in March
2000. The lease provides for an annual rental payment of $173,802.
EMPIRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
Empire is a distributor of value added, semi-finished aluminum
products. Consequently, Empire's sales volume has been, and will continue to be,
a function of its continuing ability to secure quality aluminum products from
its suppliers.
During 1996 and 1997, two of Empire's significant suppliers were
acquired and subsequently discontinued their relationships with Empire. Empire's
sales volume in 1997 and 1998 was negatively impacted by the loss of these
suppliers. In addition, gross profit margins were negatively impacted because
certain of the products provided by these suppliers generated relatively high
profit margins for Empire.
62
<PAGE>
Since 1997, Empire has succeeded in expanding its supply sources.
Specifically, Empire in the second quarter of 1999 has been benefiting from a
new supply relationship entered into in 1998. Empire expects that it will
further expand its supply sources later in 1999 when an existing supplier, with
whom Empire enjoys an exclusive, long-term relationship, is scheduled to begin
production at a new facility.
Tax Status
Empire has heretofore been taxed as a Subchapter S Corporation for
federal income tax purposes. In general, the income or loss of a Subchapter S
Corporation is passed through to its owners rather than being subjected to tax
at the entity level. Empire's status as a Subchapter S Corporation will
terminate upon completion of the merger. The pro forma income taxes included in
the selected income statement data below reflects a provision for income taxes
as if Empire had been liable for federal and state income taxes as a taxable
corporate entity for all periods presented.
Selected Income Statement Data
The following table sets forth selected income statement data for
Empire for the periods indicated:
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(unaudited)
(in millions)
<S> <C> <C> <C> <C> <C>
Net sales............................. $119.7 $111.2 $101.2 $26.8 $21.1
Gross profit.......................... 11.9 8.6 6.9 1.7 1.6
Selling, general and administrative
expenses........................... 4.9 3.4 3.1 0.7 0.7
Interest expense, net................. 1.8 1.2 1.3 0.4 0.5
Income before taxes................... 5.2 3.9 2.5 0.7 0.4
Pro forma income taxes................ 1.9 1.4 0.9 0.2 0.2
Pro forma net income.................. 3.3 2.5 1.6 0.5 0.2
</TABLE>
Results of Operations--the three months ended March 31, 1998 and 1999
Net sales decreased $5.6 million, or 21%, from $26.8 million in the
first quarter of 1998 to $21.1 million in the first quarter of 1999. This
decrease primarily reflected a significant decrease in the price of metals on
the world market combined with a change in mix of products sold from more
expensive products to less expensive products. The quantity of product sold
remained stable from period to period.
Gross profit decreased 8% in the first quarter of 1999 compared to the
first quarter of 1998. The percentage decrease in gross profit was significantly
less than the percentage decrease in sales because Empire's cost of sales
decreased commensurate with the decrease in metals prices discussed above.
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<PAGE>
Gross profit as a percentage of sales increased from 6.5% in the first
quarter of 1998 to 7.6% in the first quarter of 1999, reflecting the fact that,
as discussed above, the percentage decrease in the dollar amount of gross
profits was significantly less than the decrease in sales.
Interest expense increased 22.3% from $0.4 million during the first
quarter of 1998 to $0.5 million during the first quarter of 1999, primarily as a
result of the issuance of promissory notes to stockholders, as described under
"--Distribution of Surplus Net Worth--Distribution of Promissory Notes" below.
Results of Operations--1996, 1997 and 1998
As described above, Empire's results in 1997 and 1998 were negatively
impacted by the loss of two suppliers (one in 1996 and one in 1997). The loss of
these supply sources was the principal reason why:
o net sales (i) decreased 7% from 1996 to 1997 and (ii) decreased 9%
from 1997 to 1998;
o gross profit (i) decreased 28% from 1996 to 1997 and (ii)
decreased 19% from 1997 to 1998; and
o gross profit as a percentage of sales declined from 9.9% in 1996
to 7.7% in 1997 and 6.9% in 1998.
Empire expects that its supply sources will increase in 1999 as described above.
The decline in selling, general and administrative expenses subsequent
to 1996 primarily reflected a reduction in compensation paid to Nathan and
Sandra Kahn. In connection with the merger, the Surviving Corporation will enter
into employment agreements with Nathan and Sandra Kahn. Under the terms of these
agreements, the combined base salary payable to Nathan and Sandra Kahn will
increase to $350,000 compared with $107,000 in 1998. For additional information
concerning these employment agreements, see "Management Following the
Merger--Certain Agreements to be Entered Into with Executive Officers."
The decline in interest expense in 1997 compared to 1996 primarily
reflected reduced borrowings on lower sales volume and a decline in interest
rates.
Distribution of Surplus Net Worth
In February 1999, Empire determined to distribute to the Empire
Stockholders an amount ("Surplus Net Worth") equal to 60% of the
pre-distribution total fair value of Empire's business and net assets inclusive
of good will and going concern value, and in particular the full premium value
of Empire's supply contracts (which total value Empire and the Empire
Stockholders agreed was not less than $19 million), but in no event more than
the total stockholders' equity of Empire as shown on the balance sheet of Empire
as of December 31, 1998 (or $10,922,475). Empire carried out the foregoing
through the distribution to the Empire Stockholders of the Asset Backed Notes
described under "--Distribution of Promissory Notes" below.
Empire also determined to recalculate its Surplus Net Worth as of the
effective time of the merger (with Empire's Surplus Net Worth equaling for such
purpose the total stockholders' equity of Empire as shown on its balance sheet
as of the Effective Time), and to make additional distributions (described under
"--Possible Additional Distributions" below) to the Empire Stockholders to
reduce such Surplus Net Worth to approximately zero.
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<PAGE>
As a consequence of the foregoing, Empire has made, and expects to
make, certain distributions to the Empire Stockholders as described below.
Distribution of Promissory Notes
On February 19, 1999, Empire distributed to the Empire Stockholders two
promissory notes (the "Asset Backed Notes") in the aggregate principal amount of
$10,922,475. The Asset Backed Notes: (1) bear interest at the rate of 6% per
annum, (2) are due and payable in full on August 31, 1999 (as extended from June
30, 1999), and (3) are secured by all accounts receivable and inventory of
Empire that were in existence on the date the notes were issued and by any
proceeds received in respect of such collateral.
Empire is required to deposit any proceeds constituting collateral into
a segregated collateral account. The funds in this account will be used to repay
the Asset Backed Notes at maturity. Because Empire has been segregating funds in
a collateral account as described above, Empire has been required to increase
its borrowings under its credit facility in order to fund its working capital
requirements. This is the principal reason why the outstanding indebtedness
under the credit facility (excluding letters of credit) increased from $15.9
million as of December 31, 1998, to $26.2 million as of June 30, 1999.
Possible Additional Distributions
Prior to completion of the merger, Empire expects to make such
additional distributions to the Empire Stockholders as is necessary to reduce
Empire's Surplus Net Worth, measured as of the effective time of the merger, to
approximately zero. Such distributions may be in the form of cash or notes.
Accounting Treatment of Restricted Stock Agreement
Concurrently with the merger, the Surviving Corporation and Nathan and
Sandra Kahn will enter into a restricted stock agreement with Mr. Wrubel. Mr.
Wrubel is currently an employee of Empire and will become Vice President of
Sales of the Surviving Corporation. Pursuant to the restricted stock agreement,
the Kahns will transfer to Mr. Wrubel 469,238 shares ("Restricted Shares") of
common stock of the Surviving Corporation, which represents a portion of the
shares to be received by the Kahns in the merger. The Restricted Shares will be
comprised of (i) 358,327 shares (the "Non-Contingent Restricted Shares") that
will vest on specified dates over a three-year period, subject only to the
condition that Mr. Wrubel continue to be employed by the Surviving Corporation
as of the vesting date, and (ii) 110,911 shares (the "Contingent Restricted
Shares") that will be subject to the same vesting criteria as the Non-Contingent
Restricted Shares and, in addition, be 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 Surviving Corporation over a specified period. For additional information
concerning the Restricted Shares and the vesting requirements relating thereto,
see "Management Following the Merger--Certain Agreements to be Entered Into with
Executive Officers--Employment Agreement with Harvey Wrubel."
The transfer of the Restricted Shares from the Kahns to Mr. Wrubel will
not involve the issuance of any shares by the Surviving Corporation or any cash
expenditure by the Surviving Corporation. However, under applicable accounting
rules, such transfer will be treated the same as if the Surviving Corporation
had issued such shares to Mr. Wrubel as compensation for services and,
accordingly, the Surviving Corporation will be required to recognize an expense
relating thereto. The expense relating to the Non-Contingent Restricted Shares
will be based on
65
<PAGE>
the fair market value of the stock as of the grant date and be recognized over
the vesting period. (Assuming a fair market value of $2.00 per share as of the
grant date, the Surviving Corporation would recognize $145,985 of expense in
1999; $358,328 of expense in 2000; $159,257 of expense in 2001; and $53,085 of
expense in 2002.) The expense relating to the Contingent Restricted Shares will
be based on the fair market value of the stock as of the time of vesting and be
recognized at the time of vesting. No expense will be recognized with respect to
Contingent Restricted Shares that do not vest.
Liquidity and Capital Resources
Empire currently operates under revolving lines of credit, including a
commitment to issue letters of credit, with two commercial banks. The available
line will be $35 million as of September 30, 1999. 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, 2001.
As of June 30, 1999, the amount outstanding under Empires' revolving lines of
credit was $26.2 million (excluding letters of credit in the amount of $13.1
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 Empire'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 June 30, 1999, Empire's outstanding letters of
credit amounted to $13.1 million.
Under the terms of some of its supply contracts, Empire is required to
take minimum tonnages as specified in those contracts. As a result, Empire
could, under certain circumstances, be forced to sell the required tonnage at a
loss.
Market Risk, Sensitive Transactions
Empire is exposed to market risks arising from adverse changes in
foreign currency exchange rates and commodity prices. In the normal course of
its business, the Company uses derivatives to hedge these exposures as part of
its risk management. Empire enters into these transactions with substantial
financial institutions, to reduce the risk of non-performance by counter
parties.
Foreign Currency Exchange Rate Risk. The Company hedges its foreign
currency exposure by use of foreign exchange forward contracts as hedges of
either trade receivables or payables.
Commodity Price Risk. Generally, all industrial commodity transactions
are hedged on a daily basis, as necessary, using forward, future or option
contracts to substantially eliminate the exposure to price risk.
Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Sensitivity. Empire has exposure to changing interest
rates in the United States. The table below provides information about Empire's
indebtedness that is sensitive to changes in interest rates. The table presents
cash flows with respect to principal on indebtedness
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<PAGE>
by expected maturity dates. The interest rate on Empire's short term debt of
$19.1 million is the Money Market Rate as quoted by The Chase Manhattan Bank. At
March 31, 1999, the Money Market Rate was 7.0575%.
Exchange Rate Sensitivity. Empire purchases and sells its products in a
number of countries throughout the world and, as a result, is exposed to
movements in foreign currency exchange rates. Empire's policy is to hedge net
foreign currency cash exposures generally through foreign exchange forward and
option contracts. The contracts are entered into with major financial
institutions to minimize counterparty risk. These contracts generally have a
duration of less than twelve months and are against the U.S. dollar. The table
below provides information about Empire's foreign exchange financial instruments
by functional currency and presents such information in U.S. dollar equivalents.
For foreign currency forward exchange agreements, the table presents the gross
notional amounts and weighted average exchange rates by contractual maturity
dates. The fair value of foreign currency forward exchange contracts is the
estimated amount Empire would receive (pay) to terminate the agreements. Empire
does not hold or issue financial instruments for trading purposes.
Commodity Price Sensitivity. Empire purchases its products only upon
firm purchase orders from its customers. As such, Empire is not generally
exposed to movements in commodity prices.
<TABLE>
<CAPTION>
Average Expected Maturity Date
Contractual For Year Ended Fair Value
Rate(a) December 31, 1999 March 31, 1999
----------- ---------------------- --------------
(in thousands of US dollars)
<S> <C> <C> <C>
Debt
Short-term variable rate 19,050.0 19,050.0
Forward Contracts(b)
Canadian Dollar 1.53 650.2 (10.4)
Australian Dollar 1.61 1,621.8 (50.8)
German Marks 1.77 (670.8) (14.5)
Great Britain Pounds .62 (24.3) (0.1)
</TABLE>
- ----------------------
(a) Stated in units of local currency per U.S. dollar.
(b) Maturity amounts for forward contracts are stated in contract
notional amounts to sell (buy) local currency.
Year 2000 Issues
Some computer software programs and computer hardware and computer
chips embedded in operating systems may not recognize correctly dates beginning
on and after January 1, 2000. This could result in those programs, hardware or
systems becoming inoperable or experiencing other adverse consequences. Empire
has reviewed its internal computer software programs and hardware and believes
that they will be year 2000 compliant before January 1, 2000. Empire's costs in
connection with this review and making its software and hardware year 2000
compliant have not been and are not expected to be material.
Empire has sought assurances from its suppliers, shippers and customers
that their operations are year 2000 compliant, and has received assurances from
many of them. However,
67
<PAGE>
Empire has no control over their compliance efforts. Furthermore, most of
Empire's suppliers are located in foreign countries in which companies may not
be as advanced in achieving year 2000 compliance as companies in the United
States. There can be no assurance that year 2000 problems at Empire's suppliers
or shippers will not interfere with Empire's ability to obtain supplies in a
timely manner, if at all. Any such occurrence would have a material adverse
effect on Empire's business. Furthermore, year 2000 problems may have a negative
impact on the general economy or on the ability of businesses generally to
receive essential services (such as telecommunications, banking services, etc.).
68
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT FOLLOWING THE MERGER
The following table sets forth as of July 1, 1999, certain historical
and pro forma 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
Integrated by (i) each person that will be a director of the Surviving
Corporation, (ii) each person that will be an executive officer of the Surviving
Corporation, (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 Integrated.
<TABLE>
<CAPTION>
Number of Shares Percent of Common
Beneficially Owned(2) Stock Owned
---------------------------------------- -----------------------
Pro Forma Pro Forma
After After
Name and Address(1) Actual Merger(3) Actual Merger(3)
- ------------------------------------------ -------------------- ----------------- ------ ---------
<S> <C> <C> <C> <C>
Directors and Executive Officers Following
the Merger:
Nathan Kahn and Sandra Kahn - 8,915,523(4) - 57.4%
Harvey Wrubel - 469,238(5) - 3.02%
Jack Bendheim 36,666(6) 36,666(6) * *
Barry W. Blank 859,600(7) 859,600(7) 12.8% 5.3%
Barry L. Eisenberg 363,706(8) 363,706(8) 5.9% 2.3%
Peter G. Howard - - - -
Nathan Mazurek - - - -
Morris J. Smith 48,667(9) 48,667(9) * *
William Spier 79,669(10) 79,669(10) 1.3% *
All persons that will be executive officers or
directors following the merger as a group (10
persons) 1,388,308(11) 10,773,069(12) 20.2% 66.2%
Other Stockholders:
Alan P. Haber 1,140,605(13) 1,140,605(13) 17.8% 7.2%
</TABLE>
- ------------------
* Less than 1%
(1) The address of Messrs. Blank, Eisenberg, Haber, Smith, and Spier is
c/o Integrated, and the address of the other persons is c/o Empire.
(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.
(3) Gives effect to completion of the merger and the transfer of certain
shares from Nathan and Sandra Kahn to Mr. Wrubel as described under
"Management Following the Merger--Certain Agreements to be Entered Into
with Executive Officers--Employment Agreement With Harvey Wrubel."
69
<PAGE>
(4) Consists of shares to be received in the merger (less the shares to be
transferred to Mr. Wrubel). Of these shares, 3,824,511 share are
Contingent Shares subject to the earn-out described under "Material
Terms of the Merger Agreement--Earn-out Formula."
(5) Consists of shares to be transferred to Mr. Wrubel from Nathan and
Sandra Kahn following completion of the merger. These shares will be
subject to vesting and other conditions. See "Management Following the
Merger--Certain Agreements to be Entered Into with Executive
Officers--Employment Agreement With Harvey Wrubel."
(6) Consists of (i) 20,000 outstanding shares held by the Bendheim
Foundation, an affiliate of Mr. Bendheim, and (ii) 16,666 shares
underlying currently exercisable warrants held by Mr. Bendheim. Mr.
Bendheim disclaims beneficial ownership of the shares owned by the
Bendheim Foundation.
(7) Consists of (i) 259,600 outstanding shares held by Mr. Blank and (ii)
600,000 shares underlying currently exercisable warrants held by Mr.
Blank. Excludes any shares which may be owned by Mr. Blank's customers,
in which he disclaims any beneficial or other interest and over which
he has no voting or dispositive power.
(8) Consists of (i) 700 currently outstanding shares held by Mr. Eisenberg,
(ii) 76,667 shares underlying currently exercisable options held by Mr.
Eisenberg, (iii) 1,000 shares underlying currently exercisable warrants
held by Mr. Eisenberg, (iv) 500 shares owned by Mr. Eisenberg's wife
and (v) 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.
(9) Consists of (i) 7,000 currently outstanding shares held by Mr. Smith
and (ii) 41,667 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.
(10) Consists of (i) 54,669 currently outstanding shares held by Mr. Spier
and (ii) 25,000 shares underlying currently exercisable options held
by Mr. Spier.
(11) Consists of 627,308 currently outstanding shares and 761,000 shares
underlying currently exercisable options and warrants. Does not include
163,653 shares that Mr. Smith disclaims beneficial ownership of as
described in footnote 9 above.
70
<PAGE>
(12) Consists of 10,012,069 shares that will be outstanding following the
merger and 761,000 shares underlying currently exercisable options and
warrants. Does not include 163,653 shares that Mr. Smith disclaims
beneficial ownership of as described in footnote 9 above.
(13) Consists of (i) 830,771 shares held by Mr. Haber, (ii) 276,444 shares
underlying currently exercisable options held by Mr. Haber, (iii)
10,000 shares underlying currently exercisable warrants held by Mr.
Haber and (iv) 23,390 shares held by Mr. Haber's wife. Mr. Haber
disclaims any beneficial ownership of any stock owned by his wife.
ELECTION OF DIRECTORS
If the merger is approved, you will be asked to elect as directors the
nine persons identified as directors under "Management Following the Merger" to
hold office until the 2000 Annual Meeting of Stockholders of the Surviving
Corporation or until their successors are duly elected and have qualified. The
merger will not be completed unless these persons (or, if a nominee is
unavailable for any reason, a substitute approved by Integrated and Empire) are
elected directors.
If the merger is not approved, you will be asked to elect as directors
the 10 current directors of Integrated to hold office until the 2000 Annual
Meeting of Stockholders of Integrated or until their successors are duly elected
and have qualified. Information concerning the current directors of Integrated
is contained in Item 9 of the Annual Report on Form 10-KSB of Integrated for the
year ended December 31, 1998, a copy of which is attached hereto as Appendix G.
All nominees have consented to be named and serve if elected.
Unless a stockholder requests that voting of the proxy be withheld for
any one or more of the nominees for directors by so directing on the proxy card,
the shares represented by the accompanying proxy will be voted FOR election, as
directors, of the above-mentioned nominees. If any nominee becomes unavailable
for any reason (which event is not anticipated) to serve as a director at the
time of the meeting, then the shares represented by such proxy may be voted for
such other person as may be determined by the holders of such proxy.
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors has appointed KPMG LLP (effective upon completion
of the merger) as independent auditors to audit the financial statements of the
Surviving Corporation for the year ending December 31, 1999, subject to
ratification by the stockholders.
In the event that the stockholders fail to ratify this appointment,
other certified public accountants will be considered upon recommendation of the
audit committee. Even if this appointment is ratified, the Board of Directors,
in its discretion, may direct the appointment of a new independent accounting
firm at any time during the year, if the Board believes that such a change would
be in the best interest of the Company and its stockholders.
A representative of KPMG LLP is expected to be present at the annual
meeting, will have an opportunity to make a statement if he/she so desires and
will be available to respond to appropriate questions.
71
<PAGE>
STOCKHOLDER PROPOSALS FOR THE 2000 ANNUAL MEETING
Notice Required to Include Proposals in the Company's Proxy Statement
The Company will review for inclusion in next year's proxy statement
shareholder proposals received by March 31, 2000. All proposals must meet the
requirements set forth in the rules and regulations of the SEC in order to be
eligible for inclusion in the proxy statement. Proposals should be sent in
writing to the Company's principal executive offices.
Notice Required to Bring Business Before an Annual Meeting
The Company's By-laws establish an advance notice procedure for
stockholders to make nominations of candidates for election of director or to
bring other business before an annual meeting. Under these procedures, a
stockholder that proposes to nominate a candidate for director or proposes other
business at the 2000 Annual Meeting of Stockholders, must give the Company
written notice of such nomination or proposal not less than 60 days and not more
than 90 days prior to the scheduled date of the meeting (or, if less than 75
days' notice or prior public disclosure of the date of the meeting is given and
the date of the meeting is not within five calendar days of the date of the 1999
Annual Meeting, then the 15th day following the earlier of (i) the date such
notice was mailed or (ii) the day such public disclosure was made). Such notice
must provide certain information as specified in the Company's By-laws and must
be received at the Company's principal executive offices by the deadline
specified above.
LEGAL MATTERS
The validity of the shares of Integrated common stock to be issued in
connection with the merger will be passed upon for Integrated by Ehrenreich
Eilenberg Krause & Zivian, LLP.
INDEPENDENT AUDITORS
The consolidated financial statements of Integrated as of December
31,1998, and for the years ended December 31, 1997 and 1998 included in
Integrated's Annual Report on Form 10-KSB for the year ended December 31, 1998,
have been audited by PricewaterhouseCoopers LLP, independent accountants, as set
forth in their report thereon included therein, and are incorporated herein by
reference.
The financial statements of Empire as of December 31, 1997 and 1998,
and for the years ended December 31, 1996, 1997 and 1998 included in this Proxy
Statement have been audited by KPMG LLP, independent accountants, as set forth
in their report thereon appearing herein.
72
<PAGE>
EMPIRE RESOURCES, INC.
FINANCIAL STATEMENTS
CONTENTS
For the years ended December 31, 1996, 1997 and 1998
Independent Auditors' Report................................................F-2
Balance Sheets..............................................................F-3
Statements of Income........................................................F-4
Statements of Cash Flows....................................................F-5
Statements of Stockholders' Equity..........................................F-6
Notes to the Financial Statements..............................F-7 through F-11
For the three months ended March 31, 1999
(unaudited)
Balance Sheets.............................................................F-12
Statements of Income.......................................................F-13
Statements of Cash Flows...................................................F-14
Statements of Stockholders' Equity.........................................F-15
Notes to the Financial Statements..........................................F-16
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Empire Resources, Inc.
We have audited the accompanying balance sheets of Empire Resources,
Inc. as of December 31, 1998 and 1997, and the related statements of income,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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
amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Empire Resources,
Inc. as of December 31, 1998 and 1997, and the results of its operations and
cash flows for each of the years in the three-year period ended December 31,
1998, in conformity with generally accepted accounting principles.
KPMG LLP
New York, NY
February 5, 1999, except as to Note 8 (a)
which is as of February 19, 1999 and
except as to Note 8 (b) which is as of
February 22, 1999
F-2
<PAGE>
EMPIRE RESOURCES, INC.
BALANCE SHEETS
December 31, 1997 and 1998
<TABLE>
<CAPTION>
December 31
----------------------------
1997 1998
------------ ------------
Assets
<S> <C> <C>
Current assets:
Cash $ 559,686 147,161
Trade accounts receivable, less allowance for
doubtful accounts of $125,788 22,974,993 20,438,800
Inventories 23,055,265 14,005,173
Prepaid expenses 92,928 70,670
Other current assets 26,932 76,932
------------ ------------
Total current assets 46,709,804 34,738,736
------------ ------------
Furniture and equipment 207,776 276,493
Less accumulated depreciation (154,683) (196,459)
------------ ------------
Net furniture and equipment 53,093 80,034
Loan due from related party 202,150 202,150
Loans due from employees and third party 200,000 165,000
------------ ------------
$ 47,165,047 35,185,920
============ ============
Liabilities and Stockholders's Equity
Current liabilities:
Notes payable - banks $ 17,700,000 15,900,000
Trade accounts payable 17,275,618 7,834,845
Accrued expenses 457,644 528,600
------------ ------------
Total current liabilities 35,433,262 24,263,445
------------ ------------
Stockholders' equity:
Common stock, no par value. Authorized 200 shares;
issued and outstanding 10 shares 50,000 50,000
Retained earnings 11,681,785 10,872,475
------------ ------------
Total stockholders' equity 11,731,785 10,922,475
------------ ------------
$ 47,165,047 35,185,920
============ ============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
EMPIRE RESOURCES, INC.
STATEMENTS OF INCOME
Years ended December 1996, 1997 and 1998
<TABLE>
<CAPTION>
Years ended December 31
----------------------------------------------------------
1996 1997 1998
------------- ------------- ------------
<S> <C> <C> <C>
Net sales $ 119,716,130 111,169,339 101,163,278
Cost of goods sold 107,804,848 102,606,814 94,227,249
------------- ------------- ------------
Gross profit 11,911,282 8,562,525 6,936,029
Selling, general and administrative
expenses 4,868,607 3,437,851 3,079,983
Interest expense, net 1,845,213 1,229,607 1,331,056
------------- ------------- ------------
Income before income taxes 5,197,462 3,895,067 2,524,990
Income taxes 68,500 50,418 39,300
------------- ------------- ------------
Net income $ 5,128,962 3,844,649 2,485,690
============= ============= ============
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
EMPIRE RESOURCES, INC.
STATEMENTS OF CASH FLOWS
Years ended December 1996, 1997 and 1998
<TABLE>
<CAPTION>
Years ended December 31
--------------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 5,128,962 3,844,649 2,485,690
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 27,964 29,490 41,776
Change in assets and liabilities:
Decrease (increase) in accounts receivable 12,162,032 (2,565,874) 2,536,193
Decrease (increase) in inventories 1,376,052 (6,870,528) 9,050,092
Decrease (increase) in prepaid expenses (70,209) 30,706 22,258
Increase in other current assets -- -- (50,000)
Decrease in loans due from employees and third party -- -- 50,000
Increase (decrease) in trade accounts payable (3,666,287) 6,638,399 (9,440,773)
Increase (decrease) in accrued expenses 108,479 (23,760) 70,956
------------ ------------ ------------
Net cash provided by operating activities 15,066,993 1,083,082 4,766,192
------------ ------------ ------------
Cash flows from investing activities:
Additions to fixed assets (18,533) (7,632) (68,717)
Issuance of loans due from employees and third party (150,000) (50,000) (15,000)
Repayment of loan due from employee -- 50,000 --
Issuance of loans due from related parties (1,000,000) (202,150) --
Repayment of loan due from related parties -- 1,000,000 --
------------ ------------ ------------
Net cash (used in) provided by investing activities (1,168,533) 790,218 (83,717)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from (repayments of) notes payable - banks (9,100,000) 1,600,000 (1,800,000)
Distributions to stockholders (4,945,000) (3,319,960) (3,295,000)
------------ ------------ ------------
Net cash used in financing activities (14,045,000) (1,719,960) (5,095,000)
------------ ------------ ------------
Net increase (decrease) in cash (146,540) 153,340 (412,525)
Cash at beginning of year 552,886 406,346 559,686
------------ ------------ ------------
Cash at end of year $ 406,346 559,686 147,161
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 1,845,213 1,229,607 1,331,056
============ ============ ============
Taxes $ 68,500 90,367 300
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
EMPIRE RESOURCES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1996, 1997 and 1998
Common Retained
stock earnings Total
----------- ----------- -----------
Balances at December 31, 1995 $ 50,000 10,973,134 11,023,134
Net income -- 5,128,962 5,128,962
Dividends -- (4,945,000) (4,945,000)
----------- ----------- -----------
Balances at December 31, 1996 50,000 11,157,096 11,207,096
Net income -- 3,844,649 3,844,649
Dividends -- (3,319,960) (3,319,960)
----------- ----------- -----------
Balances at December 31, 1997 50,000 11,681,785 11,731,785
Net income -- 2,485,690 2,485,690
Dividends -- (3,295,000) (3,295,000)
----------- ----------- -----------
Balances at December 31, 1998 $ 50,000 10,872,475 10,922,475
=========== =========== ===========
See accompanying notes to financial statements.
F-6
<PAGE>
EMPIRE RESOURCES, INC.
NOTES TO THE FINANCIAL STATEMENTS
(1) Organization
Empire Resources, Inc. (the "Company") is engaged principally in the
purchase, sale and distribution of nonferrous metals to a diverse
customer base located throughout North America. The Company purchases
from a wide array of suppliers located throughout the world. Two
different suppliers accounted for 21% and 42% each of total purchases in
1998 and 1997, respectively. One supplier accounted for 12% and 18% of
total purchases in 1998 and 1997, respectively. In 1998 and 1997, no
other supplier or customer accounted for 10% or more of the Company's
purchases and sales.
The Company's operation is dependent upon its supplier relationships. The
termination or limitation by any principal supplier of its relationship
with the Company could have a material adverse effect on the Company's
results of operations.
(2) Summary of Significant Accounting Policies
(a) Revenue Recognition
Revenue is recognized when title to the goods passes to the
customers.
(b) Inventories
Inventories are stated at the lower of cost or market. Cost is
determined by the specific-identification method.
(c) 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.
F-7
<PAGE>
EMPIRE RESOURCES, INC.
NOTES TO THE FINANCIAL STATEMENTS
(d) Foreign Exchange Contracts
The Company enters into foreign exchange forward contracts to
hedge transactions primarily related to firm commitments to
purchase or sell nonferrous metals denominated in international
currencies. These contracts reduce currency risk from exchange
rate movements. Gains and losses are deferred and accounted for as
part of the underlying transactions. In entering into these
contracts, the Company has assumed the risk which might arise from
the possible inability of counterparties to meet the terms of
their contracts. The Company does not expect any losses as a
result of counterparty defaults because of the substantial size of
the counterparties.
In 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement
establishes new accounting and reporting standards for derivative
instruments and hedging activities. The Company must adopt this
statement by January 1, 2000. The Company has not determined the
impact this statement will have on its financial position or
results of operations.
(e) Option Contracts
The Company enters into option contracts to lock in prices of
nonferrous metals. The option premium paid is capitalized as
prepaid options and is expensed on the maturity date.
(f) Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
F-8
<PAGE>
EMPIRE RESOURCES, INC.
NOTES TO THE FINANCIAL STATEMENTS
(3) Financial Instruments
The carrying amounts of financial instruments including cash, trade
accounts receivable, prepaid options, loans receivable, trade accounts
payable and notes payable - banks approximated fair value as of December
31, 1998 and 1997 because of the relatively short maturity of these
instruments.
The Company hedges its foreign currency exposure to the extent considered
practicable by use of foreign exchange forward contracts. As of December
31, 1998, the Company had foreign exchange forward contracts maturing
through November 1999 to purchase approximately $0.6 million in foreign
currency, and to sell approximately $4.0 million in foreign currency, at
contracted forward rates. As of December 31, 1997, the Company had
foreign exchange forward contracts maturing through October 1998 to
purchase approximately $1.6 million in foreign currency, and to sell
approximately $7.4 million in foreign currency, at contracted forward
rates. As of December 31, 1998 and 1997, the fair value of such foreign
exchange forward contracts amounted to approximately $10,000 and
$270,000, respectively.
(4) Other Assets - Current and Noncurrent
As of December 31, 1998, other current assets include a loan due from a
third party of $50,000. This loan is noninterest bearing and will be
repaid in the first quarter of 1999. As of December 31, 1997, this loan
was included in loans due from employees and third party.
As of December 31, 1998 and 1997, loans due from related parties
consisted of a loan to Empire Resources Pacific Ltd., an affiliated
company, in the amount of $202,150. As of December 31, 1998 and 1997,
loans to employees amounted to $165,000 and $150,000, respectively. All
of these loans are noninterest bearing and are not expected to be repaid
within one year. During 1998, 1997 and 1996, the Company paid
approximately $183,000, $200,000 and $4,000, respectively, in fees to an
affiliate for certain services.
F-9
<PAGE>
EMPIRE RESOURCES, INC.
NOTES TO THE FINANCIAL STATEMENTS
(5) Notes Payable - Banks
At December 31, 1998 and 1997, the Company operated under a line of
credit of $25,000,000 with two commercial banks. Borrowings by the
Company under this line of credit are collateralized by security
interests in the Company's accounts receivable and inventory. In
addition, the Company is required to maintain working capital and net
worth ratios, as defined by the loan agreement. As of December 31, 1998
and 1997, the weighted-average interest rate on the loans outstanding
under the line of credit of $15,900,000 and $17,700,000 was 7.63% and
8.15%, respectively. The facility expires on March 31, 1999.
The Company expects to renew the existing facility to June 30, 2001.
(6) Income Taxes
The Company has elected S corporation status for Federal income tax
purposes. Accordingly, the Company is not subject to Federal tax on its
income. Instead, the stockholders are required to include the Company's
income or loss in their individual income tax returns. Income tax expense
of $39,300, $50,418 and $68,500 for the years ended December 31, 1998,
1997 and 1996, respectively, represents state and local taxes.
(7) Commitments and Contingencies
The Company leases its office facilities under a lease expiring on March
31, 2000. The future minimum rental payments under the lease are $173,802
in 1999 and $43,451 in 2000, and rental expense for the years ended
December 31, 1998, 1997 and 1996, was $177,767, $169,234 and $161,203,
respectively. Unused letters of credit at December 31, 1998 and 1997
amounted to $6,745,705 and $720,501, respectively.
F-10
<PAGE>
EMPIRE RESOURCES, INC.
NOTES TO THE FINANCIAL STATEMENTS
(8) Subsequent Events
(a) Promissory Notes
On February 19, 1999 the Company distributed to its stockholders two
promissory notes in the aggregate principal amount of $10,922,475. This
amount represents the total stockholders' equity of the Company as of
December 31, 1998. These promissory notes (1) bear interest at the rate
of 6% per annum, (2) are due and payable in full on June 30, 1999 and (3)
are secured by all accounts receivable and inventory of the Company that
were in existence on the date the notes were issued and by any proceeds
received in respect of such collateral.
(b) Merger Agreement
On February 22, 1999 the Company signed a merger agreement (the "Merger
Agreement") with Integrated Technology USA, Inc. ("ITI"). The merger is
subject to approval of ITI's stockholders. Under the terms of the Merger
Agreement, the Company will be merged with and into ITI and ITI will
issue to the current stockholders of the Company 9,384,761 shares of
common stock, of which 3,824,511 shares of common stock will be placed in
escrow. Some or all of the escrowed shares will be released to the
stockholders of the Company based on a two-year earn-out formula. Any
escrowed shares not released to the stockholders of the Company will be
returned to the treasury of the merged company or retired. Upon
completion of the merger, the merged company will continue the business
of the Company under the name of Empire Resources, Inc.
F-11
<PAGE>
EMPIRE RESOURCES, INC.
BALANCE SHEETS
December 31, 1998 and March 31, 1999
<TABLE>
<CAPTION>
December 31, 1998 March 31, 1999
----------------- --------------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash $ 147,161 $ 331,407
Trade accounts receivable, less allowance for
doubtful accounts of $125,788 20,438,800 18,649,310
Inventories 14,005,173 14,680,673
Prepaid expenses 70,670 83,509
Other current assets 76,932 127,335
-------------- -------------
Total current assets 34,738,736 33,872,234
Furniture and equipment 276,493 284,385
Less: accumulated depreciation (196,459) (206,959)
-------------- -------------
Net furniture and equipment 80,034 77,426
Loan due from related party 202,150 202,150
Loans due from employees 165,000 150,000
-------------- -------------
$ 35,185,920 $ 34,301,810
============== =============
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable - banks $ 15,900,000 $ 19,050,000
Notes payable to stockholders - 10,922,475
Trade accounts payable 7,834,845 4,232,406
Accrued expenses 528,600 117,495
Accrued interest on notes payable to stockholders - 72,817
-------------- -------------
Total current liabilities 24,263,445 34,395,193
============== =============
Stockholders' equity
Common stock, no par value. Authorized 200 shares:
issued and outstanding 10 shares 50,000 50,000
Retained earnings (accumulated deficit) 10,872,475 (143,383)
-------------- -------------
Total stockholders' equity (deficit) 10,922,475 (93,383)
-------------- -------------
Total liabilities and stockholders' equity $ 35,185,920 $ 34,301,810
============== =============
</TABLE>
See accompanying notes to financial statements
F-12
<PAGE>
EMPIRE RESOURCES, INC.
STATEMENTS OF INCOME
Three months ended March 31, 1998 and 1999
(unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
1998 1999
--------------- -------------
<S> <C> <C>
Net sales $ 26,773,422 $ 21,132,340
Cost of goods sold 25,025,031 19,525,716
--------------- ------------
Gross profit 1,748,391 1,606,624
Selling, general and administrative expenses 667,570 680,870
Interest expense, net 378,451 462,723
--------------- ------------
Income before income taxes 702,370 463,031
Income taxes 9,825 6,414
--------------- ------------
Net income $ 692,545 $ 456,617
=============== ============
</TABLE>
See accompanying notes to financial statements
F-13
<PAGE>
EMPIRE RESOURCES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Three months ended March 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
Common Retained earnings
stock (deficit) Total
---------- ----------------- -----------
<S> <C> <C> <C>
Balances at December 31, 1998 $ 50,000 $ 10,872,475 $10,922,475
Issuance of promissory notes to stockholders (10,922,475) (10,922,475)
Net income 456,617 456,617
Dividends (550,000) (550,000)
---------- ------------ -----------
Balances at March 31, 1999 $ 50,000 $ (143,383) $ (93,383)
========== =========== =========
</TABLE>
See accompanying notes to financial statements
F-14
<PAGE>
EMPIRE RESOURCES, INC.
STATEMENTS OF CASH FLOWS
Three months ended March 31, 1998 and 1999
(unaudited)
<TABLE>
<CAPTION>
Three months ended March 31
1998 1999
--------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 692,545 $ 456,617
--------------- --------------
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation 10,444 10,500
Changes in assets and liabilities
Decrease in accounts receivable 3,865,518 1,789,490
Decrease (increase) in inventories 10,501,622 (675,500)
Increase in prepaid expenses (17,565) (12,839)
Increase in other current assets - (50,403)
Decrease in trade accounts payable (10,850,625) (3,602,439)
Decrease in accrued expenses (176,630) (411,105)
Decrease in loans due from employees - 15,000
Increase in accrued interest on notes payable to stockholders - 72,817
--------------- --------------
Net cash provided by (used in) operating activities 4,025,309 (2,407,862)
--------------- --------------
Cash flows from investing activities:
Additions to fixed assets (9,745) (7,892)
--------------- --------------
Net cash used in investing activities (9,745) (7,892)
--------------- --------------
Cash flows from financing activities:
(Repayments of) proceeds from notes payable - banks (3,250,000) 3,150,000
Distributions to stockholders (410,000) (550,000)
--------------- --------------
Net cash (used in) provided by financing activities (3,660,000) 2,600,000
--------------- --------------
Net increase in cash 355,564 184,246
Cash at beginning of period 559,686 147,161
--------------- --------------
Cash at end of period $ 915,250 331,407
=============== ==============
Supplemental disclosures of cash information
Cash paid during the year for:
Interest $ 378,451 $ 368,384
=============== ==============
Taxes $ - $ 830
=============== ==============
Non-cash financing activity:
Notes payable to stockholders $ - $ 10,922,475
=============== ==============
</TABLE>
See accompanying notes to financial statements
F-15
<PAGE>
EMPIRE RESOURCES, INC.
Notes to financial statements
(1) Presentation
The accompanying unaudited financial statements have been prepared by management
and include all adjustments, consisting of normal recurring adjustments,
considered necessary for a fair presentation of the financial position, results
of operations and cash flow of the Company. The results of operations for the
three months ended March 31, 1999 are not necessarily indicative of the
operating results to be expected for the year ending December 31, 1999. For
further information, refer to the Company's financial statements and notes
thereto for the year ended December 31, 1998.
(2) Promissory Notes
On February 19, 1999 the Company distributed to its stockholders two promissory
notes in the aggregate principal amount of $10,922,475. This amount represents
the total stockholders' equity of the Company as of December 31, 1998. These
promissory notes (1) bear interest at the rate of 6% per annum, (2) are due and
payable in full on August 31, 1999 (as extended from June 30, 1999) and (3) are
secured by all accounts receivable and inventory of the Company that were in
existence on the date the notes were issued and by any proceeds received in
respect of such collateral.
(3) Merger Agreement
On February 22, 1999 the Company signed a merger agreement (the "Merger
Agreement") with Integrated Technology USA, Inc. ("ITI"). The merger is subject
to approval of ITI's stockholders. Under the terms of the Merger Agreement, the
Company will be merged with and into ITI and ITI will issue to the current
stockholders of the Company 9,384,761 shares of common stock, of which 3,824,511
shares of common stock will be placed in escrow. Some or all of the escrowed
shares will be released to the stockholders of the Company based on a two-year
earn-out formula. Any escrowed shares not released to the stockholders of the
Company will be returned to the treasury of the merged company or retired. Upon
completion of the merger, the merged company will continue the business of the
Company under the name of Empire Resources, Inc.
F-16
