FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30,2001
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-7190
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IMPERIAL INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 65-0854631
------------------------------- -------------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1259 Northwest 21st Street, Pompano Beach Florida 33069-4114
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (954)917-4114
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
----- -----
Indicate the number of shares of Imperial Industries, Inc. Common Stock
($.01 par value) outstanding as of November 1, 2001: 9,220,434
Total number of pages contained in this document: 25
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Index
Page No.
--------
Part I. Financial Information
Consolidated Balance Sheets
September 30, 2001 and December 31, 2000 3
Consolidated Statements of Operations
Nine Months and Three Months Ended
September 30, 2001 and 2000 4
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2001 and 2000 5-6
Notes to Consolidated Financial Statements 7-16
Management's Discussion and Analysis of Results
of Operations and Financial Condition 17-22
Part II. Other Information and Signatures
Item 1. Legal Proceedings 23
Item 6. Exhibits and Reports on Form 8-K 23-24
Signatures 25
2
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, December 31,
2001 2000
------------ ------------
(Unaudited)
Assets
------
Current assets:
Cash and cash equivalents $ 1,635,000 $ 1,853,000
Trade accounts receivable (less
allowance for doubtful accounts of
$488,000 and $400,000 at September 30, 2001
and December 31, 2000, respectively) 4,735,000 4,866,000
Inventories 4,457,000 4,387,000
Deferred taxes 226,000 377,000
Other current assets 303,000 78,000
------------ ------------
Total current assets 11,356,000 11,561,000
------------ ------------
Property, plant and equipment, at cost 4,341,000 4,418,000
Less accumulated depreciation (1,732,000) (1,444,000)
------------ ------------
Net property, plant and equipment 2,609,000 2,974,000
------------ ------------
Deferred taxes 589,000 589,000
------------ ------------
Excess cost of investment over net
assets acquired 1,520,000 1,551,000
------------ ------------
Other assets 123,000 117,000
------------ ------------
$ 16,197,000 $ 16,792,000
============ ============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Notes payable $ 4,870,000 $ 5,203,000
Current portion of long-term debt 1,583,000 1,636,000
Accounts payable 2,401,000 2,264,000
Payable to stockholders 48,000 48,000
Accrued expenses and other liabilities 665,000 803,000
------------ ------------
Total current liabilities 9,567,000 9,954,000
------------ ------------
Long-term debt, less current maturities 907,000 1,402,000
------------ ------------
Obligation for appraisal rights 877,000 877,000
------------ ------------
Commitments and contingencies -- --
------------ ------------
Stockholders' equity:
Common stock, $.01 par value at September 30, 2001
and December 31, 2000; 20,000,000 shares
authorized; 9,220,434 issued at September 30, 2001
and 9,205,434 issued at December 31, 2000 92,000 92,000
Additional paid-in-capital 13,920,000 13,915,000
Accumulated deficit (9,166,000) (9,448,000)
------------ ------------
Total stockholders' equity 4,846,000 4,559,000
------------ ------------
$ 16,197,000 $ 16,792,000
============ ============
See accompanying notes to consolidated financial statements
3
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
Nine Months Ended Three Months Ended
September30, September 30,
------------------------------- -------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Net sales $ 30,481,000 $ 30,355,000 $ 9,556,000 $ 11,028,000
Cost of sales 20,972,000 20,990,000 6,423,000 7,570,000
------------ ------------ ------------ ------------
Gross profit 9,509,000 9,365,000 3,133,000 3,458,000
Selling, general and
administrative expenses 8,531,000 7,892,000 2,772,000 3,160,000
------------ ------------ ------------ ------------
Operating income 978,000 1,473,000 361,000 298,000
------------ ------------ ------------ ------------
Other income (expense):
Interest expense (646,000) (560,000) (197,000) (244,000)
Miscellaneous income 116,000 124,000 64,000 93,000
------------ ------------ ------------ ------------
(530,000) (436,000) (133,000) (151,000)
------------ ------------ ------------ ------------
Income before income taxes 448,000 1,037,000 228,000 147,000
Provision for income taxes (166,000) (363,000) (89,000) (52,000)
------------ ------------ ------------ ------------
Net income $ 282,000 $ 674,000 $ 139,000 $ 95,000
============ ============ ============ ============
Basic earnings per common share $ .03 $ .08 $ .02 $ .01
============ ============ ============ ============
Weighted average common shares 9,211,941 8,845,215 9,220,434 9,205,434
============ ============ ============ ============
Diluted earnings per common share $ .03 $ .07 $ .02 $ .01
============ ============ ============ ============
Weighted average shares and
potentially dilutive shares 9,213,138 9,020,433 9,220,434 9,258,980
============ ============ ============ ============
See accompanying notes to consolidated financial statement.
4
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Increase (Decrease) In Cash and Cash Equivalents
Nine Months Ended
September 30,
-----------------------------
2001 2000
----------- -----------
(Unaudited)
Cash flows from operating activities:
Net income $ 282,000 $ 674,000
----------- -----------
Adjustments to reconcile net income
to net cash provided by:
Depreciation 377,000 311,000
Amortization 56,000 26,000
Debt issue discount 44,000 44,000
Provision for doubtful accounts 225,000 198,000
Provision for income taxes 151,000 363,000
Compensation expense - issuance of stock 5,000 60,000
Loss (Gain) on disposal of property
and equipment 3,000 (1,000)
(Increase) decrease in:
Accounts receivable (94,000) (3,198,000)
Inventory (70,000) (290,000)
Prepaid expenses and other assets (256,000) (367,000)
Increase (decrease) in:
Accounts payable 137,000 1,569,000
Accrued expenses and other liabilities (138,000) 335,000
----------- -----------
Total adjustments to net income 440,000 (950,000)
----------- -----------
Net cash provided by (used in)
operating activities 722,000 (276,000)
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Cash flows from investing activities
Purchase of property, plant and equipment (53,000) (443,000)
Proceeds from sale of property
and equipment 38,000 40,000
Acquistion of businesses -- (1,981,000)
Payment on note payable A&R acquisition (100,000) (150,000)
Proceeds from exercise of warrants -- 20,000
----------- -----------
Net cash used in investing activities (115,000) (2,514,000)
----------- -----------
Cash flows from financing activities
(Decrease) increase in notes payable-net (233,000) 3,352,000
Proceeds from issuance of long-term debt 8,000 226,000
Repayment of long-term debt (600,000) (328,000)
----------- -----------
Net cash (used in) provided by financing
activities (825,000) 3,250,000
----------- -----------
Net (decrease) increase in cash and
cash equivalents (218,000) 460,000
Cash and cash equivalents
beginning of period 1,853,000 1,119,000
----------- -----------
Cash and cash equivalents end of period $ 1,635,000 $ 1,579,000
=========== ===========
5
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Increase (Decrease) In Cash and Cash Equivalents
-continued-
Nine Months Ended
September, 30
----------------------
2001 2000
-------- --------
(Unaudited)
Supplemental disclosure of cash flow information:
Cash paid during the nine months for:
Interest $543,000 $428,000
======== ========
Non-cash transactions:
Issuance of 15,000 shares of common
stock to an employee of the Company $ 5,000 $ --
======== ========
Issuance of an aggregate of 775,000 shares
of common stock related to acquisitions
and to an officer of the Company $ -- $490,000
======== ========
Issuance of notes related to the
acquisitions $ -- $950,000
======== ========
See accompanying notes to consolidated financial statements.
6
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(1) Interim Financial Statements
----------------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not include
all of the information and footnotes required by auditing standards
generally accepted in the United States of America for complete financial
statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. Operating results for
the nine months ended September 30, 2001 are not necessarily indicative of
the results that may be expected for the year ended December 31, 2001. The
significant accounting principles used in the preparation of these interim
financial statements are the same as those used in the preparation of the
annual audited consolidated financial statements. These statements should be
read in conjunction with the financial statements and notes thereto included
in the Company's Annual Report on Form 10-K for the year ended December 31,
2000.
(2) Merger
------
On December 17, 1998, the Company's stockholders approved a plan
merging Imperial Industries, Inc. into Imperial Merger Corp., a newly-
formed, wholly-owned subsidiary of the Company, (the "Merger"), effective
December 31, 1998, (the "Effective Date"). On the Effective Date, Imperial
Merger Corp. changed its name to Imperial Industries, Inc., (the "Company").
At the Effective Date, each share of the Company's $.10 par value
common stock outstanding before the Merger was converted into one share of
$.01 par value common stock. Also at the Effective Date, 300,121 outstanding
shares of preferred stock, with a carrying value of $3,001,000 were retired
and $4,292,000 of accrued dividends on such shares were eliminated.
In connection with the elimination of the preferred stock, the Company
was required to pay cash of $733,000, of which $685,000 has been paid as of
September 30, 2001 to former preferred stockholders who had submitted their
preferred stock to the Company for the merger consideration. In addition,
the Company issued $985,000 face value of 8% subordinated debentures with a
fair value of $808,000 (the "Debentures"), and 1,574,610 shares of $.01 par
common stock with a fair value of $630,000 based on the market price of $.40
per share of the Company's common stock at the Effective Date.
Holders of 81,100 shares of preferred stock (the "Dissenting
Shareholders"), with a carrying value of $811,000, elected to exercise their
appraisal rights with respect to such preferred stock. Pursuant to Delaware
law, the Dissenting Shareholders petitioned the Delaware Chancery Court in
April 1999 to determine the fair value of their shares
7
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(2) Merger (continued)
------
at the Effective Date, exclusive of any element of value attributable to the
Merger. In the event that a Dissenting Shareholder did not perfect his
appraisal rights, each share would be entitled to receive $2.25 in cash, an
$8.00 subordinated debenture and five shares of common stock. Based on these
facts, and a valuation prepared by an independent financial advisor in
connection with the Merger, the Company recorded $877,000 in the
accompanying consolidated balance sheets at September 30, 2001 and December
31, 2000, as an estimate for the obligation for appraisal rights. The
Chancery Court may determine fair value is less than, equal to, or greater
than an aggregate of $877,000. Based on advice of counsel the Company does
not expect that there will be a final judicial determination requiring the
Company to make payment to Dissenting Shareholders' prior to September 30,
2002. Accordingly, the obligation is classified as long-term debt.
(3) Description of Business and Summary of Significant Accounting Policies
----------------------------------------------------------------------
The Company and its subsidiaries are primarily involved in the
manufacturing and sale of exterior and interior finishing wall coatings and
mortar products for the construction industry, as well as the purchase and
sale of other building materials from other manufacturers. Sales of the
Company's products are made to customers primarily in the Southeastern
United States through distributors and company-owned distribution
facilities.
(a) Basis of presentation
---------------------
The consolidated financial statements contain the accounts of the
Company and its wholly-owned subsidiaries. All material intercompany
accounts and transactions have been eliminated in consolidation.
(b) Revenue Recognition Policy
--------------------------
Revenue from sale transactions is recorded upon shipment and delivery
of inventory to the customer, net of discounts and allowances.
(c) Income Tax Policy
-----------------
The Company utilizes the liability method for determining its income
taxes. Under this method, deferred tax assets and liabilities are recognized
for the expected future tax consequences of events that have been recognized
in the consolidated financial statements or income tax return. Deferred tax
assets and liabilities are measured using the enacted tax rates expected to
apply to taxable income in the years in which temporary differences are
expected to be realized or settled; valuation allowances are provided
against assets that are not likely to be realized.
8
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(3) Description of Business and Summary of Significant Accounting Policies
----------------------------------------------------------------------
(continued)
(d) Cash and cash equivalents
-------------------------
The Company has defined cash and cash equivalents as those highly
liquid investments with a maturity of three months or less, when purchased.
Included in cash and cash equivalents at September 30, 2001 and December 31,
2000 are short term time deposits of $291,000 and $285,000, respectively.
(e) Stock based compensation
------------------------
The Company measures compensation expense related to the grant of
stock options and stock-based awards to employees in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," under which compensation
expense, if any, is generally based on the difference between the exercise
price of an option, or the amount paid for an award, and the market price or
fair value of the underlying common stock at the date of the award.
(f) Accounting estimates
---------------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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.
(g) Fair Value of Financial Instruments
-----------------------------------
The carrying amount of the Company's financial instruments principally
notes payable, the Debentures and the obligation for appraisal rights in
connection with the preferred stock elimination, approximates fair value
based on discounted cash flows as well as other valuation techniques.
(h) Segment Reporting
-----------------
The Company has adopted SFAS 131, Disclosures about Segments of an
Enterprise and Related Information. For the nine month periods ended
September 30, 2001 and 2000, the Company has determined that it operates in
a single operating segment.
9
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(3) Description of Business and Summary of Significant Accounting Policies
----------------------------------------------------------------------
(continued)
(i) New Accounting Pronouncements
-----------------------------
SFAS 133, Accounting for Derivatives and Hedging Activities, is
effective for all fiscal quarters of fiscal years beginning after June 15,
2000 (January 1, 2001 for the Company) and requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in
the fair value of derivatives are recorded each period in current earnings
or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, the type of hedge
transaction. The Company does not use derivative instruments and therefore
the adoption of SFAS 133 in 2001 did not have a material effect on the
consolidated financial statements.
In June 2001, SFAS 141, "Business Combinations," and SFAS 142,
"Goodwill and Other Intangible Assets" was adopted by the FASB. SFAS 141
requires that the purchase method of accounting be used for all business
combinations completed after June 30, 2001. SFAS 141 also specifies the
types of acquired intangible assets that are required to be recognized and
reported separately from goodwill and those acquired intangible assets that
are required to be included in goodwill. SFAS 142 will require that goodwill
no longer be amortized, but instead tested for impairment at least annually.
SFAS 142 will also require recognized intangible assets be amortized over
their respective estimated useful lives and reviewed for impairment in
accordance with SFAS 121. "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." Any recognized
intangible asset determined to have an indefinite useful life will not be
amortized, but instead tested for impairment in accordance with the Standard
until its life is determined to no longer be indefinite. SFAS 141 is
effective for all business combinations initiated after June 30, 2001, while
the provisions of SFAS 142 are effective for fiscal years beginning after
December 15, 2001, and are effective for interim periods in the initial year
of adoption. The Company is currently analyzing the effect the adoption of
these standards will have on its consolidated financial statements.
In October 2001, the Financial Accounting Standards Board issued
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"). SFAS 144 addresses accounting and reporting for the impairment or
disposal of long-lived assets. This Statement supersedes SFAS 121,
"Accounting for the Impairment of Long-Lived Assets to be Disposed Of". The
Company is required to adopt no later than January 1, 2002. The Company does
not believe that the adoption of SFAS 144 will have a material effect on its
consolidated financial statements.
10
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(4) Inventories
-----------
At September 30, 2001 and December 31, 2000 inventories consist of:
September 30, December 31,
2001 2000
---------- ----------
Raw materials $ 524,000 $ 562,000
Finished goods 3,654,000 3,560,000
Packaging materials 279,000 265,000
---------- ----------
$4,457,000 $4,387,000
========== ==========
(5) Notes Payable
-------------
At September 30, 2001, notes payable represent amounts outstanding
under a $6,000,000 line of credit from a commercial lender to the Company's
subsidiaries.
The line of credit is collateralized by the subsidiaries' accounts
receivable and inventory, bears interest at prime rate plus 1/2% (6.50% at
September 30, 2001), expires June 19, 2002, and is subject to annual
renewal. At September 30, 2001, the line of credit limit available for
borrowing based on eligible receivables and inventory was $5,270,000, of
which $4,870,000 had been borrowed. The average amounts outstanding for
the nine month periods ended September 30, 2001 and 2000 were $5,046,000,
and $3,088,000, respectively.
(6) Long-Term Debt and Current Installments of Long-Term Debt
---------------------------------------------------------
Included in long-term debt at September 30, 2001, are three mortgage
loans, collateralized by real property, in the aggregate amount of $499,000,
less current installments aggregating $56,000.
In connection with the Merger, the Company issued Debentures with a
face amount value of $985,000. Each $8.00 Debenture was discounted to a
value of $6.56 at December 31, 1998 using an effective interest rate of 16%.
The aggregate carrying value of the Debentures at September 30, 2001 is
$970,000. The Debentures are general, unsecured obligations of the Company,
subordinated in right of payment to all indebtedness to institutional and
other lenders of the Company. The Debentures are subject to redemption, in
whole or in part, at the option of the Company, at any time at a redemption
price of 100% of the principal amount thereof, plus accrued and unpaid
interest, if any, to the redemption date. Interest is payable annually on
July 1 of each year with the principal balance due and payable December 31,
2001.
During 2000, the Company acquired certain assets and assumed certain
liabilities of seven building materials distributors in which it issued
uncollateralized 8% promissory notes as partial consideration. At
11
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(6) Long-Term Debt and Current Installments of Long-Term Debt (continued)
---------------------------------------------------------
September 30, 2001, aggregate notes of $216,000 were classified as long-
term debt, and $325,000 were classified as current portion of long-term
debt.
Other long-term debt in the aggregate amount of $480,000, less current
installments of $232,000, relates principally to equipment financing. The
notes bear interest at various rates ranging from 8.75% to 15.39%.
(7) Income Taxes
------------
At September 30, 2001, the deferred tax asset of $815,000 represents
the tax effect of net operating loss carryforwards of $2,313,000. The
operating loss carryforwards expire in varying amounts through 2009.
In the nine months ended September 30, 2001 and 2000, the Company
recognized income tax expense of $166,000 and $363,000, respectively.
(8) Capital Stock
-------------
(a) Common Stock
At September 30, 2001, the Company had outstanding 9,220,434 shares of
common stock with a $.01 par value per share ("Common Stock"). The holders
of common stock are entitled to one vote per share on all matters, voting
together with the holders of preferred stock, if any. In the event of
liquidation, holders of common stock are entitled to share ratably in all
the remaining assets of the Company, if any, after satisfaction of the
liabilities of the Company and the preferential rights of the holders of
outstanding preferred stock, if any.
In June 2001, the Company issued 15,000 shares of common stock as
incentive compensation to an employee pursuant to the terms of an employment
agreement.
In the nine months ended September 30, 2000, the Company issued an
aggregate of 675,000 shares of common stock as partial consideration for the
purchase of certain assets of seven building materials distributors, an
additional 100,000 shares were issued to an officer as compensation for
services rendered, and 200,000 shares were issued in connection with the
exercise of outstanding stock purchase warrants.
12
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(8) Capital Stock (continued)
-------------
(b) Preferred Stock
---------------
The authorized preferred stock of the Company consists of 5,000,000
shares, $.01 par value per share. The preferred stock is issuable in series,
each of which may vary, as determined by the Board of Directors, as to the
designation and number of shares in such series, the voting power of the
holders thereof, the dividend rate, redemption terms and prices, the
voluntary and involuntary liquidation preferences, and the conversion rights
and sinking fund requirements, if any, of such series. At September 30, 2001
and December 31, 2000, there were no shares of preferred stock outstanding.
(c) Warrants
--------
At September 30, 2001, the Company had warrants outstanding to
purchase 150,000 shares of the Company's common stock (the "Warrants"). Each
Warrant entitles the holder to purchase one share at $.38 per share until
December 31, 2003.
(d) Stock Options
-------------
The Company has two Stock Option Plans: a Director's Stock Option Plan
and the 1999 Employee Stock Option Plan (collectively, the "1999 Plans").
The 1999 Plans provide for options to be granted at generally no less than
the fair market value of the Company's stock at the grant date. Options
granted under the 1999 Plans have a term of up to 10 years and are
exercisable six months from the grant date. The 1999 Plans are administered
by the Compensation and Stock Option Committee (the "Committee"), which is
comprised of three directors. The Committee determines who is eligible to
participate and the number of shares for which options are to be granted. A
total of 600,000 and 200,000 shares are reserved for issuance under the
Employee and Directors' Plans, respectively.
At September 30, 2001, options to purchase 280,000 shares of common
stock (the "options") were outstanding. The options have an average exercise
price of $.49, a weighted average remaining life of 3.7 years and are fully
vested.
As of September 30, 2001, options for 520,000 shares were available
for future grants under the 1999 Plans. During 2001 options to purchase
65,000 shares of common stock under the Employee Plan with an exercise price
of $.24 per share were granted.
13
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(9) Earnings Per Common Share
-------------------------
The following is a reconciliation of the numerator and denominator of
the basic and diluted per share computation (in thousands, except per share
data):
Nine Months Ended Three Months Ended
September 30, September30,
2001 2000 2001 2000
------ ------ ------ ------
BASIC:
Net income $ 282 $ 674 $ 139 $ 95
Average common shares outstanding 9,212 8,845 9,220 9,205
Basic per share amount $ .03 $ .08 $ .02 $ .01
DILUTED:
Net income $ 282 $ 674 $ 139 $ 95
Average common shares outstanding 9,212 8,845 9,220 9,205
Dilutive effect of outstanding
options and warrants 1 175 0 54
Average shares outstanding assuming
dilution 9,213 9,020 9,220 9,259
Diluted per share amount $ .03 $ .07 $ .02 $ .01
(10) Commitments and Contingencies
-----------------------------
(a) Contingencies
As of November 1, 2001, the Company's subsidiary, Acrocrete, Inc., and
other parties are defendants in 24 lawsuits pending in various Southeastern
states, by homeowners, contractors and subcontractors, or their insurance
companies, claiming moisture intrusion damages on single family residences.
The Company's insurance carriers have accepted coverage for 23 of these
claims and are providing a defense under a reservation of rights. Acrocrete
expects its insurance carriers to accept coverage for the other 1 lawsuit.
Acrocrete is vigorously defending all of these cases and believes it has
meritorious defenses, counter-claims and claims against third parties.
Acrocrete is unable to determine the exact extent of its exposure or outcome
of this litigation.
The allegations of defects in synthetic stucco wall systems are not
restricted to Acrocrete products but rather are an industry-wide issue.
There has never been any defect proven against Acrocrete. The alleged
failure of these products to perform has generally been linked to improper
application and the failure of adjacent building materials such as windows,
roof flashing, decking and the lack of caulking.
14
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(10) Commitments and Contingencies (continued)
-----------------------------
(a) Contingencies (continued)
On June 15, 1999, Premix was served with a complaint captioned Mirage
Condominium Association, Inc. v. Premix Marbletite Manufacturing Co., et
al., in Miami-Dade County Florida. The lawsuit raises a number of
allegations against twelve separate defendants involving alleged
construction defects. Plaintiff has alleged only one count against Premix,
which claims that certain materials, purportedly provided by Premix to the
Developer/ Contractor and used to anchor balcony railings to the structure
were defective. The Company's insurance carriers have not made a decision
regarding coverage to date, but have retained counsel on behalf of Premix
and are paying defense costs. The Company expects the insurance company to
eventually accept coverage. Premix is unable to determine the exact extent
of its exposure or the outcome of this litigation.
Premix and Acrocrete are engaged in other legal actions and claims
arising in the ordinary course of its business, none of which are believed
to be material to the Company.
On April 23, 1999, certain Dissenting Shareholders owning shares of
the Company's formerly issued preferred stock filed a petition for appraisal
in the Delaware Chancery Court to determine the fair value of their shares
at the effective date of Merger, exclusive of any element of value
attributable to the merger. (See Note (2) Merger).
(b) Lease Commitments
At September 30, 2001, certain property, plant and equipment were
leased by the Company under long-term leases. The Company pays aggregate
annual rent of approximately $1,110,000 for its current operating leases.
The leases expire at various dates ranging from June 30, 2002 to August 31,
2009. Comparable properties at equivalent rentals are available for
replacement of these facilities if any leases are not extended.
(11) Litigation Settlement
---------------------
During the third quarter of 2001, the Company settled outstanding
litigation against a former vendor. The settlement resulted in $61,000 of
operating income for the quarter ended September 30, 2001 and $31,000 of
operating expense for the nine months ended September 30, 2001.
15
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(12) Events Subsequent to September 30, 2001
---------------------------------------
In November 2001, the Company completed a refinancing of two mortgage
loans with a commercial bank. The borrowings provided net proceeds to the
Company of approximately $420,000 with interest equal to prime rate plus 1%
and will be used for working capital and payment of debentures due December
31, 2001. The loans are payable in monthly installments totaling
approximately $4,700 with final balloon payments due October 2004.
16
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Results of Operations
-------------------------------------------------------------
and Financial Condition
-----------------------
General
The Company's business is related primarily to the level of
construction activity in the Southeastern United States, particularly
the states of Florida, Georgia, Mississippi and Alabama. The majority of
the Company's products are sold to contractors, subcontractors and
building materials dealers located principally in these states who
provide building materials for the construction of residential,
commercial and industrial buildings and swimming pools. The level of
construction activity is subject to population growth, inventory of
available housing units, government growth policies and construction
funding, among other things. Although general construction activity has
remained strong in the Southeastern United States during the past
several years, the duration of recent general economic conditions, in
the United States as well as the magnitude of the impact the September
11, 2001 terrorist attacks may have on general economic conditions in
the future as it relates to the construction industry cannot be
predicted.
This Form 10-Q contains certain forward looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995 with
respect to the financial condition, results of operations and business
of Imperial Industries, Inc., and its subsidiaries, including statements
made under Management's Discussion and Analysis of Financial Condition
and Results of Operations. These forward looking statements involve
certain risks and uncertainties. No assurance can be given that any of
such matters will be realized. Factors that may cause actual results to
differ materially from those contemplated by such forward looking
statements include, among others, the following: realization of tax
benefits; impairment of long-lived assets, including goodwill; the
outcome of litigation; the competitive pressure in the industry; general
economic and business conditions; the ability to implement and the
effectiveness of business strategy and development plans; quality of
management; business abilities and judgement of personnel; and
availability of qualified personnel; labor and employee benefit costs.
Results of Operations
---------------------
Nine Months and Three Months Ended September 30, 2001 Compared to 2000
----------------------------------------------------------------------
Net sales for the nine months ended September 30, 2001 increased
$126,000, or approximately 0.4%, compared to the same period in 2000.
The increase in sales in 2001 was derived from the sales of building
materials generated by distributors acquired at various times during the
first six months of 2000. Results from
17
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Results of Operations and
-----------------------------------------------------------------
Financial Condition (continued)
-------------------
these acquired distributors were only included from the dates of their
respective acquisitions through September 30, 2000. These sales
primarily consisted of building materials purchased from other
manufacturers, principally gypsum, roofing, insulation, metal studs,
masonry and stucco products. Net sales for the three months ended
September 30, 2001 decreased $1,472,000 or approximately 13.3% compared
to the third quarter of 2000. Reduced market prices for gypsum
wallboard, a major product line of the Company's distribution
operations, closure of certain under-performing distribution operations
and elimination of installation services during the first six months of
2001 and reduced demand for certain of the Company's manufactured
products, accounted for the sales decline in the third quarter of 2001
compared to the same period in 2000.
Gross profit as a percentage of net sales for the nine months and
three months ended September 30, 2001 was approximately 31.2% and 32.8%
compared to 30.9% and 31.4% for the same periods in 2000. The increase
in gross profit margins in the third quarter of 2001 compared to 2000
was principally due to improved gross profit margins realized by the
Company's distribution operations.
In the first nine months of 2001, the aggregate gross profits
derived by the Company's acquired distribution facilities were adversely
affected by competitive conditions in the Company's distribution
markets, primarily the sale of gypsum products manufactured by other
companies. Market prices for gypsum wallboard is believed to be
approximately 30% lower in the third quarter of 2001 compared to the
average prices realized for the same period in 2000. The decrease
appears to be the result of excess supply and increased competition
among the gypsum wallboard manufacturers. However, the trend of lower
gypsum wallboard pricing, which commenced in early 2000 and continued
for six consecutive quarters through the first six months of the year,
began to rebound from historically low levels during the third quarter
period ended September 30, 2001. During the third quarter certain
manufacturers reduced production of gypsum wallboard and a seasonally
strong demand for gypsum wallboard resulted in increased gypsum prices
in the third quarter, although at still significantly reduced prices
from historical levels. The Company is unable to determine if such
increased prices will be maintained for the fourth quarter and beyond.
The results of operations of the Company's distribution operations
had a negative impact on the Company's consolidated results in the first
nine months of 2001 due in large part to reduced gross profits caused by
lower gypsum wallboard prices and poor operating results at certain
under-performing distribution facilities. In the nine months and third
quarter of 2001, the Company's distribution operations realized sales of
$21,399,000 and
18
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Results of Operations and
-----------------------------------------------------------------
Financial Condition (continued)
-------------------
$6,641,000, respectively, and incurred operating losses of $231,000 and
$108,000 before any charges of corporate overhead, compared to sales of
$20,966,000 and $7,990,000 and operating income of $285,000 and $58,000
during the same periods in 2000.
Efforts are being made to increase sales and gross profits of
distribution operations by focusing primarily on attaining increased
sales of the Company's manufactured products through the Company's
acquired distribution facilities, broadening the product line of the
Company's existing distribution facilities in selected markets and
decreasing reliance on sales of gypsum products in certain distribution
locations.
Selling, general and administrative expenses as a percentage of net
sales for the nine months and third quarter of 2001 were approximately
28.0% and 29.0% compared to 26.0% and 28.6% in 2000. The most
significant reason for the increase in selling, general and
administrative expenses as a percentage of sales in the 2001 periods was
the decline in gypsum wallboard prices and reduced sales arising from
the recent closure of under-performing distribution facilities in 2001.
Selling, general and administrative expenses increased $639,000 or
approximately 8.1% for the nine months ended September 30, 2001,
compared to the same period in 2000. The increase in expenses was
primarily due to additional operating costs related to the distributors
acquired at various times during 2000. The operating results of certain
of the acquired distributors were not included for the entire nine month
period ended September 30, 2000. Selling, general and administrative
expenses decreased $388,000 or approximately 12.3% in the third quarter
of 2001 compared to the same three month period in 2000, primarily a
result of closing certain under-performing operations and other cost
cutting initiatives. During the third quarter of 2001, the Company
settled outstanding litigation against a former vendor. The settlement
resulted in $31,000 of operating expense for the nine months ended
September 30, 2001 and $61,000 operating income for the third quarter of
2001.
Actions have been taken to improve operating performance in the
Company's distribution operations through: (i) a reduction in personnel
in certain locations; (ii) closure of under-performing distribution
locations in Hattiesburg and Picayune Mississippi; (iii) elimination of
installation services for certain product lines at two locations; and
(iv) development of a consolidated purchasing program in an attempt to
realize greater savings from the purchase and resale of products. The
operations associated with the two closed distribution locations and
elimination of installed services accounted for operating losses for the
nine months and three months ended September 30, 2001 of $274,000 and
$85,000, respectively.
19
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Results of Operations and
-----------------------------------------------------------------
Financial Condition (continued)
-------------------
Interest expense increased $86,000 in the first nine months of 2001
or approximately 15.4% compared to the same period in 2000. The increase
in interest expense in the first nine months of 2001 was primarily due
to additional borrowing related to the purchase and operation of the
acquired distributors. Interest expense decreased $47,000, or 19.3% in
the third quarter of 2001, compared to the same quarter in 2000 due to
lower interest rates and reduced borrowings under the Company's line of
credit because of lower working capital requirements associated with
reduction in sales.
In the nine months and three months ended September 30, 2001 the
Company recognized income tax expenses of $166,000 and $89,000, compared
to $363,000 and $52,000 for the same periods in 2000.
As a result of the above factors, the Company derived net income of
$282,000 and $139,000 or $.03 and $.02 per fully diluted share for the
nine months and third quarter of 2001, respectively, compared to net
income of $674,000 and $95,000 or $.07 and $.01 per share, respectively,
for 2000.
Liquidity and Capital Resources
-------------------------------
At September 30, 2001, the Company had working capital of
approximately $1,789,000 compared to working capital of $1,607,000 at
December 31, 2000. As of September 30, 2001, the Company had cash and
cash equivalents of $1,635,000.
The Company's principal source of short-term liquidity is existing
cash on hand and the utilization of a $6,000,000 line of credit with a
commercial lender. The maturity date of the line of credit is June 19,
2002, subject to annual renewal. The Company's subsidiaries borrow on
the line of credit, based upon and collateralized by, their eligible
accounts receivable and inventory. Generally, accounts not collected
within 120 days are not eligible accounts receivable under the Company's
borrowing agreement with its commercial lender. At September 30, 2001,
$4,870,000 had been borrowed against the line of credit. Based on
eligible receivables and inventory, the Company had, under its line of
credit, total available borrowings, (including the amount outstanding of
$4,870,000) of approximately $5,270,000 at September 30, 2001.
Trade accounts receivable represent amounts due from sub-
contractors, contractors and building materials dealers located
principally in Florida, Georgia and Mississippi who have purchased
products on an unsecured open account basis directly from the Company's
manufacturing subsidiaries and through Company owned
20
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Results of Operations
-------------------------------------------------------------
and Financial Condition (continued)
-----------------------
warehouse distribution outlets. As of September 30, 2001 the Company
owned and operated eleven distribution outlets. Accounts receivable, net
of allowance, at September 30, 2001 was $4,735,000 compared to
$4,866,000 at December 31, 2000. The decrease in receivables of
$131,000, or approximately 2.7% was primarily a result of lower sales in
the third quarter of 2001 compared to 2000.
As a result of the consummation of the Merger, among other things
the Company agreed to pay $733,000 in cash to former preferred
shareholders. At September 30, 2001, the Company had paid $685,000 of
such cash amount. Amounts payable to such shareholders at September 30,
2001 results from their non-compliance with the conditions for payment
to date.
Holders representing 81,100 preferred shares have elected
dissenters' rights, which, under Delaware law, would require cash
payments equal to the fair value of their stock, as of the date of the
merger, to be determined in accordance with Section 262 of the Delaware
General Corporation Law. Dissenting stockholders filed a petition for
appraisal rights in the Delaware Chancery Court in April 1999. The
Company has recorded a liability for each share based on the fair value
of $2.25 in cash, an $8.00 Subordinated Debenture and five shares of the
Company's common stock since that is the consideration the dissenting
holders would receive if they did not perfect their dissenters' rights
under the law.
During 2000, the Company consummated four transactions for the
purchase of seven building materials distributors in which the Company
acquired certain assets and assumed certain liabilities. The
acquisitions have had a material effect on the operations and financial
position of the Company. The impact of the Company's assets and
liabilities related to the acquisitions as of December 31, 2000, were as
follows (in thousands):
Fair value of assets and liabilities acquired:
Inventories $ 1,838
Property plant and equipment 1,445
Other assets (Excess cost of investment
over net assets acquired) 1,580
Liabilities (assumed) (851)
-------
4,012
Less:
Debt issued (1,100)
Common stock issued (430)
Adjustment for accounts receivable due Company (449)
-------
Net cash paid for building material
distributors $ 2,033
=======
21
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Results of Operations
-------------------------------------------------------------
and Financial Condition (continued)
-----------------------
The cash required to complete these transactions and fund operations
(including receivables) contributed significantly to the $3,577,000
increase in the Company's line of credit during 2000.
The Company presently is focusing its efforts on the completion of
the integration and consolidation of the acquired distribution
operations into the Company, reducing costs and expenses and improving
working capital. The Company expects to incur a limited amount of
capital expenditures during the next twelve months in its ordinary
course of business to upgrade and maintain its equipment to support
operations. Capital needs associated with these capital projects cannot
be estimated at this time, but management does not expect the cash
investment portion of the expenditures for these projects to exceed
$100,000.
In November 2001, the Company completed a refinancing of two
mortgage loans with a commercial bank yielding net proceeds of
approximately $420,000. In addition, the Company has obtained a terms
sheet from an equipment lender for additional financing of $268,000. The
Company expects to complete this financing by the end of November 2001.
The Company believes its cash on hand, new borrowing arrangements
and maintenance of its lines of credit with its commercial lender will
provide sufficient cash for its operations, to meet its current
obligations, including the 8% Debentures due December 31, 2001 and to
support the cash requirements of its capital expenditure projects.
The ability of the Company to maintain and improve its long- term
liquidity is dependent on the Company's ability to successfully maintain
and improve profitable operations and resolve litigation on terms
favorable to the Company.
22
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
PART II. Other Information
Item 1. Legal Proceedings
-----------------
See notes to Consolidated Financial Statements, Note 10(a), set
forth in Part I Financial Information.
Item 6. Exhibits andReports onForm 8-K
------------------------------
Exhibit No. Description
------------ -----------
2.1 Agreement and Plan of Merger, by and between Imperial Industries, Inc.
and Imperial Merger Corp. dated October 12, 1998 (Incorporated by
reference to Form S-4 Registration Statement, Exhibit 2).
2.2 Asset Purchase Agreement entered into as of December 31, 1999 between
Just-Rite Supply, Inc., Imperial Industries, Inc., A&R Supply, Inc.,
A&R Supply of Foley, Inc., A&R of Destin, Inc., Ronald A. Johnson,
Rita E. Ward and Jaime E. Granat (Incorporated by reference to Form
8-k dated January 19, 2000, File No. 1-7190, Exhibit 2.1).
2.3 Asset Purchase Agreement dated June 5, 2000 between Just-Rite Supply,
Inc., Imperial Industries, Inc., A&R Supply of Mississippi, Inc., A&R
Supply of Hattiesburg, Inc., Ronald A. Johnson, Dennis L. Robertson
and Richard Williamson (Incorporated by reference to Form 8-K dated
June 13, 2000, File No. 1-7190, Exhibit 2.1).
3.1 Certificate of Incorporation of the Company, (Incorporated by
reference to Form S-4 Registration Statement, Exhibit 3.1).
3.2 By-Laws of the Company, (Incorporated by reference to Form S-4
Registration Statement, Exhibit 3.2).
4.1 Form of Common Stock Purchase Warrant issued to Auerbach, Pollak &
Richardson, Inc., (Incorporated by reference to Form S-4 Registration
Statement, Exhibit 4.1).
4.2 Form of 8% Subordinated Debenture, (Incorporated by reference to Form
S-4 Registration Statement, Exhibit 4.2).
10.1 Consolidating, Amended and Restated Financing Agreement by and between
Congress Financial Corporation and Premix-Marbletite Manufacturing
Co., Acrocrete, Inc. and Just-Rite Supply, Inc. dated January 28,
2000. (Incorporated by reference to Form 10-K dated December 31, 1999,
File No. 1-7190, Exhibit 10-1).
10.2 Employment Agreement dated July 26, 1993 between Howard L. Ehler, Jr.
and the Company. (Incorporated by reference to Form 8-K dated July 26,
1993).
23
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
PART II. Other Information
Item 6. Exhibitsand Reportson Form8-K (continued)
Exhibit No. Description
------------ ------------
10.3 License Agreement between Bermuda Roof Company and Premix Marbletite
Manufacturing Co., (Incorporated by reference to Form S-4 Registration
Statement, Exhibit 10.5).
10.4 Employee Stock Option Plan (Incorporated by reference to Form 10-K
dated December 31, 2000, Exhibit 10.4).
10.5 Employee Stock Option Plan (Incorporated by reference to Form 10-K
dated December 31, 2000, Exhibit 10.5).
(b) Reportson Form 8-K
------------------
None.
24
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IMPERIAL INDUSTRIES, INC.
By: /S/ Howard L.Ehler, Jr.
------------------------------------
Howard L. Ehler, Jr.
Executive Vice President/
Principal Executive Officer
By: /S/ Betty JeanMurchison
------------------------------------
Betty Jean Murchison
Chief Accounting Officer/
Assistant Vice President
November 14, 2001
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