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 March 31, 2001
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
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(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 May 5, 2001: 9,205,434
Total number of pages contained in this document: 24
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Index
Page No.
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Part I. Financial Information
Consolidated Balance Sheets
March 31, 2001 and December 31, 2000 3
Consolidated Statements of Operations
Three Months Ended March 31, 2001 and 2000 4
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2001 and 2000 5-6
Notes to Consolidated Financial Statements 7-15
Management's Discussion and Analysis of Results
of Operations and Financial Conditions 16-21
Part II. Other Information and Signatures
Item I. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 22-23
Signatures 24
2
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, December 31,
2001 2000
------------ ------------
Assets (Unaudited)
------
Current assets:
Cash and cash equivalents $ 1,619,000 $ 1,853,000
Trade accounts receivable (less
allowance for doubtful accounts of
$410,000 and $400,000 at March 31, 2001
and December 31, 2000, respectively) 5,001,000 4,866,000
Inventories 4,494,000 4,387,000
Deferred taxes 365,000 377,000
Other current assets 400,000 78,000
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Total current assets 11,879,000 11,561,000
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Property, plant and equipment, at cost 4,409,000 4,418,000
Less accumulated depreciation (1,558,000) (1,444,000)
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Net property, plant and equipment 2,851,000 2,974,000
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Deferred taxes 589,000 589,000
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Excess cost of investment over net
assets acquired 1,541,000 1,551,000
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Other assets 119,000 117,000
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$ 16,979,000 $ 16,792,000
============ ============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Notes payable $ 4,444,000 $ 5,203,000
Current portion of long-term debt 1,676,000 1,636,000
Accounts payable 3,154,000 2,264,000
Payable to stockholders 48,000 48,000
Accrued expenses and other liabilities 990,000 803,000
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Total current liabilities 10,312,000 9,954,000
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Long-term debt, less current maturities 1,209,000 1,402,000
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Obligation for appraisal rights 877,000 877,000
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Commitments and contingencies -- --
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Stockholders' equity:
Common stock, $.01 par value at March 31, 2001
and December 31, 2000; 20,000,000 shares
authorized; 9,205,434 issued at December
31, 2000 and March 31, 2001 92,000 92,000
Additional paid-in-capital 13,915,000 13,915,000
Accumulated deficit (9,426,000) (9,448,000)
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Total stockholders' equity 4,581,000 4,559,000
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$ 16,979,000 $ 16,792,000
============ ============
See accompanying notes to consolidated financial statements.
3
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Three Months Ended
March 31,
-----------------------------
2001 2000
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(Unaudited)
Net sales $ 10,168,000 $ 7,856,000
Cost of sales 7,089,000 5,263,000
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Gross profit 3,079,000 2,593,000
Selling, general and
administrative expenses 2,844,000 2,031,000
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Operating income 235,000 562,000
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Other income (expense):
Interest expense (231,000) (119,000)
Miscellaneous income (expense) 30,000 (9,000)
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(201,000) (128,000)
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Income before income taxes 34,000 434,000
Income tax expense (12,000) (152,000)
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Net income $ 22,000 $ 282,000
============ ============
Basic earnings per common share $ -- $ .03
============ ============
Diluted earnings per common share $ -- $ .03
============ ============
Weighted average common shares outstanding 9,205,434 8,472,467
============ ============
Weighted average shares and
potentially dilutive shares outstanding 9,209,214 8,720,615
============ ============
See accompanying notes to consolidated financial statements.
4
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three Months Ended
March 31,
--------------------------
2001 2000
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(Unaudited)
Cash flows from operating activities:
Net income $ 22,000 $ 282,000
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Adjustments to reconcile net income
to net cash provided by (used in):
Depreciation 124,000 75,000
Amortization 20,000 5,000
Debt issue discount 15,000 15,000
Provision for doubtful accounts 74,000 77,000
Provision for income tax 12,000 152,000
(Increase) decrease in:
Accounts receivable (209,000) (1,528,000)
Inventory (107,000) (235,000)
Prepaid expenses and other assets (334,000) (492,000)
Increase (decrease) in:
Accounts payable 890,000 831,000
Accrued expenses and other liabilities 187,000 217,000
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Total adjustments to net income 672,000 (883,000)
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Net cash provided by (used in)
operating activities: 694,000 (601,000)
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Cash flows from investing activities:
Purchases of property, plant
and equipment (11,000) (69,000)
Proceeds received from sale of
property and equipment 10,000 --
Payment on note payable for acquisitions (100,000)
Acquisition of business -- (690,000)
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Net cash used in investing activities (101,000) (759,000)
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Cash flows from financing activities
Increase (decrease) in notes payable
banks - net (659,000) 1,568,000
Repayment of long-term debt (168,000) (61,000)
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Net cash (used in) provided by
financing activities (827,000) 1,507,000
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Net (decrease) increase in cash and
cash equivalents (234,000) 147,000
Cash and cash equivalents beginning of period 1,853,000 1,119,000
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Cash and cash equivalents end of period $ 1,619,000 $ 1,266,000
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5
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
-continued-
Three Months Ended
March 31,
--------------------------
2001 2000
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(Unaudited)
Supplemental disclosure of cash flow information:
Cash paid during the three months for:
Interest $178,000 $ 75,000
======== ========
Non-cash transactions:
Issuance of 275,000 shares of common
stock related to the acquisitions $ -- $186,000
======== ========
Issuance of notes related to the
acquisitions $ -- $375,000
======== ========
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 three months ended March 31, 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.
The preparation of financial statements in conformity with
auditing standards 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.
(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"), with the
Merger becoming 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 March 31, 2001 to former preferred stockholders who had
submitted their preferred stock to the Company for the merger
7
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(2) Merger (continued)
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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 on April 23, 1999 to determine the fair value of their
shares 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
March 31, 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 March 31, 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.
8
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(3) Description of Business and Summary of Significant Accounting Policies
----------------------------------------------------------------------
(continued)
(c) Income Tax Policy
-----------------
The Company has adopted 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.
(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 March 31, 2001 and
December 31, 2000 are short term time deposits of $287,000 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.
9
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(3) Description of Business and SummaryofSignificantAccountingPolicies
------------------------------------------------------------------
(continued)
(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 No. 131, Disclosures about Segments of
an Enterprise and Related Information. For the three month periods ended
March 31, 2001 and 2000, the Company has determined that it operates in
a single operating segment.
(i) New Accounting Pronouncements
-----------------------------
SFAS No. 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 No. 133 in 2001 did not
have a material effect on the consolidated financial statements.
(4) Inventories
-----------
At March 31, 2001 and December 31, 2000 inventories consist of:
March 31, December 31,
2001 2000
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Raw materials $ 585,000 $ 562,000
Finished goods 3,641,000 3,560,000
Packaging materials 268,000 265,000
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$4,494,000 $4,387,000
========== ==========
(5) Notes Payable
-------------
At March 31, 2001, notes payable represent amounts outstanding
under a $6,000,000 line of credit from a commercial lender to the
Company's subsidiaries.
10
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(5) Notes Payable (continued)
------------
The line of credit is collateralized by the subsidiaries'
accounts receivable and inventory, bears interest at prime rate plus
1/2% (9.5% at March 31, 2001), expires June 19, 2001, and is subject to
annual renewal. At March 31, 2001, the line of credit limit available
for borrowing based on eligible receivables and inventory was
$5,675,000, of which $4,444,000 had been borrowed. The average month-end
amounts outstanding for the three month periods ended March 31, 2001 and
2000 were $4,885,000, and $2,378,000, respectively.
(6) Long-Term Debt and Current Installments of Long-Term Debt
---------------------------------------------------------
Included in long-term debt at March 31, 2001, are three mortgage
loans, collateralized by real property, in the aggregate amount of
$541,000, less current installments aggregating $81,000.
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
March 31, 2001 is $941,000. 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
March 31, 2001, aggregate notes of $380,000 were classified as long-term
debt, and $379,500 were classified as current portion of long-term debt.
Other long-term debt in the aggregate amount of $644,000, less
current installments of $275,000, relates principally to equipment
financing. The notes bear interest at various rates ranging from 8.75%
to 15.39% and are payable monthly through 2005.
(7) Income Taxes
------------
At March 31, 2001, the deferred tax asset of $954,000 consists
of the tax effect of net operating loss carryforwards of $2,761,000,
less a valuation allowance of $0. The operating losses of $2,761,000
expire in
11
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(7) Income Taxes (continued)
------------
varying amounts through 2009.
In the three months ended March 31, 2001 and 2000, the Company
recognized income tax expense of $12,000 and $152,000, respectively,
representing income before income taxes at the statutory rate of 35%.
(8) Capital Stock
-------------
(a) Common Stock
------------
At March 31, 2001, the Company had outstanding 9,205,434 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 the three months ended March 31, 2000, the Company issued an
aggregate of 275,000 shares of common stock as partial consideration for
the purchase of certain assets of four building materials distributors.
(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 March 31, 2001 and December 31, 2000, there were no shares of
preferred stock outstanding.
(c) Warrants
--------
At March 31, 2001, the Company had warrants outstanding to
purchase 150,000 shares of the Company's common stock. The Company
issued the warrants in January 1999 to its investment banker for
financial advisory
12
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(8) Capital Stock (continued)
-------------
(b) Warrants (continued)
--------
services in connection with the Merger (the "Investment Banker
Warrants"). Each Investment Banker Warrant entitles the holder to
purchase one share at $.38 per share until December 31, 2003. The
Company estimated the fair value of the Investment Banker Warrants at
$22,000 based on a Black-Scholes pricing model and the following
assumptions: volatility of 45%, risk-free rate of 4.6%, expected life of
four years and a dividend rate of 0%.
(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 March 31, 2001, options to purchase 215,000 shares of common
stock (the "options") were outstanding. The options have an exercise
price of $.57, a weighted average remaining life of 4.0 years and are
fully vested. As of March 31, 2001, options for 585,000 shares were
available for future grants under the 1999 Plans.
(9) Earnings Per Common Share
-------------------------
The Company has adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("FAS 128"). The following is a
reconciliation of the numerator and denominator of the basic and diluted
per share computation
13
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(9) Earnings Per Common Share (continued)
-------------------------
(in thousands, except per share data):
Three Months Ended
March 31,
---------
2001 2000
---- ----
BASIC
Net income $ 22 $ 282
Average common shares outstanding 9,205 8,472
Basic per share amount $ .-- $ .03
DILUTED:
Net income $ 22 $ 282
Average common shares outstanding 9,205 8,472
Dilutive effect of outstanding
options and warrants 4 249
Average shares outstanding assuming dilution 9,209 8,721
Diluted per share amount $ .-- $ .03
(10) Commitments and Contingencies
-----------------------------
(a) Contingencies
-------------
As of May 11, 2001, the Company's subsidiary, Acrocrete, Inc.,
and other parties are defendants in 28 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 25 of these claims and are providing a defense under a
reservation of rights. Acrocrete expects its insurance carriers to
accept coverage for the other 3 lawsuits. 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.
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,
14
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(10) Commitments and Contingencies (continued)
-----------------------------
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 March 31, 2001, certain property, plant and equipment were
leased by the Company under long-term leases. The Company pays aggregate
annual rent of approximately $1,085,000 for its current operating
leases. The leases expire at various dates ranging from August 31, 2001
to August 31, 2009. Comparable properties at equivalent rentals are
available for replacement of these facilities if any leases are not
extended.
15
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
increased in the Southeastern United States during the past five years,
the duration of recent economic conditions and the magnitude of its
effect on the construction industry are uncertain and 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: 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
---------------------
Three Months Ended March 31, 2001 Compared to 2000
--------------------------------------------------
Net sales for the three months ended March 31, 2001 increased
$2,312,000, or approximately 29.4%, 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 during the second
quarter of 2000. Results from these acquired distributors were not
included in the first three months of 2000. These sales primarily
consisted of building materials purchased from other
16
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Results of Operations
-------------------------------------------------------------
and Financial Condition (continued)
-----------------------------------
Results of Operations (continued)
Three Months Ended March 31, 2001 Compared to 2000 (continued)
manufacturers, principally gypsum, roofing, insulation, metal studs,
masonry and stucco products. Management believes 2001 first quarter
sales were adversely effected by fewer product shipping days due to
more adverse weather conditions causing reduced product demand,
compared to the first quarter of 2000. In addition, declining prices
for gypsum wallboard, a major product line of the Company's
distribution operations, had an adverse effect on sales.
Gross profit as a percentage of net sales for the first
quarter of 2001 was approximately 30.3% compared to 33.0% for the same
period in 2000. The decrease in gross profit margins was principally
due to a greater proportion of consolidated sales represented by
products manufactured by other companies sold through the Company's
distribution facilities, as compared to the proportionate amount of
sale of products manufactured by the Company with higher gross profit
margins. Products manufactured by the Company accounted for
approximately 42.9% of consolidated sales in the first quarter of 2001,
compared to approximately 53.5% in 2000. The distribution facilities
typically generate lower gross profit margins than the direct sale of
the Company's manufactured products.
In the first quarter of 2001, gross profits derived by the
Company's acquired distribution facilities were adversely affected by
competitive conditions in the Company's distribution markets for sales
of gypsum products manufactured by other companies. Market prices for
gypsum wallboard, a major product line of the acquired distributors,
are estimated to have decreased in excess of 40% in the first quarter
of 2001 compared to the same period in 2000. This was due to an excess
supply and increased competition of the gypsum wallboard manufacturers
prevalent in the industry. The trend of lower pricing continued
throughout the quarter and is expected to remain low through the
balance of calendar year 2001.
The results of operations of the Company's distribution
operations had a material adverse impact on the Company's consolidated
results in the first quarter of 2001 and will continue to impact
results in 2001 due in large part to reduced gross profits as a result
of lower gypsum wallboard prices, some reduction in product demand due
to adverse weather conditions and certain underperforming distribution
facilities. In the first quarter of 2001, the Company's distribution
operations realized sales of $7,108,000 and incurred operating losses
of $71,000 before any
17
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Results of Operations
-------------------------------------------------------------
and Financial Condition (continued)
-----------------------------------
Results of Operations (continued)
---------------------
Three Months Ended March 31, 2001 Compared to 2000 (continued)
--------------------------------------------------
charges of corporate overhead, interest expense and miscellaneous
income, compared to sales of $4,867,000 and operating profits of
$235,000 for the same period in 2000.
Efforts are being made to increase sales and gross profits by
focusing primarily on attaining increased sales of the Company's
manufactured products through the Company's acquired distribution
facilities and broadening the product line of the Company's existing
distribution facilities where suitable in selected markets and decrease
reliance on sales of gypsum products.
Selling, general and administrative expenses as a percentage
of net sales for the first quarter of 2001 were approximately 28.0%
compared to 25.8% in 2000. Selling, general and administrative expenses
increased $813,000 or approximately 40.0% in 2001, compared to 2000.
The increase in expenses was primarily due to additional operating
costs related to the distributors acquired in 2000.
Efforts are being made to improve operating efficiency in the
Company's distribution operations through: (i) a reduction in personnel
in certain locations; (ii) closure of an acquired under- performing
distribution location in Hattiesburg, Mississippi; (iii) more efficient
utilization of underperforming distribution locations, including
possible consolidations and improving product mix and business
activities at such locations; and (iv) development of a consolidated
purchasing program in an attempt to realize greater savings from the
purchase and resale of products.
Interest expense increased from $119,000 in the first quarter
of 2000 or approximately 94.1% to $231,000 in 2001. The increase in
interest expense was primarily due to additional borrowing related to
the purchase and operation of the acquired distributors.
In the three months ended March 31, 2001 and 2000, the Company
recognized income tax expenses of $12,000 and $152,000, respectively,
representing income taxes at the statutory rate of 35%.
As a result of the above factors, the Company had net income
of $22,000, or $.00 per fully diluted share for the first quarter of
2001, compared to net income of $282,000, or $.03 per share for 2000.
18
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Results of Operations
-------------------------------------------------------------
and Financial Condition (continued)
-----------------------------------
Liquidity and Capital Resources
-------------------------------
At March 31, 2001, the Company had working capital of
approximately $1,567,000 compared to working capital of $1,607,000 at
December 31, 2000. As of March 31, 2001, the Company had cash and cash
equivalents of $1,619,000.
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, 2001, 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 March 31, 2001, $4,444,000 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 $4,444,000) of
approximately $5,675,000 at March 31, 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 and through Company owned
warehouse distribution outlets. As of March 31, 2001 the Company owned
and operated fourteen distribution outlets. Accounts receivable, net of
allowance, at March 31, 2001 was $5,001,000 compared to $4,866,000 at
December 31, 2000. The increase in receivables of $135,000, or
approximately 2.7% was primarily as a result of slower payment
practices of certain customers of the Company's distribution outlets.
As a result of the consummation of a merger with a wholly
owned subsidiary in 1998, the Company issued an aggregate of $994,960
face amount, 8% Debentures, 1,574,610 shares of common stock and agreed
to pay $733,000 in cash to the former preferred shareholders. At March
31, 2001, the Company had paid $684,000 of such cash amount. Amounts
payable to such shareholders at March 31, 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. 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
19
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Results of Operations
-------------------------------------------------------------
and Financial Condition (continued)
-----------------------------------
Liquidity and Capital Resources
-------------------------------
common stock since that is the consideration the dissenting holders
would receive if they did not perfect their dissenters' rights under
the law. Dissenting stockholders filed a petition for appraisal rights
in the Delaware Chancery Court on April 23, 1999.
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
------
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 in 2000.
The Company presently is focusing its efforts on the
completion of the integration and consolidation of the acquired
distribution operations into the Company. The Company expects to incur
various capital expenditures during the next twelve months in its
ordinary course of business to upgrade and maintain its equipment and
delivery fleet to support operations. In addition, the Company is
evaluating the implementation of a new centralized management
information system. 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 be material.
The Company believes its cash on hand and the maintenance of
its borrowing arrangement with its commercial lender will provide
20
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Results of Operations
-------------------------------------------------------------
and Financial Condition (continued)
-----------------------------------
Liquidity and Capital Resources
-------------------------------
sufficient cash to supplement cash shortfalls, if any, from operations
and provide adequate liquidity for the next twelve months to satisfy
the 8% Debentures due December 31, 2001 and support the cash
requirements of its capital expenditure programs. While the Company
believes it will generate sufficient cash to satisfy the 8% Debentures
at their due date of December 31, 2001, the Company intends to pursue
other means of financing rather than utilize cash flow left from
operations to satisfy the Debentures. The Company believes alternative
financing will be available on terms satisfactory to the Company.
21
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 and Reports on Form 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).
22
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-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) Reports on Form 8-K
None.
23
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 Jean Murchison
--------------------------------
Betty Jean Murchison
Principal Accounting Officer/
Assistant Vice President
May 21, 2001
24