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, 2002
-----------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 1-7190
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IMPERIAL INDUSTRIES, INC.
--------------------------------
(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
--------------
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 6, 2002: 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
March 31, 2002 and December 31, 2001 3
Consolidated Statements of Operations
Three Months Ended March 31, 2002 and 2001 4
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2002 and 2001 5
Notes to Consolidated Financial Statements 6-15
Management's Discussion and Analysis of Results 16-22
Of Operations and Financial Condition
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
March 31, December 31,
2002 2001
------------ ------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 2,016,000 $ 1,368,000
Trade accounts receivable (less
allowance for doubtful accounts of
$463,000 and $453,000 at March 31, 2002
and December 31, 2001, respectively) 4,637,000 4,419,000
Inventories 4,013,000 3,807,000
Deferred income taxes 457,000 523,000
Other current assets 328,000 294,000
------------ ------------
Total current assets 11,451,000 10,411,000
------------ ------------
Property, plant and equipment, at cost 4,254,000 4,197,000
Less accumulated depreciation (1,826,000) (1,749,000)
------------ ------------
Net property, plant and equipment 2,428,000 2,448,000
------------ ------------
Deferred income taxes 327,000 327,000
------------ ------------
Excess cost of investment over net
assts acquired 1,272,000 1,272,000
------------ ------------
Other assets 129,000 133,000
------------ ------------
$ 15,607,000 $ 14,591,000
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable $ 4,968,000 $ 4,335,000
Current portion of long-term debt 607,000 669,000
Accounts payable 2,267,000 1,906,000
Payable to stockholders 283,000 286,000
Accrued expenses and other liabilities 766,000 735,000
------------ ------------
Total current liabilities 8,891,000 7,931,000
------------ ------------
Long-term debt, less current maturities 1,374,000 1,440,000
------------ ------------
Obligation for appraisal rights 877,000 877,000
------------ ------------
Commitments and contingencies (Note 9) -- --
------------ ------------
Stockholders' equity:
Common stock, $.01 par value;
40,000,000 shares authorized;
9,220,434 issued at March 31, 2002
and December 2001, respectively $ 92,000 $ 92,000
Additional paid-in-capital 13,920,000 13,920,000
Accumulated deficit (9,547,000) (9,669,000)
------------ ------------
Total stockholders' equity 4,465,000 4,343,000
------------ ------------
$ 15,607,000 $ 14,591,000
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
3
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Three Months Ended
March 31,
-----------------------------
2002 2001
------------ ------------
(Unaudited)
Net Sales $ 8,709,000 $ 10,168,000
Cost of Sales 5,984,000 7,089,000
------------ ------------
Gross profit 2,725,000 3,079,000
Selling, general and
administrative expenses 2,462,000 2,844,000
------------ ------------
Operating income 263,000 235,000
------------ ------------
Other income (expense):
Interest expense (132,000) (231,000)
Miscellaneous income 57,000 30,000
------------ ------------
(75,000) (201,000)
------------ ------------
Income before income taxes 188,000 34,000
Income tax expense (66,000) (12,000)
------------ ------------
Net income $ 122,000 $ 22,000
============ ============
Basic earnings per common share $ .01 $ --
============ ============
Diluted earnings per common share $ .01 $ --
============ ============
Weighted average common shares outstanding 9,220,434 9,205,434
============ ============
Weighted average shares and
potentially dilutive shares outstanding 9,220,434 9,209,214
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
4
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three Months Ended
March 31,
--------------------------
2002 2001
----------- -----------
(Unaudited)
Cash flows from operating activities:
Net income $ 122,000 $ 22,000
----------- -----------
Adjustments to reconcile net income
to net cash provided by (used in):
Depreciation 108,000 124,000
Amortization 11,000 20,000
Debt issue discount -- 15,000
Provision for doubtful accounts 47,000 74,000
Provision for income tax 66,000 12,000
(Gain)on disposal of fixed assets (3,000) --
Increase in:
Accounts receivable (265,000) (209,000)
Inventory (206,000) (107,000)
Prepaid expenses and other assets (41,000) (334,000)
Increase (decrease) in:
Accounts payable 361,000 890,000
Payable to Stockholders (3,000) --
Accrued expenses and
other liabilities 31,000 187,000
----------- -----------
Total adjustments to net income 106,000 672,000
----------- -----------
Net cash provided by
operating activities: 228,000 694,000
----------- -----------
Cash flows from investing activities:
Purchases of property, plant
and equipment (112,000) (11,000)
Proceeds received from sale of
Property and equipment 27,000 10,000
Payment on note payable for acquisitions -- (100,000)
----------- -----------
Net cash used in investing activities (85,000) (101,000)
----------- -----------
Cash flows from financing activities:
Increase (decrease) in notes payable
banks - net 633,000 (659,000)
Proceeds from issuance of
long-term debt 82,000 --
Repayment of long-term debt (210,000) (168,000)
----------- -----------
Net cash provided by (used in)
financing activities 505,000 (827,000)
----------- -----------
Net increase(decrease)in cash and
cash equivalents 648,000 (234,000)
Cash and cash equivalents beginning of period 1,368,000 1,853,000
----------- -----------
Cash and cash equivalents end of period $ 2,016,000 $ 1,619,000
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
5
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, 2002
are not necessarily indicative of the results that may be expected for
the year ended December 31, 2002. The significant accounting principles
used in the preparation of these unaudited interim consolidated
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, 2001.
(2) 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 finish wall coatings
and mortar products for the construction industry, as well as the
purchasing and sale of other building materials from other
manufacturers. Sales of the Company's products are made to customers
primarily in Florida and 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) Concentration of Credit Risk
----------------------------
Concentrations of credit risk with respect to trade accounts
receivable are limited due to the large number of entities comprising
the Company's customer base. Trade accounts receivable represent
amounts due from building materials dealers, contactors and
sub-contractors, located principally in the Southeastern United States
who have purchased products on an unsecured open account basis. At
March 31, 2002, accounts aggregating $539,000,
6
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(2) Description of Business and Summary of Significant Accounting Policies
----------------------------------------------------------------------
(continued)
or approximately 10.6% of total gross trade accounts receivable were
deemed to be ineligible for borrowing purposes under the Company's
borrowing agreement with its commercial lender. See Note (4). The
allowance for doubtful accounts at March 31, 2002 of $463,000 is
considered sufficient to absorb any losses which may arise from
uncollectible accounts receivable.
The Company places its cash with commercial banks. At March
31, 2002, the Company has cash balances with banks in excess of Federal
Deposit Insurance Corporation insured limits. Management believes the
credit risk related to these deposits is minimal.
c) Inventories
-----------
Inventories are stated at the lower of cost or market (net
realizable value), on a first-in, first-out basis. Finished goods
include the cost of raw materials, freight in, direct labor and
overhead.
d) Property, plant and equipment
-----------------------------
Property, plant and equipment is stated at cost, less
accumulated depreciation. Depreciation is computed on the straight-line
basis over the estimated useful lives of the depreciable assets.
Expenditures for maintenance and repairs are charged to expense as
incurred, while expenditures which extend the useful life of assets are
capitalized. Differences between the proceeds received on the sale of
property, plant and equipment and the carrying value of the assets on
the date of sale is credited or charged to net income.
e) Excess Cost of Investment Over Net Assets Acquired and Other
---------------------------------------------------------------
Intangible Assets
-----------------
Licenses, trademarks and deferred financing costs are
amortized on the straight-line basis over the estimated useful lives of
the licenses and trademarks, or over the term of the related financing.
Excess cost of investment over net assets acquired was amortized using
the straight-line method over 40 years and is net of $57,000
accumulated amortization at March 31, 2002 and December 31, 2001. (See
Note 2 (n) Accounting Changes for goodwill accounting policy adopted
January 1, 2002).
7
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(2) Description of Business and Summary of Significant Accounting Policies
-----------------------------------------------------------------------
(continued)
f) Income Taxes
------------
The Company utilizes the liability method for determining its
income taxes. Under this method, deferred taxes and liabilities are
recognized for the expected future tax consequences of events that have
been recognized in the consolidated financial statements or income tax
returns. 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.
g) Earnings per share of stock
---------------------------
Basic earnings per share is computed by dividing net income,
by the weighted-average number of shares of common stock outstanding
each year. Diluted earnings per share is computed by dividing net
income by the weighted-average number of shares of common stock and
common stock equivalents outstanding during each year. (See Note (8) -
Earnings Per Share).
h) Cash and cash equivalents
-------------------------
The Company has defined cash and cash equivalents as those
highly liquid investments with original maturities of three months or
less, and are stated at cost. Included in cash and cash equivalents at
March 31, 2002 and December 31, 2001 are short term time deposits of
$121,000 and $121,000, respectively. Also included in cash and cash
equivalents at March 31, 2002 and December 31, 2001 are $1,183,000 and
$698,000,respectively, of customer payments that are required to be
remitted to the Company's commercial lender upon their bank clearance
under the terms of their line of credit.
i) Revenue recognition policy
--------------------------
Revenue from sales transactions, net of discounts and
allowances, is recorded upon delivery of inventory to the
customer.
j) 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
8
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(2) Description of Business and Summary of Significant Accounting Policies
----------------------------------------------------------------------
(continued)
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.
k) 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.
l) Fair Value of Financial Instruments
-----------------------------------
The carrying amount of the Company's financial instruments
principally notes payable and obligation for appraisal rights,
approximates fair value based on discounted cash flows and because the
borrowing rates are similar to the current rates offered to the
Company.
m) 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, 2002 and 2001, the Company has determined that
it operates in a single operating segment.
n) Accounting Changes
------------------
Effective January 1, 2002 the Company adopted SFAS 141,
"Business Combinations," and SFAS 142, "Goodwill and Other Intangible
Assets". SFAS 141 was issued by the FASB in June 2001. 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
9
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(2) Description of Business and Summary of Significant Accounting Policies
-----------------------------------------------------------------------
(continued)
n) Accounting Changes (continued)
------------------
goodwill and those acquired intangible assets that are required to be
included in goodwill. Our adoption of this standard did not have any
effect on our accounting for prior business combinations.
SFAS 142 requires that goodwill no longer be amortized, but
instead be tested for impairment at least annually. SFAS 142 requires
recognized intangible assets to 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 assets
determined to have an indefinite useful life are not amortized, but
instead tested for impairment in accordance with the standard until its
life is determined to no longer be indefinite. If goodwill amortization
was not recorded in the first quarter of 2001, first quarter 2001 net
income would have been $28,000.
The Company must complete the first step of the SFAS 142
transitional impairment review by June 30, 2002 and, if necessary, the
second step by December 31, 2002. The Company is currently analyzing
the effect the adoption of this standard will have on its consolidated
financial statements.
o) New Accounting Pronouncements
-----------------------------
In June 2001, the FASB issued SFAS No. 143, "Accounting for
Asset Retirement Obligations". SFAS No. 143, which is effective for
fiscal years beginning after June 15, 2002, addresses financial
accounting and reporting for obligations associated with the retirement
of tangible long-lived assets and the associated asset retirement
costs. The Company's adoption of this standard is not expected to have
a material effect on its financial statements.
In October 2001, the Financial Accounting Standards Board
issued "Accounting for the Impairment of Disposal of Long-Lived Assets"
(SFAS 144"), which is effective for fiscal years beginning after
December 15, 2001. SFAS 144 addresses accounting and reporting for the
impairment or disposal of long-lived assets. This statement superseded
SFAS 121, "Accounting for the Impairment of Long-Lived Assets to be
Disposed Of". The Company's adoption of SFAS 144 on January 1, 2002 did
not have a material effect on its consolidated financial statements.
In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections". SFAS 145 rescinds the automatic
10
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(2) Description of Business and Summary of Significant Accounting Policies
----------------------------------------------------------------------
(continued)
o) New Accounting Pronouncements (continued)
-----------------------------
treatment of gains or losses from extinguishment of debt as
extraordinary unless they meet the criteria for extraordinary items as
outlined in APB Opinion No. 30, Reporting the Results of Operations,
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and
Transactions. In addition, SFAS 145 also requires sale-leaseback
accounting for certain lease modifications that have economic effects
that are similar to sale-leaseback transactions and makes various
technical corrections to existing pronouncements. The provisions of
SFAS 145 related to the rescission of FASB Statement 4 are effective
for fiscal years beginning after May 15, 2002, with early adoption
encouraged. All other provisions of SFAS 145 are effective for
transactions occurring after May 15, 2002, with early adoption
encouraged. The Company does not anticipate SFAS 145 having a material
effect on their financial statements.
(3) Inventories
-----------
At March 31, 2002 and December 31, 2001 inventories consisted
of:
2002 2001
---- ----
Raw Materials $ 467,000 $ 465,000
Finished Goods 3,304,000 3,062,000
Packaging materials 242,000 280,000
----------- -----------
$ 4,013,000 $ 3,807,000
(4) Notes Payable
-------------
At March 31, 2002 and December 31, 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% (5.25% at March 31, 2002),
expires June 19, 2003, and is subject to annual review.
At March 31, 2002 the line of credit limit available for
borrowing based on eligible receivables and inventory aggregated
$5,133,000 of which $4,968,000 was outstanding. The average amounts
outstanding for the three month periods ended March 31, 2002 and 2001
were $4,583,000 and $4,885,000, respectively.
11
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(5) Long-Term Debt and Current Installments of Long-Term Debt
---------------------------------------------------------
Included in long-term debt at March 31, 2002, are four
mortgage loans, collateralized by real property, in the aggregate
amount of $899,000, less current installments aggregating $65,000.
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, 2002, aggregate remaining notes of $380,000
were classified as long-term debt, less current installments of
$270,000.
Other long-term debt in the aggregate amount of $702,000, less
current installments of $272,000, relates principally to equipment
financing. The notes bear interest at various rates ranging from 4.89%
to 10.83%.
(6) Income Taxes
------------
At March 31, 2002, the net deferred tax asset of approximately
$784,000 consisted mostly of the tax effect of net operating loss
carryforwards of $665,000. The operating loss carryforwards expire in
varying amounts through 2009.
In the three months ended March 31, 2002 and 2001, the Company
recognized income tax expense of $66,000 and $12,000, respectively.
(7) Capital Stock
-------------
(a) Common Stock
------------
At March 31, 2002, the Company has 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.
(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,
12
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(7) Capital Stock (continued)
-------------
(b) Preferred Stock (continued)
---------------
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, 2002
and December 31, 2001, there were no shares of preferred stock
outstanding.
(c) Warrants
--------
At March 31, 2002, 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 Option Plans
------------------
The Company has two stock option plans, the Directors' 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 form 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. As of March 31, 2002, options for
400,000 shares were available for future grants under the 1999 Plans.
(8) Earnings Per Share
------------------
Below is a reconciliation between basic and diluted earnings
per common share under FAS 128 for the three months ended March 31,
2002 and 2001 (in thousands except per share amounts):
2002 2001
--------------------- ---------------------
Per Per
Income Shares Share Income Shares Share
Net income $122 $22
Basic earnings $122 9,220 $.01 $22 9,205 $ --
per share ---- ----- ---- --- ----- ----
Effect of dilutive
securities:
Warrants -- 4
---- ----- ---- --- ----- ----
Diluted earnings
per common share $122 9,220 $.01 $22 9,209 $ --
---- ----- ---- --- ----- ----
13
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(9) Commitments and Contingencies
-----------------------------
(a) Contingencies
-------------
As of May 1, 2002, the Company's subsidiary, Acrocrete, Inc.,
and other parties are defendants in 32 lawsuits pending in various
Southeastern states, by homeowners, homeowners associations,
contractors and subcontractors, or their insurance companies, claiming
moisture intrusion damages on single and multi-family residences. The
Company's insurance carriers have accepted coverage for 27 of these
claims and are providing a defense under a reservation of rights.
Acrocrete expects its insurance carriers to accept coverage for the
other 5 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, 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. The Company
recorded $877,000 in the accompanying consolidated balance sheets at
March 31, 2002 and December 31,
14
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(9) Commitments and Contingencies (continued)
-----------------------------
(a) Contingencies (continued)
-------------
2001, as an estimate for the obligation for appraisal rights based on
the estimated fair value of the consideration they could have received
had they not elected dissenters' rights. The Chancery Court may
determine fair value is less than, equal to, or greater than an
aggregate of $877,000. The Chancery Court has scheduled a trial for the
appraisal rights for the middle of June 2002. However, the Company does
not expect a final non-appealable judicial determination requiring the
Company to make payment to the Dissenting Shareholders' in the twelve
months ended March 31, 2002. Accordingly, the obligation continues to
be classified as long-term.
(b) Lease Commitments
-----------------
At March 31, 2002, certain property, plant and equipment were
leased by the Company under long-term leases. The Company will pay
aggregate annual rent of approximately $1,048,000 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. The Company does not expect to incur any material
relocation expenses.
15
Item 2 Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
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 last
several years, the duration of recent economic conditions and the
magnitude of their effect on the construction industry are uncertain
and cannot be predicted.
Special Note Regarding Forward-Looking Statements
-------------------------------------------------
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 the Company, 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 judgment of personnel;
availability of qualified personnel; and labor and employee benefit
costs.
16
Item 2 Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (continued)
---------------------
Results of Operations
---------------------
Three Months Ended March 31, 2002 Compared to 2001
--------------------------------------------------
Net Sales for the three months ended March 31, 2002 decreased
$1,459,000 or approximately 14.3% compared to 2001. The closure of
certain under-performing distribution facilities, and the elimination
of installation services and sales of gypsum wallboard at certain
locations during 2001, in combination with reduced demand for certain
of the Company's manufactured products, accounted for the sales decline
in the first quarter of 2002 compared to 2001. The closure of the
under-performing operations accounted for $916,000 of the sales decline
in the first quarter comparable periods.
Gross profit as a percentage of net sales for the first
quarter of 2002 was approximately 31.3% compared to 30.3% in 2001. The
increase in gross profit margins was principally due to a greater
proportion of consolidated sales from company manufactured products
having higher gross profit margins. This is attributable to (i) the
closure of certain under-performing distribution facilities in 2001
whose sales were primarily comprised of lower gross profit margin
products manufactured by other companies and (ii) the Company's
continuing efforts to emphasize the sales of its manufactured products
through its distribution facilities and to decrease reliance on sales
of lower margin gypsum products. The Company recently increased its
sales force to further promote the sales of its manufactured products
to the end-user.
Market prices for gypsum wallboard, a major product line
purchased and sold by Company-owned distributors, were believed to be
slightly higher in 2002 compared to the average prices realized for the
same period in 2001. The trend of lower gypsum wallboard pricing, which
commenced in early 2000 and continued for six consecutive quarters
through the first six months of 2001, has rebounded from the
historically low levels during the third quarter ended September 30,
2001. During that quarter, certain manufacturers reduced production of
gypsum wallboard and a stronger demand for gypsum wallboard
17
Item 2 Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (continued)
---------------------
Three Months Ended March 31, 2002 Compared to 2001 (continued)
--------------------------------------------------
resulted in increased gypsum prices in the latter part of 2001,
although at still significantly reduced prices from historical levels.
The Company is unable to determine if the improvement in prices will be
maintained or trend higher during the remainder of 2002. However,
additional price increases for gypsum wallboard have been announced for
May 2002.
Selling, general and administrative expenses as a percentage
of net sales for the first quarter of 2002 were approximately 28.3%
compared to 28.0% in 2001. Selling, general and administrative expenses
decreased $382,000 or approximately 13.4% in 2002, compared to 2001.
The decrease in expenses was primarily due to a reduction in operating
costs associated with closing under-performing distribution locations
and Company-wide reductions in manpower to gain improved operating
efficiencies, which took place during 2001.
During 2001 the Company took action to improve operating
performance of the Company's distribution locations through: (i) an
approximate 32% reduction in workforce;(ii) closure of under-performing
distribution locations in Hattiesburg, Picayne and Pascagoula,
Mississippi; (iii) elimination of installation services 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.
Interest expense decreased $99,000 in the first quarter of
2002, or approximately 42.9%, compared to 2001. The decrease in
interest expense in the first three months of 2002 was primarily due to
a lower average amount outstanding under the Company's line of credit
as a result of closing the distribution facilities in 2001, the payment
of the Company's debentures at December 31, 2001, which had an
effective annual interest rate of 16%, and lower interest rates under
its variable rate borrowings.
In the first quarter of 2002, the Company recognized income
tax expense of $66,000 compared to $12,000 for the first three months
of 2001.
18
Item 2 Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (continued)
---------------------
As a result of the above factors, the Company had net income
of $122,000 or $.01 per fully diluted share for the first quarter of
2002, compared to net income of $22,000 or $ .00 per share for 2001.
Liquidity and Capital Resources
-------------------------------
Sources and Uses of Cash
------------------------
The Company realized approximately $228,000 and $694,000 of
net cash from operations for the first three months of 2002 and 2001
respectively. In the first quarter of 2001 net cash provided by
operating activities included an $890,000 increase in accounts payables
compared to a $361,000 increase in the same quarter in 2002.
During the first quarter of 2002, the net expenditures for
investing activities were $85,000 compared to $101,000 in 2001. The
purchase of equipment to up-grade the Company's manufacturing equipment
and distribution capabilities accounted for the majority of the 2002
expenditures.
During the three months ended March 31, 2002, the line of
credit balance increased approximately $633,000 to meet the Company's
working capital needs. The Company also made principal payments on
other debt totaling $210,000 during the quarter.
Future Commitments and Funding Sources
--------------------------------------
At March 31, 2002, the Company's contractual cash obligations,
with initial or remaining terms in excess of one year, remained
generally unchanged compared to December 31, 2001. See Notes 5 and 9 in
the accompanying financial statements for additional information
regarding the Company's commitments.
At March 31, 2002, the Company had working capital of
approximately $2,560,000 compared to working capital of $2,480,000 at
December 31, 2001. As of March 31, 2002, the Company had cash and cash
equivalents of $2,016,000, which included customer payments in the
amount of $1,183,000 that are required to be remitted to the Company's
commercial lender upon their bank clearance under the terms of the
Company's line of credit. The Company has implemented a cash management
program in an attempt to gain a more rapid clearance of customer
payments deposited in its bank accounts.
19
Item 2 Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (continued)
---------------------
Liquidity and Capital Resources (continued)
-------------------------------
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, 2003, subject to annual renewal. Premix, Acrocrete
and Just-Rite borrow on the line of credit, based upon and
collateralized by, their eligible accounts receivable and inventory.
Generally, accounts receivable outstanding more than 120 days are not
eligible under the agreement. At March 31, 2002, $4,968,000 was
outstanding under the line of credit. Based on eligible receivables and
inventory, the Company had, under its line of credit, total available
borrowing, (including the amount outstanding of $4,968,000) of
approximately $5,133,000 at March 31, 2002.
Trade accounts receivable represent amounts due from
sub-contractors, contractors and building materials dealers located
principally in Florida, Mississippi and Georgia who have purchased
products on an unsecured open account basis and through Company owned
warehouse distribution outlets. As of March 31, 2002, the Company owned
and operated eleven distribution outlets. Accounts receivable, net of a
$463,000 allowance, at March 31, 2002 was $4,637,000 compared to
$4,419,000 at December 31, 2001.
As a result of the consummation of the December 31, 1998
merger, among other things, the Company agreed to pay $733,000 in cash
to the former preferred shareholders and issued $985,000 face value
Debentures due December 31, 2001. Amounts payable to such shareholders
at March 31, 2002 on the Company's consolidated balance sheets of
$283,000 results from the former holders non-compliance with the
conditions for payment.
Holders representing 81,100 preferred shares have elected
dissenter's 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 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.
20
Item 2 Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (continued)
---------------------
Liquidity and Capital Resources (continued)
-------------------------------
The Company presently is focusing its efforts on building
market share for the sale of it products, reducing costs and expenses
and improving working capital. The Company expects to incur various
capital expenditures during the next twelve months to upgrade and
maintain its equipment and delivery fleet to support operations. In
addition, the Company is planning the implementation of an upgraded
centralized management information system for its distribution
operations. Capital needs associated with these capital projects cannot
be estimated at this time, but management does not expect the cash
portion of the expenditures for these projects to exceed $100,000.
The Company believes its cash on hand and the maintenance of
the borrowing arrangement with its commercial lender will provide
sufficient cash to meet current obligations for its operations and
support the cash requirements of the on-going capital expenditure
programs. The ability of the Company to maintain and improve its
long-term liquidity is primarily dependent on the Company's ability to
successfully achieve and maintain profitable operations, to obtain its
forecasted cash flow and resolve its litigation on terms favorable to
the Company. The eventual outcome of the appraisal rights litigation
cannot be predicted at this time. However, the Chancery Court has
scheduled a trial for the appraisal rights for the middle of June 2002.
The Company does not expect a final non-appealable judicial
determination requiring the Company to make payment to the Dissenting
Shareholders prior to April 1, 2003. To the extent the Company is
required, or chooses, to fund future cash requirements from sources
other than as discussed above, it will seek to secure additional
financing from banks and others through the offering of debt and/or
equity. There can be no assurance that such financing will be available
on terms acceptable to the Company.
21
Item 3 Market Risks
------------
Residential and Commercial Construction Activity
------------------------------------------------
The Company's sales depend heavily on the strength of
residential and commercial construction activity in the Southeastern
United States. The strength of these markets depends on many factors
beyond the Company's control. Some of these factors include interest
rates, employment levels, availability of credit, prices of raw
materials and consumer confidence. Downturns in the markets that the
Company serve or in the economy generally could have a material adverse
effect on the Company's operating results and financial condition.
Reduced levels of construction activity may result in intense price
competition among building materials suppliers, which may adversely
affect the Company's gross margins.
The Company's first quarter revenues and, to a lesser extent,
its fourth quarter revenues are typically adversely affected by winter
construction cycles and weather patterns in colder climates as the
level of activity in the new construction and home improvement markets
decreases. Because much of the Company's overhead and expense remains
relatively fixed throughout the year, Company profits also tend to be
lower during the first and fourth quarters.
Exposure to Interest Rates
--------------------------
The Company has two variable rate mortgages totaling $439,000
at March 31, 2002. The mortgages bear interest at prime plus 1% and are
due October 2004. In addition, the Company's $6,000,000 line of credit
from a commercial lender bears an interest rate of prime plus 1/2%. A
significant increase in the prime rate could have a material adverse
effect on the Company's operating results and financial condition.
22
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
PART II. Other Information
Item 1. Legal Proceedings
-----------------
See notes to Consolidated Financial Statements, Note 9 (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 Amendment to Certificate of Incorporation of the Company (Incorporated
by reference to Form 10-K dated December 31, 2001, Exhibit 3.2).
3.3 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).
23
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K (continued)
--------------------------------
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).
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 Directors Stock Option Plan (Incorporated by reference to Form 10-K
dated December 31, 2000, Exhibit 10.5).
(b) Reports on 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 it 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
Chief Accounting Officer/
Assistant Vice President
May 14, 2002
25