FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30,2000
------------------------------------------
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
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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
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
----- ----
Indicate the number of shares of Imperial Industries, Inc. Common Stock
($.01 par value) outstanding as of November 10, 2000: 9,205,434
Total number of pages contained in this document: 28
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Index
Page No.
--------
Part I. Financial Information
Consolidated Balance Sheets
September 30, 2000 and December 31, 1999 3
Consolidated Statements of Operations
Nine Months and Three Months Ended
September 30, 2000 and 1999 4
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2000 and 1999 5-6
Notes to Consolidated Financial Statements 7-18
Management's Discussion and Analysis of Results
of Operations and Financial Conditions 19-24
Part II. Other Information and Signatures
Item 1. Legal Proceedings 25
Item 4. Submission of Matters to a Vote of Security
Holders 25
Item 6. Exhibits and Reports on Form 8-K 26-27
Signatures 28
2
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, December 31,
2000 1999
---------- ----------
Assets (Unaudited)
------
Current assets:
Cash and cash equivalents $ 1,579,000 $1,119,000
Trade accounts receivable (less
allowance for doubtful accounts of
$417,000 and $254,000 at Sept.30, 2000,
and December 31, 1999 respectively) 5,228,000 2,677,000
Inventories 4,151,000 2,023,000
Deferred taxes 271,000 634,000
Other current assets 356,000 43,000
----------- ----------
Total current assets 11,585,000 6,496,000
----------- ----------
Property, plant and equipment, at cost 4,337,000 2,653,000
Less accumulated depreciation (1,311,000) (1,164,000)
----------- ----------
Net property, plant and equipment 3,026,000 1,489,000
----------- ----------
Deferred taxes 699,000 699,000
----------- ----------
Excess cost of investment over net
assets acquired 1,510,000 --
----------- ----------
Other assets 125,000 84,000
----------- ----------
$16,945,000 $8,768,000
=========== ==========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Notes payable $ 4,978,000 $1,526,000
Current portion of long-term debt 674,000 164,000
Accounts payable 2,471,000 902,000
Payable to stockholders 48,000 48,000
Accrued expenses and other liabilities 744,000 409,000
----------- ----------
Total current liabilities 8,915,000 3,049,000
----------- ----------
Long-term debt, less current maturities 2,454,000 1,328,000
----------- ----------
Obligation for appraisal rights 877,000 877,000
----------- ----------
Commitments and contingencies -- --
----------- ----------
Stockholders' equity:
Common stock, $.01 par value at September 30,
2000 and December 31, 1999; 20,000,000 shares
authorized; 9,205,434 and 8,230,434 issued
at September 30, 2000 and December 31, 1999
respectively 92,000 82,000
Additional paid-in-capital 13,915,000 13,414,000
Accumulated deficit (9,308,000) (9,982,000)
---------- ----------
Total stockholder's equity 4,699,000 3,514,000
---------- ----------
$16,945,000 $8,768,000
=========== ==========
See accompanying notes to consolidated financial statements.
3
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
Nine Months Ended Three Months Ended
Septembery 30, September 30,
2000 1999 2000 1999
----------- ----------- ----------- ----------
Net sales $30,355,000 $17,386,000 $11,028,000 $5,568,000
Cost of sales 20,990,000 11,825,000 7,570,000 3,760,000
----------- ----------- ----------- ----------
Gross profit 9,365,000 5,561,000 3,458,000 1,808,000
Selling, general and
administrative expenses 7,892,000 4,399,000 3,160,000 1,508,000
----------- ----------- ----------- ----------
Operating income 1,473,000 1,162,000 298,000 300,000
----------- ----------- ----------- ----------
Other income (expense):
Interest expense (560,000) (294,000) (244,000) (107,000)
Miscellaneous income 124,000 14,000 93,000 11,000
----------- ----------- ----------- ----------
(436,000) (280,000) (151,000) (96,000)
----------- ----------- ----------- ----------
Income before income taxes 1,037,000 882,000 147,000 204,000
Provision for income taxes (363,000) (313,000) (52,000) (76,000)
----------- ----------- ----------- ----------
Net income $ 674,000 $ 569,000 $ 95,000 $ 128,000
========== =========== ========== ==========
Basic earnings per common share $ .08 $ .07 $ .01 $ .02
========== =========== ========== ==========
Weighted average common shares 8,845,215 8,187,831 9,205,434 8,198,179
========== =========== ========== ==========
Diluted earnings per common share $ .07 $ .07 $ .01 $ .02
========== =========== ========== ==========
Weighted average shares and
potentially dilutive shares 9,020,433 8,420,823 9,258,980 8,414,861
========== =========== ========== ==========
See accompanying notes to consolidated financial statement.
4
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Increase (Decrease) In Cash and Cash Equivalents
Nine Months Ended
Septembery 30,
2000 1999
----------- -----------
(Unaudited)
Cash flows from operating activities:
Net income $ 674,000 $ 569,000
----------- -----------
Adjustments to reconcile net income
to net cash provided by:
Depreciation 311,000 163,000
Amortization 26,000 5,000
Debt issue discount 44,000 44,000
Provision for doubtful accounts 198,000 123,000
Provision for income taxes 363,000 299,000
Compensation expense - issuance of stock 60,000 14,000
(Gain) loss on disposal of property
and equipment (1,000) 4,000
(Increase) decrease in:
Accounts receivable (3,198,000) (553,000)
Inventory (290,000) (657,000)
Prepaid expenses and other assets (367,000) (172,000)
Increase (decrease) in:
Accounts payable 1,569,000 (429,000)
Payable to stockholders -- (685,000)
Accrued expenses and other liabilities 335,000 93,000
----------- -----------
Total adjustments to net income (950,000) (1,751,000)
----------- -----------
Net cash used in operating activities (276,000) (1,182,000)
----------- -----------
Cash flows from investing activities
Purchase of property, plant and Equipment (443,000) (366,000)
Acquistion of businesses (1,981,000) --
Payment on note payable A&R acquisition (150,000) --
Proceeds from sale of property
and equipment 40,000 31,000
Proceeds from exercise of warrants 20,000 --
Net cash used in investing activities (2,514,000) (335,000)
----------- -----------
Cash flows from financing activities
Increase in notes payable banks - net 3,352,000 1,237,000
Proceeds from issuance of long-term debt 226,000 132,000
Repayment of long-term debt (328,000) (130,000)
----------- -----------
Net cash provided by financing activities 3,250,000 1,239,000
----------- -----------
Net increase (decrease) in cash and
cash equivalents 460,000 (278,000)
Cash and cash equivalents
beginning of period 1,119,000 1,097,000
----------- -----------
Cash and cash equivalents end of period $ 1,579,000 $ 819,000
=========== ===========
5
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Increase (Decrease) In Cash and Cash Equivalents
-continued-
Nine Months Ended
Septembery 30,
2000 1999
----------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the nine months for:
Interest $428,000 $226,000
======== ========
Non-cash transactions:
Issuance of an aggregate of 775,000 shares
of common stock related to acquisitions
and to an officer of the Company $490,000 $ --
======== ========
Issuance of notes related to the
acquisitions $950,000 $ --
======== ========
For the nine months ended September 30, 1999,
47,863 shares of Common Stock were issued to
certain directors and an officer of the Company. $ -- $ 14,000
======== ========
See accompanying notes to consolidated financial statements.
6
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(1) Interim Financial Statements
The accompanying unaudited consolidated financial statements have
been prepared in accordance with the instructions to Form 10-Q and do
not include all of the information and footnotes required by auditing
standards generally accepted in the United States of America for
complete financial statements. In the opinion of management, all
adjustments considered necessary for a fair presentation have been
included. Operating results for the nine months ended September 30, 2000
are not necessarily indicative of the results that may be expected for
the year ended December 31, 2000. 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,
1999.
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 the
merger of 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 September 30, 2000 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)
consideration. In addition, the Company issued $985,000 face value of 8%
subordinated debentures with a fair value of $808,000, 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 the 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 of preferred stock would be entitled to
receive $2.25 in cash, an $8.00 subordinated debenture and five shares
of common stock. Based on these facts, and a valuation prepared by an
independent financial advisor in connection with the Merger, the Company
recorded $877,000 in the accompanying consolidated balance sheets at
September 30, 2000 and December 31, 1999, as an estimate for the
obligation for appraisal rights. The Chancery Court may determine fair
value is less than, equal to, or greater than an aggregate of $877,000.
Based on advice of counsel the Company does not expect that there will
be a final judicial determination requiring the Company to make payment
to Dissenting Shareholders' prior to September 30, 2001. Accordingly,
the obligation is classified as long-term.
(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 sale
of other building materials from other manufacturers. Sales of 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 September 30, 2000
and December 31, 1999 are short term time deposits of $282,000 and
$275,000, 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
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
9
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(3) Description of Business and Summary of Significant Accounting Policies
(continued)
(g) Fair Value of Financial Instruments
The carrying amount of the Company's financial instruments,
principally notes payable, debentures and obligation for appraisal
rights, approximates fair value based on discounted cash flows as well
as other valuation techniques.
(h) 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 anticipates that the adoption of SFAS No. 133
in 2001 will not have a material effect on the consolidated financial
statements.
(4) Inventories
At September 30, 2000 and December 31, 1999 inventories consist of:
2000 1999
Raw materials $ 455,000 $ 525,000
Finished goods 3,431,000 1,276,000
Packaging materials 265,000 222,000
---------- ----------
$4,151,000 $2,023,000
========== ==========
(5) Notes Payable
At September 30, 2000, notes payable represent amounts outstanding
under a $6,000,000 line of credit from a commercial lender to the
Company's subsidiaries and $100,000 in unsecured notes payable issued in
connection with the January 1, 2000 purchase of three building materials
distributors.
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, expires June 19, 2001, and is subject to annual
renewal. Effective April 1, 2000, the interest rate was reduced from the
prime rate plus 1% to the prime rate plus 1/2% (10% at September 30,
2000). At September 30, 2000, the line of credit limit available for
borrowing based on eligible receivables and inventory was $5,997,000, of
which $4,878,000 had been borrowed. The average month-end amounts
outstanding for the nine month periods ended September 30, 2000 and 1999
were $3,088,000, and $1,278,000, respectively.
(6) Long-Term Debt and Current Installments of Long-Term Debt
Included in long-term debt at September 30, 2000, are three mortgage
loans, collateralized by real property owned by the Company, in the
aggregate amount of $583,000, less current installments aggregating
$84,000.
In connection with the Merger described in Note 2, the Company issued
8% subordinated debentures with a face amount value of $985,000 effective
December 31, 1998. Each $8.00 debenture was discounted to a value of $6.56
at December 31, 1998 using an effective interest rate of 16%. The
aggregate carrying value of the debentures at September 30, 2000 is
$911,000. 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 the nine months ended September 30, 2000, the Company acquired
certain assets and assumed certain liabilities of seven building materials
distributors in which it issued unsecured promissory notes of $850,000 as
partial consideration. At September 30, 2000, $588,000 was classified as
long-term debt, and $262,000 was classified as current portion of
long-term debt. These obligations accrue interest at 8 % per annum.
Other long-term debt in the aggregate amount of $1,695,000, less
current installments of $328,000, relates principally to equipment
financing. The notes bear interest at various rates ranging from 8.75% to
15.39% and are payable monthly through 2004.
(7) Income Taxes
At September 30, 2000, the deferred tax asset of $1,022,000 consists
of tax effected net operating loss carryforwards of $2,655,000, less a
11
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(7) Income Taxes (continued)
valuation allowance of $1,633,000. Net operating losses of $4,823,000
expire in 2000. The remaining balance of $2,761,000 expires in varying
amounts through 2009.
In the nine months ended September 30, 2000 and 1999, the Company
recognized income tax expense of $363,000 and $313,000, respectively,
representing income before income taxes at the statutory rate of 35%.
(8) Capital Stock
(a) Common Stock
At September 30, 2000, 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.
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 nine months ended September 30, 2000, the Company issued an
aggregate of 675,000 shares of common stock as partial consideration for
the purchase of certain assets of seven building materials distributors,
an additional 100,000 shares were issued to an officer as compensation for
services rendered, and 200,000 shares were issued in connection with the
exercise of outstanding stock purchase warrants. In 1999, the Company
issued 47,863 treasury shares to directors and an officer as compensation
for services rendered.
(b) Preferred Stock
The authorized preferred stock of the Company consists of 5,000,000
shares, $.01 par value per share. The preferred stock is issuable in
series, each of which may vary, as determined by the Board of Directors,
as to the designation and number of shares in such series, the voting
power of the holders thereof, the dividend rate, redemption terms and
prices, the voluntary and involuntary liquidation preferences, and the
conversion rights and sinking fund requirements, if any, of such series.
At September 30, 2000 and December 31, 1999, there were no shares of
preferred stock outstanding.
(c) Warrants
At September 30, 2000, 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 services in connection with the Merger (the "Investment Banker
12
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(8) Capital Stock (continued)
(c) Warrants (continued)
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
In December 1999, the Board of Directors adopted the Director's Stock
Option Plan and the 1999 Employee Stock Option Plan (collectively, the
"1999 Plans"). The 1999 Plans are administered by the Compensation and
Stock Option Committee. A total of 600,000 and 200,000 shares are reserved
for issuance under the Employee and Director Plans, respectively.
On April 25, 2000, the Company granted 30,000 options under the 1999
Employee Stock Option Plan. The exercise price for such options was $.57
per share, the fair value of the common stock on September 27, 2000, the
date both the Director's Stock Option Plan and the Employee Stock Option
Plan was approved by the stockholders. As of September 30, 2000, the
Company has outstanding options to purchase 165,000 shares under the
Employee Stock Option Plan and 80,000 shares under the Director's Stock
Option Plan. Each option has an exercise price of $.57 per share. Each
outstanding option has a term of five years from the date of grant and is
fully vested.
(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 computations (in thousands, except per share data):
Nine Months Ended Three Months Ended
September 30, September 30,
------------------ ------------------
2000 1999 2000 1999
------- ------- ------- -------
BASIC
Net income $ 674 $ 569 $ 95 $ 128
Average common shares outstanding 8,845 8,188 9,205 8,198
Basic per share amount $ .08 $ .07 $ .01 $ .02
13
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(9) Earnings Per Common Share (continued)
DILUTED:
Net income $ 674 $ 569 $ 95 $ 128
Average common shares outstanding 8,845 8,188 9,205 8,198
Dilutive effect of outstanding
warrants 175 232 54 217
Average shares outstanding,
assuming dilution 9,020 8,420 9,259 8,415
Diluted per share amount $ .07 $ .07 $ .01 $ .02
(10) Commitments and Contingencies
(a) Contingencies
As of November 10, 2000, 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
under a reservation of rights and are providing a defense for all of these
claims. 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 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 carrier has not made a decision
regarding coverage to date. However, in the interim, the insurance carrier
has retained defense counsel on behalf of Premix and is paying defense
costs. The Company expects the insurance carriers to eventually accept
coverage. Premix is unable to determine the extent of its exposure or the
outcome of this litigation.
14
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(10) Commitments and Contingencies (continued)
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.
(b) Lease Commitments
The Company pays aggregate annual rent of approximately $822,000 for
its current operating facilities. The leases expire at various dates
ranging from October 31, 2000 to August 31, 2009. Comparable properties at
equivalent rentals are available for replacement of these facilities if
such leases are not extended.
(11) Recent Acquisitions
During 2000, the Company consummated four transactions for the
purchase of seven building material distributors as described below. These
acquisitions have been accounted for under the purchase method of
accounting and the results of the acquired distributors have been
consolidated since the respective acquisition dates.
Effective January 1, 2000, the Company acquired certain assets and
assumed certain liabilities of three building materials distributors
located in Pensacola and Destin, Florida and Foley, Alabama.
The three distributors ("A&R"), which had been under common
ownership, were acquired for $1,580,000 in a single transaction that was
accounted for under the purchase method of accounting.
The components of the purchase price were as follows (in thousands):
Cash $ 471
Transfer of other assets 327
Common stock issued
(225,000 shares @ $.64/share) 144
Three month unsecured note issued 150
One year unsecured note issued 100
Secured debt assumed 388
------
$1,580
======
15
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(11) Recent Acquisitions (continued)
The purchase price was allocated to the acquired assets and
liabilities based on their fair values on the acquisition date with the
excess of $401,000 being recorded as excess cost of investment over net
assets acquired, which is being amortized using the straight line method
over 40 years.
Effective March 1, 2000, the Company acquired certain assets of a
building materials distributor ("Panhandle") located in Panama City Beach,
Florida, for $386,000.
The components of the purchase price were as follows (in thousands):
Cash $ 219
Two year unsecured note issued 125
Common stock issued
(50,000 shares @ $.84/share) 42
------
$ 386
======
The purchase price was allocated to the acquired assets and
liabilities based on their fair values on the acquisition date with the
excess of $167,000 being recorded as excess cost of investment over net
assets acquired, which is being amortized using the straight line method
over 40 years.
Effective April 1, 2000 the Company acquired certain assets and
liabilities of a building materials distributor ("Tallahassee") located in
Tallahassee, Florida for $564,000.
The components of the purchase price were as follows: (in thousands):
Cash $286
Issuance of unsecured note 125
Secured debt assumed 153
----
$564
====
The purchase price was allocated to the acquired assets and
liabilities based on a preliminary estimate of their fair value on the
acquisition date with the excess of $125,000 being recorded as excess cost
of investment over net assets acquired. which is being amortized using the
straight line method over 40 years. The purchase price allocation will be
adjusted, if necessary, based upon a final determination of the fair value
of the net assets acquired.
16
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(11) Recent Acquisitions (continued)
Effective May 1, 2000, the Company acquired certain assets and
liabilities of two related distributors ("A&R of Mississippi"), with
locations in Gulfport, Hattiesburg and Pascagoula, Mississippi.
The components of the purchase price were as follows (in thousands):
Cash ($564,000 at closing, $441,000
paid 30 days after closing) $1,005
Transfer of other assets 122
Three year unsecured note issued 600
Secured debt assumed 310
Common stock issued
(400,000 shares @ $.61/share) 244
------
$2,281
======
The purchase price was allocated to the acquired assets and
liabilities based on a preliminary estimate of their fair value on the
acquisition date with the excess of $836,000 being recorded as excess cost
of investment over net assets acquired, which is being amortized using the
straight line method over 40 years. The final purchase price allocation
will be adjusted, if necessary, based upon a final determination of the
fair value of the net assets acquired.
Following are the unaudited pro-forma results of operations as if
the A&R, Panhandle, Tallahassee and A&R of Mississippi purchases had
occurred on January 1, 1999 (in thousands, except per share and share
amounts):
Nine Months Ended Nine Months Ended
September 30, 2000 September 30, 1999
------------------ ------------------
Net sales $34,494 $27,660
Net income $ 623 $ 673
Earnings per common share:
Basic $ .07 $ .07
Diluted $ .07 $ .07
This unaudited pro-forma financial information is not necessarily
indicative of the operating results that would have occurred had the
transactions been consummated as of January 1, 1999, nor is it necessarily
indicative of future operating results.
17
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(11) Recent Acquisitions (continued)
The preliminary impact of the Company's assets and liabilities
related to the acquisitions as of September 30, 2000, were as follows (in
thousands):
Fair value of assets and liabilities acquired:
Inventories $1,838
Property plant and equipment 1,444
Other assets (Excess cost of investment
over net assets acquired) 1,529
Liabilities (Assumed) (851)
------
3,960
Less:
Debt issued (1,100)
Common stock issued (430)
Adjustment for accounts receivable due Company (449)
------
Net cash paid as reflected in the
Statement of Cash Flows $1,981
======
18
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, primarily
the states of Florida, Georgia, Mississippi and Alabama. The majority
of the Company's products are sold to building materials dealers
located principally in these states who provide materials to
contractors and subcontractors engaged in the construction of
residential, commercial and industrial buildings and swimming pools.
One indicator of the level and trend of construction activity is the
amount of construction permits issued for the construction of
buildings. The level of construction activity is subject to
population growth, inventory of available housing units, government
growth policies and construction funding, among other things.
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
Nine Months and Three Months Ended September 30, 2000
Compared to 1999
Net sales for the nine months and three months ended September
30, 2000 increased $12,969,000 and $5,460,000, or approximately 74.6%
and 98.1%, compared to the same periods in 1999. The increase in
sales was derived from the sales of building materials generated by
distributors acquired at various dates during the first five months
of 2000. These sales primarily consisted of building materials
purchased from other manufacturers, principally gypsum, roofing,
insulation, metal studs, masonry and stucco products.
19
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued)
Results of Operations (continued)
Nine Months and Three Months Ended September 30, 2000
Compared to 1999 (continued)
The results of the acquired distribution facilities had a
material impact on the Company's consolidated results for the nine
months and three months ended September 30, 2000.
Gross profit as a percentage of net sales for the nine months
and three months of 2000 was approximately 30.9% and 31.4%, compared
to 32.0% and 32.5%, in the comparable periods in 1999. 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 acquired distribution
facilities, as compared to the proportionate amount of sale of
products manufactured by the Company with higher gross profit
margins. Although the acquired distribution facilities accounted for
sales of $12,891,000 and $5,415,000, for the nine month and three
month periods ended September 30, 2000, respectively, the
distribution facilities typically generate lower gross profit margins
than the direct sale of the Company's manufactured products. In
addition, competitive conditions prevalent in the Company's
distribution markets for certain products manufactured by other
companies, had an adverse impact on gross profits during the third
quarter. Efforts are being made to increase sales and gross profits
by focusing on attaining increased sales of the Company's
manufactured products through the Company's acquired distribution
facilities, expanding the sale of installed products and broadening
the product line of the Company's existing distribution facilities in
selected markets. In October 2000, the Company opened a new
distribution facility in Picayune, Mississippi to develop a larger
customer base to increase sales and improve operating efficiency
through the realignment of personnel and upgrade of its delivery
capabilities to its customers in the Mississippi trade area.
Selling, general and administrative expenses as a percentage of
net sales for the nine months and three months of 2000 was
approximately 26.0% and 28.6%, respectively, compared to 25.3% and
27.1%, for the comparable periods last year. Selling, general and
administrative expenses increased $3,493,000 and $1,652,000 or
approximately 79.4% and 109.5%, compared to the same periods in 1999.
The increase in expenses was primarily due to additional operating
costs related to the building materials distributors acquired in
2000. For example, the Company incurred additional costs to up-grade
the delivery capabilities of its distribution
20
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued)
Nine Months and Three Months Ended September 30, 2000
Compared to 1999 (continued)
facilities through adding additional vehicles and increased sales
personnel in selected markets to build market share. In addition,
startup costs incurred to develop the sales of installed products to
home builders had an adverse effect on results. Efforts are being
made to improve performance through a reduction and realignment of
personnel to gain greater operating efficiency in the distribution
facilities and to realize greater savings from the purchase and
resale of products through a consolidated purchasing program.
Interest expense increased $266,000 and $137,000, or
approximately 90.4% and 128.0%, for the nine months and three months
ended September 30, 2000, compared to the same periods last year. The
increase in interest expense was principally due to additional
borrowings related to the purchase and operations of the acquired
distributors. Miscellaneous income for the nine months ended
September 30, 2000 included a $75,000 settlement of a prior year
product liability claim against a former vendor.
In the nine months and three months ended September 30, 2000 and
1999, the Company recognized income tax expense at the federal
statutory rate of 35%. Based on the Company's net operating loss tax
carry-forwards, the Company is not expected to pay federal income
taxes for the current year.
As a result of the above factors, the Company derived net income
of $674,000 and $95,000, or $.07 and $.01 per fully diluted share,
respectively, for the nine months and three months ended September
30, 2000, compared to $569,000 and $128,000, or $.07 and $.02 per
share, in the 1999 periods.
Liquidity and Capital Resources
At September 30, 2000, the Company had working capital of
approximately $2,670,000 compared to working capital of $3,447,000 at
December 31, 1999. As of September 30, 2000, the Company had cash and
cash equivalents of $1,579,000. The primary reduction in working
capital was associated with the purchase of seven building materials
distributors in the nine months ended September 30, 2000.
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. Premix, Acrocrete
and Just-Rite borrow on the line of credit, based upon and
collateralized by, their eligible accounts receivable and inventory.
21
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued)
Liquidity and Capital Resources (continued)
Generally, accounts not collected within 120 days are not eligible
accounts receivable under the Company's borrowing agreement with its
commercial lender. At September 30, 2000, $4,878,000 had been
borrowed against the line of credit. Based on eligible receivables
and inventory, the Company had, under its line of credit total
available borrowing (including amount outstanding of $4,878,000) of
approximately $5,997,000 at September 30, 2000.
Trade accounts receivable represent amounts due from sub-
contractors, contractors and building materials dealers located
principally in Florida and Georgia who have purchased products on an
unsecured open account basis and through Company owned warehouse
distribution outlets. As of September 30, 2000, the Company owned and
operated thirteen warehouse distribution outlets. Accounts
receivable, net of allowance, at September 30, 2000 was $5,228,000
compared to $2,677,000 at December 31, 1999. The increase in
receivables of $2,551,000, or approximately 95.3% was primarily
related to higher sales levels in 2000 compared to the same period in
1999 as a result of the acquisition of the seven distributors in the
first five months of 2000.
As a result of the consummation of a merger with a wholly owned
subsidiary in 1998, the Company issued an aggregate of $985,000 face
amount, 8% subordinated debentures, 1,574,610 shares of common stock
and agreed to pay $733,000 in cash to the former preferred
shareholders. At September 30, 2000, the Company had paid $684,000 of
such cash amount. Amounts payable to such shareholders at September
30, 2000, results from their non-compliance with the conditions for
payments. 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 is unable to determine
the fair value of the preferred stock owned by such dissenting
shareholders, but 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.
Effective January 1, 2000, the Company acquired certain assets
and assumed certain liabilities of three building materials
distributors held under common ownership in a single transaction
accounted for as a purchase acquisition. The total consideration
22
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued)
Liquidity and Capital Resources (continued)
was $1,580,000 consisting of $798,000 in cash, unsecured promissory
notes of $150,000 due 90 days from closing and $100,000 due one
year from closing. The Company also assumed $388,000 of the
acquired companies' secured debt and issued 225,000 shares of the
Company's unregistered common stock valued at $.64 per share.
Effective March 1, 2000, the Company acquired certain assets
of another building materials distributor accounting for it under
the purchase method of accounting. Total consideration for the
purchase was $386,000, which included 50,000 shares of the
Company's unregistered common stock valued at $42,000 ($.84 per
share). The Company paid cash of $219,000 and issued an unsecured
promissory note of $125,000 payable over two years from closing.
Effective April 1, 2000, the Company acquired certain assets and
assumed certain liabilities of another unrelated building materials
distributor accounting for it under the purchase method of
accounting. Total consideration for the purchase price was $564,000,
consisting of $286,000 in cash, an unsecured promissory note of
$125,000, with $62,500 due and payable on April 10, 2001 and 2002,
and assumed approximately $153,000 of the acquired company's secured
debt.
Effective May 1, 2000, the Company acquired certain assets and
assumed certain liabilities of two additional building materials
distributors held under common ownership in a single transaction
accounted for as a purchase transaction. The total consideration for
the purchase was $2,281,000, which included 400,000 shares of the
Company's unregistered common stock valued at $244,000 ($.61 per
share). The Company paid cash of $564,000 at closing and $441,000 30
days after closing, transferred $122,000 of assets, issued an
unsecured promissory note of $600,000 payable over three years from
date of closing, and assumed approximately $310,000 of the acquired
companies' secured debt.
The consummation of these acquisitions and the working capital
required to fund operations at the acquired locations are the
primary contributors to the $3,352,000 increase in the amount
outstanding under the Company's line of credit.
The Company presently is focusing its efforts on the integration
and consolidation of the acquired distribution operations into the
Company. The Company expects to incur capital expenditures during the
next twelve months to upgrade certain Company facilities, maintain
and upgrade its equipment and vehicle delivery fleet to support
on-going operations and implement a new
23
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued)
Liquidity and Capital Resources (continued)
centralized management information system. Capital needs associated
with these capital improvements cannot be estimated at this time, but
management does not expect the cash investment portion of the
expenditures for these matters to be material.
The Company believes its cash on hand and the maintenance of
its borrowing arrangement with its commercial lender will provide
sufficient cash to supplement cash shortfalls, if any, from
operations and provide adequate liquidity for the next twelve months
to satisfy the obligations arising from the merger and support the
cash requirements of its capital expenditure programs.
The ability of the Company to maintain and improve its long term
liquidity is dependent upon the Company's ability to successfully (i)
maintain profitable operations; (ii) pay or otherwise satisfy
obligations arising from the merger; and (iii) resolve current
litigation on terms favorable to the Company.
Year 2000 Issues
In the fourth quarter of 1999 management completed a company
wide program to prepare the Company's computer systems and other
applications for the year 2000. Based on such assessment, the
Company developed and completed a year 2000 compliance plan, under
which all key information systems were tested, and non-compliant
software replaced. All of the Company's systems are now year 2000
compliant. In addition, the Company has not experienced any
material difficulties regarding compatibility of customers' and
suppliers' systems which interface with the Company's systems or
could otherwise impact the Company's operations.
The internal staff costs, replacement of systems and consulting
expenses to prepare the systems for the year 2000 were not material
to the Company's operating results, liquidity or financial
position.
24
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 4. Submission of Matters to a Vote of Security Holders
The Company held its 2000 annual meeting of shareholders on
September 27, 2000 (the "Annual Meeting").
(a) At the Annual Meeting, The Company's shareholders voted on
the election of Class I and II directors as follows:
One Class I director was elected at the Annual Meeting with the
votes indicated below:
For Withheld
Howard L. Ehler 6,071,998 29,965
Two Class II directors were elected at the Annual Meeting with
the votes as indicated below:
For Withhold
Milton J. Wallace 6,073,113 28,850
Morton L. Weinberger 6,070,413 31,550
(b) The Company's 1999 Employee Stock Option Plan was approved
by the Company's shareholders at the Annual Meeting by the following
vote:
For: 4,084,710
Against: 162,390
Abstain: 23,337
Not Voted: 1,831,526
(c) The Company's Director Stock Option Plan was approved by
the Company's shareholders at the Annual Meeting by the following
vote:
For: 3,813,811
Against: 420,466
Abstain: 36,160
Not Voted: 1,831,526
25
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
PART II. Other 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 (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 (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,
(Form 8-k dated June 13, 2000, File No. 1-7190, Exhibit 2.1.
3.1 Certificate of Incorporation of the Company, (Form S-4
Registration Statement, Exhibit 3.1).
3.2 By-Laws of the Company, (Form S-4 Registration Statement, Exhibit
3.2).
4.1 Form of Common Stock Purchase Warrant issued to Auerbach, Pollak &
Richardson, Inc., (Form S-4 Registration Statement, Exhibit 4.1).
4.2 Form of 8% Subordinated Debenture, (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. (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. (Form 8-K dated July 26, 1993).
26
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K (continued)
Exhibit No. Description
- ----------- -----------
10.3 Employment Arrangement dated July 3, 1996 between Fred H. Hansen
and the Company, (Form S-4 Registration Statement, Exhibit 10.3).
10.4 License Agreement between Bermuda Roof Company and Premix
Marbletite Manufacturing Co., (Form S-4 Registration Statement,
Exhibit 10.5).
(b) Reports on Form 8-K
On August 22, 2000, the Company filed a Current Report on Form
8-K/A relating to the Report on Form 8-K dated June 13, 2000 filed
with the Commission associated with the acquisition of certain of
the assets and business of A&R Supply of Mississippi, Inc. and A&R
Supply of Hattiesburg, Inc.
27
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
November 17, 2000