SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ____________ to ____________
Commission file number 1-7190
- -----------------------------
IMPERIAL INDUSTRIES, INC.
-------------------------
(Exact name of registrant as specified in its charter)
Delaware 65-0854631
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1259 Northwest 21st Street, Pompano Beach, Florida 33069-1417
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (954)y917-4114
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
----------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (S229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock of the Registrant held by
non-affiliates computed by reference to the average bid and asked price of the
registrant's Common Stock ($.01 par value) on March 22, 2002 is: $1,140,300
Number of shares of Imperial Industries, Inc. Common Stock ($.01 par
value) outstanding on March 22, 2002: 9,220,434
PART I
Item 1. Business
--------
Imperial Industries, Inc., (the "Company") is a Delaware
corporation which through its predecessor corporation has been in
existence since 1968. The Company's executive offices are located at
1259 Northwest 21st Street, Pompano Beach, Florida 33069 and the
telephone number at such offices is (954) 917-4114.
Merger
------
In December 1998, the Company approved a plan merging it into a
wholly-owned subsidiary of the Company effective December 31, 1998,
(the "Merger").
Upon consummation of the Merger, each share of common stock
outstanding prior to the Merger was automatically converted to one
share of common stock of the Company. Each share of preferred stock
outstanding prior to the Merger was converted, at the holder's option,
into either (a) $4.75 in cash and ten shares of the Company's common
stock, or (b) $2.25 in cash, an 8% subordinated debenture, face value
$8.00, and five shares of the Company's common stock. Holders
representing 81,100 preferred shares have elected dissenters' rights,
which, if perfected under Delaware law, would require the Company to
pay to the holders the fair value of their stock in cash to be
determined by the Delaware Chancery Court. Pursuant to Delaware law,
the dissenting shareholders petitioned the Delaware Chancery Court to
determine the fair value of their shares at the effective date of the
Merger, exclusive of any element of value attributable to the Merger.
In accordance with the Merger, the Company issued $984,960 of 8%
Subordinated Debentures, 1,574,610 shares of common stock and paid
$732,550 in cash to the former preferred shareholders who did not
elect dissenters' rights. The Company does not know the amount which
would be payable to dissenting holders who ultimately perfect their
dissenters rights. The Debentures were retired in 2001. For a more
complete description of the Merger, see Note (1) of Notes to
Consolidated Financial statements.
General
-------
The Company, through its subsidiaries, is engaged in the
manufacture and distribution of building materials to building
materials dealers and others located primarily in Florida,
Mississippi, Georgia, and Alabama and to a lesser extent, other states
in the Southeastern part of the United States as well as foreign
countries. The Company presently has eleven distribution outlets
through which it markets certain of its manufactured products and
other purchased products directly to developers, builders,
contractors, and sub-contractors.
The Company's business is directly related to the level of
activity in the new and renovation construction market in the
2
Item 1. Business (continued)
--------------------
General (continued)
-------------------
Southeast United States. The Company's products are used by
developers, general contractors and subcontractors in the construction
or renovation of residential, multi-family and commercial buildings
and swimming pools. Demand for new construction is related to, among
other things, population growth. Population growth, in turn, is
principally a function of migration of new residents to these states.
When economic conditions reduce migration, demand for new construction
decreases. Construction activity is also affected by the size of the
inventory of available housing units, mortgage interest rates,
availability of funds and local government growth management policies.
The Company's operations are directly related to the general economic
conditions existing in the Southeastern part of the United States.
The Company manufactures products through its wholly owned
subsidiaries, Premix-Marbletite Manufacturing Co. ("Premix") and
Acrocrete, Inc. ("Acrocrete"). The Company distributes products
through its wholly owned subsidiary, Just-Rite Supply, Inc.
("Just-Rite"). The manufacturing operations primarily produce and
distribute stucco, roof tile mortar and plaster products, while the
distribution operations expand the Company's product line by
distributing gypsum, roofing and insulation products, as well as
products manufactured by the Company.
Stucco products are applied as a finishing coat to exterior
surfaces and to swimming pools. Roof tile mortar is used to adhere
cement roof tiles to the roof. Plaster customarily is used to finish
interiors of structures.
Premix
------
Premix, together with its predecessors, has been in business for
approximately 40 years. The names "Premix" and "Premix-Marbletite" are
among the registered trademarks of Premix. The Company believes the
trade names of its manufactured products represent a substantial
benefit to the Company because of industry recognition and brand
preference. Premix manufactures stucco, roof tile mortar, plaster and
swimming pool finishes. The products manufactured by Premix basically
are a combination of portland (or masonry) cement, sand, lime, marble
and a plasticizing agent and other chemicals, including color-
impregnating materials.
Premix accounted for approximately 22%, 23% and 39% of the
Company's consolidated annual revenues in the fiscal years ended
December 31, 2001, 2000 and 1999, respectively.
The Company is a party to a licensing agreement with an
unaffiliated company to exclusively manufacture and sell a roof tile
mortar product throughout the State of Florida and certain foreign
countries.
3
Item 1. Business (continued)
--------------------
Premix (continued)
------------------
To date, a majority of all roof tile mortar sales have been derived
from South Florida. Until 1996, the Company's licensed roof tile
mortar product was the only mortar product approved by Miami Dade
County, Florida, building authorities for use to adhere all types of
cement roof tiles to roofs. In 1997, the Company's roof tile mortar
was approved by the Broward and Palm Beach County building authorities
along with other competitive products. Other adhesive products used
for similar purposes are also used by the industry. The Company has
expanded its marketing efforts for this product to other areas of
Florida based on product performance rather than only as required by
building code requirements.
Acrocrete
---------
Acrocrete, organized in 1988, manufactures synthetic acrylic
stucco products. The Company's trade name "Acrocrete" and certain of
its manufactured products are described by trade names protected by
registered trademarks. Acrocrete's products, used principally for
exterior wall coatings, broaden and complement the range of products
produced and sold by Premix. Management believes acrylic stucco
products have certain advantages over traditional cementitious stucco
products for certain types of construction applications because
synthetic acrylic products provide a hard durable finish with stronger
color retention properties. Further, acrylic stucco products have
improved flexibility characteristics, which minimizes the problems of
cracking of cement coating. Acrocrete's product system provides for
energy efficiency for both residential and commercial buildings.
For the fiscal years ended December 31, 2001, 2000 and 1999,
Acrocrete's sales accounted for approximately 22%, 21% and 61%,
respectively, of the Company's consolidated annual revenues. Prior to
January 1, 2000, the Company's distribution operations were operated
through Acrocrete.
Just-Rite
---------
In January 2000, the Company established Just-Rite to own and
operate its five wholesale distribution outlets formerly owned and
operated by Acrocrete. During the first five months of 2000,
Just-Rite acquired nine building material distribution outlets
to diversify its product offering to the construction market to
include gypsum, roofing, masonry, insulation products, as well as
4
Item 1. Business (continued)
--------------------
Just-Rite (continued)
---------------------
installation services beyond those supported by the Company's
manufacturing operation. Management believes the acquired distribution
outlets position the Company to gain a greater market share for its
manufactured products through more direct sales to the end-user and to
expand operations by distributing a wider range of building materials
to the construction industry that are complementary to its existing
product lines. In 2001, the Company closed three distribution outlets
and eliminated installation services being provided at two other
distribution outlets related to the acquired operations.
For the fiscal year ended December 31, 2001 and 2000, Just-Rite's
sales, excluding the sale of Premix and Acrocrete products, accounted
for approximately 56% and 56% of the Company's consolidated annual
revenues.
Acquisition Opportunities and Present Status
--------------------------------------------
The Company believes the gypsum, roofing and stucco building
products distribution industries are fragmented and have the potential
for consolidation in response to the competitive disadvantages faced
by smaller distributors. Management believes that these industries are
characterized by a significant number of relatively small
privately-owned, local, relationship-based companies that emphasize
service, delivery and reliability, as well as competitive pricing and
breadth of product line to their customers. The competitive
environment for these distributors, in combination with the desire for
owners of certain of these distributors to gain liquidity, provides an
opportunity for expansion through acquisition. The Company believes
that opportunities exist for a company which has the ability to source
and distribute products effectively to serve the building materials
industry and to effect cost savings through economies of scale which
can be applied to companies that may be acquired in these industries.
The Company's primary focus in 2001 was to complete the
integration of the distribution outlets acquired in 2000 with its
existing operations and to attempt to effect cost savings in the
consolidation of the acquired operations. The Company has taken action
to improve operating performance in the Company's distribution
operations through: (i) an approximate 32% reduction in workforce of
68 employees in 2001; (ii) closure of under-performing distribution
locations in Hattiesburg, Picayune 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.
While it currently will emphasize internal growth through gains in
productivity of operations, the Company believes there exists a number
of possible acquisition candidates. The Company presently is not
5
Item 1. Business (continued)
--------------------
Acquisition Opportunities and Present Status (continued)
seeking any acquisitions. Accordingly, it does not have any binding
understanding, agreement or commitment regarding any potential
acquisition. The Company may pursue acquisitions in the future if such
acquisitions will enhance Company operations.
Suppliers
---------
Premix's raw materials and products are purchased from
approximately 21 suppliers. While five suppliers account for
approximately 64% of Premix's purchases, Premix is not dependent on
any one supplier for its requirements. Equivalent materials are
readily available from other sources at similar prices.
Acrocrete's raw materials are purchased from approximately 16
other suppliers, of which five account for approximately 67% of
Acrocrete's raw material purchases. However, equivalent materials are
available from several other sources at similar prices and Acrocrete
is not dependent on any one supplier for its requirements.
The Company's Just-Rite distribution outlets sell products of
many suppliers. Just-Rite purchases a significant amount of its
products through buying group organizations, companies which
consolidate product purchase orders from many independent distributors
and order product from various vendors on the distributors behalf to
gain consolidated purchasing efficiencies for each distributor. One
such buying organization accounted for approximately 25% and 26% of
Just-Rite purchases in 2001 and 2000. However, there are other buying
organizations in which the Company believes it can obtain product at
the same or similar prices.
Marketing and Sales
The Company's marketing and sales strategy is to create a profit
center for the products it manufactures, as well as enlarging its
product offerings to include certain complementary products and other
building materials manufactured by other companies. The complementary
items are purchased by the Company and held in inventory, together
with manufactured products, for sale to customers. Generally, sales
orders are filled out of existing inventory within several days of
receipt of the order. The total package sales approach to the new and
renovation construction markets is targeted at both the end user of
the Company's products, being primarily the contractor or
subcontractor, and the distributor, principally building materials
dealers who purchase products from the Company and sell to the end
user, and in some instances, to retail customers.
While the Company's manufactured sales have been typically to
distributors, the Company focuses marketing efforts on the
contractor/subcontractor end user to create a brand preference for the
6
Item 1. Business (continued)
--------------------
Marketing and Sales (continued)
-------------------------------
Company's manufactured products. No one distributor has accounted for
10% or more of total sales during the past three years. The Company
believes the loss of any one distributor would not cause a material
loss in sales because the brand preference contractors and
subcontractors have developed for the Company's manufactured products
generally cause the user to seek a distributor who carries the
Company's products. The Company markets its products to distributors
through Company salesmen located in the Southeastern United States who
promote both Premix and Acrocrete products. However, direct sales of
manufactured products and other building materials to end users
through Just-Rite accounted for approximately 70% of total revenues in
2001.
In 1994, the Company opened a distribution outlet in Savannah,
Georgia to sell its Acrocrete products directly to the end user. The
Company's products and certain complementary products manufactured by
other companies were inventoried and sold from a leased warehouse
distribution facility.
In February 1998, the Company acquired a facility in Tampa,
Florida that was engaged primarily in the distribution of landscape
stone products. The Company utilized this distribution facility to
gain market share for the sale of its products on the West Coast of
Florida. The Company subsequently opened a distribution facility in
the third quarter of 1998 in Dallas, Georgia, and one in Gadsden,
Alabama in April 1999, which was subsequently moved to Rainbow City,
Alabama in 2000. In January 2000, the Company acquired three
additional outlets, one in Foley, Alabama, one in Pensacola, Florida
and one in Destin, Florida. In March 2000 and April 2000, the Company
acquired additional distribution outlets in Panama City Beach and
Tallahassee, Florida. In May 2000 the Company acquired three
distribution outlets located in Gulfport, Pascagoula and Hattiesburg,
Mississippi. In October, 2000, the Company opened a new distribution
outlet in Picayune, Mississippi. In 2001, the Company closed
distribution outlets in Hattiesburg, Picayune and Pascagoula,
Mississippi due to under-performance and competitive conditions in
their local markets. The Company currently has eleven (11)
distribution outlets in Florida, Georgia, Mississippi and Alabama.
Each facility contains between approximately 6,400 to 29,000
square feet. The distribution facilities are designed to promote
product brand preference to the contractor and sub-contractor, and
also to improve service capabilities, increase market share, and to
increase profit margins from the sale of the Company's products and to
expand operations by distributing a wide range of products to the
construction industry. The Company sells Acrocrete, Premix and
complementary products of other manufacturers at such distribution
facilities.
7
Item 1. Business (continued)
Seasonality
-----------
The sale of the Company's products in the construction market for
the Southeastern United States is somewhat seasonal due in part to
periods of adverse weather, with a lower rate of sales historically
occurring in the period December through February compared to the rest
of the year. As a result of acquisitions consummated in 2000 located
in Northwest Florida, Alabama and Mississippi, management believes the
Company's sales are more subject to seasonal fluctuation than in prior
years.
Competition
-----------
The Company's business is highly competitive. Premix and
Acrocrete encounter significant competition from local, independent
firms, as well as regional and national manufacturers of acrylic,
cement and plaster products, most of whom manufacture products similar
to those of Premix and Acrocrete. The Company's distribution outlets
encounter significant competition from local independent distributors
as well as regional and national distributors who sell similar
products. Many of these competitors are larger, more established and
better financed than the Company. The Company believes it can compete
with the other companies based upon product performance and quality,
customer service and prices through maintaining lower overhead costs
than larger national companies.
Environmental Matters
---------------------
The Company is subject to various federal, state and local
environmental laws and regulations in the normal course of its
business. Although the Company believes that its manufacturing,
handling, using, selling and disposing of its raw materials and
products are in accord with current environmental regulations, future
developments could require the Company to make unforeseen expenditures
relating to environmental matters. Increasingly strict environmental
laws, standards and environmental policies may increase the risk of
liability and compliance costs associated with the Company's
operations. Capital expenditures for this purpose have not been
material in past years, and expenditures for 2002 to comply with
existing laws and regulations are also not expected to have a material
effect on the Company's financial position, results of operations or
liquidity.
Employees
---------
The Company and its subsidiaries had 142 full time employees as
of December 31, 2001. The Company considers its employee relations to
be satisfactory. The Company's employees are not subject to any
collective bargaining agreement.
8
Item 2. Properties
----------
The Company and its subsidiaries maintain a total of 14
facilities in Florida, Georgia, Mississippi and Alabama. The location
and size of the Company's facilities and the nature of the operations
in which such facilities are used, are as follows:
Approximate Owned/
Location Sq. Footage Leased Company
-------- ----------- ------ -------
Pompano Beach, Fl. 19,600 Leased Premix
Winter Springs, Fl. 26,000 Owned Premix
Kennesaw, Ga. 20,400 Leased Acrocrete
Tampa, Fl. 8,470 Owned Just-Rite
Jacksonville, Fl. 11,400 Leased Just-Rite
Norcross, Ga. 12,200 Leased Just-Rite
Dallas, Ga. 6,400 Leased Just-Rite
Rainbow City, Al. 10,000 Leased Just-Rite
Pensacola, Fl. 15,250 Owned Just-Rite
Destin, Fl. 7,680 Leased Just-Rite
Foley, Al. 9,000 Leased Just-Rite
Panama City Beach, Fl. 9,540 Leased Just-Rite
Tallahassee, Fl 17,500 Leased Just-Rite
Gulfport, Ms. 28,800 Leased Just-Rite
The Just-Rite distribution outlets typically consist of a
warehouse building and supply yard for the inventory and sale of
products directly to the end user.
Except for the facilities in Tallahassee, Panama City Beach, and
Gulfport, all leased properties are leased from unaffiliated third
parties. The Tallahassee and Panama City Beach facilities are leased
from the former owners of Tallahassee Gypsum Dealers, Inc, and
Panhandle Drywall Supply, Inc., who sold their business interest to
Just-Rite in March 2000 and April 2000 and are currently employees of
the Company. The Gulfport locations are leased from an entity owned by
the former owners of A&R Supply, Inc. and A&R Supply of Mississippi,
Inc., who sold their businesses to Just-Rite, one of whom remains as a
vice president and general manager of Just-Rite. The Pascagoula
facility is leased from an entity solely-owned by the former owner of
A&R Supply of Mississippi, Inc. The Pascagoula facility has been
closed and sublet.
Management believes that the Company's facilities and equipment
are well-maintained, in good operating condition and sufficient for
its present operating needs.
9
Item 3. Legal Proceedings
-----------------
As of March 22, 2002, the Company's subsidiary Acrocrete and
other parties are defendants in 25 lawsuits pending in various
Southeastern states, by homeowners/homeowner associations, contractors
and subcontractors, or their insurance companies, claiming moisture
intrusion damages on single and multi-family family residences. The
Company's insurance carriers have accepted coverage under a
reservation of rights for 23 of these claims and are providing a
defense. The Company expects its insurance carriers to accept coverage
for the other 2 recently filed 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 12 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.
In the interim, the insurance carrier has retained defense counsel on
behalf of Premix and is paying defense costs. Premix expects the
insurance carriers to eventually accept coverage. Premix is unable to
determine the exact extent of its exposure or the outcome of this
litigation.
Premix, Acrocrete and Just-Rite are engaged in other legal
actions and claims arising in the ordinary course of its business,
none of which is believed to be material to the Company.
On April 23, 1999, certain Dissenting Shareholders owning shares
of the Company's preferred stock filed a petition for appraisal in the
Delaware Chancery Court to determine the fair value of the shares at
December 31, 1998, the effective date of the Company's Merger. (See
Note 1 of Notes to Consolidated Financial Statements).
10
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its 2001 annual meeting of shareholders on
November 14, 2001, (the "Annual Meeting").
(a) At the Annual Meeting, the Company's shareholders voted on
the election of Class III directors as follows:
Two Class III directors were elected at the Annual Meeting with
the votes as indicated below:
For Withhold
--- --------
S. Daniel Ponce 5,948,471 480,201
Lisa M. Brock 5,944,771 483,901
(b) A proposal to amend the Company's Certificate of
Incorporation in order to increase the number of authorized shares of
Common Stock from 20,000,000 to 40,000,000 was approved by the
Company's shareholders at the Annual Meeting by the following vote:
For: 5,574,384
Against: 824,626
Abstain: 29,662
Not Voted: 2,791,762
11
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
-----------------------------------------------------
The Company's Common Stock is traded in the over-the-counter
market. The following table sets forth the high and low bid quotations
of the Common Stock for the quarters indicated, as reported by the
National Quotation Bureau, Inc. Such quotations represent prices
between dealers and do not include retail mark-up, mark-down, or
commission, and may not necessarily represent actual transactions.
Fiscal, 2000 High Low
------------ ---- ---
First Quarter $.86 $.54
Second Quarter .70 .58
Third Quarter .71 .51
Fourth Quarter .44 .35
Fiscal, 2001 High Low
------------ ---- ---
First Quarter $.43 $.28
Second Quarter .39 .26
Third Quarter .29 .14
Fourth Quarter .21 .17
The Company has not paid any cash dividends on its Common Stock
since 1980 and does not anticipate paying any in the foreseeable
future.
On March 22, 2002, the Common Stock was held by 1,875
stockholders of record.
As of March 22, 2002, the closing bid and asked prices of the
Common Stock was $.15 and $.19, respectively.
12
Item 6. Selected Financial Data
-----------------------
The following is a summary of selected financial data (in
thousands except as to per share amounts) for the five years ended
December 31, 2001:
Statements of Operations Data Year Ended December 31,
- ----------------------------- -----------------------
2001(2) 2000(2) 1999 1998 1997
------- ------- ---- ---- ----
Net sales $ 39,514 $ 40,730 $ 22,604 $ 18,739 $ 15,774
-------- -------- -------- -------- --------
Cost of sales 27,254 28,218 15,198 12,823 10,867
-------- -------- -------- -------- --------
Selling, general and administrative
expenses 11,367 10,985 5,932 4,645 3,740
-------- -------- -------- -------- --------
Interest expense (825) (806) (475) (272) (329)
-------- -------- -------- -------- --------
Merger costs -- -- -- (456) --
-------- -------- -------- -------- --------
Goodwill impairment charge (238) -- -- -- --
-------- -------- -------- -------- --------
Miscellaneous income, net 77 199 34 1,218 54
-------- -------- -------- -------- --------
(Loss) income before income taxes (93) 920 1,033 1,761 892
-------- -------- -------- -------- --------
Income tax (expense) benefit, net (128) (386) 187 296 753
-------- -------- -------- -------- --------
Net (loss) income (221) 534 1,220 2,057 1,645
-------- -------- -------- -------- --------
Less: dividends on redeemable
preferred stock -- -- -- (248) (330)
-------- -------- -------- -------- --------
Less: net charge for elimination
of preferred stock -- -- -- (975) --
-------- -------- -------- -------- --------
Net (loss) income applicable to
common stockholders $ (221) $ 534 $ 1,220 $ 834 $ 1,315
-------- -------- -------- -------- --------
Net (loss) income per share
applicable to common stockholders
Basic $ (.02) $ .06 $ .15 $ .13 $ .22
-------- -------- -------- -------- --------
Diluted $ (.02) $ .06 $ .15 $ .12 $ .21
-------- -------- -------- -------- --------
Number of shares used in computation
of (loss) income per share: Basic 9,214 8,936 8,199 6,566 6,009
-------- -------- -------- -------- --------
Diluted 9,214 9,070 8,390 6,715 6,267
-------- -------- -------- -------- --------
Balance Sheets Data As of December 31,
- ------------------- ------------------
2001(2) 2000(2) 1999 1998 1997
------- ------- ---- ---- ----
Working capital $ 2,480 $ 1,607 $ 3,447 $ 2,439 $ 1,995
------- ------- ------- ------- -------
Total assets $14,591 $16,792 $ 8,768 $ 7,561 $ 5,128
------- ------- ------- ------- -------
Long-term debt,
less current maturities $ 1,440 $ 1,402 $ 1,328 $ 1,316 $ 819
------- ------- ------- ------- -------
Obligation for appraisal rights $ 877 $ 877 $ 877 $ 877 $ --
------- ------- ------- ------- -------
Redeemable preferred stock $ -- $ -- $ -- $ -- $ 3,001
------- ------- ------- ------- -------
Preferred dividends in arrears(1) $ -- $ -- $ -- $ -- $ 4,044
------- ------- ------- ------- -------
Common stock and other
stockholders' equity (deficit) $ 4,343 $ 4,559 $ 3,514 $ 2,281 $(4,441)
------- ------- ------- ------- -------
Current ratio 1.3 to 1 1.2 to 1 2.1 to 1 1.8 to 1 2.2 to 1
-------- -------- -------- -------- --------
(1) No cash dividends were paid on the cumulative redeemable preferred
stock since 1985. The preferred stock and all accumulated accrued
unpaid dividends were eliminated at December 31, 1998, upon the
effective date of the Merger.
13
Item 6. Selected Financial Data (continued)
-----------------------------------
(2) Four acquisition transactions were consummated during 2000 which
significantly impacted the Balance Sheets and Statements of (See Note
14 in the accompanying financial statements.)
Item 7. 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 its effect on the construction industry are uncertain and
cannot be predicted.
Special Note R egarding Forward-Looking Statements
--------------------------------------------------
This Form 10-K 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 judgement of personnel;
availability of qualified personnel; and labor and employee benefit
costs.
14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
-----------------------------------------------------------
Critical Accounting Policies
----------------------------
We prepare our consolidated financial statements in accordance
with accounting principles generally accepted in the United States of
America, which require management to make estimates and assumptions
(see Note 2 to the consolidated financial statements). Management
bases these estimates and assumptions on historical results and known
trends as well as our forecasts as to how these might change in the
future. Actual results could differ from these estimates and
assumptions. We believe that the following critical accounting
policies involve a higher degree of judgement and complexity:
Revenue Recognition and Related Expenses
----------------------------------------
The Company primarily recognizes sales based upon shipment of
products to its customers and has procedures in place at each of its
subsidiaries to ensure that an accurate cut-off is obtained for each
reporting period.
Provisions for the estimated costs for bad debts are recorded in
selling, general and administrative expense at the end of each
reporting period. The amounts recorded are generally based upon the
payment histories of customers while also factoring in any changes in
business conditions, such as competitive conditions in the market and
deterioration in the economic condition of the construction industry,
among other things, which may effect customers' ability to pay. As a
result, significant judgement is required by the Company in
determining the appropriate amounts to record and such judgments may
prove to be incorrect in the future. The Company believes that its
procedures for estimating such amounts are reasonable and historically
have not resulted in material adjustments in subsequent periods when
estimates are adjusted to the actual amounts.
Inventory Valuation
-------------------
The Company values inventories at the lower of cost or market
using the first-in, first-out (FIFO) method. The Company will record
provisions, as appropriate, to write-down obsolete and excess
inventory to estimated net realizable value. The process for
evaluating obsolete and excess inventory often requires the Company to
make subjective judgments and estimates concerning future sales
levels, quantities and prices at which such inventory will be able to
be sold in the normal course of business. Accelerating the disposal
process or incorrect estimates of future sales potential may cause the
actual results to differ from the estimates at the time such inventory
is disposed or sold. The Company believes that its procedures for
estimating such amounts are reasonable and historically have not
resulted in material
15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
-----------------------------------------------------------
Inventory Valuation (continued)
-------------------------------
adjustments in subsequent periods when the estimates are adjusted to
the actual amounts.
Asset Impairment
----------------
Our review of long-lived assets and goodwill requires us to
initially estimate the undiscounted future cash flow of these assets,
whenever events or changes in circumstances indicate that the carrying
amount of these assets may not be fully recoverable. If such analysis
indicates that a possible impairment may exist, we are required to
then estimate the fair value of the asset, principally determined
either by third party appraisals, sales price negotiations or
estimated discounted future cash flows, which includes making
estimates of the timing of the future cash flows, discount rates and
reflecting varying degrees of perceived risk.
The determination of fair value includes numerous uncertainties.
For example, in determining fair value of goodwill utilizing
discounted forecasted cash flows, significant judgments are made
concerning future purchased and manufactured goods sale prices,
operating, selling and administrative costs, interest and discount
rates, technological changes, consumer demand, governmental
regulations and the effects of competition. We believe that we have
made reasonable estimates and judgments in determining whether our
long-lived assets and goodwill have been impaired, however, if there
is a material change in the assumptions used in our determination of
fair values or if there is a material change in the conditions or
circumstances influencing fair value, we could be required to
recognize a material non-cash impairment charge.
Income Taxes
------------
The Company accounts for income taxes using the liability method
in accordance with SFAS No. 109 "Accounting for Income Taxes" ("SFAS
No. 109"), which requires that the deferred tax consequences of
temporary differences between the amounts recorded in the Company's
Consolidated Financial Statements and the amounts included in the
Company's federal and state income tax returns be recognized in the
balance sheet. As the Company generally does not file their income tax
returns until well after the closing process for the December 31
financial statements is complete, the amounts recorded at December 31
reflect estimates of what the final amounts will be when the actual
income tax returns are filed for that fiscal year. In addition,
estimates are often required with respect to, among other things, the
appropriate state income tax rates to use in the various states that
the Company and its subsidiaries are required to file, the potential
utilization of
16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
-----------------------------------------------------------
Income Taxes (continued)
------------------------
operating and capital loss carry-forwards for both federal and state
income tax purposes and valuation allowances required, if any, for tax
assets that may not be realizable in the future. The Company believes
that the amounts recorded as deferred income tax assets will be
recoverable through future taxable income generated by the Company.
Although there can be no assurance that all recognized deferred tax
assets will be fully recovered, the Company believes the procedures
and estimates used in its accounting for income taxes are reasonable
and in accordance with established tax law. Our forecasted profits
from future operations may be adversely affected by various factors
including, but not limited to, declines in customer demand, increased
competition, the deterioration in general economic and business
conditions, as well as other factors, including those noted under
"Special Note Regarding Forward-Looking Statements" and "Market
Risks".
Results of Operations
---------------------
Year Ended December 31, 2001 Compared to 2000
---------------------------------------------
Net sales in 2001 decreased $1,216,000 or approximately 3.0%
compared to 2000. Reduced market prices for gypsum wallboard, a major
product line of the Company's distribution operations, closure of
certain under-performing distribution operations, elimination of
installation services at certain locations and reduced demand for
certain of the Company's manufactured products, accounted for the
sales decline in 2001 compared to 2000.
Gross profit as a percentage of net sales for 2001 was
approximately 31.0% compared to 30.7% in 2000. The increase in gross
profit margins was principally due to a slight improvement in gross
profit margins realized by the Company's distribution operations.
Although, the Company realized an increase in gross profit margins,
the severe industry price declines in gypsum wallboard products was a
primary factor in the total gross profits decrease from 2000 to 2001.
In 2001, the aggregate gross profits derived by the Company's
acquired distribution facilities were adversely affected by
competitive conditions in the Company's distribution markets,
primarily the sale of gypsum products manufactured by other companies.
Market prices for gypsum wallboard were substantially lower in 2001
compared to the average prices realized in 2000. The decrease appeared
to be the result of excess supply and increased competition among the
gypsum wallboard manufacturers. However, the trend of lower gypsum
wallboard pricing, which commenced in early 2000 and continued for six
consecutive quarters through the first
17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
-----------------------------------------------------------
Year Ended December 31, 2001 Compared to 2000 (continued)
---------------------------------------------------------
six months of 2001, began to rebound from historically low levels
during the third quarter ended September 30, 2001. During the third
quarter, certain manufacturers reduced production of gypsum wallboard
and a seasonally strong demand for gypsum wallboard resulted in
increased gypsum prices in the latter part of 2001, although at still
significantly reduced prices from historical levels. The Company is
unable to determine if such increased prices will be maintained or
trend higher in 2002. However, additional price increases for gypsum
wallboard have been announced for March 2002.
The results of operations of the Company's distribution
operations had a negative impact on the Company's consolidated results
in 2001 due in large part to reduced gross profits caused by lower
gypsum wallboard prices and poor operating results at certain
under-performing distribution facilities, including those facilities
which were closed in 2001. In 2001, the Company's distribution
operations realized sales of $27,597,000 and incurred an operating
loss of $639,000 before any charges of corporate overhead and
write-off of goodwill impairment charges, compared to sales of
$28,464,000 and an operating profit of $171,000 in 2000. In addition,
the Company incurred a $238,000 impairment charge to goodwill as a
result of the under-performance of certain acquired distribution
operations subsequent to the date of their acquisition.
Efforts are being made to increase sales and gross profits of
distribution operations by focusing primarily on attaining increased
sales of the Company's manufactured products through the Company's
acquired distribution facilities and its manufacturing facilities,
broadening the product line of the Company's existing distribution
facilities in selected markets and decreasing reliance on sales of
gypsum products in certain distribution locations.
Selling, general and administrative expenses as a percentage of
net sales for 2001 were approximately 28.8% compared to 27.0% in 2000.
The most significant reason for the increase in selling, general and
administrative expenses as a percentage of sales in the year 2001 was
the decrease in revenue resulting from the decline in gypsum wallboard
prices and the recent closure of under-performing distribution
facilities in 2001. Selling, general and administrative expenses
increased $382,000 or approximately 3.5% in 2001, compared to 2000.
The increase in expenses was primarily due to additional operating
costs, including an increase in provision for bad debt expense of
$92,000, primarily related to the distributors acquired at various
times during 2000. In addition, the operating results of certain of
the acquired distributors were not included for the entire twelve
month period in 2000 due to the
18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Year Ended December 31, 2001 Compared to 2000 (continued)
---------------------------------------------------------
timing of their respective acquisitions.
The Company has taken action to improve operating performance in
the Company's distribution operations through: (i) an approximate 32%
reduction in workforce of 68 employees in 2001; (ii) closure of
under-performing distribution locations in Hattiesburg, Picayune 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. The operations associated with the three closed
distribution locations and eliminated installation services accounted
for aggregate operating losses for 2001 and 2000 of approximately,
$474,000 and $96,000 respectively. Additional charges attributed to
the closed operations, including expenses arising from the sale of
vehicles and closing of a leased facility, increased total losses
associated with the closed operations in 2001 to approximately
$592,000.
The Company had operating income of $655,000 in 2001 as compared
to operating income of $1,527,000 in 2000. Due to the closing of
certain acquired distribution facilities and the underperformance of
another, the Company recorded a $238,000 impairment of goodwill in
2001. There was no corresponding charge against operating income in
2000.
Interest expense increased $19,000 in 2001 or approximately 2.4%
compared to 2000. The increase in interest expense in 2001 was
primarily due to additional borrowings related to the purchase and
operation of the acquired distributors for a full year period in 2001,
compared to 2000, offset by lower borrowing rates.
In the year ended 2001 the Company recognized income tax expense
of $128,000, compared to $386,000 for 2000. Deferred income tax
expense in 2001 is the result of the expiration of unused net
operating loss carryforwards in 2001.
As a result of the above factors, the Company incurred a net loss
of $221,000 or $.02 per fully diluted share for 2001, compared to net
income of $534,000 or $.06 per share for 2000.
Year Ended December 31, 2000 Compared to 1999
---------------------------------------------
Net sales in 2000 increased $18,126,000, or approximately 80.2%
compared to 1999. The increase in sales was derived from the sale 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
19
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
-----------------------------------------------------------
Year Ended December 31, 2000 Compared to 1999 (continued)
---------------------------------------------------------
manufacturers, principally gypsum, roofing, insulation, metal studs,
masonry and stucco products.
Gross profit as a percentage of net sales for 2000 was
approximately 30.7% compared to 32.8% 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. Products
manufactured by the Company accounted for approximately 43.4% of
consolidated sales in 2000, compared to approximately 74.0% in 1999.
The distribution facilities typically generate lower gross profit
margins than the direct sale of the Company's manufactured products.
In 2000, gross profits derived by the Company's acquired
distribution facilities were adversely affected by competitive
conditions in the Company's distribution markets for sales of gypsum
products manufactured by other companies. Gypsum products, principally
wallboard, a major product line of the acquired distributors, suffered
price deflation of approximately 40% in 2000, due to industry
conditions.
The results of operations of the acquired distributors had a
material impact on the Company's consolidated results in 2000 and will
continue to impact results in 2001. The acquisitions were accounted
for under the purchase method of accounting. Accordingly, results of
operations of the acquired distributors have been consolidated since
their respective acquisition dates in 2000.
Efforts are being made to increase sales and gross profits by
focusing primarily on attaining increased sales of the Company's
manufactured products through the Company's acquired distribution
facilities, expanding the sale of installed products and broadening
the product line of the Company's existing distribution facilities
where suitable in selected markets.
Selling, general and administrative expenses as a percentage of
net sales for 2000 was approximately 27.0% compared to 26.2% in 1999.
Selling, general and administrative expenses increased $5,053,000 or
approximately 85.2% in 2000, compared to 1999. The increase in
expenses was primarily due to additional operating costs related to
the acquired distributors acquired in 2000 and costs incurred to
integrate the acquisitions. Certain growth initiatives in the
Company's distribution operations resulted in increased expenses in
2000. Start-up costs were incurred to develop the sale of certain
installed products at selected
20
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
-----------------------------------------------------------
Year Ended December 31, 2000 Compared to 1999 (continued)
---------------------------------------------------------
distribution locations and for the opening of a new distribution
location in Picayune, Mississippi in October 2000. In addition, the
Company incurred additional costs to up-grade the delivery
capabilities of its distribution facilities through the purchase and
leasing of additional vehicles and added sales personnel in selected
markets in an attempt to increase sales.
Efforts have been made to improve operating efficiency in the
Company's distribution operations through: (i) a reduction in
personnel in certain locations; (ii) closure of an acquired under-
performing distribution location in Hattiesburg, Mississippi; (iii)
the recent consolidation of the Company's distribution locations in
Pensacola, Florida and Foley, Alabama, through a reduction and
realignment of personnel; and (iv) an attempt to realize greater
savings from the purchase and resale of products through a
consolidated purchasing program.
Interest expense increased $331,000, or approximately 69.7%
compared to 1999. The increase in interest expense was primarily due
to additional borrowings related to the purchase and operations of the
acquired distributors. Miscellaneous income for 2000 included a
$75,000 settlement of a prior year product liability claim against a
former vendor.
In 2000, the Company incurred $367,000 of deferred income tax
expense. In 1999, the Company recognized a $574,000 tax benefit as a
result of releasing a portion of the valuation allowance on the
Company's deferred tax asset. The Company's Consolidated Statement of
Operations for the year ended December 31, 1999, reflected a deferred
income tax benefit of $213,000, comprised of taxes at the statutory
rate of 35% less the tax benefit described above.
As a result of the above factors, the Company generated net
income of $534,000, or $.06 per fully diluted share for 2000, compared
to net income of $1,220,000, or $.15 per share for 1999.
Liquidity and Capital Resources
-------------------------------
Sources and Uses of Cash
------------------------
Our business provided approximately $1,185,000 and $19,000 of net
cash from operations in 2001 and 2000, respectively. The increase in
cash flow in 2001 was primarily attributable to reductions in accounts
receivable and inventory as a result of closing certain distribution
operations, eliminating installation operations and management's
emphasis on improving working capital.
21
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
-----------------------------------------------------------
Liquidity and Capital Resources (continued)
-------------------------------------------
Sources and Uses of Cash (continued)
------------------------------------
During 2001, the net expenditures for investing activities were
$112,000 compared to $2,693,000 in 2000. The larger expenditures in
the prior year were the result of the purchase of seven building
material distributors which accounted for the majority of the 2000
expenditures.
During 2001, we reduced our line of credit balance approximately
$768,000. We also made principal payments on other debt totaling
$1,538,000, including the payment of the 8% Subordinated Debentures
due December 31, 2001. In 2001 we received proceeds of approximately
$748,000 from collateralized borrowing agreements which were partially
used to repay the 8% Subordinated Debentures.
Future Commitments and Funding Sources
--------------------------------------
At December 31, 2001, our contractual cash obligations, with
initial or remaining terms in excess of one year, were as follows:
Contractual Cash Payments Due by Fiscal 2006 and
Obligations Total 2002 2003 2004 2005 Thereafter
-------------------------------------------------------------------------------------------------------------
Long-term debt(a) $2,109,000 $ 669,000 $ 620,000 $ 729,000 $ 87,000 $ 4,000
Operating leases(a) 3,599,000 1,052,000 889,000 803,000 480,000 375,000
---------- ---------- ---------- ---------- ---------- ----------
Total contractual
cash obligations $5,708,000 $1,721,000 $1,509,000 $1,532,000 $ 567,000 $ 379,000
---------- ---------- ---------- ---------- ---------- ----------
(a) See Notes 7 and 13 in the accompanying financial statements for
additional information regarding our debt and commitments.
At December 31, 2001, the Company had working capital of
approximately $2,480,000 compared to working capital of $1,607,000 at
December 31, 2000. The improvement in working capital was primarily a
result of the payment of the $985,000 8% Subordinated Debentures due
December 31, 2001 in part from proceeds derived from long-term
financing agreements in the amount of $715,000. As of December 31,
2001, the Company had cash and cash equivalents of $1,368,000.
The Company's principal source of short-term liquidity is
existing cash on hand and the utilization of a $6,000,000 line of
credit with a commercial lender. The maturity date of the line of
credit is June 19, 2002, subject to annual renewal. Premix, Acrocrete
and Just-Rite borrow on the line of credit, based upon
22
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
-----------------------------------------------------------
Liquidity and Capital Resources (continued)
-------------------------------------------
and collateralized by, their eligible accounts receivable and
inventory. Generally, accounts not collected within 120 days are not
eligible accounts receivable under the Company's borrowing agreement
with its commercial lender. At December 31, 2001, $4,335,000 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 the amount outstanding of $4,335,000) of
approximately $4,923,000 at December 31, 2001.
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 December 31, 2001, the Company
owned and operated eleven distribution outlets. Accounts receivable,
net of allowance, at December 31, 2001 was $4,419,000 compared to
$4,866,000 at December 31, 2000. The decrease in receivables of
$447,000, or approximately 9.2%, was primarily related to lower sales
levels in the fourth quarter of 2001 compared to 2000, partially
attributable to the closing of certain distribution locations and the
elimination of installation services.
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. At December 31, 2001, the Company had
paid $685,000 of such cash amount. Amounts payable to such
shareholders at December 31, 2001 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 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.
In the fourth quarter of 2001, the Company completed the
refinancing of two mortgage loans and obtained secured equipment
borrowings from a commercial lender which generated net proceeds of
approximately $688,000 to help satisfy the 8% Debentures due December
31, 2001. At December 31, 2001, the Company paid the holders of the
Debentures tendering their bonds $787,000. Amounts
23
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
-----------------------------------------------------------
Liquidity and Capital Resources (continued)
-------------------------------------------
payable to stockholders at December 31, 2001 on the Company's
consolidated balance sheets includes $238,000 for former stockholder's
who have not yet tendered their Debentures as required by the terms of
such instrument.
The Company presently is focusing its efforts on the completion
of the integration and consolidation of the acquired distributors'
operations into the Company, 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 investment portion
of the expenditures for these projects to exceed $100,000.
The Company believes its cash on hand and the maintenance of its
borrowing arrangement with its commercial lender will provide
sufficient cash to meet its current obligations for its operations and
support the cash requirements of its capital expenditure programs in
2002.
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 and resolve
its appraisal rights litigation on terms favorable to the Company.
New Accounting Pronouncements
-----------------------------
In June 2001, SFAS 141, "Business Combinations," and SFAS 142,
"Goodwill and Other Intangible Assets" was adopted by the FASB. SFAS
141 requires that the purchase method of accounting be used for all
business combinations completed after June 30, 2001. SFAS 141 also
specifies the types of acquired intangible assets that are required to
be recognized and reported separately from goodwill and those acquired
intangible assets that are required to be included in goodwill. SFAS
142 will require that goodwill no longer be amortized, but instead
tested for impairment at least annually. SFAS 142 will also require
recognized intangible assets be amortized over their respective
estimated useful lives and reviewed for impairment in accordance with
SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of". Any recognized intangible asset
determined to have an indefinite useful life will not be amortized,
but instead tested
24
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
-----------------------------------------------------------
New Accounting Pronouncements (continued)
-----------------------------------------
for impairment in accordance with the Standard until its life is
determined to no longer be indefinite. SFAS 141 is effective for all
business combinations initiated after June 30, 2001, while the
provisions of SFAS 142 are effective for fiscal years beginning after
December 15, 2001, and are effective for interim periods in the
initial year of adoption.
The Company intends to adopt SFAS 142 in 2002. Accordingly, the
Company will no longer amortize goodwill and will perform an
impairment test of goodwill annually. The cessation of goodwill
amortization will result in a reduction of $33,000 in annual goodwill
amortization, assuming no future impairment of goodwill.
The SFAS No. 142 goodwill impairment review consists of a two-
step of first determining the fair value of the reporting unit and
comparing it to the carrying value of the net assets allocated to the
reporting unit. If this fair value exceeds the carrying value, no
further analysis is required. If the fair value of the reporting unit
is less than the carrying value of the net assets, the implied fair
value of the reporting unit is allocated to all underlying assets and
liabilities, including both recognized and unrecognized tangible
assets, based on their fair value. If necessary, goodwill is then
written-down to its implied fair value. We must complete the first
step of the 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 these standards will
have on its consolidated financial statements.
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.
Our adoption of this standard is not expected to have a material
effect on our financial statements.
In October 2001, the Financial Accounting Standards Board issued
"Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS
144"). SFAS 144 addresses accounting and reporting for the impairment
or disposal of long-lived assets. This Statement supersedes SFAS 121,
"Accounting for the Impairment of Long-Lived Assets to be Disposed
Of". The Company is required to adopt this pronouncement. The Company
does not believe that the adoption of SFAS 144 will have a material
effect on its consolidated financial statements.
25
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
-----------------------------------------------------------
Market Risks
------------
Residential and Commercial Construction Activity
------------------------------------------------
Our 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 our
control. Some of these factors include interest rates, employment
levels, availability of credit, prices of raw materials and consumer
confidence. Downturns in the market that we serve or in the economy
generally could have a material adverse effect on our operating
results and financial condition. Reduced levels of construction
activity may result in intense price competition among building
materials suppliers, which may adversely affect our gross margins.
Our first quarter revenues and, to a lesser extent, our 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 our overhead and expense remains relatively
fixed throughout the year, our profits also tend to be lower during
the first and fourth quarters.
Exposure to Interest Rates
--------------------------
We have two variable rate mortgages totaling $446,000 at December
31, 2001. The mortgages bear interest at prime plus 1% and are due
October 2004. In Addition, our $6 million 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 our operating results and financial condition.
Item 8. Financial Statement and Supplementary Data
------------------------------------------
See Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K for the Index to Financial Statements contained herein.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
-----------------------------------------------------------
None.
26
Report of Independent Certified Public Accountants
To the Board of Directors and Stockholders of
Imperial Industries, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 60 present fairly, in all material
respects, the financial position of Imperial Industries, Inc. and its
subsidiaries at December 31, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2001 in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the financial statement
schedules listed in the index appearing under Item 14(a)(2) on page 60 present
fairly, in all material respects, the information set forth therein when read
in conjunction with the related consolidated financial statements. These
financial statements and financial statement schedules are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements and financial statement schedules based on our
audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PRICEWATERHOUSECOOPERS LLP
Miami, Florida
March 29, 2002
27
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, December 31,
Assets 2001 2000
------ ---- ----
Current assets:
Cash and cash equivalents $ 1,368,000 $ 1,853,000
Trade accounts receivable (less
allowance for doubtful accounts of
$453,000 and $400,000 at December 31,
2001 and 2000, respectively) 4,419,000 4,866,000
Inventories 3,807,000 4,387,000
Deferred income taxes 523,000 377,000
Other current assets 294,000 78,000
------------ ------------
Total current assets 10,411,000 11,561,000
------------ ------------
Property, plant and equipment, at cost 4,197,000 4,418,000
Less accumulated depreciation (1,749,000) (1,444,000)
------------ ------------
Net property, plant and equipment 2,448,000 2,974,000
------------ ------------
Deferred income taxes 327,000 589,000
------------ ------------
Excess cost of investment over net
assets acquired 1,272,000 1,551,000
------------ ------------
Other assets 133,000 117,000
------------ ------------
$ 14,591,000 $ 16,792,000
============ ============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Notes payable $ 4,335,000 $ 5,203,000
Current portion of long-term debt 669,000 1,636,000
Accounts payable 1,906,000 2,264,000
Payable to stockholders 286,000 48,000
Accrued expenses and other liabilities 735,000 803,000
------------ ------------
Total current liabilities 7,931,000 9,954,000
------------ ------------
Long-term debt, less current maturities 1,440,000 1,402,000
------------ ------------
Obligation for appraisal rights 877,000 877,000
------------ ------------
Commitments and contingencies (Note 13) -- --
------------ ------------
Stockholders' equity:
Common stock, $.01 par value at December 31,
2001 and 2000; 40,000,000 shares authorized;
9,220,434 and 9,205,434 issued at
December 31, 2001 and 2000, respectively 92,000 92,000
Additional paid-in-capital 13,920,000 13,915,000
Accumulated deficit (9,669,000) (9,448,000)
------------ ------------
Total stockholders' equity 4,343,000 4,559,000
------------ ------------
$ 14,591,000 $ 16,792,000
============ ============
The accompanying notes are an integral part of the
consolidated financial statements.
28
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Year Ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
Net sales $ 39,514,000 $ 40,730,000 $ 22,604,000
Cost of sales 27,254,000 28,218,000 15,198,000
------------ ------------ ------------
Gross profit 12,260,000 12,512,000 7,406,000
Selling, general and
administrative expenses 11,367,000 10,985,000 5,932,000
Impairment charge 238,000 -- --
------------ ------------ ------------
Operating income 655,000 1,527,000 1,474,000
------------ ------------ ------------
Other income (expense):
Interest expense (825,000) (806,000) (475,000)
Miscellaneous income 77,000 199,000 34,000
------------ ------------ ------------
(748,000) (607,000) (441,000)
------------ ------------ ------------
(Loss) income before income taxes (93,000) 920,000 1,033,000
------------ ------------ ------------
Income tax (expense) benefit:
Current (12,000) (19,000) (26,000)
Deferred (116,000) (367,000) 213,000
------------ ------------ ------------
(128,000) (386,000) 187,000
------------ ------------ ------------
Net (loss) income $ (221,000) $ 534,000 $ 1,220,000
------------ ------------ ------------
Basic (loss) earnings per
share $ (.02) $ .06 $ .15
------------ ------------ ------------
Diluted (loss) earnings per
share $ (.02) $ .06 $ .15
------------ ------------ ------------
The accompanying notes are an integral part of the
consolidated financial statements.
29
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Common Stock and Other Stockholders' Equity
Years ended December 31, 2001, 2000 and 1999
Common Stock Additional
------------ paid-in Accumulated Treasury
Shares Amount capital deficit stock Total
------ ------ ------- ------- ----- -----
Balance at December 31, 1998 8,182,571 $ 82,000 $ 13,507,000 $(11,202,000) $ (106,000) $ 2,281,000
Issuance of common stock 47,863 -- (93,000) -- 106,000 13,000
Net income -- -- -- 1,220,000 -- 1,220,000
Balance at December 31, 1999 8,230,434 82,000 13,414,000 (9,982,000) -- 3,514,000
Issuance of common stock 975,000 10,000 501,000 -- -- 511,000
Net income -- -- -- 534,000 -- 534,000
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2000 9,205,434 92,000 13,915,000 (9,448,000) -- 4,559,000
Issuance of common stock 15,000 -- 5,000 -- -- 5,000
Net loss -- -- -- (221,000) (221,000)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2001 9,220,434 $ 92,000 $ 13,920,000 $ (9,669,000) $ -- $ 4,343,000
============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of the
consolidated financial statements.
30
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year Ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
Cash flows from operating activities:
Net (loss) income $ (221,000) $ 534,000 $ 1,220,000
----------- ----------- -----------
Adjustments to reconcile net (loss) income
to net cash provided by:
Depreciation 525,000 445,000 225,000
Amortization 71,000 38,000 21,000
Write-down of goodwill impairment 238,000 -- --
Debt issue discount 59,000 59,000 59,000
Provision for doubtful accounts 375,000 283,000 177,000
Provision for writedown of assets
held for sale and lease 61,000 -- --
Provision (benefit) for income taxes 116,000 367,000 (213,000)
Loss (gain) on disposal of fixed assets 32,000 (1,000) 5,000
Compensation expense - issuance of stock 5,000 60,000 13,000
(Increase) decrease in:
Accounts receivable 72,000 (2,921,000) (319,000)
Inventory 580,000 (526,000) (649,000)
Prepaid expenses and other assets (302,000) (75,000) (47,000)
Increase (decrease) in:
Accounts payable (358,000) 1,362,000 (398,000)
Payable to stockholders -- -- (685,000)
Accrued expenses and other liabilities (68,000) 394,000 257,000
----------- ----------- -----------
Total adjustments to (net loss) net income 1,406,000 (515,000) (1,554,000)
----------- ----------- -----------
Net cash provided by (used in)
operating activities 1,185,000 19,000 (334,000)
----------- ----------- -----------
Cash flows from investing activities
Purchase of property, plant
and equipment (92,000) (525,000) (415,000)
Acquisition of businesses -- (2,033,000) --
Payment on notes payable A&R acquisitions (100,000) (195,000) --
Proceeds received from sale of property
and equipment 80,000 40,000 31,000
Proceeds from exercise of warrants and
stock options -- 20,000 --
----------- ----------- -----------
Net cash used in investing activities (112,000) (2,693,000) (384,000)
----------- ----------- -----------
31
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year Ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
Cash flows from financing activities
Increase (decrease) in notes payable
banks - net (768,000) 3,577,000 746,000
Proceeds from issuance of long-term debt 748,000 273,000 459,000
Repayment of long-term debt (1,538,000) (442,000) (465,000)
----------- ----------- -----------
Net cash (used in) provided by
financing activities (1,558,000) 3,408,000 740,000
----------- ----------- -----------
Net (decrease) increase in cash
and cash equivalents (485,000) 734,000 22,000
Cash and cash equivalents,
beginning of year 1,853,000 1,119,000 1,097,000
----------- ----------- -----------
Cash and cash equivalents, end of year $ 1,368,000 $ 1,853,000 $ 1,119,000
----------- ----------- -----------
Supplemental disclosure
of cash flow information:
Cash paid during the year for interest $ 692,000 $ 622,000 $ 283,000
----------- ----------- -----------
Non-cash transactions:
Issuance of an aggregate of 15,000 and
775,000 shares, respectively, of common
stock related to acquisitions and to
an officer of the Company $ 5,000 $ 490,000 $ --
----------- ----------- -----------
Issuance of notes related to the
acquisitions $ -- $ 950,000 $ --
----------- ----------- -----------
The accompanying notes are an integral part of the
consolidated financial statements.
32
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(1) Merger
------
Effective December 31, 1998, (the "Effective Date"), the Company
merged into a wholly-owned subsidiary, (the "Merger").
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 as described in the following paragraphs.
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 December 31, 2001. In addition, the Company issued
$985,000 face value of Debentures due December 31, 2001 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. At December 31,
2001, the Company paid $787,000 of the $985,000 to Debenture holders
who had tendered their bonds as required by such instruments.
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. The Company recorded $877,000 in the accompanying
consolidated balance sheets at December 31, 2001 and 2000, 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 Company does not expect a final judicial determination
requiring the Company to make payment to Dissenting Shareholders' in
the year ended December 31, 2002. Accordingly, the obligation is
classified as long-term.
In connection with the Merger, all then outstanding stock
purchase warrants also converted into warrants with identical terms
exerciseable for shares of the Company's common stock.
33
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(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 finishing 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, contractors and sub-
contractors, located principally in the Southeastern United States who
have purchased products on an unsecured open account basis. At
December 31, 2001, accounts aggregating $669,000, or approximately 14%
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 (5). The allowance for doubtful
accounts at December 31, 2001 of $453,000 is considered sufficient to
absorb any losses which may arise from uncollectible accounts
receivable.
The Company places its cash with commercial banks. At December
31, 2001, 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.
34
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(2) Description of Business and Summary of Significant Accounting Policies
(continued)
----------------------------------------------------------------------
(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 and
$28,000 of accumulated amortization at December 31, 2001 and 2000,
respectively. (See Note 2 (n) New Accounting Pronouncements for
goodwill accounting policy).
(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 common stock
----------------------------------
Basic earnings per common share is computed by dividing net
income by the weighted-average number of shares of common stock
outstanding each year. Diluted earnings per common share is computed
by dividing net income applicable to common stockholders by the
weighted-average number of shares of common stock and common stock
equivalents outstanding during each year. (See Note (11) - Earnings
Per Common Share).
35
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(2) Description of Business and Summary of Significant Accounting Policies
(continued)
----------------------------------------------------------------------
(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
December 31, 2001 and 2000 are short term time deposits of $121,000
and $285,000, respectively.
(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 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, debentures 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
by the Company.
36
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(2) Description of Business and Summary of Significant Accounting Policies
(continued)
----------------------------------------------------------------------
(m) Segment Reporting
-----------------
The Company has adopted SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information. For the years ended December
31, 2001, 2000 and 1999, the Company has determined that it operates
in a single operating segment.
(n) New Accounting Pronouncements
-----------------------------
In June 2001, SFAS 141, "Business Combinations," and SFAS 142,
"Goodwill and Other Intangible Assets" was adopted by the FASB. SFAS
141 requires that the purchase method of accounting be used for all
business combinations completed after June 30, 2001. SFAS 141 also
specifies the types of acquired intangible assets that are required to
be recognized and reported separately from goodwill and those acquired
intangible assets that are required to be included in goodwill. SFAS
142 will require that goodwill no longer be amortized, but instead
tested for impairment at least annually. SFAS 142 will also require
recognized intangible assets be amortized over their respective
estimated useful lives and reviewed for impairment in accordance with
SFAS 121, "Accounting for the Impairment of Long- Lived Assets and for
Long-Lived Assets to be Disposed Of". Any recognized intangible asset
determined to have an indefinite useful life will not be amortized,
but instead tested for impairment in accordance with the Standard
until its life is determined to no longer be indefinite. SFAS 141 is
effective for all business combinations initiated after June 30, 2001,
while the provisions of SFAS 142 are effective for fiscal years
beginning after December 15, 2001, and are effective for interim
periods in the initial year of adoption.
The Company intends to adopt SFAS 142 in 2002. Accordingly, the
Company will no longer amortize goodwill and will perform an
impairment test of goodwill annually. The cessation of goodwill
amortization will result in a reduction of $33,000 in annual goodwill
amortization, assuming no future impairment of goodwill. Goodwill
amortization was $41,000, $29,000 and $0 in 2001, 2000 and 1999,
respectively.
The SFAS No. 142 goodwill impairment review consists of two
steps. The first is determining the fair value of the reporting unit
and the second is comparing it to the carrying value of the net assets
allocated to the reporting unit. If this fair value exceeds the
carrying value, no
37
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(2) Description of Business and Summary of Significant Accounting Policies
(continued)
----------------------------------------------------------------------
(n) New Accounting Pronouncements (continued)
-----------------------------------------
further analysis is required. If the fair value of the reporting unit
is less than the carrying value of the net assets, the implied fair
value of the reporting unit is allocated to all underlying assets and
liabilities, including both recognized and unrecognized tangible
assets, based on their fair value. If necessary, goodwill is then
written-down to its implied fair value. We must complete the first
step of the 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 these standards will
have on its consolidated financial statements.
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-live assets and the associated asset retirement costs.
Our adoption of this standard is not expected to have a material
effect on our financial statements.
In October 2001, the Financial Accounting Standards Board issued
"Accounting for the Impairment or 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 supersedes
SFAS 121, "Accounting for the Impairment of Long-Lived Assets to be
Disposed Of". The Company is required to adopt this pronouncement. The
Company does not believe that the adoption of SFAS 144 will have a
material effect on its consolidated financial statements.
(3) Inventories
-----------
At December 31, 2001 and 2000, inventories consist of:
2001 2000
---- ----
Raw materials $ 465,000 $ 562,000
Finished goods 3,062,000 3,560,000
Packaging materials 280,000 265,000
---------- ----------
$3,807,000 $4,387,000
========== ==========
38
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(4) Property, Plant and Equipment
-----------------------------
A summary of the cost of property, plant and equipment at
December 31, 2001 and 2000 is as follows:
Estimated
useful life
2001 2000 (years)
---------- ----------
Land $ 191,000 $ 191,000 - - -
Buildings and
improvements 963,000 965,000 10 - 40
Machinery and equipment 1,672,000 1,658,000 3 - 10
Vehicles 1,011,000 1,253,000 2 - 8
Furniture and Fixtures 360,000 351,000 3 - 12
---------- ----------
$4,197,000 $4,418,000
========== ==========
The net book value of property, plant and equipment pledged as
collateral under notes payable and various long-term debt agreements
aggregated $2,024,000 and $1,898,000 at December 31, 2001 and 2000,
respectively. See "Note 7."
(5) Notes Payable
-------------
At December 31, 2001 and 2000, notes payable represent amounts
outstanding under a $6,000,000 line of credit from a commercial lender
to the Company's subsidiaries and included at December 31, 2000 was
$100,000 in uncollateralized notes payable at 8% issued in connection
with the January 1, 2000 purchase of three building materials
distributors. The line of credit is collateralized by the
subsidiaries' accounts receivable and inventory, bears interest at
prime rate plus 1/2% (5.25% at December 31, 2001), expires June 19,
2002, and is subject to annual renewal. The weighted average effective
interest rate on the line of credit was 8.36%, 11.62%, and 14.09%
during the years ended December 31, 2001, 2000 and 1999, respectively.
At December 31, 2001, the line of credit limit available for
borrowing based on eligible receivables and inventory aggregated
$4,923,000, of which $4,335,000 remained outstanding. The average
amounts outstanding during 2001 and 2000 were $4,894,000, and
$3,511,000, respectively. The maximum amounts outstanding at any
month-end during 2001 and 2000 were $5,453,000 and $5,103,000,
respectively.
39
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(6) Accrued Expenses and Other Liabilities
--------------------------------------
Accrued expenses and other liabilities at December 31, 2001 and
2000 are summarized as follows:
2001 2000
---- ----
Employee compensation related items $183,000 $156,000
Taxes, other than income taxes 109,000 166,000
Income taxes 12,000 --
Interest 283,000 261,000
Other 148,000 220,000
-------- --------
$735,000 $803,000
======== ========
(7) Long-term Debt
--------------
Long-term debt of the Company is as follows:
2001 2000
---- ----
Uncollateralized notes issued for acquisitions,
interest at 8% per annum, principal and
interest payable through September 2003 $ 492,000 $ 805,000
Mortgage note payable, interest at 7 1/2% per
annum, principal and interest payable monthly
through January 2002 -- 63,000
Subordinated Debentures due December 31, 2001,
stated interest at 8% payable annually
commencing July 1, 1999, principal payable
in the amount of $985,000 at maturity -- 926,000
Mortgage note payable, interest at 8 3/4%,
principal and interest payable monthly in
the amount of approximately $3,760, with a
balloon payment of approximately $187,000
due October 4, 2004 256,000 277,000
Mortgage note payable, interest at prime + 1%,
principal payments of $800 plus interest
payable monthly, with a balloon payment of
approximately $118,000 due October 4, 2004 144,000 --
Mortgage note payable, interest at prime + 1%,
principal payments of $1,678 plus interest
payable monthly, with a balloon payment of
approximately $247,000 due October 4, 2004 302,000 --
40
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(7) Long-term Debt (continued)
--------------------------
Mortgage note payable, interest at 8 3/4%,
principal and interest payable monthly in
the amount of approximately $2,415, with a
balloon payment of approximately $198,000
due June 16, 2003 212,000 222,000
Equipment notes payable, interest at various
rates ranging from 4.89% to 10.83%, per annum,
principal and interest payable monthly
expiring at various dates through September
2006. (Includes obligations for capital
leases of $104,000) 703,000 745,000
----------- -----------
2,109,000 3,038,000
Less current maturities (669,000) (1,636,000)
----------- -----------
$ 1,440,000 $ 1,402,000
=========== ===========
As of December 31, 2001, long-term debt matures as follows:
Year ended
December 31, Amount
------------ ------
2002 $ 669,000
2003 620,000
2004 729,000
2005 87,000
2006 4,000
----------
$2,109,000
==========
In connection with the Merger, the Company issued 8% Subordinated
Debentures with a face value of $985,000 effective December 31, 1998.
Each Debenture was discounted to a value of $6.56 ($8.00 face value)
using an effective interest rate of 16%. The aggregate carrying value
of the Debentures at December 31, 2000 was $926,000. The Debentures
were general, uncollateralized obligations of the Company,
subordinated in right of payment to all indebtedness to institutional
and other lenders of the Company. The Debentures were 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. The
Debentures were retired in 2001.
(8) Income Taxes
------------
At December 31, 2001 and 2000, deferred tax assets of $850,000
and $966,000, respectively, consist mostly of the tax effect of net
operating loss carryforwards of $731,000 and $966,000, respectively.
Net operating losses of $1,923,000 expire in varying amounts through
2009.
41
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(8) Income Taxes (continued)
------------------------
The Company reduced the deferred tax asset $116,000 and $45,000,
respectively for net operating loss carryforwards which expired unused
in 2001 and 2000. During 1999, the Company recognized a tax benefit of
$574,000, based on the future utilization of net operating loss
carryforwards prior to their expiration. The ultimate realization of
the remaining deferred tax assets is largely dependent on the
Company's ability to generate sufficient future taxable income.
The current income tax expense represents state taxes and
alternative minimum taxes payable for the years ended December 31,
2001 and 2000.
A reconciliation of the Federal statutory rate to the effective
tax is as follows:
Year Ended December 31,
2001 2000 1999
---- ---- ----
U.S. statutory rate (35%) 35% 35%
Valuation allowance 0% 0% (56%)
Reversal of 1999 items (benefit) 173% 7% --
Other 0% 0% 3%
---- ---- ----
Effective rate 138% 42% (18%)
==== ==== ====
(9) Capital Stock
-------------
(a) Common Stock
------------
At December 31, 2001, the Company had outstanding 9,220,434
shares of common stock (9,205,434 shares at December 31, 2000) with a
$.01 par value per share ("Common Stock"). The holders of common stock
are entitled to one vote per share on all matters, voting together
with the holders of preferred stock, if any. In the event of
liquidation, holders of common stock are entitled to share ratably in
all the remaining assets of the Company, if any, after satisfaction of
the liabilities of the Company and the preferential rights of the
holders of outstanding preferred stock, if any.
In 2001, the Company issued 15,000 shares of common stock as
incentive compensation to an employee pursuant to the terms of an
employment agreement.
In 2000, the Company issued an aggregate of 675,000 shares of
common stock as partial consideration for the purchase of certain
assets of seven
42
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(9) Capital Stock (continued)
-------------------------
(a) Common Stock (continued)
------------------------
building materials distributors, 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. The
Company recorded compensation expense for shares issued to directors
and an officer in amounts equal to the fair value of the shares when
issued.
(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 December 31, 2001 and 2000, there were no
shares of preferred stock outstanding.
(c) Warrants
--------
At December 31, 2001 and 2000, the Company had warrants
outstanding to purchase 150,000 shares of the Company's common stock.
The Company issued 150,000 warrants in January 1999 to its investment
banker for financial advisory services in connection with the Merger
(the "Investment Banker Warrants"), which entitle 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%. Warrants to purchase 200,000
shares of the Company's common stock at $.10 per share were exercised
in 2000.
(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 from the grant date. The
1999 Plans are administered by the Compensation and Stock Option
Committee (the "Committee"), which is comprised of three directors.
The Committee
43
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(9) CapitalStock (continued)
(d) Stock Option Plans (continued)
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 December 31, 2001, options for 400,000 shares were
available for future grants under the 1999 Plans.
A summary of the activity and status of our stock option plans
was as follows:
Weighted Average Number of Options
Exercise Price Years Ended
Per Share December 31,
----------------- ------------------------
2001 2000 1999 2001 2000 1999
Outstanding Options - Beginning of Year $0.57 $ -- -- 245,000 -- --
Options Granted $0.21 $0.57 -- 185,000 245,000 --
Options Exercised $ -- $ -- -- -- -- --
Options Cancelled $ -- $ -- -- (30,000) -- --
------------------------
Options Outstanding - End of Year $0.41 $0.57 -- 400,000 245,000 --
------------------------
Options Exercisable - End of Year $0.57 $0.57 -- 215,000 245,000 --
------------------------
Information with respect to outstanding and exercisable stock
options at December 31, 2001 was as follows:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted Average Weighted Average Weighted Average
Remaining Exercise Exercise
Exercise Price Shares Life(Years) Price(1) Shares Price
-------------- ------ ----------- -------- ------ -----
$0.20 120,000 4.87 $0.20 -- --
$0.24 65,000 4.71 $0.24 -- --
$0.57 215,000 2.99 $0.57 215,000 $0.57
------- ---- ----- ------- -----
Total 400,000 3.84 $0.41 215,000
======= ==== ===== =======
(1) All options were granted at market price and no compensation cost has
been recognized in connection with these options.
Pursuant to SFAS No. 123, the Company has elected to use the
intrinsic value method of accounting for employee stock-based
compensation awards. Accordingly, the Company has not recognized
compensation expense for its noncompensatory employee stock option
awards. The Company's pro forma net results for fiscal 2001 and 2000,
had the Company elected to adopt the fair value approach (which
charges earnings for the estimated fair value of stock options) of
SFAS No. 123, would have been a loss of $283,000 ($.03 per share) for
2001 and income of $501,000 ($.06 per share) for 2000.
44
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(9) Capital Stock (continued)
-------------------------
(d) Stock Option Plans (continued)
------------------------------
The weighted average fair value of the Company's Options granted
during fiscal 2001 and 2000 were $.15 and $.44 per share,
respectively, at the date of grant. The fair value of the Options was
estimated using the Black-Scholes option pricing model with the
following weighted average assumptions for fiscal 2001 and 2000; no
expected dividend yields; expected volatility of 112% and 104%; risk
free interest rate of 5.9% and 3.4%; and an expected option life of
four years for both periods.
(10) Miscellaneous income
A summary of miscellaneous income (expense) for the years ended
December 31, 2001, 2000 and 1999 is as follows:
2001 2000 1999
---- ---- ----
Interest income $ 10,000 $ 15,000 $ 12,000
(Loss) gain on disposal of property,
plant and equipment (32,000) 1,000 (5,000)
Other, net 99,000 183,000 27,000
--------- --------- ---------
$ 77,000 $ 199,000 $ 34,000
========= ========= =========
(11) Earnings Per Common Share
Below is a reconciliation between basic and diluted earnings per
common share under FAS 128 for the years ended December 31, 2001,
2000, and 1999 (in thousands except per share amounts):
2001 2000 1999
-------------------------- ------------------------ -----------------------
Per Per Per
Income Shares Share Income Shares Share Income Shares Share
------ ------ ----- ------ ------ ----- ------ ------ -----
Net (loss) income $(221) $534 $1,220
Basic earnings
per common share $(221) 9,214 $(.02) $534 8,936 $.06 $1,220 8,199 $.15
----- ----- ----- ---- ----- ----- ------ ----- ----
Effect of dilutive
securities:
Warrants 134 191
----- ----- ----- ---- ----- ---- ------ ----- ----
Diluted (loss) earnings
per common share $(221) 9,214 $(.02) $534 9,070 $.06 $1,220 8,390 $.15
----- ----- ----- ---- ----- ---- ------ ----- ----
45
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(12) Related Party Transactions
--------------------------
The Company and its subsidiaries paid legal fees of approximately
$275,000, $238,000 and $114,000 in 2001, 2000 and 1999, respectively,
to law firms with which two directors, including the Company's
Chairman of the Board are affiliated.
(13) Commitments and Contingencies
-----------------------------
(a) Contingencies
-------------
As of March 22, 2002, the Company's subsidiary, Acrocrete, Inc.,
and other parties are defendants in 25 lawsuits pending in various
Southeastern states, by homeowners/homeowner associations, contractors
and subcontractors, or their insurance companies, claiming moisture
intrusion damages on single and multi-family family residences. The
Company's insurance carriers have accepted coverage under a
reservation of rights for 23 of these claims and are providing a
defense. The Company expects its insurance carriers to accept coverage
for the other two recently filed 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 the Company's 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, the Company 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 counsel on
behalf of Premix and is paying defense costs. The Company expects the
insurance carrier to eventually accept coverage. The Company is unable
to determine the exact extent of its exposure or the outcome of this
litigation.
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
46
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(13) Commitments and Contingencies
-----------------------------
(a) Contingencies (continued)
--------------------------
the effective date of Merger, exclusive of any element of value
attributable to the merger. (See Note (1) - Merger).
The Company is 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.
(b) Lease Commitments
-----------------
At December 31, 2001 certain property, plant and equipment were
leased by the Company under long-term leases. Certain of these leases
provided for escalation in rent upon the lease anniversary date.
Future minimum lease commitments as of December 31, 2001, for all
noncancellable leases are as follows:
December 31,
------------
2002 $1,052,000
2003 889,000
2004 803,000
2005 480,000
2006 and thereafter 375,000
----------
$3,599,000
----------
Rental expenses incurred for operating leases were approximately
$1,242,000, $957,000 and $331,000, for the years ended December 31,
2001, 2000 and 1999, respectively.
(14) Year 2000 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.
47
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(14) Year 2000 Acquisitions (continued)
----------------------------------
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 uncollateralized note issued 150
One year uncollateralized note issued 100
Collateralized debt assumed 388
------
$1,580
======
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 uncollateralized 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.
48
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(14) Year 2000 Acquisitions (continued)
----------------------------------
The components of the purchase price were as follows: (in
thousands):
Cash $286
Two year uncollateralized note issued 125
Collateralized debt assumed 153
----
$564
====
The purchase price was allocated to the acquired assets and
liabilities based on of their fair values 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.
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 ($614,000 at closing, $441,000
paid 30 days after closing) $1,055
Transfer of other assets 122
Three year uncollateralized note issued 600
Collateralized debt assumed 310
Common stock issued (400,000 shares @ $.61/share) 244
------
$2,331
======
The purchase price was allocated to the acquired assets and
liabilities based on their fair values on the acquisition date with
the excess of $886,000 being recorded as excess cost of investment
over net assets acquired, which is being amortized using the straight
line method over 40 years.
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):
Year Ended Year Ended
December 31, 2000 December 31, 1999
----------------- -----------------
Net sales $44,869 $38,361
Net income $ 483 $ 1,348
Earnings per common share:
Basic $ .05 $ .15
Diluted $ .05 $ .15
49
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(14) Year 2000 Acquisitions (continued)
----------------------------------
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.
The preliminary impact of the Company's assets and liabilities
related to the acquisitions as of December 31, 2000, were as follows
(in thousands):
Fair value of assets and liabilities acquired:
Inventories $1,838
Property plant and equipment 1,445
Other assets (Excess cost of investment
over net assets acquired) 1,580
Liabilities (Assumed) (851)
------
4,012
Less:
Debt issued (1,100)
Common stock issued (430)
Adjustment for accounts receivable due Company (449)
------
Net cash paid as reflected in the
Statement of Cash Flows $2,033
======
(15) Impairment Charge
During 2001, we reviewed our long-lived assets and goodwill for
which there were indications of possible impairment. The assets we
reviewed were primarily those associated with the Company's
distribution operations acquired in 2000, since we had experienced
losses from certain of these operations, closed several locations,
restructured operations and made changes to management. Based on these
reviews, we recorded an impairment charge of $238,000 in the fourth
quarter of 2001. This charge represented a write-down of the excess
cost of investment over net assets acquired related to the January 1,
2000 and May 1, 2000 acquisitions. The fair values of the goodwill
were primarily based on our estimates of discounted future cash flows.
50
PART III
Item 10. Directors and Executive Officers of the Registrant
--------------------------------------------------
The following table sets forth certain information with respect
to the directors and executive officers of the Company:
Name Age Position With Company
---- --- ---------------------
S. Daniel Ponce 53 Chairman of the Board - Class III
Lisa M. Brock 43 Director - Class III
Milton J. Wallace 66 Director - Class II
Morton L. Weinberger 72 Director - Class II
Howard L. Ehler, Jr. 58 Director - Class I/Principal Executive
Officer/Executive Vice President/
and Secretary
Gary J. Hasbach 57 President, Premix, Acrocrete and
Just-Rite
Betty J. Murchison 62 Chief Accounting Officer/
Assistant Vice President
The Company's Board of Directors is divided into three classes.
In accordance with the Company's Certificate of Incorporation, the
members of each Class are designated to serve for three (3) year
staggered terms. The Class I director's term expires at the 2002
annual meeting, or until his successor is elected. Class II directors
terms expire at the 2003 annual meeting or until their successors are
elected, and Class III directors terms expire at the 2004 annual
meeting or until their successors are elected.
Subject to certain contractual rights, each officer serves at the
discretion of the board of directors.
S. Daniel Ponce. Mr. Ponce has been Chairman of the Board of the
Company since 1988. Mr. Ponce has been engaged in the practice of
law for over twenty five years and is currently a stockholder in
the law firm of Wallace, Bauman, Legon, Fodiman, Ponce & Shannon,
P.A. Ponce is a member of the Board of Directors of the University
of Florida Foundation, Inc. and serves as Chairman of its audit
committee. He is also a non-practicing certified public
accountant.
Lisa M. Brock. Mrs. Brock has been a director of the Company since
1988. Mrs. Brock was employed by the Company and its
subsidiaries, Premix and Acrocrete, as Vice President for over 5
years until December, 1994 when she retired. Mrs. Brock continues
to serve as a consultant to the Company.
51
Item 10. Directors and Executive Officers of the Registrant (continued)
--------------------------------------------------------------
Milton J. Wallace. Mr. Wallace has been a director of the Company
since February 1999. Mr. Wallace has been a practicing attorney in
Miami for over 40 years and is currently a shareholder in the law
firm of Wallace, Bauman, Legon, Fodiman, Ponce & Shannon, P.A. He
was a co-founder and Chairman of the Board of Renex Corp, a
provider of dialysis services, from 1993 through February 2000 when
Renex Corp. was acquired by National Nephrology Associates, Inc.
Mr. Wallace was Chairman of the Board of Med/Waste, Inc., a
provider of medical waste management services, until February 13,
2002 when such company filed for bankruptcy protection under
Chapter 7 of the Federal Bankruptcy Code. He is a director of
several private companies.
Morton L. Weinberger, CPA. Mr. Weinberger has been a director of the
Company since 1988. Mr. Weinberger, a certified public
accountant, has been self-employed as a consultant to various
professional organizations for the past sixteen years. He provides
consulting services for the Company. For the previous twenty-five
years, he was engaged in the practice of public accounting. During
such period, he was a partner with Peat Marwick Mitchell & Co., now
known as KPMG Peat Marwick, and thereafter BDO Seidman, both public
accounting firms.
Howard L. Ehler, Jr. Mr. Ehler has been Principal Executive Officer
of the Company since March 1990 and Executive Vice President, Chief
Financial Officer and Secretary of the Company since April 1988.
Prior thereto he was Vice President, Chief Financial Officer and
Assistant Secretary of the Company for over five years.
Gary J. Hasbach. Mr. Hasbach became President of Premix and Acrocrete
in March 2001, and President of Just-Rite, in February 2000. Prior
thereto, he had been Executive Vice President of Sales and
Marketing for Premix and Acrocrete since January 1, 1999. Mr.
Hasbach was formerly President of Premix and Acrocrete from
September 1990 to May 1996. From May 1996 to December 1997, Mr.
Hasbach served as Executive Vice President of Marketing for Florida
Tile Industries, Inc, a distributor of tile and flooring products.
In addition, Mr. Hasbach was a director of the Company from 1993
to February 1997.
Betty J. Murchison. Ms. Murchison has been the Company's Chief
Accounting Officer since June 1995. Prior thereto, from October,
1991 to June 1995, she was Principal Accounting Officer of Royce
Laboratories, Inc., a manufacturer of generic pharmaceutical
products. For over 25 years prior thereto, she was employed by the
Company, the last three years acting as the Company's Chief
Accounting Officer.
52
Item 10. Directors and Executive Officers of the Registrant (continued)
--------------------------------------------------------------
Board of Directors Meetings and Attendance
------------------------------------------
The Board of Directors met four (4) times in fiscal 2001. Each
director attended all of the Board of Directors meetings in 2000.
Compensation and Stock Option Committee
---------------------------------------
The Compensation and Stock Option Committee, composed of Ms.
Brock, as Chairman and Messrs. Ponce and Weinberger met three (3)
times during 2001. Every member attended all of such meetings. The
Compensation Committee reviews the Company's general compensation
policies and procedures; establishes salaries and benefit programs for
the Chief Executive Officer and other executive officers of the
Company and its subsidiaries; reviews, approves and establishes
performance targets and awards under incentive compensation plans for
its executive officers; and reviews and approves employment
agreements. The Compensation and Stock Option Committee also
administers the Company's Employee Stock Option Plan and has the
authority to determine, among other things, to whom to grant options,
the amount of options, the terms of options and the exercise prices
thereof.
Audit Committee
---------------
The Audit Committee is presently composed of Mr. Weinberger, as
Chairman, and Messrs. Ponce and Wallace. The Audit Committee met two
(2) times during 2001. Every member attended all of such meetings. The
principal duties of the Audit Committee are to recommend the
appointment of independent auditors, meet with the Company's
independent auditors to review the arrangements for, and scope of the
audit by the independent auditors and the fees related to such work;
review the independence of the independent auditors; consider the
adequacy of the system of internal accounting controls; review and
monitor the Company's policies regarding conflicts of interest; and
discuss with management and the independent accountants the Company's
annual and quarterly financial statements.
Reports Pursuant to Section 16(a) of the Securities and Exchange Act
of 1934
--------------------------------------------------------------------
The Company's officers and directors are required to file Forms
3, 4 and 5 with the Securities and Exchange Commission in accordance
with Section 16(a) of the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder. Based solely on
a review of such reports furnished to the Company as required by Rule
16a-3(e), in 2001 no officer or director other than Mr. Wallace failed
to file any such report on a timely basis. Mr. Wallace filed Form 4's
for the months of October 2000 and April 2001 untimely.
53
Item 11. Executive Compensation
Summary Compensation Table
--------------------------
The following table summarizes the compensation paid or accrued
for each of the three fiscal years in the period ended December 31,
2000 for the Company's chief executive officer and each other
executive officer whose total annual salary and bonus exceeded
$100,000 for any fiscal year, (the "Named Executive Officers").
Annual Compensation
-------------------
Long-Term Compensation
----------------------
Securities
Other Underlying
Annual Options to
Name and Compen- Purchase
Principal Position Year Salary Bonus(1) sation(2) Shares(3)
------------------ ---- ------ -------- --------- ---------
Howard L. Ehler Jr. 2001 $150,000 $ - $ - 20,000
Principal Executive 2000 $140,000 30,000 60,000 10,000
Officer, Executive 1999 $130,000 30,000 2,000 20,000
Vice President and
Secretary
Gary Hasbach
President, Premix, 2001 140,000 - $15,000 20,000
Acrocrete and 2000 130,000 30,000 - 10,000
Just-Rite 1999 110,000 47,000 - 10,000
(1) Bonuses shown were earned in the year indicated even though
actually paid in a subsequent year. Bonuses for year 2001 have not yet
been determined.
(2) Except as indicated, none of the named individuals above have
received personal benefits or perquisites that exceed the lesser of
$50,000 or 10% of the total annual salary and bonus reported for the
named executive officer in the above table. Mr. Ehler's other Annual
Compensation in 2000 and 1999 represents the market price at date of
grant of 100,000 and 7,863 shares of common stock. Although 100,000
such shares were issued in calendar year 2000, the Compensation
Committee awarded such shares as services and performance tendered
over the previous several years. Mr. Hasbach's other Annual
Compensation in 2001 represents Mr. Hasbach's relocation expenses
provided by the Company.
(3) Stock options are granted under the terms and provisions of the
1999 Employee Stock Option Plan. For a description of the stock
options see "Executive Compensation-Options Granted in Year Ended
December 31, 2001".
54
Item 11. Executive Compensation (continued)
----------------------------------
Compensation Agreements
-----------------------
The Company is party to a one year renewable employment
agreement, (the "Employment Agreement") with Howard L. Ehler, Jr. (the
"Executive"). Mr. Ehler serves as Executive Vice President, Principal
Executive Officer and Chief Financial Officer of the Company at a
current base salary of $150,000. The Employment Agreement provides for
automatic renewal for additional one year periods on July 1st of each
year, unless the Company or Executive notifies the other party of such
party's intent not to renew at least 90 days prior to each June 30 of
the initial term and any extended term thereafter. The Executive
receives the use of a Company car, as well as certain other benefits,
such as health and disability insurance. The Executive is also
entitled to receive incentive compensation based upon targets
formulated by the Compensation Committee.
Prior to a Change in Control (as defined in the Employment
Agreement), the Company has the right to terminate the Employment
Agreement, without cause, at any time upon thirty days written notice,
provided the Company pays to the Executive a severance payment
equivalent to 50% of his then current annual base salary. As part of
the Employment Agreement, the Executive has agreed not to disclose
information and not to compete with the Company during his term of
employment and, in certain cases, for a two (2) year period following
his termination.
In the event of a Change in Control, the Employment Agreement is
automatically extended to a three year period. Thereafter, the
Executive will be entitled to terminate his employment with the
Company for any reason at any time. In the event the Executive so
terminates employment, the Executive will be entitled to receive the
lesser of (i) a lump sum equal to the base salary payments and all
other compensation and benefits the Executive would have received had
the Employment Agreement continued for the full term; or (ii) three
times the Executive's base salary then in effect on the effective date
of termination. The Executive would also be entitled to such severance
in the event the Company terminates the Executive without cause after
a Change of Control.
Options Granted in Year Ended December 31, 2001
-----------------------------------------------
The following table sets forth certain summary information
concerning the number of stock options granted and the potential
realizable value of the stock options granted to the Company's Named
Executive Officers during the fiscal year ended December 31, 2001.
55
Item 11. Executive Compensation (continued)
----------------------------------
Options Granted in Year Ended December 31, 2001 (continued)
-----------------------------------------------------------
Realizable Value
Number of at Assumed Rates
Securities % of Total of Stock Price
Underlying Options Appreciation
Options Granted to Exercise for Option Term (3)
Granted in Employees in Price Expiration -------------------
Name 2000 (1) Fiscal Year ($/Share)(2) Date 5%($) 10%($)
---- -------- ----------- ------------ ---- ----- ------
Howard L. Ehler, Jr. 20,000 10.8% $.20 11/14/06 $1,108 $2,444
Principal Executive Officer,
Executive Vice President and
Secretary
Gary J. Hasbach 20,000 10.8% $.20 11/14/06 $1,108 $2,444
President Premix, Acrocrete
and Just-Rite
(1) Options were granted pursuant to the terms and conditions of the
Company's 1999 Employee Stock Option Plan.
(2) The exercise price of $.20 per share was equal to the fair market
value of the Company's common stock at date of grant.
(3) The amounts disclosed in the columns which noted appreciation of
the Company's common stock price at the 5% and 10% rates dictated by
the Securities and Exchange Commission, are not intended to be a
forecast of the Company's common stock price and are not necessarily
indicative of the actual value which my be realized by the named
Executive Officers or the stockholders. These assumed rates of 5% and
10% would result in the Company's common stock price increasing from
$.20 per share to approximately $.26 per share and $.32 per share,
respectively. As of December 31, 2001, the market price for the common
stock was $.18 per share.
Aggregated Option Exercises in Year Ended December 31, 2001
-----------------------------------------------------------
The following table provides certain summary information
concerning the value of unexercised stock options held by the
Company's Named Executive Officers as of December 31, 2001.
56
Item 11. Executive Compensation (continued)
----------------------------------
Aggregated Option Exercises in Year Ended December 31, 2001
(continued)
-----------------------------------------------------------
Value of Unexercised
Number of Securities "In the Money"
Underlying Unexercised Options at Fiscal
Options at Fiscal Year End Year End($)(1)
-------------------------- --------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
Howard L Ehler, Jr. 50,000 - - -
Principal Executive
Officer, Executive
Vice President and
Secretary
Gary J. Hasbach 40,000 - - -
President Premix,
Acrocrete and
Just-Rite
No options were exercised by the Named Executive Officers during
the year ended December 31, 2001.
(1) The options are exercisable at $.57 and $.20 per share. At
December 31, 2001 the fair market value of the Company's common stock
was deemed to be $.18 per share, the average of the closing bid and
asked price of the common stock at such date.
The Company has two stock option plans, the Director's Stock
Option Plan and the 1999 Employee Stock Option Plan (collectively, the
"1999 Plans"). The 1999 Plans provide for options to be granted at
generally no less than the fair market value of the Company's stock at
the grant date. The 1999 Plans are administered by the Company's
Compensation and Stock Option Committee. Options granted under the
1999 Plans have a term of up to 10 years and are exercisable six
months from the grant date. A total of 600,000 and 200,000 shares are
reserved for issuance under the Employee and Director Plans. As of
December 31, 2001 there were outstanding options to purchase 240,000
and 160,000 shares under the Employee and Director Plans respectively.
The exercise price for all options currently outstanding are $.20 and
$.57 per share. All options expire five years from date of grant and
are fully vested.
Director Compensation
---------------------
During the year ended December 31, 2001, each director received
an annual retainer of $6,000, payable in quarterly installments.
Effective June 1, 1994, January 1, 1995 and January 1, 2001, the
Company entered into separate consulting agreements with Mr.
57
Item 11. Executive Compensation (continued)
----------------------------------
Director Compensation (continued)
---------------------------------
Weinberger, Ms. Brock and Mr. Wallace, respectively, to provide
various management consulting services to the Company. Mr. Wallace
and Ms. Brock receive monthly fees of $833. In connection with the
Company's acquisition program adopted in 1999, Mr. Weinberger was
requested to expend additional time in consulting with the Company's
management on acquisition possibilities, including performing due
diligence, administrative, accounting and other services. As a result
of the increased time and effort spent by Mr. Weinberger, Mr
Weinberger's consulting fee for 2000 and 2001 was $3,500 per month.
Effective January 1, 2002 the fee was reduced to $2,500 per month.
Each consulting agreement is terminable on sixty (60) days notice by
either party.
On November 14, 2001, each director was granted stock options to
purchase 20,000 shares of the Company's common stock at an exercise
price of $.20 per shares until November 14, 2006. Since September
1994, Mr. Ponce has been provided the use of a Company car at a
current cost of approximately $775 per month.
Compensation Committee Interlocks and Insider Participation
-----------------------------------------------------------
During the year ended December 31, 2001, the Compensation and
Stock Option Committee consisted of Messrs. Ponce, Weinberger and Ms.
Brock. None of these directors has been an officer or employee of the
Company or its subsidiaries during the last ten years, except Ms.
Brock, who was formerly Vice President of Premix and Acrocrete until
December 31, 1994. There are no other relationships required to be
disclosed pursuant to applicable Securities and Exchange Commission
rules and regulations.
Item 12. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
The following table sets forth certain information as of March
22, 2002 with respect to the beneficial ownership of the Company's
common stock by (i) each director of the Company, (ii) each Named
Executive Officer, (iii) each person known to the Company to own more
than 5% of such shares, and (iv) all executive officers and directors
as a group. (Except as otherwise provided herein, the information
below is supplied by the holder):
Shares (1) Percent
Beneficially Owned of Class (2)
------------------ ------------
Maureen P. Ferri 656,981 7.1%
120 Simmons Road
Statesboro, GA. 30458
Lisa M. Brock 309,006 (3) 3.3%
Howard L. Ehler, Jr. 456,108 (4) 4.9%
58
Item 12. Security Ownership of Certain Beneficial Owners and Management
(continued)
-------------------------------------------------------------
Gary J. Hasbach 290,400 (5) 3.1%
S. Daniel Ponce 611,966 (6) 6.6%
Milton J. Wallace 183,000 (7) 2.0%
Morton L. Weinberger 249,210 (8) 2.7%
All directors and officers
as a group (8 persons) 2,125,808 (9) 22.4%
- -----------------------
(1) Except as set forth herein, all securities are directly owned and
the sole investment and voting power are held by the person named.
Unless otherwise indicated, the address for each beneficial owner is
1259 N.W. 21st Street, Pompano Beach, Florida 33069-1428.
(2) The percent of class for common stockholders is based upon
9,220,434 shares of common stock outstanding and such shares of common
stock such individual has the right to acquire within 60 days upon
exercise of options that are held by such person (but not those held
by any other person).
(3) Includes 40,000 shares of common stock issuable upon exercise of
stock options.
(4) Includes 50,000 shares of common stock issuable upon exercise of
stock options.
(5) Includes 40,000 shares of common stock issuable upon exercise of
stock options.
(6) Includes 40,000 shares of common stock issuable upon exercise of
stock options.
(7) Includes 40,000 shares of common stock issuable upon exercise of
stock options.
(8) Includes 40,000 shares of common stock issuable upon exercise of
stock options.
(9) Includes 270,000 shares of common stock issuable upon the exercise
of stock options.
Item 13. Certain Relationships and Related Transactions
----------------------------------------------
The law firm of Wallace, Bauman, Legon, Fodiman, Ponce and
Shannon, P.A. of which Mr. Ponce, the Company's Chairman of the Board,
and Mr. Wallace, a Director, are stockholders, served as general
counsel to the Company. The law firm received $275,000 in 2001 for
legal services rendered to the Company.
59
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements: Page
--------------------- ----
Imperial Industries, Inc. and Subsidiaries:
Report of Independent Certified Public Accountants 27
Consolidated Balance Sheets - December 31, 2001 and 2000 28
Consolidated Statements of Operations - Years Ended
December 31, 2001, 2000 and 1999. 29
Consolidated Statement of Changes of Common Stock and
Other Stockholders' Equity - Three Years Ended
December 31, 2001. 30
Consolidated Statements of Cash Flows -
Years ended December 31, 2001, 2000 and 1999 31
Notes to Consolidated Financial Statements 33
2. Financial Statement Schedules:
------------------------------
II - Valuation and Qualifying Accounts and Reserves 61
3. Exhibits
--------
Incorporated by reference to the Exhibit Index at the
end of this Report. 62
(b) Reports on Form 8-K:
No Form 8-K Reports were filed during the last quarter
of the period covered by this Report.
60
Schedule II
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts and Reserves
Years ended December 31, 2001, 2000 and 1999
Charged Charged
Balance to cost to other Balance at
beginning and accounts- Deductions- end of
Description of period expenses describe describe period
----------- --------- -------- -------- -------- ------
Year ended December 31, 2001:
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts:
Trade $ 400,000 $ 375,000 $- $ 322,000(A) $ 453,000
---------- ---------- --- ---------- ----------
Valuation allowance for deferred taxes $ -- $ -- $- $ -- $ --
---------- ---------- --- ---------- ----------
Year ended December 31, 2000:
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts:
Trade $ 254,000 $ 283,000 $- $ 137,000(A) $ 400,000
---------- ---------- --- ---------- ----------
Valuation allowance for deferred taxes $1,633,000 $ -- $- $1,633,000(B) $ --
---------- ---------- --- ---------- ----------
Year ended December 31, 1999:
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts:
Trade $ 200,000 $ 177,000 $- $ 123,000(A) $ 254,000
---------- ---------- --- ---------- ----------
Valuation allowance for deferred taxes $2,207,000 $ -- $- $ 574,000(C) $1,633,000
---------- ---------- --- ---------- ----------
(A) Uncollectible accounts written off, net of recoveries.
(B) Expiration of related net operating loss carryforwards.
(C) Deferred tax benefit.
61
EXHIBIT INDEX
Certain of the following exhibits, designated with an asterisk (*), are
filed herewith. The exhibits not so designated have been filed previously with
the Commission, and are incorporated herein by reference to the documents
indicated in parentheses following the descriptions of such exhibits.
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 Amendment to Certificate of Incorporation of the Company.
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).
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.
10.2 Employment Agreement dated July 26, 1993 between Howard L. Ehler,
Jr. and the Company. (Form 8-K dated July 26, 1993).
10.3 License Agreement between Bermuda Roof Company and Premix Marbletite
Manufacturing Co., (Form S-4 Registration Statement, Exhibit 10.5).
10.4 Employee Stock Option Plan (Annual Report on Form 10-K for the year
ended December 31, 2000).
10.5 Directors Stock Option Plan (Annual Report on Form 10-K for the year
ended December 31, 2000).
62
EXHIBIT INDEX
(continued)
*11 Statement recomputation of earnings per share.
*21 Subsidiaries of the Company
63
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
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.
March 28, 2002 By: /s/ Howard L. Ehler,Jr.
-----------------------------------------------
Howard L. Ehler, Jr., Executive Vice President/
Principal Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ S. Daniel Ponce Chairman of the Board of March 28, 2002
- ------------------------ Directors
S. Daniel Ponce
/s/ Director
- ------------------------
Lisa M. Brock
/s/ Milton J. Wallace Director March 28, 2002
- ------------------------
Milton J. Wallace
/s/ Morton L. Weinberger Director March 28, 2002
- ------------------------
Morton L. Weinberger
/s/ Howard L. Ehler,Jr. Director, Executive Vice March 28, 2002
- ------------------------ President, Principal
Howard L. Ehler, Jr. Executive Officer, Chief
Financial Officer and
Secretary
/s/ Betty J.Murchison Assistant Vice President March 28, 2002
- ------------------------ and Chief Accounting
Betty J. Murchison Officer
64