FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to ______________________
Commission file number 1-7190
IMPERIAL INDUSTRIES, INC.
-------------------------
(Exact name of registrant as specified in its charter)
Delaware 65-0854631
-------- ----------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1259 Northwest 21st Street, Pompano Beach Florida 33069-4114
------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (954) 917-4114
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate the number of shares of Imperial Industries, Inc. Common Stock
($.01 par value) outstanding as of May 5, 2000: 8,605,434
Total number of pages contained in this document: 25
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Index
Page No.
--------
<S> <C>
Part I. Financial Information
Consolidated Balance Sheets
March 31, 2000 and December 31, 1999 3
Consolidated Statements of Operations
Three Months Ended March 31, 2000 and 1999 4
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2000 and 1999 5-6
Notes to Consolidated Financial Statements 7-17
Management's Discussion and Analysis of Results
of Operations and Financial Conditions 18-22
Part II. Other Information and Signatures
Item I. Legal Proceedings 23
Item 6. Exhibits and Reports on Form 8-K 23-24
Signatures 25
</TABLE>
2
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---- ----
<S> <C> <C>
Assets (Unaudited)
------
Current assets:
Cash and cash equivalents $ 1,266,000 $ 1,119,000
Trade accounts receivable (less
allowance for doubtful accounts of
$330,000 and $254,000 at March 31, 2000,
and December 31, 1999 respectively) 3,807,000 2,677,000
Inventories 2,955,000 2,023,000
Deferred taxes 482,000 634,000
Other current assets 522,000 43,000
------------ ------------
Total current assets 9,032,000 6,496,000
------------ ------------
Property, plant and equipment, at cost 3,423,000 2,653,000
Less accumulated depreciation (1,239,000) (1,164,000)
------------ ------------
Net property, plant and equipment 2,184,000 1,489,000
------------ ------------
Deferred taxes 699,000 699,000
------------ ------------
Excess cost of investment over net
assets acquired 565,000 --
------------ ------------
Other assets 92,000 84,000
------------ ------------
$ 12,572,000 $ 8,768,000
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable $ 3,344,000 $ 1,526,000
Current portion of long-term debt 318,000 164,000
Accounts payable 1,733,000 902,000
Payable to stockholders 48,000 48,000
Accrued expenses and other liabilities 626,000 409,000
------------ ------------
Total current liabilities 6,069,000 3,049,000
------------ ------------
Long-term debt, less current maturities 1,644,000 1,328,000
------------ ------------
Obligation for appraisal rights 877,000 877,000
------------ ------------
Commitments and contingencies -- --
------------ ------------
Stockholders' equity:
Common stock, $.01 par value at March 31, 2000
and December 31, 1999; 20,000,000 shares
authorized; 8,505,434 and 8,230,434 issued
at March 31, 2000 and December 31, 1999,
respectively 85,000 82,000
Additional paid-in-capital 13,597,000 13,414,000
Accumulated deficit (9,700,000) (9,982,000)
------------ ------------
Total stockholder's equity 3,982,000 3,514,000
------------ ------------
$ 12,572,000 $ 8,768,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------
2000 1999
---- ----
(Unaudited)
<S> <C> <C>
Net sales $ 7,856,000 $ 5,738,000
Cost of sales 5,263,000 4,003,000
----------- -----------
Gross profit 2,593,000 1,735,000
Selling, general and
administrative expenses 2,031,000 1,371,000
----------- -----------
Operating income 562,000 364,000
----------- -----------
Other income (expense):
Interest expense (119,000) (84,000)
Miscellaneous expense (9,000) 2,000
----------- -----------
(128,000) (82,000)
----------- -----------
Income before income taxes 434,000 282,000
Income tax expense (152,000) (99,000)
----------- -----------
Net income $ 282,000 $ 183,000
=========== ===========
Basic earnings per common share $ .03 $ .02
=========== ===========
Diluted earnings per common share $ .03 $ .02
=========== ===========
Weighted average common shares 8,472,467 8,182,571
=========== ===========
Weighted average shares and
potentially dilutive shares 8,720,615 8,335,135
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Increase (Decrease) In Cash and Cash Equivalents
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------
2000 1999
---- ----
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 282,000 $ 183,000
Adjustments to reconcile net income
to net cash (used in) provided by:
Depreciation 75,000 49,000
Amortization 5,000 4,000
Debt issue discount 15,000 15,000
Provision for doubtful accounts 77,000 39,000
Income tax expense 152,000 99,000
(Gain) loss on disposal of fixed assets -- 1,000
(Increase) decrease in:
Accounts receivable (1,528,000) (719,000)
Inventory (235,000) (238,000)
Prepaid expenses and other assets (492,000) (264,000)
Increase (decrease) in:
Accounts payable 831,000 542,000
Payable to stockholders -- (466,000)
Accrued expenses and other liabilities 217,000 118,000
----------- -----------
Total adjustments to net income (883,000) (820,000)
----------- -----------
Net cash used in operating activities (601,000) (637,000)
----------- -----------
Cash flows from investing activities
Purchases of property, plant
and equipment (69,000) (165,000)
Proceeds received from sale of
property and equipment -- 4,000
Acquisition of business (690,000) --
----------- -----------
Net cash used in investing activities (759,000) (161,000)
----------- -----------
Cash flows from financing activities
Increase (decrease) in notes payable
banks - net 1,568,000 539,000
Proceeds from issuance of long-term debt -- 60,000
Repayment of long-term debt (61,000) (34,000)
----------- -----------
Net cash provided by financing activities 1,507,000 565,000
----------- -----------
Net increase (decrease) in cash and
cash equivalents 147,000 (233,000)
Cash and cash equivalents beginning of period 1,119,000 1,097,000
----------- -----------
Cash and cash equivalents end of period $ 1,266,000 $ 864,000
=========== ===========
5
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Increase (Decrease) In Cash and Cash Equivalents
-continued-
Three Months Ended
March 31,
---------
2000 1999
---- ----
(Unaudited)
Supplemental disclosure of cash flow information:
Cash paid during the three months for:
Interest $ 75,000 $50,000
======== =======
Non-cash transactions:
Issuance of 275,000 shares of common
stock related to the acquisitions $186,000 --
======== =======
Issuance of notes related to the
acquisitions $375,000 --
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(1) Interim Financial Statements
----------------------------
The accompanying unaudited consolidated financial statements have
been prepared in accordance with the instructions to Form 10-Q and do
not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments considered necessary for a fair
presentation have been included. Operating results for the three months
ended March 31, 2000 are not necessarily indicative of the results that
may be expected for the year ended December 31, 2000. The significant
accounting principles used in the preparation of these interim financial
statements are the same as those used in the preparation of the annual
audited consolidated financial statements. These statements should be
read in conjunction with the financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(2) Merger
------
On December 17, 1998, the Company's stockholders approved a Plan
merging Imperial Industries, Inc. into Imperial Merger Corp., a newly-
formed, wholly-owned subsidiary of the Company, (the "Merger"), with the
Merger becoming effective December 31, 1998,, (the "Effective Date"). On
the Effective Date, Imperial Merger Corp. changed its name to Imperial
Industries, Inc., (the "Company").
At the Effective Date, each share of the Company's $.10 par value
common stock outstanding before the Merger was converted into one share
of $.01 par value common stock. Also at the Effective Date, 300,121
outstanding shares of preferred stock, with a carrying value of
$3,001,000 were retired and $4,292,000 of accrued dividends on such
shares were eliminated.
In connection with the elimination of the preferred stock, the
Company was required to pay cash of $733,000 which at March 31, 2000 was
reduced to $48,000, as a result of satisfying the cash requirements due
to former preferred stockholders who had submitted their preferred stock
7
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(2) Merger (continued)
------
to the Company for the merger consideration. In addition, the Company
issued $985,000 face value of 8% subordinated debentures with a fair
value of $808,000, and 1,574,610 shares of $.01 par common stock with a
fair value of $630,000 based on the market price of $.40 per share of
the Company's common stock at the Effective Date.
Holders of 81,100 shares of preferred stock (the "Dissenting
Shareholders"), with a carrying value of $811,000, elected to exercise
their appraisal rights with respect to the stock. Pursuant to Delaware
law, the Dissenting Shareholders petitioned the Delaware Chancery Court
on April 23, 1999 to determine the fair value of their shares at the
Effective Date, exclusive of any element of value attributable to the
Merger. In the event that a Dissenting Shareholder did not perfect his
appraisal rights, each share would be entitled to receive $2.25 in cash,
an $8.00 subordinated debenture and five shares of common stock. Based
on these facts, and a valuation prepared by an independent financial
advisor in connection with the Merger, the Company recorded $877,000 in
the accompanying consolidated balance sheets at March 31, 2000 and
December 31, 1999, as an estimate for the obligation for appraisal
rights. The Chancery Court may determine fair value is less than, equal
to, or greater than an aggregate of $877,000. Based on advice of counsel
the Company does not expect that there will be a final judicial
determination requiring the Company to make payment to Dissenting
Shareholders' in the year ended December 31, 2000. Accordingly, the
obligation is classified as long-term debt.
(3) Description of Business and Summary of Significant Accounting Policies
----------------------------------------------------------------------
The Company and its subsidiaries are primarily involved in the
manufacturing and sale of exterior and interior finishing wall coatings
and mortar products for the construction industry, as well as the
purchase and sale of other building materials from other manufacturers.
Sales of the Company's products are made to customers primarily in the
Southeastern United States through distributors and company-owned
distribution facilities.
(a) Basis of presentation
---------------------
The consolidated financial statements contain the accounts of the
Company and its wholly-owned subsidiaries. All material intercompany
accounts and transactions have been eliminated in consolidation.
(b) Revenue Recognition Policy
--------------------------
Revenue from sale transactions is recorded upon shipment and
delivery of inventory to the customer, net of discounts and allowances.
8
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(3) Description of Business and Summary of Significant Accounting Policies
----------------------------------------------------------------------
(continued)
(c) Income Tax Policy
-----------------
The Company has adopted the liability method for determining its
income taxes. Under this method, deferred tax assets and liabilities are
recognized for the expected future tax consequences of events that have
been recognized in the consolidated financial statements or income tax
return. Deferred tax assets and liabilities are measured using the
enacted tax rates expected to apply to taxable income in the years in
which temporary differences are expected to be realized or settled;
valuation allowances are provided against assets that are not likely to
be realized.
(d) Cash and cash equivalents
-------------------------
The Company has defined cash and cash equivalents as those highly
liquid investments with a maturity of three months or less, when
purchased. Included in cash and cash equivalents at March 31, 2000 and
December 31, 1999 are short term time deposits of $277,000 and $275,000,
respectively.
(e) Stock based compensation
------------------------
The Company measures compensation expense related to the grant of
stock options and stock-based awards to employees in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," under which compensation
expense, if any, is generally based on the difference between the
exercise price of an option, or the amount paid for an award, and the
market price or fair value of the underlying common stock at the date of
the award. The Company adopted the disclosure requirement provisions of
Statement of Financial Accounting Standards (SFAS") No. 123, Accounting
for Stock-Based Compensation ("SFAS No. 123"). Had the fair value based
accounting provisions of SFAS No. 123 been adopted, the effect on the
Company's net income and earnings per share information would not have
been significant.
(f) Accounting estimates
--------------------
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
9
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(3) Description of Business and Summary of Significant Accounting Policies
----------------------------------------------------------------------
(continued)
(g) Fair Value of Financial Instruments
-----------------------------------
The carrying amount of the Company's financial instruments
principally notes payable, debentures and obligation for appraisal
rights, approximates fair value based on discounted cash flows as well
as other valuation techniques.
(h) Segment Reporting
-----------------
The Company has adopted SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. For the three month periods ended
March 31, 2000 and 1999, the Company has determined that it operates in
a single operating segment.
(i) New Accounting Pronouncements
-----------------------------
SFAS No. 133, Accounting for Derivatives and Hedging Activities, is
effective for all fiscal quarters of fiscal years beginning after June
15, 2000 (January 1, 2001 for the Company) and requires that all
derivative instruments be recorded on the balance sheet at their fair
value. Changes in the fair value of derivatives are recorded each period
in current earnings or other comprehensive income, depending on whether
a derivative is designated as part of a hedge transaction and, if it is,
the type of hedge transaction. The Company does not use derivative
instruments and therefore anticipates that the adoption of SFAS No. 133
in 2001 will not have a material effect on the consolidated financial
statements.
(4) Inventories
-----------
At March 31, 2000 and December 31, 1999 inventories consist of:
2000 1999
---- ----
Raw materials $ 460,000 $ 525,000
Finished goods 2,292,000 1,276,000
Packaging materials 203,000 222,000
---------- ----------
$2,955,000 $2,023,000
========== ==========
(5) Notes Payable
-------------
At March 31, 2000, notes payable represent amounts outstanding under a
$4,500,000 line of credit from a commercial lender to the Company's
subsidiaries and $250,000 unsecured notes payable issued in connection
with the January 1, 2000 purchase of three building materials
distributors.
10
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(5) Notes Payable (continued)
-------------
The line of credit is collateralized by the subsidiaries' accounts
receivable and inventory, expires June 19, 2001, and is subject to annual
renewal. Effective April 1, 2000, the interest rate was reduced from the
prime rate plus 1% to the prime rate plus 1/2% (9 1/2% at April 1, 2000).
At March 31, 2000, the line of credit limit available for borrowing based
on eligible receivables and inventory was $4,322,000, of which $3,094,000
had been borrowed. The average month-end amounts outstanding for the three
month periods ended March 31, 2000 and 1999 were $2,378,000, and
$1,312,000, respectively.
(6) Long-Term Debt and Current Installments of Long-Term Debt
---------------------------------------------------------
Included in long-term debt at March 31, 2000, are three mortgage
loans, collateralized by real property, in the aggregate amount of
$625,000, less current installments aggregating $83,000.
In connection with the Merger described in Note 2, the Company issued
8% subordinated debentures with a face amount value of $985,000 effective
December 31, 1998. Each $8.00 debenture was discounted to a value of $6.56
at December 31, 1998 using an effective interest rate of 16%. The
aggregate carrying value of the debentures at March 31, 2000 is $881,000.
The debentures are general, unsecured obligations of the Company,
subordinated in right of payment to all indebtedness to institutional and
other lenders of the Company. The Debentures are subject to redemption, in
whole or in part, at the option of the Company, at any time at a
redemption price of 100% of the principal amount thereof, plus accrued and
unpaid interest, if any, to the redemption date. Interest is payable
annually on July 1 of each year with the principal balance due and payable
December 31, 2001.
During the three months ended March 31, 2000, the Company acquired
certain assets and assumed certain liabilities of a building materials
distributor in which it issued an unsecured promissory note of $125,000 as
partial consideration. At March 31, 2000, $62,500 was classified as long-
term debt, and $62,500 was classified as current portion of long-term
debt.
Other long-term debt in the aggregate amount of $330,000, less
current installments of $172,000, relates principally to equipment
financing. The notes bear interest at various rates ranging from 8.75% to
15.39% and are payable monthly through 2004.
(7) Income Taxes
------------
At March 31, 2000, the deferred tax asset of $1,181,000 consists of
the tax effect of net operating loss carryforwards of $2,966,000, less a
valuation allowance of $1,633,000. Net operating losses of $5,713,000
11
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(7) Income Taxes (continued)
------------
expire through 2000, the remaining balance of $2,761,000 expires in
varying amounts through 2009.
During 1999 the Company recognized $574,000 of deferred tax benefit
as a result of releasing a portion of the valuation allowance previously
established due to the uncertainty of realizing net operating losses.
Remaining deferred tax assets are fully reserved at December 31, 1999, and
relate, primarily, to the net operating loss carryforwards expiring in
2000 which the Company projects it will be unable to utilize. The ultimate
realization of the remaining deferred tax assets is largely dependent on
the Company's ability to generate sufficient future taxable income.
Management believes that the valuation allowance at March 31, 2000 and
December 31, 1999 is appropriate, given the cyclical nature of the
construction industry and other factors including but not limited to the
uncertainty of future taxable income expectations beyond the Company's
strategic planning horizon.
In the three months ended March 31, 2000 and 1999, the Company
recognized income tax expense of $152,000 and $99,000, respectively,
representing income before income taxes at the statutory rate of 35%.
(8) Capital Stock
-------------
(a) Common Stock
------------
At March 31, 2000, the Company had outstanding 8,505,434 shares of
common stock with a $.01 par value per share ("Common Stock"). The holders
of common stock are entitled to one vote per share on all matters, voting
together with the holders of preferred stock, if any. In the event of
liquidation, holders of common stock are entitled to share ratably in all
the remaining assets of the Company, if any, after satisfaction of the
liabilities of the Company and the preferential rights of the holders of
outstanding preferred stock, if any.
In the three months ended March 31, 2000, the Company issued an
aggregate of 275,000 shares of common stock as partial consideration for
the purchase of certain assets of four building materials distributors. In
1999, the Company issued 47,863 treasury shares to directors and an
officer as compensation for services rendered.
(b) Preferred Stock
---------------
The authorized preferred stock of the Company consists of 5,000,000
shares, $.01 par value per share. The preferred stock is issuable in
series, each of which may vary, as determined by the Board of Directors,
as to the designation and number of shares in such series, the voting
power of the holders thereof, the dividend rate, redemption terms and
prices, the
12
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(8) Capital Stock (continued)
-------------
(b) Preferred Stock (continued)
---------------
voluntary and involuntary liquidation preferences, and the conversion
rights and sinking fund requirements, if any, of such series. At March 31,
2000 and December 31, 1999, there were no shares of preferred stock
outstanding.
(c) Warrants
--------
At March 31, 2000, the Company had warrants outstanding to purchase
350,000 shares of the Company's common stock. Warrants for the purchase of
200,000 shares entitle the holder to purchase one share at $.10 per share
until June 29, 2000. 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%.
(d) Stock Options
-------------
In December 1999, the Board of Directors adopted the Director's Stock
Option Plan and the 1999 Employee Stock Option Plan (collectively, the
"1999 Plans"). The 1999 Plans 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. A total
of 600,000 and 200,000 shares are reserved for issuance under the Employee
and Director Plans, respectively. Adoption of the 1999 Plans are subject
to stockholder approval.
On December 16, 1999, the Company granted 215,000 options under the
1999 Plans at an exercise price that will be equal to the fair value of
the common stock on the date the Company's stockholders approve the 1999
Plans. If the stockholders do not approve the 1999 Plans, the options
shall be automatically terminated. Each option has a term of five years
from the date of grant and vesting will be determined at the time of
stockholder approval. All options granted are outstanding at March 31,
2000.
(9) Earnings Per Common Share
-------------------------
The Company has adopted Statement of Financial Accounting Standards
No. 128, "Earnings Per Share" ("FAS 128"). The following is a
reconciliation of
13
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(9) Earnings Per Common Share (continued)
-------------------------
the numerator and denominator of the basic and diluted per share
computations (in thousands, except per share data):
Three Months Ended
March 31,
---------
BASIC: 2000 1999
---- ----
Net income $282 $183
Average common shares outstanding 8,472 8,183
Basic per share amount $.03 $.02
DILUTED:
Net income $282 $183
Average common shares outstanding 8,472 8,183
Dilutive effect of outstanding warrants 249 152
Average shares outstanding assuming dilution 8,721 8,335
Diluted per share amount $.03 $.02
(10) Commitments and Contingencies
-----------------------------
(a) Contingencies
-------------
As of May 12, 2000, the Company's subsidiary, Acrocrete, Inc., and
other parties have been named in 38 lawsuits pending in various
Southeastern states, by homeowners, contractors and subcontractors, or
their insurance companies, claiming moisture intrusion damages on single
family residences. The Company's insurance carriers have accepted coverage
for 35 of these claims and are providing a defense under a reservation of
rights. Acrocrete expects its insurance carriers to accept coverage for
the other three 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 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
14
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(10) Commitments and Contingencies (continued)
-----------------------------
were defective. The Company's insurance carriers have been placed on
notice of this suit and the Company is awaiting their response regarding
coverage, but fully expects that the insurance carriers will accept
coverage and the defense. In the interim, the insurance carrier has
retained defense counsel on behalf of Premix. Premix is unable to
determine the exact extent of its exposure or the outcome of this
litigation.
Premix and Acrocrete are engaged in other legal actions and claims
arising in the ordinary course of its business, none of which are believed
to be material to the Company.
On April 23, 1999, certain Dissenting Shareholders owning shares of
the Company's formerly issued preferred stock filed a petition for
appraisal in the Delaware Chancery Court to determine the fair value of
their shares at the effective date of Merger, exclusive of any element of
value attributable to the merger.
(b) Lease Commitments
-----------------
The Company pays aggregate annual rent of approximately $489,000 for
its current operating facilities. The leases expire at various dates
ranging from October 31, 2000 to August 31, 2009. Comparable properties at
equivalent rentals are available for replacement of these facilities if
such leases are not extended.
(c) Employment Agreement
--------------------
In connection with the acquisition of three building materials
distributors in the first quarter of 2000, the Company's wholly-owned
subsidiary, Just-Rite Supply, Inc, entered into an employment agreement for
a three year period, with Ronald A. Johnson to serve as Vice President and
General Manager of Just-Rite. Mr. Johnson receives an annual base salary of
$100,000 and is entitled to incentive compensation based on the sales
performance of certain distributors. Also, Mr. Johnson is entitled to the
use of a Company vehicle, as well as certain other benefits, such as health
and disability insurance.
(11) Recent Acquisitions
-------------------
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.
15
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(11) Recent 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 note issued 150
One year note issued 100
Secured 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 goodwill, which is being amortized
using the straight line method over 40 years.
Effective March 1, 2000, the Company acquired certain assets of
another (unrelated) 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 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 goodwill, which is being amortized
using the straight line method over 40 years.
Following are the unaudited pro-forma results of operations as if
the January 1 and March 1, 2000 purchases had occurred on January 1, 1999
(in thousands, except per share and share amounts):
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
-------------- --------------
Net sales $8,278 $7,131
Net income $ 300 $ 226
Earnings per common share:
Basic $ .04 $ .03
Diluted $ .03 $ .03
16
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(11) Recent 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 March 31, 2000, were as follows (in
thousands):
Fair value of A&R assets $1,179
Liabilities assumed (A&R) (381)
Adjustment for accounts receivable due Company (A&R) (327)
Fair value of Panhandle assets 219
Net cash paid as reflected in the ------
Statement of Cash Flows $ 690
======
(12) Subsequent Event
----------------
In April 2000, the Company entered into a non-binding Letter of
Intent to acquire certain assets of A&R Supply of Mississippi, Inc. and
its affiliated company A&R Supply of Hattiesburg, Inc. ("A&R Supply of
Mississippi"). The closing is anticipated to be effective May 1, 2000 and
is subject to normal closing contingencies. The purchase price of the
proposed acquisitions will be funded through the utilization of the
Company's line of credit, assumption of certain liabilities, issuance of
unsecured notes and issuance of shares of common stock.
A&R supply of Mississippi operates three wholesale building materials
distribution facilities located in Gulfport, Hattiesburg and Pascagoula,
Mississippi. Sales of A&R Supply of Mississippi approximated $6,350,000
for their fiscal year ended March 31, 2000.
17
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations
-------------------------------------------------------------
and Financial Condition
-----------------------
General
-------
The Company's business is related primarily to the level of
construction activity in the Southeastern United States, particularly
the states of Florida, Georgia and Alabama. The majority of the
Company's products are sold to building materials dealers located
principally in Florida, Georgia and Alabama who provide materials to
contractors and subcontractors engaged in the construction of
residential, commercial and industrial buildings and swimming pools.
One indicator of the level and trend of construction activity is the
amount of construction permits issued for the construction of
buildings. The level of construction activity is subject to
population growth, inventory of available housing units, government
growth policies and construction funding, among other things.
This Form 10-Q contains certain forward looking statements
within the meaning of the Private Securities Litigation Reform Act
of 1995 with respect to the financial condition, results of
operations and business of Imperial Industries, Inc., and its
subsidiaries, including statements made under Management's
Discussion and Analysis of Financial Condition and Results of
Operations. These forward looking statements involve certain risks
and uncertainties. No assurance can be given that any of such
matters will be realized. Factors that may cause actual results to
differ materially from those contemplated by such forward looking
statements include, among others, the following: the competitive
pressure in the industry; general economic and business conditions;
the ability to implement and the effectiveness of business strategy
and development plans; quality of management; business abilities
and judgement of personnel; and availability of qualified
personnel; labor and employee benefit costs.
Results of Operations
---------------------
Three Months Ended March 31, 2000 Compared to 1999
--------------------------------------------------
Net sales for the three months ended March 31, 2000 increased
$2,118,000, or approximately 36.9%, compared to the same period in
1999. The increase in sales was derived from the sales of building
materials generated by the four distributors acquired effective
January 1, 2000 and March 1, 2000. These sales primarily consisted of
building materials purchased from other manufacturers, principally
gypsum roofing, insulation, metal studs, masonry and stucco products.
18
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Results of Operations
-------------------------------------------------------------
and Financial Condition (continued)
-----------------------
Results of Operations (continued)
---------------------
Three Months Ended March 31, 2000 Compared to 1999 (continued)
--------------------------------------------------
Gross profit as a percentage of net sales for the first quarter
of 2000 was approximately 33.0%, compared to 30.2% in the first
quarter of 1999. The increase in gross profit margins was due
principally to gains in manufacturing efficiency derived from
modifying the Company's manufacturing processes, price increases
implemented for certain of the Company's manufactured products
implemented in the last six months of 1999, and higher gross profits
derived from products manufactured by other companies, sold through
the Company's distribution facilities. The Company is attempting to
increase gross profit margins through its efforts to increase the
sale of its manufactured products through its distribution facilities
and to modify its manufacturing processes to gain further
improvements in its production efficiency.
Selling, general and administrative expenses as a percentage of
sales for the first quarter of 2000 was approximately 25.9% in 2000,
compared to 23.9% for the same period last year. Selling, general and
administrative expenses increased $660,000, or approximately 48.1% in
2000, compared to the first quarter of 1999. The increase in expenses
was primarily due to additional operating costs associated with the
Company's expanded operations, principally operating costs related to
the building material distributors acquired in the first quarter of
2000.
Interest expense increased from $84,000 in the first quarter of
1999 to $119,000 in 2000. The increase in interest expense was
principally due to additional borrowings related to the purchase and
operations of the acquired distribution facilities.
In the three months ended March 31, 2000 and 1999, the Company
recognized income tax expense of $152,000 and $99,000, respectively,
representing income before taxes at the statutory rate of 35%.
As a result of the above factors, the Company derived net income
of $282,000, or $.03 per fully-diluted share, for the first quarter
of 2000, compared to $183,000, or $.02 per fully-diluted share, for
the same period in 1999.
Liquidity and Capital Resources
-------------------------------
At March 31, 2000, the Company had working capital of
approximately $2,963,000 compared to working capital of $3,447,000 at
December 31, 1999. As of March 31, 2000, the Company had cash and
cash equivalents of $1,266,000. The primary reduction in
19
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Results of Operations
-------------------------------------------------------------
and Financial Condition (continued)
-----------------------
Liquidity and Capital Resources (continued)
-------------------------------
working capital was associated with the purchase of four building
materials distributors in the quarter ended March 31, 2000.
The Company's principal source of short-term liquidity is
existing cash on hand and the utilization of a $4,500,000 line of
credit with a commercial lender scheduled to expire on June 19, 2001.
Premix, Acrocrete and Just-Rite borrow on the line of credit, based
upon and collateralized by, their eligible accounts receivable and
inventory. Generally, accounts not collected within 120 days are not
eligible accounts receivable under the Company's borrowing agreement
with its commercial lender. At March 31, 2000, $3,094,000 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 of approximately $4,322,000 at March 31, 2000.
Trade accounts receivable represent amounts due from sub-
contractors, contractors and building materials dealers located
principally in Florida and Georgia who have purchased products on an
unsecured open account basis and through Company owned warehouse
distribution outlets. As of March 31, 2000 the Company owned and
operated nine warehouse distribution outlets. Accounts receivable,
net of allowance, at March 31, 2000 was $3,807,000 compared to
$2,677,000 at December 31, 1999. The increase in receivables of
$1,130,000, or approximately 42.2% was primarily related to higher
sales levels prevalent in 2000 compared to the same period in 1999 as
a result of the acquisitions.
As a result of the consummation of a merger with a wholly owned
subsidiary in 1998, the Company issued an aggregate of $985,000 face
amount, 8% subordinated debentures, 1,574,610 shares of common stock
and agreed to pay $733,000 in cash to the former preferred
shareholders. At March 31, 2000, the Company had paid $684,000 of
such cash amount. Amounts payable to such shareholders at March 31,
2000, results from their non-compliance with the conditions for
payments. Holders representing 81,100 preferred shares have elected
dissenters' rights, which, under Delaware law, would require cash
payments equal to the fair value of their stock, as of the date of
the merger, to be determined in accordance with Section 262 of the
Delaware General Corporation Law. The Company is unable to determine
the fair value of the preferred stock owned by such dissenting
shareholders, but recorded a liability for each share based on the
fair value of $2.25 in cash, an $8.00 Subordinated Debenture and five
shares of the Company's common stock since that is the consideration
the dissenting holders would receive if they did not perfect their
dissenters' rights under the law. Dissenting
20
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Results of Operations
-------------------------------------------------------------
and Financial Condition (continued)
-----------------------
Liquidity and Capital Resources (continued)
-------------------------------
stockholders filed a petition for appraisal rights in the
Delaware Chancery Court on April 23, 1999.
Effective January 1, 2000, the Company acquired certain assets
and assumed certain liabilities of three building materials
distributors held under common ownership in a single transaction
accounted for as a purchase acquisition. The total consideration,
exclusive of the issuance of Common Stock, was $1,580,000
consisting of $798,000 in cash, unsecured promissory notes of
$150,000 due 90 days from closing and $100,000 due one year from
closing. The Company also assumed $388,000 of the acquired
companies' secured debt and issued 225,000 shares of the Company's
unregistered common stock valued at $.64 per share.
Effective March 1, 2000, the Company acquired certain assets
of another building materials distributor accounting for it under
the purchase method of accounting. Total consideration for the
purchase was $386,000, which included 50,000 shares of the
Company's unregistered common stock valued at $42,000 ($.84 per
share). The Company paid cash of $219,000 and issued an unsecured
promissory note of $125,000 payable over two years from closing.
The consummation of these acquisitions and working capital
required to fund operations at the acquired locations resulted in
an approximate increase of $1,500,000 under the Company's line of
credit.
In April 2000, the Company entered into a non-binding letter of
intent to acquire certain of the assets of three wholesale building
material distribution facilities located in Gulfport, Hattiesburg and
Pascagula, Mississippi. The closing, subject to normal contingencies,
is anticipated to be effective May 1, 2000. The Company expects to
utilize approximately $1,500,000 under its line of credit, issue
notes in the approximate amount of $600,000, assume secured debt of
approximately $350,000 and issue 400,000 shares of common stock to
consummate the proposed acquisition and fund operations. The Company
is in the process of obtaining an increase in its line of credit with
its commercial lender to facilitate the purchase of these
distribution facilities. Management expects to receive the increase
in its line of credit in an amount sufficient to conclude the
acquisition of these facilities and fund operations.
The Company presently is evaluating the feasibility of opening
or acquiring other warehouse distribution facilities. In addition,
the Company expects to incur capital expenditures during the next
twelve months to upgrade certain Company facilities and maintain and
21
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Results of Operations
-------------------------------------------------------------
and Financial Condition (continued)
-----------------------
Liquidity and Capital Resources (continued)
-------------------------------
upgrade its equipment to support on-going operations. Management does
not expect the cash investment portion of the expenditures to upgrade
facilities and maintain equipment to be material. Capital needs
associated with opening or acquiring any additional facilities cannot
be estimated at this time.
The Company believes its cash on hand, utilization of unused
borrowings under its line of credit, and the proposed increase in its
borrowing arrangement with its commercial lender will provide
sufficient cash to supplement cash shortfalls, if any, from
operations and provide adequate liquidity for the next twelve months
to satisfy the obligations arising from the merger and support the
cash requirements of its capital expenditure programs.
The ability of the Company to maintain and improve its long term
liquidity is dependent upon the Company's ability to successfully (i)
maintain profitable operations; (ii) pay or otherwise satisfy
obligations arising from the merger; and (iii) resolve current
litigation on terms favorable to the Company.
Year 2000 Issues
----------------
In the fourth quarter of 1999 management completed a company
wide program to prepare the Company's computer systems and other
applications for the year 2000. Based on such assessment, the
Company developed and completed a year 2000 compliance plan, under
which all key information systems were tested, and non-compliant
software replaced. All of the Company's systems are now 2000
compliant. In addition, the Company has not experienced any
material difficulties regarding compatibility of customers' and
suppliers' systems which interface with the Company's systems or
could otherwise impact the Company's operations.
The internal staff costs, replacement of systems and consulting
expenses to prepare the systems for the year 2000 were not material
to the Company's operating results, liquidity or financial
position.
22
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
PART II. Other Information
Item 1. Legal Proceedings
-----------------
See notes to Consolidated Financial Statements, Note 10(a), set
forth in Part I Financial Information.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
Exhibit No. Description
----------- -----------
2.1 Agreement and Plan of Merger, by and between Imperial Industries,
Inc. and Imperial Merger Corp. dated October 12, 1998 (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).
3.1 Certificate of Incorporation of the Company, (Form S-4 Registration
Statement, Exhibit 3.1).
3.2 By-Laws of the Company, (Form S-4 Registration Statement, Exhibit
3.2).
4.1 Form of Common Stock Purchase Warrant issued to Auerbach, Pollak &
Richardson, Inc., (Form S-4 Registration Statement, Exhibit 4.1).
4.2 Form of 8% Subordinated Debenture, (Form S-4 Registration Statement,
Exhibit 4.2).
4.3 Warrant Agreements as of June 22, 1988 between the Company and two
of its directors, S. Daniel Ponce and Lisa M. Brock, formerly Lisa
M. Thompson. (Form 8-K dated June 29, 1988, File No. 1-7190,
Exhibit 10.3).
10.1 Consolidating, Amended and Restated Financing Agreement by and
between Congress Financial Corporation and Premix-Marbletite
Manufacturing Co., Acrocrete, Inc. and Just-Rite Supply, Inc. dated
January 28, 2000. (Form 10-K dated December 31, 1999, File No.
1-7190, Exhibit 10-1).
10.2 Employment Agreement dated July 26, 1993 between Howard L. Ehler,
Jr. and the Company. (Form 8-K dated July 26, 1993).
10.3 Employment Arrangement dated July 3, 1996 between Fred H. Hansen and
the Company, (Form S-4 Registration Statement, Exhibit 10.3).
23
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K (continued)
--------------------------------
Exhibit No. Description
----------- -----------
10.4 License Agreement between Bermuda Roof Company and Premix Marbletite
Manufacturing Co., (Form S-4 Registration Statement, Exhibit 10.5).
(b) Reports on Form 8-K
-------------------
On February 3, 2000 the Company filed a Form 8-K Report dated
January 19, 2000 relating to the acquisition of certain of the
assets and business of A&R Supply, Inc., A&R of Foley, Inc. and A&R
of Destin, Inc. On April 3, 2000 the Company filed an Amendment to
the Form 8-K to provide copies of the financial statements for the
acquired companies.
24
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IMPERIAL INDUSTRIES, INC.
By: /S/ Howard L. Ehler, Jr.
--------------------------
Howard L. Ehler, Jr.
Executive Vice President/
Principal Executive Officer
By: /S/ Betty Jean Murchison
--------------------------
Betty Jean Murchison
Principal Accounting Officer/
Assistant Vice President
May 22, 1999
25
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-2000
<PERIOD-END> MAR-31-2000
<CASH> 1,266
<SECURITIES> 0
<RECEIVABLES> 4,137
<ALLOWANCES> (330)
<INVENTORY> 2,955
<CURRENT-ASSETS> 9,032
<PP&E> 3,423
<DEPRECIATION> (1,239)
<TOTAL-ASSETS> 12,572
<CURRENT-LIABILITIES> 6,069
<BONDS> 0
0
0
<COMMON> 85
<OTHER-SE> 3,897
<TOTAL-LIABILITY-AND-EQUITY> 12,572
<SALES> 7,856
<TOTAL-REVENUES> 0
<CGS> 5,263
<TOTAL-COSTS> 2,031
<OTHER-EXPENSES> 9
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 119
<INCOME-PRETAX> 434
<INCOME-TAX> 152
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 282
<EPS-BASIC> .03
<EPS-DILUTED> .03
</TABLE>
