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 June 30, 2000
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------- ----------
Commission file number 1-7190
------------------
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, Pompanoy Beachy 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 August 7, 2000: 9,205,434
Total number of pages contained in this document: 26
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Index
Page No.
--------
Part I. Financial Information
Consolidated Balance Sheets
June 30, 2000 and December 31, 1999 3
Consolidated Statements of Operations
Six Months and Three Months Ended
June 30, 2000 and 1999 4
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2000 and 1999 5-6
Notes to Consolidated Financial Statements 7-18
Management's Discussion and Analysis of Results
of Operations and Financial Conditions 19-23
Part II. Other Information and Signatures
Item I. Legal Proceedings 24
Item 6. Exhibits and Reports on Form 8-K 24-25
Signatures 26
2
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ ------------
(Unaudited)
Assets
------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,386,000 $ 1,119,000
Trade accounts receivable (less
allowance for doubtful accounts of
$304,000 and $254,000 at June 30, 2000,
and December 31, 1999 respectively) 5,237,000 2,677,000
Inventories 4,169,000 2,023,000
Deferred taxes 323,000 634,000
Other current assets 431,000 43,000
Total current assets 11,546,000 6,496,000
Property, plant and equipment, at cost 4,104,000 2,653,000
Less accumulated depreciation (1,202,000) (1,164,000)
------------ ------------
Net property, plant and equipment 2,902,000 1,489,000
------------ ------------
Deferred taxes 699,000 699,000
Excess cost of investment over net
assets acquired 1,520,000 --
------------ ------------
Other assets 124,000 84,000
------------ ------------
$ 16,791,000 $ 8,768,000
============ ============
Liabilities and Stockholders' Equity
-----------------------------------
Current liabilities:
Notes payable $ 3,814,000 $ 1,526,000
Current portion of long-term debt 695,000 164,000
Accounts payable 3,195,000 902,000
Payable for acquisition 441,000 --
Payable to stockholders 48,000 48,000
Accrued expenses and other liabilities 635,000 409,000
------------ ------------
Total current liabilities 8,828,000 3,049,000
------------ ------------
Long-term debt, less current maturities 2,482,000 1,328,000
------------ ------------
Obligation for appraisal rights 877,000 877,000
------------ ------------
Commitments and contingencies -- --
------------ ------------
Stockholders' equity:
Common stock, $.01 par value at June 30, 2000
and December 31, 1999; 20,000,000 shares
authorized; 9,205,434 and 8,230,434 issued
at June 30, 2000 and December 31, 1999,
respectively 92,000 82,000
Additional paid-in-capital 13,915,000 13,414,000
Accumulated deficit (9,403,000) (9,982,000)
------------ ------------
Total stockholder's equity 4,604,000 3,514,000
------------ ------------
$ 16,791,000 $ 8,768,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 19,327,000 $ 11,818,000 $ 11,471,000 $ 6,080,000
Cost of sales 13,420,000 8,065,000 8,157,000 4,062,000
------------ ------------ ------------ ------------
Gross profit 5,907,000 3,753,000 3,314,000 2,018,000
Selling, general and
administrative expenses 4,732,000 2,891,000 2,701,000 1,520,000
------------ ------------ ------------ ------------
Operating income 1,175,000 862,000 613,000 498,000
------------ ------------ ------------ ------------
Other income (expense):
Interest expense (316,000) (187,000) (197,000) (103,000)
Miscellaneous income 31,000 3,000 40,000 1,000
------------ ------------ ------------ ------------
(285,000) (184,000) (157,000) (102,000)
------------ ------------ ------------ ------------
Income before income taxes 890,000 678,000 456,000 396,000
Provision for income taxes (311,000) (237,000) (159,000) (138,000)
------------ ------------ ------------ ------------
Net income $ 579,000 $ 441,000 $ 297,000 $ 258,000
------------ ------------ ------------ ------------
Basic earnings per common share $ .07 $ .05 $ .03 $ .03
------------ ------------ ------------ ------------
Diluted earnings per common share $ .07 $ .05 $ .03 $ .03
------------ ------------ ------------ ------------
Weighted average common shares 8,663,126 8,182,571 8,853,786 8,182,571
------------ ------------ ------------ ------------
Weighted average shares and
potentially dilutive shares 8,899,849 8,344,766 9,073,391 8,357,571
------------ ------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Increase (Decrease) In Cash and Cash Equivalents
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 579,000 $ 441,000
----------- -----------
Adjustments to reconcile net
income to net cash provided by:
Depreciation 189,000 104,000
Amortization 18,000 7,000
Debt issue discount 30,000 30,000
Provision for doubtful accounts 95,000 87,000
Provision for income taxes 311,000 237,000
Compensation expense - issuance of stock 60,000 --
(Gain) loss on disposal of property
and equipment (4,000) 6,000
Other (148,000) --
(Increase) decrease in:
Accounts receivable (2,937,000) (583,000)
Inventory (308,000) (520,000)
Prepaid expenses and other assets (446,000) (286,000)
Increase (decrease) in:
Accounts payable 2,293,000 (62,000)
Payable to stockholders -- (685,000)
Accrued expenses and other liabilities 226,000 77,000
----------- -----------
Total adjustments to net income (621,000) (1,588,000)
----------- -----------
Net cash (used in)
operating activities (42,000) (1,147,000)
----------- -----------
Cash flows from investing activities
Purchase of property, plant
and equipment (230,000) (300,000)
Proceeds from sale of property
and equipment 38,000 21,000
Proceeds from exercise of warrants 20,000 --
Acquisition of businesses (1,540,000) --
Payment on note payable A&R acquisition (150,000) --
Net cash used in investing activities (1,862,000) (279,000)
----------- -----------
Cash flows from financing activities
Increase in notes payable banks - net 2,188,000 1,201,000
Proceeds from issuance of long-term debt 151,000 100,000
Repayment of long-term debt (168,000) (89,000)
----------- -----------
Net cash provided by financing activities 2,171,000 1,212,000
----------- -----------
</TABLE>
5
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Increase (Decrease) In Cash and Cash Equivalents
-continued-
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Net increase (decrease) in cash and
cash equivalents 267,000 (214,000)
Cash and cash equivalents
beginning of period 1,119,000 1,097,000
----------- -----------
Cash and cash equivalents end of period $ 1,386,000 $ 883,000
----------- -----------
Supplemental disclosure of cash
flow information:
Cash paid during the six months for:
Interest $ 260,000 $ 119,000
----------- -----------
Non-cash transactions:
Issuance of an aggregate of 775,000 shares
of common stock related to acquisitions
and to an officer of the Company $ 490,000 $ --
----------- -----------
Issuance of notes related to the
acquisitions $ 950,000 $ --
----------- -----------
Cash due 30 days after closing of
A&R of Mississippi acquisition
("Payable for Acquisition") $ 441,000 $ --
----------- -----------
</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 six months
ended June 30, 2000 are not necessarily indicative of the results that
may be expected for the year ended December 31, 2000. The significant
accounting principles used in the preparation of these interim financial
statements are the same as those used in the preparation of the annual
audited consolidated financial statements. These statements should be
read in conjunction with the financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999.
The preparation of financial statements in conformity with
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, of which $685,000 has been
paid as of June 30, 2000 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 June 30, 2000 and
December 31, 1999, as an estimate for the obligation for appraisal
rights. The Chancery Court may determine fair value is less than, equal
to, or greater than an aggregate of $877,000. Based on advice of counsel
the Company does not expect that there will be a final judicial
determination requiring the Company to make payment to Dissenting
Shareholders' prior to June 30, 2001. 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 sale
of other building materials from other manufacturers. Sales of products
are made to customers primarily in the Southeastern United States
through distributors and company-owned distribution facilities.
(a) Basis of presentation
---------------------
The consolidated financial statements contain the accounts of the
Company and its wholly-owned subsidiaries. All material intercompany
accounts and transactions have been eliminated in consolidation.
(b) Revenue Recognition Policy
--------------------------
Revenue from sale transactions is recorded upon shipment and
delivery of inventory to the customer, net of discounts and allowances.
8
<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 June 30, 2000 and
December 31, 1999 are short term time deposits of $280,000 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) 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 June 30, 2000 and December 31, 1999 inventories consist of:
2000 1999
---------- ----------
Raw materials $ 491,000 $ 525,000
Finished goods 3,463,000 1,276,000
Packaging materials 215,000 222,000
---------- ----------
$4,169,000 $2,023,000
---------- ----------
(5) Notes Payable
-------------
At June 30, 2000, notes payable represent amounts outstanding under a
$5,500,000 line of credit (increased to $6,000,000 on July 21, 2000), from
a commercial lender to the Company's subsidiaries and $100,000 in
unsecured notes payable issued in connection with the January 1, 2000
purchase of three building materials distributors.
10
<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% (10% at June 30, 2000). At
June 30, 2000, the line of credit limit available for borrowing based on
eligible receivables and inventory was $5,500,000, of which $3,714,000 had
been borrowed. The average month-end amounts outstanding for the six month
periods ended June 30, 2000 and 1999 were $2,491,000, and $1,175,000,
respectively.
(6) Long-Term Debt and Current Installments of Long-Term Debt
---------------------------------------------------------
Included in long-term debt at June 30, 2000, are three mortgage loans,
collateralized by real property, in the aggregate amount of $604,000, less
current installments aggregating $84,000.
In connection with the Merger described in Note 2, the Company issued
8% subordinated debentures with a face amount value of $985,000 effective
December 31, 1998. Each $8.00 debenture was discounted to a value of $6.56
at December 31, 1998 using an effective interest rate of 16%. The
aggregate carrying value of the debentures at June 30, 2000 is $896,000.
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 six months ended June 30, 2000, the Company acquired
certain assets and assumed certain liabilities of seven building materials
distributors in which it issued unsecured promissory notes of $850,000 as
partial consideration. At June 30, 2000, $588,000 was classified as long-
term debt, and $262,000 was classified as current portion of long-term
debt. These obligations accrue interest at 8 per cent per annum.
Other long-term debt in the aggregate amount of $827,000, less
current installments of $349,000, 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 June 30, 2000, the deferred tax asset of $1,022,000 consists of
tax effected net operating loss carryforwards of $2,655,000, less a
valuation allowance of $1,633,000. Net operating losses of $4,823,000
11
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(7) Income Taxes (continued)
------------
expire in 2000. The remaining balance of $2,761,000 expires in
varying amounts through 2009.
In the six months ended June 30, 2000 and 1999, the Company
recognized income tax expense of $311,000 and $237,000, respectively,
representing income before income taxes at the statutory rate of 35%.
(8) Capital Stock
-------------
(a) Common Stock
------------
At June 30, 2000, the Company had outstanding 9,205,434 shares of
common stock with a $.01 par value per share ("Common Stock"). The holders
of common stock are entitled to one vote per share on all matters. In the
event of liquidation, holders of common stock are entitled to share
ratably in all the remaining assets of the Company, if any, after
satisfaction of the liabilities of the Company and the preferential rights
of the holders of outstanding preferred stock, if any.
In the six months ended June 30, 2000, the Company issued an
aggregate of 675,000 shares of common stock as partial consideration for
the purchase of certain assets of seven building materials distributors,
an additional 100,000 shares were issued to an officer as compensation for
services rendered, and 200,000 shares in connection with the exercise of
outstanding stock purchase warrants. In 1999, the Company issued 47,863
treasury shares to directors and an officer as compensation for services
rendered.
(b) Preferred Stock
---------------
The authorized preferred stock of the Company consists of 5,000,000
shares, $.01 par value per share. The preferred stock is issuable in
12
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(8) Capital Stock (continued)
-------------
(b) Preferred Stock (continued)
---------------
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 June 30, 2000 and December 31, 1999, there were no shares of preferred
stock outstanding.
(c) Warrants
--------
At June 30, 2000, the Company had warrants outstanding to purchase
150,000 shares of the Company's common stock. The Company issued the
warrants in January 1999 to its investment banker for financial advisory
services in connection with the Merger (the "Investment Banker Warrants").
Each Investment Banker Warrant entitles the holder to purchase one share
at $.38 per share until December 31, 2003. The Company estimated the fair
value of the Investment Banker Warrants at $22,000 based on a
Black-Scholes pricing model and the following assumptions: volatility of
45%, risk-free rate of 4.6%, expected life of four years and a dividend
rate of 0%.
(d) Stock Options
-------------
In December 1999, the Board of Directors adopted the Director's Stock
Option Plan and the 1999 Employee Stock Option Plan (collectively, the
"1999 Plans"). The 1999 Plans are administered by the Compensation and
Stock Option Committee. A total of 600,000 and 200,000 shares are reserved
for issuance under the Employee and Director Plans, respectively. Adoption
of the 1999 Plans are subject to stockholder approval.
On April 25, 2000, the Company granted 30,000 options under the 1999
Employee Stock Option Plan. The exercise price for such options will be
equal to the fair value of the common stock on the date the Employee Stock
Option Plan is approved by the stockholders. As of June 30, 2000, the
Company has outstanding options to purchase 165,000 shares under the
Employee Stock Option Plan and 80,000 shares under the Director's Stock
Option Plan at exercise prices which will be equal to the fair value of
the common stock on the date of stockholder approval of such 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.
13
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(9) Earnings Per Common Share
-------------------------
The Company has adopted Statement of Financial Accounting Standards
No. 128, "Earnings Per Share" ("FAS 128"). The following is a
reconciliation of the numerator and denominator of the basic and diluted
per share computations (in thousands, except per share data):
Six Months Ended Three Months Ended
June 30, June 30,
--------------- ----------------
2000 1999 2000 1999
---- ---- ---- ----
BASIC:
Net income $579 $441 $297 $258
Average common shares outstanding 8,663 8,183 8,854 8,183
Basic per share amount $.07 $.05 $.03 $.03
DILUTED:
Net income $579 $441 $297 $258
Average common shares outstanding 8,663 8,183 8,854 8,183
Dilutive effect of outstanding
warrants 237 162 219 174
Average shares outstanding,
assuming dilution 8,900 8,345 9,073 8,357
Diluted per share amount $.07 $.05 $.03 $.03
(10) Commitments and Contingencies
-----------------------------
(a) Contingencies
-------------
As of August 11, 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
under a reservation of rights and are providing a defense for 36 of these
claims. Acrocrete 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 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.
14
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(10) Commitments and Contingencies (continued)
-----------------------------
On June 15, 1999, Premix was served with a complaint captioned Mirage
Condominium Association, Inc. v. Premix Marbletite Manufacturing Co., et
al., in Miami-Dade County Florida. The lawsuit raises a number of
allegations against twelve separate defendants involving alleged
construction defects. Plaintiff has alleged only one count against Premix,
which claims that certain materials, purportedly provided by Premix to the
Developer/ Contractor and used to anchor balcony railings to the structure
were defective. The Company's insurance carriers have 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 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 $786,000 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 building materials distributors
in the first six months of 2000, the Company's wholly-owned subsidiary,
Just-Rite Supply, Inc, entered into employment agreements for a three year
period, with Ronald A. Johnson and Dennis L. Robertson to serve as Vice
Presidents and General Managers of Just-Rite. Mr. Johnson and Mr. Robertson
receive an annual base salary of $100,000 and $130,000, respectively, and
are entitled to incentive compensation based on the performance of certain
distributors. Also, each person is entitled to the use of a Company
vehicle, as well as certain other benefits, such as health and disability
insurance.
15
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(11) Recent Acquisitions
-------------------
During 2000, the Company consummated four transactions for the
purchase of seven building material distributors. These acquisitions have
been accounted for under the purchase method of accounting and the results
of the acquired distributors have been consolidated since the respective
acquisition dates.
Effective January 1, 2000, the Company acquired certain assets and
assumed certain liabilities of three building materials distributors
located in Pensacola and Destin, Florida and Foley, Alabama.
The three distributors ("A&R"), which had been under common
ownership, were acquired for $1,580,000 in a single transaction that was
accounted for under the purchase method of accounting.
The components of the purchase price were as follows (in thousands):
Cash $ 471
Transfer of other assets 327
Common stock issued
(225,000 shares @ $.64/share) 144
Three month unsecured note issued 150
One year unsecured note issued 100
Secured debt assumed 388
------
$1,580
------
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 a
building materials distributor ("Panhandle") located in Panama City Beach,
Florida, for $386,000.
The components of the purchase price were as follows (in thousands):
Cash $ 219
Two year unsecured note issued 125
Common stock issued
(50,000 shares @ $.84/share) 42
----
$386
----
The purchase price was allocated to the acquired assets and
liabilities based on their fair values on the acquisition date with the
excess of $167,000 being recorded as goodwill, which is being amortized
using the straight line method over 40 years.
16
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(11) Recent Acquisitions (continued)
-------------------
Effective April 1, 2000 the Company acquired certain assets and
liabilities of a building materials distributor ("Tallahassee") located in
Tallahassee, Florida for $564.000.
The components of the purchase price were as follows: (in thousands):
Cash $286
Issuance of unsecured note 125
Secured debt assumed 153
----
$564
----
The purchase price was allocated to the acquired assets and
liabilities based on a preliminary estimate of their fair value on the
acquisition date with the excess of $125,000 being recorded as goodwill,
which is being amortized using the straight line method over 40 years. The
purchase price allocation will be adjusted if necessary based upon a final
determination of the fair value of the net assets acquired.
Effective May 1, 2000, the Company acquired certain assets and
liabilities of two related distributors ("A&R of Mississippi"), with
locations in Gulfport, Hattiesburg and Pascagoula, Mississippi.
The components of the purchase price were as follows (in thousands):
Cash ($564,000 at closing, $441,000
paid 30 days after closing) $1,005
Transfer of other assets 122
Three year unsecured note issued 600
Secured debt assumed 310
Common stock issued
(400,000 shares @ $.61/share) 244
------
$2,281
------
The purchase price was allocated to the acquired assets and
liabilities based on a preliminary estimate of their fair value on the
acquisition date with the excess of $836,000 being recorded as goodwill,
which is being amortized using the straight line method over 40 years. The
final purchase price allocation will be adjusted if necessary based upon a
final determination of the fair value of the net assets acquired.
Following are the unaudited pro-forma results of operations as if
the January 1, March 1, April 1, and May 1, 2000 purchases had occurred on
17
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(11) Recent Acquisitions (continued)
-------------------
January 1, 1999 (in thousands, except per share and share amounts):
Six Months Ended Six Months Ended
June 30,2000 June 30,1999
------------ ------------
Net sales $23,466 $19,226
Net income $ 528 $ 552
Earnings per common share:
Basic $ .06 $ .06
Diluted $ .06 $ .06
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 June 30, 2000, were as follows (in
thousands):
Fair value of assets and liabilities acquired:
Inventories $1,838
Property plant and equipment 1,444
Other assets (Excess cost of investment
over net assets acquired) 1,529
Liabilities (Assumed) (851)
------
3,960
Less:
Debt issued (1,100)
Common Stock issued (430)
Cash paid 30 days after closing (441)
Adjustment for accounts receivable
due Company (449)
------
Net cash paid as reflected in the
Statement of Cash Flows $1,540
------
18
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Results of Operations
-------------------------------------------------------------
and Financial Condition
-----------------------
General
-------
The Company's business is related primarily to the level of
construction activity in the Southeastern United States, particularly
the states of Florida, Georgia, Mississippi and Alabama. The majority
of the Company's products are sold to building materials dealers
located principally in Florida, Georgia, Mississippi 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
---------------------
Six Months and Three Months Ended June 30,2000 Compared to 1999
---------------------------------------------------------------
Net sales for the six months and three months ended June 30,
2000 increased $7,509,000 and $5,391,000, or approximately 63.5% and
88.7%, compared to the same periods in 1999. The increase in sales
was derived from the sales of building materials generated by
distributors acquired at various dates during the six months ended
June 30, 2000. These sales primarily consisted of building materials
purchased from other manufacturers, principally gypsum, roofing,
insulation, metal studs, masonry and stucco products.
19
<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)
---------------------
Six Months and Three Months Ended June 30, 2000 Compared to 1999
----------------------------------------------------------------
(continued)
Gross profit as a percentage of net sales for the six months and
three months of 2000 was approximately 30.6% and 28.9%, compared to
31.8% and 33.2%, in the comparable periods in 1999. The decrease in
gross profit margins was principally due to a greater proportion of
consolidated sales represented by lower gross margin products,
primarily 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. In addition, competitive conditions
prevalent in selected markets for certain products manufactured by
other companies sold through the Company's distribution facilities
had an adverse impact on gross profit margins during the second
quarter of 2000. The effect of the sale of lower gross profit margin
products through the Company's distribution facilities more than
off-set the gains in gross profit margins derived from improvements
in manufacturing efficiency.
Selling, general and administrative expenses as a percentage of
net sales for the six months and three months of 2000 was
approximately 24.4% and 23.5%, respectively, compared to 24.4% and
25.0%, for the comparable periods last year. Selling, general and
administrative expenses increased $1,841,000 and $1,181,000 or
approximately 64% and 78%, compared to the same periods in 1999. The
increase in expenses was primarily due to additional operating costs
related to the building materials distributors acquired in the first
six months of 2000.
Interest expense increased $129,000 and $94,000, or
approximately 69% and 91%, for the six months and three months ended
June 30, 2000, compared to the same periods last year. The increase
in interest expense was principally due to additional borrowings
related to the purchase and operations of the acquired distributors.
In the six months and three months ended June 30, 2000 and 1999,
the Company recognized income tax expense at the federal statutory
rate of 35%. Based on the Company's net operating loss tax
carry-forwards, the Company is not expected to pay federal income
taxes for the current year.
As a result of the above factors, the Company derived net income
of $579,000 and $297,000, or $.07 and $.03 per fully diluted share,
respectively, for the six months and three months ended June 30,
2000, compared to $441,000 and $258,000, or $.05 and $.03 per share,
in the 1999 periods.
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
-------------------------------
At June 30, 2000, the Company had working capital of
approximately $2,718,000 compared to working capital of $3,447,000 at
December 31, 1999. As of June 30, 2000, the Company had cash and cash
equivalents of $1,386,000. The primary reduction in working capital
was associated with the purchase of seven building materials
distributors in the six months ended June 30, 2000.
The Company's principal source of short-term liquidity is existing
cash on hand and the utilization of a $6,000,000 line of credit with
a commercial lender. The maturity date of the line of credit is June
19, 2001. 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 June 30, 2000,
$3,714,000 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 $5,500,000 at
June 30, 2000.
Trade accounts receivable represent amounts due from sub-
contractors, contractors and building materials dealers located
principally in Florida and Georgia who have purchased products on an
unsecured open account basis and through Company owned warehouse
distribution outlets. As of June 30, 2000 the Company owned and
operated thirteen warehouse distribution outlets. Accounts
receivable, net of allowance, at June 30, 2000 was $5,237,000
compared to $2,677,000 at December 31, 1999. The increase in
receivables of $2,560,000, or approximately 95.6% 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 June 30, 2000, the Company had paid $684,000 of such
cash amount. Amounts payable to such shareholders at June 30, 2000,
results from their non-compliance with the conditions for payments.
Holders representing 81,100 preferred shares have elected dissenters'
rights, which, under Delaware law, would require cash payments equal
to the fair value of their stock, as of the date of the merger, to be
determined in accordance with Section 262 of the Delaware General
Corporation Law. The Company is unable to determine the fair value of
the preferred stock owned by such dissenting shareholders, but
recorded a liability for each share
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)
-------------------------------
based on the fair value of $2.25 in cash, an $8.00 Subordinated
Debenture and five shares of the Company's common stock since that is
the consideration the dissenting holders would receive if they did
not perfect their dissenters' rights under the law. Dissenting
stockholders filed a petition for appraisal rights in the Delaware
Chancery Court on April 23, 1999.
Effective January 1, 2000, the Company acquired certain assets
and assumed certain liabilities of three building materials
distributors held under common ownership in a single transaction
accounted for as a purchase acquisition. The total consideration
was $1,580,000 consisting of $798,000 in cash, unsecured promissory
notes of $150,000 due 90 days from closing and $100,000 due one year
from closing. The Company also assumed $388,000 of the acquired
companies' secured debt and issued 225,000 shares of the Company's
unregistered common stock valued at $.64 per share.
Effective March 1, 2000, the Company acquired certain
assets of another building materials distributor accounting for it
under the purchase method of accounting. Total consideration for the
purchase was $386,000, which included 50,000 shares of the Company's
unregistered common stock valued at $42,000 ($.84 per share). The
Company paid cash of $219,000 and issued an unsecured promissory note
of $125,000 payable over two years from closing.
Effective April 1, 2000, the Company acquired certain assets and
assumed certain liabilities of another unrelated building materials
distributor accounting for it under the purchase method of
accounting. Total consideration for the purchase price was $564,000,
consisting of $286,000 in cash, an unsecured promissory note of
$125,000, with $62,500 due and payable on April 10, 2001 and 2002,
and assumed approximately $153,000 of the acquired company's secured
debt.
Effective May 1, 2000, the Company acquired certain assets and
assumed certain liabilities of two additional building materials
distributors held under common ownership in a single transaction
accounted for as a purchase transaction. The total consideration for
the purchase was $2,281,000, which included 400,000 shares of the
Company's unregistered common stock valued at $244,000 ($.61 per
share). The Company paid cash of $564,000 at closing and $441,000 30
days after closing, transferred $122,000 of assets, issued an
unsecured promissory note of $600,000 payable over three years from
date of closing, and assumed approximately $310,000 of the acquired
companies' secured debt.
22
<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)
-------------------------------
The consummation of these acquisitions and the working capital
required to fund operations at the acquired locations are the primary
contributors to the $2,288,000 increase in the amount outstanding
under the Company's line of credit.
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
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 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 year 2000
compliant. In addition, the Company has not experienced any
material difficulties regarding compatibility of customers' and
suppliers' systems which interface with the Company's systems or
could otherwise impact the Company's operations.
The internal staff costs, replacement of systems and consulting
expenses to prepare the systems for the year 2000 were not material
to the Company's operating results, liquidity or financial
position.
23
<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).
2.3 Asset purchase Agreement dated June 5, 2000 between Just-Rite
Supply, Inc., Imperial Industries, Inc., A&R Supply of
Mississippi, Inc., A&R Supply of Hattiesburg, Inc., Ronald A.
Johnson, Dennis L. Robertson and Richard Williamson, (Form 8-k
dated June 13, 2000, File No. 1-7190, Exhibit 2.1.
3.1 Certificate of Incorporation of the Company, (Form S-4
Registration Statement, Exhibit 3.1).
3.2 By-Laws of the Company, (Form S-4 Registration Statement, Exhibit
3.2).
4.1 Form of Common Stock Purchase Warrant issued to Auerbach, Pollak &
Richardson, Inc., (Form S-4 Registration Statement, Exhibit 4.1).
4.2 Form of 8% Subordinated Debenture, (Form S-4 Registration
Statement, Exhibit 4.2).
10.1 Consolidating, Amended and Restated Financing Agreement by and
between Congress Financial Corporation and Premix-Marbletite
Manufacturing Co., Acrocrete, Inc. and Just-Rite Supply, Inc.
dated January 28, 2000. (Form 10-K dated December 31, 1999, File
No. 1-7190, Exhibit 10-1).
10.2 Employment Agreement dated July 26, 1993 between Howard L. Ehler,
Jr. and the Company. (Form 8-K dated July 26, 1993).
24
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K (continued)
--------------------------------
Exhibit No. Description
----------- -----------
10.3 Employment Arrangement dated July 3, 1996 between Fred H. Hansen
and the Company, (Form S-4 Registration Statement, Exhibit 10.3).
10.4 License Agreement between Bermuda Roof Company and Premix
Marbletite Manufacturing Co., (Form S-4 Registration Statement,
Exhibit 10.5).
(b) Reportson Form 8-K
On June 23, 2000, the Company filed a Form 8-K Report dated
June 13, 2000 relating to the acquisition of certain of the assets
and business of A&R Supply of Mississippi, Inc. and A&R Supply of
Hattiesburg, Inc.
25
<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
August 18, 2000
26
