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, 2004
-----------------------------
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 65-085463
------------------------------- -------------------
(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 by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
Indicate the number of shares of Imperial Industries, Inc. Common Stock
($.01 par value) outstanding as of August 2, 2004: 9,327,934
Total number of pages contained in this document: 33
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Page No.
-------
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 2004 and December 31, 2003 3
Consolidated Statements of Operations
Six Months and Three Months Ended June 30,
2004 and 2003 4
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2004 and 2003 5
Notes to Consolidated Financial Statements 7-17
Item 2. Management's Discussion of Financial Condition
and Results of Operations 18-24
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 25
Item 4. Controls and Procedures 26
Part II. OTHER INFORMATION AND SIGNATURES
Item 1. Legal Proceedings 27
Item 4. Submission of Matters to a Vote of
Security Holders 27
Item 6. Exhibits and Reports on Form 8 - K 28
Signatures 30
2
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, December 31,
2004 2003
Assets ------------ ------------
------ (Unaudited)
Current assets:
Cash and cash equivalents $ 859,000 $ 923,000
Restricted cash 844,000 947,000
Trade accounts receivable (less
allowance for doubtful accounts of
$720,000 and $556,000 at June 30,
2004 and December 31, 2003, respectively) 7,712,000 5,702,000
Inventories 4,891,000 4,290,000
Deferred income taxes 84,000 157,000
Other current assets 522,000 444,000
------------ ------------
Total current assets 14,912,000 12,463,000
------------ ------------
Property, plant and equipment, at cost 4,478,000 4,228,000
Less accumulated depreciation (2,535,000) (2,397,000)
------------ ------------
Net property, plant and equipment 1,943,000 1,831,000
------------ ------------
Deferred income taxes 430,000 470,000
------------ ------------
Other assets 181,000 154,000
------------ ------------
$ 17,466,000 $ 14,918,000
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable $ 5,399,000 $ 6,470,000
Current portion of long-term debt 476,000 425,000
Accounts payable 4,021,000 2,066,000
Obligation for Appraisal Rights -- 568,000
Payable to stockholders 256,000 261,000
Accrued expenses and other liabilities 919,000 478,000
Income taxes payable 235,000 22,000
------------ ------------
Total current liabilities 11,306,000 10,290,000
------------ ------------
Long-term debt, less current maturities 1,018,000 848,000
------------ ------------
Commitments and contingencies (Note 10) -- --
------------ ------------
Stockholders' equity:
Preferred Stock, $.01 par value; 5,000,000
shares authorized; none issued -- --
Common stock, $.01 par value; 40,000,000
shares authorized; 9,320,434 issued at
June 30, 2004 and 9,235,434 at December 31,
2003, respectively 93,000 92,000
Additional paid-in-capital 13,947,000 13,924,000
Accumulated deficit (8,898,000) (10,236,000)
------------ ------------
Total stockholders' equity 5,142,000 3,780,000
------------ ------------
$ 17,466,000 $ 14,918,000
============ ============
The accompanying notes are an integral part of the consolidated
financial statements.
3
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
Six Months Ended Three Months Ended
June 30, June 30,
------------------------------ ------------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net Sales $ 26,718,000 $ 19,160,000 $ 14,795,000 $ 10,198,000
Cost of Sales 18,215,000 13,189,000 10,005,000 6,951,000
------------ ------------ ------------ ------------
Gross profit 8,503,000 5,971,000 4,790,000 3,247,000
Selling, general and
administrative expenses 6,353,000 5,669,000 3,360,000 2,922,000
------------ ------------ ------------ ------------
Operating income 2,150,000 302,000 1,430,000 325,000
------------ ------------ ------------ ------------
Other income (expense):
Interest expense (225,000) (210,000) (110,000) (113,000)
Miscellaneous income 32,000 95,000 5,000 29,000
------------ ------------ ------------ ------------
(193,000) (115,000) (105,000) (84,000)
------------ ------------ ------------ ------------
Income before taxes 1,957,000 187,000 1,325,000 241,000
Income tax expense (621,000) (71,000) (351,000) (92,000)
------------ ------------ ------------ ------------
Net income $ 1,336,000 $ 116,000 $ 974,000 $ 149,000
============ ============ ============ ============
Basic income per common share $ .14 $ .01 $ .10 $ .02
============ ============ ============ ============
Diluted income per common share $ .14 $ .01 $ .10 $ .02
============ ============ ============ ============
Weighted average shares outstanding 9,257,110 9,235,434 9,278,786 9,235,434
============ ============ ============ ============
Weighted average shares and
potentially dilutive shares outstanding 9,537,729 9,235,434 9,625,400 9,235,434
============ ============ ============ ============
The accompanying notes are an integral part of the consolidated
financial statements.
4
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six Months Ended
June 30,
--------------------------
2004 2003
----------- -----------
(Unaudited)
Cash flows from operating activities:
Net income $ 1,336,000 $ 116,000
----------- -----------
Adjustments to reconcile net income to net cash provided by:
Depreciation 243,000 219,000
Amortization 61,000 19,000
Provision for doubtful accounts 345,000 111,000
Provision for deferred income tax 133,000 71,000
Provision for writedown of assets 6,000 --
Gain on disposal of fixed assets (7,000) (43,000)
Gain on disposal of assets held for sale (1,000) --
(Increase) decrease in:
Accounts receivable (2,355,000) (766,000)
Inventory (601,000) (425,000)
Other assets (165,000) 81,000
Increase in:
Accounts payable 1,955,000 531,000
Income taxes payable 193,000 --
Accrued expenses and other liabilities 436,000 95,000
----------- -----------
Total adjustments to net income 243,000 (107,000)
----------- -----------
Net cash provided by
operating activities: 1,579,000 9,000
----------- -----------
Cash flows from investing activities:
Purchases of property, plant
and equipment (374,000) (279,000)
Decrease in restricted cash 103,000 3,000
Proceeds received from disposal of assets
held for sale 14,000 --
Proceeds received from sale of fixed assets 8,000 19,000
Proceeds received from insurance settlement -- 47,000
----------- -----------
Net cash used in investing activities (249,000) (210,000)
----------- -----------
Cash flows from financing activities
(Decrease) Increase in notes payable
banks - net (1,071,000) 1,136,000
Proceeds from issuance of long-term debt 392,000 203,000
Payment of Obligation for Appraisal Rights (568,000) (973,000)
Repayment of long-term debt (171,000) (437,000)
Proceeds received from exercise of stock option 24,000 --
----------- -----------
Net cash used in financing activities (1,394,000) (71,000)
=========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
5
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
-continued-
Six Months Ended
June 30,
--------------------------
2004 2003
----------- -----------
(Unaudited)
Net decrease in cash and
cash equivalents (64,000) (272,000)
Cash and cash equivalents beginning of period 923,000 896,000
----------- -----------
Cash and cash equivalents end of period $ 859,000 $ 624,000
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the six months for:
Interest $ 222,000 $ 217,000
=========== ===========
Income taxes $ 291,000 $ --
=========== ===========
Non-cash transactions:
Capital lease obligations $ 72,000 $ 132,000
=========== ===========
Asset acquisitions financed $ 227,000 $ 71,000
=========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
6
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(1) Interim Financial Statements
----------------------------
The accompanying unaudited consolidated financial statements have
been prepared in accordance with the instructions to Form 10-Q and do
not include all of the information and footnotes required by auditing
standards generally accepted in the United States of America for
complete financial statements. In the opinion of management, all
adjustments considered necessary for a fair presentation have been
included. Operating results for the six months ended June 30, 2004 are
not necessarily indicative of the results that may be expected for the
year ended December 31, 2004. The significant accounting principles
used in the preparation of these unaudited interim consolidated
financial statements are the same as those used in the preparation of
the annual audited consolidated financial statements. These statements
should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report on
Form 10-K for the year ended December 31, 2003.
(2) Description of Business and Summary of Significant Accounting Policies
----------------------------------------------------------------------
The Company and its subsidiaries are primarily involved in the
manufacture and sale of exterior and interior finish wall coatings and
mortar products for the construction industry, as well as the sale of
building materials from other manufacturers. Sales of the Company's
products are made to customers located primarily in Florida and other
parts of the Southeastern United States through distributors and
Company-owned distribution facilities.
a) Basis of Presentation
---------------------
The consolidated financial statements herein contain the accounts of
the Company and its wholly-owned subsidiaries. All material
intercompany accounts and transactions have been eliminated in
consolidation. For the six month periods ended June 30, 2004 and 2003,
the Company has determined that it continues to operate in a single
operating segment.
b) Concentration of Credit Risk
----------------------------
Concentration of credit risk with respect to trade accounts
receivable is limited due to the large number of entities comprising
the Company's customer base. Trade accounts receivable represent
amounts due from building materials dealers, contractors and
sub-contractors, located principally in the Southeastern United States
who have purchased products on an unsecured open account basis.
7
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(2) Description of Business and Summary of Significant Accounting Policies
----------------------------------------------------------------------
(continued)
The Company places its cash with commercial banks. At June 30, 2004,
the Company had cash balances with banks in excess of Federal Deposit
Insurance Corporation insured limits. Management believes the credit
risk related to these deposits is minimal.
c) Inventories
-----------
Inventories are stated at the lower of cost or market (net
realizable value), on a first-in, first-out basis. Finished goods
include the cost of raw materials, freight in, direct labor and
overhead.
d) Property, plant and equipment
-----------------------------
Property, plant and equipment is stated at cost, less accumulated
depreciation. Depreciation is computed on the straight-line basis over
the estimated useful lives of the depreciable assets. Expenditures for
maintenance and repairs are charged to expense as incurred, while
expenditures which extend the useful life of assets are capitalized.
Differences between the proceeds received on the sale of property,
plant and equipment and the carrying value of the assets on the date of
sale is credited to or charged against net income, as applicable.
e) Income Taxes
------------
The Company utilizes the liability method for determining its income
taxes. Under this method, deferred taxes and liabilities are recognized
for the expected future tax consequences of events that have been
recognized in the consolidated financial statements or income tax
returns. Deferred tax assets and liabilities are measured using the
enacted tax rates expected to apply to taxable income in the years in
which temporary differences are expected to be realized or settled;
valuation allowances are provided against tax assets that are not
likely to be realized.
f) Earnings per share of stock
---------------------------
Basic earnings per share is computed by dividing net income by the
weighted-average number of shares of common stock outstanding each
period. Diluted earnings per share is computed by dividing net income
by the weighted-average number of shares of common stock and common
stock equivalents outstanding during each period.
g) Cash and cash equivalents
-------------------------
The Company has defined cash and cash equivalents as those highly
liquid investments with original maturities of three
8
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(2) Description of Business and Summary of Significant Accounting Policies
----------------------------------------------------------------------
(continued)
g) Cash and cash equivalents (continued)
-------------------------
months or less, and are stated at cost. Included in cash and cash
equivalents at June 30, 2004 and December 31, 2003 are short-term time
deposits of $124,000 and $123,000, respectively.
h) Restricted cash
---------------
At June 30, 2004 and December 31, 2003 the Company has $844,000 and
$947,000,respectively, of customer payments that are required to be
remitted to the Company's commercial lender upon their bank clearance
under the terms of the Company's line of credit. Such amounts, when
applied, will reduce the outstanding balance on the line of credit,
resulting in greater borrowing availability.
i) Revenue recognition policy
--------------------------
Revenue from sales transactions, net of discounts and allowances, is
recorded upon delivery of inventory to the customer.
j) Purchase rebates
----------------
The Company has an arrangement with a buying group organization
providing for inventory purchase rebates ("vendor rebates") based
principally upon achievement of certain volume purchasing levels during
the year. The Company accrues the estimated receipt of vendor rebates
as part of its cost of sales for products sold based on progress
towards earning the vendor rebates taking into consideration cumulative
purchases throughout the year. Substantially all vendor rebate
receivables are collected within three months immediately following
fiscal year-end. While management believes the Company will continue to
receive consideration from the buying group in 2004 and thereafter,
there can be no assurance that the buying group will continue to
provide a comparable amount of vendor rebates in the future.
k) 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.
9
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(2) Description of Business and Summary of Significant Accounting Policies
----------------------------------------------------------------------
(continued)
k) Stock based compensation (continued)
------------------------
Pursuant to the transition rules under SFAS No. 123, as amended by
SFAS No. 148 "Accounting for Stock-Based Compensation Transition and
Disclosure" the Company has elected to use the intrinsic value method
of accounting for employee awards, stock based compensation awards.
Accordingly, the Company has not recognized compensation expense for
its employee stock options.
The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair
value-recognition provisions of Financial Accounting Standards Board
(FASB) Statement No. 123, Accounting for Stock-Based Compensation, to
stock-based employee compensation:
Six Months Ended Three Months Ended
June 30, June 30,
------------------------------ ----------------------------
2004 2003 2004 2003
------------- ----------- ----------- -----------
Net income available to
common stockholders, as reported $ 1,336,000 $ 116,000 $ 974,000 $ 149,000
Deduct: Total stock-based employee
compensation expense determined
under fair-value-based method for
all awards, net of related tax effects (1,000) (3,000) (1,000) (3,000)
------------- ----------- ----------- -----------
Pro-forma net income $ 1,335,000 $ 113,000 $ 973,000 $ 146,000
============= =========== =========== ===========
Income per share:
Basic as reported $ .14 $ .01 $ .10 $ .02
Basic pro-forma $ .14 $ .01 $ .10 $ .02
Diluted as reported $ .14 $ .01 $ .10 $ .02
Diluted pro-forma $ .14 $ .01 $ .10 $ .02
l) Accounting estimates
--------------------
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America, requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
10
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(2) Description of Business and Summary of Significant Accounting Policies
----------------------------------------------------------------------
(continued)
m) Fair Value of Financial Instruments (continued)
-----------------------------------
The carrying amount of the Company's financial instruments,
principally notes payable, long-term debt and obligation for appraisal
rights, approximates fair value based on discounted cash flows because
the borrowing rates are similar to the current rates offered to the
Company.
(3) Trade Accounts Receivable
-------------------------
At June 30, 2004, accounts aggregating to $690,000, or approximately
8.2% of total gross trade accounts receivable, were deemed to be
ineligible for borrowing purposes under the Company's borrowing
agreement with its commercial lender, compared to $537,000, or
approximately 8.6%, of total gross trade receivables outstanding at
December 31, 2003. (See Note (5)- Notes Payable). The allowance for
doubtful accounts at June 30, 2004 of $720,000 is considered sufficient
to absorb any losses which may arise from uncollectible accounts
receivable.
(4) Inventories
-----------
At June 30, 2004 and December 31, 2003 inventories consisted of:
2004 2003
---- ----
Raw Materials $ 571,000 $ 667,000
Finished Goods 4,021,000 3,353,000
Packaging materials 299,000 270,000
---------- ----------
$4,891,000 $4,290,000
========== ==========
(5) Notes Payable
-------------
At June 30, 2004 and December 31, 2003, notes payable represent
amounts outstanding under a $7,000,000 line of credit from a commercial
lender to the Company's subsidiaries. The line of credit is
collateralized by the subsidiaries' accounts receivable and inventory,
bears interest at prime rate plus 1/2% (4.50% at June 30, 2004),
expires June 19, 2005, and is subject to annual renewal.
At June 30, 2004, the line of credit limit available for borrowing
based on eligible receivables and inventory aggregated $7,000,000, of
which $5,399,000 was outstanding. The average amounts outstanding for
the six months periods ended June 30, 2004 and 2003 were $5,912,000 and
$5,130,000, respectively.
11
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(6) Long-Term Debt and Current Installments of Long-Term Debt
---------------------------------------------------------
Included in long-term debt at June 30, 2004, are four mortgage
loans, collateralized by real property, in the aggregate amount of
$667,000, less current installments aggregating $50,000.
During 2000, the Company acquired certain assets and assumed certain
liabilities of seven building materials distributors. In connection
with certain of these acquisitions, the Company issued uncollateralized
8% promissory notes in the aggregate amount of $850,000 as partial
consideration. At June 30, 2004, all but one remaining note payable of
$128,000 was paid and the remaining note payable was classified as a
current liability.
Other long-term debt in the aggregate amount of $699,000, less
current installments of $298,000, relates principally to equipment
financing. The notes bear interest at various rates ranging from 3.10%
to 11.4%.
(7) Income Taxes
------------
At June 30, 2004, the net deferred tax asset of approximately
$514,000 consisted of the tax effect of goodwill written off during
2002.
In the six months and three months ended June 30, 2004, the Company
recognized income tax expense of $621,000 and $351,000, compared to a
tax expense of $71,000 and $92,000, respectively for the same periods
in 2003.
(8) Capital Stock
-------------
(a) Common Stock
------------
At June 30, 2004 and December 31, 2003, the Company had outstanding
9,320,434 and 9,235,434 shares of common stock, respectively, 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 any outstanding preferred stock.
(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
12
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(8) Capital Stock (continued)
------------
(b) Preferred Stock (continued)
---------------
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, 2004 and
December 31, 2003, there were no shares of preferred stock outstanding.
(c) Stock Option Plans
------------------
The Company has two stock option plans, the Directors' Stock Option
Plan (the "Directors Plan") and the 1999 Employee Stock Option Plan
(the "Employee 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 Common Stock at the grant date. Options
granted under the 1999 Plans have a term of up to 10 years and are
exercisable six months following the grant date subject to vesting
requirements that may be imposed on individual grants. The 1999 Plans
are administered by the Board's Compensation and Stock Option Committee
(the "Committee"), which is comprised of three outside directors. The
Committee determines who is eligible to participate and the number of
shares for which options are to be granted. A total of 900,000 and
400,000 shares are reserved for issuance under the Employee and
Directors' Plans, respectively.
During the six months ended June 30, 2004 the Company granted
options to 25 employees to purchase 117,500 shares at $.31 per share
(the fair market price of such shares at the date of grant),
exercisable for a five year period under the Employee Plan. Employees
exercised options to purchase 85,000 shares of Common Stock at prices
ranging from $.18 to $.57 per share during the first six months of the
year. Accordingly, as of June 30, 2004, options for 392,500 shares were
available for future grants under the Employee Plan and 200,000 shares
were available for future grant under the Directors' Plan.
(9) Earnings Per Share
------------------
Below is a reconciliation between basic and diluted earnings per
common share under FAS 128 for the six months and three
13
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(9) Earnings Per Share (continued)
------------------
months ended June 30, 2004 and 2003 (in thousands except per share
amounts):
Six Months Ended June 30,
----------------------------------------------------------------------
2004 2003
----------------------------------------------------------------------
Income Shares Per Share Income Shares Per Share
------ ------ --------- ------ ------ ---------
Net income $1,336 -- -- $116 -- --
Basic earnings
per share $1,336 9,257 $.14 $116 9,235 $.01
------ ----- ---- ---- ----- ----
Effect of dilutive
securities:
Options $ -- 281 $ -- $ -- -- $ --
------ ----- ---- ---- ----- ----
Diluted earnings
per common share $1,336 9,538 $.14 $116 9,235 $.01
====== ===== ==== ==== ===== ====
Three Months Ended June 30,
----------------------------------------------------------------------
2004 2003
----------------------------------------------------------------------
Income Shares Per Share Income Shares Per Share
------ ------ --------- ------ ------ ---------
Net income $ 974 -- -- $149 -- --
Basic earnings
per share $ 974 9,279 $.10 $149 9,235 $.02
------ ----- ---- ---- ----- ----
Effect of dilutive
securities:
Options $ -- 346 $ -- $ -- -- $ --
------ ----- ---- ---- ----- ----
Diluted earnings
per common share $ 974 9,625 $.10 $149 9,235 $.02
====== ===== ==== ==== ===== ====
For the six months ended June 30, 2004 and 2003, none and 740,000
options were excluded from the diluted earnings per share computations,
respectively, because they were anti-dilutive. For the quarter ended
June 30, 2004 and 2003, none and 740,000 options were excluded from the
diluted earnings per share computations, respectively, because they
were anti-dilutive.
(10) Commitments and Contingencies
-----------------------------
(a) Contingencies
-------------
As of August 2, 2004, the Company's subsidiary Acrocrete, together
with other parties, are defendants in 58 lawsuits pending in various
Southeastern states, brought by homeowners, homeowner associations,
contractors and subcontractors, or their insurance companies, claiming
moisture intrusion damage as a result of the use of Exterior Insulation
Finish Wall Systems ("EIFS"), on single and multi-family residences.
The Company's insurance carriers have accepted coverage under a
reservation of
14
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(10) Commitments and Contingencies (continued)
-----------------------------
(a) Contingencies (continued)
-------------
rights for 55 of these claims and are providing a defense. Acrocrete
expects its insurance carriers will accept coverage for the other 3
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 EIFS are not restricted to Acrocrete
products used in an EIFS application, but rather are an industry-wide
issue. There never has 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.
As insurance markets for moisture intrusion type coverage have all
but disappeared, the Company was forced on March 15, 2004 to renew its
existing products liability coverage with an exclusion for EIFS
exposure. The Company's management is evaluating the creation of a
self-insurance fund for these types of claims raised in the future, and
believes that with existing coverage covering all potential claims for
goods sold prior to March 15, 2004, for the foreseeable future any
uninsured claims should not have a material adverse effect on the
Company's financial position. Sales of products used in EIFS
applications are believed to represent less than 20% of the Company's
annual revenues.
On June 15, 1999, the Company's subsidiary Premix was served with a
complaint captioned Mirage Condominium Association, Inc. v. Premix, in
the Eleventh Judicial Circuit in and for Miami-Dade County, Florida,
Case No: 97-27544 (CA-11). The lawsuit raises a number of allegations
against 12 separate defendants involving alleged construction defects,
among which are allegations that certain materials purportedly provided
by Premix to the Developers/Contractor and used to anchor balcony
railings to the structure were defective. Premix believes it has
meritorious defenses to these claims. Since the inception of this
matter in 1999 the Company's insurance carrier has retained defense
counsel on behalf of Premix and is paying defense costs but has not
made a decision regarding coverage to date. Premix expects the
insurance carrier to eventually accept coverage. As discovery is not
yet completed, Premix is unable to determine the exact extent of its
exposure or the outcome of this litigation, however the Company
believes that its ultimate exposure, if any, is not material.
15
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(10) Commitments and Contingencies (continued)
-----------------------------
(a) Contingencies (continued)
-------------
Premix, Acrocrete and Just-Rite are engaged in other legal actions
and claims arising in the ordinary course of its business, none of
which is believed to be material to the Company.
On April 23, 1999, certain dissenting preferred stockholders owning
shares of the Company's preferred stock filed a petition for appraisal
in the Delaware Chancery Court to determine the fair value of the
shares at December 31, 1998, the effective date of the Company's merger
with a wholly owned subsidiary. On April 30, 2003, the Company reached
a settlement with the dissenting preferred stockholders. (See Note (11)
of the Consolidated Financial Statements.)
In March 2003, Just-Rite instituted litigation against a former
employee, employed at the Company's Gulfport, Mississippi distribution
facility, and others, due to alleged violations by the employee of his
non-compete agreements related to the acquisition of the business at
that location. The litigation against the former employee seeks to
enjoin further violations of his non-compete agreement and for damages
resulting from such actions. In connection with the litigation,
Just-Rite discontinued payments on a promissory note with a remaining
balance in the aggregate amount of $128,000, issued as partial
consideration for the acquisition of the Gulfport, Mississippi
facility. The beneficial holders of the promissory note (the former
employee and the other former owner) have initiated claims against
Just-Rite for payment of the obligation. In February 2004, the court
entered an order ruling that the former employee had violated the terms
of a preliminary injunction barring him from further competing against
Just-Rite and ordered that certain sanctions be imposed.
The Company is aggressively defending all of the lawsuits and claims
described above, and while the Company does not believe these
outstanding claims will have a material adverse effect on the Company's
financial position, given the uncertainty and unpredictability of
litigation, there can be no assurance of this.
(b) Lease Commitments
-----------------
At June 30, 2004, the Company has certain property, plant and
equipment under long-term operating leases. The Company will pay
aggregate annual rent of approximately $1,019,000 for its current
operating leases. The leases expire at various dates ranging from
February 2005, to August 31, 2009. Comparable properties at equivalent
rentals are available for replacement of these facilities if any leases
are not extended. The Company does not expect to incur any material
relocation expenses.
16
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(11) Obligation for Appraisal Rights
-------------------------------
On April 30, 2003, the Company and former holders of 81,100 shares
of Preferred Stock who elected appraisal rights in connection with the
Company's 1998 Merger ("Dissenting Stockholders") reached a settlement
(the "Settlement"). In accordance with the Settlement, the Company paid
the Dissenting Stockholders $12.00 per share in cash ($973,200) and
issued a 5.6% promissory note (the "Note") for $10.00 per share
($811,000) due May 1, 2006. The principal balance of the Note was to be
reduced to $7.00 per share ($567,700) in the event the Company prepaid
the Note in full prior to November 1, 2004. If the Note was not paid in
full prior to November 1, 2004, the interest rate would increase from
5.6% to 8.0%. The Company satisfied the cash due at closing of the
Settlement from cash on hand and borrowings from its amended line of
credit with its commercial lender based on an increase to its inventory
borrowing base. At December 31, 2003, based on management's intention
to prepay the Note in full prior to November 1, 2004, the obligation
for Appraisal Rights was classified as a short-term liability and
recorded at $568,000 on such accompanying consolidated balance sheet.
During the six months ended June 30, 2004 the Company paid the Note in
full.
17
Item 2 Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
General
-------
The Company's business is related primarily to the level of
construction activity in the Southeastern United States, particularly
the states of Florida, Georgia, Mississippi and Alabama. The majority
of the Company's products are sold to contractors, subcontractors and
building materials dealers located principally in these states who
provide building materials for the construction of residential,
commercial and industrial buildings and swimming pools. The level of
construction activity is subject to population growth, inventory of
available housing units, government growth policies, interest rate
levels and construction funding, among other things. Although general
construction activity has remained strong in the Southeastern United
States during the last several years, the duration of recent economic
conditions and the magnitude of their effect on the construction
industry are uncertain and cannot be predicted.
Special Note Regarding Forward-Looking Statements
-------------------------------------------------
This Form 10-Q contains certain forward looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995
with respect to the financial condition, results of operations and
business of the Company, and its subsidiaries, including statements
made under Management's Discussion and Analysis of Financial Condition
and Results of Operations. These forward looking statements involve
certain risks and uncertainties. No assurance can be given that any of
such matters will be realized. Factors that may cause actual results to
differ materially from those contemplated by such forward looking
statements include, among others, many of which are beyond the
Company's control, the following: realization of tax benefits;
impairment of long-lived assets, including goodwill; the ability to
collect account or note receivables when due or within a reasonable
period of time after they become due and payable; the cost of capital
and related fees may increase; the outcome of any current or future
litigation; the adequacy or availability of insurance coverage for
certain types of future product damage claims; the competitive pressure
in the industry; unexpected product shortages; general economic and
business conditions; the ability to implement and the effectiveness of
business strategy and development plans; quality of management;
business abilities and judgment of personnel; changes in accounting
policies and practices, as may be adopted by regulatory agencies as
well as the Financial Accounting Standards Board; availability of
qualified personnel; and labor and employee benefit costs.
These risks are not exhaustive. The Company operates in a
continually changing business environment, and new risks emerge from
time to time. The Company cannot predict such risks nor can the Company
assess the impact, if any, of such risks on its business or the extent
to which any risk, or
18
Item 2 Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations (continued)
-------------
Special Note Regarding Forward-Looking Statements (continued)
-------------------------------------------------
combination of risks may cause actual results to differ from those
projected in any forward-looking statements. Further, financial results
for any quarter are not necessarily indicative of results to be
expected for the year, due in part to the affect weather has on sales
and production volume.
These forward-looking statements speak only as of the date of this
document. The Company does not undertake any obligation to update or
revise any of these forward-looking statements to reflect events or
circumstance occurring after the date of this document or to reflect
the occurrence of unanticipated events.
Overview
--------
The Company's net sales for the six months and three months ended
June 30, 2004 increased approximately 39.4% and 45.1% in 2004,
respectively, as compared to the same periods in 2003. Demand for
products sold by the Company was stronger in the first six months of
2004 compared to 2003 primarily due to greater strength in the new
housing and commercial construction markets in the Company's trade area
consisting of the Southeastern United States, as well as market share
gains in selected territories. Management expects the strength in new
construction activity to remain solid in the Company's principal
markets during 2004 absent changes in general economic conditions.
However it is possible certain product shortages within the industry,
including concrete and steel could slow construction activity and
reduce demand for Company products in certain of its markets.
The Company's gross margins improved slightly in the first six
months and second quarter of 2004 compared to the same periods in 2003
primarily because of improved construction markets. Selling, general
and administrative expenses increased in the first six months and
second quarter of 2004 compared to the same periods in 2003, due
primarily to higher payroll and delivery expenses related to servicing
the increased sales. The Company expects these costs will continue to
reflect comparative year-to-year increases because of higher sales.
However, since a substantial portion of the Company's costs are fixed
in nature, the significant increase in sales had a favorable impact on
operating income.
The Company had cash, cash equivalents and restricted cash of
$1,703,000 as of June 30, 2004 compared to $1,870,000 at December 31,
2003. In the first six months of 2004, the Company retired the $568,000
appraisal obligation note payable to the Company's former preferred
stockholders. Management believes that available liquidity under its
line of credit with its commercial lender plus expected operating cash
flows will meet the Company's cash needs in 2004, including the cash
19
Item 2 Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations (continued)
-------------
Overview (continued)
--------
requirements associated with its capital expenditure programs. The
Company is undertaking a major plant modernization capital expenditure
project for its Winter Springs, Florida manufacturing facility to
enhance its manufacturing efficiencies and productivity. Financing
commitments have been obtained from a commercial bank to fund
approximately $1,130,000 of these capital expenditures, which are
expected to aggregate approximately $1,500,000. The Company believes it
will maintain sufficient liquidity to supplement the funding
requirements for any portion of these capital improvements not financed
and meet its current obligations from operations.
Results of Operations
---------------------
Six Months and Three Months Ended June 30, 2004 compared to 2003
----------------------------------------------------------------
Net sales for the six months and three months ended June 30, 2004
increased $7,558,000 and $4,597,000, or approximately 39.5% and 45.1%,
respectively, compared to the same periods in 2003. The increase in
sales and greater demand for Company products is principally due to the
greater strength in the new housing and commercial construction markets
in the Company's trade areas compared to the same periods last year.
Such increases in sales occurred even though sales for the six months
and three months ended June 30, 2003, included net sales of
approximately $961,000 and $478,000, respectively, generated by a
distribution facility closed in December 2003.
Gross profit as a percentage of net sales for the first six months
and second quarter of 2004 was approximately 31.8% and 32.4% compared
to 31.2% and 31.8% for the same periods in 2003. The Company generated
improved gross profit margins from sales through its distribution
facilities primarily as a result of increases in purchase discounts and
vendor rebates from suppliers in the first six months of 2004 compared
to the same period in 2003. The improved margins from the distribution
facilities in combination with incremental cost benefits realized from
greater volumes of production generated from the Company's
manufacturing facilities and minimal increases in selling prices,
offset the adverse affect of cost increases of raw materials and higher
insurance costs included in cost of sales for Company manufactured
products in the comparable periods for 2004 and 2003. The slight
increase in comparative gross profit margins for the 2004 and 2003
periods reflect improved market conditions and generally similar
competitive conditions in the Company's markets for the sales of both
its manufactured and distributed products.
The Company is continuing its efforts to emphasize the sales of its
higher gross profit margin manufactured products
20
Item 2 Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations (continued)
-------------
Six Months and Three Months Ended June 30, 2004 compared to 2003
----------------------------------------------------------------
(continued)
through its distribution facilities and other distributors and to
decrease reliance on sales of products purchased from other
manufacturers from which it generally realizes lower gross profit
margins.
Selling, general and administrative expenses increased $684,000 and
$438,000 in the six months and second quarter of 2004, or approximately
12.1% and 15.0% compared to the same periods in 2003, prior to the
off-set of $263,000 and $160,000 reductions in such expenses for the
respective periods related to a former distribution facility closed in
December, 2003. Despite the increase, selling, general and
administrative expenses as a percentage of net sales for the six months
and three months ended June 30, 2004 were approximately 23.8% and 22.7%
compared to 29.6% and 28.7% for the same periods in 2003. The
percentage decrease was primarily the result of certain fixed costs
being absorbed over higher sales volume.
For the six months ended June 30, 2004, the increase in selling,
general and administrative expenses of $947,000, adjusted for the
reduction in expenses related to the closed distribution facility, was
primarily attributable to an increase of $514,000 in payroll and
related costs, and a $184,000 increase in delivery costs, necessary to
service the increased sales. In addition, the Company increased its
provision for bad debt expense $207,000 in the first six months of 2004
compared to the same period in 2003. For the three months ended June
30, 2004, the adjusted increase in selling, general and administrative
expenses of $598,000 was primarily attributable to an increase of
$306,000 in payroll and related costs and a $131,000 increase in
delivery costs. The provision for bad debt expense in the second
quarter of 2004 was $97,000 greater in 2004 compared to the same period
in 2003.
A substantial portion of the Company's costs are fixed in nature.
Accordingly, operating income is affected materially by fluctuations in
net sales. The significant increase in net sales in the first six
months and second quarter of 2004 compared to the same periods in 2003
had a favorable impact on operating income. As a result of the above
factors and the operating leverage gained from the increase in sales,
the Company generated operating income of $2,150,000 and $1,430,000 in
the first six months and second quarter of 2004 compared to operating
income of $302,000 and $325,000 in the same periods last year.
21
Item 2 Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations (continued)
-------------
Six Months and Three Months Ended June 30, 2004 compared to 2003
----------------------------------------------------------------
(continued)
Interest expense increased $15,000 and decreased $3,000 in the
first six months and second quarter of 2004, respectively, compared to
2003. The slight increase in interest expense for the first six months
of 2004 was primarily due to a greater amount of interest bearing debt
outstanding in 2004 compared to 2003.
Miscellaneous income, net of expenses, decreased $63,000 and $24,000
in the six months and second quarter of 2004, compared to the same
periods in 2003. The decrease in miscellaneous income in 2004 is
attributed primarily to the Company recognizing greater gains from the
disposal of certain equipment in the first six months of 2003 compared
to the same period in 2004.
In the six months and second quarter of 2004, the Company recognized
income tax expense of $621,000 and $351,000 compared to an income tax
expense of $71,000 and $92,000 for the same periods in 2003.
After giving effect to the above factors, the Company had net income
of $1,336,000 and $974,000, or $.14 and $.10 per fully diluted share,
for the six months and second quarter of 2004, compared to net income
of $116,000 and $149,000, or $.01 and $.02 per share, for the first six
months and second quarter of 2003, respectively.
Liquidity and Capital Resources
-------------------------------
At June 30, 2004, the Company had working capital of approximately
$3,606,000 compared to working capital of $2,173,000 at December 31,
2003.
As of June 30, 2004, the Company had cash and cash equivalents of
$859,000. Additionally, the Company had customer payments in the amount
of $844,000 that are required to be remitted to the Company's
commercial lender upon their bank clearance under the terms of the
Company's line of credit. Upon remittance of such amount, the
outstanding balance of the line of credit will be reduced by such
amount and will increase the availability for future borrowing under
the line.
Sources and Uses of Cash
------------------------
The Company's operations provided approximately $1,579,000 and
$9,000 of net cash from operations for the first six months of 2004 and
2003, respectively. The significant increase in cash flow in the first
six months of 2004 was primarily attributable to higher net income of
$1,336,000 ($116,000 in 2003) and increases in accounts payable and
accrued expenses, which in
22
Item 2 Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations (continued)
-------------
Sources and Uses of Cash (continued)
------------------------
aggregate, more than offset increases in accounts receivable and
inventory associated with increased sales.
The net expenditures for investing activities in the first six
months of 2004 were $249,000 compared to $210,000 in 2003. The
increases in expenditures in 2004 compared to 2003 were primarily the
result of a greater amount of purchases of equipment and vehicles to
upgrade and improve the Company's job-site delivery capability to its
customers. The Company is presently undertaking a plant modernization
program for its manufacturing facilities which is expected to require
capital commitments of approximately $1,500,000 during the remainder of
2004 and early 2005, of which the majority of funds will be available
from financing.
During the six months ended June 30, 2004, the Company used net cash
of approximately $1,394,000 in its financing activities, compared to
using $71,000 in 2003. In 2004, the Company increased its long-term
borrowing for purchases of equipment and facility improvements by
$392,000, compared to increased borrowings of $203,000 for similar
items in 2003. In the first six months of 2004, the Company paid off
the remaining balance of the Appraisal Rights Obligation of $568,000,
compared to a payment of $973,000 in the same period last year. In
2004, the Company reduced notes payable and long-term debt $1,242,000
compared to a net increase of $699,000 in the first six months of 2003.
Future Commitments and Funding Sources
--------------------------------------
At June 30, 2004, the Company's contractual cash obligations, with
initial or remaining terms in excess of one year, remained generally
unchanged compared to December 31, 2003. (See Notes 6 and 10 in the
accompanying consolidated financial statements for additional
information regarding our debt and commitments.)
The Company's principal source of short-term liquidity is existing
cash on hand and the utilization of a $7,000,000 line of credit with a
commercial lender. The maturity date of the line of credit is June 19,
2005, subject to annual renewal. Premix, Acrocrete and Just-Rite borrow
on the line of credit, based upon and collateralized by, their eligible
accounts receivable and inventory. Generally, accounts recorded but not
collected within 120 days are not considered to be eligible receivables
for borrowing purposes under the Company's financing agreement with its
commercial lender. At June 30, 2004, $5,399,000 had been borrowed
against the line of credit. Based on eligible receivables and
inventory, the Company had additional total available borrowing under
its line of credit of approximately $1,601,000 at June 30, 2004.
23
Item 2 Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations (continued)
-------------
Future Commitments and Funding Sources (continued)
--------------------------------------
Trade accounts receivable represent amounts due from subcontractors,
contractors and building materials dealers located principally in
Florida, Georgia, Mississippi and other Southeastern states who
purchase products on an unsecured open account basis and through
Company owned warehouse distribution outlets. As of June 30, 2004, the
Company owned and operated ten distribution outlets. Accounts
receivable, net of allowance, at June 30, 2004 was $7,712,000 compared
to $5,702,000 at December 31, 2003. The increase in receivables of
$2,010,000, or approximately 35.3%, was primarily related to increased
sales in the first six months of 2004, particularly sales for the month
of June 2004 as compared with the month of December 2003 (an increase
of approximately $1,795,000 or 48.3%) and to a lesser extent, some
slowness in payments by certain customers in 2004 compared to 2003.
As a result of the consummation of the December 31, 1998 merger, the
Company agreed to pay $733,000 in cash to its former preferred
stockholders. At June 30, 2004, the Company had paid $690,000 of such
cash amount. Amounts payable to such stockholders at June 30, 2004
results from their non-compliance with the condition for payments.
Holders representing 81,100 preferred shares elected dissenters'
rights under Delaware law. On April 30, 2003, the Company and the
dissenting preferred stockholders ("Dissenting Stockholder") reached a
settlement (the "Settlement") whereby the Company paid the Dissenting
Stockholders $12.00 per share in cash ($973,200) and issued a 5.6%
promissory note (the "Note") for $811,000 due May 1, 2006. The
principal balance of the Note would be reduced to $567,700 in the event
the Company prepays the Note in full prior to November 1, 2004. If not
paid by November 2004 the interest rate would increase from 5.6% to
8.0%. The Company satisfied the cash due at closing from cash on hand
and borrowings from its amended line of credit with its commercial
lender. During the six months ended June 30, 2004, the Company paid the
Note in full.
At June 30, 2004, the Company has paid the holders of the
Subordinated Debentures tendering their bonds an aggregate of $808,000
(primarily during 2002). Amounts payable to stockholders at June 30,
2004 and December 31, 2003 on the Company's consolidated balance sheets
includes $213,000 payable to former debenture holders who have not yet
tendered their Debentures as required by the terms of such instrument.
The Company presently is focusing its efforts on enhancing customer
service, increasing operating productivity by reducing costs and
expenses through capital investment and improving working capital.
During the next twelve months the Company expects to incur various
capital expenditures aggregating approximately $400,000 upgrade and
maintain its equipment and delivery fleet due to normal wear and tear
to
24
Item 2 Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations (continued)
-------------
Future Commitments and Funding Sources (continued)
--------------------------------------
support its distribution facilities and improve customer service. The
Company expects to finance a majority of these expenditures from
various lenders with the balance funded by cash derived from
operations.
In addition, the Company is undertaking a major capital project to
expand and enhance its manufacturing capabilities to more effectively
serve its customer base, to gain production efficiencies and provide
the opportunity to broaden its manufactured product lines and enter new
markets. The Company has obtained financing commitments from a
commercial bank aggregating $1,130,000 and has commenced the capital
project for the modernization of its equipment at its Winter Springs,
Florida manufacturing facility. Management estimates the modernization
project for the Winter Springs manufacturing facility could represent
approximately $1,500,000 in capital expenditures.
Effective March 15, 2004 the Company was forced to renew its
products liability coverage with an exclusion for EIFS exposure. Based
on past experience for these types of claims, the Company does not
expect any of these types of uninsured claims that may be alleged in
the future to have a material effect on the Company's financial
position within the next 15 to 18 months. Due to the uncertainty and
unpredictability of litigation there can be no assurances as to when or
if any future uninsured claims may be filed. See Note (10).
The Company believes its cash on hand, cash generated from
operations and the maintenance of its borrowing arrangement with its
commercial lender will provide sufficient cash to meet current
obligations for its operations and support the supplemental cash
requirements necessary for its capital expenditure programs in 2004
described above.
The ability of the Company to maintain and improve its long-term
liquidity is primarily dependent on the Company's ability to
successfully maintain profitable operations.
Item 3 Quantitative and Qualitative disclosures About Market Risks
-----------------------------------------------------------
Residential and Commercial Construction Activity
------------------------------------------------
The Company's sales depend heavily on the strength of residential
and commercial construction activity in the Southeastern United States.
The strength of these markets depends on many factors beyond the
Company's control. Some of these factors include interest rates,
employment levels, availability of credit, prices of raw materials and
consumer confidence. Downturns in the markets that the Company serves,
or in the economy generally, could have a material adverse effect on
the Company's operating results and financial
25
Item 3 Quantitative and Qualitative disclosures About Market Risks (continued)
-----------------------------------------------------------
Residential and Commercial Construction Activity (continued)
------------------------------------------------
condition. Reduced levels of construction activity may result in
intense price competition among building materials suppliers, which may
adversely affect the Company's gross margins.
The Company's first quarter revenues and, to a lesser extent, its
fourth quarter revenues are typically adversely affected by winter
construction cycles and weather patterns in colder climates as the
level of activity in the new construction and home improvement markets
decreases during these periods. Because much of the Company's overhead
and expenses remain relatively fixed throughout the year, Company
profits also tend to be lower during the first and fourth quarters.
Exposure to Interest Rates
--------------------------
The Company had four variable rate mortgages totaling $667,000 at
June 30, 2004. The mortgages bear interest at prime plus 1% and are due
March 2009. In addition, the Company's $7,000,000 line of credit from a
commercial lender bears an interest rate of prime plus 1/2%. A
significant increase in the prime rate could have a material adverse
effect on the Company's operating results and financial condition.
Item 4 Controls and Procedures
-----------------------
a. Evaluation of disclosure controls and procedures
The Company has established disclosure controls and procedures to
ensure that material information relating to the Company, including its
consolidated subsidiaries, is made known to the officer who certifies
the Company's financial reports, as well as to other members of senior
management and the Board of Directors.
The Company's management, under the supervision of the Company's
Chief Executive Officer ("CEO")/Chief Financial Officer ("CFO"), has
evaluated the effectiveness of the Company's disclosure controls and
procedures as defined in Securities and Exchange Commission ("SEC")
Rule 13a-15(e) as of the end of the period covered by this report.
Management has concluded that the Company's disclosure controls and
procedures are effective to ensure that information the Company is
required to disclose in reports that it files or submits under the
Securities Exchange Act is communicated to management, including the
CEO/CFO, as appropriate, to allow timely decisions regarding required
disclosure and is recorded, processed, summarized, and reported within
the time periods specified in the SEC's rules and forms.
b. Changes in internal controls
There were no significant changes in the Company's internal controls
or in other factors that could significantly affect the Company's
internal controls subsequent to the evaluation date.
26
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
PART II. Other Information
Item 1. Legal Proceedings
-----------------
See notes to Consolidated Financial Statements, Note 10 (a), set
forth in Part I Financial Information.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Company held its 2004 Annual Meeting of Shareholders on May 26,
2004 (the "Annual Meeting").
a. At the Annual Meeting, the Company's shareholders voted on the
election of Class III directors, Two Class III directors were
elected at the Annual Meeting with the votes as indicated below:
For Withhold
--------- --------
Lisa M. Brock 7,299,071 54,779
S. Daniel Ponce 7,269,773 25,481
b. An amendment to the Company's 1999 Employee Stock Option Plan to
increase the number of shares available for grants of options from
600,000 to 800,000 was approved by the Company's shareholders at the
Annual Meeting by the following vote:
For: 4,077,874
Against: 732,479
Abstain: 61,288
Not Voted: 2,452,911
c. An amendment to the Company's Director's Stock Option Plan to
increase the number of shares available for grants of options from
200,000 to 400,000 was approved by the Company's shareholders at the
Annual Meeting by the following vote:
For: 4,064,381
Against: 743,991
Abstain: 63,269
Not Voted: 2,452,911
27
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
PART II. Other Information - continued
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
Exhibit No. Description
----------- -----------
2.1 Agreement and Plan of Merger, by and between Imperial Industries, Inc.
and Imperial Merger Corp. dated October 12, 1998 (Incorporated by
reference to Form S-4 Registration Statement, Exhibit 2).
3.1 Certificate of Incorporation of the Company, (Incorporated by reference
to Form S-4 Registration Statement, Exhibit 3.1).
3.2 Amendment to Certificate of Incorporation of the Company (Incorporated
by reference to Form 10-K dated December 31, 2001, Exhibit 3.2).
3.3 By-Laws of the Company, (Incorporated by reference to Form S-4
Registration Statement, Exhibit 3.2).
10.1 Consolidating, Amended and Restated Financing Agreement by and between
Congress Financial Corporation and Premix-Marbletite Manufacturing Co.,
Acrocrete, Inc. and Just-Rite Supply, Inc. dated January 28, 2000.
(Incorporated by reference to Form 10-K dated December 31, 1999, File
No. 1-7190, Exhibit 10-1).
10.2 Employee Stock Option Plan (Incorporated by reference to Form 10-K
dated December 31, 2000, Exhibit 10.4).
10.3 Directors Stock Option Plan (Incorporated by reference to Form 10-K
dated December 31, 2000, Exhibit 10.5).
10.4 Form of Promissory Note issued in Settlement of Preferred Stock
Dissenters Rights. (Incorporated by reference to Form 10-Q dated March
31, 2003, Exhibit 10.4)
10.5 Amendment No. 3 to 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 April 22, 2003. (Incorporated by reference to Form
10-Q dated March 31, 2003, Exhibit 10.5)
31.1 Certification Pursuant to Rule 15-d-14(a)
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
-------------------
A Form 8-K was filed on May 13, 2004 announcing the issuance of a
press release setting forth a summary of the
28
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
PART II. Other Information - continued
(b) Reports on Form 8-K (continued)
-------------------
Company's sales and operating results for the three months ended
March 31, 2004.
In addition, a Form 8-K was filed on June 1, 2004 announcing the
issuance of a press release concerning the appointment of Stephen
C. Brown as President of Just-Rite Supply, Inc., a principal
operating subsidiary of the Company.
29
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.
Chief Executive Officer/
Chief Financial Officer
By: /S/ Betty Jean Murchison
-------------------------
Betty Jean Murchison
Chief Accounting Officer/
Assistant Vice President
August 12, 2004
30