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, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from________________________ to ______________________
Commission file number 1-7190
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IMPERIAL INDUSTRIES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 59-0967727
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(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3009 Northwest 75th Avenue, Miami, Florida 33122-1439
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (305) 477-7000
-------------------------
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
($.10 par value) outstanding as of August 3, 1998: 6,607,961
Total number of pages contained in this document: 23
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Index
Page No.
--------
Part I. Financial Information
Consolidated Balance Sheets
June 30, 1998 and December 31, 1997 3
Consolidated Statements of Operations
Six Months Ended June 30, 1998 and 1997 4
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1998 and 1997 5-6
Notes to Consolidated Financial Statements 7-17
Management's Discussion and Analysis of Results
of Operations and Financial Conditions 18-21
Part II. Other Information and Signatures
Item I. Legal Proceedings 22
Item 3. Default Upon Senior Securities 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
2
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, December 31,
Assets 1998 1997
------ ---- ----
(Unaudited)
Current assets:
Cash and cash equivalents $ 542,000 $ 552,000
Trade accounts receivable (less
allowance for doubtful accounts of
$209,000 in 1998 and $176,000 in 1997) 2,397,000 1,534,000
Inventories 1,512,000 1,204,000
Deferred taxes 106,000 350,000
Other current assets 217,000 60,000
------------ -----------
Total current assets 4,774,000 3,700,000
------------ -----------
Property, plant and equipment, at cost 3,317,000 2,974,000
Less accumulated depreciation (2,104,000) (2,100,000)
------------ -----------
Net property, plant and equipment 1,213,000 874,000
------------ -----------
Deferred taxes 450,000 450,000
------------ -----------
Other assets 109,000 104,000
------------ -----------
$6,546,000 $5,128,000
============ ===========
Liabilities and Common Stock and other Stockholders' Deficit
------------------------------------------------------------
Current liabilities:
Notes payable $1,017,000 $ 778,000
Current portion of long-term debt 171,000 130,000
Accounts payable 1,069,000 580,000
Accrued expenses and other liabilities 258,000 217,000
------------ -----------
Total current liabilities 2,515,000 1,705,000
------------ -----------
Long-term debt, less current maturities 948,000 819,000
------------ -----------
Preferred dividends in arrears 4,209,000 4,044,000
------------ -----------
Redeemable preferred stock, $1.00 par
value, $1.10 cumulative convertible
series; 300,121 shares outstanding; at
$10 per share redemption value 3,001,000 3,001,000
------------ -----------
Commitments and contingencies - -
------------ -----------
Common stock and other stockholders' deficit:
Common stock, $.10 par value, authorized
20,000,000 shares; 6,607,961 and
6,483,961 issued, respectively 666,000 663,000
Additional paid-in-capital 7,061,000 7,260,000
Accumulated deficit (11,748,000) (12,036,000)
------------ -----------
(4,021,000) (4,113,000)
Less cost of shares in treasury (47,863
shares in 1998 and 147,863 in 1997) (106,000) (328,000)
------------ -----------
Total common stock and other
stockholders' deficit (4,127,000) (4,441,000)
------------ -----------
$6,546,000 $5,128,000
============ ===========
See accompanying notes to consolidated financial statements.
3
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
Six Months Ended Three Months Ended
June 30, June 30,
--------------------------- --------------------------
1998 1997 1998 1997
---------- ----------- ----------- ----------
Net sales $8,785,000 $8,004,000 $4,674,000 $4,301,000
Cost of sales 5,851,000 5,500,000 3,060,000 2,924,000
----------- ----------- ----------- -----------
Gross profit 2,934,000 2,504,000 1,614,000 1,377,000
Selling, general and
administrative expenses 2,186,000 1,892,000 1,140,000 974,000
----------- ----------- ----------- -----------
Operating income 748,000 612,000 474,000 403,000
----------- ----------- ----------- -----------
Other income (expense):
Interest expense (137,000) (167,000) (73,000) (87,000)
Miscellaneous income (expense) 86,000 (4,000) 15,000 (14,000)
----------- ----------- ----------- -----------
(51,000) (171,000) (58,000) (101,000)
----------- ----------- ----------- -----------
Income before income taxes 697,000 441,000 416,000 302,000
Income tax expense (244,000) - (146,000) -
----------- ----------- ----------- -----------
Net income 453,000 441,000 270,000 302,000
Less: Dividends on redeemable
preferred stock (note 8b) (165,000) (165,000) (82,000) (82,000)
----------- ----------- ----------- -----------
Net income applicable to
common stockholders (note 9) $288,000 $276,000 $188,000 $220,000
=========== =========== =========== ===========
Basic earnings per common share $.04 $.05 $.03 $.04
=========== =========== =========== ===========
Weight average common shares 6,515,519 5,624,347 6,546,730 5,665,040
=========== =========== =========== ===========
Diluted earnings per common share $.04 $.05 $.03 $.04
=========== =========== =========== ===========
Weighted average common and potentially
dilutive shares 6,679,086 5,960,922 6,708,828 6,047,183
=========== =========== =========== ===========
See accompanying notes to consolidated financial statement.
4
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Increase (Decrease) In Cash and Cash Equivalents
Six Months Ended
June 30,
---------------------------
1998 1997
----------- -----------
(Unaudited)
Cash flows from operating activities:
Net income $453,000 $441,000
Adjustments to reconcile net income
to net cash provided by:
Depreciation 83,000 71,000
Amortization 9,000 11,000
Provision for doubtful accounts 38,000 62,000
Income tax expense 244,000 -
Compensation expense - issuance of stock 32,000 41,000
(Gain) loss on disposal of property
and equipment (3,000) 2,000
(Increase) decrease in:
Accounts receivable (909,000) (710,000)
Inventory (308,000) 74,000
Prepaid expenses and other assets (171,000) (103,000)
Increase (decrease) in:
Accounts payable 489,000 136,000
Accrued expenses and other liabilities 41,000 140,000
--------- -----------
Total adjustments to net income (455,000) (276,000)
--------- -----------
Net cash (used in) provided by
operating activities (2,000) 165,000
--------- -----------
Cash flows from investing activities
Purchase of property, plant
and equipment (432,000) (114,000)
Proceeds from disposal of property
and equipment 13,000 8,000
Proceeds from exercise of stock options 2,000 2,000
--------- -----------
Net cash used in investing activities (417,000) (104,000)
--------- -----------
Cash flows from financing activities
Increase (decrease) in notes
payable banks - net 239,000 (29,000)
Proceeds from issuance of long-term debt 275,000 -
Repayment of long-term debt (105,000) (89,000)
--------- -----------
Net cash provided by financing activities 409,000 (118,000)
--------- -----------
Net decrease in cash and cash equivalents (10,000) (57,000)
Cash and cash equivalents
beginning of period 552,000 455,000
--------- -----------
Cash and cash equivalents end of period $542,000 $398,000
========= ===========
5
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Increase (Decrease) In Cash and Cash Equivalents
-continued-
Six Months Ended
June 30,
-------------------------
1998 1997
-------- --------
(Unaudited)
Supplemental disclosure of cash flow information:
Cash paid during the six months for:
Interest $136,000 $169,000
========= ==========
Non-cash transactions:
During the six months ended June 30, 1998,
58,333 (shares vested under the Company's
Restricted Stock Plan) and 124,000 shares of
Common Stock were issued to directors and
employees of the Company. For the six months
ended June 30, 1997, 202,733 shares of Common
Stock were issued to directors and employees
of the Company $32,000 $41,000
========= ==========
See accompanying notes to consolidated financial statements.
6
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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, 1998 are not necessarily indicative of the results that may
be expected for the year ended December 31, 1998. 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,
1997.
The preparation of financial statements in conformity with generally
accepted accounting principals 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) Revenue Recognition Policy
--------------------------
Revenue from sale transactions is recorded upon shipment and delivery
of inventory to the customer, net of discounts and allowances.
(3) 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, 1998 and December 31,
1997 are short term time deposits of $262,000 and $259,000, respectively.
(4) Income Tax Policy
-----------------
The Company records income taxes using the liability method. Under
this method, deferred tax liabilities are recognized for temporary
differences that will result in taxable amounts in future years. Deferred
tax assets are recognized for temporary differences that will result in
deductible amounts in future years. These temporary differences are
primarily the result of net operating loss carryforwards. Valuation
allowances are recognized if it is more likely than not that some or all
of the deferred tax assets will not be realized (See note 7).
7
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(5) Notes Payable
-------------
Included in notes payable at June 30, 1998, is $1,017,000 which
represents the amount outstanding under a $2,000,000 line of credit from a
commercial lender to Premix-Marbletite Manufacturing Co. ("Premix") and
Acrocrete, Inc. ("Acrocrete"), the Company's two principal operating
subsidiaries. The line of credit is collateralized by Premix's and
Acrocrete's accounts receivable and inventory. The line of credit bears
interest at the lender's prime rate plus 2% (10-1/2% at August 3, 1998)
and expires June 19, 1999, subject to annual renewal. The line of credit
is automatically extended for an additional one year term unless either
party gives the other notice of termination by April 20th of each year. At
June 30, 1998, the line of credit limit available for borrowing aggregated
$2,000,000, of which $1,017,000 had been borrowed. For the six months
ended June 30, 1998 and 1997, the maximum borrowings at any month end were
$1,127,000 and $1,585,000 respectively. The average month end amount
outstanding during the six months ended June 30, 1998 and 1997 periods
were $1,041,000 and $1,441,000, respectively.
(6) Long-Term Debt and Current Installments of Long-Term Debt
---------------------------------------------------------
Included in long-term debt at June 30, 1998, are two mortgage loans,
collateralized by Premix's real property, in the amounts of $467,000 and
$307,000, respectively, less current installments of $44,000. Each loan
bears adjustable interest rates. As of August 3, 1998, interest rates on
such mortgage loans were 10.5% and 12%, respectively. Premix is under
contract to sell the facility collateralized by the $467,000 loan with a
closing scheduled on or before September 30, 1998. Upon the sale of the
facility, the $476,000 obligation would be satisfied. The closing is
subject to certain contingencies.
Effective as of February 1, 1998, Acrocrete, Inc. acquired the
property, plant, equipment and inventory of a wholesale distribution
facility, engaged in the sale of landscape stone and building materials.
The total purchase price of the acquisition was approximately $400,000. A
portion of the purchase price was financed through a $197,000 mortgage
note included in long-term debt at June 30, 1998, collateralized by the
facility's real property, less current installments of $67,000. Principal
and interest is payable monthly over a four year period. Interest accrues
at the rate of 7 1/2% per annum.
Other long-term debt in the aggregate amount of $148,000, less
current installments of $60,000, relates principally to equipment
financing. The notes bear interest at various rates ranging from 8.75% to
15.39% and are payable monthly through 2002.
8
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(7) Income Taxes and Tax Credit Carryforwards
-----------------------------------------
At June 30, 1998, the deferred tax asset of $556,000 primarily
consists of the tax effect of net operating loss carryforwards of
$11,300,000 less a valuation allowance of $3,300,000. Net operating losses
expire in varying amounts through 2009.
During 1997, the Company recognized $800,000 of deferred tax assets
as a result of releasing a portion of the valuation allowance previously
established due to the uncertainty of realizing net operating losses. The
remaining deferred tax assets were fully reserved at December 31, 1997.
The ultimate realization of the remaining deferred tax assets is largely
dependent on the Company's ability to generate sufficient future taxable
income. Management believes that the valuation allowance at June 30, 1998
and December 31, 1997 is appropriate, given the cyclical nature of the
construction industry and other factors including but not limited to the
uncertainty of future taxable income expectations beyond the Company's
strategic planning horizon.
In the six months ended June 30, 1998, the Company recognized income
tax expense of $244,000 representing income before taxes at the statutory
rate of 35%.
(8) Capital Stock
-------------
(a) Common Stock
------------
At June 30, 1998, the Company had outstanding 6,607,961 shares
(net of Treasury shares) of Common Stock $.10 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 prior preferential rights of the holders of
outstanding preferred stock, if any.
In February 1997, 33,333 shares of Common Stock were issued to
the President of Premix and Acrocrete as part of his employment
compensation.
In May 1997, 25,400 shares of Common Stock were issued upon the
exercise of stock options previously granted under the Company's
stock option plans.
In May 1997, the Company issued an aggregate of 144,000 shares
of Common Stock to its Directors and certain employees of the Company
as part of their compensation for services rendered.
In July 1997, the Company's Board of Directors adopted a
9
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(8) Capital Stock (continued)
-------------
(a) Common Stock (continued)
------------
Restricted Stock Plan (the "Plan") for the benefit of certain key
employees. An aggregate of 241,667 shares of Common Stock were
reserved for issuance under the Plan. The Plan is administered by the
Company's Compensation Committee. In July 1997, an aggregate of
241,667 restricted shares were issued to two employees, subject to
certain vesting requirements over a three year period. An aggregate
of 175,000 shares vests over a three year period based on certain
performance goals set forth in the Plan. An aggregate of 66,667
shares vests over a two year period based on continued employment
with the Company by the holder. If the vesting requirements are not
met, the restricted shares theretofore issued will be forfeited and
thereafter be subject to reallocation under the Plan. Prior to
vesting, the holders receive all of the benefits of ownership of the
restricted shares, including voting rights, but do not have the right
to transfer such unvested shares. On January 21, 1998 an aggregate of
58,333 shares had met the Plan's vesting requirements and were
released and reissued to two employees.
In July 1997, the Company issued 25,000 shares of Common Stock
to an employee of the Company as part of his employment compensation.
In July 1997, an aggregate of 452,100 shares of Common Stock were
issued to the Company's Directors and the Executive Vice President of
the Company upon the exercise of stock options previously granted
under the Company's stock option plans. The Company received
aggregate cash proceeds of $45,210.
In April 1998, an aggregate of 24,000 shares of Common Stock
were issued to employees of the Company upon the exercise of stock
options previously granted under the Company's stock option plans.
The Company received aggregate cash proceeds of $2,400.
In May 1998, the Company issued from treasury an aggregate of
100,000 shares of Common Stock to its Directors as part of their
compensation for services rendered.
(b) Preferred Stock - $1.10 Cumulative Convertible Series
-----------------------------------------------------
The authorized preferred stock of the Company consists of
5,000,000 shares, $1.00 par value per share. The preferred stock is
issuable in series, each of which may vary, as determined by the
Board of Directors, as to the designation and number of shares in
such series, the voting power of the holders thereof, the dividend
rate, redemption terms and prices, the voluntary and involuntary
liquidation preferences, and the conversion rights and sinking fund
requirements, if any, of such series.
10
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(8) Capital Stock (continued)
-------------
(b) Preferred Stock - $1.10 Cumulative Convertible Series (continued)
-----------------------------------------------------
At June 30, 1998, the Company had issued and outstanding 300,121
shares of $1.10 cumulative convertible preferred stock ("Preferred
Stock"). The holders of Preferred Stock are entitled to one vote per
share on all matters without regard to class, except that the holders
of Preferred Stock are entitled to vote as a separate class with
regard to the issuance of any equity securities which ranks senior or
on parity with the Preferred Stock, or to change or repeal any of the
express terms of the Preferred Stock in a manner substantially
prejudicial to the holders thereof. Each share of Preferred Stock is
entitled to cumulative quarterly dividends at the rate of $1.10 per
annum and is currently convertible into 1.149 shares of Common Stock.
The liquidation preference of the Preferred Stock is $10.00 per
share, plus accrued but unpaid dividends. The Preferred Stock is
callable, in whole or in part, by the Company at its option at any
time upon 30 days prior notice, at $11.00 per share, plus accrued but
unpaid dividends.
The Company has omitted dividends on its Preferred Stock for the
six months ended June 30, 1998 in the amount of $165,000 and for each
quarter since the fourth quarter of 1985 aggregating $4,209,000
through June 30, 1998. The omission of Preferred Stock dividends is a
reduction in net income applicable to common stockholders and have
been recorded as non-current liabilities on the Company's
consolidated balance sheets.
The Preferred Stock is subject to redemption through a mandatory
sinking fund at a redemption price of $10.00 per share on April 1 of
each year. Through June 30, 1998, an aggregate of 359,879 shares of
Preferred Stock were converted into 1,199,557 shares of Common Stock.
As a result of these conversions, the Company was required to redeem
36,121 shares in 1991 and an additional 66,000 shares for each year
thereafter until all such shares of Preferred Stock was redeemed.
The Company did not redeem any shares of Preferred Stock as
required on April 1, 1991 or any year thereafter. Under the
provisions of the sinking fund requirements, if an annual sinking
fund requirement is not met, it is added to the requirements for the
next year. The Preferred Stock has not been included in common
stockholders' deficit because of its mandatory redemption feature.
The Company is prohibited from paying any cash dividends on
Common Stock and from purchasing or otherwise acquiring for value,
any shares of either Preferred or Common Stock, while the Company is
in default in the payment of any dividends on the Preferred Stock and
the sinking fund requirements are in arrears.
11
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(8) Capital Stock (continued)
-------------
(c) Warrants
--------
At June 30, 1998, the Company had 200,000 warrants outstanding.
Each warrant entitles the holder to purchase one share of Common
Stock at $.10 per share. In June 1997 the Company extended the
expiration date to June 29, 2000 from June 28, 1997. Two directors
acquired 150,000 and 50,000 warrants, respectively, in connection
with a $400,000 financing in 1988. The loan has since been repaid by
the Company.
(d) Stock Options
-------------
In April 1998, an aggregate of 24,000 shares of Common Stock were
issued to employees pursuant to the exercise of stock options
previously granted under the Company's stock option plans. The
exercise price of all such options was $.10 per share. All options
outstanding under the Company's stock option plans have been
exercised. No additional options may be granted under any of the
Company's stock option plans.
(9) Earning Per Common Share
------------------------
The Company has adopted Statement of Financial Accounting Standards
No. 128, Earnings Per Share ("FAS 128) which requires that dual
presentation of basic and diluted earnings per share for the years ending
after December 15, 1997. Basic earnings per common share is computed by
dividing net income, after deducting preferred stock dividends accumulated
during the year ("net income applicable to common stockholders"), by the
weighted average number of shares of common stock outstanding each year.
Diluted earnings per common share is computed by dividing net income
applicable to common stockholders by the weighted-average number of shares
of common stock and common stock equivalents outstanding during each year.
In accordance with the provision of FAS 128, the Company has retroactively
restated earnings per common share.
(10) Commitments and Contingencies
-----------------------------
(a) In April 1996, Premix was dismissed as a defendant, to which it had
been a party with other unaffiliated companies, in 27 asbestos lawsuits
pending in various circuit courts in Alabama and Florida. Such lawsuits
sought unspecified damages alleging injuries to persons exposed to
products containing asbestos. As of June 30, 1998 Premix is not a
defendant and has not been named a defendant in any additional lawsuits
which allege injuries due asbestos exposure.
12
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(10) Commitments and Contingencies (continued)
-----------------------------
The Company and Premix are parties to an Interim Agreement for Defense
and Indemnity of Asbestos Bodily Injury Cases (the "Agreement") with
certain of its insurance carriers under which each party agreed to pay a
negotiated percentage share of defense costs and indemnification
expenditures, subject to policy limits, for the pending and future
asbestos claims. The Agreement has been extended until May 15, 1999 and is
subject to cancellation upon sixty days notice by any party.
The insurance carriers have agreed to pay, in the aggregate,
approximately 93% of the damages, costs and expenditures related to the
litigation. Premix is responsible for the remaining 7%.
The Company believes, based upon the Agreement with its insurance
carriers, and its experience in these claims to date, it has adequate
insurance coverage for any future similar type of claims. To date, no case
went to trial with Premix as a defendant. Premix has either settled for a
nominal amount of money or been voluntarily dismissed without payment from
approximately 193 cases. Based upon historical results, the Company does
not believe any potential future claims would be material. However, there
can be no assurance that insurance will ultimately cover the aggregate
liability for damages to which Premix may be exposed. Premix is unable at
this time to determine the exact extent of its exposure or outcome of the
litigation of any other similar cases that may arise in the future.
Acrocrete was a co-defendant in a lawsuit captioned "Stephen P.
Zabow, II and Karen I. Zabow, et al. vs. M/I Schottenstein Homes, Inc.,
Heiner Construction Company and Acrocrete, Inc.", filed October 2, 1996 in
Wake County, North Carolina. The lawsuit involved claims by owners of
eight homes in Cary, North Carolina, against the general contractor, a
subcontractor, and Acrocrete. The claims related to the use of synthetic
stucco in the construction of such homes which was allegedly manufactured
by Acrocrete. The lawsuit alleged negligent misrepresentation, breach of
warranty, unfair and deceptive trade practices, fraud and negligence due
to defective material, and requests punitive damages. The plaintiffs
alleged that Acrocrete knew of inherent defects prevalent in synthetic
stucco wall systems that permitted water intrusion to cause moisture
damage to the interior and wood framing of the houses. In October 1997,
the plaintiffs voluntarily dismissed Acrocrete with prejudice as a result
of the Plaintiff's settlement with the general contractor defendant.
13
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(10) Commitments and Contingencies (continued)
-----------------------------
On October 17, 1997, Acrocrete was named a co-defendant in a lawsuit
captioned "M/I Schottenstein Homes, Inc. vs. Acrocrete, Inc. et al filed
in Wake County, North Carolina. The lawsuit involves subrogation claims by
CNA Insurance on behalf of M/I Schottenstein Homes, Inc. based on the
claims of owners of 52 homes constructed by M/I Schottenstein Homes, Inc.,
the general contractor, that the use of synthetic stucco in the system of
construction of the exterior finish of their homes, allegedly manufactured
by Acrocrete, caused moisture intrusion damages. Eight of the homeowners
were the parties to the previously described lawsuit filed against
Acrocrete. As part of its settlement with the homeowner, M/I Homes
received an assignment of any claims which the homeowners may have against
any other contractors, subcontractors, material men, or suppliers which
might be responsible for any damages pertaining to the alleged defects.
The initial Complaint against Acrocrete and the other parties alleged
negligent misrepresentation, breach of warranty, fraud, unfair and
deceptive trade practices and requests for punitive damages. On June 29,
1998, the Court ordered the Plaintiff to file fifty-two (52) separate
amended complaints relating to the construction of each of the separate
houses at issue in the original Complaint.
While Acrocrete has not yet been provided with the separate amended
complaints referred to above, from its review of the original Complaint it
believes that it has meritorious defenses against these claims as well as
counter-claims against the general contractor and installers of the
product. The Company's insurance carrier has accepted coverage and is
providing Acrocrete with a defense under a reservation of rights.
Acrocrete is unable, at this time, to determine the extent of its exposure
or possible outcome of this litigation.
In addition, Acrocrete has been named a defendant in nine similar
lawsuits filed against Acrocrete and other parties, (contractors and
subcontractors), by homeowners, or their insurance companies, claiming
moisture intrusion damages on single family residences.
Acrocrete is vigorously defending all of these cases and believes it
has meritorious defenses, counter-claims and claims against third parties.
The Company's insurance carriers have accepted coverage for all nine of
the above claims and are providing a defense under a reservation of
rights. Acrocrete is unable to determine the exact extent of its exposure
or outcome of litigation of these lawsuits.
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.
14
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(10) Commitments and Contingencies (continued)
-----------------------------
(b) The Company pays aggregate monthly rent of approximately $9,300 for
three of its operating facilities. The leases expire at various dates
ranging from December 31, 1998 to April 30, 2000. Comparable properties at
equivalent rentals are available for replacement of these facilities if
such leases are not extended.
In April 1998, the Company entered into a lease agreement for
approximately 20,400 square feet of warehouse and office space in a
building to be constructed in Kennesaw, Georgia. The lease, scheduled to
commence upon the Company's occupancy on October 1, 1998 and expire on
September 30, 2005, provides for initial monthly rental payments of
$6,715, with escalations in monthly rent on each annual anniversary date
of the lease. The lease contains a renewal option for five years. The
Company terminated the lease at its Atlanta, Georgia facility effective
October 31, 1998.
In June, 1998, the Company entered into a lease agreement for 19,600
square foot facility in Pompano Beach, Florida. The term of the lease will
commence September 1, 1998 and expire on August 31, 2008. The lease
provides for minimum monthly rental payments of $7,350, with cost of
living increases on each anniversary date of the lease.
In addition, the Company leases one automobile under an agreement
which provides for a monthly payment of approximately $800 through June
2001.
(c) Howard L. Ehler, Jr. ("the Executive") is employed by the Company
pursuant to a one year renewable agreement (the "Employment Agreement").
Mr. Ehler serves as Executive Vice President and Chief Financial Officer
of the Company at a current annual base salary of $120,000. The Employment
Agreement provides for automatic renewal for additional one year periods
as of July 1, of each year, unless the Company or the Executive notifies
the other party of an intent not to renew at least 90 days prior to
expiration of the existing term. The Executive receives a car allowance,
as well as certain other benefits, such as health and disability
insurance. The Executive is also entitled to receive incentive
compensation based upon targets formulated by the Company's Compensation
Committee.
Prior to a change in control, the Company has the right to terminate
the Employment Agreement without cause at any time upon thirty days
written notice, provided the Company pays to the Executive a severance
payment equivalent to 50% of his then current annual base salary. As part
of the Employment Agreement, the Executive has agreed not to disclose
confidential information and not to compete with the Company during his
term of employment and, in certain cases
15
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(10) Commitments and Contingencies (continued)
-----------------------------
for a two (2) year period following his termination.
In the event of a "Change in Control" (as defined in the Employment
Agreement), the Employment Agreement is automatically extended to a three
year period. Thereafter, the Executive will be entitled to terminate his
employment with the Company for any reason at any time. In the event the
Executive terminates his employment after a Change of Control, the
Executive will be entitled to receive the lesser of (i) a lump sum amount
equal to the base salary payments and all other compensation and benefits
Executive would have received had the Employment Agreement continued for
the full term; or (ii) three times Executive's base salary then in effect
on the effective date of termination. The Executive would also be entitled
to such severance in the event the Company terminates the Executive
without cause after a Change of Control.
In addition, Mr. Ehler was issued 75,000 shares of Common Stock
of the Company on July 31, 1997 pursuant to the terms of the Company's
Restricted Stock Plan. See "Note (8) (a) Common Stock".
(d) During the third quarter of 1996, the Company entered into an
employment arrangement with Fred H. Hansen to serve as President of the
Company's subsidiaries, Premix and Acrocrete. Mr. Hanson presently
receives an annual base salary of $150,000 and a bonus based upon earnings
performance of the Subsidiaries. Under this arrangement, Mr. Hansen
received 33,333 shares of common stock in February 1997. In addition. Mr.
Hansen was issued 166,667 shares of Common Stock on July 31, 1997 pursuant
to the terms of the Company's Restricted Stock Plan. See "Note (8) (a)
Common Stock". Also Mr Hansen received a moving allowance of $15,000 and
is entitled to the use of a Company auto, or car allowance of $650 per
month during his employment, as well as certain other benefits, such as
health and disability insurance. As part of the employment arrangement,
Mr. Hansen agreed not to disclose confidential information and not to
compete with the Company during his term of employment and for a one year
period following his termination.
(e) Management has undertaken a company wide program to prepare the
Company's computer systems and other applications for the year 2000.
Possible year 2000 problems create a risk for a company in that unforeseen
problems in its own computer systems or those of its third party suppliers
could have a material impact on a company's ability to conduct its
business operations. The purpose of the Company's program is to identify
significant year 2000 exposures and to update it computer systems and
business operations to deal with those exposures. Any internal staff costs
as well as consulting and other expenses to prepare the systems for the
year 2000 are not expected to be material to the Company's operating
results. The Company believes the software used in its internal operations
is 2000 year compliant.
16
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(11) Stock Based Compensation
------------------------
Effective 1996, the Company has adopted the disclosure provisions of
Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"),
"Accounting for Stock-Based Compensation" and has retained the intrinsic
value method of accounting for such stock-based compensation. Had the fair
value based accounting provisions of SFAS No. 123 been adopted, the effect
would not be material.
17
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 Florida and Georgia. The majority of the
Company's products are sold to building materials dealers located
principally in Florida and Georgia 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.
Results of Operations
---------------------
Six Months Ended June 30, 1998 Compared to 1997
-----------------------------------------------
Net sales for the six months ended June 30, 1998 increased
$781,000, or approximately 10%, compared to the same period in 1997.
For the three months ended June 30, 1998, sales increased $373,000
or approximately 9%, compared to the same quarter in 1997. The sales
of landscape stone products through the Company's new distribution
outlet in Tampa, Florida, acquired effective February 1, 1998,
accounted for approximately $637,000 of the increase in sales for
the six months ended June 30, 1998.
Gross profit as a percentage of net sales for the six months
and second quarter of 1998 was approximately 33% and 35% compared to
31% and 32% in the comparable periods in 1997. The increase in gross
profit margins was principally due to savings realized from raw
material purchases, modifications made to the Company's
manufacturing process to gain greater production efficiency, and
cost reduction programs implemented in 1996 which continue to focus
on manufacturing processes for opportunities to reduce cost.
Selling, general and administrative expenses as a percentage of
net sales for the six months and second quarter of 1998 was
approximately 25% and 24%, respectively, compared to 24% and 23% for
the comparable periods last year. Selling, general and
administrative expenses increased $294,000, or approximately 16% for
the six months ended June 30, 1998 compared to the same period in
1997. The increase in expenses was primarily due to additional sales
expenses associated with servicing the increased volume of business
and costs related to the Company's new distribution facility in
Tampa, Florida which was acquired effective February 1, 1998 and
professional and consulting fees of $60,000 related to preparation
of the Company's plan to restructure its capital structure.
18
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations (continued)
-------------------------
Results of Operations (continued)
---------------------
Six months Ended June 30, 1998 Compared to 1997 (continued)
-----------------------------------------------
Miscellaneous income for the six months ended June 30, 1998
includes $62,000 of reimbursements the Company received from the
State of Florida environmental authorities insurance program for
costs the Company incurred in prior years related to the removal of
underground fuel tanks located at its facilities.
For the six months and three months ended June 30, 1998, in
accordance with SFAS 109, "Accounting For Income Taxes", the Company
is required to recognize income tax expense of $244,000 and
$146,000, respectively, representing income before taxes at the
statutory rate of 35%. Based on the Company's net operating loss
carryforwards, the Company is not expected to pay such taxes on its
federal income tax returns. The Company did not recognize income tax
expense in the June 30, 1997 comparable periods.
As a result of the above factors and after giving effect to
preferred stock dividends accrued, but not paid, the Company derived
net income applicable to common stockholders of $288,000, or $.04
per share for the six months ended June 30, 1998, compared to net
income of $276,000, or $.05 per share, in 1997. Net income
applicable to common stockholders includes charges of $165,000in the
1998 and 1997 six month periods for unpaid cumulative dividends on
preferred stock.
Liquidity and Capital Resources
-------------------------------
At June 30, 1998, the Company had working capital of
approximately $2,259,000 compared to working capital of $1,995,000
at December 31, 1997. As of June 30, 1998, the Company had cash and
cash equivalents of $542,000.
The Company's principal source of short-term liquidity is
existing cash on hand and the utilization of a $2,000,000 line of
credit with a commercial lender scheduled to expire on June 19,
1999. The line of credit is automatically extended for an additional
one year term unless either party gives the other notice of
nonextension 60 days prior to the expiration date. Premix and
Acrocrete, the Company's subsidiaries, borrow on the line of credit,
based upon and collateralized by, its 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, 1998, $1,017,000
had been borrowed against $2,000,000 in available lines of credit
limits.
Trade accounts receivable represent amounts due from building
materials dealers located principally in Florida and Georgia who
19
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations (continued)
-------------------------
Liquidity and Capital Resources (continued)
-------------------------------
have purchased products on an unsecured open account basis and sales
directly to the end-user (contractors and subcontractors), through
Company owned warehouse distribution outlets. The Company presently
owns and operates three warehouse distribution outlets.
The Company's common stockholders' deficit of $4,127,000 at
June 30, 1998, resulted primarily from losses incurred in 1987 and
prior years, and unpaid cumulative dividends required by the
Company's issued and outstanding preferred stock. The Company has
attempted to generate net income and adequate cash to support
operations by various methods, including the commencement of
manufacturing acrylic stucco products, opening warehouse
distribution outlets to sell its products directly to the end user,
the development and sale of new products, reductions in raw material
costs and changes to manufacturing processes to gain greater
production efficiency. For the six months ended June 30, 1998, these
actions enabled the Company to derive income before taxes and the
application of unpaid dividends on the redeemable preferred stock in
1998 of $697,000 compared to income of $441,000 in the same six
month period in 1997.
The Company has omitted payment of cash dividends on its
preferred stock since the fourth quarter of 1985, and has accrued
$4,209,000 of dividends in arrears on the preferred stock as of June
30, 1998. The Company is continuing its efforts to develop a plan to
satisfy the preferred stock dividend arrearage and mandatory sinking
fund requirements which would be acceptable to its stockholders.
On March 6, 1998, the Company entered into an agreement with an
investment banker to provide advisory services to the Company in
connection with the development of a plan to satisfy the Company's
Redeemable Preferred Stock dividend arrearage and mandatory sinking
fund requirements. The investment banker has received cash
consideration of $37,500 and is entitled to receive additional
consideration based upon the success of the plan. The Company
expects to submit a proposal involving the Preferred Stock to its
stockholders in the fourth quarter of 1998.
Effective February 1, 1998, Acrocrete, Inc. acquired the
property, plant, equipment and inventory of a wholesale distribution
facility engaged in the sale of landscape stone and building
materials. The total purchase price was approximately $400,000. A
portion of the purchase price was financed through the issuance of a
$215,000 mortgage note payable monthly over four years, with
interest at the rate of 7 1/2% per annum.
The Company expects other capital expenditures in 1998 for
20
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations (continued)
-------------------------
Liquidity and Capital Resources (continued)
-------------------------------
improvements to its equipment and manufacturing facilities to
require aggregate cash expenditures of approximately $275,000. In
the first quarter of 1998, the Company added approximately 6,000
square feet of warehouse space to its Casselberry, Florida
manufacturing facility to consolidate Florida manufacturing
operations to more closely mirror geographic market demands. Other
projects planned in 1998 are aimed at relocating and expanding the
Company's manufacturing facility in Atlanta, Georgia, and the
proposed sale and relocation of the Company's manufacturing /
distribution facility in Miami to a leased location in Broward
County. The Company expects to complete the above cost reduction
projects in 1998 from cash on hand, or borrowings under its line of
credit, and will continue to focus on the efficient utilization of
its resources in its efforts to accomplish further cost reductions.
In the first quarter of 1998, the Company entered into a
contract for the sale of its Miami facility providing for a closing
September 30, 1998, subject to certain contingencies. The buyer has
deposited $100,000 in escrow. In April 1998, the Company entered
into a lease agreement for a new 20,400 square foot facility in
Kennesaw, Georgia.
In June 1998. the Company entered into a lease agreement for
19,600 square foot facility in Pompano Beach, Florida. The Pompano
Beach facility is intended to replace the Miami facility upon its
sale.
The Company believes its cash on hand, the anticipated cash
receipts from the sale of its Miami, Florida facility and the
maintenance of its borrowing arrangement with its commercial lender
will provide sufficient cash to supplement cash shortfalls, if any,
from operations and provide adequate liquidity for the next twelve
months to 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 omitted preferred stock dividends and preferred
stock redemption requirements; and (iii) resolve current litigation
on terms favorable to the Company.
21
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 3. Default Upon Senior Securities
------------------------------
The Company has 300,121 shares of $1.10 cumulative convertible
preferred stock issued and outstanding. Each share of preferred
stock is entitled to cumulative quarterly dividends at the rate of
$1.10 per annum. As of June 30, 1998, the Company has omitted
dividends aggregating $4,209,000 on its outstanding preferred stock.
Also, under the provisions of the sinking fund requirements of the
preferred stock, the Company was required to redeem 36,121 shares in
1991 and an additional 66,000 shares of preferred stock on April 1
each year thereafter until fully redeemed. The Company has been
unable to satisfy the sinking fund requirements and did not redeem
any shares of preferred stock since April 1991. For a more complete
description, see Note 8 (b) of Notes to Consolidated Financial
Statements.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
Exhibit 4.1 Certificate of Designation with respect to the
Preferred Stock [Incorporated by reference to the Company's
registration statement on Form S-2, File No. 1-7190, dated February
22, 1983].
(b) Reports on Form 8-K
-------------------
None
22
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 13, 1998
23