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 September 30,1999
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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
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Commission file number 1-7190
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IMPERIAL INDUSTRIES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 65-0854631
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(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1259 Northwest 21ST Street, Pompano Beach Florida 33069-4114
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (954) 917-4114
---------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
Indicate the number of shares of Imperial Industries, Inc. Common Stock
($.01 par value) outstanding as of November 2, 1999: 8,230,434
Total number of pages contained in this document: 26
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Index
Page No.
--------
Part I. Financial Information
Consolidated Balance Sheets
September 30, 1999 and December 31, 1998 3
Consolidated Statements of Operations
Nine Months and Three Months Ended September 30, 1999
and 1998 4
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1999 and 1998 5-6
Notes to Consolidated Financial Statements 7-17
Management's Discussion and Analysis of Results
of Operations and Financial Conditions 18-23
Part II. Other Information and Signatures
Item I. Legal Proceedings 24
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 26
2
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, December 31,
Assets 1999 1998
------ ---- ----
(Unaudited)
Current assets:
Cash and cash equivalents $ 819,000 $ 1,097,000
Trade accounts receivable (less
allowance for doubtful accounts of
$285,000 in 1999 and $200,000 in 1998) 2,965,000 2,535,000
Inventories 2,031,000 1,374,000
Deferred taxes 202,000 505,000
Other current assets 181,000 15,000
------------ ------------
Total current assets 6,198,000 5,526,000
------------ ------------
Property, plant and equipment, at cost 2,608,000 2,517,000
Less accumulated depreciation (1,105,000) (1,182,000)
------------ ------------
Net property, plant and equipment 1,503,000 1,335,000
------------ ------------
Deferred taxes 615,000 615,000
------------ ------------
Other assets 86,000 85,000
------------ ------------
$ 8,402,000 $ 7,561,000
============ ============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Notes payable $ 2,017,000 $ 780,000
Current portion of long-term debt 437,000 123,000
Accounts payable 871,000 1,300,000
Payable to stockholders 48,000 733,000
Accrued expenses and other liabilities 244,000 151,000
------------ ------------
Total current liabilities 3,617,000 3,087,000
------------ ------------
Long-term debt, less current maturities 1,044,000 1,316,000
------------ ------------
Obligation for appraisal rights 877,000 877,000
------------ ------------
Commitments and contingencies -- --
------------ ------------
Stockholders' equity:
Preferred stock, $.01 par value 5,000,000
shares authorized; none issued
Common stock, $.01 par value 20,000,000
shares authorized; 8,230,434 issued at
September 30, 1999 and December 31, 1998
respectively 82,000 82,000
Additional paid-in-capital 13,415,000 13,507,000
Accumulated deficit (10,633,000) (11,202,000)
------------ ------------
2,864,000 2,387,000
Less cost of shares in treasury
(47,863 shares at December 31, 1998) -- (106,000)
------------ ------------
Total stockholders' equity 2,864,000 2,281,000
------------ ------------
$ 8,402,000 $ 7,561,000
============ ============
See accompanying notes to consolidated financial statements.
3
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
Nine Months Ended Three Months Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
Net sales $ 17,386,000 $ 13,564,000 $ 5,568,000 $ 4,779,000
Cost of sales 11,825,000 9,090,000 3,760,000 3,239,000
------------ ------------ ------------ ------------
Gross profit 5,561,000 4,474,000 1,808,000 1,540,000
Selling, general and
administrative expenses 4,399,000 3,443,000 1,508,000 1,257,000
------------ ------------ ------------ ------------
Operating income 1,162,000 1,031,000 300,000 283,000
------------ ------------ ------------ ------------
Other income (expense):
Interest expense (294,000) (206,000) (107,000) (69,000)
Miscellaneous income (expense) 14,000 110,000 11,000 24,000
------------ ------------ ------------ ------------
(280,000) (96,000) (96,000) (45,000)
------------ ------------ ------------ ------------
Income before income taxes 882,000 935,000 204,000 238,000
Provision for income taxes (313,000) (343,000) (76,000) (99,000)
------------ ------------ ------------ ------------
Net income 569,000 592,000 128,000 139,000
Less: Dividends on redeemable
preferred stock -- (248,000) -- (83,000)
------------ ------------ ------------ ------------
Net income applicable to
common stockholders $ 569,000 $ 344,000 $ 128,000 $ 56,000
============ ============ ============ ============
Basic earnings per common share $ .07 $ .05 $ .02 $ .01
============ ============ ============ ============
Weighted average number of
common shares outstanding 8,187,831 6,546,672 8,198,179 6,607,961
============ ============ ============ ============
Diluted earnings per common share $ .07 $ .05 $ .02 $ .01
============ ============ ============ ============
Weighted average number of common and
potentially dilutive shares outstanding 8,420,823 6,714,952 8,414,861 6,750,818
============ ============ ============ ============
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
Nine Months Ended
September 30,
--------------------------
1999 1998
---- ----
(Unaudited)
Cash flows from operating activities:
Net income $ 569,000 $ 592,000
----------- -----------
Adjustments to reconcile net income
to net cash provided by:
Depreciation 163,000 130,000
Amortization 5,000 14,000
Debt issue discount 44,000 --
Provision for doubtful accounts 123,000 58,000
Provision for income taxes 299,000 319,000
Compensation expense - issuance of stock 14,000 32,000
Loss (gain) on disposal of property
and equipment 4,000 (3,000)
(Increase) decrease in:
Accounts receivable (553,000) (1,194,000)
Inventory (657,000) (458,000)
Prepaid expenses and other assets (172,000) (119,000)
Increase (decrease) in:
Accounts payable (429,000) 430,000
Payable to stockholders (685,000) --
Accrued expenses and other liabilities 93,000 80,000
----------- -----------
Total adjustments to net income (1,751,000) (711,000)
----------- -----------
Net cash used in operating activities (1,182,000) (119,000)
----------- -----------
Cash flows from investing activities
Purchase of property, plant
and equipment (366,000) (525,000)
Proceeds from sale of property
and equipment 31,000 13,000
Proceeds from exercise of stock options -- 2,000
----------- -----------
Net cash used in investing activities (335,000) (510,000)
----------- -----------
Cash flows from financing activities
Increase in notes payable banks - net 1,237,000 500,000
Proceeds from issuance of long-term debt 132,000 289,000
Repayment of long-term debt (130,000) (153,000)
----------- -----------
Net cash provided by financing activities 1,239,000 636,000
----------- -----------
Net (decrease) increase in cash and
cash equivalents (278,000) 7,000
Cash and cash equivalents
beginning of period 1,097,000 552,000
----------- -----------
Cash and cash equivalents end of period $ 819,000 $ 559,000
=========== ===========
5
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Increase (Decrease) In Cash and Cash Equivalents
-continued-
Nine Months Ended
September 30,
--------------------------
1999 1998
---- ----
(Unaudited)
Supplemental disclosure of cash flow information:
Cash paid during the nine months for:
Interest $226,000 $211,000
======== ========
Non-cash transactions:
For the nine months ended September 30,
1999, 47,863 shares of Common Stock were
issued to certain directors and an officer
of the Company.
During the nine months ended September 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. $14,000 $32,000
======= =======
See accompanying notes to 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 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 nine months
ended September 30, 1999 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1999. 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,
1998.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(2) Merger
------
On December 17, 1998, the Company's stockholders approved a Plan
merging Imperial Industries, Inc. into Imperial Merger Corp., a
newly-formed, wholly-owned subsidiary of the Company, (the "Merger") with
the Merger becoming effective December 31, 1998, (the "Effective Date").
On the Effective Date, Imperial Merger Corp. changed its name to Imperial
Industries, Inc., (the "Company").
At the Effective Date, each share of the Company's $.10 par value
common stock outstanding before the Merger was converted into one share of
$.01 par value common stock resulting in the recapitalization of $599,000
from common stock to additional paid-in-capital. Also at the Effective
Date, 300,121 outstanding shares of preferred stock, with a carrying value
of $3,001,000 were retired and $4,292,000 of accrued dividends on such
shares, were eliminated as described in the following paragraphs.
Holders of 219,021 shares of the preferred stock (the "Exchanging
Shareholders"), with a carrying value of $2,190,000, elected to convert
their shares into either (a) $4.75 in cash and ten shares of the Company's
common stock, or (b) $2.25 in cash, an 8% three-year $8.00 subordinated
debenture and five shares of the Company's common stock. In connection
with the Exchanging Shareholders election, the
7
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(2) Merger (continued)
------
Company was required to pay cash of $733,000 which was presented as
Payable to Stockholders in the accompanying consolidated balance sheet at
December 31, 1998. The Company was also required to issue $985,000 face
value of 8% subordinated debentures with a fair value of $808,000, and
1,574,610 shares of $.01 par value common stock with a fair value of
$630,000 based on the market price of $.40 per share of the Company's
common stock at the Effective Date. The total fair value of the cash,
debentures and common stock to be exchanged with the Exchanging
Shareholders was $2,171,000. Had the Exchanging Shareholders elected to
convert their shares under the provisions of the preferred stock's
governing instrument, they would have received 251,655 shares of common
stock with a fair value of $101,000. The excess of the total fair value of
cash, debentures and common stock to be exchanged with the Exchanging
Shareholders, over the fair value which the Exchanging Shareholders would
have received under the preferred stock's original conversion provisions
represented a conversion charge of $2,070,000 to accumulated deficit and a
reduction in net income applicable to common stockholders in the
consolidated statement of operations for the year ended December 31, 1998.
In addition, conversion of the 219,021 preferred shares resulted in a
credit to additional paid-in capital of $5,835,000.
Holders of 81,100 shares of preferred stock (the "Dissenting
Shareholders"), with a carrying value of $811,000, elected to exercise
their appraisal rights with respect to the stock. Pursuant to Delaware
law, the Dissenting Shareholders petitioned the Delaware Chancery Court to
determine the fair value of their shares at the Effective Date, exclusive
of any element of value attributable to the Merger. In the event that a
Dissenting Shareholder did not perfect his appraisal rights, each such
share would be entitled to receive the cash, the $8.00 subordinated
debenture and the five shares of common stock described under option (b)
in the preceding paragraph. Based on these facts, and a valuation prepared
by an independent financial advisor in connection with the Merger, the
Company recorded $877,000 in the accompanying consolidated balance sheet
at December 31, 1998, and September 30, 1999, as an estimate for the
obligation for appraisal rights. The Chancery Court may determine fair
value is less than, equal to, or greater than an aggregate of $877,000. In
addition, elimination of the 81,100 preferred shares and accrued dividends
on such shares resulted in a credit to accumulated deficit, and an
addition to net income applicable to common stockholders of $1,095,000 at
December 31, 1998.
At September 30, 1999 cash payable to stockholders was reduced to
$48,000 from $733,000 at December 31, 1998, as a result of satisfying the
cash requirements due to Exchanging Shareholders who had submitted their
preferred stock to the Company for the merger consideration.
8
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(2) Merger (continued)
------
On April 27, 1999, certain Dissenting Shareholders filed a petition
for appraisal in the Delaware Chancery Court to determine the fair value
of their shares at the Effective Date.
In connection with the Merger, all outstanding stock purchase warrants
were converted into warrants with identical terms exerciseable for shares
of the Company's common stock.
Also, in connection with the Merger, the Company issued 150,000
common stock purchase warrants to its investment banker, exercisable at
$.38 per share until December 31, 2003. Costs of the Merger aggregated
approximately $456,000 and were expensed in 1998.
(3) Revenue Recognition Policy
--------------------------
Revenue from sale transactions is recorded upon shipment and delivery
of inventory to the customer, net of discounts and allowances.
(4) 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 September 30, 1999 and December
31, 1998 are short term time deposits of $273,000 and $267,000,
respectively.
(5) Income Tax Policy
-----------------
The Company has adopted the liability method for determining its
income taxes. Under this method, deferred tax assets and liabilities are
recognized for the expected future tax consequences of events that have
been recognized in the consolidated financial statements or income tax
return. Deferred tax assets and liabilities are measured using the enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be realized or settled; valuation
allowances are provided against assets that are not likely to be realized.
(6) Inventories
-----------
At September 30, 1999 and December 31, 1998, inventories consist of:
1999 1998
---- ----
Raw materials $ 429,000 $ 345,000
Finished goods 1,403,000 810,000
Packaging materials 199,000 219,000
---------- ----------
$2,031,000 $1,374,000
========== ==========
9
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(7) Notes Payable
-------------
Included in notes payable at September 30, 1999, is $2,017,000 which
represented the amount outstanding under a $3,000,000 line of credit from
a commercial lender to Premix-Marbletite Manufacturing Co. ("Premix") and
Acrocrete, Inc. ("Acrocrete"), the Company's two principal operating
subsidiaries. Aggregate lines of credit were increased from $3,000,000 to
$4,500,000 on October 1, 1999. The line of credit is collateralized by
Premix's and Acrocrete's accounts receivable and inventory. The amended
line of credit now bears interest at the lender's prime rate plus 1% (9
1/4% at November 1, 1999) and expires June 19, 2001, subject to annual
renewal. For the nine months ended September 30, 1999 and 1998, the
maximum borrowings at any month end were $2,017,000 and $1,278,000,
respectively. The average month end amount outstanding during the nine
month periods ended September 30, 1999 and 1998 were $1,278,000 and
$1,020,000, respectively.
(8) Long-Term Debt and Current Installments of Long-Term Debt
---------------------------------------------------------
Included in long-term debt at September 30, 1999, are two mortgage
loans, collateralized by real property, in the amounts of $299,000 and
$130,000, respectively, less current installments aggregating $353,000.
Premix refinanced the $299,000 mortgage loan on October 4, 1999 with a new
lender in the amount of $300,000 for a period of five years. As of
November 1, 1999, the interest rates on such mortgage loans were 8 3/4%
and 7 1/2%, respectively.
In connection with the Merger described in Note 2, the Company issued
8% subordinated debentures with a face amount value of $984,960 effective
December 31, 1998. Each $8.00 debenture was discounted to a value of $6.56
at December 31, 1998 using an effective interest rate of 16%. The
aggregate carrying value of the debentures at September 30, 1999 is
$852,000. The debentures are general, unsecured obligations of the
Company, subordinated in right of payment to all indebtedness to
institutional and other lenders of the Company. The Debentures are subject
to redemption, in whole or in part, at the option of the Company, at any
time at a redemption price of 100% of the principal amount thereof, plus
accrued and unpaid interest, if any, to the redemption date. Interest is
payable annually on July 1 of each year with the principal balance due and
payable December 31, 2001.
Other long-term debt in the aggregate amount of $200,000, less
current installments of $84,000, relates principally to equipment
financing. The notes bear interest at various rates ranging from 8.75% to
15.39% and are payable monthly through 2003.
10
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(9) Income Taxes and Tax Credit Carryforwards
-----------------------------------------
At September 30, 1999, the deferred tax asset of $817,000 primarily
consists of the tax effect of net operating loss carryforwards of
$9,200,000 less a valuation allowance of $2,200,000. Net operating losses
of approximately $5,500,000 expire thru 2000, the remaining balance of
approximately $3,700,000 expires in varying amounts through 2009.
During 1998, the Company recognized $927,000 of deferred tax assets
as a result of releasing a portion of the valuation allowance established
for the uncertainty of realizing net operating losses. The remaining
deferred tax assets are fully reserved at December 31, 1998. 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 September 30, 1999 and
December 31, 1998 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 nine months ended September 30, 1999 and 1998, the Company
recognized income tax expense of $313,000 and $343,000, respectively,
representing income before taxes at the statutory rate of 35%.
(10) Capital Stock
-------------
(a) Common Stock
------------
At September 30, 1999, the Company had outstanding 8,230,434
shares of Common Stock $.01 par value per share ("Common Stock"). The
holders of Common Stock are entitled to one vote per share on all
matters. In the event of liquidation, holders of Common Stock are
entitled to share ratably in all the remaining assets of the Company,
if any, after satisfaction of the liabilities of the Company and the
prior preferential rights of the holders of outstanding preferred
stock, if any.
Effective December 31, 1998, in connection with the Merger, the
Company's former Preferred Stockholders received 1,574,610 shares of
common stock and other consideration in exchange for their preferred
stock. See Note (2) Merger.
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.
In April 1998, an aggregate of 24,000 shares of Common Stock
were issued to employees of the Company upon the exercise of
11
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(10) Capital Stock (continued)
-------------------------
stock options previously granted under the Company's stock option
plans. The Company received aggregate cash proceeds of $2,400.
In September 1999, the Company issued from treasury an aggregate
of 47,863 shares of common stock to certain of its Directors and an
officer as part of their compensation for services rendered.
(b) Preferred Stock
---------------
The authorized preferred stock of the Company consists of
5,000,000 shares, $.01 par value per share, none of which are issued
as of September 30, 1999. 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.
(c) Redeemable Preferred Stock - $1.10 Cumulative Convertible Series
----------------------------------------------------------------
Prior to December 31, 1998 the Company had issued and
outstanding 300,121 shares of $1.10 cumulative convertible preferred
stock ("Preferred Stock"). The holders of Preferred Stock were
entitled to one vote per share on all matters without regard to
class, except that the holders of Preferred Stock were entitled to
vote as a separate class with regard to the issuance of any equity
securities which ranked 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 was entitled to cumulative quarterly
dividends at the rate of $1.10 per annum and was convertible into
1.149 shares of Common Stock. The liquidation preference of the
Preferred Stock was $10.00 per share, plus accrued but unpaid
dividends. The Preferred Stock was 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 had omitted dividends on its Preferred Stock since
the fourth quarter of 1985 aggregating $4,292,000 through September
30, 1998. The omission of Preferred Stock dividends was a reduction
in net income applicable to common stockholders and had been recorded
as non-current liabilities on the Company's consolidated balance
sheets.
The Preferred Stock was subject to redemption through a
mandatory sinking fund at a redemption price of $10.00 per share
12
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(10) Capital Stock (continued)
-------------------------
(c) Redeemable Preferred Stock- $1.10 Cumulative Convertible Series
(continued)
on April 1 of each year. As a result, 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 was not met, it was added to the requirements for
the next year.
The Company was 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 was
in default in the payment of any dividends on the Preferred Stock and
the sinking fund requirements were in arrears.
Effective December 31, 1998, all outstanding shares of Preferred
Stock were retired and all accumulated dividends were eliminated as a
result of the Merger.
(d) Warrants
--------
At September 30, 1999, the Company had the following outstanding
series of warrants:
(i) 200,000 warrants. Each warrant entitles the holder to purchase
one share of Common Stock at $.10 per share until June 29, 2000. 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.
(ii) 150,000 warrants. In January 1999 the Company issued 150,000
warrants to its investment banker for financial advisory services in
connection with the Merger. Each warrant entitles the holder to
purchase one share of common stock until December 31, 2003 at $.38
per share.
(11) Earnings Per Share of Common Stock
----------------------------------
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, ("net income applicable to common
13
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(11) Earnings Per Share of Common Stock (continued)
----------------------------------------------
stockholders"), after deducting preferred stock dividends accumulated
during the year 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. The difference between the
weighted average number of common shares outstanding and the weighted
average number of common and potentially dilutive shares outstanding
for the nine month and three month periods are shares represented by
outstanding warrants at September 30, 1999.
(12) Commitments and Contingencies
-----------------------------
(a) Acrocrete and other parties have been named in thirty-six pending
lawsuits in various Southeastern states, by homeowners, contractors,
subcontractors, or their insurance companies, claiming moisture
intrusion damages on single family residences. The Company's insurance
carriers have accepted coverage for thirty-three of the above claims
and are providing a defense under a reservation of rights. The Company
expects its insurance carriers to accept coverage for the other three
recently filed claims. 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 the outcome of this litigation.
The allegations of defects in synthetic stucco wall systems are
not restricted to Acrocrete products but rather are an industry-wide
issue. There has never been any defect proven against the Company. 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.
In response to the alleged defects and in compliance with modified
building codes adopted in North Carolina and Georgia. Acrocrete,
together with many other manufacturers of synthetic stucco wall
systems, has developed modified wall systems that allow the drainage of
incidental moisture that may enter the wall system. Most manufacturers
continue to produce the traditional (i. e., face-sealed) stucco systems
and in commercial construction, estimated to account for more than 50%
of product sales, the traditional system is still the product of
choice. The alleged defects have generally occurred in the residential
construction market. To the Company's knowledge, in the commercial
market, where methods of construction and quality control are monitored
more closely than in the residential market, the alleged drainage
problem has been limited.
On June 15, 1999, Premix was served with a complaint captioned
Mirage Condominium Association, Inc. v. Premix Marbletite Manufacturing
Co., et al., in Miami-Dade County Florida. The lawsuit raises a number
of allegations against 12 separate defendants involving alleged
14
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(12) Commitments and Contingencies (continued)
-----------------------------------------
construction defects. Plaintiff has alleged only one count against
Premix, which claims that certain materials, purportedly provided by
Premix to the Developer/Contractor and used to anchor balcony railings
to the structure were defective. The Company's insurance carrier is
providing a defense under a reservation of rights while it makes a
determination of coverage. Premix intends to vigorously defend this
claim and believes it has meritorious defenses. Premix is unable to
determine the exact extent of it exposure or the outcome of this
litigation.
Premix and Acrocrete are engaged in other legal actions and
claims arising in the ordinary course of its business, none of which
are believed to be material to the Company.
On April 27, 1999, certain Dissenting Shareholders owning shares
of the Company's preferred stock filed a petition for appraisal in the
Delaware Chancery Court to determine the fair value of the shares at
December 31, 1998, the Effective Date of the Company's Merger. (See
Note 2 to Notes to Consolidated Financial Statements).
(b) Leases
The Company pays aggregate annual rent of approximately $248,000
for its current operating facilities. The leases expire at various
dates ranging from March 31, 2000 to August 31, 2008. Comparable
properties at equivalent rentals are available for replacement of these
facilities if such leases are not extended.
(c) Howard L. Ehler, Jr. ("the Executive") is employed by the Company
as Executive Vice President and Chief Financial Officer pursuant to a
one year renewable agreement (the "Employment Agreement"). Mr. Ehler
receives a current annual base salary of $130,000, a car allowance, and
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 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
15
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(12) Commitments and Contingencies (continued)
-----------------------------------------
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. On January 21, 1998 and December 31, 1998, 25,000
and 50,000 shares, respectively, were released and reissued to Mr. Ehler
free of restrictions.
(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. Hansen 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. On January 21, 1998
and December 31, 1998, 33,333 and 133,334 shares, respectively, were
released and reissued to Mr. Hansen free of restrictions. Also Mr Hansen
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.
(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 its 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 year 2000 compliant.
(13) Stock Based Compensation
------------------------
In October 1995, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 123 Accounting
for Stock-Based Compensation (SFAS 123). SFAS 123, the disclosure
16
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(13) Stock Based Compensation (continued)
------------------------------------
provisions of which must be implemented for fiscal years beginning
subsequent to December 15, 1995, established a fair value based method of
accounting for stock based compensation plans, the effect of which can
either be disclosed or recorded. The Company has adopted the disclosure
requirement provisions of SFAS 123 in 1996. However, the Company has
retained the intrinsic value method of accounting for stock based
compensation, based on APB Opinion No. 225. Had the fair value based
accounting provisions of SFAS 123 been adopted, the effect would not be
significant.
(14) Fair Value of Financial Instruments
-----------------------------------
The carrying amount of the Company's debt instruments approximate
fair value as defined under SFAS 107. Fair value is estimated based on
discounted cash flows as well as other valuation techniques.
(15) Subsequent Event
----------------
In October 1999, the Company entered into a non-binding Letter of
Intent to acquire certain of the assets of A & R Supply, Inc. and it's
affiliated companies ("A & R Supply"). The closing is anticipated to be
effective January 1, 2000 and is subject to normal contingencies. The
purchase price for the proposed transaction will be funded through
utilization of the Company's line of credit and issuance of shares of
Common Stock.
A & R Supply operates three wholesale building materials
distribution facilities located in Pensacola, Florida, Destin, Florida,
and Foley, Alabama. Products distributed by A & R Supply include gypsum,
roofing and insulation products, as well as products manufactured by
Imperial's subsidiaries, Acrocrete and Premix Marbletite Manufacturing Co.
Sales of A & R Supply approximate $4,300,000 for the nine months ended
September 30, 1999.
17
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Results of Operations
-------------------------------------------------------------
and Financial Condition
-----------------------
General
-------
The Company's volume of business is related 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 building construction permits issued. The level of
construction activity is subject among other things, to population
growth, inventory of available housing units, government growth
policies and construction funding, among other things.
Results of Operations
---------------------
Nine Months and Three Months Ended September 30, 1999 Compared to
-----------------------------------------------------------------
1998
----
Net sales for the nine months and three months ended September
30, 1999 increased $3,822,000 and $789,000 or approximately 28% and
17% compared to the same periods in 1998. The increase in sales was
derived primarily from increased sales of Acrocrete products,
together with certain complementary products manufactured by other
companies, sold through the Company's distribution outlets. The sales
of Acrocrete products derived from the Company's new distribution
outlets in Tampa, Florida, acquired February 1, 1998, Dallas,
Georgia, opened July 1, 1998, and Gadsden, Alabama, opened April 1,
1999, accounted for approximately $2,063,000 and $404,000 of the
increase in sales for the nine months and three months ended
September 30, 1999, respectively.
Gross profit as a percentage of net sales for the nine months
and three months of 1999 was approximately 32% and 32%, compared to
33% and 32% in the comparable periods in 1998. The decrease in gross
profit margins for the nine month period was principally due to a
greater proportion of sales of lower gross margin products, including
certain complementary products manufactured by other companies sold
through the Company's distribution facilities. The Company is
attempting to increase gross profit margins through, among other
things, the Company's recent relocation of certain of its
manufacturing facilities and modifications made to manufacturing
processes to gain greater production efficiency. In addition, the
Company instituted a
18
Item 2. Management's Discussion and Analysis of Results of Operations
-------------------------------------------------------------
and Financial Condition (continued)
-----------------------
Results of Operations (continued)
---------------------
Nine Months and Three Months Ended September 30, 1999 Compared to
-----------------------------------------------------------------
1998 (continued)
----
price increase for certain products in the third quarter of 1999, in
an effort to offset the increases in costs of certain raw materials.
Selling, general and administrative expenses as a percentage of
net sales for the nine months and three months of 1999 was
approximately 25% and 27%, respectively, compared to 25% and 26%,
for the comparable periods last year. Selling, general and
administrative expenses increased $956,000 and $251,000, or
approximately 28% and 20%, for the nine months and three months
ended September 30, 1999, compared to the same periods in 1998. The
increase in expenses was primarily due to additional sales expenses
associated with servicing the increased volume of business,
including a new senior marketing and sales manager, and operating
costs related to the Company's new distribution facilities. The nine
month and three month 1998 results included professional and
consulting fees of $178,000 and $118,000, respectively, related to
preparation of the Company's plan of merger consummated in 1998.
The 1999 nine months and three months results include interest
expense in the amounts of $148,000 and $57,000, respectively,
associated with the issuance of Subordinated Debentures and payment
of obligations in connection with the Company's merger at December
31, 1998. Miscellaneous income for the nine months ended September
30, 1998 included $62,000 of reimbursements the Company received
from the State of Florida environmental authorities insurance
program for the costs the Company incurred in prior years related to
the removal of underground fuel tanks located at its facilities.
In the nine months and three months ended September 30, 1999
and 1998 the Company recognized an income tax provision at the
federal statutory rate of 35%. Based on the Company's net operating
loss carry-forwards, the Company is not expected to pay federal
income taxes for the current year.
As a result of the above factors, the Company derived net
income applicable to common stockholders of $569,000 and $128,000
for the nine months and three months ended September 30, 1999,
compared to net income of $344,000 and $56,000, for the comparable
periods in 1998. Net income applicable to common stockholders
includes charges of $248,000 and $83,000 in the 1998 nine month and
three month periods for unpaid cumulative dividends on preferred
stock which was eliminated effective December 31, 1998.
19
Item 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations (continued)
-------------------------
Liquidity and Capital Resources
-------------------------------
At September 30, 1999, the Company had working capital of
approximately $2,581,000 compared to working capital of $2,439,000
at December 31, 1998. As of September 30, 1999, the Company had cash
and cash equivalents of $819,000.
The Company's principal source of short-term liquidity is
existing cash on hand and the utilization of a $4,500,000 line of
credit with a commercial lender scheduled to expire on June 19,
2001. Premix 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
September 30, 1999, $2,017,000 had been borrowed against the line of
credit. Based on eligible receivables and inventory, the Company
had, under its line of credit, total available borrowings of
approximately $3,000,000 at September 30, 1999.
Trade accounts receivable represent amounts due from building
materials dealers located principally in Florida and Georgia who
have purchased products on an unsecured open account basis and
through Company owned warehouse distribution outlets. The Company
presently owns and operates five warehouse distribution outlets.
Accounts receivable, net of allowance, at September 30, 1999 was
$2,965,000 compared to $2,535,000 at December 31, 1998. The increase
in receivables of $430,000, or approximately 17%, was primarily
related to higher sales levels prevalent during the period preceding
September 30, 1999, as compared to the same three month period
preceding December 31, 1998, and to a lesser extent, slower payment
practices from certain of the Company's customers.
The Company's shareholders approved a plan of merger with a
wholly owned subsidiary becoming effective December 31, 1998. The
Plan satisfied the Company's redeemable preferred stock dividend
arrearage and mandatory sinking fund requirements which aggregated
$7,293,000 at September 30, 1998.
As a result of the consummation of the merger, the Company
issued an aggregate of $984,960 face amount, 8% subordinated
debentures, 1,574,610 shares of common stock and agreed to pay
$732,550 in cash to the former preferred shareholders. At September
30, 1999, the Company had paid $684,375 of such cash amount.
20
Item 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations (continued)
-------------------------
Liquidity and Capital Resources (continued)
-------------------------------
Holders representing 81,100 preferred shares have elected dissenters
rights, which, under Delaware law, would require cash payments equal
to the fair value of their stock, to be determined in accordance
with Section 262 of the Delaware General Corporation Law. The
Company is unable to determine the fair value of the preferred stock
but reserved the equivalent of the estimated value of option (b)
above, since that is the consideration the dissenting holders would
receive if they did not perfect their dissenters' rights under the
law. Dissenting stockholders filed a petition for appraisal rights
in the Delaware Chancery Court on April 27, 1999. Expenses
associated with the merger aggregated approximately $456,000 and
were expensed in 1998. The cash payable to the former preferred
shareholders not yet paid is presented as cash payable to
stockholders on the Company's Balance Sheet as at September 30,
1999.
The Company's stockholders' equity of $2,864,000 at September
30, 1999, compared to a common stockholders' deficit of $4,441,000
at December 31, 1997, resulted from the financial effect of the
merger, principally the elimination of the preferred stock and the
accumulated unpaid accrued dividends thereon, and net income derived
in 1998 and 1999.
In October 1999, the Company entered into a non-binding Letter
of Intent to acquire certain of the assets of three wholesale
building material distribution facilities located in Pensacola,
Florida, Destin, Florida, and Foley, Alabama. The closing, subject
to normal contingencies, is anticipated to be effective January 1,
2000. The Company expects to utilize up to $1,500,000 under its line
of credit and issue 225,000 shares of Common Stock to consummate the
proposed acquisition and fund operations.
The Company has no other material capital expenditures planned
for the next twelve months, other than expenditures that the Company
intends to spend to upgrade the Company's facilities and maintain
its equipment to support its operations. Management estimates it
will require a cash investment of approximately $150,000 to fund
these improvements during the next twelve months. However, the
Company presently is evaluating the feasibility of opening or
acquiring other warehouse distribution facilities. Capital needs
associated with opening or acquiring any additional facilities
cannot be estimated at this time.
The Company believes its cash on hand, utilization of unused
borrowings under its line of credit, and the 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 satisfy the obligations arising from the merger and support the
cash requirements of its capital expenditure programs.
21
Item 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations (continued)
-------------------------
Liquidity and Capital Resources (continued)
-------------------------------
The ability of the Company to maintain and improve its long
term liquidity is dependent upon the Company's ability to
successfully (i) maintain profitable operations; (ii) pay or
otherwise satisfy obligations arising from the merger; and (iii)
resolve current litigation on terms favorable to the Company.
This Form 10-Q contains certain forward looking statements
within the meaning of the Private Securities Litigation Reform Act
of 1995 with respect to the financial condition, results of
operations and business of Imperial Industries, Inc., and its
subsidiaries, including statements made under Management's
Discussion and Analysis of Financial Condition and Results of
Operations. These forward looking statements involve certain risks
and uncertainties. No assurance can be given that any of such
matters will be realized. Factors that may cause actual results to
differ materially from those contemplated by such forward looking
statements include, among others, the following: the competitive
pressure in the industry; general economic and business conditions;
the ability to implement and the effectiveness of business strategy
and development plans; quality of management; business abilities
and judgement of personnel; and availability of qualified
personnel; labor and employee benefit costs.
Year 2000 Issues
----------------
Management has undertaken a company wide program to prepare the
Company's computer systems and other applications for the year
2000. The year 2000 problem, which is common to most businesses,
concerns the inability of such systems to properly recognize dates
and date- sensitive information on and beyond January 1, 2000. In
1997, the Company began to assess the vulnerability of its systems
to the year 2000 problem. Based on such assessment, the Company has
developed a year 2000 compliance plan, under which all key
information systems are being tested, and non-compliant software
replaced. The Company expects to complete testing and verification
of such systems for year 2000 compliance during 1999. The Company
is also surveying the year 2000 compliance status and compatibility
of customers' and suppliers' systems which interface with the
Company's systems or could otherwise impact the Company's
operations.
The Company currently believes that it will be able to modify
or replace its affected systems in time to minimize any detrimental
effects on its operations. The most reasonable likely worst case
scenario of failure by the Company, or its customers, or suppliers,
to resolve the year 2000 problem would be a temporary slowdown of
operations at one or more of the Company's facilities and temporary
inability on the part of the Company to timely process orders and
billing and deliver finished products to its customers. The Company
is currently considering and identifying various contingency
options, including manual alternatives to systems operations, which
would minimized the risk of any unresolved year 2000 problems of
their
22
Item 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations (continued)
-------------------------
Liquidity and Capital Resources (continued)
-------------------------------
operations.
The Company believes any internal staff costs, replacement of
systems and consulting expenses to prepare the systems for the year
2000 will not be material to the Company's operating results,
liquidity or financial position.
23
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
PART II. Other Information
Item 1. Legal Proceedings
-----------------
See notes to Consolidated Financial Statements, Note 10(a), set
forth in Part I Financial Information.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
Exhibit No. Description
- ----------- -----------
2.1 Agreement and Plan of Merger, by and between Imperial Industries,
Inc. and Imperial Merger Corp. dated October 12, 1998 (Form S-4
Registration Statement, Exhibit 2).
3.1 Certificate of Incorporation of the Company, (Form S-4
Registration Statement, Exhibit 3.1).
3.3 By-Laws of the Company, (Form S-4 Registration Statement, Exhibit
3.2).
4.1 Form of Common Stock Purchase Warrant issued to Auerbach, Pollak
& Richardson, Inc., (Form S-4 Registration Statement, Exhibit
4.1).
4.2 Form of 8% Subordinated Debenture, (Form S-4 Registration
Statement, Exhibit 4.2).
4.3 Warrant Agreements as of June 22, 1988 between the Company and two
of its directors, S. Daniel Ponce and Lisa M. Brock, formerly
Lisa M. Thompson. (Form 8-K dated June 29, 1988, File No. 1-7190,
Exhibit 10.3)
10.1 Financing Agreements, dated as of June 20, 1988 between Premix
and Congress. (Form 8-K dated June 29, 1988, File No. 1-7190,
Exhibit 10.2)
10.2 Amendment, dated January 12, 1998 to the Financing Agreement
filed September 4, 1998, (Form S-4 Registration Statement,
Exhibit 10.1 (ii).
10.4 1984 Stock Option Plan (Form 10-K, year ended December 31, 1984,
File No. 1-7190, Exhibit 10.5)
10.5 Agreement dated as of May 16, 1989, between the Company and four
insurance companies, relating to the defense and indemnity of
asbestos related personal injury claims against Premix.
(Form 10-Q, quarter ended September 30, 1989, File No. 1-7190,
Exhibit 10)
24
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
PART II. Other Information
(continued)
Item 6. Exhibits and Reports on Form 8-K (continued)
--------------------------------
Exhibit No. Description
- ----------- -----------
10.6 Employment Agreement dated July 26, 1993 between Howard L. Ehler,
Jr. and the Company. (Form 8-K dated July 26, 1993)
10.7 Employment Agreement dated July 3, 1996 between Fred H. Hansen
and the Company, (Form S-4 Registration Statement, Exhibit 10.3).
10.8 Restricted Stock Plan, (Form S-4 Registration Statement, Exhibit
10.4).
10.9 License Agreement between Bermuda Roof Company and Premix
Marbletite Manufacturing Co., (Form S-4 Registration Statement,
Exhibit 10.5).
(b) Reports on Form 8-K
-------------------
None
25
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
November 12, 1999
26