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, 1997
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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.
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(Exact name of registrant as specified in its charter)
Delaware 59-0967727
- -------------------------------- -------------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3009 Northwest 75th Avenue, Miami, Florida 33122-1439
------------------------------------------ ----------
(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 November 3, 1997 6,483,961.
Total number of pages contained in this document: 22
Page 1 of 23
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Index
Page No.
Part I. Financial Information
Consolidated Balance Sheets
September 30, 1997 and December 31, 1996 3-4
Consolidated Statements of Operations
Nine Months and Three Months Ended
September 30, 1997 and 1996 5
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1997 and 1996 6-7
Notes to Consolidated Financial Statements 8-17
Management's Discussion and Analysis of Results
of Operations and Financial Condition 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
Page 2 of 23
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, December 31,
1997 1996
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 513,000 $ 455,000
Trade accounts receivable (less
allowance for doubtful accounts of
$172,000 in 1997 and $145,000 in 1996) 2,148,000 1,508,000
Inventories 1,233,000 1,272,000
Other current assets 120,000 22,000
----------- -----------
Total current assets 4,014,000 3,257,000
Property, plant and equipment, at cost 2,980,000 2,789,000
Less accumulated depreciation (2,116,000) (2,020,000)
----------- -----------
Net property, plant and equipment 864,000 769,000
Other assets 122,000 90,000
----------- -----------
$5,000,000 $4,116,000
=========== ===========
Page 3 of 23
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, December 31,
1997 1996
(Unaudited)
Liabilities and Common Stock and other Stockholders' Deficit
Current liabilities:
Notes payable $1,388,000 $1,424,000
Current portion of long-term debt 149,000 161,000
Accounts payable 678,000 660,000
Accrued expenses and other liabilities 269,000 140,000
----------- -----------
Total current liabilities 2,484,000 2,385,000
Long-term debt, less current maturities 837,000 895,000
----------- -----------
Preferred dividends in arrears 3,962,000 3,714,000
----------- -----------
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; 6,483,961 and
5,562,461 issued and outstanding,
respectively 663,000 571,000
Additional paid-in-capital 7,260,000 7,229,000
Accumulated deficit (12,879,000) (13,351,000)
----------- -----------
(4,956,000) (5,551,000)
Less cost of shares in treasury (147,863
shares in 1997 and 1996) (328,000) (328,000)
----------- -----------
Total common stock and other
stockholders' deficit (5,284,000) (5,879,000)
----------- -----------
$5,000,000 $4,116,000
=========== ===========
See accompanying notes to consolidated financial statements.
Page 4 of 23
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
<TABLE>
Nine Months Ended Three Months Ended
September 30, September 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net sales $12,155,000 $10,433,000 $4,151,000 $3,481,000
Cost of sales 8,349,000 7,468,000 2,849,000 2,489,000
------------ ------------ ----------- -----------
Gross profit 3,806,000 2,965,000 1,302,000 992,000
Selling, general and
administrative expenses 2,817,000 2,434,000 925,000 882,000
------------ ------------ ----------- -----------
Operating income 989,000 531,000 377,000 110,000
Other income (expense):
Interest expense (257,000) (238,000) (90,000) (81,000)
Miscellaneous income (expense) (12,000) 28,000 (8,000) 5,000
------------ ------------ ----------- -----------
(269,000) (210,000) (98,000) (76,000)
------------ ------------ ----------- -----------
Net income 720,000 321,000 279,000 34,000
Less: Dividends on redeemable
preferred stock (note 8b) (248,000) (248,000) (83,000) (83,000)
------------ ------------ ----------- -----------
Net income (loss) lapplicable to
common stockholders (note 9) $ 472,000 $ 73,000 $ 196,000 $ (49,000)
============ ============ =========== ===========
Weighted average number of common and
common equivalent shares outstanding 6,138,986 5,440,000 6,496,073 5,533,175
============ ============ =========== ===========
Net income (loss) per share applicable to
common stockholders (note 9) $.08 $.01 $.03 $(.01)
============ ============ =========== ===========
</TABLE>
See accompanying notes to consolidated financial statement.
Page 5 of 23
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Increase (Decrease) In Cash and Cash Equivalents
Nine Months Ended
September 30,
1997 1996
(Unaudited)
Cash flows from operating activities:
Net income $720,000 $321,000
Adjustments to reconcile net income
to net cash provided by:
Depreciation 110,000 98,000
Amortization 17,000 13,000
Provision for doubtful accounts 76,000 63,000
Compensation expense - common stock 41,000 24,000
Loss (gain) on disposal of property
and equipment 2,000 (1,000)
(Increase) decrease in:
Accounts receivable (716,000) (228,000)
Inventory 39,000 44,000
Prepaid expenses and other assets (113,000) (58,000)
Increase (decrease) in:
Accounts payable 18,000 (91,000)
Accrued expenses 129,000 49,000
--------- ---------
Total adjustments to net income (397,000) (87,000)
Net cash provided by operating
activities 323,000 234,000
--------- ---------
Cash flows from investing activities
Purchase of property, plant
and equipment (215,000) (95,000)
Proceeds from disposal of property
and equipment 8,000 4,000
Proceeds from exercise of stock options 48,000 -
--------- ---------
Cash used in investing activities (159,000) (91,000)
Cash flows from financing activities
Decrease in notes payable
banks - net (36,000) (26,000)
Reduction of long-term debt - net (70,000) (87,000)
--------- ---------
Cash used in financing activities (106,000) (113,000)
Net increase in cash and cash equivalents 58,000 30,000
Cash and cash equivalents
beginning of period 455,000 252,000
--------- ---------
Cash and cash equivalents end of period $513,000 $282,000
========= =========
Page 6 of 23
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Increase (Decrease) In Cash and Cash Equivalents
-continued-
Nine Months Ended
September, 30
1997 1996
(Unaudited)
Supplemental disclosure
of cash flow information:
Cash paid during the nine months for:
Interest $257,000 $235,000
========= =========
Non-cash transactions:
During the nine months ended September 30, 1997 and
1996, 202,333 and 175,000 shares of Common Stock
was issued to directors and employees of the
Company $ 41,000 $ 24,000
========= =========
See accompanying notes to consolidated financial statements.
Page 7 of 23
<PAGE>
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 nine
months ended September 30, 1997 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1997.
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, 1996.
(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 September 30, 1997
and December 31, 1996 are time deposits of $257,000 and $153,000,
respectively.
(4) Income Taxes
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).
(5) Notes Payable
Included in notes payable at September 30, 1997, is $1,388,000
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
Page 8 of 23
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(5) Notes Payable (continued)
by Premix's and Acrocrete's accounts receivable and inventory.
Borrowings under the line of credit is limited to the lesser of (i)
80% of the net collectible value of eligible accounts receivable and
30% of the net realizable value of eligible inventory and (ii)
$2,000,000. The line of credit bears interest at the lender's prime
rate plus 4% (12-1/2% at November 1, 1997) and expires June 20th, of
each year, but is automatically extended for an additional one year
term unless either party gives the other notice of termination by
April 21 of each year. The line of credit was automatically extended
through June 20, 1998. At September 30, 1997, the line of credit
limit available for borrowing aggregated $2,000,000, of which
$1,388,000 had been borrowed. For the nine months ended September 30,
1997 and 1996, the maximum borrowings at any month end were
$1,585,000 and $1,419,000 respectively. The average month end amount
outstanding during the nine months ended September 30, 1997 and 1996
periods were $1,426,000 and $1,299,000 respectively.
(6) Long-Term Debt
Included in long-term debt at September 30, 1997, are two
mortgage loans, collateralized by Premix's real property, in the
amounts of $495,000 and $312,000, respectively, less current
installments of $43,000. Each loan bears adjustable interest rates.
As of November 1, 1997, interest rates on such mortgage loans were
10.5% and 12%, respectively.
Other long-term debt in the aggregate amount of $156,000, less
current installments of $83,000, relates principally to equipment
financing. The equipment financing notes bear interest at various
rates ranging from 8.75% to 15.39% and are payable, principal and
interest, monthly through 1998.
(7) Tax Credit Carryforwards
At September 30, 1997, the Company had approximately $11.8
million of net operating losses, for book and tax purposes, available
through the year 2009 and investment and other tax credits of
approximately $165,000 available through the year 2001. A valuation
allowance for 100% of the resulting net deferred tax asset of
approximately $4.3 million has been established due to the
uncertainties relating to its eventual realizability. Changes in the
Company's ownership, if any, may have the effect of limiting the
annual utilization of these carryforwards.
Page 9 of 23
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(8) Capital Stock
(a) Common Stock
At September 30, 1997, the Company had outstanding
6,483,961 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 voting
together with the holders of Preferred Stock. 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.
On May 23, 1996, the Company issued from treasury 25,000
shares of Common Stock to an employee of the Company as part of
his employment compensation. On July 12, 1996, the Company
issued an aggregate of 150,000 shares of Common Stock to the
Directors and Executive Vice President of the Company as part of
their compensation for services rendered.
On February 4, 1997, the Company issued 33,333 shares of
authorized, but unissued Common Stock to the President of Premix
and Acrocrete as part of his employment compensation.
On May 1, 1997, 25,400 shares of Common Stock were issued as
a result of the exercise of stock options previously granted
under the Company's stock option plans.
On May 29, 1997, the Company issued an aggregate of 144,000
shares of Common Stock to the Directors and certain employees of
the Company as part of their compensation for services rendered.
Subsequent to June 30, 1997, the Company's Board of
Directors adopted a 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. On
July 31, 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 will
Page 10 of 23
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(8) Capital Stock (continued)
vest over a three year period based on certain performance goals
set forth in the Plan. An aggregate of 66,667 shares will vest
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 thereafter.
Prior to vesting, the holders will receive all of the benefits of
ownership of the restricted shares, but will not have the right
to transfer such unvested shares.
On July 15, 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 Directors and the Executive Vice
President of the Company as a result of the exercise of Stock
Options previously granted under the Company's stock option
plans. The Company received aggregate cash proceeds of $45,210.
(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.
At September 30, 1997, 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.
Page 11 of 23
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(8) Capital Stock (continued)
(b) Preferred Stock - $1.10 Cumulative Convertible Series (continued)
The Company has omitted dividends on its Preferred Stock for
the nine months ended September 30, 1997 in the amount of
$248,000 and for each quarter since the fourth quarter of 1985
aggregating $3,962,000 through September 30, 1997. 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 September 30, 1997, 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.
(c) Warrants
At September 30, 1997, the Company had the following
outstanding series of warrants:
(i) 1,316,999 warrants issued in the Company's public offering
in 1983. Each warrant entitles the holder to purchase one share
of Common Stock at $4.80 per share until March 31, 1998.
(ii) 200,000 warrants. Each warrant entitles the holder to
purchase one share of Common Stock at $.10 per share until June
29, 2000. The warrants were extended to June 29, 2000 from June
28, 1997 on June 20, 1997. Two directors acquired 150,000 and
50,000 warrants, respectively, in connection with a $400,000
Page 12 of 23
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(8) Capital Stock (continued)
(c) Warrants (continued)
financing in 1988. The loan has since been repaid by the
Company.
(d) Stock Options
At September 30, 1997, 24,000 shares of Common Stock were
reserved for issuance pursuant to stock options granted under the
Company's stock option plans. The exercise price of all such
options is $.10 per share. No additional options may be granted
under any of the Company's stock option plans.
(9) Net Income Applicable to Common Stockholders
Net income applicable to common stockholders includes $248,000
in Preferred Stock dividends accrued, but not declared, for each of
the nine months ended September 30, 1997 and 1996, respectively.
Net income per share of Common Stock is computed after
considering the effect of Preferred Stock dividends, on the basis of
the weighted average number of Common Stock and Common Stock
equivalents outstanding during the period. Common stock equivalents
represent the dilutive effect of the assumed exercise of outstanding
stock options and certain warrants exercisable at $.10 per share.
Shares issuable in exchange for convertible Preferred Stock and
warrants exercisable at $4.80 per share are antidilutive and,
therefore, are not included in the computations.
(10) Commitments and Contingencies
(a) In April 1996, the Company and Premix were dismissed as a
defendant, to which it had been a party with other unaffiliated
companies, in the remaining 27 asbestos lawsuits which were pending
against the Company and Premix in various circuit courts in Alabama
and Florida. Such lawsuits sought unspecified damages alleging
injuries to persons exposed to products containing asbestos. As of
November 1, 1997, the Company is not a defendant in any lawsuits which
allege injuries due to abestos exposure.
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.
Page 13 of 23
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IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(10) Commitments and Contingencies (continued)
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 a
settlement with the general contractor defendant.
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
claims by 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,
Page 14 of 23
<PAGE>
INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(10) Commitments and Contingencies (continued)
subcontractors, material men, or suppliers which might be responsible
for any damages pertaining to the alleged defects. The lawsuit
against Acrocrete and the other parties alleges negligent
misrepresentation, breach of warranty, fraud, unfair and deceptive
trade practices and requests punitive damages.
Acrocrete believes it has meritorious defenses against the claim
and cross-claims against the general contractor and installer of the
product. Acrocrete expects the Company's insurance carriers to accept
coverage and provide a defense under reservation of rights. Acrocrete
is unable, at this time, to determine the exact extent of its exposure
or outcome of the litigation of this lawsuit.
In addition, Acrocrete has been named in three similar lawsuits
filed against Acrocrete and other parties (contractors and sub-
contractors), by homeowners, or their insurance companies, claiming
moisture intrusion damages on single family residences.
Acrocrete is vigorously defending these cases and believes it
has meritorious defenses, counter-claims and claims against third
parties. Acrocrete expects the Company's insurance carriers to accept
coverage for each of the above claims and provide defense under
reservation of rights. Acrocrete is unable to determine the exact
extent of its exposure or outcome of litigation of these lawsuits.
(b) The Company pays aggregate monthly rent of approximately $9,000
for three of its operating facilities. The leases expire at various
dates ranging from April 30, 1998 to December 31, 1998. Comparable
properties at equivalent rentals are available for replacement of
these facilities if such leases are not extended.
In addition, the Company leases one automobile under an
agreement which provides for a minimum monthly payment of $600
through June 1998. The Company is subject to an operating lease
agreement for certain computer equipment which provides for monthly
rental payments of $971 through February, 1998.
(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
$100,000. 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,
Page 15 of 23
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(10) Commitments and Contingencies (continued)
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
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, providing for an
annual base salary to $117,601 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.
(11) Stock Based Compensation
Effective 1996, the Company has adopted the disclosure
provisions of Statement of Financial Accounting Standards No. 123
Page 16 of 23
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(11) Stock Based Compensation (continued)
("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.
Page 17 of 23
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
General
The Company's business is related primarily to the level of
construction activity in 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
Nine Months Ended September 30, 1997 Compared to 1996
Net sales for the nine months ended September 30, 1997,
increased $1,722,000, or approximately 17%, compared to the same
period in 1996. For the three months ended September 30, 1997, net
sales increased $670,000, or approximately 19%, compared to the
same quarter in 1996. Approximately $1,063,000 of the increase in
sales for the nine months ended September 30, 1997 was derived from
the sale of Acrocrete products, together with certain complementary
products manufactured by other companies, which were sold through
the Company's wholesale distribution facilities. Premix products,
principally a roof tile mortar product, accounted for the balance
of the increase in sales.
Gross profit as a percentage of net sales for the nine months
and three months ended September 30, 1997, was approximately 31%
and 31%, respectively, compared to 28% and 28% in the comparable
periods in 1996. The increase in gross profit margins was
principally due to savings realized from raw material purchases and
modifications made to the Company's manufacturing process to gain
greater production efficiency.
Selling, general and administrative expenses as a percentage
of net sales for the nine months and three months ended September
30, 1997 was approximately 23% and 22%, respectively, compared to
23% and 25%, for the same periods in 1996. Selling, general and
administrative expenses for the nine months ended September 30,
1997 increased $383,000, or approximately 16% compared to 1996.
The increase in expenses was primarily due to expenses associated
with the expanded operations and additional sales and delivery
expenses associated with servicing the increased volume of
business.
Page 18 of 23
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Results of Operations (continued)
Nine Months Ended and Three Months Ended September
30, 1997 Compared to 1996 (continued)
Interest expense for the nine months ended September 30, 1997
increased $19,000, or approximately 8%, compared to 1996, primarily
because of increased borrowings under its line of credit with its
commercial lender to fund working capital requirements resulting
from increased sales.
As a result of the above factors and after giving effect to
accrued unpaid dividends on the redeemable preferred stock, the
Company derived net income applicable to common stockholders of
$472,000, or $.08 per share in 1997, compared to net income of
$73,000, or $.01 per share, in 1996. Net income applicable to
common stockholders includes charges of $248,000 in the 1997 and
1996 nine month periods for unpaid cumulative dividends on
preferred stock.
Liquidity and Capital Resources
At September 30, 1997, the Company had working capital of
approximately $1,530,000 compared to working capital of $872,000 at
December 31, 1996. As of September 30, 1997, the Company had cash
and cash equivalents of $513,000.
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 20,
1998. Premix and Acrocrete, the Company's subsidiaries, borrow on
the line of credit collateralized by, its eligible accounts
receivable and inventory. Borrowings under the line of credit is
limited to the lesser of (i) 80% of the net collectible value of
eligible accounts receivable and 30% of the net realizable value of
eligible inventory and (ii) $2,000,000. 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, 1997, $1,388,000 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
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. As a result
of a higher level of sales generated in 1997 compared to 1996, the
Page 19 of 23
<PAGE>
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)
Company's accounts receivable increased from $1,653,000 at December
31, 1996 to $2,300,000 at September 30, 1997.
The Company's common stockholders' deficit of $5,284,000 at
September 30, 1997, 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 its manufacturing processes to gain
greater production efficiency. In the first nine months of 1997,
these actions enabled the Company to derive net income of $720,000
prior to the application of unpaid dividends on the redeemable
preferred stock, compared to a net income of $381,000 in 1996.
The Company has omitted payment of cash dividends on its
preferred stock since the fourth quarter of 1985, and has accrued
$3,962,000 of dividends in arrears on the preferred stock as of
September 30, 1997. 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.
The Company believes its cash on hand and the maintenance of
its borrowing arrangement with its commercial lender will provide
sufficient cash to supplement any cash shortfalls from operations
and provide adequate liquidity for the next twelve months.
The Company has no material capital expenditures scheduled for
the next twelve months, other than expenditures that the Company
is expected to spend to upgrade the Company's manufacturing
facilities in Atlanta, Georgia and Casselberry, Florida. The
Company expended approximately $150,000 in the first nine months of
1997 to upgrade its manufacturing processes in its facilities and
estimates it will require an additional $100,000 for improvements
to its equipment and facilities. Additionally, the Company is
presently evaluating certain other cost reduction projects aimed at
consolidating and expanding manufacturing capabilities to more
closely mirror market geographic demands. These projects include
the proposed sale of the Company's manufacturing facility in Miami
and possibly moving the Company's manufacturing facility in
Atlanta.
Page 20 of 23
<PAGE>
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)
The ability of the Company to maintain and improve its long term
liquidity is dependent upon the Company's ability to successfully
(i) achieve long-term 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.
Page 21 of 23
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
PART II. Other Information
Item 1. Legal Proceedings
See notes to Consolidated Financial Statements, Note 10(a),
set forth in Part I Financial Information.
Item 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 September 30, 1997, the Company has
omitted dividends aggregating $3,962,000 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 2.1 Amended Plan of Reorganization [Incorporated by
reference to the Company's Form 8-K, File No. 1-7190, dated June
26, 1987.]
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
Page 22 of 23
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IMPERIAL INDUSTRIES, INC.
By: /S/ Howard L. Ehler, Jr.
---------------------------------------
Howard L. Ehler, Jr.
Executive Vice President/
Principal Executive Officer
By: /S/ Betty Jean Murchison
---------------------------------------
Betty Jean Murchison
Principal Accounting Officer/
Assistant Vice President
November 12, 1997
Page 23 of 23
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
1997 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 513
<SECURITIES> 0
<RECEIVABLES> 2,320
<ALLOWANCES> 172
<INVENTORY> 1,233
<CURRENT-ASSETS> 4,014
<PP&E> 2,980
<DEPRECIATION> 2,116
<TOTAL-ASSETS> 5,000
<CURRENT-LIABILITIES> 2,484
<BONDS> 0
3,001
0
<COMMON> 663
<OTHER-SE> (5,619)
<TOTAL-LIABILITY-AND-EQUITY> 5,000
<SALES> 12,155
<TOTAL-REVENUES> 12,155
<CGS> 8,349
<TOTAL-COSTS> 8,349
<OTHER-EXPENSES> 2,829
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 257
<INCOME-PRETAX> 720
<INCOME-TAX> 0
<INCOME-CONTINUING> 720
<DISCONTINUED> 0
<EXTRAORDINARY> (248)
<CHANGES> 0
<NET-INCOME> 472
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.08
</TABLE>
