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 March 31, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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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
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(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3009 Northwest 75th Avenue, Miami, Florida 33122-1439
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (305) 477-7000
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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 May 4, 1998: 6,507,961
Total number of pages contained in this document: 23
Page 1 of 23
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IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Index
Page No.
Part I. Financial Information
Consolidated Balance Sheets
March 31, 1998 and December 31, 1997 3-4
Consolidated Statements of Operations
Three Months Ended March 31, 1998 and 1997 5
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1998 and 1997 6-7
Notes to Consolidated Financial Statements 8-17
Management's Discussion and Analysis of Results
of Operations and Financial Conditions 18-21
Part II. Other Information and Signatures
Item I. Legal Proceedings 22
Item 3. Default Upon Senior Securities 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
Page 2 of 23
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IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, December 31,
Assets 1998 1997
(Unaudited)
Current assets:
Cash and cash equivalents $ 582,000 $ 552,000
Trade accounts receivable (less
allowance for doubtful accounts of
$194,000 in 1998 and $176,000 in 1997) 2,118,000 1,534,000
Inventories 1,434,000 1,204,000
Deferred taxes 252,000 350,000
Other current assets 305,000 60,000
----------- -----------
Total current assets 4,691,000 3,700,000
Property, plant and equipment, at cost 3,207,000 2,974,000
Less accumulated depreciation (2,068,000) (2,100,000)
----------- -----------
Net property, plant and equipment 1,139,000 874,000
Deferred taxes 450,000 450,000
Other assets 99,000 104,000
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$6,379,000 $5,128,000
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Page 3 of 23
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IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, December 31,
1998 1997
(Unaudited)
Liabilities and Common Stock and other Stockholders' Deficit
Current liabilities:
Notes payable $1,135,000 $ 778,000
Current portion of long-term debt 170,000 130,000
Accounts payable 1,072,000 580,000
Accrued expenses and other liabilities 254,000 217,000
----------- -----------
Total current liabilities 2,631,000 1,705,000
Long-term debt, less current maturities 961,000 819,000
Preferred dividends in arrears 4,127,000 4,044,000
Redeemable preferred stock, $1.00 par
value, $1.10 cumulative convertible
series; 300,121 shares outstanding; at
$10 per share redemption value 3,001,000 3,001,000
Commitments and contingencies - -
Common stock and other stockholders' deficit:
Common stock, $.10 par value, authorized
20,000,000 shares; 6,483,961 and
6,483,961 issued, respectively 663,000 663,000
Additional paid-in-capital 7,260,000 7,260,000
Accumulated deficit (11,936,000) (12,036,000)
----------- -----------
(4,013,000) (4,113,000)
Less cost of shares in treasury (147,863
shares in 1998 and 1997) (328,000) (328,000)
Total common stock and other
stockholders' deficit (4,341,000) (4,441,000)
----------- -----------
$6,379,000 $5,128,000
=========== ===========
See accompanying notes to consolidated financial statements.
Page 4 of 23
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IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
Three Months Ended
March 31,
1998 1997
Net sales $4,111,000 $3,703,000
Cost of sales 2,791,000 2,576,000
----------- -----------
Gross profit 1,320,000 1,127,000
Selling, general and
administrative expenses 1,046,000 918,000
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Operating income 274,000 209,000
Other income (expense):
Interest expense (64,000) (80,000)
Miscellaneous income 71,000 10,000
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7,000 (70,000)
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Income before income taxes 281,000 139,000
Income tax expense (98,000) -
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Net income 183,000 139,000
Less: Dividends on redeemable
preferred stock (83,000) (83,000)
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Net income applicable to common
stockholders $ 100,000 $ 56,000
=========== ===========
Basic earnings per common share $ .02 $ .01
=========== ===========
Diluted earnings per common share $ .02 $ .01
=========== ===========
See accompanying notes to consolidated financial statements.
Page 5 of 23
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IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Increase (Decrease) In Cash and Cash Equivalents
Three Months Ended
March 31,
1998 1997
(Unaudited)
Cash flows from operating activities:
Net income $ 183,000 $139,000
Adjustments to reconcile net income
to net cash (used in) provided by:
Depreciation 39,000 35,000
Amortization 5,000 5,000
Provision for doubtful accounts 18,000 40,000
Income tax expense 98,000 -
(Gain) loss on disposal of fixed assets (3,000) 2,000
Compensation expense - issuance of stock 9,000 6,000
(Increase) decrease in:
Accounts receivable (602,000) (453,000)
Inventory (230,000) 50,000
Prepaid expenses and other assets (254,000) (100,000)
Increase (decrease) in:
Accounts payable 492,000 220,000
Accrued expenses and other liabilities 37,000 77,000
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Total adjustments to net income (391,000) (118,000)
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Net cash (used in) provided by
operating activities (208,000) 21,000
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Cash flows from investing activities
Purchases of property, plant
and equipment (307,000) (58,000)
Proceeds received from sale of
property and equipment 6,000 8,000
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Net cash used in investing activities (301,000) (50,000)
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Cash flows from financing activities
Increase (decrease) in notes payable
banks - net 357,000 (45,000)
Proceeds from issuance of long-term debt 226,000 -
Repayment of long-term debt (44,000) (50,000)
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Net cash provided by (used in)
financing activities 539,000 (95,000)
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Net increase (decrease) in cash and
cash equivalents 30,000 (124,000)
Cash and cash equivalents beginning of period 552,000 455,000
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Cash and cash equivalents end of period $ 582,000 $331,000
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Page 6 of 23
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IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Increase (Decrease) In Cash and Cash Equivalents
-continued-
Three Months Ended
March 31,
1998 1997
(Unaudited)
Supplemental disclosure
of cash flow information:
Cash paid during the three months for:
Interest $62,000 $80,000
=========== ===========
Non-cash transactions:
During the three months ended March 31,
1998 and 1997, 58,333 (shares vested under
the Company's Restricted Stock Plan) and
33,333 shares of Common Stock were
issued to officers of the Company $ 9,000 $ 6,000
=========== ===========
See accompanying notes to consolidated financial statements.
Page 7 of 23
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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 three
months ended March 31, 1998 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1998.
The significant accounting principles used in the preparation of these
interim financial statements are the same as those used in the
preparation of the annual audited consolidated financial statements.
These statements should be read in conjunction with the financial
statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1997.
The preparation of financial statements in conformity with
generally accepted accounting principals requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
(2) Revenue Recognition Policy
Revenue from sale transactions is recorded upon shipment and
delivery of inventory to the customer, net of discounts and
allowances.
(3) Cash Equivalents
The Company has defined cash and cash equivalents as those highly
liquid investments with a maturity of three months or less when
purchased. Included in cash and cash equivalents at March 31, 1998 and
December 31, 1997 are short term time deposits of $261,000 and
$259,000, respectively.
(4) Income Tax Policy
The Company records income taxes using the liability method.
Under this method, deferred tax liabilities are recognized for
temporary differences that will result in taxable amounts in future
years. Deferred tax assets are recognized for temporary differences
that will result in deductible amounts in future years. These
temporary differences are primarily the result of net operating loss
carryforwards. Valuation allowances are recognized if it is more
likely than not that some or all of the deferred tax assets will not
be realized (See note 7).
Page 8 of 23
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IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(5) Notes Payable
Included in notes payable at March 31, 1998, is $955,000 which
represents the amount outstanding under a $2,000,000 line of credit
from a commercial lender to Premix-Marbletite Manufacturing Co.
("Premix") and Acrocrete, Inc. ("Acrocrete"), the Company's two
principal operating subsidiaries. The line of credit is
collateralized by Premix's and Acrocrete's accounts receivable and
inventory. The line of credit bears interest at the lender's prime
rate plus 2% (10-1/2% at May 4, 1998) and expires June 19, 1999,
subject to annual renewal. The line of credit is automatically
extended for an additional one year term unless either party gives the
other notice of termination by April 20th of each year. At March 31,
1998, the line of credit limit available for borrowing aggregated
$2,000,000, of which $955,000 had been borrowed. For the three
months ended March 31, 1998 and 1997, the maximum borrowings at any
month end were $1,070,000 and $1,391,000 respectively. The average
month end amount outstanding during the three months ended March 31,
1998 and 1997 periods were $935,000 and $1,386,000, respectively.
Notes payable at March 31, 1998 also includes a $180,000
obligation payable monthly over a 90 day period without interest
incurred in connection with the acquisition of assets associated with
the purchase of a wholesale distribution location in Tampa, Florida
during the first quarter of 1998. (See Note 6).
(6) Long-Term Debt and Current Installments of Long-Term Debt
Included in long-term debt at March 31, 1998, are two mortgage
loans, collateralized by Premix's real property, in the amounts of
$476,000 and $309,000, respectively, less current installments of
$44,000. Each loan bears adjustable interest rates. As of May 4,
1998, interest rates on such mortgage loans were 10.5% and 12%,
respectively. Premix is under contract to sell the facility
collateralized by the $476,000 loan on September 30, 1998 subject to
the buyer completing their due diligence prior to May 23, 1998. Upon
the sale of the facility, the $476,000 obligation would be satisfied.
Effective as of February 1, 1998, Acrocrete, Inc. acquired the
property, plant, equipment and inventory of a wholesale distribution
facility, engaged in the sale of landscape stone and building
materials. The total purchase price of the acquisition was
approximately $400,000. A portion of the purchase price was financed
through a $215,000 mortgage note included in long-term debt at March
31, 1998, collateralized by the facility's real property, less current
installments of $58,000. Principal and interest is payable monthly
over a four year period. Interest accrues at the rate of 7 1/2% per
annum.
Other long-term debt in the aggregate amount of $131,000, less
current installments of $68,000, relates principally to equipment
financing. The notes bear interest at various rates ranging from
8.75% to 15.39% and are payable monthly through 2002.
Page 9 of 23
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IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(7) Income Taxes and Tax Credit Carryforwards
At March 31, 1998, the deferred tax asset of $702,000 primarily
consists of the tax effect of net operating loss carryforwards of
$11,300,000 less a valuation allowance of $3,300,000. Net operating
losses expire in varying amounts through 2009.
During 1997, the Company recognized $800,000 of deferred tax
assets as a result of releasing a portion of the valuation allowance
previously established due to the uncertainty of realizing net
operating losses. The remaining deferred tax assets were fully
reserved at December 31, 1997. The ultimate realization of the
remaining deferred tax assets is largely dependent on the Company's
ability to generate sufficient future taxable income. Management
believes that the valuation allowance at March 31, 1998 and December
31, 1997 is appropriate, given the cyclical nature of the construction
industry and other factors including but not limited to the
uncertainty of future taxable income expectations beyond the Company's
strategic planning horizon.
In the three months ended March 31, 1998, the Company recognized
income tax expense of $98,000 representing income before taxes at the
statutory rate of 35%.
(8) Capital Stock
(a) Common Stock
At March 31, 1998, 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. In the event of
liquidation, holders of Common Stock are entitled to share
ratably in all the remaining assets of the Company, if any, after
satisfaction of the liabilities of the Company and the prior
preferential rights of the holders of outstanding preferred
stock, if any.
In May 1997, 25,400 shares of Common Stock were issued upon
the exercise of stock options previously granted under the
Company's stock option plans.
In May 1997, the Company issued an aggregate of 144,000
shares of Common Stock to its Directors and certain employees of
the Company as part of their compensation for services rendered.
In July 1997, the Company's Board of Directors adopted a
Restricted Stock Plan (the "Plan") for the benefit of certain key
employees. An aggregate of 241,667 shares of Common Stock were
Page 10 of 23
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IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(8) Capital Stock (continued)
(a) Common Stock (continued)
reserved for issuance under the Plan. The Plan is administered
by the Company's Compensation Committee. In July 1997, an
aggregate of 241,667 restricted shares were issued to two
employees, subject to certain vesting requirements over a three
year period. An aggregate of 175,000 shares vests over a three
year period based on certain performance goals set forth in the
Plan. An aggregate of 66,667 shares vests over a two year period
based on continued employment with the Company by the holder. If
the vesting requirements are not met, the restricted shares
theretofore issued will be forfeited and thereafter be subject to
reallocation under the Plan. Prior to vesting, the holders
receive all of the benefits of ownership of the restricted
shares, including voting rights, but do not have the right to
transfer such unvested shares. Effective January 21, 1998 an
aggregate of 58,333 shares had met the Plan's vesting
requirements and were released and reissued to two employees.
In July 1997, the Company issued 25,000 shares of Common
Stock to an employee of the Company as part of his employment
compensation. In July 1997, an aggregate of 452,100 shares of
Common Stock were issued to the Company's Directors and the
Executive Vice President of the Company upon the exercise of
stock options previously granted under the Company's stock option
plans. The Company received aggregate cash proceeds of $45,210.
In April 1998, an aggregate of 24,000 shares of Common Stock
were issued to employees of the Company upon the exercise of
stock options previously granted under the Company's stock option
plans. The Company received aggregate cash proceeds of $2,400.
(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 March 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 are entitled
Page 11 of 23
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IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(8) Capital Stock (continued)
(b) Preferred Stock - $1.10 Cumulative Convertible Series (continued)
to one vote per share on all matters without regard to class,
except that the holders of Preferred Stock are entitled to vote
as a separate class with regard to the issuance of any equity
securities which ranks senior or on parity with the Preferred
Stock, or to change or repeal any of the express terms of the
Preferred Stock in a manner substantially prejudicial to the
holders thereof. Each share of Preferred Stock is entitled to
cumulative quarterly dividends at the rate of $1.10 per annum
and is currently convertible into 1.149 shares of Common Stock.
The liquidation preference of the Preferred Stock is $10.00 per
share, plus accrued but unpaid dividends. The Preferred Stock
is callable, in whole or in part, by the Company at its option at
any time upon 30 days prior notice, at $11.00 per share, plus
accrued but unpaid dividends.
The Company has omitted dividends on its Preferred Stock for
the three months ended March 31, 1998 in the amount of $83,000
and for each quarter since the fourth quarter of 1985 aggregating
$4,127,000 through March 31, 1998. The omission of Preferred
Stock dividends is a reduction in net income applicable to common
stockholders and have been recorded as non-current liabilities on
the Company's consolidated balance sheets.
The Preferred Stock is subject to redemption through a
mandatory sinking fund at a redemption price of $10.00 per share
on April 1 of each year. Through March 31, 1998, an aggregate of
359,879 shares of Preferred Stock were converted into 1,199,557
shares of Common Stock. As a result of these conversions, the
Company was required to redeem 36,121 shares in 1991 and an
additional 66,000 shares for each year thereafter until all such
shares of Preferred Stock was redeemed.
The Company did not redeem any shares of Preferred Stock as
required on April 1, 1991 or any year thereafter. Under the
provisions of the sinking fund requirements, if an annual sinking
fund requirement is not met, it is added to the requirements for
the next year. The Preferred Stock has not been included in
common stockholders' deficit because of its mandatory redemption
feature.
The Company is prohibited from paying any cash dividends on
Common Stock and from purchasing or otherwise acquiring for
value, any shares of either Preferred or Common Stock, while the
Company is in default in the payment of any dividends on the
Preferred Stock and the sinking fund requirements are in arrears.
Page 12 of 23
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IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(8) Capital Stock (continued)
(c) Warrants
At March 31, 1998, 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 April 30, 1998.
Subsequently, such warrants expired.
(ii) 200,000 warrants. Each warrant entitles the holder to
purchase one share of Common Stock at $.10 per share. In June
1997 the Company extended the expiration date to June 29, 2000
from June 28, 1997. Two directors acquired 150,000 and 50,000
warrants, respectively, in connection with a $400,000 financing
in 1988. The loan has since been repaid by the Company.
(d) Stock Options
At March 31, 1998, 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 was $.10 per share. In April 1998, all such options were
exercised. No additional options may be granted under any of the
Company's stock option plans.
(9) Earning Per Common Share
The Company has adopted Statement of Financial Accounting
Standards No. 128, Earnings Per Share ("FAS 128) which requires that
dual presentation of basic and diluted earnings per share for the
years ending after December 15, 1997. Basic earnings per common share
is computed by dividing net income, after deducting preferred stock
dividends accumulated during the year ("net income applicable to
common stockholders"), by the weighted average number of shares of
common stock outstanding each year. Diluted earnings per common share
is computed by dividing net income applicable to common stockholders
by the weighted-average number of shares of common stock and common
stock equivalents outstanding during each year. In accordance with
the provision of FAS 128, the Company has retroactively restated
earnings per common share.
(10) Commitments and Contingencies
(a) In April 1996, the Company was dismissed as a defendant, to which
it had been a party with other unaffiliated companies, in 27 asbestos
lawsuits pending in various circuit courts in Alabama and Florida.
Page 13 of 23
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IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(10) Commitments and Contingencies (continued)
Such lawsuits sought unspecified damages alleging injuries to persons
exposed to products containing asbestos. Since that date, the Company
has not been named a defendant in any lawsuits which allege injuries
due asbestos 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.
The insurance carriers have agreed to pay, in the aggregate,
approximately 93% of the damages, costs and expenditures related to
the litigation. Premix is responsible for the remaining 7%.
The Company believes, based upon the Agreement with its insurance
carriers, and its experience in these claims to date, it has adequate
insurance coverage for any future similar type of claims. To date,
no case went to trial with Premix as a defendant. Premix has either
settled for a nominal amount of money or been voluntarily dismissed
without payment from approximately 193 cases. Based upon historical
results, the Company does not believe any potential future claims
would be material. However, there can be no assurance that insurance
will ultimately cover the aggregate liability for damages to which
Premix may be exposed. Premix is unable at this time to determine the
exact extent of its exposure or outcome of the litigation of any other
similar cases that may arise in the future.
Acrocrete was a co-defendant in a lawsuit captioned "Stephen P.
Zabow, II and Karen I. Zabow, et al. vs. M/I Schottenstein Homes,
Inc., Heiner Construction Company and Acrocrete, Inc.", filed October
2, 1996 in Wake County, North Carolina. The lawsuit involved claims
by owners of eight homes in Cary, North Carolina, against the general
contractor, a subcontractor, and Acrocrete. The claims related to the
use of synthetic stucco in the construction of such homes which was
allegedly manufactured by Acrocrete. The lawsuit alleged negligent
misrepresentation, breach of warranty, unfair and deceptive trade
practices, fraud and negligence due to defective material, and
requests punitive damages. The plaintiffs alleged that Acrocrete knew
of inherent defects prevalent in synthetic stucco wall systems that
permitted water intrusion to cause moisture damage to the interior and
wood framing of the houses. In October 1997, the plaintiffs
voluntarily dismissed Acrocrete with prejudice as a result of the
Page 14 of 23
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IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(10) Commitments and Contingencies (continued)
Plaintiff's 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,
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
claims, as well as a counterclaim against the general contractor and
installer of the product. The Company's insurance carriers has
accepted coverage and are providing defense under a 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 nine similar lawsuits
filed against Acrocrete and other parties, (contractors and
subcontractors), by homeowners, or their insurance companies, claiming
moisture intrusion damages on single family residences.
Acrocrete is vigorously defending all of these cases and
believes it has meritorious defenses, counter-claims and claims
against third parties. The Company's insurance carriers have accepted
coverage for five of the above claims and are providing defense under
a reservation of rights. The Company expects its insurance carriers
to accept coverage for the other two remaining claims. Acrocrete is
unable to determine the exact extent of its exposure or outcome of
litigation of these lawsuits.
Premix and Acrocrete are engaged in other legal actions and
claims arising in the ordinary course of its business, none of which
are believed to be material to the Company.
(b) The Company pays aggregate monthly rent of approximately $9,300
for three of its operating facilities. The leases expire at various
Page 15 of 23
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IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(10) Commitments and Contingencies (continued)
dates ranging from December 31, 1998 to April 30, 2000. Comparable
properties at equivalent rentals are available for replacement of
these facilities if such leases are not extended.
In addition, the Company leases one automobile under an
agreement which provides for a minimum monthly payment of
approximately $800 through June 2001.
(c) Howard L. Ehler, Jr. ("the Executive") is employed by the
Company pursuant to a one year renewable agreement (the "Employment
Agreement"). Mr. Ehler serves as Executive Vice President and Chief
Financial Officer of the Company at a current annual base salary of
$120,000. The Employment Agreement provides for automatic renewal for
additional one year periods as of July 1, of each year, unless the
Company or the Executive notifies the other party of an intent not to
renew at least 90 days prior to expiration of the existing term. The
Executive receives a car allowance, as well as certain other benefits,
such as health and disability insurance. The Executive is also
entitled to receive incentive compensation based upon targets
formulated by the Company's Compensation Committee.
Prior to a change in control, the Company has the right to
terminate the Employment Agreement without cause at any time upon
thirty days written notice, provided the Company pays to the Executive
a severance payment equivalent to 50% of his then current annual base
salary. As part of the Employment Agreement, the Executive has
agreed not to disclose confidential information and not to compete
with the Company during his term of employment and, in certain cases
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
Page 16 of 23
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(10) Commitments and Contingencies (continued)
of the Company on July 31, 1997 pursuant to the terms of the Company's
Restricted Stock Plan. See "Note (8) (a) Common Stock".
(d) During the third quarter of 1996, the Company entered into an
employment arrangement with Fred H. Hansen to serve as President of
the Company's subsidiaries, Premix and Acrocrete. Mr. Hanson
presently receives an annual base salary of $150,000 and a bonus based
upon earnings performance of the Subsidiaries. Under this
arrangement, Mr. Hansen received 33,333 shares of common stock in
February 1997. In addition. Mr. Hansen was issued 166,667 shares of
Common Stock on July 31, 1997 pursuant to the terms of the Company's
Restricted Stock Plan. See "Note (8) (a) Common Stock". Also Mr
Hansen received a moving allowance of $15,000 and is entitled to the
use of a Company auto, or car allowance of $650 per month during his
employment, as well as certain other benefits, such as health and
disability insurance.
(11) Stock Based Compensation
Effective 1996, the Company has adopted the disclosure
provisions of Statement of Financial Accounting Standards No. 123
("SFAS No. 123"), "Accounting for Stock-Based Compensation" and has
retained the intrinsic value method of accounting for such stock-based
compensation. Had the fair value based accounting provisions of SFAS
No. 123 been adopted, the effect would not be material.
(12) Subsequent Event
In April 1998, the Company entered into a lease agreement for
approximately 20,400 square feet of warehouse and office space in a
building to be constructed in Kennesaw, Georgia. The lease,
scheduled to commence upon the Company's occupancy on October 1, 1998
and expire on September 30, 2005, provides for initial rental payments
of $6,715, with escalation in monthly rent on each annual anniversary
date of the lease. The lease contains a renewal option for five
years.
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
Three Months Ended March 31, 1998 Compared to 1997
Net sales for the three months ended March 31, 1998 increased
$408,000, or approximately 11%, compared to the same period in
1997. The sales of landscape stone products derived from the
Company's new distribution outlet in Tampa, Florida, acquired
effective February 1, 1998, accounted for approximately $235,000 of
the increase in sales.
Gross profit as a percentage of net sales for the first
quarter of 1998 was approximately 32%, compared to 30% in the first
quarter of 1997. The increase in gross profit margins was due to
savings realized from raw material purchases, modifications made to
the Company's manufacturing process to gain greater production
efficiency, and cost reduction programs implemented in 1996 which
continue to focus on manufacturing processes for opportunities to
reduce cost.
Selling, general and administrative expenses as a percentage
of net sales for the first quarter of 1998 was approximately 25%,
the same as for the comparable period last year. However, selling,
general and administrative expenses increased $128,000, or
approximately 14% in 1998 compared to 1997. The increase in
expenses was primarily due to additional sales expenses associated
with servicing the increased volume of business and costs related
to the Company's new distribution facility in Tampa, Florida which
was acquired effective February 1, 1998.
Miscellaneous income for the three months ended March 31, 1998
includes $62,000 of reimbursements the Company received from the
State of Florida environmental authorities insurance program for
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)
Three Months Ended March 31, 1998 Compared to 1997 (continued)
costs the Company incurred in prior years related to the removal of
underground fuel tanks located at its facilities.
In the three months ended March 31, 1998, the Company
recognized income tax expense of $98,000 representing income before
taxes at the statutory rate of 35%.
As a result of the above factors and after giving effect to
preferred stock dividends accrued, but not paid, the Company
derived net income applicable to common stockholders of $100,000,
or $.02 per share in 1998, compared to net income of $56,000, or
$.01 per share, in 1997. Net income applicable to common
stockholders includes charges of $83,000 in the 1998 and 1997 first
quarter periods for unpaid cumulative dividends on preferred stock.
Liquidity and Capital Resources
At March 31, 1998, the Company had working capital of
approximately $2,060,000 compared to working capital of $1,995,000
at December 31, 1997. As of March 31, 1998, the Company had cash
and cash equivalents of $582,000.
The Company's principal source of short-term liquidity is
existing cash on hand and the utilization of a $2,000,000 line of
credit with a commercial lender scheduled to expire on June 19,
1999. The line of credit is automatically extended for an
additional one year term unless either party gives the other notice
of nonextension 60 days prior to the expiration date. Premix and
Acrocrete, the Company's subsidiaries, borrow on the line of
credit, based upon and collateralized by, its eligible accounts
receivable and inventory. Generally, accounts not collected within
120 days are not eligible accounts receivable under the Company's
borrowing agreement with its commercial lender. At March 31, 1998,
$955,000 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. The Company
presently owns and operated three warehouse distribution outlets.
The Company's common stockholders' deficit of $4,341,000 at
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)
March 31, 1998, resulted primarily from losses incurred in 1987 and
prior years, and unpaid cumulative dividends required by the
Company's issued and outstanding preferred stock. The Company has
attempted to generate net income and adequate cash to support
operations by various methods, including the commencement of
manufacturing acrylic stucco products, opening warehouse
distribution outlets to sell its products directly to the end user,
the development and sale of new products, reductions in raw
material costs and changes to manufacturing processes to gain
greater production efficiency. In 1998, these actions enabled the
Company to derive income before taxes and the application of unpaid
dividends on the redeemable preferred stock in 1998 of $281,000
compared to income of $139,000 in the same three month period in
1997.
The Company has omitted payment of cash dividends on its
preferred stock since the fourth quarter of 1985, and has accrued
$4,127,000 of dividends in arrears on the preferred stock as of
March 31, 1998. The Company is continuing its efforts to develop a
plan to satisfy the preferred stock dividend arrearage and
mandatory sinking fund requirements which would be acceptable to
its stockholders.
On March 6, 1998, the Company entered into an agreement with
an investment banker to provide advisory services to the Company in
connection with the development of a plan to satisfy the Company's
Redeemable Preferred Stock dividend arrearage and mandatory sinking
fund requirements. The investment banker received cash
consideration $25,000 and is entitled to receive additional
consideration based upon the success of the plan.
Effective February 1, 1998, Acrocrete, Inc. acquired the
property, plant, equipment and inventory of a wholesale
distribution facility engaged in the sale of landscape stone and
building materials. The total purchase price was approximately
$400,000. A portion of the purchase price was financed through the
issuance of a $215,000 mortgage note payable monthly over four
years, with interest at the rate of 7 1/2% per annum. In addition,
Acrocrete incurred a $180,000 obligation payable monthly over a 90
day period without interest in connection with the acquisition.
The Company expects other capital expenditures in 1998 for
improvements to its equipment and manufacturing facilities to
require aggregate cash expenditures of approximately $275,000. In
the first quarter of 1998, the Company added approximately 6,000
square feet of warehouse space to its Casselberry, Florida
manufacturing facility to consolidate Florida manufacturing
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)
operations to more closely mirror market geographic demands. Other
projects planned in 1998 are aimed at relocating and expanding the
Company's manufacturing facility in Atlanta, Georgia, and the
proposed sale and relocation of the Company's manufacturing /
distribution facility in Miami to a leased location in Broward
County. The Company expects to complete the above cost reduction
projects in 1998 from cash on hand, or borrowings under its line
of credit, and will continue to focus on the efficient utilization
of its resources in its efforts to accomplish further cost
reductions.
In the first quarter of 1998, the Company entered into a
contract for the sale of its Miami facility providing for a closing
September 30, 1998. The buyer has until May 23, 1998 to complete
their due diligence and determine if they desire to proceed with
the purchase of the property and deposit $100,000 in escrow. In
April 1998, the Company entered into a lease agreement for a new
20,400 square foot facility in Kennesaw, Georgia. See "Note 12
Subsequent Event".
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 to
support the cash requirements of its capital expenditure programs.
The ability of the Company to maintain and improve its long
term liquidity is dependent upon the Company's ability to
successfully (i) 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 March 31, 1998, the Company has omitted
dividends aggregating $4,127,000 on its outstanding preferred
stock. Also, under the provisions of the sinking fund requirements
of the preferred stock, the Company was required to redeem 36,121
shares in 1991 and an additional 66,000 shares of preferred stock
on April 1 each year thereafter until fully redeemed. The Company
has been unable to satisfy the sinking fund requirements and did
not redeem any shares of preferred stock since April 1991. For a
more complete description, see Note 8 (b) of Notes to Consolidated
Financial Statements.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 4.1 Certificate of Designation with respect to the
Preferred Stock [Incorporated by reference to the Company's
registration statement on Form S-2, File No. 1-7190, dated February
22, 1983].
(b) Reports on Form 8-K
None
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
May 12, 1998
Page 23 of 23
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
1998 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 582
<SECURITIES> 0
<RECEIVABLES> 2,312
<ALLOWANCES> 194
<INVENTORY> 1,434
<CURRENT-ASSETS> 4,691
<PP&E> 3,207
<DEPRECIATION> 2,068
<TOTAL-ASSETS> 6,379
<CURRENT-LIABILITIES> 2,631
<BONDS> 0
3,001
0
<COMMON> 663
<OTHER-SE> (5,004)
<TOTAL-LIABILITY-AND-EQUITY> 6,379
<SALES> 4,111
<TOTAL-REVENUES> 4,182
<CGS> 2,791
<TOTAL-COSTS> 3,837
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 64
<INCOME-PRETAX> 281
<INCOME-TAX> (98)
<INCOME-CONTINUING> 183
<DISCONTINUED> 0
<EXTRAORDINARY> (83)
<CHANGES> 0
<NET-INCOME> 100
<EPS-PRIMARY> 0.02
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</TABLE>
