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Filed pursuant to Rule 424(b)(3)
Registration File Nos. 333-62949
IMPERIAL INDUSTRIES, INC.
1259 NORTHWEST 21ST STREET
POMPANO BEACH, FLORIDA 33069
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD DECEMBER 17, 1998
You are cordially invited to attend a special meeting (the "Meeting") of
the stockholders of Imperial Industries, Inc., a Delaware corporation
("Imperial" or the "Company") to be held on Thursday, December 17, 1998, at
10:00 a.m., local time, at the Hyatt Regency Hotel, 400 S.E. 2nd Avenue, Miami,
Florida, for the following purposes:
1. To approve and adopt the Amended and Restated Agreement and Plan of
Merger dated as of October 12, 1998 (the "Merger Agreement") between the
Company and Imperial Merger Corp. ("Merger Sub"), a Delaware corporation
and a wholly-owned subsidiary of the Company, providing for the merger (the
"Merger") of the Company with and into Merger Sub, with Merger Sub being
the surviving entity. In accordance with the Merger Agreement, (i) each
issued and outstanding share of the Company's common stock, $.10 par value
("Imperial Common") will be converted, without any action by the holder
thereof, into one share of common stock, $.01 par value ("Sub Common"), of
Merger Sub and (ii) each issued and outstanding share of the Company's
$1.10 cumulative convertible redeemable preferred stock ("Preferred Stock")
will be converted, at the option of the holder thereof, into either
(A) $4.75 in cash and ten shares of Sub Common or (B) $2.25 in cash, an
$8.00 principal amount three year 8% subordinated debenture of Merger Sub
and five shares of Sub Common. Upon the effective date of the Merger, the
name of Merger Sub will be changed to Imperial Industries, Inc.; and
2. To transact such other business as may properly come before the
Meeting and any adjournments or postponements thereof.
The Merger and other related matters are more fully described in the
accompanying Proxy Statement/Prospectus and the appendices thereto, which form a
part of this Notice.
The Board of Directors of Imperial has fixed the close of business on
October 30, 1998 as the record date (the "Record Date") for the determination of
stockholders entitled to notice of, and to vote at, the Meeting or any
adjournments or postponements thereof. Only holders of Imperial Common and
Preferred Stock of record as of the close of business on the Record Date are
entitled to notice of, and to vote at, the Meeting or any adjournments or
postponements thereof.
The Imperial Board of Directors believes that the terms of the Merger are
fair to, and in the best interests of, Imperial and its stockholders, has
unanimously approved the Merger and the transactions contemplated thereby and
unanimously recommends that you vote FOR the ratification and approval of the
Merger Agreement and the Merger.
In accordance with Section 262 of the Delaware General Corporation Law, a
copy of which is enclosed as Annex D to the accompanying Proxy
Statement/Prospectus, holders of Imperial Common and Preferred Stock are
entitled to appraisal rights with respect to such stock in connection with the
Merger.
Whether or not you plan to attend the meeting, please complete, date, sign
and return promptly the enclosed proxy card. A return envelope is provided for
your convenience and requires no postage for mailing in the United States.
By Order of the Board of Directors,
Howard L. Ehler, Jr.
Secretary
November 2, 1998
PLEASE DO NOT SEND IN ANY CERTIFICATES FOR YOUR PREFERRED STOCK AT THIS
TIME.
HOLDERS OF PREFERRED STOCK ARE REQUESTED NOT TO SURRENDER THEIR
CERTIFICATES FOR EXCHANGE UNTIL THEY RECEIVE A NOTICE AND LETTER OF TRANSMITTAL
FROM THE EXCHANGE AGENT.
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PROSPECTUS
IMPERIAL INDUSTRIES, INC.
IMPERIAL MERGER CORP.
PROXY STATEMENT
FOR SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON THURSDAY, DECEMBER 17, 1998
This Proxy Statement/Prospectus is being furnished to holders of the common
stock, par value $.10 per share (the "Imperial Common"), and holders of the
$1.10 cumulative convertible redeemable preferred stock ("Preferred Stock") of
Imperial Industries, Inc., a Delaware corporation ("Imperial" or the "Company"),
in connection with the solicitation of proxies by and on behalf of the Board of
Directors of the Company for use at the Special Meeting (the "Meeting") of
Stockholders of the Company, and any adjournment or postponements thereof. The
Meeting is scheduled to be held on Thursday, December 17, 1998, at 10:00 a.m.,
local time, at the Hyatt Regency Hotel, 400 S.E. 2nd Avenue, Miami, Florida. It
is anticipated that the mailing to stockholders of this Proxy
Statement/Prospectus and the enclosed Form of Proxy will commence on or about
November 2, 1998.
At the Meeting, stockholders will be asked to consider and vote upon a
proposal to approve and adopt the Amended and Restated Agreement and Plan of
Merger dated as of October 12, 1998 (the "Merger Agreement") between the Company
and Imperial Merger Corp. ("Merger Sub"), a Delaware corporation and a
wholly-owned subsidiary of the Company, providing for the merger (the "Merger")
of the Company with and into Merger Sub, with Merger Sub being the surviving
entity. The Merger will become effective upon the filing of a Certificate of
Merger (the "Certificate of Merger") with the Delaware Secretary of State
pursuant to the Delaware General Corporation Law (the "GCL"). It is expected
that the Merger, if approved at the Meeting, will become effective on or about
December 31, 1998 (the "Effective Date").
The purpose of the Merger is to restructure the Company's capitalization to
enhance stockholder value for the holders of Imperial Common and Preferred Stock
by retiring all of the outstanding shares of Preferred Stock and thereby
eliminating the accumulated accrued dividends thereon. Upon consummation of the
Merger, each share of Imperial Common outstanding immediately prior to the
consummation of the Merger will be converted, without any action by the holder
thereof, into one share of common stock, par value $.01 per share ("Sub
Common"), of Merger Sub, and each share of Preferred Stock outstanding
immediately prior to the consummation of the Merger will be converted, at the
option of the holder thereof, into either (A) $4.75 in cash and ten shares of
Sub Common or (B) $2.25 in cash, an $8.00 principal amount three year 8%
subordinated debenture of Merger Sub (each, a "Debenture") and five shares of
Sub Common (collectively, the "Merger Consideration"). In addition, at the
Effective Date, the name of Merger Sub will be changed to Imperial Industries,
Inc. Commencing 60 days after the Effective Date, all unsubmitted shares of
Preferred Stock, except shares as to which dissenters' rights of appraisal have
been properly asserted, will evidence the right to receive $2.25 in cash, a
Debenture and five shares of Sub Common. A copy of the Merger Agreement is
attached as Appendix A to this Proxy Statement/Prospectus and is incorporated
herein by reference.
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
WHICH SHOULD BE CONSIDERED IN EVALUATING THE MERGER DESCRIBED HEREIN AND THE
SECURITIES OFFERED HEREBY.
Merger Sub has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (the "Registration Statement") on Form
S-4 (Commission File No. 333-62949) under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to the Sub Common and Debentures to be
issued pursuant to the Merger Agreement. This Proxy Statement/ Prospectus is the
prospectus of Merger Sub filed as part of the Registration Statement.
The Imperial Common and Preferred Stock are included on the NASD Electronic
Bulletin Board under the symbols IPII and IPIIP, respectively. On October 20,
1998, the closing bid quotations for the Imperial Common and Preferred Stock
were $0.28 and $5.50, respectively. Following the Merger, it is anticipated that
the Sub Common will be included on the NASD Electronic Bulletin Board under the
symbol "IPII". While the Debentures will be freely tradeable, there can be no
assurance that an active trading market will develop for the Debentures
following the Merger.
In accordance with the GCL, holders of Imperial Common and Preferred Stock
are entitled to appraisal rights in connection with the Merger. See "The
Merger--Appraisal Rights."
THE SECURITIES ISSUABLE PURSUANT TO THIS PROXY STATEMENT/PROSPECTUS HAVE NOT
BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS NOVEMBER 2, 1998.
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TABLE OF CONTENTS
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AVAILABLE INFORMATION............................................ iii
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS................ iii
SUMMARY.......................................................... 1
General........................................................ 1
The Meeting.................................................... 2
The Merger..................................................... 2
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK
DIVIDENDS...................................................... 6
SELECTED FINANCIAL DATA.......................................... 7
SELECTED UNAUDITED PRO FORMA CONDENSED FINANCIAL DATA............ 8
RISK FACTORS..................................................... 9
Risks Relating to an Investment in Imperial.................... 9
Risks Relating to the Merger................................... 11
Tax Risks...................................................... 13
COMPARATIVE PER SHARE DATA....................................... 14
PRICE RANGE OF IMPERIAL COMMON AND PREFERRED STOCK............... 15
THE MEETING...................................................... 16
General........................................................ 16
Matters to be Considered at the Meeting........................ 16
Record Date.................................................... 16
Proxies........................................................ 16
Quorum......................................................... 17
Vote Required.................................................. 17
THE MERGER....................................................... 17
Background of the Merger....................................... 17
Recommendation of the Board of Directors; Reasons for the
Merger...................................................... 18
Financial Advisor; Fairness Opinion............................ 20
Estimated Fees and Expenses; Sources of Funds.................. 23
Certain Federal Income Tax Consequences of the Merger.......... 23
Interests of Certain Persons in the Merger; Conflicts of
Interest.................................................... 26
Appraisal Rights............................................... 26
Regulatory Approvals........................................... 28
Accounting Treatment........................................... 28
Resale Restrictions............................................ 28
THE MERGER AGREEMENT............................................. 29
The Merger..................................................... 29
Effective Date of the Merger................................... 29
Conversion of Securities....................................... 29
Treatment of Warrants.......................................... 29
Exchange of Certificates....................................... 29
Conditions of the Merger....................................... 30
Management After the Merger.................................... 30
Charter Documents of Surviving Corporation..................... 30
DESCRIPTION OF MERGER SUB SECURITIES............................. 30
Sub Common..................................................... 30
Sub Preferred.................................................. 31
Debentures..................................................... 31
Transfer Agent................................................. 32
IMPERIAL MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION............................. 33
General........................................................ 33
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Results of Operations.......................................... 33
Liquidity and Capital Resources................................ 35
BUSINESS OF IMPERIAL............................................. 37
General........................................................ 37
Premix......................................................... 37
Acrocrete...................................................... 38
Suppliers...................................................... 38
Marketing and Sales............................................ 38
Seasonality.................................................... 39
Competition.................................................... 39
Environmental Matters.......................................... 39
Employees...................................................... 39
Properties..................................................... 40
Legal Proceedings.............................................. 40
MANAGEMENT OF IMPERIAL........................................... 42
Executive Officers and Directors............................... 42
Board of Directors Meetings and Attendance..................... 43
Compensation and Stock Option Committee........................ 43
Reports Pursuant to Section 16(a) of the Securities and
Exchange Act of 1934........................................ 43
Executive Compensation......................................... 43
Compensation Agreements........................................ 44
Aggregated Option Exercises in Year Ended December 31, 1997 and
Year End Option Values...................................... 45
Director Compensation.......................................... 45
Compensation Committee Interlocks and Insider Participation.... 45
Security Ownership of Certain Beneficial Owners and
Management.................................................. 45
Certain Relationships and Related Transactions................. 47
LEGAL MATTERS.................................................... 47
EXPERTS.......................................................... 47
EXCHANGE AGENT................................................... 47
INFORMATION/SOLICITATION AGENT................................... 47
OTHER MATTERS.................................................... 48
UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION.............. 49
INDEX TO FINANCIAL STATEMENTS.................................... F-1
</TABLE>
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Appendix A Agreement and Plan of Merger
Appendix B Opinion of Auerbach, Pollack & Richardson, Inc.
Appendix C Section 262 of the Delaware General Corporation Law
Appendix D Projections
</TABLE>
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AVAILABLE INFORMATION
Imperial is (and following the Merger, Merger Sub will be) subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and in accordance therewith files, and will file, reports,
proxy statements and other information with the Commission. The Registration
Statement, as well as reports, proxy statements and other information filed by
Imperial, can be inspected and copied at the Commission's Public Reference Room,
Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and
at the public reference facilities maintained by the Commission at its regional
offices located at Suite 1400, Citicorp Center, 500 West Madison Street,
Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York
10048. Copies of such materials can be obtained from the Commission at
prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549. Electronic registration statements
and other reports, proxy statements and information filed through the
Commission's Electronic Data Gathering, Analysis and Retrieval system are
publicly available through the Commission's Website (http://www.sec.gov).
Merger Sub has filed the Registration Statement with the Commission
covering the Sub Common and Debentures to be issued pursuant to the Merger
Agreement. As permitted by the rules and regulations of the Commission, this
Proxy Statement/Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits thereto. For further information, please
refer to the Registration Statement, including the exhibits thereto. Statements
contained in this Proxy Statement/Prospectus relating to the contents of any
contract or other document referred to herein are not necessarily complete, and
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement or such other document, each such
statement being qualified in all respects by such reference.
No person is authorized to provide any information or to make any
representations with respect to the matters described in this Proxy
Statement/Prospectus other than those contained herein and, if given or made,
such information or representation must not be relied upon as having been
authorized by Imperial, Merger Sub or any other person. This Proxy
Statement/Prospectus does not constitute an offer to sell, or a solicitation of
any offer to purchase, any securities, or a solicitation of a proxy, in any
jurisdiction in which, or to or from any person to or from whom, it is unlawful
to make such an offer or solicitation. Neither the delivery of this Proxy
Statement/Prospectus nor any distribution of securities hereunder shall under
any circumstances be deemed to imply that there has been no change in the
assets, properties or affairs of Imperial or Merger Sub since the date hereof or
that the information set forth herein is correct as of any time subsequent to
the date hereof.
The Company has appointed Morrow & Co., Inc. as Information Agent for the
Merger. Questions regarding the enclosed Proxy Statement/Prospectus may be
directed to the Information Agent at (800) 566-9061.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Prospective investors should note that this Proxy Statement/Prospectus
contains certain "forward-looking statements" (and, in particular, without
limiting the generality of the foregoing, Appendix D, "Projected Income
Statements," to this Proxy Statement/Prospectus), as such term is defined in the
Private Securities Litigation Reform Act of 1995, including, without limitation,
statements containing the words "believes," "anticipates," "expects," "intends,"
"should," "seeks to," and similar words. Prospective investors are cautioned
that any such forward-looking statements are not guarantees of future
performance and involve risks, assumptions and uncertainties. The future results
and stockholder values of the Company following the Merger may differ materially
from those expressed in these forward-looking statements. Many of the factors
that will determine those results and values are beyond the Company's ability to
control or predict. Stockholders are cautioned not to put undue reliance on any
forward-looking statements. Actual results may differ materially from those in
the forward-looking statements as a result of various factors, including but not
limited to, the risk factors set forth in this Proxy Statement/Prospectus. The
accompanying information contained in this Proxy Statement/Prospectus identifies
certain important factors that could cause such differences.
iii
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SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and the notes thereto appearing elsewhere
in this Proxy Statement/Prospectus and the appendices hereto. Unless otherwise
indicated, (a) all references herein to the "Company" or "Imperial" refer to
Imperial Industries, Inc. and (b) all references to "Merger Sub" herein refer to
Imperial Merger Corp. Each stockholder is urged to read this Proxy
Statement/Prospectus and its appendices before voting on the matters discussed
herein.
GENERAL
This Proxy Statement/Prospectus is being furnished to stockholders of
Imperial, a Delaware corporation, in connection with the solicitation of proxies
by the Board of Directors of Imperial, for use at a Special Meeting of
Stockholders of Imperial which is scheduled to be held on December 17, 1998. At
the Meeting, stockholders will be asked to consider and vote upon the proposed
Merger of Imperial with and into Merger Sub, a Delaware corporation, pursuant to
the terms of the Merger Agreement. The Merger Agreement is included in this
Proxy Statement/Prospectus as Appendix A. The principal purpose of the Merger is
to restructure the Company's capitalization to enhance stockholder value for the
holders of Imperial Common and Preferred Stock by retiring all of the
outstanding shares of Preferred Stock and eliminating the accrued dividends
thereon. As a result of the Merger and upon consummation thereof, each share of
Imperial Common outstanding immediately prior to the consummation of the Merger
will be converted, without any action by the holder thereof, into one share of
Sub Common, and each share of Preferred Stock outstanding immediately prior to
the consummation of the Merger will be converted, at the option of the holder
thereof, into either (A) $4.75 in cash and ten shares of Sub Common or
(B) $2.25 in cash, a Debenture and five shares of Sub Common. In addition, at
the Effective Date, the name of Merger Sub will be changed to Imperial
Industries, Inc.
Imperial
The Company is engaged in the manufacture of building materials for sale to
building materials dealers and others located primarily in Florida and Georgia,
and to a lesser extent, other states in the Southeastern United States. The
Company's products are used by developers, general contractors and
subcontractors in the construction or repair and remodeling of residential,
multi-family and commercial buildings and swimming pools. The Company's business
is directly related to the level of activity in the new construction and home
improvement, repair and remodeling markets, as well as the general economic
conditions existing in the Southeastern part of the United States.
The Company has experienced a substantial improvement in its results of
operations since 1994 due principally to introduction of new products, savings
realized from raw material purchases, modifications made to the Company's
manufacturing processes to gain greater production efficiencies, and on-going
cost reduction programs implemented in 1996. These programs, in conjunction with
increased sales derived in part from the opening of distribution outlets
commencing in 1994 to sell its products directly to the end-user, have had a
favorable impact on the Company's profitability.
The Company's manufacturing and sales operations are conducted by its
wholly owned subsidiaries, Premix-Marbletite Manufacturing Co. ("Premix") and
Acrocrete, Inc. ("Acrocrete"). The Company primarily manufactures stucco, roof
tile mortar and plaster products.
Stucco products are applied as a finishing coat to exterior surfaces and to
swimming pools. Roof tile mortar is used to adhere cement roof tiles to the
roofs of structures. Plaster customarily is used to finish interiors of
structures.
Imperial is a Delaware corporation organized in 1968. The Company's
executive offices are located at 1259 21st Street, Pompano Beach, Florida 33069,
and the telephone number at such offices is (954) 917-4114.
Merger Sub
Imperial Merger Corp., a Delaware corporation, is a wholly owned subsidiary
of the Company which was formed in July 1998 for the purpose of effectuating the
Merger. The Certificate of Incorporation and Bylaws of Merger Sub are identical
in all material terms to those of the Company. Upon consummation of the Merger,
1
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Merger Sub's name will be changed to Imperial Industries, Inc. Merger Sub shares
offices with Imperial. The officers and directors of Imperial serve in the same
capacity with Merger Sub.
THE MEETING
The Meeting will be held on December 17, 1998, at 10:00 a.m., local time,
at the Hyatt Regency Hotel, 400 S.E. 2nd Avenue, Miami, Florida. At the Meeting,
including any adjournments or postponements thereof, stockholders will be asked
to consider and vote upon (i) a proposal to approve and adopt the Merger
Agreement and the transactions contemplated thereby and (ii) such other business
as properly may come before the Meeting.
The close of business on October 30, 1998 has been fixed as the record date
(the "Record Date") for the determination of stockholders entitled to notice of,
and to vote at, the Meeting or any adjournments or postponements thereof.
Holders of Imperial Common and holders of Preferred Stock are entitled to one
vote for each share of Imperial Common and Preferred Stock held by them. The
holders of a majority of the outstanding shares of Preferred Stock, together
with the holders of a majority of the outstanding shares of Imperial Common,
present either in person or by properly executed proxies, will constitute a
quorum at the Meeting.
The favorable vote of the holders of a majority of the shares of Imperial
Common outstanding and entitled to vote at the Meeting, and the favorable vote
of the holders of a majority of the shares of Preferred Stock outstanding and
entitled to vote at the Meeting, each voting separately as a class, are required
for the approval of the Merger. As of the Record Date, the Company had 6,607,961
shares of Imperial Common outstanding, and 300,121 shares of Preferred Stock
outstanding. As of the Record Date, the Company's directors, executive officers
and their affiliates beneficially owned 2,172,226 shares of Imperial Common
(excluding 200,000 shares which may be acquired upon the exercise of warrants
which are exercisable within 60 days of the Record Date) and 2,000 shares of
Preferred Stock, representing 32.9% and 0.7% of the outstanding shares of
Imperial Common and Preferred Stock, respectively. All of the directors and
executive officers of the Company and their affiliates have advised the Company
that they intend to vote their shares of Imperial Common and Preferred Stock in
favor of the Merger. See "The Meeting--Vote Required."
THE MERGER
Purpose of the Merger. The principal purpose of the Merger is to
restructure the Company's capitalization to enhance stockholder value for the
holders of Imperial Common and Preferred Stock by retiring all of the
outstanding shares of Preferred Stock and eliminating the accumulated accrued
dividends thereon. The Company currently is unable to satisfy its financial
obligations to its Preferred Stockholders and does not expect to be able to do
so in the foreseeable future. The Board of Directors of the Company believes the
elimination of the Preferred Stock dividend and sinking fund obligations and
simplification of the Company's equity ownership would enhance stockholder value
and facilitate the Company's access to capital markets.
Conversion of Securities. Upon consummation of the transactions
contemplated by the Merger Agreement, Imperial will be merged with and into
Merger Sub, with Merger Sub being the surviving corporation (the "Surviving
Corporation"). Each share of Imperial Common outstanding immediately prior to
the consummation of the Merger will be converted, without any action by the
holder thereof, into one share of Sub Common, and each share of Preferred Stock
outstanding immediately prior to the consummation of the Merger will be
converted, at the option of the holder thereof, into either (A) $4.75 in cash
and ten shares of Sub Common (resulting in the payment of $1,425,575 in cash and
the issuance of 3,001,210 shares of Sub Common, if all holders of Preferred
Stock choose this option) or (B) $2.25 in cash, a Debenture and five shares of
Sub Common (resulting in the payment of $675,272 in cash and the issuance of
300,121 Debentures with an aggregate principal amount of $2,400,968 and
1,500,605 shares of Sub Common, if all holders of Preferred Stock choose this
option). See "The Merger Agreement--Conversion of Securities."
The following table illustrates the Merger Consideration to be issued in
the Merger in the event (i) all holders of Preferred Stock elect to receive per
share Merger Consideration consisting of $4.75 in cash and ten shares of Sub
Common ("Option A"), (ii) all holders of Preferred Stock elect to receive per
share Merger
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Consideration consisting of $2.25 in cash, an $8.00 principal amount Debenture
and five shares of Sub Common ("Option B") and (iii) holders of an equal number
of shares of Preferred Stock elect Option A or Option B.
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100% OPTION A 0% OPTION A 50% OPTION A
0% OPTION B 100% OPTION B 50% OPTION B
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Cash (1)................. $ 1,425,575 $ 675,272 $1,050,423
Debentures (principal)... $ 0 $ 2,400,968 $1,200,488
Sub Common (shares)(2)... 3,001,210 1,500,605 2,250,915
</TABLE>
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(1) A significant portion of the cash component of the Merger Consideration will
be derived from the sale of the Company's Miami, Florida facility which was
completed on October 2, 1998.
(2) In addition, Imperial Common stockholders will be issued 6,607,961 shares of
Sub Common in exchange for all outstanding Imperial Common.
In arriving at their opinion as to the fairness of the Merger from a
financial point of view, Auerbach, Pollak & Richardson, Inc., the Company's
financial advisor, calculated that Option A has a value, on a pro forma basis,
of $13.29 per share of Preferred Stock and Option B has a value, on a pro forma
basis, of $12.80 per share of Preferred Stock. See "The Merger--The Financial
Advisor; Fairness Opinion" for additional information regarding the estimated
value of each of the above options.
Description of Securities to be Received.
Sub Common. The Sub Common to be issued in the Merger is identical in all
material respects to the Imperial Common. See "Description of Merger Sub
Securities--Sub Common."
Debentures. The Debentures will become due and payable as to principal
three years from the Effective Date. Interest, at the rate of 8% per annum, will
be payable in cash on an annual basis. The Debentures will be unsecured
obligations of Merger Sub. See "Description of Merger Sub
Securities--Debentures."
Recommendation of the Board of Directors. The Company's Board of Directors
believes that the terms of the Merger are fair to, and in the best interests of,
the Company and its stockholders. Accordingly, the Board of Directors has
approved the Merger Agreement and unanimously recommends a vote FOR approval and
adoption of the Merger Agreement by the stockholders of the Company. The Board
of Directors of the Company, in reaching its determination to approve the
proposed Merger, considered a number of factors as described herein. The Board
believes that it is in the best interest of all of its stockholders and the
Company to restructure the Company's capitalization by eliminating the Preferred
Stock. Such restructuring will remove an impediment to the Company's future
financings, improve the book value per common share by removing both the
aggregate redemption value and accumulated dividend arrearages for the Preferred
Stock, and also improve the income (loss) from operations per common share by
eliminating the annual Preferred Stock dividend requirements, while providing
the Preferred Stockholders a combination of cash and securities with more
liquidity and potential for appreciation than the Preferred Stock. See "The
Merger--Background of the Merger," "--Reasons for the Merger; Recommendation of
the Board of Directors," "--Financial Advisor; Fairness Opinion" and "--
Interests of Certain Persons in the Merger; Conflicts of Interest."
Estimated Fees and Expenses and Sources of Funds. Cash required to fund
the Company's obligations resulting from the Merger, including the cash
component of the Merger Consideration, is estimated to aggregate approximately
$1,825,575. These funds will be derived from available working capital (a
significant portion of which represents the proceeds from the sale of the
Company's Miami, Florida facility in October 1998) and borrowings under the
Company's line of credit. See "The Merger--Estimated Fees; Expenses and Sources
of Funds."
Opinion of Financial Advisor. Auerbach, Pollak & Richardson, Inc.
("Auerbach") delivered to the Board of Directors of the Company a written
opinion dated October 12, 1998 that, as of such date and based upon and subject
to certain matters as stated therein, the terms of the Merger are fair to the
holders of Imperial Common and Preferred Stock from a financial point of view.
See "The Merger--Financial Advisor; Fairness Opinion." The full text of the
opinion of Auerbach, which sets forth the assumptions made, matters considered
and
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limitations on the review undertaken by Auerbach, is attached as Appendix B
hereto and is incorporated herein by reference. Stockholders are urged to read
the opinion carefully in its entirety.
Effective Date of the Merger. If approved by the stockholders, the Merger
will become effective (the "Effective Date") immediately upon the filing of the
Certificate of Merger with the Delaware Secretary of State in accordance with
the GCL. The Effective Date is currently expected to occur on or about December
31, 1998 and upon satisfaction or waiver of the conditions precedent to the
Merger set forth in the Merger Agreement. On the Effective Date, the name of
Merger Sub will be changed to Imperial Industries, Inc. See "The Merger
Agreement--Effective Date of the Merger" and "--Conditions of the Merger."
Conditions of the Merger; Termination. The obligations of Imperial and
Merger Sub to consummate the Merger are subject to the satisfaction of certain
conditions, including, among others, (i) obtaining requisite stockholder
approval and (ii) the effectiveness of the Registration Statement and the
receipt by Merger Sub of all necessary approvals under applicable state
securities laws. The Merger Agreement may be terminated by either company's
Board of Directors for any reason at any time prior to the Effective Date. The
parties currently intend to terminate the Merger Agreement if holders of greater
than 5% of either the Imperial Common or Preferred Stock demand dissenters'
rights of appraisal under the GCL. See "The Merger Agreement--Conditions of the
Merger."
Surrender of Preferred Stock Certificates. Immediately following the
Effective Date, holders of Preferred Stock will be furnished with a transmittal
letter to be used to select their desired Merger Consideration and to exchange
their certificates therefor. To ensure that they receive their desired form of
Merger Consideration, holders will be required to return their Preferred Stock
certificates and letters of transmittal within 60 days after the Effective Date.
Certificates representing shares of Preferred Stock timely surrendered by
holders who do not select a desired form of Merger Consideration will be
converted into $2.25 in cash, a Debenture and five shares of Sub Common (the
"Default Merger Consideration"). Commencing 60 days after the Effective Date,
all unsubmitted or improperly submitted shares of Preferred Stock, other than
shares as to which dissenters' rights of appraisal have been properly asserted,
will evidence the right to receive the Default Merger Consideration. In
addition, shares as to which dissenters' rights of appraisal have been properly
asserted, which rights are waived or abandoned subsequent to the 60th day after
the Effective Date, similarly will evidence the right to receive the Default
Merger Consideration.
It will not be necessary for holders of Imperial Common to surrender or
exchange their certificates for new certificates representing Sub Common. See
"The Merger Agreement--Exchange of Certificates."
Certain Federal Income Tax Consequences. The Merger is intended to qualify
as a nontaxable reorganization under Section 368(a) of the Internal Revenue Code
of 1986, as amended and in effect on the date hereof (the "Code"). Accordingly,
for federal income tax purposes, neither Imperial nor Merger Sub will recognize
any taxable gain or loss as a result of the Merger, and Imperial stockholders
will not recognize any taxable gain or loss on the conversion of their Imperial
Common into Sub Common pursuant to the Merger. Holders of Preferred Stock may
recognize taxable gain or loss in connection with the Merger to the extent they
receive Debentures and cash in the Merger. EACH HOLDER OF IMPERIAL COMMON AND
PREFERRED STOCK SHOULD CONSULT HIS OWN TAX ADVISOR REGARDING THE TAX
CONSEQUENCES OF THE MERGER IN LIGHT OF SUCH HOLDER'S OWN SITUATION, INCLUDING
THE APPLICATION AND EFFECT OF ANY STATE, LOCAL OR FOREIGN INCOME AND OTHER TAX
LAWS. See "The Merger--Certain Federal Income Tax Consequences of the Merger."
Accounting Treatment. The Merger will be accounted for as a reorganization
of entities under common control and will reflect the carryover basis of
Imperial. See "The Merger--Accounting Treatment."
Interests of Certain Persons in the Merger; Conflicts of Interest.
Howard L. Ehler, Jr., the Company's Executive Vice President, owns 2,000
shares of Preferred Stock.
Dissenters' Rights. Under the GCL, holders of Imperial Common or Preferred
Stock who, prior to the Meeting, properly demand appraisal and do not vote in
favor of the Merger Agreement and the Merger have the right, under certain
circumstances, if the Merger is nonetheless consummated, to require the
Surviving Corporation to purchase their shares for "fair value" (exclusive of
any element of value arising from the
4
<PAGE>
accomplishment or expectation of the Merger). To exercise such appraisal rights,
such stockholders must, among other things, (i) deliver a written demand for
appraisal by or for the stockholder of record, in a manner that reasonably
informs the Surviving Corporation of the identity of such stockholder, before
the taking of the vote on the Merger and the Merger Agreement at the Meeting,
(ii) not vote for approval of the Merger and the Merger Agreement, and
(iii) continually hold shares of Imperial Common or Preferred Stock subject to
the demand for appraisal from the date of making the demand through the
Effective Date, all in accordance with the requirements of the GCL. Any
stockholder who has properly demanded appraisal may, at any time within 60 days
after the Effective Date, withdraw his or her demand for appraisal and elect to
accept the Merger Consideration to be paid under the Merger Agreement without
interest. Stockholders considering whether to seek appraisal should bear in mind
that the fair value of their Imperial Common or Preferred Stock determined under
the GCL could be more than, the same as or less than the value of the
consideration to be paid pursuant to the Merger Agreement. See "The
Merger--Appraisal Rights" and Appendix C--Section 262 of the Delaware General
Corporation Law.
Resales of Merger Sub Securities. The shares of Sub Common and Debentures
to be issued pursuant to the Merger Agreement have been registered under the
Securities Act and therefore may be resold without restriction by persons who
are not deemed to be "affiliates" (as such term is defined under the Securities
Act) of either Imperial or Merger Sub. See "The Merger--Resale Restrictions."
Risk Factors. There are a number of risks relating to an investment in the
Company (and, following the Merger, Merger Sub), including those relating to:
(i) general economic and business conditions, including the level of new housing
starts and activity in the home improvement, repair and remodeling markets,
which will, among other things, affect demand for the Company's products and
services; (ii) adoption of new environmental laws and regulations and changes in
how they are interpreted and enforced; (iii) the regulatory environment in which
the Company operates, including the Company's ability to comply with the
requirements of various building codes; (iv) the ability of the Company to
implement its business strategy; (v) changes in consumer preference;
(vi) competition; (vii) quality of management; and (viii) availability of
qualified personnel.
In addition, there are a number of risks relating to the Merger, including
those relating to: (i) the lack of assurance that stockholders will realize any
benefits from the Merger; (ii) the immediate dilution to the holders of Imperial
Common of their ownership interest in Merger Sub; (iii) the fact that the Merger
was not negotiated at arms' length; (iv) the limited trading market for Imperial
Common and, following the Merger, the Sub Common; (v) the likelihood that no
public trading market will develop for the Debentures following the Merger; and
(v) the tax impact of the Merger on holders of Preferred Stock. See "Risk
Factors" for a more complete discussion of the factors which should be
considered in evaluating the Merger and the securities offered hereby.
5
<PAGE>
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
The following table sets forth the ratio of earnings to combined fixed
charges and Preferred Stock dividends, on a historical and pro forma basis, for
the six months ended June 30, 1998 and for the year ended December 31, 1997. For
the purpose of calculating the ratio on a historical basis, earnings include
income (loss) before income taxes plus fixed charges, excluding Preferred Stock
dividends. Fixed charges include interest expense, Preferred Stock dividends and
an amount equivalent to interest included in rental charges. The Company has
assumed that one-third of rental expense is representative of the interest
factor. For the purpose of calculating the ratio on a pro forma basis, earnings
include income (loss) before income taxes plus fixed charges. Fixed charges
include interest expense and an amount equivalent to interest included in rental
charges.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
1997 1998
------------ --------------
<S> <C> <C>
Historical...... 2.3 2.1
Pro Forma....... 2.1 3.2
</TABLE>
On a historical basis, earnings were less than combined fixed charges and
Preferred Stock dividends by $56,000, $208,000, $345,000 and $472,00 for the
years ended December 31, 1996, 1995, 1994 and 1993, respectively, and,
accordingly, such years are not included in the preceding table. The Company has
omitted payment of Preferred Stock dividends since the fourth quarter of 1985.
6
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented in the table below have been derived
from Imperial's Consolidated Financial Statements and notes thereto included
elsewhere herein and should be read in conjunction therewith. See also "Imperial
Management's Discussion and Analysis of Financial Condition and Results of
Operations." Data as of and for the six months ended June 30, 1998 and June 30,
1997 have been derived from unaudited consolidated financial statements. The
unaudited financial statements include all adjustments consisting of normal
accruals that management considers necessary for a fair presentation of the
financial position and results of operations for those periods. Results of
operations for the six months ended June 30, 1998 are not necessarily indicative
of the results that may be expected for the entire year ending December 31,
1998.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------- ----------------
1997 1996 1995 1994 1993 1998 1997
------- ------- ------- ------ ------ ------ ------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA
Net sales.................... $15,774 $13,742 $11,615 $7,996 $7,714 $8,785 $8,004
Cost of sales................ 10,867 9,881 8,239 5,726 5,637 5,851 5,500
Selling, general and
administrative expenses.... 3,740 3,313 2,979 2,104 2,068 2,186 1,892
Interest expense............. (329) (317) (282) (204) (168) (137) (167)
Miscellaneous income
(expense).................. 54 43 7 23 17 86 (4)
Income (loss) before income
taxes...................... 892 274 122 (15) (142) 697 441
Income tax benefit, net
(expense).................. 753 -- -- -- -- (244) --
Net income (loss)............ 1,645 274 122 (15) (142) 453 441
Less: dividends on redeemable
preferred stock............ (330) (330) (330) (330) (330) (165) (165)
Net income (loss) applicable
to common stockholders..... $ 1,315 $ (56) $ (208) $ (345) $ (472) $ 288 $ 276
Net income (loss) per share
applicable to common
stockholders:..............
Basic...................... $ .22 $ (.01) $ (.04) $ (.06) $ (.09) $ .04 $ .05
Diluted.................... $ .21 $ (.01) $ (.04) $ (.06) $ (.09) $ .04 $ .05
Weighted average shares...... 6,009 5,471 5,382 5,317 5,217 6,516 5,624
Weighted average and
potentially dilutive
shares..................... 6,267 5,471 5,382 5,317 5,217 6,679 5,961
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------------------------------------------- -----------
1997 1996 1995 1994 1993 1998
-------- -------- -------- -------- -------- -----------
(IN THOUSANDS, EXCEPT RATIOS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital.............. $ 1,995 $ 872 $ 733 $ 334 $ 417 $ 2,259
Total assets................. $ 5,128 $ 4,116 $ 3,747 $ 3,067 $ 2,668 $ 6,546
Long-term debt, less current
maturities................. $ 819 $ 895 $ 1,000 $ 576 $ 678 $ 948
Redeemable preferred stock... $ 3,001 $ 3,001 $ 3,001 $ 3,001 $ 3,001 $ 3,001
Preferred dividends in
arrears(1)................. $ 4,044 $ 3,714 $ 3,384 $ 3,054 $ 2,723 $ 4,209
Common stock and other
stockholders' deficit...... $ (4,441) $ (5,879) $ (5,846) $ (5,641) $ (5,301) $ (4,127)
Current ratio................ 2.2 to 1 1.4 to 1 1.3 to 1 1.2 to 1 1.3 to 1 1.9 to 1
</TABLE>
- ------------------
(1) No cash dividends have been paid on the Preferred Stock since 1985.
7
<PAGE>
SELECTED UNAUDITED PRO FORMA CONDENSED FINANCIAL DATA
The following table presents selected unaudited pro forma condensed
financial information regarding Merger Sub after giving effect to the Merger,
and reflecting the issuance of the Merger Consideration and the elimination of
the outstanding shares of Preferred Stock and accumulated dividends thereon.
Immediately following the Effective Date, the financial statements of Merger Sub
will be the same as the financial statements of the Company immediately prior to
the Effective Date, except as changed incident to the issuance of the Merger
Consideration and the elimination of the outstanding shares of Preferred Stock
and the accumulated dividends thereon. See "Unaudited Pro Forma Condensed
Financial Information."
<TABLE>
<CAPTION>
YEAR ENDED
SIX MONTHS ENDED DECEMBER 31,
JUNE 30, 1998 1997
----------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
STATEMENTS OF OPERATIONS DATA
Net sales............................... $ 8,785 $ 15,774
Cost of sales........................... 5,887 10,938
Sellling, general and administrative
expenses.............................. 2,186 3,740
Interest expense........................ (229) (501)
Miscellaneous income.................... 86 54
Income before income taxes.............. 569 649
Income tax (expense) benefit............ (199) 838
Net income.............................. 370 1,487
Less: dividends on redeemable preferred
stock................................. 0 0
Net income applicable to common
stockholders.......................... $ 370 $ 1,487
Net income per share applicable to
common stockholders:
Basic................................. $ 0.04 $ 0.18
Diluted............................... $ 0.04 $ 0.17
Weighted average shares................. 8,767 8,260
Weighted average and potentially
dilutive shares....................... 9,011 8,599
<CAPTION>
JUNE 30,
1998
---------
(IN THOUSANDS)
<S> <C>
BALANCE SHEET DATA
Working capital......................... $ 1,656
Total assets............................ 6,373
Long-term debt, less current
maturities............................ 1,502
Redeemable preferred stock.............. 0
Preferred stock dividends in arrears.... 0
Common stock and other stockholders'
equity................................ 1,753
</TABLE>
The unaudited pro forma condensed financial data assume that each share of
Imperial Common will be converted into one share of Sub Common, and each share
of Preferred Stock will be converted, at the option of the Preferred
Stockholder, into either: (A) $4.75 in cash and ten shares of Sub Common, or
(B) $2.25 in cash, a Debenture and five shares of Sub Common. Because Imperial
is unable in advance to determine the proportion of Preferred Stock which will
be converted under (A) versus (B), Imperial has prepared the pro forma condensed
financial data using the arbitrary assumption that 50% of the outstanding shares
of Preferred Stock will be converted under (A) and 50% will be converted under
(B). The pro forma financial data include an adjustment to reflect the
conversion of 300,121 shares of Preferred Stock into 2,250,915 shares of Sub
Common and 150,061 Debentures, the elimination of Preferred Stock dividends, and
the payment of cash to Preferred Stockholders.
The pro forma statements of operations data exclude a charge to common
stockholders of $3,617,000 representing the excess of the fair value of cash and
securities to be issued to Preferred Stockholders on the conversion of their
stock over the fair value of common stock issuable to Preferred Stockholders had
the stock been converted at the conversion rate specified in the Preferred
Stock's governing instrument (the "excess consideration"). The pro forma
statements of operations data exclude $340,000 of estimated future transaction
costs associated with the proposed Merger which will be recognized as incurred
subsequent to June 30, 1998. The pro forma statements of operations data also
exclude $67,000 of costs representing the estimated fair value of 150,000
warrants to be issued to Auerbach, and a $1,044,000 estimated gain on the sale
of the Company's Miami facility. However, the excess consideration, the
transaction costs, the estimated fair value of the warrants to be issued to
Auerbach and the estimated gain on the sale of the Miami facility are reflected
in common stock and other stockholders' deficit in the pro forma balance sheet
data. See Notes 1 and 2 to the Unaudited Pro Forma Condensed Financial
Information.
8
<PAGE>
RISK FACTORS
The following factors should be considered carefully by stockholders of
Imperial in evaluating the Merger and the securities offered hereby.
RISKS RELATING TO AN INVESTMENT IN IMPERIAL
Operating Losses and Accumulated Deficit. The Company has only recently
become profitable, reporting net income applicable to common stockholders (after
giving effect to accrued unpaid dividends on the Preferred Stock) of $1,315,000
and $288,000 for the year ended December 31, 1997 and six months ended June 30,
1998, respectively, as compared to net losses applicable to common stockholders
of $56,000, $208,000, $345,000 and $472,000 for the years ended December 31,
1996, 1995, 1994 and 1993, respectively. In addition, the Company had an
accumulated stockholders' deficit of $4,441,000 and $4,127,000 at December 31,
1997 and June 30, 1998, respectively. 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. There
can be no assurances that these efforts to generate net income and cash will
continue to be effective in the future. See "Imperial Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Dependence on the Construction Industry; Economic Conditions. The
Company's business is primarily dependent upon the construction industry and is
directly affected by the level of new housing starts and activity in the home
improvement, repair and remodeling markets in Florida and Georgia and, to a
lesser extent, other states in the Southeastern United States, which comprise
the geographic areas in which the Company operates. The demand for construction
varies depending upon a number of factors, including fluctuations in regional
population and economic growth rates, interest rates and levels of material and
energy supplies. Accordingly, adverse economic conditions in the Company's
markets or a worsening of general economic conditions could adversely affect the
Company's operating results. While at the present time economic conditions for
the construction and building supply industry are favorable in the Company's
areas of operation, these areas have suffered economic difficulties in the past
and there can be no assurance that these economic conditions will not decline
again in the future or that demand for the Company's products will remain at
current levels.
Regulation. The Company is subject to a wide range of federal, state and
local laws, regulations and ordinances. In particular, many of these laws and
regulations pertain to the protection of the environment and regulate water
discharges and air emissions, as well as the handling, use and disposal of
hazardous and non-hazardous waste materials. In addition, the Company's
facilities are subject to regulations and safety standards established by the
Occupation Safety and Health Act, the federal agencies which oversee compliance
with this act and the safety codes of state and local government. Moreover,
certain of the Company's products are required to comply with local and regional
building codes. While the Company believes it is substantially in compliance
with all such applicable laws and regulations, there can be no assurance that
the Company is, or in the future will be, able to comply with, or continue to
comply with, current or future government regulations in every jurisdiction in
which it may conduct its business operations. The Company's operating costs may
be affected by the obligation to pay for the cost of complying with existing
environmental and safety laws, ordinances and regulations. In addition, in the
event any future legislation is adopted, the Company may, from time to time, be
required to make significant capital and operating expenditures in response to
such legislation. See "Business of Imperial."
Seasonality. The sale of Premix's and Acrocrete's products in the
construction market for the Southeastern United States is somewhat seasonal,
with a slightly lower rate of sales historically occurring in the period
December through February compared to the rest of the year. See "Business of
Imperial."
Competition. The Company's business is highly competitive. Premix and
Acrocrete encounter significant competition from local, regional and national
manufacturers of acrylic, cement and plaster products, most of whom manufacture
products similar to those of Premix and Acrocrete. Many of these competitors are
larger, more established and better financed than the Company. The Company
believes it can compete with the other companies based upon product quality,
customer service and maintaining lower overhead costs than larger national
companies. See "Business of Imperial."
9
<PAGE>
Dependence on Key Personnel. The Company's future success will depend to a
significant extent on the efforts of key management personnel, including Howard
L. Ehler, Jr., Executive Vice President and Principal Executive Officer of the
Company and Fred H. Hansen, President of the Company's Premix and Acrocrete
subsidiaries. The Company has entered into employment agreements with each of
Messrs. Ehler and Hansen. The loss of either of these key employees could have a
material adverse effect on the Company's business. See "Management."
Risks Associated with Low-priced "Over-the-counter" Securities. Imperial
Common and Preferred Stock are currently traded in the "over-the-counter market"
on the "Electronic Bulletin Board" of the National Association of Securities
Dealers, Inc. (the "NASD"). See "Price Range of Imperial Common and Preferred
Stock." Securities of companies traded on the NASD Electronic Bulletin Board are
generally more difficult to dispose of and to obtain accurate quotations as to
price than securities of companies that are traded on the Nasdaq National
Market, the Nasdaq SmallCap Market or the national securities exchanges.
The Securities Enforcement and Penny Stock Reform Act of 1990 requires
additional disclosure relating to the market for penny stocks in connection with
trades in any stock defined as a penny stock. Commission regulations generally
define a penny stock to be an equity security that has a market price of less
than $5.00 per share, subject to certain exceptions. Such exceptions include any
equity security listed on Nasdaq or a national securities exchange and any
equity security issued by an issuer that has (i) net tangible assets of at least
$2,000,000, if such issuer has been in continuous operation for three years,
(ii) net tangible assets of at least $5,000,000, if such issuer has been in
continuous operation for less than three years, or (iii) average annual revenue
of at least $6,000,000 for the last three years. Unless an exception is
available, the regulations require the delivery, prior to any transaction
involving a penny stock, of a disclosure schedule explaining the penny stock
market and the risks associated therewith.
In addition, trading in the Company's securities is currently subject to
Rule 15g-9 promulgated under the Exchange Act for non-Nasdaq and non-exchange
listed securities. Pursuant to Rule 15g-9, broker/dealers who recommend the
Company's securities to persons other than established customers and accredited
investors must make a special written suitability determination for the
purchaser and receive the purchaser's written agreement to a transaction prior
to sale. Securities are exempt from this rule if their market price is at least
$5.00 per share.
The impact of the regulations applicable to penny stocks on the Company's
securities is to reduce the market liquidity of the Company's securities by
limiting the ability of broker/dealers to trade the Company's securities and the
ability of purchasers of the Company's securities to sell their securities in
the secondary market. The low price of the Imperial Common also has a negative
effect on the amount and percentage of transaction costs paid by individual
stockholders and the potential ability of the Company to raise additional
capital by issuing additional shares. The primary reasons for these effects
include the internal policies of certain institutional investors that prohibit
the purchase of low-priced stocks, the fact that many brokerage houses do not
permit low-priced stocks to be used as collateral for margin accounts or to be
purchased on margin and certain brokerage house policies and practices that tend
to discourage individual brokers from dealing in low-priced stocks. In addition,
since broker's commissions on low-priced stocks represent a higher percentage of
the stock price than commissions on higher priced stocks, the current low share
price of the Imperial Common results in individual shareholders paying
transaction costs that are a higher percentage of their total share value than
would be the case if the Imperial Common's share price were substantially
higher.
Nasdaq SmallCap Listing Requirements. Merger Sub intends to apply for
listing of the Sub Common on the Nasdaq SmallCap Market as soon as it meets the
eligibility requirements. Under recently implemented Nasdaq rules, in order to
be eligible for listing on the Nasdaq SmallCap Market, (i) the Sub Common must
have a minimum bid price of $4.00, (ii) Merger Sub must have minimum tangible
net assets (total assets less total liabilities and goodwill) of $4 million or a
market capitalization of at least $50 million or net income of at least $750,000
in the most recent year or in two of the three prior years, (iii) Merger Sub
must have a public float of at least one million shares with a market value of
at least $5 million and (iv) the Sub Common must have at least three market
makers and be held of record by at least 300 shareholders. Merger Sub will not
meet these eligibility requirements immediately following the Effective Date. If
at any time thereafter Merger Sub were to satisfy all listing requirements other
than the minimum bid price of $4.00 per share, then the Board of Directors is
likely to recommend that Merger Sub effect a reverse stock split in order to
meet this minimum trading price listing
10
<PAGE>
requirement. Any such reverse stock split would require stockholder approval.
There can be no assurance that at any time Merger Sub would be able to satisfy
some or all listing requirements or that any proposed reverse stock split will
be approved by the stockholders or successfully implemented following such
approval.
Merger Sub does not intend to apply for listing of the Debentures on any
trading market.
Effects of Certain Anti-Takeover Provisions. Certain provisions of the
Company's and Merger Sub's Certificates of Incorporation and Bylaws and the GCL
could delay or frustrate the removal of incumbent directors and could make
difficult a merger, tender offer or proxy contest involving the Company or
Merger Sub, even if such events could be viewed as beneficial by the Company's
or Merger Sub's stockholders. For example, the Certificates of Incorporation
require a 75% supermajority vote of stockholders to amend certain provisions of
the Bylaws pertaining to the calling of special meetings and the election and
removal of directors. In addition, the Board of Directors of each company has
the ability to issue 'blank check' preferred stock without stockholder approval.
Although Merger Sub does not currently plan to issue any preferred stock, the
rights of the holders of Sub Common may be materially limited or qualified by
the issuance of preferred stock. Other provisions of the Certificates of
Incorporation and Bylaws divide each Board of Directors into three classes, each
class serving three year staggered terms. The Company and Merger Sub are also
subject to provisions of the GCL which prohibit a publicly held Delaware
corporation from engaging in a broad range of business combinations with a
person who, together with affiliates and associates, owns 15% or more of the
corporation's outstanding voting shares (an "interested stockholder") for three
years after the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. See "Description of Merger Sub
Securities--Sub Preferred" and "Management of Imperial."
Limitation on Liability of Directors to Stockholders. The Company's and
Merger Sub's By Laws limit the monetary liability of their directors in their
capacity as directors to the fullest extent permitted by the GCL.
No Dividends. The Company has not paid any cash dividends on Imperial
Common since 1980. The Company is prohibited from paying any dividends on
Imperial Common until all accrued and unpaid dividends on the Preferred Stock
are paid in full. The Company has omitted cash dividends on its Preferred Stock
since the fourth quarter of 1985, and unpaid dividends aggregated $4,209,000 at
June 30, 1998. Even if the Merger is approved, Merger Sub does not anticipate
paying dividends on Sub Common for the foreseeable future. Earnings, if any,
will be retained to finance the operation and expansion of Merger Sub's
business.
RISKS RELATING TO THE MERGER
No Assurance that Merger Sub or its Stockholders Will Realize Anticipated
Benefits from the Merger. The Company's Board of Directors believes that the
Company and its stockholders will benefit from restructuring the Company's
capitalization to eliminate the Preferred Stock and the accumulated dividend
arrearage thereon. In the opinion of the Board, elimination of the Preferred
Stock will remove an impediment to the Company's future financings, improve the
book value per common share by removing the aggregate redemption value and
accumulated dividend arrearages for the Preferred Stock, and also improve the
income (loss) per common share by eliminating the annual Preferred Stock
dividend requirements, while providing the Preferred Stockholders a combination
of cash and securities with potentially more liquidity and greater potential for
appreciation than the Preferred Stock. There can be no assurance, however, that
Merger Sub and its stockholders will ultimately realize any of the anticipated
benefits of the Merger.
No Arms' Length Negotiation or Independent Representatives. The Merger has
been initiated and structured by individuals who are executive officers and
directors of Imperial. No independent persons were hired to negotiate the terms
of the Merger on behalf of the Company's stockholders. If such persons had been
hired, the terms of the Merger might have been more or less favorable to the
public stockholders of the Company. The Company retained Auerbach as its
financial advisor to assist in developing the structure of the proposed Merger.
See "The Merger--Financial Advisor; Fairness Opinion."
Substantial Ownership Interest of Management and Affiliates. Following the
Effective Date, and assuming the maximum and minimum number of shares of Sub
Common are issued in the Merger (3,001,210 shares and 1,500,605 shares,
respectively), the executive officers and directors of the Company and their
affiliates will beneficially own 2,392,226 shares (including warrants
exercisable within 60 days after the Effective Date), or
11
<PAGE>
approximately 24.4%, if the maximum number of shares of Sub Common are issued,
or 24.7%, if the minimum number of shares of Sub Common are issued, of the
outstanding Sub Common. While such ownership may not allow management to
exercise control over Merger Sub, such ownership, together with their positions
as executive officers and directors of Merger Sub, will enable management to
exercise significant influence on the management and operation of Merger Sub.
Dilution. Holders of Imperial Common will have their ownership interest in
Merger Sub diluted by the issuance of Sub Common in the Merger to holders of
Preferred Stock. A maximum of 3,001,210 shares of Sub Common may be issued in
the Merger to the holders of the Preferred Stock (without giving effect to
150,000 common stock purchase warrants to be issued to Auerbach and an aggregate
of 200,000 warrants held by two directors of the Company). As a result, the
Preferred Stock would have been converted into Sub Common representing
approximately 31.2% of the Sub Common outstanding after the Merger, assuming all
holders of Preferred Stock choose to convert all their shares pursuant to
Option A.
Subordination. The Debentures are general, unsecured obligations of Merger
Sub, subordinated in right of payment to all existing and future Senior Debt
(generally, all indebtedness to institutional and other lenders) of Merger Sub.
The Debentures do not limit the amount of Senior Debt that may be incurred by
Merger Sub.
By reason of such subordination, in the event of the insolvency,
liquidation, reorganization, dissolution or other winding-up of Merger Sub or
upon a default in payment with respect to, or the acceleration of, or if a
judicial proceeding is pending with respect to any default under, any Senior
Debt, the holders of such Senior Debt must be paid in full before the holders of
the Debentures may be paid. Also, under certain circumstances, no payments may
be made with respect to the principal or interest on the Debentures if a
nonpayment default exists with respect to Senior Debt. See "Description of
Merger Sub Securities."
No Trustee or Indenture for the Debentures. The Debentures will not be
issued pursuant to an Indenture of Trust, nor will the Debentures be qualified
under the Trust Indenture Act of 1939, as amended. Consequently, holders of the
Debentures will be required to rely on their own resources, rather than upon the
resources of a trustee, to enforce the terms and provisions of the Debentures
against Merger Sub.
No Sinking Fund. Merger Sub has not created any sinking fund or other
similar reserve fund for the payment of principal and interest on the
Debentures. If Merger Sub does not generate sufficient cash flow from operations
or obtain other sources of financing at the time the Debentures mature, Merger
Sub may not have sufficient funds to provide for the payment of principal and
interest owing on the Debentures.
Limited Liquidity. A maximum of $2,400,968 (representing 300,121
Debentures) principal amount of Debentures may be issued in the Merger. In
management's opinion, there will not be a sufficient public "float" for an
active trading market to develop in the Debentures, nor will Merger Sub assist
in or encourage the development of any such trading market. Accordingly,
although the Debentures will be registered under the Securities Act, it is
likely that the holders of such securities will be required to bear the economic
risk of an investment in the Debentures until the prepayment or maturity
thereof.
Fixed Merger Consideration Despite Change in Common Stock Prices. At the
Effective Date, each share of Preferred Stock outstanding immediately prior to
the Merger will be converted, at the option of the holder thereof, into either
(A) $4.75 in cash and ten shares of Sub Common or (B) $2.25 in cash, an $8.00
principal amount Debenture and five shares of Sub Common. These conversion
options will not be adjusted in the event of any decrease or increase in the
price of Imperial Common prior to the Effective Date. The price of Imperial
Common may vary from its market price at the date of this Proxy
Statement/Prospectus and at the date of the Meeting. Such variations may be the
result of changes in the business, operations or prospects of the Company,
general market and economic conditions and other factors. At the time of the
Meeting, the holders of Preferred Stock will not know the exact value of the Sub
Common that they will receive when the Merger is consummated. Certificates
representing shares of Preferred Stock timely surrendered by holders who do not
select a desired form of Merger Consideration will be converted into the Default
Merger Consideration. Commencing 60 days after the Effective Date, all
unsubmitted, and improperly submitted, shares of Preferred Stock, other than
shares as to which dissenters' rights of appraisal have been properly asserted,
will evidence the right to receive the Default Merger Consideration. In
addition, shares as to which dissenters' rights of appraisal have been properly
12
<PAGE>
asserted, which rights are waived or abandoned subsequent to the 60th day after
the Effective Date, similarly will evidence the right to receive the Default
Merger Consideration.
TAX RISKS
No Ruling Regarding Tax Consequences. The Company will not seek a ruling
from the Internal Revenue Service (the "IRS") with regard to the proposed
transaction. The opinion of Rosen & Reade, LLP, special tax counsel to the
Company, concerning the federal income tax consequences of the Merger, which is
summarized in the discussion in "The Merger--Certain Federal Income Tax
Consequences of the Merger," will not be binding on the IRS and does not
preclude the IRS from adopting positions contrary to those stated in the
discussion.
Valuation of Merger Consideration. The market for shares of Imperial
Common is relatively inactive and it is not known if there will be a market for
the Debentures. It may, therefore, be difficult for a stockholder to estimate
the value, as determined after the proposed transaction, of the Sub Common and
Debentures to be received in the Merger. As the discussion in "The
Merger--Certain Federal Income Tax Consequences of the Merger" indicates,
whether a gain or loss will be realized by a holder of Preferred Stock will
depend, in part, upon the value of the Sub Common and Debentures to be received
in the Merger. The IRS could, of course, assign values to the Sub Common and to
the Debentures that are different from those determined by a stockholder.
Treatment of Accumulated Dividend Arrearages. The earnings and profits of
the Company and of Merger Sub for 1998 will not be known until the end of 1998.
It will not be possible, therefore, for a holder of Preferred Stock to know, at
the time of the Merger, how much, if any, of the accumulated dividend arrearages
on the Preferred Stock will be treated as a dividend and how much will be
treated as capital gain or as a return of capital. See "The Merger--Certain
Federal Income Tax Consequences of the Merger; Exchange of Preferred Stock."
13
<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth: (1) the historical net income (loss)
applicable to common stockholders and the book value of Imperial Common on a per
share basis; and (2) the pro forma net income applicable to common stockholders
and book value of Sub Common, on a per share basis, after giving affect to the
proposed merger of Imperial and Merger Sub. Imperial has not paid any cash
dividends on Imperial Common since 1980. The information presented in this table
should be read in conjunction with the unaudited pro forma condensed balance
sheet at June 30, 1998 and statements of operations for the six months ended
June 30, 1998 and for the year ended December 31, 1997 and the historical
financial statements and the notes thereto of Imperial appearing elsewhere in
this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
BASIC BASIC DILUTED DILUTED
HISTORICAL PRO FORMA (1) HISTORICAL PRO FORMA (1)
---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Per share net income (loss)
applicable to common
stockholders:
Fiscal year ended:
December 31, 1995..... $(0.04) $(0.04)
December 31, 1996..... (0.01) (0.01)
December 31, 1997..... 0.22 $0.18 0.21 $0.17
Six months ended:
June 30, 1997......... 0.05 0.05
June 30, 1998......... 0.04 0.04 0.04 0.04
</TABLE>
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
---------- -------------
<S> <C> <C>
Per share book value of
common stock: (1)(2)
At December 31, 1997..... $(0.68)
At June 30, 1998......... (0.62) $0.20
</TABLE>
- ------------------
(1) Assumes holders of an equal number of shares of Preferred Stock choose
Option A and Option B. Includes the issuance of 2,250,915 shares of Sub
Common and 150,061 Debentures upon conversion of all outstanding shares of
Preferred Stock pursuant to the Merger. See Note 2 to Unaudited Pro Forma
Condensed Financial Information.
(2) Includes a charge to common stockholders of $3,617,000 representing the
excess of the fair value of cash and securities to be issued to Preferred
Stockholders on the conversion of their stock over the fair value of the
common stock issuable to preferred stockholders had the stock been converted
at the conversion rate specified in the Preferred Stock's governing
instrument. Also includes estimated future transaction costs of $340,000,
$67,000 estimated fair value of 150,000 warrants issuable to Auerbach upon
consummation of the Merger, and $1,044,000 estimated gain on the sale of the
Company's Miami, Florida facility. See Note 1 to the Unaudited Pro Forma
Condensed Financial Information.
14
<PAGE>
PRICE RANGE OF IMPERIAL COMMON AND PREFERRED STOCK
The Imperial Common and Preferred Stock are traded in the over-the-counter
market. The following table sets forth the high and low bid quotations of the
Imperial Common and Preferred Stock for the quarters indicated, as reported by
the National Quotation Bureau, Inc. Such quotations represent prices between
dealers and do not include retail mark-up, mark-down, or commission, and may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
IMPERIAL
COMMON PREFERRED STOCK
----------- ----------------
FISCAL 1996 HIGH LOW HIGH LOW
- --------------------------- ---- ---- ------- -------
<S> <C> <C> <C> <C>
First Quarter.............. $.06 $.03 $1.75 $1.625
Second Quarter............. .10 .06 2.00 1.625
Third Quarter.............. .14 .07 2.25 1.75
Fourth Quarter............. .14 .08 2.375 1.875
<CAPTION>
FISCAL 1997 HIGH LOW HIGH LOW
- --------------------------- ---- ---- ------- -------
<S> <C> <C> <C> <C>
First Quarter.............. $.20 $.08 $3.25 $2.25
Second Quarter............. .28 .20 2.8125 2.625
Third Quarter.............. .45 .20 5.50 2.8125
Fourth Quarter............. .44 .29 5.25 4.50
<CAPTION>
FISCAL 1998 HIGH LOW HIGH LOW
- --------------------------- ---- ---- ------- -------
<S> <C> <C> <C> <C>
First Quarter.............. $.40 $.25 $5.75 $5.125
Second Quarter............. .58 .36 8.75 5.75
Third Quarter.............. .44 .29 7.75 5.25
Fourth Quarter (through
October 20, 1998)........ .34 .28 5.50 5.50
</TABLE>
On October 20, 1998, the Imperial Common and Preferred Stock were held by
2,091 and 85, respectively, stockholders of record.
As of October 20, 1998, the closing bid and asked prices of the (i)
Imperial Common were $.28 and $.42, respectively, and (ii) Preferred Stock were
$5.50 and $7.00, respectively.
15
<PAGE>
THE MEETING
GENERAL
This Proxy Statement/Prospectus is being furnished to stockholders of
Imperial in connection with the solicitation of proxies by the Board of
Directors of Imperial for use at a Special Meeting of Stockholders of Imperial
to be held on Thursday, December 17, 1998, at 10:00 a.m., local time, at the
Hyatt Regency Hotel, 400 S.E. 2nd Avenue, Miami, Florida, and any adjournments
or postponements thereof.
The Proxy Statement/Prospectus, the attached Notice of Meeting and the
accompanying form of proxy are first being mailed to stockholders of Imperial on
or about November 2, 1998.
MATTERS TO BE CONSIDERED AT THE MEETING
At the Meeting, holders of shares of Imperial Common and Preferred Stock
will consider and vote upon (i) a proposal to approve and adopt the Merger
Agreement and the transactions contemplated thereby and (ii) such other business
as properly may come before the Meeting.
The Company's Board of Directors believes that the terms of the Merger are
fair to, and in the best interests of, the Company and its stockholders.
Accordingly, the Board of Directors has approved the Merger Agreement and
unanimously recommends a vote FOR approval and adoption of the Merger Agreement
by the stockholders of the Company. For additional information, see "The
Merger--Reasons for the Merger; Recommendation of the Board of Directors."
RECORD DATE
The Board of Directors of Imperial has fixed the close of business on
October 30, 1998 as the Record Date for the determination of stockholders
entitled to notice of, and to vote at, the Meeting. Accordingly, only holders of
record of Imperial Common and Preferred Stock as of the close of business on the
Record Date are entitled to notice of, and to vote at, the Meeting. As of the
Record Date, 6,607,961 shares and 300,121 shares of Imperial Common and
Preferred Stock, respectively, were outstanding and held of record by 2,091 and
85 stockholders, respectively.
PROXIES
When a proxy card is returned, properly signed and dated, the shares
represented thereby will be voted in accordance with the instructions on the
proxy card. If a stockholder does not attend the Meeting and does not return the
signed proxy card, such stockholder's shares will not be voted. If a stockholder
returns a signed proxy card but does not indicate how his or her shares are to
be voted, such shares will be voted FOR approval of the Merger Agreement and the
transactions contemplated thereby. As of the date of this Proxy
Statement/Prospectus, the Company's Board of Directors does not know of any
other matters which are to come before the Meeting. If any other matters are
properly presented at the Meeting for consideration, the persons named in the
enclosed form of proxy and acting thereunder will have discretion to vote on
such matters in accordance with their best judgment.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i) filing
with the Secretary of Imperial, at or before the taking of the vote at the
Meeting, a written notice of revocation bearing a later date than the proxy,
(ii) duly executing a later dated proxy relating to the same shares of Imperial
Common or Preferred Stock and delivering it to the Secretary of Imperial before
the taking of the vote at the Meeting or (iii) attending the Meeting and voting
in person (although attendance at the Meeting will not in and of itself
constitute a revocation of a proxy). Any written notice of revocation or
subsequent proxy should be sent so as to be delivered to the Company at
1259 Northwest 21st Street, Pompano Beach, Florida 33069, Attention: Corporate
Secretary, or hand delivered to the Secretary of Imperial at or before the
taking of the vote at the Meeting.
Imperial will bear the cost of the solicitation of proxies from its
stockholders. In addition to solicitation by use of the mails, proxies may be
solicited by directors, officers and employees of Imperial in person or by
telephone or other means of communication. Such directors, officers and
employees will not be additionally compensated, but may be reimbursed for
out-of-pocket expenses incurred in connection with such solicitation.
Arrangements also will be made with custodians, nominees and fiduciaries for the
forwarding of proxy solicitation materials to beneficial owners of shares held
of record by such custodians, nominees and fiduciaries, and Imperial will
reimburse such custodians, nominees and fiduciaries for reasonable expenses
incurred in connection therewith. In addition, Morrow & Co., Inc. (the
"Information Agent") will assist in the solicitation of
16
<PAGE>
proxies by Imperial, and will act as Information Agent for the Merger. The
Information Agent will receive a fee totaling $5,000 plus out-of-pocket expenses
for such services.
STOCKHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THEIR PROXY CARDS.
THE PROCEDURES FOR THE EXCHANGE OF SECURITIES AFTER THE MERGER IS CONSUMMATED
ARE SET FORTH BELOW IN THIS PROXY STATEMENT/PROSPECTUS.
QUORUM
The presence, either in person or by properly executed proxies, of the
holders of a majority of the outstanding shares of Preferred Stock, together
with the holders of a majority of the outstanding shares of Imperial Common, is
necessary to constitute a quorum at the Meeting. Both abstentions and broker
non-votes are considered present for purposes of determining a quorum but are
excluded from votes cast.
VOTE REQUIRED
Holders of Imperial Common and Preferred Stock are entitled to one vote at
the Meeting for each share of Imperial Common and Preferred Stock held of record
by them on the Record Date. The affirmative vote of the holders of a majority of
the shares of Imperial Common outstanding and entitled to vote at the Meeting,
and the affirmative vote of the holders of a majority of the shares of Preferred
Stock outstanding and entitled to vote at the Meeting, voting separately as a
class, are required for the approval of the Merger. Abstentions and broker
non-votes will have the effect of votes against the Merger Agreement. As of the
Record Date, the Company's directors, executive officers and their affiliates
beneficially owned 2,172,226 shares of Imperial Common (excluding 200,000 shares
which may be acquired upon the exercise of warrants which are exercisable within
60 days of the Record Date) and 2,000 shares of Preferred Stock, representing
32.9% and 0.7% of the outstanding shares of Imperial Common and Preferred Stock,
respectively. All of the directors, executive officers and their affiliates have
advised the Company that they intend to vote their shares of Imperial Common and
Preferred Stock in favor of the Merger.
THE MERGER
BACKGROUND OF THE MERGER
The Company originally issued the Preferred Stock in a February 1983 public
offering of its securities. Each share of Preferred Stock is entitled to
cumulative quarterly dividends at the rate of $1.10 per annum. The Company has
omitted payment of dividends on the Preferred Stock since the fourth quarter of
1985 aggregating $4,209,000 through June 30, 1998. In addition, the Preferred
Stock is subject to redemption through a mandatory sinking fund at a redemption
price of $10.00 per share, at the rate of approximately 66,000 shares a year,
starting in 1986, less any shares of Preferred Stock converted into Imperial
Common. Through June 30, 1998, an aggregate of 359,879 shares of Preferred Stock
were converted into 1,199,557 shares of Imperial Common. As a result of these
conversions, the Company was required to redeem 36,121 shares in 1991 and 66,000
shares for each year thereafter through 1995, at which time the Preferred Stock
was intended to be fully retired. The Company did not redeem any shares of the
Preferred Stock as required on April 1, 1991, or during 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. Among
other things, the Company is prohibited from paying any cash dividends on
Imperial Common at any time that the Company is in default in the payment of any
dividends on the Preferred Stock or if the sinking fund requirements are in
arrears. The Company is currently unable to satisfy the dividend and sinking
fund arrearages, and it does not anticipate that it will be able to satisfy
these obligations in their entirety in the foreseeable future.
In management's view, the actual intrinsic stockholder value of Imperial is
significantly higher than is reflected in the market price of Imperial Common,
but for the ongoing and increasing Preferred Stock dividend accruals and sinking
fund arrearages. Management believes that maximum value to holders of Imperial
Common and Preferred Stock alike would best be attained by utilizing future cash
generated by operations or from external sources to implement the Company's
growth and expansion goals rather than for the satisfaction of dividend and
sinking fund arrearages. Accordingly, on several occasions the Board of
Directors, in response to inquiries from holders of Preferred Stock and during
the Board's meetings incident to considering whether the Company could declare
dividends on and/or make partial redemptions of the Preferred Stock, considered
the related issue of whether the Preferred Stock should be retired or otherwise
restructured prior to final redemption. At the Company's November 1993 Annual
Meeting of Stockholders, the Board of Directors proposed that, in return for a
payment of $1.00 per share, the holders of the Preferred Stock approve an
amendment to the Certificate of
17
<PAGE>
Designation of Rights and Preferences (the "Certificate of Designation")
relating to the Preferred Stock which, if adopted, would have, among other
changes, eliminated (i) the dividend arrearages, (ii) the ongoing requirement to
pay cumulative dividends and (iii) the mandatory sinking fund redemption
provisions. The amendment was rejected, primarily because, according to several
significant holders of Preferred Stock, in light of the Company's then financial
condition the proposed amendment did not provide sufficient value to such
holders.
In 1997, the Company began to realize an improvement in its results of
operations and management came to the conclusion that it would be increasingly
difficult, if not impossible, for the Company to increase its stockholder value
and realize its expansion goals without restructuring its capitalization to
eliminate the Preferred Stock dividend and sinking fund arrearages. In late
1997, management contacted seven of the larger holders of Preferred Stock to
explore their interest in a restructuring of their holdings. In the spring of
1998, the Company retained Auerbach as its financial advisor to assist it in
structuring a transaction which would accomplish this objective, while
maximizing the potential for the Company to accomplish its business plan for
future growth and enhancing overall stockholder value.
Thereafter, the Company's management, assisted by its financial and legal
advisors, commenced the process of structuring a proposed transaction.
Management determined that any consideration issuable to the holders of
Preferred Stock in any such transaction would be limited by the Company's
then-current financial condition, limited resources, and the likelihood of
significant transaction costs. Management further determined that the Company
was limited as to the number of new shares of common stock that could be offered
to the holders of Preferred Stock without jeopardizing both the Company's
financial flexibility and its ability to utilize its approximately $11,000,000
of net operating loss ("NOL") carry-overs for income tax purposes. Management
therefore informed its advisors of its preference that the consideration
actually issued to the holders of the Preferred Stock in any such transaction
approximate no greater than (i) 2,400,000 newly issued shares of common stock,
(ii) $1,500,000 principal amount of indebtedness and (iii) $1,000,000 in cash.
In May 1998, the Board of Directors, together with its financial and legal
advisors, considered several proposed transactions. Initially, the Board of
Directors considered a proposed transaction in which the per share Merger
Consideration to be received by the holders of the Preferred Stock would consist
of either, at the option of the holder of the Preferred Stock, (A) $4.50 in cash
and ten warrants ("Sub Warrants") to purchase Sub Common or (B) $2.00 in cash, a
Debenture and four Sub Warrants. Although the Board of Directors was initially
favorably inclined toward this proposal, on reflection it subsequently
determined to replace the Sub Warrant component of the Merger Consideration with
eight shares of Sub Common, in the case of Option A above, and three shares of
Sub Common, in the case of Option B above. The Board of Directors based its
determination principally on its assessment that the issuance of Sub Common
would provide holders of Preferred Stock with a greater degree of liquidity and
potential for price appreciation than would be provided by the proposed issuance
of the Sub Warrants. In early October 1998, the Board of Directors, after taking
into account conditions prevalent in public equity markets, increased the Merger
Consideration payable per share of Preferred Stock to $4.75 in cash and ten
shares of Sub Common under Option A and to $2.25 in cash, a Debenture and five
shares of Sub Common under Option B. Following its review of these proposals,
the Board of Directors preliminarily approved the proposed Merger described
herein, believing such proposal was the fairest to its stockholders of the
transactions considered and had the highest likelihood for acceptance and
approval by such stockholders. The Board of Directors did not substantively
consider any proposals other than those described in this paragraph.
In mid October 1998, Auerbach orally advised management that the terms of
the proposed Merger described in this Proxy Statement/Prospectus are fair, from
a financial point of view, to Imperial's stockholders. On October 12, 1998, the
Board of Directors, after considering various factors, including the fairness
opinion of Auerbach, ratified its approval of the Merger, the Merger Agreement
and the transactions contemplated by the Merger Agreement, and resolved to
recommend to Imperial's stockholders that they vote to approve the proposal to
adopt the Merger Agreement.
RECOMMENDATION OF THE BOARD OF DIRECTORS; REASONS FOR THE MERGER
The Board of Directors of Imperial believes that the Merger is fair to and
in the best interests of Imperial and its stockholders and unanimously
recommends that Imperial's stockholders vote for approval of the Merger
Agreement and the transactions contemplated thereby. In reaching its
determination, the Board of Directors
18
<PAGE>
consulted with Imperial management, as well as its financial advisors and legal
counsel, and considered a number of factors, both positive and negative,
including, without limitation, the following:
The following positive factors, among others, were considered:
1. Improved Book Value. Elimination of the Preferred Stock from the
Company's capital structure will improve the book value per common share by
$.82, from $(.62) to $.20 on a pro forma basis at June 30, 1998, assuming
holders of an equal number of shares of Preferred Stock choose Option A or
Option B. The improvement will result primarily from the elimination of
$3,001,000 of Preferred Stock and $4,209,000 of accumulated dividends
thereon less the issuance of $984,000 of Debentures and cash paid to
Preferred Stockholders of $1,050,000.
2. Enhancement of the Company's Financial Flexibility. By
eliminating the Preferred Stock liquidation preference and dividend
arrearages, the Company's balance sheet will be strengthened and its
financing alternatives enhanced.
3. Greater Value for Preferred Stockholders. The Sub Common together
with the cash and Debentures to be received by the Preferred Stockholders
should provide them with an opportunity to realize greater liquidity and
value than the current Preferred Stock provides. Average daily trading
volume of the Preferred Stock was approximately 511 shares for the first
eight months of 1998 (prior to the announcement of the proposed Merger),
compared to the average daily trading volume of approximately 3,260 shares
for the Imperial Common during the same period. Moreover, the cash and debt
components of the Merger Consideration will provide the holders of the
Preferred Stock with an additional readily ascertainable element of value.
4. Greater Ability to Pursue Growth Opportunities. The Company
intends in the future to pursue growth opportunities, both internally and
through acquisitions. Although the Company believes that as a result of the
Merger, it may be in a more favorable position to make acquisitions that
will enhance the Company's operations, there can be no assurance that any
such events will occur. The Company does not currently have any plans,
understandings, commitments or agreements relating to any proposed
acquisition or financing.
5. Fairness Opinion. The opinion of Auerbach that the Merger
Consideration is fair, from a financial point of view, to Imperial's
stockholders.
The following negative factors, among others, were considered:
1. Dilution. If the Merger is approved, holders of Imperial Common
could have their ownership interest in the Company diluted by up to
3,001,210 shares, representing approximately 31.2% of the Sub Common
outstanding after the Merger. However, the Board of Directors determined
that the Merger would likely result in less dilution and cost to the
Company than would be experienced if the Preferred Stock were redeemed
pursuant to the terms of the Certificate of Designation governing the
Preferred Stock by raising additional capital from third parties.
2. Value of Merger Consideration. Holders of Preferred Stock will
receive Merger Consideration having an estimated value less than the
current combined current redemption price and dividend arrearages of the
Preferred Stock. However, the Board of Directors believes that the Merger
Consideration has potentially greater value than the current market price
of the Preferred Stock.
3. Adverse Impact on Company Liquidity. The Merger will require the
Company to pay significant out-of-pocket transaction costs, as well as cash
consideration to the holders of the Preferred Stock. If all holders of
Preferred Stock were to elect to receive $4.75 per share in cash and ten
shares of Sub Common, the Company would be required to pay aggregate cash
consideration of $1,425,575, in addition to approximately $400,000 in
estimated out-of-pocket transaction costs. If all holders of Preferred
Stock were to elect to receive $2.25 in cash, an $8.00 principal amount
Debenture and five shares of Sub Common, the Company would be required to
pay aggregate cash consideration of $675,272 and would incur aggregate
indebtedness of $2,400,968 (and annual interest obligations thereon of
approximately $192,100), together with out-of-pocket transaction costs.
However, management believes that cash from operations, together with the
strengthening of its balance sheet as a result of the Merger, will provide
it with sufficient financial flexibility and liquidity to fund both its
ongoing operations and the costs associated with the Merger.
19
<PAGE>
In view of the wide variety of factors considered in connection with its
evaluation of the proposed Merger, the Board of Directors did not find it
practicable to, and did not, quantify or otherwise attempt to assign relative
weights to the specific factors considered in reaching its determination.
THE BOARD OF DIRECTORS OF IMPERIAL UNANIMOUSLY RECOMMENDS THAT IMPERIAL'S
STOCKHOLDERS VOTE TO APPROVE AND ADOPT THE MERGER AGREEMENT.
In the event that the Merger is not approved by the Company's stockholders,
the Preferred Stock will continue to accrue dividends in arrears and the Company
would continue to be obligated to redeem the Preferred Stock and pay the
accumulated dividend arrearages. The Company does not know when it will resume
the payment of dividends on, and the redemption of, the Preferred Stock. The
Company does not currently expect to resume payment of dividends or continue
redemptions for the foreseeable future. Although it is likely the Company would
be able to continue to operate indefinitely in its current condition, the
Company would continue to be limited in taking any steps necessary to enhance
stockholder value in the future.
FINANCIAL ADVISOR; FAIRNESS OPINION
In March 1998, the Company retained Auerbach to assist the Company in its
consideration and evaluation of possible transactions. In October 1998,
Imperial's Board asked Auerbach to render an opinion as to the fairness of the
Merger to the holders of Imperial Common and Preferred Stock from a financial
point of view. Imperial's Board did not place limitations on the investigations
to be made or the procedures to be followed by Auerbach in preparing and
rendering its opinion.
On October 12, 1998, Auerbach delivered its written opinion that the terms
of the Merger are fair to the holders of Imperial Common and Preferred Stock
from a financial point of view.
The full text of the written opinion of Auerbach, which sets forth
assumptions made, matters considered and limitations on the review undertaken in
connection with the opinion, is attached as Appendix B hereto and is
incorporated herein by reference. Stockholders are urged to, and should, read
such opinion in its entirety and consider it carefully. The Auerbach opinion is
directed to Imperial's Board and does not constitute a recommendation to any
individual stockholder as to how such stockholder should vote at the Meeting.
The summary of Auerbach's opinion set forth in this Proxy Statement/Prospectus
is qualified in its entirety by reference to the full text of such opinion.
Auerbach relied upon and assumed, without independent verification, the
accuracy and completeness of all publicly available financial information and
all financial information furnished or otherwise communicated to it by Imperial.
Auerbach did not make any appraisal of the assets of Imperial. Auerbach does not
express any opinion as to what the value of the Merger Consideration actually
will be when issued pursuant to the Merger or the price at any time at which the
Sub Common will trade. Auerbach's opinion does not address the underlying
business decision to enter into the Merger.
Auerbach also assumed that: (i) the Merger will be accounted for as a
reorganization of entities under common control; and (ii) any material
liabilities (contingent or otherwise, known or unknown) of Imperial are set
forth in the consolidated financial statements of Imperial. Auerbach assumes no
responsibility for the legal, tax or accounting aspects of the Merger.
In connection with its evaluation and opinion, Auerbach reviewed, among
other things: (i) the Merger Agreement; (ii) Imperial's most recently available
Annual Report on Form 10-K; (iii) certain Quarterly Reports on Forms 10-Q of
Imperial; and (iv) certain internal financial analyses and forecasts prepared by
Imperial's management. Auerbach also met with management to discuss the
Company's business and business prospects. Auerbach assumed that all financial
projections provided by Imperial were based upon assumptions reflecting the
best, currently available estimates and good faith judgment of management as to
the future performance of Imperial and that management does not have any
information or beliefs that would make the projections materially misleading.
In connection with preparing its evaluation and opinion, Auerbach performed
a variety of financial and comparative analyses, including, but not limited to,
those described below. Auerbach believes that its analyses must be considered as
a whole and that selecting portions of the analyses and of the factors
considered by it,
20
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without considering all factors and analyses, could create a misleading view of
the processes underlying its evaluation and opinion. The preparation of a
fairness opinion is a complex process and is not necessarily susceptible to a
partial analysis or summary description. In its analysis, Auerbach made numerous
implicit assumptions about industry and general economic conditions, and other
matters which are beyond the control of Imperial and may not be indicative of
future results or actual values, which may be significantly more or less
favorable than such estimates. Estimates of values of companies or assets do not
purport to be appraisals or necessarily reflect the prices at which companies
and assets may actually be sold. Because such estimates are inherently subject
to uncertainty, Auerbach can give no assurances that such estimates will be
realized.
Comparable Company Analysis. Using publicly available information,
Auerbach reviewed certain financial information and ratios of each of the
following publicly-traded companies that Auerbach deemed, through experience and
discussions with management of Imperial, to be reasonably similar to Imperial:
ABT Building Products Corporation, Dal-Tile International, Inc., Hydraulic Press
Brick Co. and Smith-Midland Corp. (the "Publicly-Traded Comparables").
Auerbach's review of the Publicly-Traded Comparables included analysis of
(i) latest twelve month ("LTM") revenues, (ii) LTM earnings before interest,
taxes, depreciation and amortization ("EBITDA") and (iii) LTM net income.
Auerbach evaluated the market multiples for such companies to determine the
highest, lowest and median market multiples for each of the selected items
(i) through (iii) above.
This analysis indicated that the approximate enterprise value multiples of
revenue ranged from 0.47 to 1.32, with a median multiple of 0.82 and the
approximate enterprise value multiples of EBITDA ranged from 3.6 to 7.3, with a
median multiple of 4.6. The market multiple analysis of net income was not
included due to the lack of meaningful information from the Publicly-Traded
Comparable Companies.
Auerbach subsequently used the median multiples derived from the
Publicly-Traded Comparables and applied such multiplies to the corresponding
financial information for Imperial, based on Imperial's financial statements for
the LTM ended June 30, 1998, to determine Imperial's approximate imputed
enterprise value. The resulting range of imputed enterprise values for Imperial
were then adjusted to account for pro forma net debt (debt minus cash), by
subtracting approximately $3.5 million of pro forma debt, yielding a range of
imputed equity values for Imperial.
Based upon the revenue multiples, the imputed enterprise value of Imperial
ranged from approximately $7.8 million to approximately $21.8 million; after
subtracting net debt, the imputed equity value of Imperial ranged from
approximately $4.3 million to approximately $18.3 million. Based upon the EBITDA
multiples, the imputed enterprise value of Imperial ranged from approximately
$5.5 million to approximately $11.0 million; after subtracting net debt, the
imputed equity value of Imperial ranged from approximately $2.0 million to
approximately $7.5 million.
None of the Publicly-Traded Comparables utilized as a comparison are
identical to Imperial. Accordingly, an analysis of publicly-traded comparable
companies is not mathematical. Rather it involves complex consideration and
judgements concerning differences in financial and operating characteristics of
the comparable companies and other factors that could affect the public trading
and market values of the comparable companies or company to which they are being
compared.
Discounted Cash Flow Analysis. Auerbach performed a discounted cash flow
("DCF") analysis, by calculating (x) the present value of Imperial's projected
unleveraged free cash flows for the years ending December 31, 1998, 1999 and
2000 with (y) the present value of a range of terminal values described below.
Free cash flow represents the amount of cash generated and available for
principal, interest and dividend payments after providing for ongoing business
operations; these free cash flow figures were based upon operating and financial
forecasts provided to Auerbach by the management of Imperial.
The range of terminal values represents the residual value of Imperial at
the end of the three year forecast period; this range of terminal values was
calculated by applying a range of imputed multiples to Imperial's:
(i) revenues; (ii) EBITDA and (iii) perpetual growth rates, in the final year of
the forecast period.
As part of the DCF analysis, Auerbach utilized discount rates based upon
several assumptions including interest rates, the inherent business risk of
Imperial and Imperial's estimated cost of capital.
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Based upon a range of terminal value multiples of 7.0x to 8.0x, and a range
of discount rates of 18% to 20%, the imputed enterprise value of Imperial ranged
from approximately $10.7 million to approximately $12.3 million
The resulting range of imputed enterprise values for Imperial was then
adjusted to account for net debt, yielding a range of imputed equity values for
Imperial of approximately $7.2 million to approximately $8.8 million.
Pro Forma Analysis. Auerbach reviewed and analyzed the projections for
Imperial based upon operating and financial projections provided to it by
Imperial's management and the terms of the Merger. Auerbach noted that under the
terms of the Merger Agreement, the Merger Consideration issuable to the holders
of Preferred Stock, depending on the form of Merger Consideration chosen,
included components ranging from a minimum to a maximum of (i) 1,500,605 shares
to 3,001,210 shares of Sub Common, (ii) $0 to $2,400,968 principal amount of
Debentures and (iii) $675,272 to $1,425,575 in cash. Furthermore, based upon
discussions with management, Auerbach assumed (i) a 4% cost of funding to the
Company with respect to the cash component of the Merger Consideration and
(ii) 8% interest per annum on the Debentures issued in the Merger.
Auerbach reviewed certain pro forma financial effects resulting from the
Merger for each of the fiscal years ending December 31 in the three year period
ending December 31, 2000. Auerbach estimated, on a pro forma basis, the Merger
would be accretive to the earnings per share ("EPS") of Imperial in each of such
periods. Such estimates were, in part, based upon management's projections of
net income through fiscal 2000, the elimination of Preferred Stock dividend
obligations and arrearages and other post-Merger savings or revenue
enhancements.
Based on its analysis as described above, Auerbach valued, on a pro forma
basis, the per share Merger Consideration to be received by the holders of the
Preferred Stock at (A) $13.29, if a holder elected to have each of his or her
shares converted into $4.75 in cash and ten shares of Sub Common or (B) $12.80,
if a holder elected to have each of his or her shares converted into $2.25 in
cash, a Debenture and five shares of Sub Common. Auerbach determined the imputed
value of the Merger Consideration proposed to be issued to the holders of the
Preferred Stock by utilizing: (i) an imputed, pro forma market value of the Sub
Common of (x) approximately $0.85, if all holders of Preferred Stock chose
Option A above, (y) approximately $0.80, if all holders of Preferred Stock chose
Option B above and (z) $0.83, if an equal number of holders of Preferred Stock
chose Options A and B above; (ii) a market value of the Debenture of 82% cash
value; and (iii) the cash component of the two choices of Merger Consideration
to be offered in the Merger.
Attached hereto as Appendix D are the projections prepared by the Company
which were utilized by Auerbach in performing the analyses described above.
Auerbach is an investment banking and advisory firm, which as part of its
investment banking business is regularly engaged in the valuation of businesses
and their securities in connection with mergers, acquisitions, underwritings,
sales and distributions of securities, private placements and valuations for
corporate and other purposes. Auerbach is a recognized investment banking firm
whose principals have substantial experience in transactions similar to the
Merger and are familiar with Imperial and its business. Auerbach had not
previously rendered services to, or engaged in any transaction with, Imperial or
its affiliates, prior to rendering services as Imperial's financial advisor.
Imperial has paid Auerbach $25,000 for its services as financial advisor,
and has agreed, in the event the Merger is consummated, to pay Auerbach an
additional $50,000 and to issue to Auerbach warrants to purchase 150,000 shares
of Sub Common exercisable for a period of five years, commencing on the
Effective Date, at an exercise price of $0.38 per share (which was the average
closing price of Imperial Common on the NASD Electronic Bulletin Board for the
five days prior to Imperial's retention of Auerbach as its financial advisor),
subject to adjustment. Imperial agreed to pay Auerbach a fee of $25,000 upon the
delivery of the fairness opinion, all of which has been paid. In addition,
Imperial has agreed to indemnify Auerbach to the full extent lawfully permitted
from and against certain liabilities that may arise out of its engagement by
Imperial and in the rendering of its opinion, and to reimburse Auerbach for
reasonable out-of-pocket expenses.
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ESTIMATED FEES AND EXPENSES; SOURCES OF FUNDS
Estimated cash expenditures for fees and expenses incurred, or to be
incurred, by the Company in connection with the Merger Agreement and the
transactions contemplated thereby are approximately as follows:
<TABLE>
<S> <C>
Cash Portion of Merger Consideration... $1,425,575(1)
Financial Advisory Fees and Expenses... 105,000
Legal Fees and Expenses................ 140,000
Accounting Fees and Expenses........... 30,000
SEC Filing Fees........................ 1,128
Printing and Mailing Expenses.......... 70,000
Miscellaneous Expenses................. 53,872
----------
$1,825,575(2)
----------
----------
</TABLE>
- ------------------
(1) Assumes all holders of Preferred Stock elect to receive per share Merger
Consideration consisting of $4.75 in cash and ten shares of Sub Common.
(2) Includes fees and expenses of $60,000 incurred through June 30, 1998.
The total amount required to pay the cash portion of the Merger
Consideration and the expenses incident to the Merger and the consummation of
the transactions contemplated thereby will be paid from borrowings under the
Company's line of credit with its commercial lender and cash on hand (a
significant portion of which will be derived from the proceeds or the sale of
the Company's Miami, Florida facility which occurred on October 2, 1998).
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
THE FOLLOWING DISCUSSION IS A SUMMARY OF MATERIAL FEDERAL INCOME TAX
CONSEQUENCES OF THE MERGER TO THE STOCKHOLDERS OF IMPERIAL WHO HOLD IMPERIAL
COMMON AND PREFERRED STOCK ON THE EFFECTIVE DATE. THE DISCUSSION IS INTENDED
ONLY AS A SUMMARY AND DOES NOT PURPORT TO BE A COMPLETE ANALYSIS OF ALL
POTENTIAL TAX EFFECTS RELEVANT TO A DECISION WHETHER TO VOTE FOR THE APPROVAL OF
THE MERGER. THE DISCUSSION IS BASED ON CURRENT PROVISIONS OF THE INTERNAL
REVENUE CODE OF 1986, AS AMENDED (THE "CODE"), THE TREASURY REGULATIONS
THEREUNDER, AND APPLICABLE JUDICIAL AND ADMINISTRATIVE INTERPRETATIONS ON THE
DATE HEREOF, ALL OF WHICH ARE SUBJECT TO CHANGE (POSSIBLY WITH RETROACTIVE
EFFECT) AND TO DIFFERING INTERPRETATIONS. THIS DISCUSSION DOES NOT ADDRESS ALL
ASPECTS OF FEDERAL TAXATION THAT MAY BE RELEVANT TO PARTICULAR STOCKHOLDERS IN
LIGHT OF THEIR PERSONAL CIRCUMSTANCES OR TO STOCKHOLDERS SUBJECT TO SPECIAL
TREATMENT UNDER THE CODE. IN ADDITION, THIS DISCUSSION DOES NOT ADDRESS ANY
STATE, LOCAL OR FOREIGN TAX CONSEQUENCES OF THE MERGER.
EACH STOCKHOLDER OF IMPERIAL COMMON OR PREFERRED STOCK IS URGED TO CONSULT
ITS TAX ADVISOR WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES OF THE MERGER TO
SUCH HOLDER.
Tax Opinion. In the opinion of Rosen & Reade, LLP, special tax counsel to
Imperial (the "Tax Opinion"), subject to the assumptions, limitations,
qualifications and other considerations described below under "Certain
Considerations with Respect to Tax Opinion," the Merger will constitute a
"reorganization" for Federal income tax purposes within the meaning of Code
Section 368(a), and Imperial and Merger Sub will each be a party to such
reorganization within the meaning of Code Section 368(b).
Effect of Merger on Imperial and Merger Sub. Neither Imperial nor Merger
Sub will realize gain or loss as a result of the Merger.
Exchange of Common Stock. Upon consummation of the Merger, each share of
Imperial Common outstanding immediately prior to the Merger will be converted
into one share of Sub Common. Such exchange will be tax-free.
Exchange of Preferred Stock. Each share of Preferred Stock outstanding
immediately prior to the Effective Date will be converted, under Option A, into
$4.75 cash and ten shares of Sub Common, or, under Option B, into $2.25 cash,
five shares of Sub Common and an $8.00 principal amount Debenture.
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The receipt of shares of Sub Common in exchange for Preferred Stock will be
tax-free. The federal tax treatment for the cash and Debentures received in
exchange for the Preferred Stock will depend on whether, in the case of Option
A, the value of the Sub Common and the $4.75 cash exceeds the adjusted tax basis
of the Preferred Stock in the hands of the Preferred Stockholder, or, in the
case of Option B, the value of the Sub Common, the $2.25 in cash and the
Debenture exceeds such basis. The Sub Common and the Debenture will be valued,
for this purpose, immediately following the Merger.
If there is an excess, gain will be realized to the extent of such excess.
If, however, the basis of the Preferred Stock exceeds the value of the Sub
Common and the cash (and the Debenture, in the case of Option B), the Preferred
Stockholder will realize a loss on the exchange, but the loss will not be
deductible for federal income tax purposes.
If a Preferred Stockholder realizes a gain on the exchange, the gain will
be taxable, but not in an amount greater than the amount of the cash (plus the
value of the Debenture, in the case of Option B) received in the exchange.
The portion of the gain determined to be taxable under the above discussion
will be treated as a dividend to the extent of the lesser of (a) the dividends
in arrears on the Preferred Stock given up in the exchange, or (b) the Preferred
Stockholder's ratable share of the accumulated earnings and profits of Imperial
as of December 31, 1997 and the current earnings and profits of Imperial and
Merger Sub for the calendar year 1998. The dividends in arrears on the Preferred
Stock were $4,209,000, or $14.025 per share as of June 30, 1998. There were no
accumulated earnings and profits of Imperial as of December 31, 1997. The
combined earnings and profits of Imperial and of Merger Sub for the calendar
year 1998 cannot be determined until the end of 1998. The portion of the gain
determined to be taxable under the above discussion that is not treated as a
dividend will be taxed as capital gain if the Preferred Stock is a capital asset
in the hands of the Preferred Stockholder. The capital gain will be short-term
or long-term depending upon whether the Preferred Stock surrendered in the
exchange has been held for longer than one year.
Basis and Holding Period. The basis of the Sub Common received in exchange
for Imperial Common will be the same as the basis of the shares of Imperial
Common which are surrendered in the exchange. The holding period of the Sub
Common will include the holding period for the Imperial Common.
The basis of the Sub Common that is received in exchange for Preferred
Stock will be equal to the basis of the Preferred Stock surrendered in the
exchange, minus the value of the Debenture, if a Debenture is received under
Option B, minus the amount of cash received in the exchange, plus the amount
treated as a dividend, and plus the amount of gain that is recognized in the
exchange (not including any amount treated as a dividend). The basis of the
Debenture will be its fair market value immediately after the exchange. The
holding period for the Debenture will begin on the date of the Merger.
Original Issue Discount. The Debenture will have original issue discount
to the extent that its "stated redemption price at maturity" exceeds its "issue
price." The stated redemption price of the Debenture at its maturity is the face
amount of the Debenture issued to the Preferred Stockholder in the exchange. The
issue price of the Debenture will be its value immediately after the exchange.
As noted above, it is the view of Auerbach that the Debenture will have a market
value of 82% of its face amount. While this view is not determinative of the
value of the Debenture, it is highly likely that the Debenture will have
original issue discount.
If the Debenture has original issue discount, the holder must include in
income, in addition to any interest paid on the Debenture, a portion of the
original issue discount for each day during the taxable year that the Debenture
is held until the due date of the Debenture. By way of illustration, if the
Debenture is issued in late 1998, is payable in late 2001, and it is determined
that there is original issue discount of $18 for each principal amount of $100,
the holder (and, subject to adjustment, any subsequent holder) will be required
to include as ordinary income an annual portion of the original issue discount
in each of the calendar years 1998, 1999, 2000 and 2001. Merger Sub will be
entitled to a corresponding deduction in each of those years.
The holder's tax basis for the Debentures will be increased each year by
the amount of original issue discount included in income by the holder. If the
Debenture is held to its maturity and the Debenture is paid according to its
terms, and if the holder has reported as income each annual portion of the
original issue discount, the holder will not need to report any further gain on
payment of the Debenture.
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If a holder (other than an owner of Preferred Stock) acquires a Debenture
at a "market discount," as defined in Code Sections 1276-1278, and thereafter
recognizes gain on a disposition of the Debenture, the portion of the market
discount that accrues while the Debenture is held will be treated as ordinary
income at the time of its disposition. This may affect the market value of the
Debentures.
Backup withholding may be applicable to interest paid each year on a
Debenture and to the original issue discount includible in the gross income of
the holder for such year.
Stockholders Exercising Appraisal Rights. A stockholder who exercises
statutory appraisal rights and receives cash in exchange for his Imperial stock
will be treated, for federal income tax purposes, as surrendering his stock for
redemption. The income tax treatment of amounts received by a stockholder in
redemption of his stock will be determined under the rules of Code Sections 301
and 302. In general, amounts received by a stockholder in a redemption which
results in the complete termination of the stockholder's interest in a
corporation are taxed as capital gain or loss. In determining whether a
stockholder has had a complete termination of his interest in a corporation, the
attribution rules of Code Section 318 must be considered. Under these rules,
stock which is owned by persons and entities who are related to the stockholder
are treated, for the purposes of Code Section 302, as owned by the stockholder.
This attributed stock ownership may cause the stockholder to fail to have a
complete termination of his interest in a corporation.
The amount of the gain or loss realized on redemption of shares which is
treated as a complete termination of the stockholder's interest in the
corporation is determined by comparing the amount of cash and other property
received by the redeeming stockholder with his adjusted tax basis for the shares
surrendered. The gain is long-term or short-term capital gain depending upon
whether his holding period for the stock redeemed is longer or shorter than one
year.
A holder of both Preferred Stock and Imperial Common who exercises his
appraisal rights and receives cash for only one of these stock issues, while
retaining the other stock issue, will not have a complete termination of his
interest in Imperial. A stockholder in that circumstance should consult his tax
advisor to determine whether the redemption, as to him, is "essentially
equivalent to a dividend." Amounts received by such stockholder which are
treated as "essentially equivalent to a dividend" will be treated as a dividend
to the extent of the stockholder's ratable share of earnings and profits of
Imperial and Merger Sub. Any amount received in excess of such ratable share of
such earnings and profits would be treated as a reduction in the basis for the
holder's remaining shares of Imperial and any amount in excess of such basis
would be treated as capital gain. The gain would be long-term or short-term
depending upon whether the holding period of the stock redeemed is longer or
shorter than one year.
Backup Withholding. In order to avoid backup withholding, Merger Sub is
required to obtain from each stockholder and each Debenture holder his taxpayer
identification number (social security number or employer identification number)
and his certification that such number is correct. Accordingly, each stockholder
should complete and sign the substitute Form W-9 included as part of the
transmittal letter (which will be mailed after the Effective Date). If backup
withholding is required, Merger Sub must withhold 31% of any amount paid as a
dividend on Sub Common. Merger Sub, in that case, must also withhold 31% of the
interest paid each year to a Debenture holder and an amount equal to 31% of the
original issue discount includible in the gross income of the holder of the
Debenture for such year, but not in excess of the amount of the cash payment on
the Debenture in such year.
Certain Considerations with Respect to Tax Opinion. The Tax Opinion and
the foregoing summary of federal income tax consequences of the Merger are and
will be subject to certain assumptions, limitations and qualifications and based
on current law and, among other things, certain representations of Imperial.
Reference is made to the full text of the Tax Opinion which sets forth the
assumptions made and matters considered in connection therewith, a copy of which
has been filed as an exhibit to the Registration Statement of which this Proxy
Statement/Prospectus is a part. The opinion of counsel is not binding on the IRS
and does not preclude the IRS from adopting a contrary position. In addition, if
any of such representations or assumptions are inconsistent with the actual
facts, the federal income tax consequences of the Merger could be adversely
affected.
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INTERESTS OF CERTAIN PERSONS IN THE MERGER; CONFLICTS OF INTEREST
Howard L. Ehler, Jr., the Executive Vice President of the Company, owns
2,000 shares of Preferred Stock, and will receive the same Merger Consideration
as all other holders of Preferred Stock. No officer or director of the Company
has any interest in the Merger in addition to any interest they may have as
stockholders of the Company generally.
APPRAISAL RIGHTS
Holders of Imperial Common and Preferred Stock (collectively, "Imperial
Capital Stock") are entitled to rights of appraisal under Section 262 of the GCL
("Section 262") in connection with the Merger. If the Merger is accomplished,
holders of Imperial Capital Stock who hold such shares of record on the date of
making a written demand for appraisal as described below, continuously hold such
shares through the Effective Date and otherwise comply fully with the procedures
prescribed in Section 262 will be entitled to a judicial determination of the
"fair value" of their shares (exclusive of any element of value arising from the
accomplishment or expectation of the Merger) and to receive from the Surviving
Corporation payment of such fair value in cash.
Shares of Imperial Capital Stock which are outstanding immediately prior to
the Effective Date and with respect to which appraisal shall have been properly
demanded in accordance with Section 262 shall not be converted into the right to
receive the Merger Consideration in the Merger at or after the Effective Date
unless and until the holder of such shares withdraws his or her demand for such
appraisal or becomes ineligible for such appraisal.
Under Section 262, not less than 20 days prior to the Meeting, Imperial is
required to notify each stockholder eligible for appraisal rights of the
availability of such appraisal rights. The Notice of Special Meeting of
Stockholders of Imperial dated November 2, 1998 constitutes notice to holders
of Imperial Capital Stock that appraisal rights are available to them.
The following is a brief summary of the statutory procedures to be followed
by a holder of Imperial Capital Stock in order to perfect appraisal rights under
the GCL. ALTHOUGH SETTING FORTH THE MATERIAL TERMS OF SECTION 262, THIS SUMMARY
IS NOT INTENDED TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SECTION 262 WHICH IS ATTACHED HERETO AS APPENDIX C AND IS INCORPORATED HEREIN BY
REFERENCE. ANY IMPERIAL STOCKHOLDER CONSIDERING DEMANDING APPRAISAL IS ADVISED
TO READ THE FULL TEXT OF SECTION 262 CONTAINED IN APPENDIX C AND TO CONSULT
LEGAL COUNSEL.
If any holder of Imperial Capital Stock elects to exercise such
stockholder's appraisal rights, such stockholder must satisfy each of the
following conditions:
(i) A written demand for appraisal of shares of Imperial Capital Stock
must be delivered to Imperial by any holder thereof seeking appraisal
before the taking of the vote on the Merger and the Merger Agreement at the
Meeting. Such demand must reasonably inform Imperial that the stockholder
intends thereby to demand appraisal of his or her shares. Merely voting
against, or failing to vote in favor of, the approval of the Merger and the
Merger Agreement will not constitute a demand for appraisal within the
meaning of Section 262.
(ii) Stockholders electing to exercise their appraisal rights under
Section 262 must not vote for approval of the Merger and the Merger
Agreement. A failure to vote will satisfy this condition. If, however, a
stockholder votes for approval of the Merger and the Merger Agreement or
returns a signed proxy but does not specify a vote against the approval of
the Merger and the Merger Agreement or a direction to abstain, the proxy
will be voted for the approval of the Merger and the Merger Agreement,
which will have the effect of waiving such stockholder's appraisal rights.
(iii) Such stockholder must continually hold such shares from the date
of making of the demand through the Effective Date.
(iv) A demand for appraisal must be executed by or for the Imperial
stockholder of record, fully and correctly, as such stockholder's name
appears on his or her Imperial stock certificates. If Imperial Capital
Stock is owned of record in a fiduciary capacity, such as by a trustee,
guardian or custodian, such demand
26
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must be executed by the fiduciary. If Imperial Capital Stock is owned of
record by more than one person, as in a joint tenancy or tenancy in common,
such demand must be executed by all joint owners. An authorized agent,
including an agent for two or more joint owners, may execute the demand for
appraisal for a stockholder of record, so long as the agent identifies the
record owner and expressly discloses the fact that, in exercising the
demand, such agent is acting as agent for the record owner.
A record owner who holds Imperial Capital Stock as a nominee for others may
exercise appraisal rights with respect to the shares held for all or fewer than
all beneficial owners of shares of Imperial Capital Stock as to which the holder
is the record owner. In such case, the written demand must set forth the number
of shares covered by such demand. Where the number of shares is not expressly
stated, the demand will be presumed to cover all shares of Imperial Capital
Stock outstanding in the name of such record owner. BENEFICIAL OWNERS WHO ARE
NOT RECORD OWNERS AND WHO INTEND TO EXERCISE APPRAISAL RIGHTS SHOULD INSTRUCT
THE RECORD OWNER TO COMPLY STRICTLY WITH THE STATUTORY REQUIREMENTS WITH RESPECT
TO THE DELIVERY OF WRITTEN DEMAND FOR APPRAISAL. A DEMAND FOR APPRAISAL
SUBMITTED BY A BENEFICIAL OWNER WHO IS NOT THE RECORD OWNER WILL NOT BE HONORED.
If any holder of Imperial Capital Stock fails to comply with any of the
conditions of Section 262 and the Merger becomes effective, such stockholder
will be entitled to receive the consideration provided for in the Merger
Agreement, but will have no appraisal rights with respect to such stockholder's
Imperial Capital Stock.
An Imperial stockholder who elects to exercise appraisal rights must mail
or deliver the written demand for appraisal to: Imperial Industries, Inc., 1259
Northwest 21st Street, Pompano Beach, Florida 33069, Attention: Corporate
Secretary. The written demand for appraisal should specify the stockholder's
name and mailing address and the number of shares of Imperial Capital Stock
covered by the demand, and should state that the stockholder is thereby
demanding appraisal in accordance with Section 262.
Within 10 days after the Effective Date, the Surviving Corporation must
provide notice as to the date of effectiveness of the Merger to all Imperial
stockholders who have duly and timely delivered demands for appraisal and
otherwise complied with Section 262 ("Dissenting Stockholders").
Within 120 days after the Effective Date, any Dissenting Stockholder is
entitled, upon written request, to receive from the Surviving Corporation a
statement setting forth the aggregate number of shares not voted in favor of the
Merger and with respect to which demands for appraisal have been received by the
Surviving Corporation, and the number of holders of such shares. Such statement
must be mailed within 10 days after the written request therefor has been
received by the Surviving Corporation.
Within 120 days after the Effective Date, either the Surviving Corporation
or any Dissenting Stockholder may file a petition in the Delaware Court of
Chancery demanding a determination of the fair value of each share of Imperial
Common and/or Preferred Stock. If a petition for an appraisal is timely filed,
after a hearing on such petition, the Delaware Court of Chancery will determine
which former Imperial stockholders are entitled to appraisal rights and
thereafter will appraise the shares of Imperial Capital Stock owned by such
stockholders, determining the fair value of such shares, exclusive of any
element of value arising from the accomplishment or expectation of the Merger,
together with a fair rate of interest to be paid, if any, upon the amount
determined to be fair value.
In determining fair value, the Delaware Court of Chancery is to take into
account all relevant factors. In Weinberger v. UOP, Inc., et al., the Delaware
Supreme Court discussed the factors that could be considered in determining fair
value in an appraisal proceeding, stating that "proof of value by any techniques
or methods which are generally considered acceptable in the financial community
and otherwise admissible in court" should be considered and that "[f]air price
obviously requires consideration of all relevant factors involving the value of
a company." The Delaware Supreme Court stated that in making this determination
of fair value, the Delaware Court of Chancery and the appraiser may consider
"all factors and elements which reasonably might enter into the fixing of
value," including "market value, asset value, dividends, earnings prospects, the
nature of the enterprise and any other factors which were known or which could
be ascertained as of the date of merger and which throw any light on future
prospects of the merged corporation . . . ." The Delaware Supreme Court has
construed Section 262 to mean that "elements of future value, including the
nature of the enterprise, which are
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known or susceptible of proof as of the date of the merger and not the product
of speculation, may be considered." However, the Court noted that Section 262
provides that fair value is to be determined "exclusive of any element of value
arising from the accomplishment or expectation of the merger."
Stockholders of Imperial considering whether to seek appraisal should bear
in mind that the fair value of their Imperial Capital Stock determined under
Section 262 could be more than, the same as or less than the value of the
consideration to be paid pursuant to the Merger Agreement, and that an opinion
of an investment banking firm as to fairness from a financial point of view is
not necessarily an opinion as to fair value under Section 262 of the DGCL.
The cost of the appraisal proceeding may be determined by the Delaware
Court of Chancery and assessed upon the parties as the Court deems equitable in
the circumstances. Upon application of a Dissenting Stockholder, the Court may
order that all or a portion of the expenses incurred by any Dissenting
Stockholder in connection with the appraisal proceeding, including without
limitation reasonable attorneys' fees and the fees and expenses of experts, be
charged pro rata against the value of all shares entitled to appraisal. In the
absence of such a determination or assessment, each party bears its own
expenses.
A Dissenting Stockholder who has duly demanded appraisal in compliance with
Section 262 will not, after the Effective Date, be entitled to vote for any
purpose the Imperial Capital Stock subject to such demand or to receive payment
of dividends or other distributions on such Imperial Capital Stock except for
dividends or other distributions payable to stockholders of record at a date
prior to the Effective Date.
At any time within 60 days after the Effective Date, any Dissenting
Stockholder may withdraw his or her demand for appraisal and accept the
consideration to be paid under the Merger Agreement without interest. After this
period, a Dissenting Stockholder may withdraw his or her demand for appraisal
only with the consent of the Surviving Corporation. If no petition for appraisal
is filed with the Delaware Court of Chancery within 120 days after the Effective
Date, Dissenting Stockholders' rights to appraisal shall cease and they shall be
entitled to receive the consideration to be paid under the Merger Agreement
without interest. Since the Surviving Corporation has no obligation or intention
to file such a petition, any Imperial stockholder who desires such a petition to
be filed is advised to file it on a timely basis. No petition timely filed in
the Delaware Court of Chancery demanding appraisal shall be dismissed as to any
Imperial stockholder without the approval of the Delaware Court of Chancery, and
such approval may be conditioned upon such terms as the Delaware Court of
Chancery deems just.
FAILURE TO TAKE ANY REQUIRED STEP IN CONNECTION WITH THE EXERCISE OF
APPRAISAL RIGHTS MAY RESULT IN THE TERMINATION OR WAIVER OF SUCH RIGHTS.
REGULATORY APPROVALS
The Company is not aware of any license or regulatory permit which is
material to its business and which is likely to be adversely affected by
consummation of the Merger or any approval or other action by any state, federal
or foreign government or governmental agency that would be required prior to the
Merger.
ACCOUNTING TREATMENT
The Merger will be accounted for as a reorganization of entities under
common control and will reflect the carryover basis of Imperial.
RESALE RESTRICTIONS
All shares of Sub Common and Debentures received by stockholders in the
Merger will be freely transferable, except that shares of Sub Common and
Debentures received by persons who are deemed to be "affiliates" (as such term
is defined under the Securities Act) of Imperial prior to the Merger may be
resold by them only in transactions permitted by the resale provisions of Rule
145 under the Securities Act or as otherwise permitted under the Securities Act.
Persons who may be deemed to be affiliates of a party generally include
individuals or entities that control, are controlled by, or are under common
control with, such party and may include certain officers and directors of such
party as well as principal stockholders of such party.
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THE MERGER AGREEMENT
The detailed terms and conditions to the Merger are contained in the Merger
Agreement, which is included in full as Appendix A to this Proxy
Statement/Prospectus and incorporated herein by reference. The following summary
of the material terms of the Merger Agreement is qualified in its entirety by,
and made subject to, the more complete information set forth in the Merger
Agreement
THE MERGER
Subject to the terms and conditions of the Merger Agreement, at the
Effective Date, Imperial will be merged with and into Merger Sub, with Merger
Sub being the Surviving Corporation, and thereupon the separate existence of
Imperial will cease. The Merger will have effects specified in the GCL.
EFFECTIVE DATE OF THE MERGER
Upon the satisfaction or waiver of all conditions to the Merger, and
provided that the Merger Agreement has not been terminated or abandoned,
Imperial and Merger Sub will cause the Certificate of Merger to be filed with
the Secretary of State of the State of Delaware. The Merger will become
effective upon the filing of the Certificate of Merger or at such later time as
Imperial and Merger Sub have agreed upon and designated in such filing as the
Effective Date. The Effective Date is currently expected to occur on or shortly
after December 31, 1998. On the Effective Date, the name of Merger Sub will be
changed to Imperial Industries, Inc.
CONVERSION OF SECURITIES
Each share of Imperial Common outstanding immediately prior to the
consummation of the Merger will be converted, without any action by the holder
thereof, into one share of Sub Common, and each share of Preferred Stock
outstanding immediately prior to the consummation of the Merger will be
converted, at the option of the holder thereof, into either (A) $4.75 in cash
and ten shares of Sub Common or (B) $2.25 in cash, a Debenture and five shares
of Sub Common. All shares of Preferred Stock converted in the Merger will no
longer be outstanding and will automatically be canceled and retired and will
cease to exist, and each holder of a certificate representing any such shares
will cease to have any rights with respect thereto, except the right to receive,
without interest, the Merger Consideration upon surrender of such certificate.
TREATMENT OF WARRANTS
All outstanding Imperial common stock purchase warrants, all of which are
currently exercisable, will remain outstanding and will be exercisable for
shares of Sub Common. Thereafter, the material terms and conditions pursuant to
which such warrants will be exercisable will be the same as are currently in
effect.
EXCHANGE OF CERTIFICATES
Following the Effective Date, holders of Preferred Stock will be furnished
with a transmittal letter by Continental Stock Transfer and Trust Company
("Continental" or the "Exchange Agent") to be used to select their desired
Merger Consideration and to exchange their certificates therefor. To ensure that
they receive their desired form of Merger Consideration, holders will be
required to promptly return their Preferred Stock certificates and letters of
transmittal so that these documents are received by the Exchange Agent within
60 days after the Effective Date. Certificates representing shares of Preferred
Stock timely surrendered by holders who do not select a desired form of Merger
Consideration will be converted into $2.25 in cash, a Debenture and five shares
of Sub Common (the "Default Merger Consideration"). Commencing 60 days after the
Effective Date, all unsubmitted, or improperly submitted, shares of Preferred
Stock, other than shares as to which dissenters' rights of appraisal have been
properly asserted, will evidence the right to receive the Default Merger
Consideration. In addition, shares as to which dissenters' rights of appraisal
have been properly asserted, which rights are waived or abandoned subsequent to
the 60th day after the Effective Date, similarly will evidence the right to
receive the Default Merger Consideration.
It will not be necessary for holders of Common Stock to surrender or
exchange their certificates for new certificates representing Sub Common.
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HOLDERS OF PREFERRED STOCK ARE REQUESTED NOT TO SURRENDER THEIR
CERTIFICATES FOR EXCHANGE UNTIL THEY RECEIVE A NOTICE AND LETTER OF TRANSMITTAL
FROM THE EXCHANGE AGENT.
After the close of business on the day prior to the Effective Date, there
will be no transfers on the transfer books of Imperial of shares of Preferred
Stock which were outstanding immediately prior to the Effective Date.
In the event any certificate representing Preferred Stock is lost, stolen
or destroyed, upon the making of an affidavit of that fact by the person
claiming such certificate to be lost, stolen or destroyed and, if required by
Merger Sub, the posting by such person of a bond in such amount, form and with
such surety as Merger Sub may direct as indemnity against any claim that may be
made against it with respect to such certificate, the Exchange Agent will issue
in exchange for such lost, stolen or destroyed certificate the appropriate
Merger Consideration in respect of such certificate.
CONDITIONS OF THE MERGER
The obligations of Imperial and Merger Sub to consummate the Merger are
subject to the satisfaction of certain conditions, including, among others,
(i) obtaining requisite stockholder approval and (ii) the effectiveness of the
Registration Statement and the receipt by Merger Sub of all necessary approvals
under applicable state securities laws. The Merger Agreement may be terminated
for any reason at any time prior to the Effective Date. The parties currently
intend to terminate the Merger Agreement if holders of greater than 5% of either
the Imperial Common or Preferred Stock assert dissenters' rights of appraisal
under the GCL.
MANAGEMENT AFTER THE MERGER
Merger Sub's Board of Directors currently consists, and immediately after
the Merger will consist, of the persons serving on the Company's Board of
Directors immediately prior to the Merger. Merger Subs's executive officers
currently consists, and immediately after the Merger will consist, of persons
serving as the Company's executive officers immediately prior to the Merger in
their respective positions. See "Management of Imperial."
CHARTER DOCUMENTS OF SURVIVING CORPORATION
If the Merger is approved, the Certificate of Incorporation and Bylaws of
Merger Sub will become the charter documents of the Surviving Corporation.
Merger Sub's Certificate of Incorporation is substantially the same as the
Company's Certificate of Incorporation, with the following exception: Article
First of the Company's Certificate of Incorporation provides that the corporate
name is Imperial Industries, Inc., while Article First of Merger Sub's
Certificate of Incorporation provides that the corporate name is Imperial Merger
Corp.; and the par value of Imperial Common is $.10 per share, while the par
value of Sub Common is $.01 per share. Upon consummation of the Merger, the name
of Merger Sub, as the Surviving Corporation, will be changed to Imperial
Industries, Inc. The Bylaws of Merger Sub are identical to the Company's Bylaws.
The books, records and accounts of the Company, upon consummation of the
Merger, will become the books, records and accounts of the Surviving
Corporation.
DESCRIPTION OF MERGER SUB SECURITIES
The authorized capital stock of Merger Sub consists of 5,000,000 shares of
Preferred Stock, par value $.01 per share (the "Sub Preferred"), none of which
is presently issued and outstanding, and 20,000,000 shares of Sub Common, par
value $.01 per share, of which 200 shares were issued and outstanding as of the
date of this Proxy Statement/Prospectus and all of which are beneficially owned
by Imperial. Holders of capital stock of the Company have no preemptive or other
subscriptive rights.
SUB COMMON
Subject to prior rights of any Sub Preferred then outstanding and to
contractual limitations, if any, the holders of outstanding shares of Sub Common
are entitled to receive dividends out of assets legally available therefor, as
declared by the Board of Directors and paid by Merger Sub.
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In the event of any liquidation, dissolution or winding-up of Merger Sub,
holders of Sub Common will be entitled to share equally and ratably in all
assets available for distribution after payment of creditors, holders of any
series of Sub Preferred Stock outstanding at the time, and any other debts,
liabilities and preferences. Since Merger Sub's Board of Directors has the
authority to fix the rights and preferences of, and to issue, Merger Sub's
authorized but unissued Sub Preferred Stock without approval of the holders of
its Sub Common, the rights of such holders may be materially limited or
qualified by the issuance of the Sub Preferred.
The Sub Common presently outstanding is, and the Sub Common to be issued
upon consummation of the Merger will be, fully paid and non-assessable.
The Sub Common owned by Imperial will be canceled upon the Effective Date.
SUB PREFERRED
The Board of Directors of Merger Sub is empowered to issue Sub Preferred
from time to time in one or more series, without stockholder approval, and with
respect to each series to determine (subject to limitations prescribed by law)
(1) the number of shares constituting such series, (2) the dividend rate on the
shares of each series, whether such dividends shall be cumulative and the
relation of such dividends to the dividends payable on any other class of stock,
(3) whether the shares of each series shall be redeemable and the terms of any
redemption thereof, (4) whether the shares shall be convertible into Common
Stock or other securities and the terms of any conversion privileges, (5) the
amount per share payable on each series or other rights of holders of such
shares on liquidation or dissolution of Merger Sub, (6) the voting rights, if
any, for shares of each series, (7) the provision of a sinking fund, if any, for
each series, and (8) generally any other rights and privileges not in conflict
with the Certificate of Incorporation for each series and any qualifications,
limitations or restrictions thereof. Merger Sub currently has no plans to issue
any Sub Preferred.
DEBENTURES
General
The Debentures will be unsecured subordinated obligations of Merger Sub and
will mature on the third anniversary (the "Due Date") of the Effective Date. The
Debentures will bear interest at the rate of 8% per annum and will be payable
annually as to interest only on July 1 of each year to each Debenture holder of
record on such date, through and including the Due Date, commencing July 1,
1999. Interest on the Debentures will accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from the date of
original issuance. Interest will be computed on the basis of a 360-day year
consisting of twelve 30-day months.
The Debentures will be issued in registered form, without coupons, and in
denominations of $8.00 and integral multiples thereof.
Merger Sub will act as Paying Agent, and Continental will act as Transfer
Agent, for the Debentures. The Debentures may be presented for registration of
transfer and exchange at the offices of Continental, at 2 Broadway, New York,
New York 10004.
Redemption
The Debentures will be subject to redemption, in whole or in part, at the
option of Merger Sub at any time after issuance, at a redemption price of 100%
of the principal amount thereof plus accrued and unpaid interest, if any, to the
redemption date.
If less than all the Debentures are to be redeemed at any time, selection
of Debentures for redemption will be made by Merger Sub on a pro rata basis.
Notice of redemption will be mailed by first class mail at least 30 but not more
than 60 days before the redemption date to each holder of Debentures to be
redeemed at its registered address. If any Debenture is to be redeemed in part
only, the notice of redemption that relates to such Debenture will state the
portion of the principal amount thereof to be redeemed. A new Debenture in
principal amount equal to the unredeemed portion thereof will be issued in the
name of the holder thereof upon cancellation of the original Debenture. On and
after the redemption date, interest will cease to accrue on Debentures or
portions of them called for redemption.
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Subordination
The Debentures will be general, unsecured obligations of Merger Sub,
subordinated in right of payment to all indebtedness to institutional and other
lenders ("Senior Debt") of Merger Sub. The Debentures do not limit the amount of
Senior Debt Merger Sub may incur.
Certain Restrictions
The Debentures will contain certain representations, warranties and
covenants by Merger Sub, including:
-- obligations to continue to timely comply with the reporting
obligations of the Exchange Act;
-- limitations on the sale or other disposal of properties necessary
for the conduct of Merger Sub's business;
-- limitations on the creation of liens, except for liens created with
respect to Senior Debt or in connection with purchase money
obligations incurred in the ordinary course of business;
-- limitations on distributions from subsidiaries without fair
consideration;
-- limitations on mergers, consolidations or other extraordinary
corporate transactions; and
-- limitations on transactions with affiliates other than
subsidiaries.
Events of Default and Remedies
The Debentures will provide that an Event of Default will occur if:
(i) Merger Sub defaults in the payment of interest on the Debentures when the
same become due and payable and such default continues for a period of 30 days;
(ii) Merger Sub defaults in the payment of principal on the Debentures when the
same becomes due and payable upon maturity, upon redemption or otherwise;
(iii) any representation or warranty of Merger Sub in the Debentures shall be
false, incorrect or incomplete when made as to any material fact or facts;
(iv) Merger Sub fails to comply with any of its other covenants or other
agreements in the Debentures and such failure continues for a period of 60 days
following written notice from the Holder; (v) Merger Sub or any material
subsidiary pursuant to or within the meaning of any Bankruptcy Law
(A) commences a voluntary case, (B) consents to the entry of an order for relief
against it in an involuntary case, (C) consents to the appointment of a
custodian for all or substantially all of its property, or (D) makes a general
assignment for the benefit of its creditors; (vi) a court of competent
jurisdiction enters an order or decree under any Bankruptcy Law that (A) is for
relief against Merger Sub or a subsidiary in an involuntary case, (B) appoints a
custodian of Merger Sub or a material subsidiary for all or substantially all of
its property, or (C) orders the liquidation of Merger Sub or any material
subsidiary, and the order or decree remains unstayed and in effect for 60 days
of the entry thereof; (vii) a judgment in an amount exceeding $250,000 is
entered against Merger Sub or any of its material subsidiaries and such judgment
is not satisfied or stayed within 60 days; or (viii) the holder of any
indebtedness of Merger Sub aggregating at least $250,000 shall seize, dispose of
or apply in satisfaction of such indebtedness, any assets of Merger Sub having a
fair market value in excess of $250,000 individually or in the aggregate. For
purposes of the Debentures, the term "Bankruptcy Law" means Title 11, U.S. Code
or any similar federal or state law for the relief of debtors and the term
"Custodian" means any receiver, trustee, assignee, liquidator or similar
official under any Bankruptcy Law.
If any Event of Default occurs and is continuing, holders aggregating
33 1/3% of the principal amount of the then-outstanding Debentures may declare
all the Debentures to be due and payable immediately.
TRANSFER AGENT
ChaseMellon Shareholder Services, 4 Station Square, Suite 301, Pittsburgh,
PA 15219-1173, is the transfer agent for the Sub Common.
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IMPERIAL MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
GENERAL
The Company's business is related primarily to the level of construction
activity in Florida and Georgia. The majority of the Company's products are sold
to building materials dealers located principally in Florida and Georgia who
provide materials to contractors and subcontractors engaged in the construction
of residential, commercial and industrial buildings and swimming pools. One
indicator of the level and trend of construction activity is the amount of
construction permits issued for the construction of buildings. The level of
construction activity is subject to population growth, inventory of available
housing units, government growth policies and construction funding, among other
things.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO 1997
Net sales for the six months ended June 30, 1998 increased $781,000, or
approximately 10%, compared to the same period in 1997. 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
$673,000 of the increase in sales for the six months ended June 30, 1998.
Gross profit as a percentage of net sales for the first six months was
approximately 33% compared to 31% in the comparable period in 1997. The increase
in gross profit margin was principally due to savings realized from raw material
purchases, modifications made to the Company's manufacturing process to gain
greater production efficiency, and cost reduction programs implemented in 1996
which continue to focus on manufacturing processes for opportunities to reduce
cost.
Selling, general and administrative expenses as a percentage of net sales
for the first six months was approximately 25% compared to 24% for the
comparable period in 1997. Selling, general and administrative expenses
increased $294,000, or approximately 16%, for the six months ended June 30, 1998
compared to the same period in 1997. The increase in expenses was primarily due
to additional sales expenses associated with servicing the increased volume of
business and costs related to the Company's new distribution facility in Tampa,
Florida which was acquired effective February 1, 1998 and professional and
consulting fees of $60,000 related to preparation of the Company's plan to
restructure its capitalization.
Miscellaneous income for the six months ended June 30, 1998 includes
$62,000 of reimbursements the Company received from the State of Florida
environmental authorities insurance program for costs the Company incurred in
prior years related to the removal of underground fuel tanks located at its
facilities.
Accounts receivable at June 30, 1998 was $2,397,000 compared to $1,534,000
at December 31, 1997. The increase in receivables of $836,000, or approximately
56%, was primarily related to higher seasonal sales levels prevalent during the
period preceding June 30, 1998 and to a lesser extent, slower payment practices
from certain of the Company's customers.
For the six months ended June 30, 1998, in accordance with SFAS 109,
"Accounting for Income Taxes," the Company recognized income tax expense of
$244,000 representing income before taxes at the statutory rate of 35%. Based on
the Company's net operating loss carryforwards, the Company is not expected to
pay such taxes on its federal income tax returns. The Company did not recognize
income tax expense in the six month period ended June 30, 1997.
As a result of the above factors and after giving effect to preferred stock
dividends accrued, but not paid, the Company derived net income applicable to
common stockholders of $288,000, or $.04 per share on a diluted basis, for the
six months ended June 30, 1998, compared to net income of $276,000, or $.05 per
share on a diluted basis, in 1997. Net income applicable to common stockholders
includes charges of $165,000 in the 1998 and 1997 six month periods for unpaid
cumulative dividends on preferred stock.
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YEAR ENDED DECEMBER 31, 1997 COMPARED TO 1996
Net sales for 1997 increased $2,032,000, or approximately 15%, compared to
1996. Approximately $1,184,000 of the increase in sales for 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. Although the
Company attempted to implement a price increase of approximately 3% during 1997
for certain of its products, competitive pressures required the Company to
abandon this price increase in most instances.
Gross profit as a percentage of net sales for 1997 was approximately 31%,
compared to 28% in 1996. 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 1997 was approximately 24%, the same as 1996. Selling, general and
administrative expenses increased $427,000, or approximately 13%, 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.
In fiscal year ended December 31, 1997, the Company recognized an $800,000
tax credit as a result of a reevaluation of a portion of the valuation allowance
of the Company's net operating losses.
As a result of the above factors and after giving effect to accrued unpaid
dividends on the Preferred Stock, the Company derived net income applicable to
common stockholders of $1,315,000, or $.21 per share in 1997 on a diluted basis,
compared to a net loss of $56,000, or $.01 per share, in 1996 on a diluted
basis. Net income applicable to common stockholders includes charges of $330,000
in 1997 and 1996 for unpaid cumulative dividends on Preferred Stock.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO 1995
Net sales in 1996 increased $2,127,000, or approximately 18%, compared to
1995. 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 Company
did not increase the prices of its products during 1996 as compared to 1995
prices due to competitive conditions.
Gross profit as a percentage of net sales for 1996 was approximately 28%,
compared to 29% in 1995. The decrease in gross profit margins was principally
due to higher manufacturing expenses and a greater proportion of sales of lower
gross profit margin products, including certain complementary products
manufactured by other companies. The Company has been reviewing all raw material
purchases to ensure it realizes the lowest cost possible and is in the process
of streamlining and updating its manufacturing processes by acquiring and
modifying certain equipment to gain greater production efficiency. As a result,
the Company anticipates achieving higher gross profit margins in 1997 compared
to 1996.
Selling, general and administrative expenses as a percentage of net sales
for 1996 was approximately 24% compared to 26% in 1995. In 1995, selling,
general and administrative expenses included start-up costs associated with the
opening of two of the Company's three distribution outlets. However, selling,
general and administrative expenses increased $334,000 or approximately 11% in
1996, compared to 1995. The increase in expenses was primarily due to expenses
associated with the expanded operations, particularly additional sales expenses
related to the Company's distribution outlets. Selling, general and
administrative expenses as a percentage of net sales decreased in 1996 compared
to 1995 because of spreading expenses over greater revenues without the
corresponding increase of overhead. Interest expense was greater in 1996
compared to 1995, primarily because of increased borrowings under the Company's
line of credit with its commercial lender to fund working capital requirements
resulting from increased sales.
Due to the above factors and after giving effect to Preferred Stock
dividends accrued but not paid, the Company incurred a net loss applicable to
common stockholders of $56,000, or $.01 per share in 1996 on a
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diluted basis, compared to a net loss of $208,000 or $.04 per share in 1995 on a
diluted basis. Net loss to common stockholders includes charges of $330,000 in
1996 and 1995 for unpaid cumulative dividends on Preferred Stock.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company had working capital of approximately
$2,259,000 compared to working capital of $1,995,000 at December 31, 1997. As of
June 30, 1998, the Company had cash and cash equivalents of $542,000. On October
2, 1998, the Company sold its Miami, Florida facility for $1,405,000 and
received net cash proceeds of $801,000 after satisfaction of the mortgage and
payment of commissions and closing costs.
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, their respective eligible accounts receivable and
inventory. Generally, accounts not collected within 120 days are not eligible
accounts receivable under the Company's borrowing agreement with its commercial
lender. At June 30, 1998, $1,017,000 had been borrowed against $2,000,000 in
available lines of credit.
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 operates three warehouse distribution
outlets.
The Company's common stockholders' deficit of $4,127,000 at June 30, 1998
resulted primarily from losses incurred in 1987 and prior years, and unpaid
cumulative dividends required by the Company's issued and outstanding Preferred
Stock. The Company has attempted to generate net income and adequate cash to
support operations by various methods, including the commencement of
manufacturing acrylic stucco products, opening warehouse distribution outlets to
sell its products directly to the end user, the development and sale of new
products, reductions in raw material costs and changes to manufacturing
processes to gain greater production efficiency. For the six months ended June
30, 1998, these actions enabled the Company to derive income before taxes and
the application of unpaid dividends on the redeemable preferred stock of
$697,000 compared to income of $441,000 in the same six month period in 1997.
The Company has omitted payment of cash dividends on its Preferred Stock
since the fourth quarter of 1985, and has accrued $4,209,000 of dividends in
arrears on the Preferred Stock as of June 30, 1998. The Company is continuing
its efforts to develop a plan to satisfy the Preferred Stock dividend arrearage
and mandatory sinking fund requirements which would be acceptable to its
stockholders.
On March 6, 1998, the Company entered into an agreement with Auerbach to
provide advisory services to the Company in connection with the development of a
plan to satisfy the Preferred Stock dividend arrearage and mandatory sinking
fund requirements, which resulted in the merger proposal described elsewhere
herein. Auerbach has received cash consideration of $37,500 and is entitled to
receive additional consideration based upon the success of the merger proposal.
Effective February 1, 1998, Acrocrete acquired the property, plant,
equipment and inventory of a wholesale distribution facility located in Tampa,
Florida engaged in the sale of landscape stone and building materials. The total
purchase price was approximately $400,000. A portion of the purchase price was
financed through the issuance of a $215,000 mortgage note payable monthly over
four years, with interest at the rate of 7 1/2% per annum.
The Company expects other capital expenditures in 1998 for improvements to
its equipment and manufacturing facilities to require aggregate cash
expenditures of approximately $275,000. In the first quarter of 1998, the
Company added approximately 6,000 square feet of warehouse space to its
Casselberry, Florida manufacturing facility to consolidate Florida manufacturing
operations to more closely mirror 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
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reduction projects in 1998 from cash on hand, or borrowings under its lines of
credit, and will continue to focus on the efficient utilization of its resources
in its efforts to accomplish further cost reductions.
In April 1998, the Company entered into a lease agreement for a new 20,400
square foot facility in Kennesaw, Georgia.
The Company believes its cash on hand, the cash receipts from the sale of
its Miami, Florida facility and the maintenance of its borrowing arrangement
with its commercial lender will provide sufficient cash to supplement any cash
shortfalls from operations and provide adequate liquidity for the next twelve
months to complete the merger proposal, support the cash requirements of its
capital expenditure programs. A significant component of the Merger
Consideration will be derived from the sale of the Company's Miami, Florida
facility which was completed on October 2, 1998.
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
dividend and redemption requirements as provided in the merger proposal; and
(iii) resolve current litigation on terms favorable to the Company.
LITIGATION
In management's view, the litigation relating to alleged defects in
Accrocrete's synthetic stucco wall sytems, as described in "Business of
Imperial--Legal Proceedings" will not have a material adverse effect on
Imperial's relationship with its customers. The Company continues to produce
traditional stucco wall systems which are not affected by the water intrusion
problems allegedly affecting synthetic stucco systems. These products are viewed
as an alternative to synthetic stucco systems. Many of the Company's customers,
on learning of the industry-wide litigation relating to synthetic stucco
systems, have switched back to the traditional stucco products offered by the
Company.
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 asessment, the Company has
developed a year 2000 compliance plan, under which all key information systems
are being tested, and non-compliant software is scheduled to be replaced by
January 1, 1999. 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 operation.
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 reasonably 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 a 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 minimize the risk of any
unresolved year 2000 problems of their operation.
The Company believes any internal staff costs, replacement of systems and
consulting expenses to prepare the systems for the year 2000 are not expected to
be material to the Company's operating results, liquidity or financial position.
36
<PAGE>
BUSINESS OF IMPERIAL
GENERAL
The Company is engaged in the manufacture of building materials for sale to
building materials dealers and others located primarily in Florida and Georgia,
and to a lesser extent, other states in the Southeastern United States. In
addition, the Company has three distribution outlets through which it markets
certain of its products directly to end users.
The Company's business is directly related to the level of activity in the
new construction and home improvement, repair and remodeling markets in Florida
and Georgia, and to a lesser extent other states in the Southeastern United
States. The Company's products are used by developers, general contractors and
subcontractors in the construction or repair and remodeling of residential,
multi-family and commercial buildings and swimming pools. In Florida, demand for
new construction is related to, among other things, population growth.
Population growth, in turn, is principally a function of migration of new
residents to the state. When economic conditions reduce migration, demand for
new construction decreases. Construction activity is also affected by the size
of the inventory of available housing units, mortgage interest rates,
availability of funds and local government growth management policies. The
Company's operations are directly related to the general economic conditions
existing in the Southeastern United States.
The Company's manufacturing and sales operations are conducted by its
wholly owned subsidiaries, Premix and Acrocrete. The Company primarily
manufactures stucco, roof tile mortar and plaster products.
Stucco products are applied as a finishing coat to exterior surfaces and to
swimming pools. Roof tile mortar is used to adhere cement roof tiles to the
roofs of structures. Plaster customarily is used to finish interiors of
structures.
PREMIX
Premix, together with its predecessors, has been in business for
approximately 40 years. The names "Premix" and "Premix-Marbletite" are among the
registered trademarks of Premix. The Company believes the trade names of its
manufactured products represent a substantial benefit to the Company because of
industry recognition and brand preference. Premix manufactures stucco, roof tile
mortar, plaster and swimming pool finishes. The products manufactured by Premix
basically are a combination of portland (or masonry) cement, sand, lime, marble
and a plasticizing agent and other chemicals, including colorimpregnating
materials. Premix accounted for approximately 49%, 49% and 59% of the Company's
consolidated annual revenues in the fiscal years ended December 31, 1997, 1996
and 1995, respectively, and 47% and 49% of the Company's consolidated revenues
in the six month periods ended June 30, 1998 and 1997, respectively.
In August 1994, the Company entered into a five year licensing agreement
with an unaffiliated company to exclusively manufacture and sell a new roof tile
mortar product throughout Florida. The Company has the option to renew the
agreement for two additional five year periods. Premix has also entered into
agreements to manufacture this product on behalf of selected wholesalers' who
distribute this product under the wholesalers' names through their existing
established dealer networks to service the roofing contractor industry. To date,
a majority of all roof tile mortar sales have been derived from South Florida.
Until 1996, the Company's licensed roof tile mortar product was the only mortar
product approved by Miami--Dade County, Florida, building authorities for use to
adhere all types of cement roof tiles to roofs. In 1997, the Company's roof tile
mortar was approved by the Broward and Palm Beach County building authorities
along with other competitive products. Other adhesive products used for similar
purposes are also used by the industry. The manufacturing of this new product
did not require any significant change to the current manufacturing facility.
The Company has expanded its marketing efforts for this product to other areas
of Florida based on product performance rather than only as required by building
code requirements.
37
<PAGE>
ACROCRETE
Acrocrete manufactures synthetic acrylic stucco products. The Company's
trade name "Acrocrete" and certain of its manufactured products are described by
trade names protected by registered trademarks. Acrocrete's products, used
principally for exterior wall coatings, broaden and complement the range of
products produced and sold by Premix. Management believes acrylic stucco
products have certain advantages over traditional cementitious stucco products
for certain types of construction applications because synthetic acrylic
products provide a hard durable finish with stronger color retention properties.
Further, acrylic stucco products have improved flexibility characteristics,
which minimizes the problems of cracking of cement coating. Acrocrete's product
system provides for energy efficiency for both residential and commercial
buildings. For the fiscal years ended December 31, 1997, 1996 and 1995,
Acrocrete's sales accounted for approximately 51%, 51% and 41%, respectively, of
the Company's consolidated annual revenues. For the six month periods ended
June 30, 1998 and 1997, Acrocrete's sales accounted for approximately 53% and
51%, respectively, of the Company's consolidated revenues.
SUPPLIERS
Premix's raw materials and products are purchased from approximately 26
suppliers. While five suppliers account for approximately 64% of Premix's
purchases, Premix is not dependent on any one supplier for its requirements.
Equivalent materials are readily available from other sources at similar prices.
Acrocrete's raw materials are purchased from approximately 20 suppliers, of
which five account for approximately 84% of Acrocrete's raw material purchases.
However, equivalent materials are available from several other sources at
similar prices, and Acrocrete is not dependent on any one supplier for its
requirements.
MARKETING AND SALES
The Company's marketing and sales strategy is to create a profit center for
the products it manufactures, as well as enlarging its product offering by
selling certain complementary products manufactured by other companies that are
part of wall system applications. The complementary items are purchased by the
Company and held in inventory, together with manufactured products, for sale to
customers. Generally, sales orders are filled out of existing inventory within
several days of receipt of the order. The total package sales approach to the
new and renovation construction markets is targeted at both the end user of the
Company's products, being primarily the contractor or subcontractor, and the
distributor, principally building materials dealers who purchase products from
the Company and sell to the end user, and in some instances, to retail
customers. A majority of the Company's sales are made directly by the Company to
approximately 250 distributors.
While the Company's sales are typically to distributors, the Company
focuses marketing efforts on the contractor/subcontractor end user to create a
brand preference for the Company's products. One distributor accounted for
approximately 11% of total sales in 1995 but only 5% and 3% of total sales in
1996 and 1997, respectively. The loss of that distributor would not cause a
material loss in sales because the brand preference contractors and
subcontractors have developed for the Company's products generally cause the
user to seek a distributor who carries the Company's products. Sales by other
distributors as well as direct sales to end users contributed to the percentage
decline in sales to the one distributor. The Company primarily markets its
products to distributors through Company salesmen, who promote both Premix and
Acrocrete products, located in the Southeastern United States.
In April 1994, the Company started a pilot program in Savannah, Georgia to
sell its Acrocrete products directly to the end user. The Company's products and
certain complementary products manufactured by other companies are inventoried
and sold from a leased warehouse distribution facility. In January 1995, the
Company opened a second distribution facility in Jacksonville, Florida. In May
1995, the Company opened a third distribution facility in Norcross, Georgia.
Each leased facility contains between approximately 7,500 to 8,500 square
feet. The distribution facilities are designed to promote product brand
preference to the contractor and sub-contractor, and also to improve service
capabilities, increase market share, and to increase profit margins from the
sale of the Company's
38
<PAGE>
products. The Company sells Acrocrete and complementary products of other
manufacturers at such distribution facilities. The Company closed the Savannah
Facility at the end of the first quarter of 1997.
Effective February 1, 1998, the Company acquired a facility in Tampa,
Florida that was engaged primarily in the distribution of landscape stone
products. The Company intends to utilize this distribution facility to gain
market share for the sale of its products on the West Coast of Florida. The
Company presently does not have any plans to open other warehouse distribution
facilities.
SEASONALITY
The sale of Premix's and Acrocrete's products in the construction market
for the Southeastern United States is somewhat seasonal, with a slightly lower
rate of sales historically occurring in the period December through February
compared to the rest of the year.
COMPETITION
The Company's business is highly competitive. Premix and Acrocrete
encounter significant competition from local, independent firms, as well as,
regional and national manufacturers of acrylic, cement and plaster products,
most of whom manufacture products similar to those of Premix and Acrocrete. Many
of these competitors are larger, more established and better financed than the
Company. The Company believes it can compete with the other companies based upon
product performance and quality, customer service and price, through maintaining
lower overhead costs than larger national companies.
ENVIRONMENTAL MATTERS
The Company is subject to various federal, state and local environmental
laws and regulations in the normal course of its business. Although the Company
believes that its manufacture, handling, use, sale and disposal of its raw
materials and products are in accord with current environmental regulations,
future developments could require the Company to make unforeseen expenditures
relating to environmental matters. Increasingly strict environmental laws,
standards and environmental policies may increase the risk of liability and
compliance costs associated with the Company's operations. Capital expenditures
for this purpose were not material in 1997, and expenditures for 1998 to comply
with existing laws and regulations are also not expected to have a material
effect on the Company's financial position, results of operations or liquidity.
In 1992, the Company removed its fuel pumps and underground tanks at its
facilities in Miami and Casselberry, Florida, rather than upgrade the storage
tank systems to comply with more stringent environmental standards which went in
effect December 31, 1992. Upon removal of the tanks, test results showed
evidence of soil and ground water contamination at each site. The contaminated
soil was removed from the properties and the regulatory authorities required the
Company to test the groundwater and provide engineering reports to determine
what remedial actions, if any, were necessary. In December 1994 and June 1995,
the environmental authorities released the Company from having to undertake any
additional remedial action to its Casselberry and Miami, Florida facilities,
respectively.
Premix was eligible for reimbursement of certain allowable costs associated
with the removal of the contamination and engineering studies that were required
in connection with the assessment of contamination through an insurance program
established by the State of Florida environmental authorities. The Company
received $62,000 of such reimbursement during the first quarter of 1998, and
does not anticipate receiving any additional amounts in the future.
EMPLOYEES
The Company and its subsidiaries had 90 full-time employees as of June 30,
1998. The Company considers its employee relations to be satisfactory. The
Company's employees are not subject to any collective bargaining agreement.
39
<PAGE>
PROPERTIES
The Company and its subsidiaries maintain a total of six facilities in
Florida and Georgia. The location and size of the Company's facilities and the
nature of the operations in which such facilities are used, are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION SQ. FOOTAGE OWNED/LEASED COMPANY PRODUCTS
- -------------------- ----------- ------------- -------------------------
<S> <C> <C> <C>
Pompano Beach,
Fl................ 19,600 Leased Premix (Manufacturing)
Casselberry, Fl..... 26,000 Owned Premix (Manufacturing)
Tampa, Fl........... 8,470 Owned Acrocrete (Distribution)
Atlanta, Ga......... 14,750 Leased Acrocrete (Manufacturing)
Jacksonville, Fl.... 7,500 Leased Acrocrete (Distribution)
Norcross, Ga........ 7,600 Leased Acrocrete (Distribution)
</TABLE>
The Casselberry facility is encumbered by a first mortgage lien with
outstanding principal balance at June 30, 1998 of $307,000. In June 1998, the
Company entered into a lease agreement for the facility in Pompano Beach,
Florida for initial rental payments of $7,350 per month. The lease expires
August 31, 2008. See Note 15(b) of Notes to Consolidated Financial Statements.
The Tampa facility, acquired effective February 1, 1998, is encumbered by a
first mortgage lien in the amount of $197,000 at June 30, 1998.
The lease on the Atlanta facility expires April 30, 2000 with early
termination rights, and provides for rental payments of $3,340 per month. The
Company has exercised its rights under the lease to terminate the lease
effective October 31, 1998. In April 1998, the Company entered into a new lease
agreement for a 20,400 square foot facility in Kennesaw, Georgia.
The facilities located in Norcross, Georgia and Jacksonville, Florida are
utilized for the distribution of Acrocrete's products directly to the end-user
(contractor/subcontractor). The lease on the Jacksonville facility expires
December 31, 1998, and provides for rental payments of $3,036 per month.
Acrocrete leases the Norcross facility at $2,920 per month, through the lease
expiration date of April 30, 1999. The Company plans to renew the lease for the
Jacksonville facility. Comparable properties at equivalent rentals are available
for replacement of this facility if such lease is not extended.
Management believes that the Company's facilities and equipment are
well-maintained, in good operating condition and sufficient for its present
operating needs. The Company is presently undertaking certain projects aimed at
consolidating, upgrading and expanding its manufacturing operations which
involves relocating certain operations to new facilities. See "Imperial
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources".
LEGAL PROCEEDINGS
In April 1996, Premix was dismissed as defendants, to which they had been a
party with other unaffiliated companies, in the remaining 27 asbestos lawsuits
pending in various circuit courts in Alabama and Florida. Such lawsuits sought
unspecified damages alleging injuries to persons exposed to products containing
asbestos. As of August 31, 1998, Premix is not a defendant in any lawsuits which
allege injuries due to 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 any
litigation to which the Agreement applies. Premix would be responsible for the
remaining 7%.
The Company believes, based upon the Agreement with its insurance carriers,
and its experience in these claims to date, that it has adequate insurance
coverage for any future similar type of claims. To date, no case has gone to
trial with Premix as a defendant. Premix has either settled for a nominal amount
of money or been voluntarily dismissed without payment in 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
40
<PAGE>
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. ("Schottenstein"),
et al., Heiner Construction Company and Acrocrete, Inc.", filed October 2, 1996
in Wake County, North Carolina. In October 1997, the plaintiffs voluntarily
dismissed Acrocrete with prejudice as a result of the plaintiffs settlement with
the general contractor defendant, Schottenstein.
Also in October 1997, Schottenstein filed a lawsuit captioned "M/I
Schottenstein Homes v. Acrocrete, et al.", ostensibly seeking indemnity and/or
contribution from Acrocrete, and other defendants, for its settlement with the
Zabow plaintiffs as well as other homeowners. Specifically, the lawsuit involves
claims by owners of 52 homes constructed by Schottenstein, that the use of
synthetic stucco in the system construction of the exterior finish of their
homes caused moisture intrusion damage. As a part of its settlement with the
homeowners, Schottenstein 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. As a result of objections by
several codefendants, to the effect that their services and/or products related
to only a select few of the many homes at issue, the Court severed this lawsuit
into 52 separate actions. Acrocrete's insurance carriers have accepted coverage
and are providing a defense under a reservation of rights.
On October 6, 1998, as a result of mediation Acrocrete, Schottenstein, as
well as all codefendants, agreed to settle all pending claims. Acrocrete's
counsel has entered into a written mediation settlement agreement with
Schottenstein, which requires Acrocrete to pay $102,000 to Schottenstein's
insurer CNA. Acrocrete's insurers have agreed to pay this sum, without
contribution from Acrocrete, in order to avoid the significant costs associated
with litigating these 52 actions.
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 all of the above claims
and are providing defense under a reservation of rights. Acrocrete is unable to
determine the exact extent of its exposure or outcome of litigation of these
lawsuits.
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 in any of the legal actions discussed above and
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 lack of caulking.
In response to the alleged defects and in compliance with modified building
codes adopted in North Carolina, 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.,
non-synthetic) 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 occurred only 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 never occurred.
In the fourth quarter of 1993, the Company incurred a $100,000 charge to
settle a product liability lawsuit for which the Company was not insured. The
Company entered into an agreement to settle this lawsuit for $100,000, payable
in equal monthly installments of $2,083 over a four year period with an annual
interest rate of 7 1/2%. The final installment was paid in August 1998.
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.
41
<PAGE>
MANAGEMENT OF IMPERIAL
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to the
directors and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH COMPANY
- ----------------------- --- -----------------------------------------------
<S> <C> <C>
S. Daniel Ponce........ 49 Chairman of the Board--Class III
Lisa M. Brock.......... 40 Director--Class III
Leonard C. Ferri....... 83 Director--Class II
Morton L. Weinberger... 68 Director--Class II
Fred H. Hansen......... 51 President, Premix and Acrocrete
Howard L. Ehler, Jr.... 54 Principal Executive Officer/Executive Vice
President and Secretary
Betty J. Murchison..... 58 Principal Accounting Officer/Assistant Vice
President
</TABLE>
The Company's Board of Directors is divided into three classes. In
accordance with the Company's Certificate of Incorporation, the members of each
Class are designated to serve for three year staggered terms. Class I directors
were to serve until the 1994 annual meeting or until their successors were
elected, Class II directors were to serve until the 1995 annual meeting or until
their successors were elected, and Class III directors were to serve until the
1996 annual meeting or until their successors were elected. The Company did not
have an annual meeting of stockholders in 1994, 1995, 1996 and 1997.
Accordingly, Class I, Class II and Class III directors will serve until the next
annual meeting to be held by the Company. The Company currently has no Class I
directors.
Subject to certain contractual rights, each officer serves at the
discretion of the Board of Directors.
S. Daniel Ponce. Mr. Ponce has been Chairman of the Board of the Company
since 1988. Mr. Ponce has been engaged in the practice of law for over 20 years
and is currently a stockholder in the law firm of Hanzman, Criden, Korge,
Chaykin, Ponce & Heise, P.A. Mr. Ponce is a member of the Board of Directors of
the University of Florida Foundation, Inc. and serves as Chairman of its audit
committee. He is also a non-practicing certified public accountant.
Lisa M. Brock. Mrs. Brock has been a director of the Company since 1988.
Mrs. Brock was employed by the Company and its subsidiaries, Premix and
Acrocrete, as Vice President for over five years until December 1994.
Mrs. Brock continues to serve as a consultant to the Company. Mrs. Brock is the
niece of Leonard C. Ferri.
Leonard C. Ferri. Mr. Ferri has been a director of the Company since 1976.
Mr. Ferri has been an independent management consultant since 1975. In 1975,
Mr. Ferri retired as Managing Director of Xerox de Mexico, S.A. From 1965 to
1970, he served as Managing Director of Xerox de Peru, S.A. For the 19 years
prior thereto, he was employed by Radio Corporation of America (RCA), the last
six years as Regional Director--Latin America in RCA's international division.
Mr. Ferri serves as a consultant to the Company. Mr. Ferri is the uncle of Lisa
M. Brock.
Morton L. Weinberger. Mr. Weinberger has been a director of the Company
since 1988. Mr. Weinberger, a certified public accountant, has been
self-employed as a consultant to various accounting firms and other professional
organizations for the past 12 years. He provides consulting services to the
Company. For the previous 25 years, he was engaged in the practice of public
accounting. During such period, he was a partner with Peat Marwick Mitchell &
Co., now known as KPMG Peat Marwick, and thereafter BDO Seidman, both public
accounting firms.
Fred H. Hansen. Mr. Hansen has been President of Premix and Acrocrete
since September 1996. Prior thereto, from 1986 to 1996, he was employed by
Dryvit Systems Canada Ltd., a manufacturer of synthetic stucco products, the
last six years acting as Vice President and General Manager. From 1982 to 1986,
Mr. Hansen was
42
<PAGE>
the National Sales Manager for W.R. Grace & Co. of Canada Ltd., a manufacturer
and distributor of building materials.
Howard L. Ehler, Jr. Mr. Ehler has been Principal Executive Officer of the
Company since March 1990 and Executive Vice President, Chief Financial Officer
and Secretary of the Company since April 1988. Prior thereto he was Vice
President, Chief Financial Officer and Assistant Secretary of the Company for
over five years.
Betty J. Murchison. Ms. Murchison has been Principal Accounting Officer of
the Company since June 1995. Prior thereto, from October, 1991 to June 1995, she
was Principal Accounting Officer of Royce Laboratories, Inc., a manufacturer of
generic pharmaceutical products. For over 25 years prior thereto, she was
employed by the Company, the last three years acting as the Company's Principal
Accounting Officer.
BOARD OF DIRECTORS MEETINGS AND ATTENDANCE
The Board of Directors met five times during 1997. Each director attended
all of the Board of Directors meetings in 1997.
COMPENSATION AND STOCK OPTION COMMITTEE
Messrs. Ponce, Ferri, Weinberger and Ms. Brock serve on the Compensation
and Stock Option Committee, with Mr. Ponce serving as Chairman. The Compensation
and Stock Option Committee met three times during 1997. Each member attended all
of the meetings.
REPORTS PURSUANT TO SECTION 16(A) OF THE SECURITIES AND EXCHANGE ACT OF 1934
The Company's officers and directors are required to file Forms 3, 4 and 5
with the Commission in accordance with Section 16(a) of the Exchange Act, and
the rules and regulations promulgated thereunder. Based solely on a review of
such reports furnished to the Company as required by Rule 16a-3(e), in 1997 no
officer or director failed to file any such report on a timely basis except
Mr. Hansen. Fred H. Hansen filed one late Form 4 report relating to one purchase
transaction.
EXECUTIVE COMPENSATION
The following table summarizes the compensation paid or accrued for each of
the three fiscal years in the three year period ended December 31, 1997 for the
Company's principal executive officer and each other executive officer whose
total annual salary and bonus exceeded $100,000 for any fiscal year (the "Named
Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION -------------
-------------------------------------------------- RESTRICTED
OTHER ANNUAL STOCK
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION(2) AWARDS(4)
- --------------------------------- ---- -------- -------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Howard L. Ehler, Jr. ............ 1997 $100,000 $ 40,000 -- $18,750
Principal Executive Officer, 1996 98,555 32,000 -- 3,500
Executive Vice President and 1995 95,685 15,000 -- --
Secretary
Fred H. Hansen .................. 1997 $117,601(3) $ 85,000 -- $41,667
President, Premix and Acrocrete 1996 37,000 10,000 15,000 --
</TABLE>
- ------------------
(1) Bonuses shown were earned in the year indicated even though actually paid in
a subsequent year.
(2) Except as indicated, none of the named individuals above have received
personal benefits or perquisites that exceed the lesser of $50,000 or 10% of
the total annual salary and bonus reported for the named executive
(Footnotes continued on next page)
43
<PAGE>
(Footnotes continued from previous page)
officer in the above table. Mr. Hansen's Other Annual Compensation in 1996
included $15,000 in moving and relocation expenses.
(3) Mr. Hansen's employment began September 2, 1996 at an annual salary of
$117,601.
(4) The restricted stock included in the table in 1997 represents the market
value of the entire stock award on the date of grant pursuant to the terms
of the Company's Restricted Stock Plan, even though no shares were vested as
of such date. As of December 31, 1997, based on the average of the bid and
asked market price of Imperial Common on that date of $.42, Mr. Ehler held
75,000 shares of restricted stock valued at $31,500, and Mr. Hansen held
166,667 shares of restricted stock valued at $70,000. The values indicated
are not necessarily indicative of the actual values which may be realized by
the Named Executive Officers. Mr. Ehler's restricted stock is schedule to
vest at the rate of 25,000 shares per year over a three year period ending
December 31, 1999. Mr. Hansen's restricted stock is scheduled to vest as
follows: 33,333 shares in 1997, 66,667 shares in 1998, 33,333 shares in
1999, and 33,334 shares in 2000. The restricted stock becomes vested when
and if Plan vesting requirements are attained. Dividends are paid on the
restricted stock at the same time and same rate as paid to all Imperial
Common stockholders and such shares may be voted.
COMPENSATION AGREEMENTS
The Company is party to a one year renewable employment agreement (the
"Employment Agreement") with Howard L. Ehler, Jr. Mr. Ehler serves as Executive
Vice President, Principal Executive Officer and Chief Financial Officer of the
Company at a current base salary of $120,000. The Employment Agreement provides
for automatic renewal for additional one year periods on July 1st of each year,
unless the Company or Mr. Ehler notifies the other party of such party's intent
not to renew at least 90 days prior to each June 30 of the initial term and any
extended term thereafter. Mr. Ehler receives a car allowance, as well as certain
other benefits, such as health and disability insurance. Mr. Ehler is also
entitled to receive incentive compensation based upon targets formulated by the
Compensation Committee.
Prior to a Change in Control (as defined in the Employment Agreement), 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
Mr. Ehler a severance payment equivalent to 50% of his then current annual base
salary. As part of the Employment Agreement, Mr. Ehler has agreed not to
disclose information and not to compete with the Company during his term of
employment and, in certain cases, for a two year period following his
termination.
In the event of a Change in Control, the Employment Agreement is
automatically extended for a three year period. Thereafter, Mr. Ehler will be
entitled to terminate his employment with the Company for any reason at any
time. In the event Mr. Ehler so terminates employment, Mr. Ehler will be
entitled to receive the lesser of (i) a lump sum equal to the base salary
payments and all other compensation and benefits Mr. Ehler would have received
had the Employment Agreement continued for the full term; or (ii) three times
Mr. Ehler'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 Mr. Ehler without cause after a Change of Control.
In addition, Mr. Ehler was issued 75,000 shares of Imperial Common on
July 30, 1997 pursuant to the terms of the Company's Restricted Stock Plan. See
Note 12(c) of Notes to Consolidated Financial Statements.
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
Imperial Common in February 1997. In addition, Mr. Hansen was issued 166,667
shares of Imperial Common on July 31, 1997 pursuant to the terms of the
Company's Restricted Stock Plan. See Note 12(d) of Notes to Consolidated
Financial Statements. Also, Mr. Hansen received a moving allowance of $15,000 in
1996 and is entitled, at his election, to the use of a Company car, or car
allowance of $650 per month during his employment, as well as certain other
benefits, such as health and disability insurance. As part of the employment
agreement, Mr. Hansen agreed not to disclose
44
<PAGE>
confidential information and not to compete with the Company during his term of
employment and for a one year period following his termination.
AGGREGATED OPTION EXERCISES IN YEAR ENDED DECEMBER 31, 1997 AND YEAR END OPTION
VALUES
The following table sets forth certain aggregated option information for
each of the Named Executive Officers for the fiscal year ended December 31,
1997.
<TABLE>
<CAPTION>
SHARES ACQUIRED VALUE
NAME ON EXERCISE REALIZED(1)
- --------------------------- --------------- -----------
<S> <C> <C>
Howard L. Ehler, Jr........ 83,550 $12,525
Fred H. Hansen............. -- --
</TABLE>
- ------------------
(1) Represents the difference between the option exercise price and the closing
market price of Imperial Common on the date of exercise.
No options were granted during the year ended December 31, 1997, and no
unexercised options were outstanding at December 31, 1997.
DIRECTOR COMPENSATION
During the year ended December 31, 1997, each director received an annual
retainer of $6,000, payable in quarterly installments. Effective June 1, 1994
and January 1, 1995, and renewed each year thereafter, the Company entered into
separate consulting agreements with Messrs. Ferri and Weinberger, and
Ms. Brock, respectively, to provide various management consulting services to
the Company. Each Agreement provides for monthly fees of $833 and may be
terminated by either party upon 60 days notice.
On May 29, 1997, each director received 35,000 shares of Imperial Common.
The average of the bid and asked market price on said date was $.25 per share.
Effective May 20, 1998, each director received an additional 25,000 shares of
Imperial Common. The average of the bid and asked market price on said date was
$.39 per share. Commencing September 1994, Mr. Ponce was provided the use of a
Company car at a current cost of approximately $786 per month.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the year ended December 31, 1997, the Compensation and Stock Option
Committee consisted of Messrs. Ponce, Ferri, Weinberger and Ms. Brock. None of
these directors has been an officer or employee of the Company or its
subsidiaries during the last ten years, except Ms. Brock, who was formerly Vice
President of Premix and Acrocrete until December 31, 1994. In 1997, the Company
paid legal fees to a law firm in which Mr. Ponce is affiliated. See "--Certain
Relationships and Related Transactions." There are no other relationships
required to be disclosed pursuant to applicable Commission rules and
regulations.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of September 1, 1998
with respect to the beneficial ownership of the Company's equity securities by
(i) each director of the Company, (ii) each Named Executive Officer, (iii) each
person known to the Company to own more than 5% of each class of equity
securities, and
45
<PAGE>
(iv) all executive officers and directors as a group. (Except as otherwise
provided herein, the information below is supplied by the holder):
<TABLE>
<CAPTION>
SHARES
TITLE OF BENEFICIALLY PERCENT
CLASS OWNED(1) CLASS(2)
--------- ------------------ -----------
<S> <C> <C> <C>
Maureen P. Ferri ............ Common 656,981 9.9%
7335 Old Elm Drive
Hialeah, Fl 33015
Jimmy V. Brabham(3) ......... Common 374,000 5.7
412 Rory Street
Lake Charles, La 70601
Estate of
M.G. Woodward(4) .......... Preferred 27,000 9.0
147 Maison Place N.W.
Atlanta, Ga 30327
Estate of
Latham G. Kays(5) ......... Preferred 15,275 5.1
8 Paris Court
Lake St. Louis, Mo 63367
Derco Ltd.(6) ............... Preferred 23,863 8.0
P.O. Box 1790
Georgetown Grand Cayman
Cayman Islands
Lisa M. Brock ............... Common 296,506(7) 4.5
Howard L. Ehler, Jr. ........ Common 253,245(8) 3.8
Preferred 2,000 .3
Leonard C. Ferri ............ Common 238,200 3.6
Fred H. Hansen ............... Common 220,000(9) 3.3
S. Daniel Ponce ............. Common 501,966(10) 7.4
Morton L. Weinberger ........ Common 199,210 3.0
All directors and officers as
a group (7 persons) ....... Common 1,715,245(11) 25.2
Preferred 2,000 .3
</TABLE>
- ------------------
(1) Except as set forth herein, all securities are owned directly and the sole
investment and voting power are held by the person named. Unless otherwise
indicated, the address for each beneficial owner is the same as the
Company.
(2) The percent of class for preferred stockholders is based on 300,121 shares
of Preferred Stock outstanding. The percent of class for common
stockholders is based upon 6,607,961 shares of Imperial Common outstanding
and such shares of Imperial Common such individual has the right to acquire
within 60 days upon exercise of options or warrants that are held by such
person (but not those held by any other person).
(3) Based on the Company's stockholder list at August 31, 1998. To the
Company's knowledge, no Schedule 13D has been filed with the Commission.
(4) Based upon oral representations made by the son of such deceased
stockholder. To the Company's knowledge, no Schedule 13D has been filed
with the Commission. The Company has no information regarding the identity
of person(s) with sole or shared voting and investment power for such
securities.
(5) On August 31, 1992, Latham G. Kays filed a Schedule 13D with the
Commission, indicating he beneficially owns 15,275 shares of Preferred
Stock, or 5.1% of the outstanding Preferred Stock. In 1995, the Company
(Footnotes continued on next page)
46
<PAGE>
(Footnotes continued from previous page)
was orally advised that Mr. Kays had died. To the Company's knowledge, no
amendment to the Schedule 13D has been filed with the Commission. The
Company has no current information regarding the identity of person(s) with
sole or shared voting and investment power for such securities.
(6) On November 30, 1993, Derco Ltd. submitted a proxy at the Company's Annual
Meeting of Stockholders, indicating that Derco Ltd. beneficially owned an
aggregate of 23,863 shares of Preferred Stock, or 8.0% of the outstanding
Preferred Stock. To the Company's knowledge, no Schedule 13D has been filed
with the Commission. The Company has no current information regarding the
identity of person(s) with sole or shared voting and investment power for
such securities.
(7) Includes 50,000 shares of Imperial Common issuable upon exercise of
warrants.
(8) Includes 50,000 shares of restricted Imperial Common subject to vesting
requirements.
(9) Includes 133,334 shares of restricted Imperial Common subject to vesting
requirements.
(10) Includes 150,000 shares of Imperial Common issuable upon exercise of
warrants.
(11) Includes 200,000 shares of Imperial Common issuable upon the exercise of
warrants.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The law firm of Hanzman, Criden, Korge, Chaykin, Ponce & Heise, P.A., in
which Mr. Ponce, the Company's Chairman of the Board, is a stockholder,
currently serves as general counsel to the Company. In addition, the law firm
represents the Company in all its outstanding litigation.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon by
Coleman & Rhine LLP, 1120 Avenue of the Americas, New York, New York 10036. The
federal income tax consequences in connection with the Merger will be passed
upon by Rosen & Reade, LLP, 757 Third Avenue, New York, New York 10017.
EXPERTS
The consolidated financial statements as of December 31, 1997 and 1996 and
for each of the three years in the period ended December 31, 1997 included in
this Proxy Statement/Prospectus have been so included in reliance upon the
report of PricewaterhouseCoopers LLP, independent certified public accountants,
given on the authority of such firm as experts in auditing and accounting.
EXCHANGE AGENT
The Company has appointed Continental as Exchange Agent for the Merger.
Certificates representing shares of Preferred Stock should not be submitted for
exchange until the holder thereof receives a letter of transmittal from the
Exchange Agent following the Effective Date of the Merger. It will not be
necessary for the holders of Imperial Common to surrender or exchange their
Imperial Common certificates for new certificates representing Sub Common.
Merger Sub will pay the fees and expenses of the Exchange Agent.
INFORMATION/SOLICITATION AGENT
The Company has appointed Morrow & Co., Inc. as Information Agent for the
Merger. Any questions regarding or requests for additional copies of this Proxy
Statement/Prospectus may be directed to the Information Agent at the address and
telephone number below:
445 Park Avenue, 5th Floor
New York, New York 10022
(800) 566-9061
Merger Sub will pay the fees and expenses of the Information Agent.
47
<PAGE>
OTHER MATTERS
At the date of this Proxy Statement/Prospectus, the Board of Directors
knows of no other matters which will be presented for consideration at the
Meeting. If any such other matters are properly presented for action at the
Meeting, it is the intention of the persons named in the accompanying form of
proxy to vote the shares represented by the proxy in accordance with their
judgment on such matters.
48
<PAGE>
UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
The following unaudited pro forma condensed balance sheet at June 30, 1998
and the unaudited pro forma condensed statements of operations for the six
months ended June 30, 1998 and the year ended December 31, 1997 give effect to
the proposed merger of Imperial with and into its wholly-owned subsidiary,
Merger Sub. The proposed Merger will be accounted for as a reorganization of
entities under common control. The unaudited pro forma condensed balance sheet
presents the financial position of Imperial and Merger Sub as of June 30, 1998
assuming the proposed Merger had occurred as of June 30, 1998. Such information
is based upon the historical balance sheet of Imperial as of that date adjusted
for the conversion of Imperial Common and Preferred Stock upon consummation of
the Merger. The unaudited pro forma condensed statements of operations give
effect to the proposed Merger of Imperial and Merger Sub by adjusting the
historical results of operations of Imperial for the six months ended June 30,
1998 and and for the year ended December 31, 1997 as if the proposed Merger had
become effective January 1, 1997. These unaudited pro forma financial statements
should be read in conjunction with the historical financial statements and notes
thereto of Imperial included elsewhere in this proxy statement.
The pro forma information is presented for illustrative purposes only and
is not necessarily indicative of the operating results or financial position
that would have occurred if the proposed Merger had been consummated on January
1, 1997 with respect to the pro forma statements of operations or at June 30,
1998 with respect to the pro forma balance sheet, nor is it indicative of the
future operating results or financial position of the combined company.
49
<PAGE>
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
IMPERIAL ADJUSTMENTS PRO FORMA
------------ ------------- ------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........ $ 542,000 $ 542,000
Trade accounts receivable, net... 2,397,000 2,397,000
Inventories...................... 1,512,000 1,512,000
Deferred taxes................... 106,000 106,000
Other current assets............. 217,000 217,000
------------ ------------
Total current assets.......... 4,774,000 4,774,000
Property, plant and equipment,
net.............................. 1,213,000 $ (173,000)(2a) 1,040,000
Deferred taxes..................... 450,000 450,000
Other assets....................... 109,000 109,000
------------ ------------- ------------
$ 6,546,000 $ (173,000) $ 6,373,000
------------ ------------- ------------
------------ ------------- ------------
LIABILITIES AND COMMON STOCK
AND OTHER STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable.................... $ 1,017,000 $ 640,000 (2b) $ 1,657,000
Current portion of long-term
debt.......................... 171,000 (37,000)(2c) 134,000
Accounts payable................. 1,069,000 1,069,000
Accrued expense and other
liabilities................... 258,000 258,000
------------ ------------- ------------
Total current liabilities..... 2,515,000 603,000 3,118,000
Long-term debt, less current
maturities....................... 948,000 554,000 (2c) 1,502,000
Preferred dividends, in arrears.... 4,209,000 (4,209,000)(2d) 0
Redeemable preferred stock, $1 par
value, $1.10 cumulative
convertible series; 300,121
shares outstanding at $10 per
share redemption value........... 3,001,000 (3,001,000)(2d) 0
Common stock and other
stockholders' deficit:
Common stock, $.10 par value
($.01 pro forma par value),
authorized 20,000,000 shares;
6,655,824 and 8,306,490 shares
issued, respectively.......... 666,000 (577,000)(2e) 89,000
Additional paid-in capital....... 7,061,000 9,437,000 (2f) 16,498,000
Accumulated deficit.............. (11,748,000) (2,980,000)(2g) (14,728,000)
------------ ------------- ------------
(4,021,000) 5,880,000 (1,859,000)
Less 47,863 treasury shares at
cost.......................... (106,000) (106,000)
------------ ------------- ------------
Total common stock and other
stockholders' deficit....... (4,127,000) 5,880,000 1,753,000
------------ ------------- ------------
$ 6,546,000 $ (173,000) $ 6,373,000
------------ ------------- ------------
------------ ------------- ------------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial information.
50
<PAGE>
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ----------
<S> <C> <C> <C>
Net sales........................ $8,785,000 $8,785,000
Cost of sales.................... 5,851,000 $ 36,000 (2h) 5,887,000
---------- ----------- ----------
Gross profit................... 2,934,000 (36,000) 2,898,000
Selling, general and
administrative expenses........ 2,186,000 2,186,000
---------- ----------- ----------
Operating income............... 748,000 (36,000) 712,000
Other (expenses) income, net..... (51,000) (92,000)(2i) (143,000)
---------- ----------- ----------
Income before income taxes..... 697,000 (128,000) 569,000
Income tax (expense) benefit..... (244,000) 45,000 (2j) (199,000)
---------- ----------- ----------
Net income (loss)................ 453,000 (83,000) 370,000
Less dividends on redeemable
preferred stock................ (165,000) 165,000 (2k) 0
---------- ----------- ----------
Net income available to common
stockholders................ $ 288,000 $ 82,000 $ 370,000
---------- ----------- ----------
---------- ----------- ----------
Earnings per common share:
Basic.......................... $ 0.04 $ 0.04
---------- ----------
---------- ----------
Diluted........................ $ 0.04 $ 0.04
---------- ----------
---------- ----------
Weighted average shares.......... 6,516,000 8,767,000
---------- ----------
---------- ----------
Weighted average and potentially
dilutive shares................ 6,679,000 9,011,000
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial information.
51
<PAGE>
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
----------- ----------- -----------
<S> <C> <C> <C>
Net sales........................ $15,774,000 $15,774,000
Cost of sales.................... 10,867,000 $ 71,000 (2h) 10,938,000
----------- ----------- -----------
Gross profit................... 4,907,000 (71,000) 4,836,000
Selling, general and
administrative expenses........ 3,740,000 3,740,000
----------- ----------- -----------
Operating income............... 1,167,000 (71,000) 1,096,000
Other (expense) income, net...... (275,000) (172,000)(2i) (447,000)
----------- ----------- -----------
Income (expense) before income
taxes....................... 892,000 (243,000) 649,000
Income tax benefit............... 753,000 85,000 (2j) 838,000
----------- ----------- -----------
Net income (loss)................ 1,645,000 (158,000) 1,487,000
Less dividends on redeemable
preferred stock................ (330,000) 330,000 (2k) 0
----------- ----------- -----------
Net income available to common
stockholders................ $ 1,315,000 $ 172,000 $ 1,487,000
----------- ----------- -----------
----------- ----------- -----------
Earnings per common share:
Basic.......................... $ 0.22 $ 0.18
----------- -----------
----------- -----------
Diluted........................ $ 0.21 $ 0.17
----------- -----------
----------- -----------
Weighted average shares.......... 6,009,000 8,260,000
----------- -----------
----------- -----------
Weighted average and potentially
dilutive shares................ 6,267,000 8,599,000
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial information.
52
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED
FINANCIAL INFORMATION
1. BASIS OF PRESENTATION
Upon consummation of the proposed Merger, each share of Imperial Common
will be converted, without action of the holder, into one share of Sub Common
and each share of Preferred Stock will be converted, at the option of the
Preferred Stockholder, into either; (A) $4.75 in cash and ten shares of Sub
Common or (B) $2.25 in cash, a Debenture and five shares of Sub Common. Because
Imperial is unable in advance to determine the proportion of Preferred Stock
which will be converted under (A) versus (B), Imperial has prepared the pro
forma combined financial statements using the arbitrary assumption that 50% of
the preferred stock will be converted under (A) and 50% will be converted under
(B). The unaudited pro forma balance sheet and statements of operations have
been prepared based upon the foregoing conversions. The following table
illustrates the consideration to be issued to Preferred Stockholders in the
event that all Preferred Stockholders elect to receive either (A) $4.75 in cash
and ten shares of Sub Common, or (B) $2.25 in cash, a Debenture and five shares
of Sub Common, or an equal number of shares of Preferred Stock elect (A) or (B).
<TABLE>
<CAPTION>
100% (A) 0% (A) 50% (A)
0% (B) 100% (B) 50% (B)
---------- ---------- ----------
<S> <C> <C> <C>
Cash.................................. $1,426,000 $ 675,000 $1,050,000
Debentures (principal)................ $ 0 $2,401,000 $1,200,000
Sub Common (shares)................... 3,001,000 1,501,000 2,251,000
</TABLE>
The pro forma statements of operations exclude a charge to common
stockholders of $3,617,000 representing the excess of the fair value of cash and
securities to be issued to Preferred Stockholders on the conversion of their
stock over the fair value of Imperial Common issuable to Preferred Stockholders
had the stock been converted at the conversion rate specified in the Preferred
Stock's governing instrument (the "excess consideration") and is calculated as
follows:
<TABLE>
<S> <C> <C>
Fair value of consideration issued to
Preferred Stockholders on conversion
under the Merger:
Cash................................ $1,050,000
Debentures.......................... 984,000
Sub Common.......................... 1,869,000 $3,903,000
----------
Fair value of Imperial Common issuable
under Preferred Stock's original
governing instrument:
Shares of Preferred Stock........... 300,121
Original conversion rate............ x1.149
----------
Sub Common shares issued on
conversion.......................... 345,000
Fair value per Sub Common share at
Merger date...................... $ 0.83 286,000
---------- ----------
Excess consideration.................. $3,617,000
----------
----------
</TABLE>
The pro forma statements of operations exclude $340,000 of estimated future
transaction costs associated with the proposed merger which will be recognized
as incurred subsequent to June 30, 1998. The pro forma statements of operations
also exclude $67,000 of costs representing the estimated fair value of 150,000
warrants to purchase 150,000 shares of Sub Common issuable upon consummation of
the Merger to Auerbach for serving as Imperial's financial advisor. The pro
forma statements of operations also exclude a $1,044,000 estimated gain on the
sale of the Company's Miami, Florida facility which was sold on October 2, 1998
and the proceeds from which will form a significant portion of the cash portion
of the Merger Consideration. However, the pro forma accumulated deficit has been
adjusted to reflect the excess consideration, the transaction costs, the
estimated fair value of the warrants and the gain on the sale in the common
stock and other stockholders' deficit section of the unaudited pro forma
condensed balance sheet at June 30, 1998.
Pro forma basic and diluted earnings per common share for the respective
periods has been computed based on the pro forma weighted average common shares,
and pro forma weighted average and potentially dilutive shares outstanding,
including the effects of converting all Preferred Stock into Sub Common and
Debentures. Potentially dilutive shares outstanding include 81,000 shares,
assumed issued to Auerbach upon exercise of its 150,000 warrants, computed under
the treasury stock method.
53
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED
FINANCIAL INFORMATION--(CONTINUED)
1. BASIS OF PRESENTATION--(CONTINUED)
The following table presents the effect on total assets, stockholders'
deficit and earnings per share assuming all Preferred Stockholders elect (A), or
all Preferred Stockholders elect (B).
<TABLE>
<CAPTION>
100% (A) 0% (A)
PRO FORMA 0% (B) 100% (B)
- -------------------------------------- ---------- ----------
<S> <C> <C>
Total assets.......................... $6,373,000 $6,373,000
Stockholders' deficit................. $2,361,000 $1,143,000
Earnings per share:
Six months ended June 30, 1998:
Basic............................ $ 0.04 $ 0.04
Diluted.......................... $ 0.04 $ 0.04
Year ended December 31, 1997:
Basic............................ $ 0.17 $ 0.19
Diluted.......................... $ 0.17 $ 0.18
</TABLE>
2. PRO FORMA ADJUSTMENTS
(a) Represents sale of Miami, Florida corporate headquarters and production
facility, at carrying value.
(b) Includes borrowings under the Company's line of credit of $1,050,000 to
fund the Preferred Stock conversion, and to pay transaction costs of $340,000,
less cash of $750,000 received on the sale of the Miami facility after deducting
estimated relocation expenditures.
(c) Includes reductions in current ($37,000) and long term ($430,000)
portions of mortgage debt in connection with the sale of the Miami facility, and
issuance of long term debt consisting of 150,061 Debentures, at a fair value of
$6.56 per Debenture pursuant to the Preferred Stock conversion, totaling
$984,000.
(d) Represents dividends and Preferred Stock eliminated pursuant to the
Preferred Stock conversion.
(e) Issuance of 2,250,915 shares of $.01 par value Sub Common pursuant to
the Preferred Stock conversion less the recapitalization of 6,655,824 (including
47,863 treasury shares) shares of Imperial Common, with a par value of $.10 per
share, for Sub Common with a par value of $.01 per share.
(f) Includes the following:
<TABLE>
<S> <C>
Excess consideration to preferred
stockholders on the conversion...... $ 3,617,000
Elimination of preferred stock........ 3,001,000
Value of warrants to Auerbach......... 67,000
Par value of common stock issued...... (22,000)
Cash and debentures exchanged......... (2,034,000)
Elimination of preferred dividends, in
arrears............................. 4,209,000
Recapitalization of 6,655,824 shares
of Imperial Common.................. 599,000
-----------
$ 9,437,000
-----------
-----------
</TABLE>
(g) Includes the following:
<TABLE>
<S> <C>
Excess consideration to preferred
stockholders on the conversion.......... $(3,617,000)
Transaction costs......................... (340,000)
Value of warrants to Auerbach............. (67,000)
Estimated gain on sale of Miami facility.. 1,044,000
-----------
$(2,980,000)
-----------
-----------
</TABLE>
54
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED
FINANCIAL INFORMATION--(CONTINUED)
2. PRO FORMA ADJUSTMENTS--(CONTINUED)
(h) Rental expense to replace the Miami facility net of depreciation
eliminated in connection with the sale of the Miami facility as follows:
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED JUNE 30, 1998 DECEMBER 31, 1997
------------------- -----------------
<S> <C> <C>
Replacement facility rents............................ $44,000 $88,000
Miami facility depreciation........................... (8,000) (17,000)
------- -------
$36,000 $71,000
------- -------
------- -------
</TABLE>
(i) Includes interest expense on the Debentures, and on the line of credit
borrowings, less interest eliminated on the Miami facility's mortgage debt as
follows:
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED JUNE 30, 1998 DECEMBER 31, 1997
------------------- -----------------
<S> <C> <C>
Debentures interest................................... $ (84,000) $(158,000)
Line of credit interest............................... (33,000) (67,000)
Mortgage interest..................................... 25,000 53,000
--------- ---------
$ (92,000) $(172,000)
--------- ---------
--------- ---------
</TABLE>
(j) Assumes tax benefit at 35% statutory rate applied to income before
income taxes.
(k) Elimination of dividends on Preferred Stock converted to Sub Common.
55
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
IMPERIAL INDUSTRIES, INC.--HISTORICAL
Report of Independent Certified Public Accountants....................................................... F-2
Consolidated Balance Sheets at December 31, 1996 and 1997 (Audited), and at June 30, 1998 (Unaudited).... F-3
Consolidated Statements of Operations for the Years Ended December 31, 1995, 1996 and 1997 (Audited), and
for the Six Months Ended June 30, 1997 and 1998 (Unaudited)........................................... F-4
Consolidated Statements of Changes in Common Stock and Other Stockholders' Deficit for the Years Ended
December 31, 1995, 1996 and 1997 (Audited), and for the Six Months Ended June 30, 1998 (Unaudited).... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and 1997 (Audited), and
for the Six Months Ended June 30, 1997 and 1998 (Unaudited)........................................... F-6
Notes to Consolidated Financial Statements............................................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Imperial Industries, Inc.
In our opinion, the consolidated financial statements listed in the Index
appearing on page F-1 present fairly, in all material respects, the financial
position of Imperial Industries, Inc. and its subsidiaries at December 31, 1996
and 1997, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Miami, Florida
March 27, 1998
F-2
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- JUNE 30,
1996 1997 1998
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........ $ 455,000 $ 552,000 $ 542,000
Accounts receivable, net of
allowance of $145,000 and
$176,000 at December 31, 1996
and 1997, respectively and
$209,000 at June 30, 1998..... 1,508,000 1,534,000 2,397,000
Inventories...................... 1,272,000 1,204,000 1,512,000
Deferred taxes................... -- 350,000 106,000
Prepaid expenses and other
current assets................ 22,000 60,000 217,000
----------- ----------- -----------
Total current assets.......... 3,257,000 3,700,000 4,774,000
Property, plant and equipment, at
cost............................. 2,789,000 2,974,000 3,317,000
Less accumulated depreciation.... (2,020,000) (2,100,000) (2,104,000)
----------- ----------- -----------
Net property, plant and
equipment................... 769,000 874,000 1,213,000
Deferred taxes..................... -- 450,000 450,000
Other assets....................... 90,000 104,000 109,000
----------- ----------- -----------
$ 4,116,000 $ 5,128,000 $ 6,546,000
----------- ----------- -----------
----------- ----------- -----------
LIABILITIES AND COMMON STOCK
AND OTHER STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable.................... $ 1,424,000 $ 778,000 $ 1,017,000
Current portion of long-term
debt.......................... 161,000 130,000 171,000
Accounts payable................. 660,000 580,000 1,069,000
Accrued expenses and other
liabilities................... 140,000 217,000 258,000
----------- ----------- -----------
Total current liabilities..... 2,385,000 1,705,000 2,515,000
Long-term debt, less current
maturities....................... 895,000 819,000 948,000
Preferred dividends in arrears..... 3,714,000 4,044,000 4,209,000
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 3,001,000
Commitments and contingencies...... -- -- --
Common stock and other
stockholders' deficit:
Common stock, $.10 par value,
authorized 20,000,000 shares;
5,710,324, 6,631,824, and
6,655,824 issued,
respectively.................. 571,000 663,000 666,000
Additional paid-in-capital....... 7,229,000 7,260,000 7,061,000
Accumulated deficit.............. (13,351,000) (12,036,000) (11,748,000)
----------- ----------- -----------
(5,551,000) (4,113,000) (4,021,000)
Less cost of shares in treasury
(147,863 shares in 1996 and
1997 and 47,863 shares in
1998.......................... (328,000) (328,000) (106,000)
----------- ----------- -----------
Total common stock and other
stockholders' deficit....... (5,879,000) (4,441,000) (4,127,000)
----------- ----------- -----------
$ 4,116,000 $ 5,128,000 $ 6,546,000
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------- ------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales............... $11,615,000 $13,742,000 $15,774,000 $8,004,000 $8,785,000
Cost of sales........... 8,239,000 9,881,000 10,867,000 5,500,000 5,851,000
----------- ----------- ----------- ---------- ----------
Gross profit.......... 3,376,000 3,861,000 4,907,000 2,504,000 2,934,000
Selling, general and
administrative
expenses.............. 2,979,000 3,313,000 3,740,000 1,892,000 2,186,000
----------- ----------- ----------- ---------- ----------
Operating income...... 397,000 548,000 1,167,000 612,000 748,000
Other income (expense):
Interest expense...... (282,000) (317,000) (329,000) (167,000) (137,000)
Miscellaneous income.... 7,000 43,000 54,000 (4,000) 86,000
----------- ----------- ----------- ---------- ----------
(275,000) (274,000) (275,000) (171,000) (51,000)
----------- ----------- ----------- ---------- ----------
Income before income
taxes.............. 122,000 274,000 892,000 441,000 697,000)
----------- ----------- ----------- ---------- ----------
Income tax benefit
(expense):
Current............... -- -- (47,000) -- (244,000)
Deferred.............. -- -- 800,000 -- --
----------- ----------- ----------- ---------- ----------
-- -- 753,000 -- (244,000)
----------- ----------- ----------- ---------- ----------
Net income.............. $ 122,000 $ 274,000 $ 1,645,000 $ 441,000 $ 453,000
----------- ----------- ----------- ---------- ----------
----------- ----------- ----------- ---------- ----------
Less: Dividends on
redeemable preferred
stock................. (330,000) (330,000) (330,000) (165,000) (165,000)
----------- ----------- ----------- ---------- ----------
Net income (loss)
applicable to
common
stockholders..... $ (208,000) $ (56,000) $ 1,315,000 $ 276,000 $ 288,000
----------- ----------- ----------- ---------- ----------
----------- ----------- ----------- ---------- ----------
Basic earnings (loss)
per common share... $ (.04) $ (.01) $ .22 $ .05 $ .04
----------- ----------- ----------- ---------- ----------
----------- ----------- ----------- ---------- ----------
Weighted average
common shares...... 5,382,000 5,471,000 6,009,000 5,624,000 6,516,000
----------- ----------- ----------- ---------- ----------
----------- ----------- ----------- ---------- ----------
Diluted earnings
(loss) per common
share.............. $ (.04) $ (.01) $ .21 $ .05 $ .04
----------- ----------- ----------- ---------- ----------
----------- ----------- ----------- ---------- ----------
Weighted average
common and
potentially
dilutive shares.... 5,382,000 5,471,000 6,297,000 5,961,000 6,679,000
----------- ----------- ----------- ---------- ----------
----------- ----------- ----------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK
AND OTHER STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN ACCUMULATED TREASURY
STOCK CAPITAL DEFICIT STOCK TOTAL
-------- ---------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C>
Balance at
December 31, 1994.... $556,000 $7,384,000 $(13,087,000) $(494,000) $(5,641,000)
Issuance of 50,000
shares of common
stock............. -- (108,000) -- 111,000 3,000
Accrued dividends in
arrears on
preferred stock... -- -- (330,000) -- (330,000)
Net income........... -- -- 122,000 -- 122,000
-------- ---------- ------------ --------- -----------
Balance at
December 31, 1995.... 556,000 7,276,000 (13,295,000) (383,000) (5,846,000)
Issuance of 175,000
shares of common
stock............. 15,000 (47,000) -- 55,000 23,000
Accrued dividends in
arrears on
preferred stock... -- -- (330,000) -- (330,000)
Net income........... -- -- 274,000 -- 274,000
-------- ---------- ------------ --------- -----------
Balance at
December 31, 1996.... 571,000 7,229,000 (13,351,000) (328,000) (5,879,000)
Issuance of 921,500
shares of common
stock............. 92,000 31,000 -- -- 123,000
Accrued dividends in
arrears on
preferred stock... -- -- (330,000) -- (330,000)
Net income........... -- -- 1,645,000 -- 1,645,000
-------- ---------- ------------ --------- -----------
Balance at
December 31, 1997.... 663,000 7,260,000 (12,036,000) (328,000) (4,441,000)
Issuance of 124,000
shares of common
stock............. 3,000 (199,000) -- 222,000 26,000
-------- ---------- ------------ --------- -----------
Accrued dividends in
arrears on
preferred stock... -- -- (165,000) -- (165,000)
Net income........... -- -- 453,000 -- 453,000
-------- ---------- ------------ --------- -----------
Balance at June 30,
1998 (Unaudited)..... $666,000 $7,061,000 $(11,748,000) $(106,000) $(4,127,000)
-------- ---------- ------------ --------- -----------
-------- ---------- ------------ --------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------- ---------------------
1995 1996 1997 1997 1998
--------- --------- ---------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income....................... $ 122,000 $ 274,000 $1,645,000 $ 441,000 $ 453,000
Adjustments to reconcile net
income to net cash provided by
(used in):
Depreciation.................. 119,000 133,000 149,000 71,000 83,000
Amortization.................. 13,000 16,000 19,000 11,000 9,000
Provision for doubtful
accounts.................... 137,000 99,000 126,000 62,000 38,000
Deferred taxes, net........... -- -- (800,000) -- --
Income tax expense............ -- -- -- -- 244,000
Loss (gain) on disposal of
fixed assets................ (3,000) 4,000 1,000 2,000 (3,000)
Compensation expense--issuance
of stock.................... 3,000 23,000 41,000 41,000 32,000
(Increase) decrease in:
Accounts receivable......... (421,000) (236,000) (152,000) (710,000) (909,000)
Inventories................. (243,000) 8,000 68,000 74,000 (308,000)
Prepaid expenses and other
assets................... (48,000) -- (38,000) (103,000) (171,000
(Decrease) increase in:
Accounts payable............ 286,000 (48,000) (80,000) 136,000 489,000
Accrued expenses and other
liabilities.............. (65,000) 40,000 77,000 140,000 41,000
--------- --------- ---------- --------- ---------
Net cash (used in) provided
by operating
activities............... (100,000) 313,000 1,056,000 165,000 (2,000)
--------- --------- ---------- --------- ---------
Cash flows from investing
activities:
Proceeds received from sale of
property and equipment........ 3,000 11,000 9,000 8,000 13,000
Purchases of property, plant and
equipment..................... (224,000) (201,000) (263,000) (114,000) (432,000)
--------- --------- ---------- --------- ---------
Net cash used in investing
activities.................... (221,000) (190,000) (254,000) (106,000) (419,000)
--------- --------- ---------- --------- ---------
Cash flows from financing
activities:
Increase (decrease) in notes
payable banks--net............ 201,000 179,000 (646,000) (29,000) 239,000
Proceeds from issuance of
long-term debt................ 703,000 66,000 60,000 -- 275,00
Repayment of long-term debt...... (569,000) (165,000) (167,000) (89,000) (105,000)
Proceeds received from the
exercise of stock options..... -- -- 48,000 2,000 2,000
--------- --------- ---------- --------- ---------
Net cash provided by (used in)
financing activities........ 335,000 80,000 (705,000) (116,000) 411,000
--------- --------- ---------- --------- ---------
Net increase (decrease) in cash and
cash equivalents................. 14,000 203,000 97,000 (57,000) (10,000)
Cash and cash equivalents,
beginning of period.............. 238,000 252,000 455,000 455,000 552,000
--------- --------- ---------- --------- ---------
Cash and cash equivalents, end of
period........................... $ 252,000 $ 455,000 $ 552,000 $ 398,000 $ 542,000
--------- --------- ---------- --------- ---------
--------- --------- ---------- --------- ---------
Supplemental disclosure of cash
flow information:
Cash paid during the year for
interest...................... $ 284,000 $ 314,000 $ 329,000 $ 169,000 $ 136,000
--------- --------- ---------- --------- ---------
--------- --------- ---------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Imperial Industries, Inc. (the "Company") and its subsidiaries are
primarily involved in the manufacturing and sale of exterior and interior
finishing wall coating and mortar products for the construction industry. The
Company also manufactures and sells finishing coat products for swimming pools.
The consolidated financial statements contain the accounts of the Company
and its wholly owned subsidiaries, Acrocrete, Inc. ("Acrocrete") and
Premix-Marbletite Manufacturing Company ("Premix"), as well as other
subsidiaries which did not have significant operations during 1995 through 1997.
A summary of the significant accounting policies followed in the
preparation of the accompanying consolidated financial statements is presented
below.
(a) Interim financial data
The interim financial data as of June 30, 1998 and for the six months ended
June 30, 1998 and June 30, 1997 is unaudited; however, in the opinion of the
Company, the interim data includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair statement of the results for the
interim periods.
(b) Basis of presentation
The consolidated financial statements of the Company and its subsidiaries
have been prepared in accordance with generally accepted accounting principles
which assume that assets will be realized and liabilities will be satisfied in
the normal course of business.
(c) Significant customers
During 1995, one distributor accounted for approximately 11% of total
sales. During 1997 and 1996, no single customer accounted for more than 10% of
the Company's sales.
(d) Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All material intercompany accounts and
transactions have been eliminated in consolidation.
(e) Inventories
Inventories are stated at the lower of cost or market (net realizable
value), on a first-in, first-out basis. Finished goods include the cost of raw
materials, freight in, direct labor and overhead.
(f) Property, plant and equipment
Property, plant and equipment is stated at cost, less accumulated
depreciation. Depreciation is computed on the straight-line basis over the
estimated useful lives of the depreciable assets. Expenditures for maintenance
and repairs are charged to expense as incurred, while expenditures which extend
the useful life of assets are capitalized.
(g) 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."
F-7
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES--(CONTINUED)
(h) Earnings (loss) 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 (loss) 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 (loss) 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 (loss) per common
share. (See Note (10) - Earnings (Loss) Per Common Share).
(i) Cash and 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 December 31, 1997 and 1996 are short term time
deposits of $259,000 and $153,000, respectively.
(j) Revenue recognition policy
Revenue from sales transactions is recorded upon shipment and delivery of
inventory to the customer, net of discounts and allowances.
(k) 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 provisions of which must be
implemented for fiscal years beginning subsequent to December 15, 1995,
establishes 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. 25. Had the fair value based accounting
provisions of SFAS 123 been adopted, the effect would not be significant.
(l) Accounting estimates
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.
(m) Financial instruments
The carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable and notes payable approximated fair value as of December 31,
1997 and 1996 because of the relatively short maturity of these instruments. The
carrying amount of long-term debt approximated fair value at December 31, 1997
and 1996 because the debt's effective interest rate reflects the market interest
rate.
2. INVENTORIES
At December 31, 1997 and 1996, inventories consist of:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Raw materials......... $ 364,000 $ 376,000
Finished goods........ 614,000 710,000
Packaging materials... 226,000 186,000
---------- ----------
$1,204,000 $1,272,000
---------- ----------
---------- ----------
</TABLE>
F-8
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY, PLANT AND EQUIPMENT
A summary of the cost of property, plant and equipment at December 31, 1997
and 1996 is as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE
1997 1996 (YEARS)
---------- ---------- -----------
<S> <C> <C> <C>
Land.......................... $ 74,000 $ 74,000 --
Buildings and improvements.... 834,000 823,000 10-40
Machinery and equipment....... 1,296,000 1,129,000 3-10
Vehicles...................... 574,000 570,000 2- 8
Furniture and fixtures........ 196,000 193,000 3-12
---------- ----------
$2,974,000 $2,789,000
---------- ----------
---------- ----------
</TABLE>
The net book value of property, plant and equipment pledged as collateral
under notes payable and various long-term debt agreements aggregated $480,000
and $509,000 at December 31, 1997 and 1996, respectively. See "Note 6."
4. NOTES PAYABLE
Included in notes payable at December 31, 1997 and 1996 is $778,000 and
$1,424,000, respectively, which represents the amounts outstanding under a
$2 million line of credit from a commercial lender to Premix and Acrocrete. The
line of credit is collateralized by Premix and Acrocrete's accounts receivable
and inventory, bears interest at prime rate plus 4% (12 1/2% at December 31,
1997) and expires June 19, 1998, subject to annual renewal. Effective
January 1, 1998, the Company amended its line of credit to bear interest at
prime rate plus 2% and extended the maturity date to June 19, 1999, subject to
annual renewal. The weighted average effective interest rate on the line of
credit was 17.04%, 15.06%, and 14.86% during the years ended December 31, 1997,
1996 and 1995, respectively.
The line of credit is automatically extended for an additional one year
term on each June 19th unless either party gives the other notice of
nonextension 60 days prior to the preceding June 19th. At December 31, 1997, the
line of credit limit available for borrowing aggregated $1,580,000, of which
$778,000 had been borrowed. The average month end amounts outstanding during
1997 and 1996 were $1,316,000, and $1,308,000, respectively. The maximum amounts
outstanding at any month end during 1997 and 1996 were $1,585,000 and
$1,424,000, respectively.
5. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities at December 31, 1997 and 1996 are
summarized as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Employee compensation related items.... $ 72 000 $ 46,000
Taxes, other than income taxes......... 38,000 32,000
Income taxes........................... 30,000 --
Interest............................... 7,000 8,000
Legal fees............................. -- 1,000
Other.................................. 70,000 53,000
-------- --------
$217,000 $140,000
-------- --------
-------- --------
</TABLE>
F-9
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. LONG-TERM DEBT
Long-term debt of the Company is as follows:
<TABLE>
<CAPTION>
1997 1996
-------- ----------
<S> <C> <C>
Adjustable rate mortgage note payable, interest at
10.5% at December 31, 1997, principal in the
amount of $3,111 together with interest is payable
monthly, with a balloon payment of approximately
$376,000 due December 5, 2000...................... $485,000 $ 523,000
Adjustable rate mortgage note payable, interest at
12% at December 31, 1997, principal and interest
payable monthly in the amount of approximately
$3,600, with a balloon payment of approximately
$292,000 due September 1, 2000..................... 310,000 316,000
Litigation settlement agreement, interest at 7.5% due
monthly, principal payable in 48 equal 48 monthly
periods in the amount of approximately $2,083
through August 1998................................ 19,000 43,000
Equipment notes payable, interest at various rates
ranging from 8.75% to 15.39%, per annum, principal
and interest payable monthly....................... 135,000 174,000
-------- ----------
949,000 1,056,000
Less current maturities.............................. (130,000) (161,000)
-------- ----------
$819,000 $ 895,000
-------- ----------
-------- ----------
</TABLE>
As of December 31, 1997, long-term debt matures as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
----------------------- --------
<S> <C>
1999................... $ 71,000
2000................... 727,000
2001................... 15,000
2002................... 6,000
--------
$819,000
--------
--------
</TABLE>
In the fourth quarter of 1993, the Company incurred a $100,000 charge to
settle a product liability lawsuit for which the Company had no insurance. The
Company entered into an agreement to settle this lawsuit for $100,000, payable
monthly over a four-year period with interest at the rate of 7 1/2% per annum.
In accordance with the terms of the agreement, in the event of the Company's
bankruptcy, the plaintiff will be permitted to file a claim for $160,000, less
any amounts previously paid.
7. INCOME TAXES
At December 31, 1997, the deferred tax asset of $800,000 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 are 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 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.
The current income tax expense represents state taxes and alternative
minimum taxes payable for the year ended December 31, 1997.
F-10
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. CAPITAL STOCK
(a) Common Stock
At December 31, 1997, the Company had outstanding 6,483,961 shares of
Common Stock (5,562,461 shares in 1996 with a $.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 preferential rights of the holders of outstanding
preferred stock, if any.
On February 7, 1995, the Company issued 50,000 shares of Common Stock from
treasury to the former President of Premix and Acrocrete as part of his
employment compensation.
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 upon 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 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 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 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. Prior to
vesting, the holders will receive all of the benefits of ownership of the
restricted shares, including voting rights, but will not have the right to
transfer such unvested shares. Effective January 21, 1998, an aggregate of
58,333 had met the Plan vesting requirements and were released and reissued to
two employees.
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 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.
(b) Redeemable 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 December 31, 1997 and 1996, the Company had issued and outstanding
300,121 shares of $1.10 cumulative convertible redeemable 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
F-11
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. CAPITAL STOCK--(CONTINUED)
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 the Preferred
Stock is entitled to cumulative quarterly dividends at the rate of $1.10 per
annum and is 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 and unpaid dividends.
The Company has omitted dividends on its Preferred Stock since the fourth
quarter of 1985 aggregating $4,044,000 through December 31, 1997 ($3,714,000
through December 31, 1996). The omission of Preferred Stock dividends is a
reduction of net income applicable to Common Stockholders and is recorded as a
non-current liability in the accompanying consolidated balance sheets.
The Preferred Stock is subject to redemption through a mandatory sinking
fund at a redemption price of $10.00 per share, at the rate of approximately
66,000 preferred shares a year, starting in 1986, less any preferred shares
converted into common stock. Through December 31, 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 66,000 shares for each year thereafter through 1995, at which
time the Preferred Stock was intended to be fully retired. The Preferred Stock
has not been included in common stock and other stockholders' deficit because of
its mandatory redemption feature.
The Company did not redeem any shares of the 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 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, at any time that the Company is in default in the
payment of any dividends on the Preferred Stock or if the sinking fund
requirements are in arrears.
(c) Warrants
At December 31, 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. During February, 1997, the Company's Board of
Directors authorized an extension of the expiration date of these warrants
from March 31, 1997 to March 31, 1998. In March 1998, the Board of
Directors extended the expiration date of the warrants to April 30, 1998.
The warrants are not registered nor are they exercisable until a
registration statement covering the underlying Common Stock is declared
effective by the Securities and Exchange Commission.
(ii) 200,000 warrants issued in connection with financing arrangements
in 1988. Each warrant entitles the holder to purchase one share of Common
Stock at $.10 per share. The expiration date was 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 financing in
1988. The loan has since been repaid by the Company.
(d) Stock Options
The Company's 1979 Non-Qualified Stock Option Plan (the "1979 Plan")
expired in 1989 and no additional options may be granted thereunder. At
December 31, 1997, 2,500 shares of common stock were reserved for issuance upon
exercise of outstanding stock options originally granted under the 1979 Plan.
The Company's 1984 Stock Option Plan (the "1984 Plan") expired in 1994 and
no additional options may be granted thereunder. At December 31, 1997, options
for 21,500 shares of common stock were outstanding under the 1984 Plan.
F-12
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. CAPITAL STOCK--(CONTINUED)
Option activity under these plans is summarized as follows:
<TABLE>
<CAPTION>
FAIR MARKET VALUE
AT DATE OF GRANT
NUMBER OF PRICE --------------------
SHARES PER SHARE TOTAL PER SHARE TOTAL
--------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C>
Outstanding and exercisable
at December 31, 1994..... 505,500 $ .10 $50,000 $.02-.20 $50,000
--------- ----- ------- --------- -------
--------- ----- ------- --------- -------
Granted during 1995........ -- -- -- -- --
Exercised during 1995...... -- -- -- -- --
Terminated during 1995..... -- -- -- -- --
--------- ----- ------- --------- -------
--------- ----- ------- --------- -------
Outstanding and exercisable
at December 31, 1995..... 505,500 $ .10 $50,000 $.02-.20 $50,000
--------- ----- ------- --------- -------
--------- ----- ------- --------- -------
Granted during 1996........ -- -- -- -- --
Exercised during 1996...... -- -- -- -- --
Terminated during 1996..... -- -- -- -- --
--------- ----- ------- --------- -------
--------- ----- ------- --------- -------
Outstanding and exercisable
at December 31, 1996..... 505,500 $ .10 $50,000 $.02-.20 $50,000
--------- ----- ------- --------- -------
--------- ----- ------- --------- -------
Granted during 1997........ -- -- -- -- --
Exercised during 1997...... (477,500) .10 48,000 -- 48,000
Terminated during 1997..... (4,000) $ .10 -- -- --
--------- ----- ------- --------- -------
--------- ----- ------- --------- -------
Outstanding and exercisable
at December 31, 1997..... 24,000 $ .10 $ 2,000 $.02-.20 $ 2,000
--------- ----- ------- --------- -------
--------- ----- ------- --------- -------
</TABLE>
The following options to purchase the Company's common stock, all of which
are vested, were outstanding under the Plans on December 31, 1997:
<TABLE>
<CAPTION>
YEAR OF GRANT NUMBER OF SHARES EXERCISE PRICE EXPIRATION DATE
------------- ---------------- -------------- ---------------
<S> <C> <C> <C>
1989 5,000 .10* 7/29/99**
1994 19,000 .10 3/27/99
------
24,000
------
------
</TABLE>
- ------------------
* In 1993, the exercise price per share was reduced from $.20 per share to
$.10.
** In 1994, the expiration date was extended from 7/29/94 to 7/29/99.
9. OTHER INCOME (EXPENSE)
A summary of miscellaneous income (expense) for the years ended
December 31, 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- ------
<S> <C> <C> <C>
Interest income..................... $10,000 $ 5,000 $4,000
(Loss) gain on disposal of property,
plant and equipment............... (1,000) (4,000) 3,000
Other, net.......................... 45,000 42,000 --
------- ------- ------
$54,000 $43,000 $7,000
------- ------- ------
------- ------- ------
</TABLE>
F-13
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. EARNINGS (LOSS) PER COMMON SHARE
Below is a reconciliation between basic and diluted earnings (loss) per
common share under FAS 128 for the years ended December 31, 1997, 1996 and 1995
(in thousands except per share amounts):
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------- --------------------------- ---------------------------
PER PER PER
INCOME SHARES SHARE INCOME SHARES SHARE INCOME SHARES SHARE
------ ------ --------- ------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net income......... $1,645 $ 274 $ 122
Less dividends on
redeemable
preferred
stock......... (330) (330) (330)
------ ------ ----- ------ ------ ------- ------ ------ -------
Basic earnings
(loss) per
common share..... $1,315 6,009 $ .22 $ (56) 5,471 $ (0.01) $ (208) 5,382 $ (0.04)
------ ------ ----- ------ ------ ------- ------ ------ -------
------ ------ ----- ------ ------ ------- ------ ------ -------
Effect of dilutive
securities:
Stock options.... 24
Warrants......... 200
------ ------ ----- ------ ------ ------- ------ ------ -------
Diluted earnings
(loss) per
common share..... $1,315 6,267 $ .21 $ (56) 5,471 $ (0.01) $ (208) 5,382 $ (0.04)
------ ------ ----- ------ ------ ------- ------ ------ -------
------ ------ ----- ------ ------ ------- ------ ------ -------
</TABLE>
11. RELATED PARTY TRANSACTIONS
The Company and its subsidiaries paid legal fees of approximately $37,000,
$29,000 and $35,000 in 1997, 1996 and 1995, respectively, to law firms with
which the Chairman of the Board was affiliated.
12. 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 pending in various circuit courts in Alabama and Florida. Such
lawsuits sought unspecified damages alleging injuries to persons exposed to
products containing asbestos. As of March 2, 1998, the Company is not a
defendant in any lawsuits which allege injuries due to 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 a nd 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.
F-14
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
Acrocrete was a co-defendant in a lawsuit captioned "Stephen P. Zabow, II
and Karen I. Zabow, et al. vs. M/I Schottenstein Homes, Inc., Heiner
Construction Company and Acrocrete, Inc.", filed October 2, 1996 in Wake County,
North Carolina. The lawsuit involved claims by owners of eight homes in Cary,
North Carolina, against the general contractor, a subcontractor, and Acrocrete.
The claims related to the use of synthetic stucco in the construction of such
homes which was allegedly manufactured by Acrocrete. The lawsuit alleged
negligent misrepresentation, breach of warranty, unfair and deceptive trade
practices, fraud and negligence due to defective material, and requests punitive
damages. The plaintiffs alleged that Acrocrete knew of inherent defects
prevalent in synthetic stucco wall systems that permitted water intrusion to
cause moisture damage to the interior and wood framing of the houses. In October
1997, the Plaintiffs voluntarily dismissed Acrocrete with prejudice as a result
of the Plaintiff 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 claim as well as
a counter claim against the general contractor and installer of the product. The
Company's insurance carriers has accepted coverage and is 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 seven 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 dates ranging
from April 30, 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 $600 through June, 1998. The Company
is subject to an operating lease agreement for certain computer equipment which
provides for monthly rental payments of $1,000 through February, 1998.
Rental expenses incurred for operating leases were approximately $128,000,
$129,000 and $122,000, for the years ended December 31, 1997, 1996 and 1995,
respectively.
(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, Principal Executive
F-15
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
Officer 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 entitle 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 the Executive would have
received had the Employment Agreement continued for the full term; or
(ii) three times Executive's base salary then in effect on the effective date of
termination. The Executive would also be entitled to such severance in the event
the Company terminates the Executive without cause after a Change of Control.
In addition, Mr. Ehler was issued 75,000 shares of Common Stock of the
Company on July 31, 1997 pursuant to the terms of the Company's Restricted Stock
Plan. See "Note (8)(a) Common Stock".
(d) During the third quarter of 1996, the Company entered into an
employment arrangement with Fred H. Hansen to serve as President of the
Company's subsidiaries, Premix and Acrocrete. Mr. 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. 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 a
car allowance of $650 per month during his employment, as well as certain other
benefits, such as health and disability insurance.
13. CONCENTRATION OF CREDIT RISK
Concentrations of credit risk with respect to trade accounts receivable are
limited due to the number of entities comprising the Company's customer base.
However, 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. At December 31, 1997, accounts aggregating
$53,000, or approximately 3% of total gross trade accounts receivable were
deemed to be ineligible for borrowing purposes under the Company's borrowing
agreement with its commercial lender. The allowance for doubtful accounts at
December 31, 1997 of $176,000 is considered sufficient to absorb any losses
which may arise from uncollectible accounts receivable.
The Company places its cash with high quality commercial banks, however, at
December 31, 1997, the Company has cash balances with banks in excess of Federal
Deposit Insurance Corporation insured limits. Management believes the credit
risk related to these deposits is minimal.
F-16
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. SUBSEQUENT EVENT
Effective as of February 1, 1998, Acrocrete acquired the property, plant,
equipment and inventory of a wholesale distribution facility, engaged in the
sale of landscape stone and building materials. The closing for this transaction
occurred on March 2, 1998 for a total purchase price of approximately $400,000.
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 of $25,000 and is entitled to receive
additional consideration based upon the success of the plan
15. INTERIM FINANCIAL DATA--SUBSEQUENT EVENTS (UNAUDITED)
(a) Capital Stock
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 exercise price of all such options
was $.10 per share. All options outstanding under the Company's stock option
plans have been exercised. No additional options may be granted under any of the
Company's stock option plans.
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.
The term, as extended, of 1,316,999 warrants issued in the Company's 1983
public offering expired on April 30, 1998.
(b) Commitments and Contingencies
In April 1998, the Company entered into a lease agreement for approximately
20,400 square feet of warehouse and office space in a building to be constructed
in Kennesaw, Georgia. The lease, scheduled to commence upon the Company's
occupancy on October 1, 1998 and expire on September 30, 2005, provides for
initial monthly rental payments of $6,715, with escalations in monthly rent on
each annual anniversary date of the lease. The lease contains a renewal option
for five years. The Company terminated the lease at its Atlanta, Georgia
facility effective October 31, 1998.
In June 1998, the Company entered into a lease agreement for a 19,600
square foot facility in Pompano Beach, Florida. The term of the lease will
commence September 1, 1998 and expire on August 31, 2008. The lease provides for
minimum monthly rental payments of $7,350, with cost of living increases on each
anniversary date of the lease.
On October 6, 1998, as a result of mediation Acrocrete, Schottenstein, as
well as all codefendants, agreed to settle all pending claims. Acrocrete's
counsel has entered into a written mediation settlement agreement with
Schottenstein, which requires Acrocrete to pay $102,000 to Schottenstein's
insurer CNA. Acrocrete's insurers have agreed to pay this sum, without
contribution from Acrocrete, in order to avoid the significant costs associated
with litigating these 52 actions.
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 2000 year compliant.
F-17
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
THIS AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER ("Merger
Agreement"), dated as of October 12, 1998, among IMPERIAL INDUSTRIES, INC., a
Delaware corporation ("Imperial"), and IMPERIAL MERGER CORP., a newly-formed
Delaware corporation and a wholly-owned subsidiary of Imperial ("Merger Sub").
RECITALS
WHEREAS, the parties wish to provide for the merger (the "Merger") of
Imperial with and into Merger Sub, whereby it is contemplated that (i) each
issued and outstanding share of Imperial's common stock, $.10 par value
("Imperial Common"), will be converted, without any action by the holder
thereof, into one share of common stock, $.01 par value ("Sub Common"), of
Merger Sub and (ii) each issued and outstanding share of Imperial's $1.10
cumulative convertible redeemable preferred stock ("Preferred Stock") will be
converted, at the option of the holder thereof, into either (A) $4.75 in cash
and ten shares of Sub Common or (B) $2.25 in cash, an $8.00 principal amount
three year 8% subordinated debenture (each, a "Debenture") of Merger Sub and
five shares of Sub Common, in accordance with the terms set forth in this Merger
Agreement; and
WHEREAS, the parties hereto desire to set forth certain covenants and
agreements made by Imperial to Merger Sub, and by Merger Sub to Imperial, and
the conditions precedent to the consummation of the Merger; and
WHEREAS, the Boards of Directors of Imperial and Merger Sub have approved
and adopted this Merger Agreement and the Merger as a plan of reorganization
under the provisions of Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code"); and
WHEREAS, the parties previously entered into an Agreement and Plan of
Merger, dated as of April 6, 1998, which Agreement and Plan of Merger is hereby
amended and restated in its entirety by this Merger Agreement;
NOW, THEREFORE, in consideration of the premises and of the mutual
provisions, agreements and covenants herein contained, Imperial and Merger Sub
hereby agree as follows:
ARTICLE 1
THE MERGER
1.1 At the Effective Time (as hereinafter defined) of the Merger, Imperial
shall be merged with and into Merger Sub, which shall be the surviving
corporation (hereinafter sometimes called the "Surviving Corporation").
1.2 All shares of Merger Sub capital stock, if any, that are owned
directly or indirectly by Imperial shall be canceled without any action on the
part of the holder of such shares, and no stock of Merger Sub or other
consideration shall be delivered in exchange therefor.
1.3 Shares of Imperial Common and Preferred Stock (collectively, "Imperial
Capital Stock") issued and outstanding immediately prior to the Effective Time
shall be converted at the Effective Time as follows:
(a) Each share of Imperial Common shall by virtue of the Merger and
without any action by the holder thereof, be converted into one share of
Sub Common;
(b) Each share of Preferred Stock shall be converted into the right to
receive, at the option of the holder thereof and subject to the terms
below, either (A) $4.75 in cash and ten shares of Sub Common or (B) $2.25
in cash, a Debenture and five shares of Sub Common (collectively, the
"Merger Consideration").
i. Certificates representing shares of Preferred Stock surrendered
to Merger Sub within 60 days after the Effective Time by holders thereof
who do not select a desired form of Merger Consideration will be
converted into $2.25 in cash, a Debenture and five shares of Sub Common
(the "Default Merger Consideration").
ii. All shares of Preferred Stock not surrendered, or not properly
submitted, to Merger Sub within 60 days after the Effective Time, other
than shares as to which dissenters' rights of appraisal have been
properly asserted, will evidence the right to receive only the Default
Merger Consideration.
A-1
<PAGE>
1.4 At the Effective Time, Merger Sub shall make available to an exchange
agent selected by Merger Sub and reasonably acceptable to Imperial (the
"Exchange Agent"), for the benefit of those persons who immediately prior to the
Effective Time were the holders of Preferred Stock, sufficient cash and a
sufficient number of certificates representing Debentures and shares of Sub
Common required to effect the delivery of the aggregate Merger Consideration
required to be issued pursuant to Section 1.3 (such aggregate Merger
Consideration being hereinafter referred to as the "Exchange Fund"). The
Exchange Agent shall, pursuant to irrevocable instructions, deliver the Merger
Consideration contemplated to be issued pursuant to Section 1.3. The Exchange
Fund shall not be used for any other purpose.
(a) As soon as practicable after the Effective Time, the Exchange Agent
shall send a notice and transmittal form to each holder of record of the
Preferred Stock immediately prior to the Effective Time advising such holder of
the effectiveness of the Merger and the procedure for surrendering to the
Exchange Agent (who may appoint forwarding agents with the approval of Merger
Sub) the certificate or certificates to be exchanged pursuant to the Merger (the
"Certificates"). Upon the surrender for exchange of Certificates, together with
such letter of transmittal duly completed and properly executed in accordance
with instructions thereto and such other documents as may be required pursuant
to such instructions, the holder shall be paid promptly, without interest
thereon and subject to any required withholding of taxes, the Merger
Consideration to which such holder is entitled hereunder, and such Certificates
shall forthwith be canceled. Until so surrendered and exchanged, the
Certificates shall represent solely the right to receive the Merger
Consideration pursuant to Section 1.3, subject to any required withholding of
taxes. If any payment for the Preferred Stock is to be made to a person other
than the person in whose name the Certificates for such shares surrendered are
registered, it shall be a condition of the exchange that the person requesting
such exchange shall pay to the Exchange Agent any transfer or other taxes
required by reason of the delivery of such payment to a person other than the
registered owner of the Certificates surrendered or shall establish to the
satisfaction of the Exchange Agent that such tax has been paid or is not
applicable.
(b) In the event any Certificates shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Certificate to be lost, stolen or destroyed and, if required by Merger Sub,
the posting by such person of a bond in such amount, form and with such surety
as Merger Sub may direct as indemnity against any claim that may be made against
it with respect to such Certificate, the Exchange Agent will issue in exchange
for such lost, stolen or destroyed Certificate the amount of Merger
Consideration deliverable (and unpaid dividends and distributions) in respect
thereof pursuant to this Agreement.
(c) Subject to the agreement of the Exchange Agent, among other things:
(i) the Exchange Agent shall maintain the Exchange Fund as a separate fund to be
held for the benefit of holders of the Preferred Stock, which shall be promptly
applied by the Exchange Agent to making payments provided for in Sections 1.3
and 1.4; (ii) any portion of the Exchange Fund that has not been paid to holders
of the Preferred Stock pursuant to Sections 1.3 and 1.4 prior to that date which
is six months from the Effective Time shall be paid to Merger Sub, and any
holders of Preferred Stock who shall not have theretofore complied with
Section 1.4 shall thereafter look only to Merger Sub for payment of the Merger
consideration to which they are entitled under this Agreement; (iii) the
Exchange Fund shall not be used for any purpose that is not provided for herein;
and (iv) all expenses of the Exchange Agent shall be paid directly by Merger
Sub. Promptly following the date which is six months from the Effective Time,
the Exchange Agent shall return to Merger Sub the cash, securities and any other
instruments in its possession relating to the transactions described in this
Agreement, and the Exchange Agent's duties shall terminate. Thereafter, each
holder of Certificates formerly representing Preferred Stock may surrender such
Certificates to Merger Sub and (subject to applicable abandoned property,
escheat and similar laws) receive in exchange therefor the Merger Consideration
payable with respect thereto pursuant to Sections 1.3 and 1.4 hereof, without
interest, but shall have no greater rights against Merger Sub than may be
accorded to general creditors of Merger Sub under the General Corporation Law of
the State of Delaware (the "DGCL"). The Exchange Agent shall not be entitled to
vote or exercise any rights of ownership with respect to the Sub Common held by
it from time to time hereunder
(d) No dividends or other distributions with respect to Sub Common with a
record date after the Effective Time shall be paid to the holders of any
unsurrendered Certificates with respect to the Sub Common represented thereby
until the surrender of such Certificates in accordance with this Section 1.4.
Subject to the effect of applicable laws, following surrender of any such
Certificates, there shall be paid to the holder of the Certificates
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representing whole shares of Sub Common issued in exchange therefor, without
interest, (i) at the time of such surrender, the amount of dividends or other
distributions with a record date after the Effective Time theretofore paid with
respect to such shares of sub Common Stock, and (ii) at the appropriate payment
date, the amount of dividends or other distributions with a record date after
the Effective Time but prior to such surrender and with a payment date
subsequent to such surrender payable with respect to such shares of Sub Common.
1.5 If any holders of Imperial Capital Stock elect to exercise rights of
appraisal under Section 262 of the DGCL, Imperial shall give Merger Sub notice
thereof and Merger Sub shall have the right to participate in all negotiations
and proceedings with respect to any such exercise. If any dissenting holder of
Imperial Capital Stock shall fail to perfect or shall have effectively withdrawn
or lost any right to appraisal that such holder may have, the shares of Imperial
Capital Stock held by such holder shall be thereupon treated as though such
shares of Imperial Capital Stock had been converted into cash and/or securities
of Merger Sub pursuant to Section 1.3 hereof.
1.6 At the Effective Time, each outstanding stock option, convertible
debenture, warrant or any other right to acquire shares of Imperial Common (but
not including any such rights existing prior to the Effective Time incident to
the Preferred Stock) outstanding immediately prior to the Effective Time shall
be converted into a stock option, convertible debenture, warrant or other right
to acquire the shares of Sub Common, giving the holder the same rights with
respect to the same number of shares of Sub Common that the holder had with
respect to Imperial Common under such outstanding stock option, convertible
debenture, security, warrant or other right.
1.7 At the Effective Time, each outstanding share of Imperial Common held
as treasury stock by Imperial shall automatically, and without any action by
Imperial or Merger Sub, be converted into one share of Sub Common.
1.8 Each outstanding certificate which immediately prior to the Effective
Time represented shares of Imperial Common or warrants to purchase Imperial
Stock shall be deemed for all purposes to evidence ownership of an equal number
of shares of Sub Common or warrants to purchase Sub Common, respectively. No
exchange of such certificates will be required in order to evidence such
ownership.
1.9 All Merger Consideration delivered upon the surrender for exchange of
shares of Preferred Stock in accordance with the terms hereof shall be deemed to
have been delivered in full satisfaction of all rights pertaining to such shares
of Preferred Stock. There shall be no further registration of transfers on the
stock transfer books of the Surviving Corporation of the shares of Preferred
Stock which were outstanding immediately prior to the Effective Time of the
Merger. If, after the Effective Time of the Merger, certificates formerly
representing Preferred Stock are presented to the Surviving Corporation for any
reason, they shall be canceled and exchanged as provided in this Article 1.
1.10 Unless otherwise provided for by the parties to this Merger
Agreement, upon and after the Effective Time of the Merger, the Surviving
Corporation shall possess all the rights, privileges, powers and franchises, and
be subject to all the restrictions, disabilities and duties, of Imperial; and
all rights, privileges, powers and franchises of Imperial, and all property,
real, personal and mixed, and all debts due to Imperial shall be vested in and
be the property of the Surviving Corporation; and all debts, liabilities and
duties of Imperial shall thenceforth attach to the Surviving Corporation and may
be enforced against it to the same extent as if such debts, liabilities and
duties had been incurred or contracted by it.
ARTICLE 2
EFFECTIVE TIME
2.1 Subsequent to the execution of this Merger Agreement, Imperial shall
submit this Merger Agreement to its stockholders for their approval pursuant to
the applicable provisions of the DGCL.
2.2 Following the approval of the Merger by the stockholders of Imperial
and upon fulfillment or waiver of the conditions specified in Section 5.1
hereof, and provided that this Merger Agreement has not been terminated and
abandoned pursuant to Section 5.2 hereof, the parties will cause a Certificate
of Merger to be executed, acknowledged and filed with the Secretary of State of
the State of Delaware as provided in Section 251 of the DGCL and a copy of the
Certificate of Merger, certified by the Secretary of State of the State of
Delaware,
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to be recorded thereafter in the Office of the Recorder of New Castle County (or
other appropriate county) in the State of Delaware, all in accordance with the
provisions of Section 103 of the DGCL.
2.3 The Merger shall become effective on the date and time specified in
the Certificate of Merger filed with the Secretary of State of the State of
Delaware (the date and time so specified in such filing being herein sometimes
referred to as the "Effective Time").
ARTICLE 3
COVENANTS AND AGREEMENTS
3.1 Imperial shall: (i) present this Merger Agreement for adoption or
rejection by vote of the stockholders of Imperial at a Special Meeting (the
"Meeting") of Stockholders of Imperial; (ii) furnish to such holders such
documents and information in connection therewith as is required by law; (iii)
recommend approval of this Merger Agreement by such holders; and (iv) as sole
stockholder of Merger Sub, vote all shares of Sub Common owned by it to approve
this Merger Agreement.
3.2 Merger Sub shall not, prior to the Effective Time, without obtaining
the written consent of Imperial, permit any change in the Certificate of
Incorporation of Merger Sub or its capital stock.
3.3 Merger Sub as the Surviving Corporation shall be liable for all the
obligations of Imperial outstanding as of the Effective Time and hereby
expressly assumes all such obligations as of the Effective Time.
3.4 At the Effective Time, the Certificate of Incorporation of Merger Sub
shall be amended to change the name of Merger Sub to "Imperial Industries, Inc."
ARTICLE 4
CERTIFICATE OF INCORPORATION, BYLAWS
AND BOARD OF DIRECTORS OF SURVIVING CORPORATION
4.1 The Certificate of Incorporation of Merger Sub as constituted at the
Effective Time shall thereafter be the Certificate of Incorporation of the
Surviving Corporation, until it shall be amended as provided by law; provided,
however, that Article First of the Certificate of Incorporation of Merger Sub,
at the Effective Time and upon the filing of the Certificate of Merger, shall be
amended to read as follows:
"First: The name of the corporation is Imperial Industries, Inc."
4.2 The Bylaws of Merger Sub as constituted at the Effective Time shall
thereafter be the Bylaws of the Surviving Corporation, until they shall be
amended.
4.3 From and after the Effective Time the members of the Board of
Directors of the Surviving Corporation shall consist of those persons serving as
directors of Imperial immediately prior to the Effective Time, to hold office
until the expiration of their current terms and the election and due
qualification of their successors, or their prior resignation, removal or death.
4.5 From and after the Effective Time the officers of the Surviving
Corporation shall consist of those persons serving as officers of Imperial
immediately prior to the Effective Time, and in their respective positions, to
hold office until their successors are duly selected and qualified, or their
prior resignation, removal or death.
ARTICLE 5
CONDITIONS, AMENDMENTS, TERMINATION AND MISCELLANEOUS
5.1 The respective obligations of Merger Sub and Imperial to consummate
the Merger contemplated by this Merger Agreement are subject to the following
conditions, any and all of which (other than the conditions set forth in
Section 5.1(a) and (e)), may be waived by Merger Sub and Imperial:
(a) The Registration Statement on Form S-4 (File No. 333-62949) (the
"Registration Statement") relating to the Meeting, the Merger and the Sub
Common and Merger Consideration to be issued in connection therewith shall
have been declared effective by the Securities and Exchange Commission, and
no stop order shall be in effect with respect thereto;
(b) All other third-party consents which are required in order to
consummate the Merger and to effectuate the transactions incidental or
related thereto shall have been obtained;
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(c) Imperial shall have received an opinion of Rosen & Reade, LLP, tax
counsel to Imperial, in form and substance satisfactory to Imperial, with
respect to the tax consequences of the Merger;
(d) Imperial shall have received an opinion of Auerbach, Pollak &
Richardson, Inc., financial advisor to Imperial, in form and substance
satisfactory to Imperial, to the effect that the terms of the Merger are
fair to the stockholders of Imperial from a financial point of view; and
(e) The stockholders of Imperial shall have adopted and approved this
Merger Agreement.
5.2 This Merger Agreement may be terminated and the Merger may be
terminated and abandoned for any reason by resolution adopted by either of the
respective Boards of Directors of Merger Sub and Imperial at any time prior to
the Effective Time, even though this Merger Agreement shall have been approved
by the stockholders of either or both of Merger Sub and Imperial.
5.3 Each party hereto agrees that it will execute and deliver or cause to
be executed and delivered all such further assignments, assurances or other
instruments, and shall take or cause to be taken all such further actions as may
be necessary or desirable to consummate the Merger provided for herein and the
other transactions contemplated by this Merger Agreement.
5.4 This Merger Agreement shall be construed under and in accordance with
the laws of the State of Delaware.
5.5 This Merger Agreement of shall be binding upon and inure to the
benefit of the respective successors and assigns of the parties hereto.
5.6 This Merger Agreement may be executed in separate counterparts, each
of which, when so executed, shall be deemed to be an original, and all such
counterparts when taken together shall constitute but one and the same
instrument.
IN WITNESS WHEREOF, Imperial and Merger Sub have caused this Agreement to
be duly signed all as of the date first written.
IMPERIAL INDUSTRIES, INC.
By: /s/ HOWARD L. EHLER, JR.
---------------------------------
Howard L. Ehler, Jr.
Executive Vice President
IMPERIAL MERGER CORP.
By: /s/ BETTY J. MURCHISON
---------------------------------
Betty J. Murchison
Assistant Vice President
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APPENDIX B
AUERBACH, POLLAK & RICHARDSON, INC.
Investments Since 1908
October 12, 1998
Board of Directors
Imperial Industries, Inc.
1259 NW 21st Street
Pompano Beach, FL 33069
Ladies and Gentlemen:
Imperial Industries, Inc. (the "Company"), a Delaware corporation, and
Imperial Merger Corp. ("Merger Sub"), a Delaware corporation and wholly-owned
subsidiary of the Company, have entered into an agreement (the "Agreement")
providing for the merger (the "Merger") of the Company with and into Merger Sub,
whereby Merger Sub will be the surviving entity. The proposed consideration (the
"Proposed Consideration") is comprised of (i) the conversion of each issued and
outstanding share of the Company's common stock ("Imperial Common") into one
share of Merger Sub common stock ("Sub Common") and (ii) the conversion of each
issued and outstanding share of the Company's cumulative convertible redeemable
preferred stock ("Imperial Preferred") into, at the option of the holder
thereof, either (a) $4.75 in cash and ten shares of Sub Common or (b) $2.25 in
cash, an $8.00 principal amount three year 8% subordinated debenture of Merger
Sub and five shares of Sub Common. The Merger is expected to be consummated on
or around December 31, 1998.
You have asked us whether or not, in our opinion, the Proposed
Consideration to be received by the holders of Imperial Common and Imperial
Preferred in the Merger is fair, from a financial point of view, to such
shareholders.
In arriving at the opinion set forth below, we have among other things:
(1) Reviewed the Form S-4 Registration Statement relating to the
Merger and the Merger Consideration;
(2) Reviewed the Merger Agreement;
(3) Reviewed Imperial's most recently available Annual Report on Form
10-K; certain Quarterly Reports on Forms 10-Q of Imperial; Imperial's
Certificate of Designation of Preferred Stock; and certain internal
financial analyses and forecasts prepared by Imperial's management;
(4) Conducted meetings with members of management to discuss the
Company's businesses and business prospects;
(5) Performed a variety of financial and comparative analyses,
including, but not limited to:
(i) Evaluation of certain financial information and ratios of
publicly-traded companies similar to the Company;
(ii) Evaluation of projected discounted cash flows of the Company
and Merger Sub; and
(iii) Evaluation of the projected pro forma results of the Merger;
and
(6) Reviewed such other financial studies and analyses and performed
such other investigations and took into account such other matters as we
deemed necessary, including our assessment of general economic, market and
monetary conditions.
In preparing our opinion, we have relied upon and assumed without
independent verification the accuracy and completeness of all publicly available
financial information and all financial information furnished or otherwise
communicated to us by the Company. We have not made any appraisal of the assets
of the Company or Merger Sub, nor have we expressed any opinion as to what the
value of the Merger Consideration actually will be when issued pursuant to the
Merger or the price at any time at which the Sub Common will trade. Our opinion
does not address the underlying business decision to enter into the Merger.
450 Park Avenue, 8th Floor o New York, NY 10022
(212) 508-1300 o Fax (212) 508-1376
Toll Free 800-442-2923
Member National Association of Securities Dealers, Inc.
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Auerbach, Pollak & Richardson, Inc., is acting as financial advisor to the
Company in connection with the Merger and will receive a fee for our services,
including a fee for rendering this opinion and additional fees for our other
services as financial advisor. A substantial portion of such fees is contingent
upon the effectiveness of the Merger.
It is understood that this letter may not be disclosed or otherwise
referred to without our prior consent, except as may otherwise be required by
law or by a court of competent jurisdiction; provided, however, that we hereby
consent to the inclusion of this opinion in any registration statement or proxy
statement used in connection with the Merger so long as the opinion is included
in its entirety in such registration statement or proxy statement.
It is our opinion that the price of the Sub Common may be adversely
affected by the immediate dilution and liquidity of the converted Imperial
Preferred and/or market perceptions thereof. This fact notwithstanding, and on
the basis of, and subject to the foregoing, we are of the opinion that the
Proposed Consideration in the Merger is fair to the holders of Imperial Common
and Imperial Preferred, from a financial point of view.
Very truly yours,
AUERBACH, POLLAK & RICHARDSON, INC.
By: /s/ MICHAEL P. CONSIDINE
--------------------------------
Michael P. Considine
Executive Vice President
AUERBACH, POLLAK & RICHARDSON, INC.
450 Park Avenue o New York, NY 10022
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APPENDIX C
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
262 Appraisal Rights. (a) Any stockholder of a corporation of this State
who holds shares of stock on the date of the making of a demand pursuant to
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation, who
has otherwise complied with subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in writing
pursuant to Section 228 of this title shall be entitled to an appraisal by the
Court of Chancery of the fair value of the stockholder's shares of stock under
the circumstances described in subsections (b) and (c) of this section. As used
in this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section 251 (other than a merger effected pursuant to
Section 251(g) of this title), Section 252, Section 254, Section 257,
Section 258, Section 263 or Section 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or
(ii) held of record by more than 2,000 holders; and further provided that
no appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the holders of the surviving corporation as
provided in subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (l) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
Sections 251, 252, 254, 257, 258, 263 and 264 of this title to
accept for such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned by
the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
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the procedures of this section, including those set forth in subsections
(d) and (e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsections (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of his shares
shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to
Section 228 or Section 253 of this title, each constituent corporation,
either before the effective date of the merger or consolidation or within
ten days thereafter, shall notify each of the holders of any class or
series of stock of such constituent corporation who are entitled to
appraisal rights of the approval of the merger or consolidation and that
appraisal rights are available for any or all shares of such class or
series of stock of such constituent corporation, and shall include in such
notice a copy of this section; provided that, if the notice is given on or
after the effective date of the merger or consolidation, such notice shall
be given by the surviving or resulting corporation to all such holders of
any class or series of stock of a constituent corporation that are entitled
to appraisal rights. Such notice may, and, if given on or after the
effective date of the merger or consolidation, shall, also notify such
stockholders of the effective date of the merger or consolidation. Any
stockholder entitled to appraisal rights may, within 20 days after the date
of mailing of such notice, demand in writing from the surviving or
resulting corporation the appraisal of such holder's shares. Such demand
will be sufficient if it reasonably informs the corporation of the identity
of the stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given, provided, that
if the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the
day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the
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merger or consolidation, any stockholder who has complied with the requirements
of subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
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(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection
(d) of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within
60 days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
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APPENDIX D
IMPERIAL INDUSTRIES, INC.
PROJECTED INCOME STATEMENTS
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-----------------------------------------------------------------
1998 1999 2000
----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenue...................................... $17,951,400 $19,746,540 $21,721,194
Cost of Goods Sold........................... 12,027,438 67% 13,032,716 66% 14,249,103 66%
----------- ----------- -----------
Gross Profit................................. 5,923,962 33% 6,713,824 34% 7,472,091 34%
Selling, General & Administrative Expenses... 4,433,996 25% 4,877,395 25% 5,365,135 25%
----------- ----------- -----------
Operating Income............................. 1,489,966 8% 1,836,428 9% 2,106,956 10%
Interest Income (expense).................... (266,919) (213,828) (110,304)
----------- ----------- -----------
Pre-tax Income............................... 1,223,047 1,622,601 1,996,652
Income Taxes................................. 366,914 486,780 598,996
----------- ----------- -----------
Net Income................................... 856,133 5% 1,135,820 6% 1,397,656 6%
Preferred Stock Dividends.................... -0- -0- -0-
Net Income to Common Shareholders............ $ 856,133 5% $ 1,135,820 6% $ 1,397,656 6%
----------- ----------- -----------
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</TABLE>
D-1
