FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to _______________________
Commission file number 1-7190
------
IMPERIAL INDUSTRIES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 59-0967727
- --------------------------------------------------------------------------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1259 Northwest 21st Street, Pompano Beach, Florida 22069
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (954) 917-4114
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate the number of shares of Imperial Industries, Inc. Common Stock
($.10 par value) outstanding as of November 2, 1998: 6,607,961
Total number of pages contained in this document: 24
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Index
Page No.
--------
Part I. Financial Information
Consolidated Balance Sheets
September 30, 1998 and December 31, 1997 3
Consolidated Statements of Operations
Nine Months Ended September 30, 1998 and 1997 4
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1998 and 1997 5-6
Notes to Consolidated Financial Statements 7-17
Management's Discussion and Analysis of Results
of Operations and Financial Conditions 18-22
Part II. Other Information and Signatures
Item I. Legal Proceedings 23
Item 3. Default Upon Senior Securities 23
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
2
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
Assets 1998 1997
------ ---- ----
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 559,000 $ 552,000
Trade accounts receivable (less
allowance for doubtful accounts of
$209,000 in 1998 and $176,000 in 1997) 2,670,000 1,534,000
Inventories 1,662,000 1,204,000
Deferred taxes 31,000 350,000
Other current assets 125,000 60,000
------------ -------------
Total current assets 5,047,000 3,700,000
------------ -------------
Property, plant and equipment, at cost 3,410,000 2,974,000
Less accumulated depreciation (2,151,000) (2,100,000)
------------ -------------
Net property, plant and equipment 1,259,000 874,000
------------ -------------
Deferred taxes 450,000 450,000
------------ -------------
Other assets 134,000 104,000
------------ -------------
$6,890,000 $5,128,000
============ =============
Liabilities and Common Stock and
--------------------------------
other Stockholders' Deficit
---------------------------
Current liabilities:
Notes payable $1,278,000 $ 778,000
Current portion of long-term debt 152,000 130,000
Accounts payable 1,010,000 580,000
Accrued expenses and other liabilities 297,000 217,000
------------ -------------
Total current liabilities 2,737,000 1,705,000
------------ -------------
Long-term debt, less current maturities 932,000 819,000
------------ -------------
Preferred dividends in arrears 4,292,000 4,044,000
------------ -------------
Redeemable preferred stock, $1.00 par
value, $1.10 cumulative convertible
series; 300,121 shares outstanding; at
$10 per share redemption value 3,001,000 3,001,000
------------ -------------
Commitments and contingencies - -
------------ -------------
Common stock and other stockholders' deficit:
Common stock, $.10 par value, authorized
20,000,000 shares; 6,607,961 and
6,483,961 issued, respectively 666,000 663,000
Additional paid-in-capital 7,061,000 7,260,000
Accumulated deficit (11,692,000) (12,036,000)
------------ -------------
(3,965,000) (4,113,000)
Less cost of shares in treasury (47,863
shares in 1998 and 147,863 in 1997) (107,000) (328,000)
------------ -------------
Total common stock and other
stockholders' deficit (4,072,000) (4,441,000)
------------ -------------
$6,890,000 $5,128,000
============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September30, September 30,
---------------------------- ----------------------------
1998 1997 1998 1997
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 13,564,000 $ 12,155,000 $ 4,779,000 $ 4,151,000
Cost of sales 9,090,000 8,349,000 3,239,000 2,849,000
------------ ------------ ------------ ------------
Gross profit 4,474,000 3,806,000 1,540,000 1,302,000
Selling, general and
administrative expenses 3,443,000 2,817,000 1,257,000 925,000
------------ ------------ ------------ ------------
Operating income 1,031,000 989,000 283,000 377,000
------------ ------------ ------------ ------------
Other income (expense):
Interest expense (206,000) (257,000) (69,000) (90,000)
Miscellaneous income (expense) 110,000 (12,000) 24,000 (8,000)
------------ ------------ ------------ ------------
(96,000) (269,000) (45,000) (98,000)
------------ ------------ ------------ ------------
Income before income taxes 935,000 720,000 238,000 279,000
Income tax expense (343,000) -- (99,000) --
------------ ------------ ------------ ------------
Net income 592,000 720,000 139,000 279,000
Less: Dividends on redeemable
preferred stock (note 8b) (248,000) (248,000) (83,000) (83,000)
------------ ------------ ------------ ------------
Net income (loss) applicable to
common stockholders (note 9) $ 344,000 $ 472,000 $ 56,000 $ 196,000
============ ============ ============ ============
Basic earnings per common share $ .05 $ .08 $ .01 $ .03
============ ============ ============ ============
Weighted average common shares 6,546,672 5,825,278 6,607,961 6,220,589
============ ============ ============ ============
Diluted earnings per share $ .05 $ .08 $ .01 $ .03
============ ============ ============ ============
Weighted average common and potentially
dilutive shares 6,714,952 6,138.986 6,750,818 6,496,073
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statement.
4
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Increase (Decrease) In Cash and Cash Equivalents
<TABLE>
<CAPTION>
Nine Months Ended
September30,
---------------------------
1998 1997
---------- -----------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $592,000 $720,000
---------- -----------
Adjustments to reconcile net income
to net cash provided by:
Depreciation 130,000 110,000
Amortization 14,000 17,000
Provision for doubtful accounts 58,000 76,000
Income tax expense 319,000 -
Compensation expense - issuance of stock 32,000 41,000
(Gain) loss on disposal of property
and equipment (3,000) 2,000
(Increase) decrease in:
Accounts receivable (1,194,000) (716,000)
Inventory (458,000) 39,000
Prepaid expenses and other assets (119,000) (113,000)
Increase (decrease) in:
Accounts payable 430,000 18,000
Accrued expenses and other liabilities 80,000 129,000
---------- -----------
Total adjustments to net income (711,000) (397,000)
---------- -----------
Net cash (used in) provided by
operating activities (119,000) 323,000
---------- -----------
Cash flows from investing activities
Purchase of property, plant
and equipment (525,000) (215,000)
Proceeds from disposal of property
and equipment 13,000 8,000
Proceeds from exercise of stock options 2,000 48,000
---------- -----------
Net cash used in investing activities (510,000) (159,000)
---------- -----------
Cash flows from financing activities
Increase (decrease) in notes payable
banks - net 500,000 (36,000)
Proceeds from issuance of long-term debt 289,000 -
Repayment of long-term debt (153,000) (70,000)
---------- -----------
Net cash provided by (used in)
financing activities 636,000 (106,000)
---------- -----------
Net increase in cash and cash equivalents 7,000 58,000
Cash and cash equivalents
beginning of period 552,000 455,000
---------- -----------
Cash and cash equivalents end of period $559,000 $513,000
========== ===========
</TABLE>
See accompanying notes to consolidated financial statement.
5
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Increase (Decrease) In Cash and Cash Equivalents
-continued-
Nine Months Ended
September, 30
---------------------
1998 1997
---- ----
(Unaudited)
Supplemental disclosure
of cash flow information:
Cash paid during the nine months for:
Interest $211,000 $257,000
======== ========
Non-cash transactions:
During the nine months ended September 30, 1998,
58,333 (shares vested under the Company's
Restricted Stock Plan) and 124,000 shares of
Common Stock were issued to directors and
employees of the Company. For the nine months
ended September 30, 1997, 202,733 shares of
Common Stock were issued to directors and
employees of the Company $32,000 $41,000
======== ========
See accompanying notes to consolidated financial statements.
6
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Interim Financial Statements
----------------------------
The accompanying unaudited consolidated financial statements have
been prepared in accordance with the instructions to Form 10-Q and do
not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments considered necessary for a
fair presentation have been included. Operating results for the nine
months ended September 30, 1998 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1998.
The significant accounting principles used in the preparation of these
interim financial statements are the same as those used in the
preparation of the annual audited consolidated financial statements.
These statements should be read in conjunction with the financial
statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1997.
The preparation of financial statements in conformity with
generally accepted accounting principals requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
(2) Revenue Recognition Policy
--------------------------
Revenue from sale transactions is recorded upon shipment and
delivery of inventory to the customer, net of discounts and
allowances.
(3) Cash Equivalents
----------------
The Company has defined cash and cash equivalents as those highly
liquid investments with a maturity of three months or less when
purchased. Included in cash and cash equivalents at September 30, 1998
and December 31, 1997 are short term time deposits of $265,000 and
$259,000, respectively.
(4) Income Tax Policy
-----------------
The Company records income taxes using the liability method.
Under this method, deferred tax liabilities are recognized for
temporary differences that will result in taxable amounts in future
years. Deferred tax assets are recognized for temporary differences
that will result in deductible amounts in future years. These
temporary differences are primarily the result of net operating loss
carryforwards. Valuation allowances are recognized if it is more
likely than not that some or all of the deferred tax assets will not
be realized (See note 7).
7
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(5) Notes Payable
-------------
Included in notes payable at September 30, 1998, is $1,278,000
which represents the amount outstanding under a $2,000,000 line of
credit from a commercial lender to Premix-Marbletite Manufacturing Co.
("Premix") and Acrocrete, Inc. ("Acrocrete"), the Company's two
principal operating subsidiaries. The line of credit is
collateralized by Premix's and Acrocrete's accounts receivable and
inventory. The line of credit bears interest at the lender's prime
rate plus 2% (10-1/4% at November 2, 1998) and expires June 19, 1999,
subject to annual renewal. At September 30, 1998, the line of credit
limit available for borrowing aggregated $2,000,000, of which
$1,278,000 had been borrowed. For the nine months ended September 30,
1998 and 1997, the maximum borrowings at any month end were
$1,278,000 and $1,585,000 respectively. The average month end
amount outstanding during the nine months ended September 30, 1998 and
1997 periods were $1,020,000 and $1,426,000, respectively.
(6) Long-Term Debt and Current Installments of Long-Term Debt
---------------------------------------------------------
Included in long-term debt at September 30, 1998, are two
mortgage loans, collateralized by Premix's real property, in the
amounts of $457,000 and $306,000, respectively, less current
installments of $44,000. Premix sold the facility collateralized by
the $457,000 loan on October 2, 1998 and satisfied the mortgage loan.
The interest rate on the remaining mortgage loan was 10.5%. See Note
12, "Subsequent Events".
Effective as of February 1, 1998, Acrocrete, Inc. acquired the
property, plant, equipment and inventory of a wholesale distribution
facility, engaged in the sale of landscape stone and building
materials. The total purchase price of the acquisition was
approximately $400,000. A portion of the purchase price was financed
through a $184,000 mortgage note included in long-term debt at
September 30, 1998, collateralized by the facility's real property,
less current installments of $54,000. Principal and interest is
payable monthly over a four year period. Interest accrues at the rate
of 7 1/2% per annum.
Other long-term debt in the aggregate amount of $137,000, less
current installments of $54,000, relates principally to equipment
financing. The notes bear interest at various rates ranging from
8.75% to 15.39% and are payable monthly through 2002.
8
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(7) Income Taxes and Tax Credit Carryforwards
-----------------------------------------
At September 30, 1998, the deferred tax asset of $481,000
primarily consists of the tax effect of net operating loss
carryforwards of $11,300,000 less a valuation allowance of $3,300,000.
Net operating losses expire in varying amounts through 2009.
During 1997, the Company recognized $800,000 of deferred tax
assets as a result of releasing a portion of the valuation allowance
previously established due to the uncertainty of realizing net
operating losses. The remaining deferred tax assets were fully
reserved at December 31, 1997. The ultimate realization of the
remaining deferred tax assets is largely dependent on the Company's
ability to generate sufficient future taxable income. Management
believes that the valuation allowance at September 30, 1998 and
December 31, 1997 is appropriate, given the cyclical nature of the
construction industry and other factors including but not limited to
the uncertainty of future taxable income expectations beyond the
Company's strategic planning horizon.
In the nine months ended September 30, 1998, the Company
recognized income tax expense of $343,000 representing income before
taxes at the federal statutory rate of 35%, plus state income tax.
(8) Capital Stock
-------------
(a) Common Stock
------------
At September 30, 1998, the Company had outstanding 6,607,961
shares (net of Treasury shares) of Common Stock $.10 par value
per share ("Common Stock"). The holders of Common Stock are
entitled to one vote per share on all matters. In the event of
liquidation, holders of Common Stock are entitled to share
ratably in all the remaining assets of the Company, if any, after
satisfaction of the liabilities of the Company and the prior
preferential rights of the holders of outstanding preferred
stock, if any.
In February 1997, 33,333 shares of Common Stock were issued
to the President of Premix and Acrocrete as part of his
employment compensation.
In May 1997, 25,400 shares of Common Stock were issued upon
the exercise of stock options previously granted under the
Company's stock option plans.
In May 1997, the Company issued an aggregate of 144,000
shares of Common Stock to its Directors and certain employees of
the Company as part of their compensation for services rendered.
In July 1997, the Company's Board of Directors adopted a
9
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(8) Capital Stock (continued)
-------------
(a) Common Stock (continued)
------------
Restricted Stock Plan (the "Plan") for the benefit of certain key
employees. An aggregate of 241,667 shares of Common Stock were
reserved for issuance under the Plan. The Plan is administered
by the Company's Compensation Committee. In July 1997, an
aggregate of 241,667 restricted shares were issued to two
employees, subject to certain vesting requirements over a three
year period. An aggregate of 175,000 shares vests over a three
year period based on certain performance goals set forth in the
Plan. An aggregate of 66,667 shares vests over a two year period
based on continued employment with the Company by the holder. If
the vesting requirements are not met, the restricted shares
theretofore issued will be forfeited and thereafter be subject to
reallocation under the Plan. Prior to vesting, the holders
receive all of the benefits of ownership of the restricted
shares, including voting rights, but do not have the right to
transfer such unvested shares. As of September 30, 1998 an
aggregate of 58,333 shares had met the Plan's vesting
requirements and were released to holders.
In July 1997, the Company issued 25,000 shares of Common
Stock to an employee of the Company as part of his employment
compensation. In July 1997, an aggregate of 452,100 shares of
Common Stock were issued to the Company's Directors and the
Executive Vice President of the Company upon the exercise of
stock options previously granted under the Company's stock option
plans. The Company received aggregate cash proceeds of $45,210.
In April 1998, an aggregate of 24,000 shares of Common Stock
were issued to employees of the Company upon the exercise of
stock options previously granted under the Company's stock option
plans. The Company received aggregate cash proceeds of $2,400.
In May 1998, the Company issued from treasury an aggregate
of 100,000 shares of Common Stock to its Directors as part of
their compensation for services rendered.
(b) Preferred Stock - $1.10 Cumulative Convertible Series
-----------------------------------------------------
The authorized preferred stock of the Company consists of
5,000,000 shares, $1.00 par value per share. The preferred stock
is issuable in series, each of which may vary, as determined by
the Board of Directors, as to the designation and number of
shares in such series, the voting power of the holders thereof,
the dividend rate, redemption terms and prices, the voluntary and
involuntary liquidation preferences, and the conversion rights
and sinking fund requirements, if any, of such series.
At September 30, 1998, the Company had issued and
10
<PAGE>
INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(8) Capital Stock (continued)
-------------
(b) Preferred Stock - $1.10 Cumulative Convertible Series (continued)
-----------------------------------------------------
outstanding 300,121 shares of $1.10 cumulative convertible
preferred stock ("Preferred Stock"). The holders of Preferred
Stock are entitled to one vote per share on all matters without
regard to class, except that the holders of Preferred Stock are
entitled to vote as a separate class with regard to the issuance
of any equity securities which ranks senior or on parity with the
Preferred Stock, or to change or repeal any of the express terms
of the Preferred Stock in a manner substantially prejudicial to
the holders thereof. Each share of Preferred Stock is entitled
to cumulative quarterly dividends at the rate of $1.10 per annum
and is currently convertible into 1.149 shares of Common Stock.
The liquidation preference of the Preferred Stock is $10.00 per
share, plus accrued but unpaid dividends. The Preferred Stock
is callable, in whole or in part, by the Company at its option at
any time upon 30 days prior notice, at $11.00 per share, plus
accrued but unpaid dividends.
The Company has omitted dividends on its Preferred Stock for
the nine months ended September 30, 1998 in the amount of
$248,000 and for each quarter since the fourth quarter of 1985
aggregating $4,292,000 through September 30, 1998. The omission
of Preferred Stock dividends is a reduction in net income
applicable to common stockholders and have been recorded as non-
current liabilities on the Company's consolidated balance sheets.
The Preferred Stock is subject to redemption through a
mandatory sinking fund at a redemption price of $10.00 per share
on April 1 of each year. Through September 30, 1998, an
aggregate of 359,879 shares of Preferred Stock were converted
into 1,199,557 shares of Common Stock. As a result of these
conversions, the Company was required to redeem 36,121 shares in
1991 and an additional 66,000 shares for each year thereafter
until all such shares of Preferred Stock was redeemed.
The Company did not redeem any shares of Preferred Stock as
required on April 1, 1991 or any year thereafter. Under the
provisions of the sinking fund requirements, if an annual sinking
fund requirement is not met, it is added to the requirements for
the next year. The Preferred Stock has not been included in
common stockholders' deficit because of its mandatory redemption
feature.
The Company is prohibited from paying any cash dividends on
Common Stock and from purchasing or otherwise acquiring for
value, any shares of either Preferred or Common Stock, while the
Company is in default in the payment of any dividends on the
Preferred Stock and the sinking fund requirements are in arrears.
See Note 12 "Subsequent Events".
11
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(8) Capital Stock (continued)
-------------
(c) Warrants
--------
At September 30, 1998, the Company had 200,000 warrants
outstanding. Each warrant entitles the holder to purchase one
share of Common Stock at $.10 per share. In June 1997 the
Company extended the expiration date of such warrants to June 29,
2000 from June 28, 1997. Two directors acquired 150,000 and
50,000 warrants, respectively, in connection with a $400,000
financing in 1988. The loan has since been repaid by the
Company.
(d) Stock Options
-------------
In April 1998, an aggregate of 24,000 shares of Common Stock
were issued to employees pursuant to the exercise of stock
options previously granted under the Company's stock option
plans. The exercise price of all such options was $.10 per
share. No options remain outstanding under the Company's stock
option plans as of September 30, 1998 and all such stock option
plans will automatically terminate.
(9) Earning Per Common Share
------------------------
The Company has adopted Statement of Financial Accounting
Standards No. 128, Earnings Per Share ("FAS 128) which requires that
dual presentation of basic and diluted earnings per share for the
years ending after December 15, 1997. Basic earnings per common share
is computed by dividing net income, after deducting preferred stock
dividends accumulated during the year ("net income applicable to
common stockholders"), by the weighted average number of shares of
common stock outstanding each year. Diluted earnings per common share
is computed by dividing net income applicable to common stockholders
by the weighted-average number of shares of common stock and common
stock equivalents outstanding during each year. In accordance with
the provision of FAS 128, the Company has retroactively restated
earnings per common share.
(10) Commitments and Contingencies
-----------------------------
(a) Premix has not been a defendant in any asbestos lawsuits since
April 1996 when it was dismissed from 27 cases then pending in various
circuit courts in Alabama and Florida.
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
12
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(10) Commitments and Contingencies (continued)
-----------------------------
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 expires on 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
any asbestos related litigation. 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, 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. The Company has not been
a party to any such litigation since April 1996. Based upon historical
results, the Company does not believe any potential future claims
would be material. However, there can be no assurance that insurance
will ultimately cover the aggregate liability for damages to which
Premix may be exposed. Premix is unable at this time to determine the
exact extent of its exposure or outcome of the litigation of any other
similar cases that may arise in the future.
Acrocrete was a co-defendant in a lawsuit captioned "Stephen P.
Zabow, II and Karen I. Zabow, et al vs. M/I Schottenstein Homes, Inc.
("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.
However, 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. Based upon the
13
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(10) Commitments and Contingencies (continued)
-----------------------------
allegations, 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, without admitting any liability on the
underlying facts.
In addition, Acrocrete has been named a defendant in nine
similar lawsuits filed against Acrocrete and other parties,
(contractors and subcontractors), by homeowners, or their insurance
companies, claiming moisture intrusion damages on single family
residences.
The Company's insurance carriers have accepted coverage for all
nine of the above claims and are providing a defense under a
reservation of rights. Acrocrete is vigorously defending all of these
cases and believes it has meritorious defenses, counter-claims and
claims against third parties. Acrocrete is unable to determine the
exact extent of its exposure or 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 the 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.
14
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(10) Commitments and Contingencies (continued)
-----------------------------
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 $16.650
for four of its current operating facilities. The leases expire at
various dates ranging from December 31, 1998 to August 31, 2008.
Comparable properties at equivalent rentals are available for
replacement of these facilities if such leases are not extended.
In April 1998, the Company entered into a lease agreement for
approximately 20,400 square feet of warehouse and office space in a
building to be constructed in Kennesaw, Georgia. The lease, scheduled
to commence upon the Company's planned 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. In connection with the planned occupancy and lease of
this facility, the Company will terminate the lease at its Atlanta,
Georgia facility.
In addition, the Company leases one automobile under an
agreement which provides for a monthly payment of approximately $800
through June 2001.
(c) Howard L. Ehler, Jr. ("the Executive") is employed by the
Company pursuant to a one year renewable agreement (the "Employment
Agreement"). Mr. Ehler serves as Executive Vice President and Chief
Financial Officer of the Company at a current annual base salary of
$120,000. The Employment Agreement provides for automatic renewal for
additional one year periods as of July 1, of each year, unless the
Company or the Executive notifies the other party of an intent not to
renew at least 90 days prior to expiration of the existing term. The
Executive receives a car allowance, as well as certain other benefits,
such as health and disability insurance. The Executive is also
entitled to receive incentive compensation based upon targets
formulated by the Company's Compensation Committee.
Prior to a change in control, the Company has the right to
terminate the Employment Agreement without cause at any time upon
thirty days written notice, provided the Company pays to the Executive
a severance payment equivalent to 50% of his then current annual base
salary. As part of the Employment Agreement, the Executive has
agreed not to disclose confidential information and not to compete
with the Company during his term of employment and, in certain cases
15
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(10) Commitments and Contingencies (continued)
-----------------------------
for a two (2) year period following his termination.
In the event of a "Change in Control" (as defined in the
Employment Agreement), the Employment Agreement is automatically
extended to a three year period. Thereafter, the Executive will be
entitled to terminate his employment with the Company for any reason
at any time. In the event the Executive terminates his employment
after a Change of Control, the Executive will be entitled to receive
the lesser of (i) a lump sum amount equal to the base salary payments
and all other compensation and benefits Executive would have received
had the Employment Agreement continued for the full term; or (ii)
three times Executive's base salary then in effect on the effective
date of termination. The Executive would also be entitled to such
severance in the event the Company terminates the Executive without
cause after a Change of Control.
In addition, Mr. Ehler was issued 75,000 shares of Common Stock
of the Company on July 31, 1997 pursuant to the terms of the Company's
Restricted Stock Plan. See "Note (8) (a) Common Stock".
(d) During the third quarter of 1996, the Company entered into an
employment arrangement with Fred H. Hansen to serve as President of
the Company's subsidiaries, Premix and Acrocrete. Mr. Hanson
presently receives an annual base salary of $150,000 and a bonus based
upon earnings performance of the Subsidiaries. Under this
arrangement, Mr. Hansen received 33,333 shares of common stock in
February 1997. In addition. Mr. Hansen was issued 166,667 shares of
Common Stock on July 31, 1997 pursuant to the terms of the Company's
Restricted Stock Plan. See "Note (8) (a) Common Stock". Also Mr
Hansen received a moving allowance of $15,000 and is entitled to the
use of a Company auto, or car allowance of $650 per month during his
employment, as well as certain other benefits, such as health and
disability insurance. As part of the employment arrangement, Mr.
Hansen agreed not to disclose confidential information and not to
compete with the Company during his term of employment and for a one
year period following his termination.
(e) Management has undertaken a company wide program to prepare the
Company's computer systems and other applications for the year 2000.
Possible year 2000 problems create a risk for a company in that
unforeseen problems in its own computer systems or those of its third
party suppliers could have a material impact on a company's ability to
conduct its business operations. The purpose of the Company's program
is to identify significant year 2000 exposures and to update it
computer systems and business operations to deal with those exposures.
Any internal staff costs as well as consulting and other expenses to
prepare the systems for the year 2000 are not expected to be material
to the Company's operating results. The Company believes the software
used in its internal operations is 2000 year compliant.
16
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(11) Stock Based Compensation
------------------------
Effective 1996, the Company has adopted the disclosure provisions
of Statement of Financial Accounting Standards No. 123 ("SFAS No.
123"), "Accounting for Stock-Based Compensation" and has retained the
intrinsic value method of accounting for such stock-based
compensation. Had the fair value based accounting provisions of SFAS
No. 123 been adopted, the effect would not be material.
(12) Subsequent Events
-----------------
(a) On October 2, 1998, the Company sold its Miami 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.
(b) On November 2, 1998, the Company mailed a Proxy Statement/
Prospectus to Stockholders to consider a vote upon the proposed merger
of the Company into Imperial Merger Corp., a newly-formed wholly-owned
subsidiary of the Company at a special meeting of Stockholders
scheduled for December 17, 1998. Pursuant to the terms of the Merger
Agreement, subject to shareholder approval, the Company will merge
into the Subsidiary, and (i) each share of the Company's Common Stock
will be automatically converted into one share of the Subsidiary's
Common Stock and (ii) each share of the Company's Preferred Stock will
be converted, at the option of the Preferred Stockholder, into either
(A) $4.75 in cash and ten shares of the Subsidiary's Common Stock or
(B) $2.25 in cash and $8.00 principal amount three-year 8%
subordinated debenture of the Subsidiary and five shares of the
Subsidiary's Common Stock.
The proposed 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 plus
$400,000 in out of pocket expenses, and would incur aggregate
indebtedness of $2,400,968 (and annual interest obligations thereon of
approximately $192,000). However, management believes that cash from
operations, proceeds from the sale of its Miami facility, 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.
17
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Results of Operations
-------------------------------------------------------------
and Financial Condition
-----------------------
General
-------
The Company's business is related primarily to the level of
construction activity in Florida and Georgia. The majority of the
Company's products are sold to building materials dealers located
principally in Florida and Georgia who provide materials to
contractors and subcontractors engaged in the construction of
residential, commercial and industrial buildings and swimming
pools. One indicator of the level and trend of construction
activity is the amount of construction permits issued for the
construction of buildings. The level of construction activity is
subject to population growth, inventory of available housing units,
government growth policies and construction funding, among other
things.
Results of Operations
---------------------
Nine Months and Three Months Ended September 30, 1998 Compared to
-----------------------------------------------------------------
1997
----
Net sales for the nine months ended September 30, 1998
increased $1,409,000, or approximately 12%, compared to the same
period in 1997. For the three months ended September 30, 1998,
sales increased $628,000 or approximately 15%, compared to the same
quarter in 1997. The sales of landscape stone products through the
Company's new distribution outlet in Tampa, Florida, acquired
effective February 1, 1998, accounted for approximately $1,054,000
and $417,000 of the increase in sales for the nine months and three
months ended September 30, 1998, respectively.
Gross profit as a percentage of net sales for the nine months
and third quarter of 1998 was approximately 33% and 32% compared
to 31% and 31% in the comparable periods in 1997. The increase in
gross profit margins was principally due to savings realized from
raw material purchases, modifications made to the Company's
manufacturing process to gain greater production efficiency, and
cost reduction programs implemented in 1996 which continue to focus
on manufacturing processes for opportunities to reduce cost.
Selling, general and administrative expenses as a percentage
of net sales for the nine months and third quarter of 1998 was
approximately 25% and 26%, respectively, compared to 23% and 22%
for the comparable periods last year. Selling, general and
administrative expenses increased $626,000, or approximately 22%
for the nine months ended September 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
18
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations (continued)
-------------------------
Results of Operation (continued)
--------------------
Nine Months and Three Months Ended September 30, 1998 Compared to
-----------------------------------------------------------------
1997 (continued)
----
$178,000 related to preparation of the Company's plan to
restructure its capital structure through the proposed merger with
Imperial Merger Corp. The Company expects to incur an additional
$225,000 of out-of-pocket expenses in the fourth quarter in
connection with the proposed merger.
Miscellaneous income for the nine months ended September 30, 1998
includes $62,000 of reimbursements the Company received from the
State of Florida environmental authorities insurance program for
costs the Company incurred in prior years related to the removal of
underground fuel tanks located at its facilities.
For the nine months and three months ended September 30, 1998,
in accordance with SFAS 109, "Accounting For Income Taxes", the
Company is required to recognize income tax expense of $319,000 and
$75,000, respectively, representing income before taxes at the
statutory rate of 35%. Based on the Company's net operating loss
carryforwards, the Company is not expected to pay such taxes on its
federal income tax returns. The Company did not recognize income
tax expense in the September 30, 1997 comparable periods.
As a result of the above factors and after giving effect to
preferred stock dividends accrued, but not paid, the Company
derived net income applicable to common stockholders of $344,000,
or $.05 per share for the nine months ended September 30, 1998,
compared to net income of $472,000, or $.08 per share, in 1997.
Net income applicable to common stockholders includes charges of
$248,000in the 1998 and 1997 nine month periods for unpaid
cumulative dividends on preferred stock.
Liquidity and Capital Resources
-------------------------------
At September 30, 1998, the Company had working capital of
approximately $2,310,000 compared to working capital of $1,995,000
at December 31, 1997. As of September 30, 1998, the Company had
cash and cash equivalents of $559,000. 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
estimates it will realize an estimated gain of $1,044,000 from the
sale of the property.
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
19
<PAGE>
INDUSTRIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations (continued)
-------------------------
Liquidity and Capital Resources (continued)
-------------------------------
additional one year term unless either party gives the other notice
of nonextension 60 days prior to the expiration date. Premix and
Acrocrete, the Company's subsidiaries, borrow on the line of
credit, based upon and collateralized by, its eligible accounts
receivable and inventory. Generally, accounts not collected within
120 days are not eligible accounts receivable under the Company's
borrowing agreement with its commercial lender. At September 30,
1998, $1,278,000 had been borrowed against $2,000,000 in available
lines of credit limits.
Trade accounts receivable represent amounts due from building
materials dealers located principally in Florida and Georgia who
have purchased products on an unsecured open account basis and
sales directly to the end-user (contractors and subcontractors),
through Company owned warehouse distribution outlets. The Company
presently owns and operates three warehouse distribution outlets.
Accounts receivable at September 30, 1998 was $2,670,000 compared
to $1,534,000 at December 31, 1997. The increase in receivables of
$1,136,000, or approximately 74%, was primarily related to higher
seasonal sales levels prevalent during the period preceding
September 30, 1998 and to a lesser extent, slower payment practices
from certain of the Company's customers.
The Company's common stockholders' deficit of $4,072,000 at
September 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 nine months ended September
30, 1998, these actions enabled the Company to derive income before
taxes and the application of unpaid dividends on the redeemable
preferred stock in 1998 of $934,000 compared to income of $720,000
in the same nine 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
$4,292,000 of dividends in arrears on the preferred stock as of
September 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
20
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations (continued)
-------------------------
Liquidity and Capital Resources (continued)
-------------------------------
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, which resulted in a merger proposal being
submitted to the Company's stockholders on December 17, 1998
pursuant to a Proxy Statement/Prospectus dated November 2, 1998.
The proposed 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. The out-of-pocket expenditures
will be incurred regardless of whether stockholder approval of the
Merger is obtained. Through September 30, 1998, the Company has
incurred approximately $178,000 in out-of-pocket expenses. Upon
stockholder approval of the Merger, 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. The investment banker has received
cash consideration of $50,000 and is entitled to receive additional
consideration based upon the success of the plan.
Effective February 1, 1998, Acrocrete, Inc. acquired the
property, plant, equipment and inventory of a wholesale
distribution facility engaged in the sale of landscape stone and
building materials. The total purchase price was approximately
$400,000. A portion of the purchase price was financed through the
issuance of a $215,000 mortgage note payable monthly over four
years, with interest at the rate of 7 1/2% per annum.
The Company expects other capital expenditures in the fourth
quarter of 1998 for improvements to its equipment and manufacturing
facilities to require aggregate cash expenditures of approximately
$125,000. In the first quarter of 1998, the Company added
approximately 6,000 square feet of warehouse space to its
Casselberry, Florida manufacturing facility to consolidate Florida
manufacturing operations to more closely mirror geographic market
demands. Other projects planned in 1998 are aimed at relocating
and expanding the Company's manufacturing facility in Atlanta,
Georgia, and the sale and relocation of the Company's manufacturing
/distribution facility in Miami to a leased location in Broward
21
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations (continued)
-------------------------
Liquidity and Capital Resources (continued)
-------------------------------
County. The Company expects to complete the above cost reduction
projects in 1998 from cash on hand, or borrowings under its line
of credit, and will continue to focus on the efficient utilization
of its resources in its efforts to accomplish further cost
reductions.
In April 1998, the Company entered into a lease agreement for
a new 20,400 square foot facility in Kennesaw, Georgia, planned for
occupancy during the fourth quarter of 1998. In June 1998, the
Company entered into a lease agreement for a 19,600 square foot
facility in Pompano Beach, Florida to replace the Miami facility
sold on October 2, 1998.
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 cash shortfalls, if any, from
operations and provide adequate liquidity for the next twelve
months to complete the merger proposal and support the cash
requirements of its capital expenditure programs.
The ability of the Company to maintain and improve its long
term liquidity is dependent upon the Company's ability to
successfully (i) maintain profitable operations; (ii) pay or
otherwise satisfy omitted preferred stock dividends and preferred
stock redemption requirements as provided in the merger proposal;
and (iii) resolve current litigation on terms favorable to the
Company.
22
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
PART II. Other Information
Item 1. Legal Proceedings
-----------------
See notes to Consolidated Financial Statements, Note 10(a),
set forth in Part I Financial Information.
Item 3. Default Upon Senior Securities
------------------------------
The Company has 300,121 shares of $1.10 cumulative convertible
preferred stock issued and outstanding. Each share of preferred
stock is entitled to cumulative quarterly dividends at the rate of
$1.10 per annum. As of September 30, 1998, the Company has omitted
dividends aggregating $4,292,000 on its outstanding preferred
stock. Also, under the provisions of the sinking fund requirements
of the preferred stock, the Company was required to redeem 36,121
shares in 1991 and an additional 66,000 shares of preferred stock
on April 1 each year thereafter until fully redeemed. The Company
has been unable to satisfy the sinking fund requirements and did
not redeem any shares of preferred stock since April 1991. For a
more complete description, see Note 8 (b) of Notes to Consolidated
Financial Statements.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
Exhibit 4.1 Certificate of Designation with respect to the
Preferred Stock [Incorporated by reference to the Company's
registration statement on Form S-2, File No. 1-7190, dated February
22, 1983].
(b) Reports on Form 8-K
-------------------
None
23
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IMPERIAL INDUSTRIES, INC.
By: /S/ Howard L. Ehler, Jr.
-----------------------------------
Howard L. Ehler, Jr.
Executive Vice President/
Principal Executive Officer
By: /S/ Betty Jean Murchison
-----------------------------------
Betty Jean Murchison
Principal Accounting Officer/
Assistant Vice President
November 12, 1998
24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
1998 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-Q
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 559
<SECURITIES> 0
<RECEIVABLES> 2,879
<ALLOWANCES> (209)
<INVENTORY> 1,662
<CURRENT-ASSETS> 5,047
<PP&E> 3,410
<DEPRECIATION> (2,151)
<TOTAL-ASSETS> 6,890
<CURRENT-LIABILITIES> 2,737
<BONDS> 0
3,001
0
<COMMON> 666
<OTHER-SE> (4,738)
<TOTAL-LIABILITY-AND-EQUITY> 6,890
<SALES> 13,564
<TOTAL-REVENUES> 13,674
<CGS> 9,090
<TOTAL-COSTS> 12,533
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 206
<INCOME-PRETAX> 935
<INCOME-TAX> 343
<INCOME-CONTINUING> 592
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<NET-INCOME> 344
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