SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _____________________ to ________________________
Commission file number 1-7190
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IMPERIAL INDUSTRIES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 65-0854631
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1259 Northwest 21st Street, Pompano Beach, Florida 33069-1417
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (954) 917-4114
---------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
-----------------------------
(Title of Class)
8% Subordinated Debentures
--------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (S229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock of the Registrant held by
non-affiliates computed by reference to the average bid and asked price of the
registrant's Common Stock ($.01 par value) on March 10, 1999 is: $2,221,029
Number of shares of Imperial Industries, Inc. Common Stock ($.01 par
value) outstanding on March 10, 1999: 8,182,571
Total number of pages contained in this document: 54
<PAGE>
PART I
Item 1. Business
--------
Imperial Industries, Inc., through a merger with its
predecessor corporation, is a Delaware corporation organized in
1968. The Company's executive offices are located at 1259 Northwest
21st Street, Pompano Beach, Florida 33069 and the telephone number
at such offices is (954) 917-4114.
Merger
------
On October 12, 1998, the Board of Directors approved a plan
merging Imperial Industries, Inc. into Imperial Merger Corp., a
newly-formed, wholly-owned subsidiary of the Company, (the
"Merger"). The Merger was approved at a special meeting of the
Company's Stockholders on December 17, 1998, with the Merger
becoming effective December 31, 1998. On the effective date of the
Merger, Imperial Merger Corp. changed its name to Imperial
Industries, Inc. (hereinafter referred to as (the "Company").
Upon consummation of the Merger, each share of common stock
outstanding prior to the Merger was automatically converted to one
share of common stock of the Company. Each share of preferred stock
outstanding prior to the Merger was converted, at the holder's
option, into either (a) $4.75 in cash and ten shares of the
Company's common stock, or (b) $2.25 in cash, an 8% subordinated
debenture, face value $8.00, and five shares of the Company's common
stock. Holders representing 81,100 preferred shares have elected
dissenters rights, which, if perfected under Delaware law, would
require the Company to pay to the holders the fair value of their
stock in cash to be determined by the Delaware Chancery Court.
In accordance with the Merger, the Company is presently
required to issue $984,960 8% Subordinated Debentures, 1,574,610
shares of common stock and pay $732,550 in cash to the former
preferred shareholders who have not elected dissenters rights. The
Company does not know the amount which would be payable to
dissenting holders who ultimately perfect their dissenters rights.
Those dissenting stockholders who fail to perfect their dissenters
rights under Delaware law would ultimately receive the consideration
in Option (b) above. For a more complete description of the Merger,
see Note (1a) of Notes to Consolidated Financial statements.
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 part of the United States as well as foreign countries.
In addition, the Company has four distribution outlets through which
it markets certain of its products directly to end users. The
Company's products are used in the construction industry by
developers, builders, contractors, and sub-contractors.
The Company's business is directly related to the level of
activity in the new and renovation construction market in Florida,
and to a lesser extent other states in the Southeastern part of the
United
2
<PAGE>
Item 1. Business (continued)
--------
General (continued)
-------
States. The Company's products are used by developers, general
contractors and subcontractors in the construction or renovation 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 part
of the United States.
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 roof. 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 color-impregnating materials.
Premix accounted for approximately 42%, 49% and 49% of the
Company's consolidated annual revenues in the fiscal years ended
December 31, 1998, 1997 and 1996, 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 the State of
Florida and foreign countries. 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
3
<PAGE>
Item 1. Business (continued)
--------
Premix (continued)
------
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.
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, 1998, 1997 and 1996,
Acrocrete's sales accounted for approximately 58%, 51% and 51%,
respectively, of the Company's consolidated annual revenues.
Suppliers
---------
Premix's raw materials and products are purchased from
approximately 26 suppliers. While five suppliers account for
approximately 52% 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 24
suppliers, of which five account for approximately 59% 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
4
<PAGE>
Item 1. Business (continued)
--------
Marketing and Sales (continued)
-------------------
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. No
one distributor has accounted for 10% or more of total sales during
the past three years. The Company believes the loss of any one
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. Although the Company
primarily markets its products to distributors through Company
salesmen, located in the Southeastern United States who promote both
Premix and Acrocrete products, direct sales to end users now account
for over 34% of total revenues.
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 3,200 to 11,400
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 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.
In February 1998, the Company acquired a facility in Tampa,
Florida that was engaged primarily in the distribution of landscape
stone products. The Company is utilizing this distribution facility
in an attempt to gain market share for the sale of its products on
the West Coast of Florida. The Company subsequently opened a fourth
distribution facility in the third quarter of 1998 in Dallas,
Georgia, to provide greater customer service in the Northwest
Atlanta area and increase market share. The Company presently is
evaluating the feasibility of opening 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.
5
<PAGE>
Item 1. Business (continued)
--------
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 prices
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 have
not been material in past years, and expenditures for 1999 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 former 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 in 1998 and does not
anticipate receiving any additional amounts in the future.
Employees
---------
The Company and its subsidiaries had 86 full time employees as
of December 31, 1998. The Company considers its employee relations
to be satisfactory. The Company's employees are not subject to any
collective bargaining agreement.
6
<PAGE>
Item 2. Properties
----------
The Company and its subsidiaries maintain a total of 7
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:
Approximate Owned/
Location Sq. Footage Leased Company Products
-------- ----------- ------ ----------------
Pompano Beach, Fl 19,600 Leased Premix (Manufacturing)
Casselberry, Fl. 26,000 Owned Premix (Manufacturing)
Kennesaw, Ga. 20,400 Leased Acrocrete (Manufacturing)
Tampa, Fl. 8,470 Owned Acrocrete (Distribution)
Jacksonville, Fl. 11,400 Leased Acrocrete (Distribution)
Norcross, Ga. 7,600 Leased Acrocrete (Distribution)
Dallas, Ga. 3,200 Leased Acrocrete (Distribution)
The Casselberry facility is encumbered by a first mortgage lien
with an outstanding principal balance at December 31, 1998 of
$304,000. In June 1998, the Company entered into a lease agreement
for the facility in Pompano Beach, Florida for rental payments of
$7,350 per month and expires August 31, 2008. The Pompano facility
replaced its former manufacturing facility in Miami, Florida. On
October 2, 1998, the Company sold its Miami, Florida manufacturing
facility for $1,406,000 and received net cash proceeds of $801,000
after satisfaction of the mortgage and payment of commissions and
closing costs. The Tampa facility, is encumbered by a first mortgage
lien in the amount of $170,000 at December 31, 1998.
In December 1998, Acrocrete moved its manufacturing operation
to a new facility in Kennesaw, Georgia. The lease on the Kennesaw
facility provides for initial monthly rental payments of $6,715,
with escalations in monthly rent on each anniversary date. The lease
expires September 30, 2005.
The facilities located in Norcross, Georgia, and Dallas,
Georgia and Jacksonville, Florida are utilized for the distribution
of Acrocrete's products directly to the end-user (contractor and
subcontractor). The lease on the Jacksonville facility expires
December 31, 2001, and provides for rental payments of $3,675 per
month. Acrocrete leases the Norcross facility at $3,037 per month,
through the lease expiration date of April 30, 1999. The lease on
the Dallas facility provides for monthly rental payments of $1,270
and expires May 31, 1999. The Company may elect to not renew the
lease for the Norcross facility in order to move to a larger
facility. Comparable properties at equivalent rentals are available
for replacement of these facilities if such leases are 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 has recently relocated
certain operations to new facilities to consolidate, expand and
upgrade it manufacturing capabilities.
7
<PAGE>
Item 3. Legal Proceedings
-----------------
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
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 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 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 from approximately 193
cases. Based upon historical results, the Company does not believe
any potential future claims would be material. However, there can be
no assurance that insurance will ultimately cover the aggregate
liability for damages to which Premix may be exposed. Premix is
unable, at this time, to determine the exact extent of its exposure
or outcome of the litigation of any other similar cases that may
arise in the future.
Acrocrete was a co-defendant in a lawsuit captioned "Stephen P.
Zabow, II and Karen I. Zabow, et al. vs. M/I Schottenstein Homes,
Inc. ("Schottenstein"), et al., Heiner Construction Company, and
Acrocrete, Inc.", filed October 2, 1996 in Wake County, North
Carolina. The lawsuit against Acrocrete and the other parties
alleged negligent misrepresentation, breach of warranty, fraud,
unfair and deceptive trade practices and requests punitive damages.
In October 1997, the plaintiffs voluntarily dismissed Acrocrete with
prejudice as a result of the plaintiff's 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. The lawsuit involved 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, to which Scottenstein received an
assignment of any claims which the homeowners may have against any
other contractors, subcontractors, material men, or suppliers. Based
upon the allegations, the Court severed this lawsuit into 52
separate actions. Acrocrete's insurance carriers have accepted
coverage and
8
<PAGE>
Item 3. Legal Proceedings (continued)
-----------------
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 insurers paid $102,000 to
Schottenstein's insurer, CNA without contribution from Acrocrete, in
order to avoid the significant costs associated with litigating
these 52 actions. As of March 15, 1999, all 52 of these actions were
dismissed with prejudice as a result of stipulations which were
executed and filed by all parties.
In addition, Acrocrete has been named a defendant in sixteen
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
thirteen of the above claims and are providing a defense under a
reservation of rights. The Company expects its insurance carriers to
accept coverage for the other three recently filed claims. Acrocrete
is vigorously defending all of these cases and believes it has
meritorious defenses, counter-claims and claims against third
parties. Acrocrete is unable to determine the exact extent of its
exposure or 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.
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.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
At a Special Meeting of Stockholders held on December 17, 1998,
the Company proposed a merger to its stockholders between the
Company
9
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders (continued)
---------------------------------------------------
and Imperial Merger Corp., a Delaware corporation and a wholly-owned
subsidiary of the Company, providing for the Merger of the Company
with and into Imperial Merger Corp., effective December 31, 1998,
with Imperial Merger Corp. being the surviving entity. The principal
purpose of the Merger was to restructure the Company's
capitalization to enhance stockholder value for the holders of the
Company's common and preferred Stock by retiring all of the
outstanding shares of preferred stock and eliminating the accrued
dividends thereon. The Merger required a majority vote of the issued
and outstanding shares of common and preferred stock, voting
separately as to class, for approval. Pursuant to the terms of the
Merger, each share of the Company's Common Stock was to be
automatically converted into one share of Imperial Merger Corp.
common stock and each share of the Company's preferred stock would
be converted, at the option of the Preferred Stockholder, into
either (A) $4.75 in cash and ten shares of Imperial Merger Corp.
common stock, or (B) $2.25 in cash, an $8.00 principal amount three
year 8% subordinated debenture of Imperial Merger Corp., and five
shares of Imperial Merger Corp. common stock.
The following votes were cast on the Merger:
Common Stock
------------
For Against Abstain Broker Non Vote
--- ------- ------- ---------------
4,379,691 175,493 86,553 None
Preferred Stock
---------------
For Against Abstain Broker Non Vote
--- ------- ------- ---------------
155,573 68,900 2,825 None
The Merger was approved by the stockholders effective December
31, 1998. Accordingly, the preferred stock was retired and all
accumulated accrued dividends were eliminated. Imperial Merger Corp.
subsequently changed its name to Imperial Industries, Inc.
Preferred Stockholders owning an aggregate of 95,901 shares
elected to receive Option (A), while holders of 123,120 shares
either elected, or were defaulted to, Option (B) in accordance with
the plan of Merger. The holders of the balance of such shares of
preferred stock elected dissenters' rights. As a result, the Company
is initially required to pay $732,550 in cash, issue $984,960 in
face value of debentures and 1,574,610 shares of common stock to its
former Preferred Stockholders.
Holders of preferred stock electing dissenters' rights will be
required to follow the procedures set forth in Section 262 of the
Delaware General Corporation Law to perfect their rights. If such
procedures are followed, such holders will receive cash payments
equal to the fair value of such shares as determined pursuant to
Section 262.
10
<PAGE>
Item 5. Market for the Registrant's Common Equity and Related
-----------------------------------------------------
Stockholder Matters
-------------------
The Company's Common Stock is traded in the over-the-counter
market. The following table sets forth the high and low bid
quotations of the Common 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.
Fiscal, 1997 High Low
------------ ---- ---
First Quarter $.20 $.08
Second Quarter .28 .20
Third Quarter .45 .20
Fourth Quarter .44 .29
Fiscal, 1998 High Low
------------ ---- ---
First Quarter $.40 $.25
Second Quarter .58 .36
Third Quarter .44 .29
Fourth Quarter .40 .28
The Company has not paid any cash dividends on its Common
Stock since 1980.
On March 10, 1999, the Common Stock was held by 2,081
stockholders of record.
As of March 10, 1999, the closing bid and asked prices of the
Common Stock was $.34 and $.44, respectively.
11
<PAGE>
Item 6. Selected Financial Data
-----------------------
The following is a summary of selected financial data (in thousands
except as to per share amounts) for the five years ended December 31,
1998:
<TABLE>
<CAPTION>
Statements of Operations Data Year Ended December 31,
- ----------------------------- --------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales $18,739 $15,774 $13,742 $11,615 $7,996
------- ------- -------- -------- --------
Cost of sales 12,823 10,867 9,881 8,239 5,726
------- ------- -------- -------- --------
Selling, general and administrative
expenses 4,645 3,740 3,313 2,979 2,104
------- ------- -------- -------- --------
Interest expense (272) (329) (317) (282) (204)
------- ------- -------- -------- --------
Merger costs (456) - - - -
------- ------- -------- -------- --------
Miscellaneous income, net 1,218 54 43 7 23
------- ------- -------- -------- --------
Income (loss) before income taxes 1,761 892 274 122 (15)
------- ------- -------- -------- --------
Income tax benefit, net 296 753 - - -
------- ------- -------- -------- --------
Net income (loss) 2,057 1,645 274 122 (15)
------- ------- -------- -------- --------
Less: dividends on redeemable
preferred stock (248) (330) (330) (330) (330)
------- ------- -------- -------- --------
Less: net charge for elimination
of preferred stock (975) - - - -
------- ------- -------- -------- --------
Net income (loss) applicable to
common stockholders $ 834 $1,315 $ (56) $ (208) $ (345)
------- ------- -------- -------- --------
Net income (loss) per share
applicable to common stockholders
Basic $ .13 $ .22 $ (.01) $ (.04) $ (.06)
------- ------- -------- -------- --------
Diluted $ .12 $ .21 $ (.01) $ (.04) $ (.06)
------- ------- -------- -------- --------
Number of shares used in computation
of income (loss) per share: Basic 6,566 6,009 5,471 5,382 5,317
------- ------- -------- -------- --------
Diluted 6,715 6,267 5,471 5,382 5,317
------- ------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
Balance Sheets Data
- -------------------
As of December 31,
--------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Working capital $2,439 $1,995 $ 872 $ 733 $ 334
------- ------- --------- -------- --------
Total assets $7,561 $5,128 $4,116 $3,747 $3,067
------- ------- --------- -------- --------
Long-term debt,
less current maturities $1,316 $ 819 $ 895 $1,000 $ 576
------- ------- --------- -------- --------
Obligation for appraisal rights $ 877 $ - $ - $ - $ -
------- ------- --------- -------- --------
Redeemable preferred stock $ - $3,001 $3,001 $3,001 $3,001
------- ------- --------- -------- --------
Preferred dividends in arrears(1) $ - $4,044 $3,714 $3,384 $3,054
------- ------- --------- -------- --------
Common stock and other
stockholders' equity (deficit) $2,281 $(4,441) $(5,879) $(5,846) $(5,641)
------- ------- --------- -------- --------
Current ratio 1.8 to 1 2.2 to 1 1.4 to 1 1.3 to 1 1.2 to 1
------- ------- --------- -------- --------
</TABLE>
- ---------------
(1) No cash dividends were paid on the cumulative redeemable preferred
stock since 1985. The preferred stock and all accumulated accrued
unpaid dividends were eliminated at December 31, 1998, upon the
effective date of the Merger.
12
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations
-------------------------
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
---------------------
Year Ended December 31, 1998 Compared to 1997
---------------------------------------------
Net sales in 1998 increased $2,965,000, or approximately 19%
compared to 1997. 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. Sales derived from the Company's
new distribution outlet in Tampa, Florida, acquired effective
February 1, 1998, accounted for approximately $1,790,000 of the
increase in sales.
Gross profit as a percentage of net sales for 1998 was
approximately 32%, compared to 31% in 1997. The increase in gross
profit margins was principally due to savings realized from raw
material purchases and modifications made to the Company's
manufacturing process to gain greater production efficiency.
Selling, general and administrative expenses as a percentage of
net sales for 1998, was approximately 25%, compared to 24% in 1997.
Selling, general and administrative expenses increased $905,000, or
approximately 24%, in 1998 compared to 1997. The increase in
expenses was primarily due to additional sales and delivery expenses
associated with servicing the increased volume of business and costs
related to the Company's new distribution outlet in Tampa, Florida,
which was acquired in February 1998. In addition, the Company
estimates it incurred approximately $122,000 in costs in connection
with relocating four of its facilities to new locations in 1998.
Miscellaneous income for 1998 includes, a gain of $1,066,000
derived from the sale of it former manufacturing facility in Miami,
Florida and $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. Miscellaneous
expenses includes approximately $456,000 in fees and expenses
13
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations (continued)
-------------------------
Year Ended December 31, 1998 Compared to 1997 (continued)
---------------------------------------------
associated with the Merger and elimination of the preferred stock
in 1998.
In 1998, the Company recognized a $927,000 tax benefit as a
result of the releasing of a portion of the valuation allowance on
the Company's deferred tax assets. For the fiscal year ended
December 31, 1998, the Company recognized a net income tax benefit
of $320,000 representing income before taxes at the statutory rate
of 35% less the tax benefit described above. Based on the Company's
net operating loss carryforwards, the Company is not expected to pay
such taxes on its federal income tax for 1998.
As a result of the above factors and after giving effect to the
Merger and preferred stock dividends accrued, but not paid in 1998
and 1997, the Company derived net income applicable to common
stockholders of $834,000 or $.13 per share for 1998, compared to net
income of $1,315,000 or $.22 per share in 1997. Net income
applicable to common stockholders includes charges of $248,000 in
1998 and $330,000 in 1997 for unpaid cumulative dividends on
preferred stock which was retired in 1998. In addition, in
connection with the Merger, net income applicable to common
stockholders has been reduced by $975,000.
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.
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 benefit as a result of releasing a portion of the
14
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations (continued)
-------------------------
Year Ended December 31, 1997 Compared to 1996 (continued)
---------------------------------------------
valuation allowance on the Company's deferred tax assets.
As a result of the above factors and after giving effect to
accrued unpaid dividends on the redeemable preferred stock, the
Company derived net income applicable to common stockholders of
$1,315,000, or $.22 per share in 1997, compared to a net loss of
$(56,000), or $(.01) per share, in 1996. Net income applicable to
common stockholders includes charges of $330,000in 1997 and 1996 for
unpaid cumulative dividends on preferred stock.
Liquidity and Capital Resources
-------------------------------
At December 31, 1998, the Company had working capital of
approximately $2,439,000 compared to working capital of $1,995,000
at December 31, 1997. As of December 31, 1998, the Company had cash
and cash equivalents of $1,097,000. On October 2, 1998, the Company
sold its Miami, Florida facility for $1,406,000 and received net
cash proceeds of approximately $801,000, after satisfaction of the
mortgage and payment of commissions and closing costs. The Company
used the proceeds of such sale to reduce the outstanding principal
balance on its line of credit.
The Company's principal source of short-term liquidity is
existing cash on hand and the utilization of a $3,000,000 line of
credit with a commercial lender scheduled to expire on June 19,
2000. 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
December 31, 1998, $780,000 had been borrowed against $2,443,000 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
through Company owned warehouse distribution outlets. The Company
presently owns and operates four warehouse distribution outlets.
Accounts receivable at December 31, 1998 was $2,735,000 compared to
$1,710,000 at December 31, 1997. The increase in receivables of
$1,025,000, or approximately 60%, was primarily related to higher
seasonal sales levels prevalent during the period preceding December
31, 1998, as compared to the same period in 1997, and to a lesser
extent, slower payment practices from certain of the Company's
customers.
15
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations (continued)
-------------------------
Liquidity and Capital Resources (continued)
-------------------------------
In 1998, the Company developed a plan in the form of a merger
with a wholly owned subsidiary to satisfy the Company's redeemable
preferred stock dividend arrearage and mandatory sinking fund
requirements which aggregated $7,293,000 at September 30, 1998. The
plan was approved at a special meeting of stockholders on December
17, 1998, with the merger becoming effective December 31, 1998.
As a result of the consummation of the merger, each share of
common stock outstanding prior to the merger was converted to one
share of common stock of the Company. The holders of each share of
preferred stock had the option to convert such shares into either
(a) $4.75 in cash and ten shares of the Company's common stock, or
(b) $2.25 in cash, an 8% subordinated debenture and five shares of
the Company's common stock.
In accordance with the merger agreement, the Company is
required to issue to the holders of 219,021 shares of preferred
stock an aggregate of $984,960 face amount, 8% subordinated
debentures, 1,574,610 shares of common stock and pay $732,550 in
cash to the former preferred shareholders. Holders representing
81,100 preferred shares have elected dissenters rights, which, under
Delaware law, would require cash payments equal to the fair value of
their stock, to be determined in accordance with Section 262 of the
Delaware General Corporation Law. The Company is unable to determine
the fair value of the preferred stock but reserved the equivalent of
the estimated value of option (b) above, since that is the
consideration the dissenting holders would receive if they do not
perfect their dissenters' rights under the law. Expenses associated
with the merger aggregated approximately $456,000 and are charged to
expense in the 1998 Consolidated Statement of Operations. The cash
payable to the former preferred shareholders is titled payable to
stockholders on the Company's Balance Sheet as at December 31, 1998.
Management believes that cash available from unused borrowings under
its line of credit, 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 obligations associated with
the merger, including any payments to dissenting stockholders.
The Company's common stockholders' equity of $2,281,000 at
December 31, 1998, compared to a common stockholders' deficit of
$4,441,000 at December 31, 1997, resulted from the financial effect
of the merger, principally the elimination of the preferred stock
and the accumulated unpaid accrued dividends thereon, and net income
derived in 1998.
In February 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
16
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations (continued)
-------------------------
Liquidity and Capital Resources (continued)
-------------------------------
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 has no material capital expenditures planned for
the next twelve months, other than expenditures that the Company
intends to spend to upgrade the Company's facilities and maintain
its equipment to support its operations. Management estimates it
will require a cash investment of approximately $150,000 to fund
these improvements in 1999. The Company presently is evaluating the
feasibility of opening other warehouse distribution facilities.
Capital needs associated with opening any additional facilities
cannot be estimated at this time.
The Company believes its cash on hand, utilization of unused
borrowings under its line of credit, and the maintenance of its
borrowing arrangement with its commercial lender will provide
sufficient cash to supplement cash shortfalls, if any, from
operations and provide adequate liquidity for the next twelve months
to satisfy the obligations arising from the merger and support the
cash requirements of its capital expenditure programs.
The ability of the Company to maintain and improve its long
term liquidity is dependent upon the Company's ability to
successfully (i) maintain profitable operations; (ii) pay or
otherwise satisfy obligations arising from the merger; and (iii)
resolve current litigation on terms favorable to the Company.
This Form 10-K contains certain forward looking statements
within the meaning of the Private Securities Litigation Reform Act
of 1995 with respect to the financial condition, results of
operations and business of Imperial Industries, Inc., and its
subsidiaries, including statements made under Management's
Discussion and Analysis of Financial Condition and Results of
Operations. These forward looking statements involve certain risks
and uncertainties. No assurance can be given that any of such
matters will be realized. Factors that may cause actual results to
differ materially from those contemplated by such forward looking
statements include, among others, the following: the competitive
pressure in the industry; general economic and business conditions;
the ability to implement and the effectiveness of business strategy
and development plans; quality of management; business abilities and
judgement of personnel; and availability of qualified personnel;
labor and employee benefit costs.
Year 2000 Issues
----------------
Management has undertaken a company wide program to prepare
the Company's computer systems and other applications for the year
2000. The year 2000 problem, which is common to most businesses,
concerns the inability of such systems to properly recognize dates
and date-
17
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations (continued)
-------------------------
Year 2000 Issues - continued
----------------
sensitive information on and beyond January 1, 2000. In 1997, the
Company began to assess the vulnerability of its systems to the
year 2000 problem. Based on such assessment, the Company has
developed a year 2000 compliance plan, under which all key
information systems are being tested, and non-compliant software
was 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 operations.
The Company currently believes that it will be able to modify
or replace its affected systems in time to minimize any
detrimental effects on its operations. The most 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 temporary inability on the part of the Company to
timely process orders and billing and deliver finished products to
its customers. The Company is currently considering and
identifying various contingency options, including manual
alternatives to systems operations, which would minimized the risk
of any unresolved year 2000 problems of their operations.
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.
Item 8. Financial Statement and Supplementary Data
------------------------------------------
See Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K for the Index to Financial Statements
contained herein.
18
<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 under Item 14(a)(1) and (2) on page 48 present fairly, in all
material respects, the financial position of Imperial Industries, Inc. and its
subsidiaries at December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998, 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 29, 1999
19
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, December 31,
Assets 1998 1997
------ ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,097,000 $ 552,000
Trade accounts receivable (less
allowance for doubtful accounts of
$200,000 in 1998 and $176,000 in 1997) 2,535,000 1,534,000
Inventories 1,374,000 1,204,000
Deferred taxes 505,000 350,000
Other current assets 15,000 60,000
------------ ------------
Total current assets 5,526,000 3,700,000
------------ ------------
Property, plant and equipment, at cost 2,517,000 2,974,000
Less accumulated depreciation (1,182,000) (2,100,000)
------------ ------------
Net property, plant and equipment 1,335,000 874,000
------------ ------------
Deferred taxes 615,000 450,000
------------ ------------
Other assets 85,000 104,000
------------ ------------
$ 7,561,000 $5,128,000
============ ============
Liabilities and Common Stock and other Stockholders' Equity (Deficit)
---------------------------------------------------------------------
Current liabilities:
Notes payable $ 780,000 $ 778,000
Current portion of long-term debt 123,000 130,000
Accounts payable 1,300,000 580,000
Payable to stockholders 733,000 -
Accrued expenses and other liabilities 151,000 217,000
------------ ------------
Total current liabilities 3,087,000 1,705,000
------------ ------------
Long-term debt, less current maturities 1,316,000 819,000
------------ ------------
Obligation for appraisal rights 877,000 -
------------ ------------
Preferred dividends in arrears - 4,044,000
------------ ------------
Redeemable preferred stock, $1.00 par
value, $1.10 cumulative convertible
series; -0- and 300,121 shares outstanding;
at December 31, 1998 and 1997, respectively - 3,001,000
------------ ------------
Commitments and contingencies - -
------------ ------------
Common stock and other stockholders' equity (deficit):
Common stock, $.01 par value at December 31, 1998,
$.10 par value at December 31, 1997, 20,000,000
shares authorized; 8,182,571 and 6,483,961 issued
at December 31, 1998 and 1997 respectively 82,000 663,000
Additional paid-in-capital 13,507,000 7,260,000
Accumulated deficit (11,202,000) (12,036,000)
------------ ------------
2,387,000 (4,113,000)
Less cost of shares in treasury (47,863
shares at December 31, 1998 and 147,863
shares at December 31, 1997) (106,000) (328,000)
------------ ------------
Total common stock and other
stockholders' equity (deficit) 2,281,000 (4,441,000)
------------ ------------
$ 7,561,000 $5,128,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net sales $18,739,000 $15,774,000 $13,742,000
Cost of sales 12,823,000 10,867,000 9,881,000
------------- ------------ ------------
Gross profit 5,916,000 4,907,000 3,861,000
Selling, general and
administrative expenses 4,645,000 3,740,000 3,313,000
------------- ------------ ------------
Operating income 1,271,000 1,167,000 548,000
------------- ------------ ------------
Other income (expense):
Interest expense (272,000) (329,000) (317,000)
Merger costs (456,000) - -
Miscellaneous income 1,218,000 54,000 43,000
------------- ------------ ------------
490,000 (275,000) (274,000)
------------- ------------ ------------
Income before income taxes 1,761,000 892,000 274,000
------------- ------------ ------------
Income tax benefit (expense):
Current (24,000) (47,000) -
Deferred - net 320,000 800,000 -
------------- ------------ ------------
296,000 753,000 -
------------- ------------ ------------
Net income 2,057,000 1,645,000 274,000
Less: Net charge for elimination
of preferred stock (975,000) - -
Less: Dividends on redeemable
preferred stock (248,000) (330,000) (330,000)
------------- ------------ ------------
Net income applicable to
common stockholders $ 834,000 $ 1,315,000 $ (56,000)
============= ============ ============
Basic earnings (loss) per
common share $.13 $.22 $(.01)
============= ============ ============
Diluted earnings (loss) per
common share $.12 $.21 $(.01)
============= ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Common Stock and Other Stockholders'
Deficit
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Additional
Common paid-in Accumulated Treasury
Stock capital deficit stock Total
----- ------- ------- ----- -----
<S> <C> <C> <C> <C> <C>
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 2,000 (187,000) 222,000 37,000
Accrued dividends in arrears
on preferred stock (248,000) (248,000)
Recapitalization of par value of
common stock from $.10 to
$.01 per share (599,000) 599,000
Issuance of 1,574,510 shares of
common stock - preferred stock
conversion 16,000 5,835,000 (975,000) 4,876,000
Net income 2,057,000 2,057,000
----------- ----------- ------------- ---------- ------------
Balance at December 31, 1998 $82,000 $13,507,000 $(11,202,000) $(106,000) $2,281,000
=========== =========== ============= ========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $2,057,000 $1,645,000 $274,000
Adjustments to reconcile net income
to net cash (used in) provided by:
Depreciation 178,000 149,000 133,000
Amortization 31,000 19,000 16,000
Provision for doubtful accounts 154,000 126,000 99,000
Deferred taxes, net (320,000) (800,000) -
Loss (gain) on disposal of fixed assets (1,078,000) 1,000 4,000
Compensation expense - issuance of stock 68,000 41,000 23,000
(Increase) decrease in:
Accounts receivable (1,155,000) (152,000) (236,000)
Inventories (170,000) 68,000 8,000
Prepaid expenses and other assets 1,000 (38,000) -
(Decrease) increase in:
Accounts payable 720,000 (80,000) (48,000)
Accrued expenses and other liabilities (66,000) 77,000 40,000
---------- ---------- --------
Net cash provided by operating
activities 420,000 1,056,000 313,000
---------- ---------- --------
Cash flows from investing activities
Proceeds received from sale of property
and equipment 1,278,000 9,000 11,000
Purchases of property, plant
and equipment (839,000) (263,000) (201,000)
---------- ---------- --------
Net cash provided by (used in) investing
activities 439,000 (254,000) (190,000)
---------- ---------- --------
Cash flows from financing activities
(Decrease) increase in notes payable
banks - net 2,000 (646,000) 179,000
Proceeds from issuance of long-term debt 324,000 60,000 66,000
Repayment of long-term debt (642,000) (167,000) (165,000)
Proceeds received from the exercise
of stock options 2,000 48,000 -
---------- ---------- --------
Net cash (used in) provided by
financing activities (314,000) (705,000) 80,000
---------- ---------- --------
Net increase in cash and cash
equivalents 545,000 97,000 203,000
Cash and cash equivalents,
beginning of year 552,000 455,000 252,000
---------- ---------- --------
Cash and cash equivalents, end of year $1,097,000 $552,000 $455,000
========== ========== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $276,000 $329,000 $314,000
========== ========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(1) Summary of Significant Accounting Policies
------------------------------------------
(a) Merger
------
On October 12, 1998, the Board of Directors approved a Plan
merging Imperial Industries, Inc. into Imperial Merger Corp., a
newly-formed, wholly-owned subsidiary of the Company, (the "Merger")
The Merger was approved at a special meeting of the stockholders on
December 17, 1998, with the Merger becoming effective December 31,
1998,, (the "Effective Date"). On the Effective Date, Imperial Merger
Corp. changed its name to Imperial Industries, Inc., (the "Company").
At the Effective Date, each share of the Company's $.10 par value
common stock outstanding before the Merger was converted into one
share of $.01 par value common stock resulting in the recapitalization
of $599,000 from common stock to additional paid-in-capital. Also at
the Effective Date, 300,121 outstanding shares of preferred stock,
with a carrying value of $3,001,000 were retired and $4,292,000 of
accrued dividends on such shares, were eliminated as described in the
following paragraphs.
Holders of 219,021 shares of the preferred stock retired (the
"Exchanging Shareholders"), with a carrying value of $2,190,000,
elected to convert their shares into either (a) $4.75 in cash and ten
shares of the Company's common stock, or (b) $2.25 in cash, an 8%
three-year $8.00 subordinated debenture and five shares of the
Company's common stock. In connection with the Exchanging
Shareholders' election, the Company is required to pay cash of
$733,000 which is presented as payable to stockholders in the
accompanying consolidated balance sheet at December 31, 1998. The
Company is also required to issue $985,000 face value of 8%
subordinated debentures with a fair value of $808,000, and 1,574,610
shares of $.01 par common stock with a fair value of $630,000 based on
the market price of $.40 per share of the Company's common stock at
the Effective Date. The total fair value of the cash, debentures and
common stock to be exchanged with the Exchanging Shareholders is
$2,171,000. Had the Exchanging Shareholders elected to convert their
shares under the provisions of the preferred stock's governing
instrument, they would have received 251,655 shares of common stock
with a fair value of $101,000. The excess of the total fair value of
cash, debentures and common stock to be exchanged with the Exchanging
Shareholders, over the fair value which the Exchanging Shareholders
would have received under the preferred stock's original conversion
provisions represents a conversion charge of $2,070,000 to accumulated
deficit and a reduction in net income applicable to common
stockholders in the accompanying consolidated statement of operations
for the year ended December 31, 1998. In addition, conversion of the
219,021 preferred shares resulted in a credit to additional paid-in
capital of $5,835,000.
24
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(1) Summary of Significant Accounting Policies (continued)
------------------------------------------
(a) Merger (continued)
------
Holders of 81,100 shares of preferred stock (the "Dissenting
Shareholders"), with a carrying value of $811,000, elected to exercise
their appraisal rights with respect to the stock. Under Delaware law,
the Dissenting Shareholders are entitled to petition the Delaware
Chancery Court to determine the fair value of their shares at the
Effective Date, exclusive of any element of value attributable to the
Merger. In the event that a Dissenting Shareholder does not perfect
his appraisal rights, each such share would be entitled to receive the
cash, the $8.00 subordinated debenture and the five shares of common
stock described under option (b) in the preceding paragraph. Based on
these facts, and a valuation prepared by an independent financial
advisor in connection with the Merger, the Company has recorded
$877,000 in the accompanying consolidated balance sheet at December
31, 1998, as an estimate for the obligation for appraisal rights. The
Chancery Court may determine fair value is less than, equal to, or
greater than an aggregate of $877,000. In addition, elimination of the
81,100 preferred shares and accrued dividends on such shares resulted
in a credit to accumulated deficit, and an addition to net income
applicable to common stockholders of $1,095,000.
In the calculation of earnings per share for the year ended
December 31, 1998, $975,000 has been deducted from net income
representing the conversion charge of $2,070,000, less $1,095,000
which is the excess of the carrying value of the Dissenting
Shareholders preferred stock and accrued dividends, over the
obligation for appraisal rights.
All outstanding stock purchase warrants also converted into
warrants with identical terms exerciseable for shares of the Company's
common stock.
In connection with the Merger, the Company issued 150,000 common
stock purchase warrants to its investment banker, exercisable at $.38
per share until December 31, 2003. Costs of the Merger aggregated
approximately $456,000 and are charged to the 1998 Consolidated
Statement of Operations.
(b) Nature of the Business
----------------------
The Company and its subsidiaries are primarily involved in the
manufacturing and sale of exterior and interior finishing wall
coatings and mortar products for the construction industry. Sales of
the Company's products are made to customers primarily in Florida and
the Southeastern United States through distributors and company-owned
distribution facilities.
25
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(1) Summary of Significant Accounting Policies (continued)
------------------------------------------
(c) Consolidation Policy
--------------------
The Consolidated financial statements contain the accounts of the
Company and its wholly-owned subsidiaries, Acrocrete, Inc.
(Acrocrete), Premix Marbletite Manufacturing Company, Inc. (Premix),
as well as other subsidiaries with insignificant operations. All
material intercompany accounts and transactions have been eliminated
in consolidation.
(d) 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.
(e) 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, 1998, accounts aggregating $51,000, or
approximately 2% of total gross trade accounts receivable were deemed
to be ineligible for borrowing purposes under the Company's borrowing
agreement with its commercial lender. See Note (4). The allowance for
doubtful accounts at December 31, 1998 of $200,000 is considered
sufficient to absorb any losses which may arise from uncollectible
accounts receivable.
The Company places its cash with commercial banks, however; at
December 31, 1998, 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) 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.
(g) 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.
26
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(1) Summary of Significant Accounting Policies (continued)
------------------------------------------
(g) Property, plant and equipment (continued)
-----------------------------
Differences between the proceeds received on the sale of property,
plant and equipment and the carrying value of the assets on the date
of sale is credited or charged to net income.
(h) Intangible Assets
-----------------
Licenses, trademarks and deferred financing costs are amortized on
straight-line basis over the estimated useful lives of the licenses
and trademarks, or over the term of the related financing.
(i) Income taxes
------------
The Company has adopted the liability method for determining its
income taxes. Under this method, deferred tax assets and liabilities
are recognized for the expected future tax consequences of events that
have been recognized in the consolidated financial statements or
income tax return. Deferred tax assets and liabilities are measured
using the enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be realized
or settled; valuation allowances are provided against assets that are
not likely to be realized.
(j) 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 the
dual presentation of basic and diluted earnings per share for the
years ending after December 15, 1997. Basic earnings (loss) per common
share for all periods prior to October 1, 1998 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).
(k) 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, 1998
and 1997 are short term time deposits of $267,000 and $259,000,
respectively.
27
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(1) Summary of Significant Accounting Policies (continued)
------------------------------------------
(l) Revenue recognition policy
--------------------------
Revenue from sales transactions is recorded upon shipment and
delivery of inventory to the customer, net of discounts and
allowances.
(m) 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.
(n) Accounting estimates
--------------------
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
(o) Fair Value of Financial Instruments
-----------------------------------
The carrying amount of the Company's debt instruments approximate
fair value as defined under SFAS 107. Fair value is estimated based
on discounted cash flows as well as other valuation techniques.
Financial Instrument Carrying Value Fair Value
-------------------- -------------- ----------
Cash and equivalents $1,097,000 $1,097,000
Accounts receivable 2,535,000 2,535,000
Accounts payable 2,033,000 2,033,000
Notes payable 780,000 780,000
Loans and mortgages payable 508,000 508,000
8% Subordinated debentures 808,000 808,000
Obligation for appraisal rights 877,000 877,000
28
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(2) Inventories
-----------
At December 31, 1998 and 1997, inventories consist of:
1998 1997
---- ----
Raw materials $ 345,000 $ 364,000
Finished goods 810,000 614,000
Packaging materials 219,000 226,000
---------- ----------
$1,374,000 $1,204,000
========== ==========
(3) Property, Plant and Equipment
-----------------------------
A summary of the cost of property, plant and equipment at December
31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
Estimated
useful life
1998 1997 (years)
---- ---- -------
<S> <C> <C> <C>
Land $ 151,000 $ 74,000 - - -
Buildings and
improvements 560,000 834,000 10 - 40
Machinery and equipment 1,141,000 1,296,000 3 - 10
Vehicles 487,000 574,000 2 - 8
Furniture and Fixtures 178,000 196,000 3 - 12
---------- ----------
$2,517,000 $2,974,000
========== ==========
</TABLE>
The net book value of property, plant and equipment pledged as
collateral under notes payable and various long-term debt agreements
aggregated $543,000 and $480,000 at December 31, 1998 and 1997,
respectively. See "Note 6."
(4) Notes Payable
-------------
Included in notes payable at December 31, 1998 and 1997 is $780,000
and $778,000, respectively, which represents amounts outstanding under a
$3 million line of credit from a commercial lender to Premix and
Acrocrete. Aggregate lines of credit were increased from $2,000,000 to
$3,000,000 on November 30, 1998. The line of credit is collateralized by
Premix and Acrocrete's accounts receivable and inventory, bears interest
at prime rate plus 2% (9 3/4% at December 31, 1998) expires June 19, 2000,
and is subject to annual renewal. The weighted average effective interest
rate on the line of credit was 17.49%, 17.04%, and 15.06% during the years
ended December 31, 1998, 1997 and 1996, respectively.
At December 31, 1998, the line of credit limit available for
borrowing aggregated $2,443,000, of which $780,000 had been borrowed. The
average month end amounts outstanding during 1998 and 1997 were $957,000,
and $1,316,000, respectively. The maximum amounts outstanding at any month
end during 1998 and 1997 were $1,253,000 and $1,585,000, respectively.
29
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(5) Accrued Expenses and Other Liabilities
--------------------------------------
Accrued expenses and other liabilities at December 31, 1998 and 1997
are summarized as follows:
1998 1997
---- ----
Employee compensation related items $ 42,000 $ 72,000
Taxes, other than income taxes 41,000 38,000
Income taxes - 30,000
Interest 4,000 7,000
Other 64,000 70,000
--------- ---------
$151,000 $217,000
========= =========
(6) Long-term Debt
--------------
<TABLE>
<CAPTION>
Long-term debt of the Company is as follows:
1998 1997
---- ----
<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. This note was paid in connection with the sale
of the building securing the obligation $ - $485,000
Adjustable rate mortgage note payable, interest at 12% at December 31,
1998, principal and interest payable monthly in the amount of
approximately $3,600, with a balloon payment of approximately $292,000
due September 1, 2000 304,000 310,000
Mortgage note payable, interest at 7 1/2% per
annum, principal and interest payable monthly
through January 2002 170,000 -
Subordinated debentures due December 31, 2001, interest payable annually
commencing July 1, 1999, principal payable in the amount of
$984,960 at maturity 808,000 -
Litigation settlement agreement, interest at 7.5% due monthly, principal
payable in 48 equal 48 monthly installments of
approximately $2,083 through August 1998 - 19,000
Equipment notes payable, interest at various
rates ranging from 8.75% to 15.39%, per annum,
principal and interest payable monthly 157,000 135,000
----------- ----------
1,439,000 949,000
Less current maturities (123,000) (130,000)
----------- ----------
$1,316,000 $819,000
=========== ==========
</TABLE>
30
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
6) Long-term debt (continued)
--------------
As of December 31, 1998, long-term debt matures as follows:
Year ended
December 31, Amount
------------ ------
2000 400,000
2001 897,000
2002 19,000
2003 -
-----------
$1,316,000
===========
In connection with the Merger described in Note 1(a), the Company
issued 123,120 8% subordinated debentures with a face amount value of
$984,960 effective December 31, 1998. Each debenture has been discounted
to a value of $6.56 using an effective interest rate of 16%. The aggregate
carrying value of the debentures at December 31, 1998 is $808,000. The
debentures are general, unsecured obligations of the Company, subordinated
in right of payment to all indebtedness to institutional and other lenders
of the Company. The Debentures are subject to redemption, in whole or in
part, at the option of the Company, at any time at a redemption price of
100% of the principal amount thereof, plus accrued and unpaid interest, if
any, to the redemption date.
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. The final payment was made in 1998.
(7) Income Taxes
------------
At December 31, 1998, the deferred tax asset of $1,120,000 primarily
consists of the tax effect of net operating loss carryforwards of
$9,500,000 less a valuation allowance of $2,200,000. Net operating losses
of approximately $6,700,000 expire thru 2000, the balance expires in
varying amounts through 2009.
During 1998 the Company recognized $927,000 of deferred tax benefit
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, 1998. The
ultimate realization of the remaining deferred tax assets is largely
dependent on the Company's ability to generate sufficient future taxable
income. Management believes that the valuation allowance at December 31,
1998 is appropriate, given the cyclical nature of the construction
industry and other factors including but not limited to the uncertainty of
future taxable income expectations beyond the Company's strategic planning
horizon.
The current income tax expense represents state taxes and alternative
minimum taxes payable for the years ended December 31, 1998 and 1997.
31
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(7) Income taxes (continued)
------------
A reconciliation of the Federal statutory rate to the effective tax
rate is as follows:
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
U.S. statutory rate 35% 35% 35%
Net operating loss carryfowards (35%) (35%) (35%)
Valuation allowance (18%) (89%) 0%
Other 1% 5% 0%
------ ----- -----
Effective rate (17%) (84%) 0%
====== ===== =====
(8) Capital Stock
-------------
(a) Common Stock
------------
At December 31, 1998, the Company had outstanding 8,182,571 shares of
common stock (6,483,961 shares in 1997) with a $.01 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,
if any. 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 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 was 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 were to vest over a
three year period based on certain performance goals set forth in the
Plan.
32
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(8) Capital Stock (continued)
-------------
(a) Common stock (continued)
------------
An aggregate of 66,667 shares were to vest over a two year period based on
continued employment with the Company by the holder. If the vesting
requirements were not met, the restricted shares theretofore issued were
to be forfeited and thereafter be subject to reallocation under the plan.
Prior to vesting, the holders received all of the benefits of ownership of
the restricted shares, including voting rights, but did 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 December 31, 1998, the remaining restricted
shares 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.
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 if common stock to its Directors as part of their compensation for
services rendered.
Effective December 31, 1998, in connection with the Merger, the
Company's former Preferred Stockholders received 1,574,610 shares of
common stock and other consideration in exchange for their preferred
stock. See Note (1)(a) Merger.
(b) Preferred Stock
---------------
The authorized preferred stock of the Company consists of 5,000,000
shares, $.01 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, 1998 and 1997, there were no shares and 300,121 shares of
$1.00 par value preferred stock outstanding, respectively.
Redeemable Preferred Stock - $1.10 Cumulative Convertible Series
----------------------------------------------------------------
Until December 31, 1998, the Company had issued and outstanding
300,121 shares of $1.10 cumulative convertible redeemable preferred stock
("Preferred Stock"). The holders of preferred stock were entitled to one
33
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(8) Capital Stock (continued)
-------------
(a) Preferred stock (continued)
---------------
vote per share on all matters without regard to class, except that the
holders of preferred stock were entitled to vote as a separate class with
regard to the issuance of any equity securities which 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 was entitled to
cumulative quarterly dividends at the rate of $1.10 per annum and was
convertible into 1.149 shares of common stock. The liquidation preference
of the preferred stock was $10.00 per share, plus accrued but unpaid
dividends. The preferred stock was callable, in whole or in part, by the
Company at its option at any time upon 30 days prior notice, at $11.00 per
share, plus accrued and unpaid dividends.
The Company had omitted dividends on its preferred stock since the
fourth quarter of 1985 aggregating $4,044,000 through December 31, 1997.
The omission of preferred stock dividends was 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 was 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 was not 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 was
not met, it is added to the requirements for the next year.
The Company was prohibited from paying any cash dividends on common
stock and from purchasing or otherwise acquiring for value, any shares of
either preferred or common stock, at any time that the Company was in
default in the payment of any dividends on the preferred stock or if the
sinking fund requirements are in arrears.
Effective December 31, 1998, all outstanding shares of preferred
stock were retired and all accumulated accrued dividends were eliminated
as a result of the Merger.
34
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(8) Capital Stock (continued)
-------------
(c) Warrants
--------
At December 31, 1998, the Company had the following outstanding
series of warrants:
(i) 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. In June 1997, the expiration date was extended to
June 29, 2000. Two directors acquired 150,000 and 50,000 warrants,
respectively, in connection with a $400,000 financing in 1988. The loan
has since been repaid by the Company.
(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. In 1998 all outstanding stock options were exercised and the
Plan was automatically terminated.
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. In 1998 all outstanding stock options were exercised and the
Plan was automatically terminated.
Option activity under these plans is summarized as follows:
Options 1996 1997 1998
------- ---- ---- ----
Outstanding and exercisable
at beginning of year 505,500 505,500 24,000
Granted at market price - - -
Exercised - (477,500) (24,000)
Terminated - (4,000) -
------- --------- -------
Outstanding and exercisable
at end of year 505,500 24,000 -
======= ========= =======
Fair market value at date of grant was in all cases, equal to the exercise
price.
35
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(9) Miscellaneous income
--------------------
A summary of miscellaneous income (expense) for the years ended
December 31, 1998, 1997 and 1996 is as follows:
1998 1997 1996
---- ---- ----
Interest income $ 13,000 $10,000 $ 5,000
(Loss) gain on disposal of property,
plant and equipment 1,078,000 (1,000) (4,000)
Other, net 127,000 45,000 42,000
---------- ------- --------
$1,218,000 $54,000 $43,000
========== ======= ========
On October 2, 1998, the Company sold its Miami, Florida
manufacturing facility for $1,406,000 and received net cash proceeds of
$801,000 after satisfaction of the mortgage and payment of commissions and
closing costs. A gain of $1,066,000 was recognized on this transaction and
included in other income above.
(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, 1998, 1997
and 1996 (in thousands except per share amounts):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
Per Per
Income Shares Share Income Shares Share Income Shares Share
<S> <C> <C> <C>
Net income $2,057 $1,675 $ 274
Less net charge
for elimination of
preferred stock (975)
Less dividends on
redeemable
preferred stock (248) (330) (330)
-------- ------- --------
Basic earnings
(loss) per
common share $ 834 6,566 $.13 $1,315 6,009 $.22 $ (56) 5,471 $(0.01)
-------- -------- ------ ------- ------ ----- -------- ------- -------
Effect of dilutive
securities:
Stock options 24
Warrants 200 200
-------- -------- ------ ------- ------ ----- -------- ------- -------
Diluted earnings
(loss) per
common share $ 834 6,715 $.12 $1,315 6,267 $.21 $ (56) 5,471 $(0.01)
-------- -------- ------ ------- ------ ----- -------- ------- -------
</TABLE>
(11) Related Party Transactions
--------------------------
The Company and its subsidiaries paid legal fees of approximately
$86,000, $37,000 and $29,000 in 1998, 1997 and 1996, respectively, to law
firms with which the Company's Chairman of the Board was affiliated.
36
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(12) 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 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 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
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 from approximately 193 cases. Based upon historical results, the
Company does not believe any potential future claims would be material.
However, there can be no assurance that insurance will ultimately cover
the aggregate liability for damages to which Premix may be exposed. Premix
is unable, at this time, to determine the exact extent of its exposure or
outcome of the litigation of any other similar cases that may arise in the
future.
Acrocrete was a co-defendant in a lawsuit captioned "Stephen P.
Zabow, II and Karen I. Zabow, et al. vs. M/I Schottenstein Homes, Inc.
("Schottenstein"), et al., Heiner Construction Company, and Acrocrete,
Inc.", filed October 2, 1996 in Wake County, North Carolina. The lawsuit
against Acrocrete and the other parties alleged negligent
misrepresentation, breach of warranty, fraud, unfair and deceptive trade
practices and request punitive damages. 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. The
lawsuit involved 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, to
which Scottenstein received an assignment of any claims which the
homeowners may have against any other contractors, subcontractors,
material men, or suppliers. Based upon the 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.
37
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(12) Commitments and Contingencies (continued)
-----------------------------
On October 6, 1998, as a result of mediation, Acrocrete,
Schottenstein as well as all codefendants, agreed to settle all pending
claims. Acrocrete's insurers paid $102,000 to Schottenstein's insurer CNA,
without contribution from Acrocrete, in order to avoid the significant
costs associated with litigating these 52 actions. As of March 15, 1999,
all 52 of these actions were dismissed with prejudice, as a result of
Stipulations which were executed and filed by all parties.
In addition, Acrocrete has been named a defendant in sixteen 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 thirteen
of the above claims and are providing a defense under a reservation of
rights. The Company expects its insurance carriers to accept coverage for
the other three recently filed remaining claims. Acrocrete is vigorously
defending all of these cases and believes it has meritorious defenses,
counter-claims and claims against third parties. Acrocrete is unable to
determine the exact extent of its exposure or 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.
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) Leases
------
At December 31, 1998 certain property, plant and equipment were
leased by the Company under long-term leases. Certain of these leases
provided for escalation in rent upon the lease anniversary date. Future
minimum lease
38
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(12) Commitments and Contingencies (continued)
-----------------------------
commitments as of December 31, 1998, for all noncancellable leases are as
follows:
December 31,
-----------
1999 $242,000
2000 222,000
2001 221,000
2002 180,000
2003 184,000
Rental expenses incurred for operating leases were approximately
$153,000, $128,000 and $129,000, for the years ended December 31, 1998,
1997 and 1996, 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 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 term. 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
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.
39
<PAGE>
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-continued-
(12) Commitments and Contingencies (continued)
-----------------------------
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 car allowance of $650 per
month during his employment, as well as certain other benefits, such as
health and disability insurance. As part of Mr. Hansen's employment, Mr.
Hansen agreed not to disclose confidential information and not to compete
during his term of employment and for a one year period following his
termination.
(13) Acquisition of Distribution Facility
------------------------------------
In February 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 for $395,000. 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, and the balance was paid over a 90 day period from
the Company's operating funds. The purchase price was allocated among the
assets acquired, based on estimated fair values, as follows: land and
buildings $205,000, equipment $10,000 and inventory $180,000.
(14) Subsequent Event
----------------
In January 1999, the Company issued 150,000 warrants to its
investment banker for financial advisory services in connection with the
Merger. Each warrant entitles the holder to purchase one share of common
stock until December 31, 2003 at $.38 per share.
****************************
40
<PAGE>
PART II
Item 9. Changes in and Disagreements with Accountants on Accounting
-----------------------------------------------------------
and Financial Disclosure
------------------------
None
Item 10. Directors and Executive Officers of the Registrant
--------------------------------------------------
The following table sets forth certain information with respect
to the directors and executive officers of the Company:
Name Age Position With Company
---- --- ---------------------
S. Daniel Ponce 50 Chairman of the Board - Class III
Lisa M. Brock 40 Director - Class III
Leonard C. Ferri 84 Director - Class II
Milton J. Wallace 63 Director - Class II
Morton L. Weinberger 69 Director - Class II
Fred H. Hansen 52 President, Premix and Acrocrete
Howard L. Ehler, Jr. 55 Principal Executive Officer/Executive
Vice President and Secretary
Betty J. Murchison 59 Principal Accounting Officer/
Assistant Vice President
Gary J. Hasbach 54 Executive Vice President, Premix
and Acrocrete
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 (3) 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 in 1994, 1995, 1996, 1997 or
1998. Accordingly, Class I, Class II and Class III directors will
serve until the next annual meeting to be held by the Company. The
Company has no Class I directors. Mr. Wallace was appointed to fill
a vacancy on the Board on February 17, 1999.
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 twenty years and is currently a stockholder in the
law firm of Hanzman, Criden, 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 5
years until December, 1994 when she retired. Mrs. Brock continues
to serve as a consultant to the Company. Mrs. Brock is the niece
41
<PAGE>
Item 10. Directors and Executive Officers of the Registrant (continued)
--------------------------------------------------
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 is the uncle of Lisa M. Brock.
Milton J. Wallace. Mr. Wallace became a director of the Company on
February 17, 1999. Mr. Wallace has been a practicing attorney in
Miami for over 30 years and is currently a shareholder in the law
firm of Wallace, Bauman, Legon, Fodiman & Shannon, P.A. He was a
co-founder and a member of the Board of Directors of Home
Intensive Care, Inc., a provider of home infusion and dialysis
services, serving as Chairman of its Executive Committee from
1985 through July 1993 and Chairman of the Board from December
1989 until July 1993 when Home Intensive Care, Inc. was acquired
by W.R. Grace & Co. Mr. Wallace is Chairman of the Board of
Med/Waste, Inc., a provider of medical waste management services
and Renex Corp., a kidney dialysis provider. He is a director of
several private companies and is Chairman of the Dade County
Florida Housing Finance Authority.
Morton L. Weinberger, CPA. 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
professional organizations for the past twelve years. He provides
consulting services for the Company. For the previous twenty-five
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., the last six years
acting as Vice President and General Manager. From 1982 to 1986,
Mr. Hansen was 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 the Principal Accounting
Officer 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.
42
<PAGE>
Item 10. Directors and Executive Officers of the Registrant (continued)
--------------------------------------------------
Gary J. Hasbach. Mr. Hasbach became Executive Vice President of
Sales and Marketing for Premix and Acrocrete on January 1, 1999.
Mr. Hasbach was formerly President of Premix and Acrocrete from
September 1990 to May 1996. In addition, Mr. Hasbach was a
director of the Company from 1993 to February 1997. From May 1996
to December 1997, Mr. Hasbach served as Executive Vice President
of Marketing for Florida Tile Industries, Inc., a distributor of
tile and flooring products.
Board of Directors Meetings and Attendance
------------------------------------------
The Board of Directors met four (4) times in fiscal 1998. Each
director attended all of the Board of Directors meetings in 1998,
other than Milton Wallace who was not a director in 1998.
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 six (6)
times in fiscal 1998. 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 Securities and Exchange Commission in accordance
with Section 16(a) of the Securities Exchange Act of 1934, as
amended, 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 1998 no officer or director failed to
file any such report on a timely basis.
Item 11. Executive Compensation
----------------------
SUMMARY COMPENSATION TABLE
--------------------------
The following table summarizes the compensation paid or accrued
for each of the three fiscal years in the period ended December 31,
1998 for the Company's chief executive officer and each other
executive officer whose total annual salary and bonus exceeded
$100,000 for any fiscal year, (the "Named Executive Officers").
43
<PAGE>
Item 11. Executive Compensation (continued)
----------------------
SUMMARY COMPENSATION TABLE (continued)
--------------------------
<TABLE>
<CAPTION>
Annual Compensation
------------------- Long-Term
Compensation
Other ------------
Annual Restricted
Name and Compen- Stock
Principal Position Year Salary Bonus(1) sation(2) Awards(3)
------------------ ---- ------ -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Howard L. Ehler Jr. 1998 $120,000 $35,000 $ - $ -
Principal Executive 1997 $100,000 40,000 - 18,750
Officer, Executive 1996 $ 98,555 32,000 - 3,500
Vice President and
Secretary
Fred H. Hansen 1998 $150,000 $75,000 $ - $ -
President, Premix 1997 117,601 85,000 - 41,667
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
officer in the above table. Mr. Hansen's Other Annual Compensation in 1996
consisted of $15,000 in moving and relocation expenses. Mr. Hansen's
employment began September 2, 1996 at an annual salary of $117,601.
(3) 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. 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 Common
Stockholders and such shares may be voted. In 1998, the Company released
all restricted stock from the Restricted Stock Plan and reissued the stock
to the named executives.
Compensation Agreements
-----------------------
The Company is party to a one year renewable employment agreement,
(the "Employment Agreement") with Howard L. Ehler, Jr. (the "Executive").
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 Executive notifies the other party of such party's intent not to renew
at
44
<PAGE>
Item 11. Executive Compensation (continued)
----------------------
SUMMARY COMPENSATION TABLE (continued)
--------------------------
least 90 days prior to each June 30 of the initial term and any extended
term thereafter. 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 Compensation Committee.
Prior to a Change in Control (as defined in the Employment
Agreements), 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 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, 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 so terminates employment,
the Executive will be entitled to receive the lesser of (i) a lump sum
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 the 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 30, 1997 pursuant to the terms of the Company's
Restricted Stock Plan. See "Note (8)(a) Common Stock.
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 of the Company 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 in 1996 and is entitled, at his election, 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.
Options Granted in Year Ended December 31, 1998
-----------------------------------------------
No options were granted to the Named Executive Officers during the
year ended December 31, 1998.
Aggregated Option Exercises in Year Ended December 31, 1998
-----------------------------------------------------------
No options were exercised by the Named Executive Officers during the
year ended December 31, 1998 and no unexercised options were outstanding
at December 31, 1998.
45
<PAGE>
Item 11. Executive Compensation (continued)
Director Compensation
During the year ended December 31, 1998, each director received an
annual retainer of $6,000, payable in quarterly installments. Effective
June 1, 1994 and January 1, 1995, 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 upon 60 days notice by either party.
On May 29, 1998, each director received 25,000 shares of the
Company's common stock. The average of the bid and asked market price on
said date was $.40 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, 1998, 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. There are no other relationships required to be disclosed pursuant
to applicable Securities and Exchange Commission rules and regulations.
Item 12. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
The following table sets forth certain information as of March 10,
1999 with respect to the beneficial ownership of the Company's common
stock 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
such shares, and (iv) all executive officers and directors as a group.
(Except as otherwise provided herein, the information below is supplied by
the holder):
Shares (1) Percent
Beneficially Owned of Class (2)
------------------ ------------
Maureen P. Ferri 656,981 8.0%
7335 Old Elm Drive,
Hialeah, Fl 33015
Lisa M. Brock 296,506 (3) 3.6
Howard L. Ehler, Jr. 268,245 3.3
Leonard C. Ferri 238,200 2.9
Fred H. Hansen 220,000 2.7
S. Daniel Ponce 551,966 (4) 6.6
Milton J. Wallace - -
Morton L. Weinberger 199,210 2.4
All directors and officers
as a group (9 persons) 2,030,645 (5) 24.2
- -----------------
46
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
(continued)
(1) Except as set forth herein, all securities are directly owned 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 common stockholders is based upon 8,182,571
shares of common stock outstanding and such shares of common stock
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) Includes 50,000 shares of common stock issuable upon exercise of
warrants.
(4) Includes 150,000 shares of common stock issuable upon exercise of
warrants.
(5) Includes 200,000 shares of common stock issuable upon the exercise
of warrants.
Item 13. Certain Relationships and Related Transactions
----------------------------------------------
The law firm of Hanzman, Criden, 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 for
which the firm received $86,000 in 1998.
47
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
---------------------------------------------------------------
(a) The following documents are filed as part of this report:
1. Financial Statements: Page
--------------------- ----
Imperial Industries, Inc. and Subsidiaries:
Report of Independent Certified Public Accountant 19
Consolidated Balance Sheets - December 31, 1998 and 1997 20
Consolidated Statements of Operations - Years Ended
December 31, 1998, 1997 and 1996. 21
Consolidated Statement of Changes of Common Stock and
Other Stockholders' Deficit - Three Years Ended
December 31, 1998. 22
Consolidated Statements of Cash Flows -
Years ended December 31, 1998, 1997 and 1996 23
Notes to Consolidated Financial Statements 24
2. Financial Statement Schedules:
-----------------------------
II - Valuation and Qualifying Accounts and Reserves 49
3. Exhibits
--------
Incorporated by reference to the Exhibit Index at the
end of this Report. 50
(b) Reports on Form 8-K:
No Form 8-K Reports were filed during the last quarter of the
period covered by this Report.
48
<PAGE>
Schedule II
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts and Reserves
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Charged Charged
Balance to cost to other Balance at
beginning and accounts- Deductions- end of
Description of period expenses describe describe period
----------- --------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998:
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts:
Trade $176,000 $154,000 $ - $130,000(A) $200,000
----------- ---------- ----- --------- -----------
Year ended December 31, 1997:
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts:
Trade $145,000 $126,000 $ - $95,000(A) $176,000
----------- ---------- ----- --------- -----------
Year ended December 31, 1996:
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts:
Trade $139,000 $99,000 $ - $93,000(A) $145,000
----------- ---------- ----- --------- -----------
</TABLE>
(A) Uncollectible accounts written off, net of recoveries.
49
<PAGE>
EXHIBIT INDEX
Certain of the following exhibits, designated with an asterisk (*), are
filed herewith. The exhibits not so designated have been filed previously with
the Commission, and are incorporated herein by reference to the documents
indicated in parentheses following the descriptions of such exhibits.
Exhibit No. Description
- ---------- -----------
2.1 Agreement and Plan of Merger, by and between Imperial Industries,
Inc. and Imperial Merger Corp. dated October 12, 1998 (Form S-4
Registration Statement, Exhibit 2).
3.1 Certificate of Incorporation of the Company, (Form S-4 Registration
Statement, Exhibit 3.1).
3.3 By-Laws of the Company, (Form S-4 Registration Statement, Exhibit
3.2).
4.1 Form of Common Stock Purchase Warrant issued to Auerbach, Pollak
& Richardson, Inc., (Form S-4 Registration Statement, Exhibit
4.1).
4.2 Form of 8% Subordinated Debenture, (Form S-4 Registration Statement,
Exhibit 4.2).
4.3 Warrant Agreements as of June 22, 1988 between the Company and two
of its directors, S. Daniel Ponce and Lisa M. Brock, formerly Lisa
M. Thompson. (Form 8-K dated June 29, 1988, File No. 1-7190,
Exhibit 10.3)
10.1 Financing Agreements, dated as of June 20, 1988 between Premix
and Congress. (Form 8-K dated June 29, 1988, File No. 1-7190,
Exhibit 10.2)
10.2 Amendment, dated January 12, 1998 to the Financing Agreement
filed September 4, 1998, (Form S-4 Registration Statement,
Exhibit 10.1 (ii).
10.3 1979 Non-Qualified Stock Option Plan (Registrant Statement No. 2-
69479, Exhibit 1.D).
10.4 1984 Stock Option Plan (Form 10-K, year ended December 31, 1984,
File No. 1-7190, Exhibit 10.5)
10.5 Agreement dated as of May 16, 1989, between the Company and four
insurance companies, relating to the defense and indemnity of
asbestos related personal injury claims against Premix. (Form 10-
Q, quarter ended September 30, 1989, File No. 1-7190, Exhibit 10)
10.6 Employment Agreement dated July 26, 1993 between Howard L. Ehler,
Jr. and the Company. (Form 8-K dated July 26, 1993)
50
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ---------- -----------
10.7 Employment Agreement dated July 3, 1996 between Fred H. Hansen
and the Company, (Form S-4 Registration Statement, Exhibit 10.3).
10.8 Restricted Stock Plan, (Form S-4 Registration Statement, Exhibit
10.4).
10.9 License Agreement between Bermuda Roof Company and Premix
Marbletite Manufacturing Co., (Form S-4 Registration Statement,
Exhibit 10.5).
*11 Statement recomputation of earnings per share.
*21 Subsidiaries of the Company
51
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
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.
March 29, 1999 By: /s/ Howard L. Ehler, Jr.
-----------------------------------------------
Howard L. Ehler, Jr., Executive Vice President/
Principal Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ S. Daniel Ponce Chairman of the Board of March 29, 1999
- -----------------------
S. Daniel Ponce Directors
/s/ Lisa M. Brock Director March 29, 1999
- -----------------------
Lisa M. Brock
/s/ Leonard C. Ferri Director March 29, 1999
- -----------------------
Leonard C. Ferri
/s/ Milton J. Wallace Director March 29, 1999
- -----------------------
Milton J. Wallace
/s/ Morton L. Weinberger Director March 29, 1999
- -----------------------
Morton L. Weinberger
/s/ Howard L. Ehler, Jr. Executive Vice President, March 29, 1999
- ----------------------- Secretary, Principal
Howard L. Ehler, Jr. Executive Officer and
Chief Financial Officer
/s/ Betty J.Murchison Assistant Vice President March 29, 1999
- ----------------------- and Principal Accounting
Betty J. Murchison Officer
52
IMPERIAL INDUSTRIES, INC. AND SUBSIDIARIES
Statement Recomputation of Per Share Earnings
Calculation of (loss) income per share for the years ended December 31,
1998, 1997 and 1996 are as follows:
1998 1997 1996
---- ---- ----
Income before income taxes $1,761,000 $ 892,000 $ 274,000
Income tax benefit (expense):
Current (24,000) (47,000) -
Deferred 320,000 800,000 -
---------- ---------- -----------
296,000 753,000 -
---------- ---------- -----------
Net income 2,057,000 1,645,000 274,000
Less: net charge for elimination
of preferred stock (975,000) - -
Less: dividends on redeemable
preferred stock, $1.10 cumulative
convertible series (248,000) (330,000) (330,000)
---------- ---------- -----------
Net income (loss) applicable
to common stockholders $834,000 $1,315,000) $(56,000)
========== ========== ===========
Basic earnings (loss) per
common share $.13 $.22 $(.01)
========== ========== ===========
Diluted earnings (loss) per
common share $.12 $.21 $(.01)
========== ========== ===========
IMPERIAL INDUSTRIES, INC.
Subsidiaries of the Registrant
December 31, 1998
Incorporated
under laws of
-------------
Acrocrete, Inc. Florida
Just-Rite Lumber Company, Inc Florida
Premix-Marbletite Manufacturing Co. Florida
Triple I Leasing, Inc. Florida
