<PAGE>
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1996
[ ] TRANSITIONAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission file number: 33-29942-NY
RAGAR CORP.
(Exact name of small business issuer as specified in its charter)
New York 11-2925673
(State or other jurisdiction IRS Employer Identification Number)
of incorporation)
c/o Branin Investments, Inc., 100 Maiden Lane, New York, New York 10038
(Address of principal executive offices)
(212) 898-8888
(Issuer's telephone number)
(Former name, former address or former fiscal year,
if changes since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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. X Yes ___ No
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 15,135,716 shares of Common Stock,
par value $.001 per share, were outstanding at August 9, 1996.
Transitional Small Business Disclosure Format: ___ Yes X No
<PAGE>
INDEX
Page
----
Part I - Financial Information
Item 1. Financial Statements
Consolidated balance sheets 3
Consolidated statements of income - Six months
ended June 30, 1996 and 1995 4
Consolidated statements of income - Three months
ended June 30, 1996 and 1995 5
Consolidated statements of cash flows 6-7
Notes to consolidated financial statements 8-13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14-18
Part II - Other Information
Item 2. Changes in Securities 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
EXHIBIT 27 - Financial Data Schedule 20
2
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A NEW YORK CORPORATION)
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
ASSETS June 30, 1996 December 31, 1995
------------- -----------------
<S> <C>
Current Assets
Cash $ 543,099 $ 693,356
Accounts receivable, less allowance for doubtful
accounts 1996 $156,000, 1995 $44,000 4,431,388 3,467,282
Inventory 621,024 638,295
Current portion of related party note receivable 144,638 132,800
Prepaid expenses 81,562 61,637
------------------ -----------------
Total current assets 5,821,711 4,993,370
------------------ -----------------
Related Party Note Receivable, less current portion 97,293 146,736
Property and Equipment, net 409,816 415,738
Intangible Assets, net 18,006,832 18,528,647
------------------ -----------------
$ 24,335,652 $ 24,084,491
================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Subordinated notes payable $ - $ 515,422
Note payable (Note 4) 2,592,176 1,865,604
Credit facility (Note 4) 10,500,000 -
Current maturities of long-term debt (Note 4) 31,000 3,527,862
Accounts payable 2,358,788 1,799,764
Accrued expenses 372,286 448,835
Customer deposits 965,375 592,496
------------------ -----------------
Total current liabilities (Note 4) 16,819,625 8,749,983
------------------ -----------------
Deferred Income Taxes 69,212 35,616
Long-Term Debt, less current maturities (Note 4) 74,056 8,811,558
------------------ -----------------
Stockholders' Equity (Note 5)
Preferred stock, 12% cumulative, $.01 par value,
$1,000 stated value; authorized 5,500 shares; issued
and outstanding 1996 4,660 shares, 1995 4,140 shares 4,660,000 4,140,000
Discount on preferred stock (1,445,916) (1,283,571)
Common stock, $.001 par value, authorized 120,000,000
shares; issued and outstanding 1996 15,135,716 shares,
1995 14,932,145 shares 15,136 14,932
Additional paid-in capital 3,507,149 3,330,008
Retained earnings 636,390 285,965
------------------ -----------------
7,372,759 6,487,334
------------------ -----------------
Total liabilities and stockholder's equity $ 24,335,652 $ 24,084,491
================== =================
</TABLE>
3
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A NEW YORK CORPORATION)
CONSOLIDATED STATEMENTS OF INCOME
Six Months Ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
Predecessor Ragar
Ragar Business Corp.
Corp. January 1, 1995 June 2, 1995 to
June 30, 1996 to June 1, 1995 June 30, 1995
------------- --------------- -------------
<S> <C> <C> <C>
Sales $ 20,749,636 $ 16,362,727 $ 3,776,065
Cost of sales 15,038,636 11,331,930 2,870,124
----------------- ---------------- ---------------
Gross profit 5,711,000 5,030,797 905,941
Selling, general and administrative expenses:
Related party consulting fees 245,000 - 45,000
Related party rent expense 50,142 - 8,357
Other 3,085,163 1,292,945 395,864
----------------- ---------------- ---------------
3,380,305 1,292,945 449,221
----------------- ---------------- ---------------
Amortization and depreciation 610,565 14,195 91,910
----------------- ---------------- ---------------
Operating income 1,720,130 3,723,657 364,810
Other income (expense):
Miscellaneous income 9,732 19,892 -
Interest expense (801,580) (6,405) (161,497)
----------------- ---------------- ---------------
Income before taxes 928,282 3,737,144 203,313
Income taxes 319,057 - 68,945
----------------- ---------------- ---------------
Net income $ 609,225 $ 3,737,144 $ 134,368
================= ================ ===============
Net income per common share $ 0.02 $ 0.01
================= ================ ===============
Unaudited Proforma Information:
Net income before taxes $ 3,737,144
Proforma income tax expense 1,270,629
----------------
Proforma net income after taxes $ 2,466,515
================
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A NEW YORK CORPORATION)
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
Predecessor Ragar
Ragar Business Corp.
Corp. April 1, 1995 June 2, 1995 to
June 30, 1996 to June 1, 1995 June 30, 1995
------------- --------------- -------------
<S> <C> <C> <C>
Sales $ 10,984,681 $ 6,593,918 $ 3,776,065
Cost of sales 7,951,589 4,634,760 2,870,124
----------------- ----------------- --------------
Gross profit 3,033,092 1,959,158 905,941
Selling, general and administrative expenses:
Related party consulting fees 120,000 - 45,000
Related party rent expense 25,071 - 8,357
Other 1,675,340 470,288 395,864
----------------- ----------------- --------------
1,820,411 470,288 449,221
----------------- ----------------- --------------
Amortization and depreciation 294,019 5,678 91,910
----------------- ----------------- --------------
Operating income 918,662 1,483,192 364,810
Other income (expense):
Miscellaneous income 5,223 11,986 -
Interest expense (386,587) (2,530) (161,497)
----------------- ----------------- --------------
Income before taxes 537,298 1,492,648 203,313
Income taxes 184,307 - 68,945
----------------- ----------------- --------------
Net income $ 352,991 $ 1,492,648 $ 134,368
================= ================= ==============
Net income per common share $ 0.01 $ 0.01
================= ==============
Unaudited Proforma Information:
Net income before taxes $ 1,492,648
Proforma income tax expense 507,500
-----------------
Proforma net income after taxes $ 985,148
=================
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A NEW YORK CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
Predecessor
Business Ragar Corp.
Ragar Corp. January 1, 1995 June 2, 1995 to
June 30, 1996 to June 1, 1995 June 30, 1995
------------- --------------- -------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Cash received from customers $ 20,158,409 $ 15,378,509 $ 3,757,429
Cash paid to suppliers and employees (18,181,678) (13,629,493) (2,069,321)
Interest paid (8,877) (6,405) (18,753)
Income taxes paid (138,000) - -
Miscellaneous income received 9,731 19,892 13,669
--------------- ----------------- ---------------
Net cash provided by
operating activities 1,839,585 1,762,503 1,683,024
--------------- ----------------- ---------------
Cash Flows from Investing Activities
Net advances to related parties 37,605 - (294,651)
Acquisition cost expenditures (15,338) - (25,056)
Payments for acquisition of net assets
of Predecessor Business - - (19,257,524)
Proceeds from sale of equipment - 72,076 -
Purchase of equipment (42,045) - (28,975)
--------------- ----------------- ---------------
Net cash provided by (used
in) investing activities (19,778) 72,076 (19,606,206)
--------------- ----------------- ---------------
Cash Flows from Financing Activities
Debt issuance costs - - (897,034)
Proceeds from issuance of stock in
connection with capitalization of company - - 1,864,925
Proceeds from long-term debt - - 14,000,000
Principal payments on long-term debt (9,809) (8,156) -
Proceeds from subordinated notes payable - - 1,569,364
Principal payment on subordinated notes
payable (560,000) - -
Proceeds from issuances of preferred
and common stock 520,000 - 1,523,473
Proceeds from note payable - - 1,152,532
Payments on note payable (1,754,655) - (724,714)
Cash dividends paid (165,600) (2,400,000) (26,245)
--------------- ----------------- ---------------
Net cash provided by (used
in) financing activities (1,970,064) (2,408,156) 18,462,301
--------------- ----------------- ---------------
Net increase (decrease) in cash (150,257) (573,577) 539,119
Cash, beginning 693,356 665,393 -
--------------- ----------------- ---------------
Cash, ending $ 543,099 $ 91,816 $ 539,119
=============== ================= ===============
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A NEW YORK CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Six Months Ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
Predecessor
Business Ragar Corp.
Ragar Corp. January 1, 1995 June 2, 1995 to
June 30, 1996 to June 1, 1995 June 30, 1995
------------- --------------- -------------
<S> <C> <C> <C>
Reconciliation of Net Income to Net Cash
Provided by Operating Activities
Net income $ 609,225 $ 3,737,144 $ 134,368
Depreciation 73,412 14,195 2,977
Amortization 537,153 - 88,933
Accretion of discount on
subordinated notes payable 44,578 - -
Deferred income taxes 33,596 - 5,500
Provision for bad debts 26,000 5,633 5,000
Interest on long-term debt and notes
added to note payable 731,227 - -
Changes in assets and liabilities
Increase in accounts receivable (990,106) (603,294) (214,761)
(Increase) decrease in inventory 17,271 (87,620) 85,000
Increase in prepaid expenses (19,925) - -
Increase (decrease) in accounts
payable 559,024 (599,153) 925,818
Increase (decrease) in customer
deposits 372,879 (380,924) 191,126
Increase (decrease) in accrued
expenses (154,749) (323,478) 459,063
---------------- ------------------ ----------------
Net cash provided by
operating activities $ 1,839,585 $ 1,762,503 $ 1,683,024
================ ================== ================
</TABLE>
See Notes to Consolidated Financial Statements.
7
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A NEW YORK CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies
Nature of business
Ragar Corp. (Successor Business, Ragar, or Company) was organized under the laws
of the state of New York on July 19, 1988. Ragar Corp. had substantially no
operations prior to its exchange, on June 2, 1995, in a reverse acquisition with
Carpet Barn Holdings, Inc. (CBH), which was organized under the laws of the
State of Delaware on May 26, 1995 (see Note 2). CBH and its wholly owned
subsidiary, Carpet Barn, Inc (CBI), a Delaware corporation, were formed for the
purpose of acquiring the assets and operations of Carpet Barn, Inc., a Nevada
corporation (Predecessor Business), a retail carpet sales and installation
outlet located in Las Vegas, Nevada. The Company began operations on June 2,
1995, the date of the acquisition, as described in Note 2.
The Company is also related, through common ownership, to C. B. Realty of
Delaware, Inc. (Realty)
The Company sells floor coverings, primarily carpet, to the new home and retail
replacement markets primarily in Southern Nevada.
A summary of the Company's significant accounting policies follows. Unless
specifically discussed, the accounting policies apply to Ragar (and its
subsidiaries) and the Predecessor Business.
The results of operations of the Company are not comparable to those of the
Predecessor Business, due primarily to the amortization of intangible assets and
interest expense incurred on the acquisition debt. Also, the Predecessor
Business' financial statements contain no provision for income taxes.
Basis of presentation
On June 2, 1995, the Company acquired all of the common stock of CBH in an
exchange (the Exchange) by the holders of such common stock for newly issued
common stock of the Company, representing 91% of the Company's common stock
outstanding after the Exchange. For financial reporting and accounting purposes,
the exchange was recorded as a reverse acquisition, with CBH as the accounting
acquirer. In a reverse acquisition, the accounting acquirer is treated as the
surviving entity, even though the registrant's legal existence does not change
and the financial statement titles refer to the Company, not the accounting
acquirer. The accounting acquirer treats the Exchange as a purchase acquisition.
As a result, the historical financial information presented is CBH's and not the
Company's as previously reported. The operating results of the Company are
included with CBH after June 2, 1995, the date of the Exchange. See Note 2 for a
further discussion of the Exchange.
8
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A NEW YORK CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies (continued)
Basis of presentation (continued)
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-QSB and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In management's opinion, the accompanying consolidated financial statements
reflect all material adjustments (consisting only of normal recurring accruals)
necessary for a fair statement of the results for the interim periods presented.
The results for the interim period ended June 30, 1996, are not necessarily
indicative of the results which will be reported for the entire year.
The opening stockholders' equity of CBH was retroactively restated to give
effect to the impact of the exchange as if CBH had been recapitalized. As a
result, the preferred stock of CBH is presented as preferred stock of the
Company.
Principles of consolidation
The Successor Business consolidated financial statements include the accounts of
the Company and its subsidiaries CBH and CBI. All material intercompany accounts
and transactions have been eliminated in consolidation.
Cash
During the periods presented, the Company and the Predecessor Business
maintained cash balances, which at times, were in excess of federally insured
limits. At June 30, 1996 the Company's cash balances were maintained at
financial institutions in Nevada and Illinois.
Inventory
Inventory consists primarily of carpet and vinyl and is stated at the lower of
cost (first-in, first-out method) or market.
Property and equipment
Property and equipment is stated at cost, less accumulated depreciation.
Depreciation is provided on the straight line and accelerated methods for
financial reporting purposes using estimated useful lives of five to forty
years.
9
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A NEW YORK CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies (continued)
Intangibles
Cost in excess of the net assets of the business' acquired in connection with
the Company's acquisitions (see Note 2) is being amortized by the straight-line
method over twenty-five years. The Company periodically reviews the value of its
goodwill to determine if an impairment has occurred. The Company does not
believe that an impairment of its goodwill has occurred based on an evaluation
of operating income, cash flows and business prospects.
The Company incurred financing costs related to the bank financing obtained in
connection with the acquisition of the Predecessor Business (see Note 2). These
costs are being amortized on the effective interest method over the nominal four
year term of the debt (See Note 4).
The Company also entered into a covenant not-to-compete in connection with the
acquisition of Predecessor Business (see Note 2). The covenant is being
amortized on the straight-line method over the five-year term of the agreement.
Income taxes
The Company provides for deferred taxes on a liability method whereby deferred
tax assets are recognized for deductible temporary differences and operating
loss and tax credit carryforwards and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities are
adjusted for the effect of changes in tax laws and rates on the date of
enactment.
Advertising
Advertising costs are expensed as incurred.
Earnings per common share
Earnings per common share is calculated based on the weighted average number of
common shares outstanding during the period and the net income less preferred
stock dividends accrued for the period. There were no common stock equivalents
outstanding during the periods presented.
Use of estimates in the preparation of financial statements
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 disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expense during the reported period.
Actual results could differ from those estimates.
10
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A NEW YORK CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies (continued)
Fair value of financial instruments
The carrying values of financial instruments including cash, accounts
receivable, subordinated notes payable, note payable, credit facility, accounts
payable and accrued expenses approximate their fair values because of their
short maturities.
The carrying values of long-term debt and the related party note receivable
approximate their fair values because the interest rates on these instruments
are at market interest rates.
Note 2. Acquisitions
On June 2, 1995, the Company acquired all of the common stock of CBH in an
exchange by the holders of such common stock for 13,362,500 newly issued shares
of common stock of the Company, representing 91% of the Company's common stock
outstanding after the Exchange. Ragar had no operations prior to the acquisition
of the Predecessor Business. Its only asset was approximately $860,000 of cash
and it had immaterial liabilities.
Concurrent with CBH's exchange with the Company, CBI executed an Asset Purchase
Agreement to acquire certain assets net of assumed liabilities of the
Predecessor Business for a cash purchase price of $19,257,524. The acquisition
was accounted for as a purchase.
On July 28, 1995 the Company purchased substantially all of the assets of
Steve's Floor Covering, Inc. for approximately $267,000.
Note 3. Proforma Financial Information
Unaudited pro forma results of operations of the Company assuming the
acquisitions occurred on January 1, 1995 and carried forward through June 30,
1996 are presented below. Proforma adjustments made to the historical results of
operations consist principally of the amortization of intangible assets,
interest expense related to acquisition financing and income taxes.
<TABLE>
<CAPTION>
Six Months Ended June 30, Three Months Ended June 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 20,749,636 $ 20,138,792 $ 10,984,681 $ 10,369,983
Gross profit 5,711,000 5,936,738 3,033,092 2,865,099
Net income 609,225 1,793,531 352,991 794,688
Net income per common share 0.02 0.11 0.01 0.05
</TABLE>
11
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A NEW YORK CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Proforma Financial Information (continued)
The net income per common share is based on the 15,036,669 and 15,067,859
weighted average common shares outstanding during the six and three month
periods ended June 30, 1996, respectively, and the 14,525,000 weighted average
common shares outstanding during both the six and three month periods ended June
30, 1995.
The above pro forma information does not purport to be indicative of the results
of operations that would have occurred had the acquisitions occurred on January
1, 1995 and is not intended to be a projection or indicative of future results.
Note 4. Credit Agreement and Working Capital Deficit
Concurrent with its acquisition of the Predecessor Business the Company entered
into a Credit Agreement with First Source Financial, LLP (First Source) under
which the Company obtained a $14,000,000 credit facility due May 31, 1999 and a
$3,000,000 working capital note due May 31, 1997, which, under certain
conditions may be extended through May 31, 1999. The Credit Agreement contains
covenants requiring CBI to maintain minimum levels of tangible net worth,
working capital and various financial ratios. The agreement also limits payments
from CBI to CBH and limits dividends, redemptions and purchases of capital stock
of CBI, CBH and the Company. CBH pledged to First Source all of the common stock
of CBI to secure CBI's obligations under the Credit Agreement and guaranteed
CBI's debt obligations to First Source under the Credit Agreement.
During the period from June 2, 1995 (commencement of operations) through June
30, 1996 the Company has violated the following covenants: 1) adjusted net worth
at June 30, 1995, 2) quarterly and annual interest coverage ratios. On April 15,
1996 First Source waived, through June 1, 1996, the covenant violations
occurring prior to that time and agreed to negotiate in good faith to amend such
covenants by June 1, 1996 so that the Company could reasonably expect to be in
compliance with the amended covenants based on its operating and cash flow
budgets. In connection with obtaining the waiver the Company agreed to limit
certain payments including principal payments of CBH's subordinated debt, with
the exception that such payments could be made from the proceeds of newly
acquired capital, if any.
The Company had certain discussions with First Source in an effort to amend such
covenants but was unable to reach an agreement with First Source. The
discussions are not continuing at present, and the Company believes that the
covenants are not likely to be amended. Moreover, the waiver period has not been
extended beyond June 1, 1996, and therefore, the Company has been in violation
of the covenants since June 1, 1996. To date, First Source has still allowed the
Company to borrow up to the full capacity under the original terms of the Credit
Agreement and the Company has received no indication from First Source that they
intend to exercise their right under the Credit Agreement to accelerate the
maturity of the debt. The Company's next principal payment under the Credit
Agreement is $875,000 due August 31, 1996. Based on its current cash flow
projections the Company believes it will be able to make this payment from cash
generated from operations. However, there can be no assurance in this regard.
12
RAGAR CORP. AND SUBSIDIARIES
(A NEW YORK CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Credit Agreement and Working Capital Deficit (continued)
Because First Source has maintained its right to accelerate the maturity of the
debt due to the covenant violations, the Company has classified the debt as
current on the June 30, 1996 consolidated balance sheet.
The Company is currently exploring other financing options which are available
to it. The Company is currently having discussions with several other lenders in
this regard, however there can be no assurance that the Company will be able to
obtain alternate financing or that such financing will be on similar or
favorable terms. If First Source chooses to accelerate the maturity of the debt
or if the Company were to obtain alternate financing certain unamortized debt
acquisition costs classified as intangible assets would be charged to expense.
Such unamortized debt acquisition costs totaled $628,625 at June 30, 1996.
Additionally, the Credit Agreement contains a prepayment penalty clause
requiring the Company to pay up to 2% of the then applicable revolving loan
commitment, as defined in the Credit Agreement, if the Company chooses to
terminate the Credit Agreement prior to May 31, 1999.
Note 5. Preferred Stock
On May 9, 1996, CBH issued 520 shares of preferred stock, raising $520,000. The
preferred stock pays cumulative dividends, payable monthly, at the annual rate
of 12% of the $1,000 stated value. In connection with the issuance of the
preferred stock, the Company issued 148,571 shares of common stock. The Company
allocated the $520,000 of proceeds between the preferred and common stock based
on the Company's estimate of the relative fair market values of the securities.
The holders of such preferred stock have the right to vote on all matters as a
single class with the holders of CBH common stock, and in the aggregate have
votes equal to 6% of the total voting power of CBH. The preferred stock is
mandatorily redeemable upon an underwritten public offering of the Company. The
proceeds were used to make the final principal and interest payments on CBH's
subordinated debt.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations of
the Company relates to the six months and three months ended June 30, 1996 and
1995 and should be read in conjunction with the financial statements and notes
thereto included elsewhere in this Report. Discussion of information for 1995
relates to the proforma consolidated financial results of the Company.
Results of Operations
Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995 (on a
pro forma basis).
To facilitate the comparison between the six month periods ended June 30, 1996
and 1995 the 1995 results have been adjusted on a pro forma basis assuming the
acquisitions described in Note 2 to the consolidated financial statements
occurred on January 1, 1995. The pro forma adjustments made to the historical
results of operations include related party rent expense of $41,785,
amortization and depreciation of $444,665, interest expense of $736,536 and
income taxes of $854,995.
<TABLE>
<CAPTION>
Predecessor Ragar
Business Corp. Proforma
January 1, 1995 June 2, 1995 Six Months
to to Pro forma Ended
June 1, 1995 June 30, 1995 Adjustments June 30, 1995
------------ ------------- ----------- -------------
<S> <C> <C> <C> <C>
Sales $ 16,362,727 $ 3,776,065 $ - $ 20,138,792
Gross profit 5,030,797 905,941 - 5,936,738
Selling, general and 1,292,945 449,221 41,785 1,783,951
administrative
Amortization and depreciation 14,195 91,910 444,665 550,770
Other income (expense) 13,487 (161,497) (736,536) (884,546)
Income taxes - 68,945 854,995 923,940
Net income 3,737,144 134,368 (2,077,981) 1,793,531
</TABLE>
The pro forma adjustments for income taxes takes into account that the
Predecessor Business was a subchapter S corporation for income tax reporting
purposes.
Total revenues increased by $610,844 to $20,749,636 for the six months ended
June 30, 1996 from $20,138,792 for the six months ended June 30, 1995,
representing an increase of 3.0%. This increase is attributable to an increase
in new home sales for the first half of 1996 over the first half of 1995.
Although total revenues increased, gross profit decreased from $5,936,738 for
the six months ended June 30, 1995 to $5,711,000 for the six months ended June
30, 1996, representing a decrease of 3.8%. This decrease is a direct result of
an increase in new home sales which generally have a lower gross margin than
replacement sales and to price increases from the Company's vendors which were
offset in part by increases in contract prices to new home buyers which began to
take effect in April 1996.
14
<PAGE>
Selling, general and administrative expenses increased from $1,783,951 for the
six months ended June 30, 1995 to $3,380,305 for the six months ended June 30,
1996. This increase is due to the following: 1) increases in salaries and
related payroll taxes of $508,228, 2) an increase in the modification rate for
workers' compensation due to the change in ownership on June 2, 1995 resulting
in an increase of $246,707, 3) contract labor to upgrade the Company's
management information system of $30,916, 4) professional expenses associated
with the annual audit and required public filings of $81,093, 5) increases in
advertising and insurance expenses of $259,796, and 6) related party payments
consisting of consulting fees and rents of $200,000.
Operating income decreased by $1,881,887 from $3,602,017 for the six months
ended June 30, 1995 to $1,720,130. Net income decreased from $1,793,531 for the
six months ended June 30, 1995 to $609,225 for the six months ended June 30,
1996. These decreases were due to the above mentioned decreases in gross margin
and increases in selling, general and administrative expenses.
Three Months Ended June 30, 1996 Compared to Three Months Ended June 30, 1995
(on a pro forma basis).
To facilitate the comparison between the three month periods ended June 30, 1996
and 1995 the 1995 results have been adjusted on a pro forma basis assuming the
acquisitions described in Note 2 to the consolidated financial statements
occurred on January 1, 1995. The pro forma adjustments made to the historical
results of operations include related party rent expense of $16,714,
amortization and depreciation of $177,866, interest expense of $309,333 and
income taxes of $328,415.
<TABLE>
<CAPTION> Predecessor Ragar
Business Corp. Proforma
April 1, 1995 June 2, 1995 Three Months
to to Pro forma Ended
June 1, 1995 June 30, 1995 Adjustments June 30, 1995
------------ ------------- ----------- -------------
<S> <C> <C> <C> <C>
Sales $ 6,593,918 $ 3,776,065 $ - $ 10,369,983
Gross profit 1,959,158 905,941 - 2,865,099
Selling, general and
administrative 470,288 449,221 16,714 936,223
Amortization and depreciation 5,678 91,910 177,866 275,454
Other income (expense) 9,456 (161,497) (309,333) (461,374)
Income taxes 68,945 328,415 397,360
Net income 1,492,648 134,368 (832,328) 794,688
</TABLE>
The pro forma adjustment for income taxes takes into account that the
Predecessor Business was a subchapter S corporation for income tax reporting
purposes.
Total revenues increased by $614,698 to $10,984,681 for the three months ended
June 30, 1996 from $10,369,983 for the three months ended June 30, 1995,
representing an increase of 5.9%. This increase is attributable to an increase
in new home sales for the second quarter of 1996 over the second quarter of
1995.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Gross profit increased from $2,865,099 for the three months ended June 30, 1995
to $3,033,092 for the three months ended June 30, 1996, representing an increase
of 5.9%. This increase is a direct result of an increase in contract prices for
sales to new home buyers which began to take effect in April 1996 and an
increase in sales volume.
Selling, general and administrative expenses increased from $936,223 for the
three months ended June 30, 1995 to $1,820,411 for the three months ended June
30, 1996. This increase is due to the following: 1) increases in salaries and
related payroll taxes of $367,241, 2) an increase in the modification rate for
workers' compensation due to the change in ownership on June 2, 1995 resulting
in an increase of $165,703, 3) contract labor to upgrade the Company's
management information system of $12,658, 4) professional expenses associated
with the annual audit and required public filings of $53,080, 5) increases in
advertising and insurance expenses of $185,738 and 6) related party payments
consisting of consulting fees and rents of $75,000.
Operating income decreased by $734,760 from $1,653,422 for the three months
ended June 30, 1995 to $918,662 for the three months ended June 30, 1996. Net
income decreased from $794,688 for the three months ended June 30, 1995 to
$352,991 for the three months ended June 30, 1996. These decreases were due to
the above mentioned increases in selling, general and administrative expenses.
Liquidity and Capital Resources
The Company's cash decreased by $150,257 during the six months ended June 30,
1996. Cash provided by operating activities was $1,839,584. At June 30, 1996,
the Company has a working capital deficit of $10,997,914. Included in such
deficit is $13,092,176 due to First Source Financial, LLP (First Source) under
the Credit Agreement (the Credit Agreement) described below.
Concurrent with its acquisition of the Predecessor Business the Company, through
its indirect subsidiary CBI, entered into a Credit Agreement with First Source
Financial, LLP under which the Company obtained a $14,000,000 credit facility
due May 31, 1999 and a $3,000,000 working capital note due May 31, 1997, which,
under certain conditions may be extended through May 31, 1999. The Credit
Agreement contains covenants requiring CBI to maintain minimum levels of
tangible net worth, working capital and various financial ratios. The agreement
also limits payments from CBI to CBH and limits dividends, redemptions and
purchases of capital stock of CBI, CBH and the Company. CBH pledged to First
Source all of the common stock of CBI to secure CBI's obligations under the
Credit Agreement and guaranteed CBI's debt obligations to First Source under the
Credit Agreement.
During the period from June 2, 1995 (commencement of operations) through June
30, 1996 the Company has violated the following covenants: 1) adjusted net worth
at June 30, 1995, 2) quarterly and annual interest coverage ratios. On April 15,
1996 First Source waived, through June 1, 1996, the covenant violations
occurring prior to that time and agreed to negotiate in good faith to amend such
covenants by June 1, 1996 so that the Company could reasonably expect to be in
compliance with the amended covenants based on its operating and cash flow
budgets. In connection with obtaining the waiver the Company agreed to limit
certain payments including principal payments of CBH's subordinated debt, with
the exception that such payments could be made from the proceeds of newly
acquired capital, if any.
16
<PAGE>
The Company had certain discussions with First Source in an effort to amend such
covenants but was unable to reach an agreement with First Source. The
discussions are not continuing at present, and the Company believes that the
covenants are not likely to be amended. Moreover, the waiver period has not been
extended beyond June 1, 1996, and therefore, the Company has been in violation
of the covenants since June 1, 1996. To date, First Source has still allowed the
Company to borrow up to the fully capacity under the original terms of the
Credit Agreement and the Company has received no indication from First Source
that they intend to exercise their right under the Credit Agreement to
accelerate the maturity of the debt. The Company's next principal payment under
the Credit Agreement is $875,000 due August 31, 1996. Based on its current cash
flow projections the Company believes it will be able to make this payment from
cash generated from operations. The Company's cash position has been adversely
affected by an increase in accounts receivable from $3,467,282 at December 31,
1995 to $4,431,388 at June 30, 1996. In light of this increase, the Company has
stepped up its collection efforts and anticipates an increase in its cash flows
through a reduction in accounts receivable of approximately $500,000 during the
third quarter of 1996. However, there can be no assurances in this regard.
Because First Source has maintained its right to accelerate the maturity of the
debt due to the covenant violations the Company has classified the debt as
current on the June 30, 1996 consolidated balance sheet.
The Company is currently exploring other financing options which are available
to it. The Company is currently having discussions with several other lenders in
this regard, however there can be no assurance that the Company will be able to
obtain alternate financing or that such financing will be on similar or
favorable terms. If First Source chooses to accelerate the maturity of the debt
or if the Company were to obtain alternate financing certain unamortized debt
acquisition costs classified as intangible assets would be charged to expense.
Such unamortized debt acquisition costs totaled $628,625 at June 30, 1996.
Additionally, the Credit Agreement contains a prepayment penalty clause
requiring the Company to pay up to 2% of the then applicable revolving loan
commitment, as defined in the Credit Agreement, if the Company chooses to
terminate the Credit Agreement prior to May 31, 1999.
During the six months ended June 30, 1996, cash used in investing activities was
$19,778. Cash used by financing activities during such period was $1,970,064,
primarily used to make principal payments on the First Source debt, principal
payments on the CBH subordinated notes payable and preferred stock dividends.
Such amounts were offset in party by proceeds of $520,000 provided by the
issuance of common stock of the Company and preferred stock of CBH.
Immediately prior to the consummation of the Exchange and the Financing, CBH
privately sold an aggregate principal amount of $1,940,000 of Notes (the Note
Offering), together with shares of CBH common stock, raising $1,940,000, and
privately sold an aggregate of 2,215 shares of CBH Preferred Stock (the
Preferred Stock Offering), together with shares of CBH common stock, raising an
aggregate of $2,215,000. The Notes, which have been paid in full, bore interest
at 12% per annum payable monthly. The first half of the principal due on
November 30, 1995, was satisfied by the Company making principal payments of
$560,000 and the exchange of $820,000 of the Notes for 820 shares of 12%
preferred stock of CBH. In addition, $1,125,000 was raised in connection with
the sale of 1,125 shares of such 12% preferred stock, ($605,000 of which was
raised in November 1995 and $520,000 of which was raised in May 1996). The
proceeds were used to make principal payments on CBH's subordinated debt in
November 1995 and May 1996. In connection with the issuance of the 1,945 shares
of 12% preferred stock, the Company issued 555,713 shares of its common stock.
The newly issued shares of 12% preferred stock pay cumulative dividends, payable
monthly, at an annual rate of 12% of the $1,000 stated value and are mandatorily
redeemable upon an underwritten public offering of the Company. The Company
believes that it has the capacity to obtain additional financing through the
sale of equity securities of the Company. However, there can be no assurance in
this regard.
17
<PAGE>
Impact of Inflation
The Company believes that its revenues are not materially affected by inflation
and that any increased expenses due to inflationary pressures will be offset,
over time, by corresponding increases in prices it charges to its customers.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On May 9, 1996, CBH issued 520 shares of preferred stock, raising $520,000 . The
preferred stock pays cumulative dividends, payable monthly, at the annual rate
of 12% of the $1,000 stated value. In connection with the issuance of the
preferred stock, the Company issued 148,571 shares of common stock. The Company
allocated the $520,000 of proceeds between the preferred and common stock based
on the Company's estimate of the relative fair market values of the securities.
The holders of such preferred stock have the right to vote on all matters as a
single class with the holders of CBH common stock, and in the aggregate have
votes equal to 6% of the total voting power of CBH. The proceeds were used to
make the final principal and interest payments due on CBH's subordinated debt.
The preferred stock is redeemable upon an underwritten public offering of the
Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. Page
--------- ----
27 - Financial Data Schedule 19
b) Reports on Form 8-K.
None
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant had duly caused this report to be signed by the undersigned,
thereunto duly authorized.
August 19, 1996
/s/ Philip A. Herman
--------------------------------
Philip A. Herman
Chairman of the Board and President
(Principal Executive Officer)
August 19, 1996 /s/ William Poccia
--------------------------------
William Poccia
Chief Financial Officer
(Principal Financial and
Accounting Officer)
19
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 543,099
<SECURITIES> 0
<RECEIVABLES> 4,431,388
<ALLOWANCES> 156,000
<INVENTORY> 621,024
<CURRENT-ASSETS> 5,821,711
<PP&E> 409,816
<DEPRECIATION> 117,533
<TOTAL-ASSETS> 24,335,652
<CURRENT-LIABILITIES> 16,819,625
<BONDS> 74,056
0
3,214,084
<COMMON> 15,136
<OTHER-SE> 3,507,149
<TOTAL-LIABILITY-AND-EQUITY> 24,335,652
<SALES> 20,749,636
<TOTAL-REVENUES> 20,749,636
<CGS> 15,038,636
<TOTAL-COSTS> 3,990,870
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 26,000
<INTEREST-EXPENSE> 801,580
<INCOME-PRETAX> 928,282
<INCOME-TAX> 319,057
<INCOME-CONTINUING> 928,282
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 609,225
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
</TABLE>
