<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: September 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)
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 changed 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: 14,569,586 shares of Common Stock,
par value $.001 per share, were outstanding at November 14, 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 - Nine months
ended September 30, 1996 and 1995 4
Consolidated statements of income - Three months
ended September 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 14-17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
EXHIBIT 27 - Financial Data Schedule 20
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A New York Corporation)
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
ASSETS September 30, 1996 December 31, 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash $ 471,519 $ 693,356
Accounts receivable, less allowance for doubtful
accounts 1996 $71,924; 1995 $44,000 3,815,207 3,467,282
Inventory 828,211 638,295
Current portion of related party note receivable 159,095 132,800
Prepaid expenses 122,281 61,637
------------------------------------
Total current assets $ 5,396,313 $ 4,993,370
------------------------------------
Related Party Note Receivable, less current portion 71,633 146,736
Property and Equipment, net 468,118 415,738
Intangible Assets, net 17,741,197 18,528,647
------------------------------------
$23,677,261 $24,084,491
====================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Subordinated notes payable $ -- $ 515,422
Note payable (Note 4) 2,846,765 1,865,604
Credit facility (Note 4) 9,625,000 --
Current maturities of long-term debt (Note 4) 31,000 3,527,862
Accounts payable 2,038,212 1,799,764
Accrued expenses 423,029 448,835
Customer deposits 1,173,566 592,496
------------------------------------
Total current liabilities (Note 4) 16,137,572 8,749,983
------------------------------------
Deferred Income Taxes 93,212 35,616
Long-Term Debt, less current maturities (Note 4) 100,175 8,811,558
------------------------------------
Stockholders' Equity
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 1996 15,150,586 shares,
1995 14,932,145 shares 15,151 14,932
Additional paid-in capital 3,507,134 3,330,008
Retained earnings 615,743 285,965
------------------------------------
7,352,112 6,487,334
Less cost of treasury stock (581,000 shares) (Note 5) 5,810 --
------------------------------------
7,346,302 6,487,334
------------------------------------
Total liabilities and stockholder's equity $23,677,261 $24,084,491
====================================
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A New York Corporation)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
Nine Months Ended September 30, 1996 and 1995
Predecessor Ragar
Ragar Business Corp.
Corp. ---------------- -------------------
------------------- January 1, 1995 June 2, 1995 to
September 30, 1996 to June 1, 1995 September 30, 1995
- ------------------------------------------------------------------------- -----------------------------------------
<S> <C> <C> <C>
Sales $31,303,170 $16,362,727 $13,526,471
Cost of sales 22,796,823 11,331,930 10,133,551
------------ -------------------------------------
Gross profit 8,506,347 5,030,797 3,392,920
Selling, general and administrative expenses:
Related party consulting fees 335,000 - 180,000
Related party rent expense 75,213 - 33,428
Other 4,948,487 1,292,945 1,585,760
------------ -------------------------------------
5,358,700 1,292,945 1,799,188
------------ -------------------------------------
Amortization and depreciation 902,118 14,195 372,481
------------ -------------------------------------
Operating income 2,245,529 3,723,657 1,221,251
Other income (expense):
Miscellaneous income 14,388 19,892 30,544
Interest expense (1,149,482) (6,405) (615,136)
------------ -------------------------------------
Income before taxes 1,110,435 3,737,144 636,659
Income taxes 382,057 218,603
------------ -------------------------------------
Net income $ 728,378 $ 3,737,144 $ 418,056
============ =====================================
Income applicable to common stock $ 329,778 $ 309,456
============ ============
Net income per common share $ 0.02 $ 0.02
============ ============
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)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended September 30, 1996 and 1995
Ragar Ragar
Corp. Corp.
------------ -----------
1996 1995
- --------------------------------------------------------------------------- -----------
<S> <C> <C>
Sales $10,553,534 $9,750,406
Cost of sales 7,758,187 7,263,427
------------ -----------
Gross profit 2,795,347 2,486,979
Selling, general and administrative expenses:
Related party consulting fees 90,000 135,000
Related party rent expense 25,071 25,071
Other 1,863,325 1,189,896
------------ -----------
1,978,396 1,349,967
------------ -----------
Amortization and depreciation 291,553 280,571
------------ -----------
Operating income 525,398 856,441
Other income (expense):
Miscellaneous income 4,656 30,544
Interest expense (347,901) (453,639)
------------ -----------
Income before taxes 182,153 433,346
Income taxes 63,000 149,658
------------ -----------
Net income $ 119,153 $ 283,688
============ ===========
Income applicable to common stock $ (20,647) $ 202,238
============ ===========
Net income per common share $ (0.00) $ 0.01
============ ===========
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A New York Corporation)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 1996 and 1995
Predecessor
Ragar Corp. Business Ragar Corp.
------------------- ---------------- -------------------
January 1, 1995 June 2, 1995 to
September 30, 1996 to June 1, 1995 September 30, 1995
- ------------------------------------------------------------------------- -----------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Cash received from customers $ 31,536,314 $ 15,378,509 $ 13,465,812
Cash paid to suppliers and employees (28,369,329) (13,629,493) (10,497,020)
Interest paid (96,988) (6,405) (77,937)
Income taxes paid (138,000) -- (264,000)
Miscellaneous income received 14,388 19,892 44,212
------------- --------------------------------------
Net cash provided by
operating activities 2,946,385 1,762,503 2,671,067
------------- --------------------------------------
Cash Flows from Investing Activities
Net advances to related parties (90,992) -- (304,026)
Acquisition cost expenditures (15,339) -- (46,166)
Payments for acquisition of net assets
of Predecessor Business -- -- (19,257,524)
Payments for acquisition of net assets
of Steve's Floor Covering, Inc. -- -- (266,722)
Proceeds from sale of equipment -- 72,076 19,000
Purchase of equipment (112,457) -- (81,954)
------------- --------------------------------------
Net cash provided by (used
in) investing activities (218,788) 72,076 (19,937,392)
------------- --------------------------------------
Cash Flows from Financing Activities
Debt issuance costs -- -- (897,034)
Proceeds from issuance of stock in con-
nection with capitalization of company -- -- 1,864,925
Purchase of treasury stock (5,810) -- --
Proceeds from long-term debt -- -- 14,000,000
Principal payments on long-term debt (17,497) (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 (2,720,527) -- (1,454,480)
Cash dividends paid (165,600) (2,400,000) (107,695)
------------- --------------------------------------
Net cash provided by (used
in) financing activities (2,949,434) (2,408,156) 17,651,085
------------- --------------------------------------
Net increase (decrease) in cash (221,837) (573,577) 384,760
Cash, beginning 693,356 665,393 --
------------- --------------------------------------
Cash, ending $ 471,519 $ 91,816 $ 384,760
============= ======================================
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A New York Corporation)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Nine Months Ended September 30, 1996 and 1995
Predecessor
Ragar Corp. Business Ragar Corp.
------------------- ---------------- -------------------
January 1, 1995 June 2, 1995 to
September 30, 1996 to June 1, 1995 September 30, 1995
- ------------------------------------------------------------------------- ----------------------------------------
<S> <C> <C> <C>
Reconciliation of Net Income to Net Cash
Provided by Operating Activities
Net income $ 728,378 $3,737,144 $ 418,056
Depreciation 119,329 14,195 15,110
Amortization 802,789 -- 357,498
Accretion of discount on
subordinated notes payable 44,578 -- 123,546
Deferred income taxes 57,596 -- 22,000
Provision for bad debts 46,000 5,633 20,000
Interest on long-term debt and notes
added to note payable 1,076,688 -- 401,226
Changes in assets and liabilities
Increase in accounts receivable (393,925) (603,294) (491,033)
(Increase) decrease in inventory (189,916) (87,620) 21,991
Increase in prepaid expenses (60,644) -- (27,235)
Increase (decrease) in accounts
payable 238,449 (599,153) 1,010,061
Increase (decrease) in customer
deposits 581,069 (380,924) 333,964
Increase (decrease) in accrued
expenses (104,006) (323,478) 466,083
----------- -----------------------------------
Net cash provided by
operating activities $2,946,385 $1,762,503 $2,671,067
=========== ===================================
</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 September 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 September 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 seven
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 businesses 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. The net income per common share is
based on the 15,008,433 and 14,951,963 weighted average common shares
outstanding during the nine and three months ended September 30, 1996,
respectively.
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 92% 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 for the nine months ended September
30, 1995 of the Company assuming the acquisitions occurred on January 1, 1995
and carried forward through September 30, 1995 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.
Net sales 29,889,198
Gross margin 8,423,717
Net income 2,077,219
Net income per common share 0.13
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 14,525,000 weighted average
common shares outstanding during the nine period ended September 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.
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
September 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 it
intends to exercise its 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 November 30, 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
<PAGE>
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 September 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 $588,500 at September 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. Contingencies
On September 5, 1996, the Nevada Department of Employment, Training and
Rehabilitation notified the Company that it had changed the status of the
Company's floorcovering installers from independent contractors to employees,
subjecting the Company to unemployment tax obligations with respect to such
installers. The Company maintains that these installers are not employees of the
Company but rather independent contractors and, as such, the Company is not
subject to payment of unemployment taxes with regard to these installers. The
Company is vigorously defending its position, but, if the Company does not
prevail in this regard, it may be required to make payments to compensate for
not paying these taxes in the past and may also be subject to future payment of
these taxes for these installers. The outcome of this matter is undeterminable;
therefore, no liability has been recorded in the financial statements.
The Company's Chief Financial Officer (CFO) was terminated by the Company in
August, 1996. In connection with such termination, the Company has for $5,810
repurchased 581,000 shares of Common Stock held in escrow pursuant to the former
CFO's employment agreement. The former CFO has commenced a suit against the
Company alleging wrongful and unlawful termination. The Company and its legal
counsel believe it has meritorious defenses to such allegations, and the Company
intends to defend the matter vigorously.
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 nine months and three months ended September 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 and
the Predecessor Business with regards to the nine months ended September 30,
1995.
Results of Operations
Nine Months Ended September 30, 1996 Compared to Nine Months Ended
September 30, 1995 (on a pro forma basis).
To facilitate the comparison between the nine month periods ended September 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
--------------- ------------- -------------
June 2, 1995 Nine Months
January 1, 1995 to Ended
to September 30, Pro forma September 30,
June 1, 1995 1995 Adjustments 1995
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $16,362,727 $13,526,471 $ -- $29,889,198
Gross margin 5,030,797 3,392,920 -- 8,423,717
Selling, general and
administrative 1,292,945 1,799,188 41,785 3,133,918
Amortization and depreciation 14,195 372,481 444,665 831,341
Other income (expense) 13,487 (584,592) (736,536) (1,307,641)
Income taxes -- 218,603 854,995 1,073,598
Net income 3,737,144 418,056 (2,077,981) 2,077,219
</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 $1,415,972 to $31,303,170 for the nine months ended
September 30, 1996 from $29,889,198 for the nine months ended September 30,
1995, representing an increase of 4.7%. This increase is attributable to an
increase in new home sales for the first three quarters of 1996 over the first
three quarters of 1995.
14
<PAGE>
Gross margin increased from $8,423,717, for the nine months ended September 30,
1995 to $8,506,347 for the nine months ended September 30, 1996, representing an
increase of 0.1%. This slight increase is a direct result of an increase in new
home sales, which generally have a lower gross margin than replacement sales and
to increases in contract prices to new home buyers, which began to take effect
in April 1996, offset by price increases from the Company's vendors.
Selling, general and administrative expenses increased from $3,133,918 for the
nine months ended September 30, 1995 to $5,358,701 for the nine months ended
September 30, 1996. This increase is due to the following: 1) increases in
salaries and related payroll taxes of $881,078, 2) an increase in the
modification rate for workers' compensation due to the change in ownership on
June 2, 1995 of $283,202, 3) an increase in promotion and travel & entertainment
expenses of $78,677, 4) professional expenses associated with and required
public filings of $161,635, 5) increases in advertising and insurance expenses
of $449,023, 6) an increase in bad debt expenses of $81,144 and 7) an increase
in related party payments consisting of consulting fees and rents of $155,000.
Operating income decreased by $2,212,929 from $4,458,458 for the nine months
ended September 30, 1995 to $2,245,529 for the nine months ended September 30,
1996. Net income decreased from $2,077,219 for the nine months ended September
30, 1995 to $728,378 for the nine months ended September 30, 1996. These
decreases were due principally to the above-mentioned increases in selling,
general and administrative expenses.
Three Months Ended September 30, 1996 Compared to Three Months Ended
September 30, 1995.
Total revenues increased by $803,128 to $10,553,534 for the three months ended
September 30, 1996 from $9,750,406 for the three months ended September 30,
1995, representing an increase of 8.2%. This increase is attributable to an
increase in new home sales for the third quarter of 1996 over the third quarter
of 1995.
Gross margin increased from $2,486,979 for the three months ended September 30,
1995 to $2,795,347 for the three months ended September 30, 1996, representing
an increase of 12.4%. 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 $1,349,967 for the
three months ended September 30, 1995 to $1,978,396 for the three months ended
September 30, 1996. This increase is due to the following: 1) increases in
salaries and related payroll taxes of $340,398, 2) an increase in promotion and
travel & entertainment expenses of $68,480, 3) an increase in bad debt expenses
of $37,413, 4) professional expenses associated with required public filings of
$15,328, 5) increases in advertising and insurance expenses of $189,227 and
offset by 6) a decrease in related party payments consisting of consulting fees
and rents of $45,000.
Operating income decreased by $331,043 from $856,441 for the three months ended
September 30, 1995 to $918,662 for the three months ended September 30, 1996.
Net income decreased from $283,688 for the three months ended September 30, 1995
to $119,153 for the three months ended September 30, 1996. These decreases were
due principally to the above mentioned increases in selling, general and
administrative expenses partially offset by the increase in gross margin.
15
<PAGE>
Liquidity and Capital Resources
The Company's cash decreased by $221,837 during the nine months ended September
30, 1996. Cash provided by operating activities was $2,946,385. At September 30,
1996, the Company had a working capital deficit of $10,741,259. Included in such
deficit is $12,471,765 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
September 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 Notes (defined below) were repaid in full in May
1996 using proceeds raised through the sale of additional shares of CBH
Preferred Stock, as discussed below.
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 it
intends to exercise its 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 November 30, 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 $3,815,207 at September 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 up to approximately $350,000
during the fourth 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 September 30, 1996 consolidated balance sheet.
16
<PAGE>
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 $588,500 at September 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 nine months ended September 30, 1996, cash used in investing
activities was $218,787. Cash used by financing activities during such period
was $2,949,434, 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 and is currently pursuing discussions
with an underwriting firm concerning a possible equity offering. However,
there can be no assurance in this regard.
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.
17
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 5, 1996, the Nevada Department of Employment, Training and
Rehabilitation notified the Company that it had made a determination that the
Company had failed to pay unemployment taxes with respect to certain floor
covering installers. The Company believes based in part on a prior determination
by such Department classifying the Predecessor's installers as independent
contractors, that these installers are not employees of the Company and the
Company is not subject to these payments. The Company is vigorously defending
its position, but, if the Company does not prevail in this regard, it may be
required to make payments to compensate for not paying these taxes in the past
and may also be subject to future payment of these taxes for these installers.
The employment of the Company's Chief Financial Officer, was terminated by the
Company in August 1996. On September 11, 1996, the former CFO sued the Company
and its subsidiaries and the Company's directors in District Court in Clark
County, Nevada alleging that his employment agreement was wrongfully terminated,
that the Company violated duties of good faith and fair dealing with him and
that he was tortiously discharged. He seeks unspecified compensatory damages in
excess of $10,000, punitive damages, injunctive and declaratory relief,
attorney's fees and costs and such other relief as the court deems just and
equitable. The Company believes that it has meritorious defenses and intends to
vigorously pursue them. Moreover, the Company is considering whether it has
counterclaims against the former CFO.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. Page
----
27 - Financial Data Schedule 20
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.
November 14, 1996 /s/ Philip A. Herman
Philip A. Herman
Chairman of the Board and President
(Principal Executive Officer)
November 14, 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 471,519
<SECURITIES> 0
<RECEIVABLES> 3,887,131
<ALLOWANCES> 71,924
<INVENTORY> 828,211
<CURRENT-ASSETS> 5,396,313
<PP&E> 631,568
<DEPRECIATION> 163,450
<TOTAL-ASSETS> 23,677,261
<CURRENT-LIABILITIES> 16,137,572
<BONDS> 100,175
0
3,214,084
<COMMON> 15,151
<OTHER-SE> 4,117,067
<TOTAL-LIABILITY-AND-EQUITY> 23,677,261
<SALES> 31,303,170
<TOTAL-REVENUES> 31,303,170
<CGS> 22,796,823
<TOTAL-COSTS> 6,260,819
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 46,000
<INTEREST-EXPENSE> 1,149,481
<INCOME-PRETAX> 1,110,435
<INCOME-TAX> 382,057
<INCOME-CONTINUING> 728,378
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 728,378
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
</TABLE>
