<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, 1997
[ ] 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
NATIONS FLOORING, INC.
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 11-2925673
- --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation) (IRS Employer Identification
Number)
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: 3,642,397 shares of Common Stock, par
value $.001 per share, were outstanding at November 10 , 1997.
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 operations 4 - 5
Consolidated statements of cash flows 6
Notes to consolidated financial statements 7 - 16
- -------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17-23
- -------------------------------------------------------------------------------
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 24 - 25
Item 6. Exhibits and Reports on Form 8-K 26
- -------------------------------------------------------------------------------
SIGNATURES 27
- -------------------------------------------------------------------------------
EXHIBIT 27 - Financial Data Schedule 28
- -------------------------------------------------------------------------------
2
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
(A DELAWARE CORPORATION)
CONSOLIDATED BALANCE SHEETS (Unaudited)
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
ASSETS (Note 3) December 31, 1996 September 30, 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash $ 335,130 $ 167,268
Accounts receivable, less allowance for doubtful
accounts 1996 $347,000; 1997 $230,000 3,281,236 2,813,418
Due from employee 63,104 16,523
Inventory 709,627 808,015
Current portion of related party note receivable 169,169 164,685
Deferred public offering costs 155,721 470,181
Prepaid expenses and other 168,588 516,446
------------------------------------
Total current assets 4,882,575 4,956,536
------------------------------------
Related Party Note Receivable, less current portion 45,327
Equipment and leasehold improvements, net 549,349 603,303
Intangible Assets, net 16,905,761 16,257,834
------------------------------------
$ 22,383,012 $ 21,817,673
====================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable - bank (Note 4) $ 2,879,581 $ 2,686,527
Notes payable - other (Note 2) -- 500,000
Current maturities of long-term debt (Note 4) 8,781,519 6,158,000
Accounts payable 2,250,206 2,585,881
Due to principal shareholder 390,038 1,200,786
Accrued expenses 442,145 391,349
Customer deposits 916,480 1,390,061
------------------------------------
Total current liabilities 15,659,969 14,912,604
------------------------------------
Deferred Income Taxes 79,344 145,667
------------------------------------
Due to shareholder (Note 3) -- 500,000
------------------------------------
Long-Term Debt, less current maturities (Note 4) 110,815 101,148
------------------------------------
Minority Interest: Preferred Stock of Subsidiary 3,117,274 3,117,274
------------------------------------
Stockholders' Equity
Common stock, $.001 par value, authorized 20,000,000
shares; issued 3,787,647 shares 3,788 3,788
Additional paid-in capital 3,050,240 3,050,240
Retained earnings (deficit) 367,392 (7,238)
------------------------------------
3,421,420 3,046,790
Less cost of treasury stock (145,250 shares) 5,810 5,810
------------------------------------
3,415,610 3,040,980
------------------------------------
Total liabilities and stockholders' equity $ 22,383,012 $ 21,817,673
====================================
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
(A DELAWARE CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Nine Months Ended September 30,
<TABLE>
<CAPTION>
1996 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Sales $ 31,303,170 $ 28,922,733
Cost of sales 22,796,823 21,458,527
----------------------------
Gross profit 8,506,347 7,464,206
Selling, general and administrative expenses:
Related party consulting fees 335,000 90,000
Related party rent expense 75,213 75,213
Other 4,948,487 5,251,360
----------------------------
5,358,700 5,416,573
----------------------------
Amortization and depreciation 877,758 912,715
----------------------------
Operating income 2,269,889 1,134,918
Other income (expense):
Miscellaneous income 14,388 8,990
Interest expense (1,149,482) (1,081,228)
----------------------------
Income before taxes and dividends to preferred
stockholders of subsidiary 1,134,795 62,680
Provision for income taxes 390,340 17,910
----------------------------
Income before dividends to preferred stockholders
of subsidiary 744,455 44,770
Dividends to preferred stockholders of subsidiary 398,600 419,400
----------------------------
Net income (loss) $ 345,855 $ (374,630)
============================
Net income (loss) per common share 0.09 (0.10)
============================
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
(A DELAWARE CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended September 30,
<TABLE>
<CAPTION>
1996 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Sales $ 10,553,534 $ 10,069,585
Cost of sales 7,758,187 7,625,697
----------------------------
Gross profit 2,795,347 2,443,888
Selling, general and administrative expenses:
Related party consulting fees 90,000 30,000
Related party rent expense 25,071 25,071
Other 1,863,325 1,826,427
----------------------------
1,978,396 1,881,498
----------------------------
Amortization and depreciation 283,433 272,692
----------------------------
Operating income 533,518 289,698
Other income (expense):
Miscellaneous income 4,656 2,673
Interest expense (347,901) (276,348)
----------------------------
Income before taxes and dividends to preferred
stockholders of subsidiary 190,273 16,023
Provision for income taxes 65,761 2,388
----------------------------
Income before dividends to preferred stockholders
of subsidiary 124,512 13,635
Dividends to preferred stockholders of subsidiary 139,800 139,800
----------------------------
Net loss $ (15,288) $ (126,165)
============================
Net loss per common share (0.00) (0.03)
============================
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
(DELAWARE CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30,
<TABLE>
<CAPTION>
1996 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Reconciliation of Net Income (Loss) to Net Cash
Provided by Operating Activities
Net income (loss) $ 345,855 $ (374,630)
Depreciation 119,329 190,000
Amortization 778,429 722,715
Accretion of discount on subordinated notes payable 44,578
Deferred income taxes 52,076 66,323
Provision for bad debts 46,000 129,355
Interest on long-term debt and notes added to note payable 1,076,688 837,099
Common stock issued in lieu of interest payment 15,000
Rent expense in lieu of note receivable payments from Realty 75,213 75,213
Changes in assets and liabilities
(Increase) decrease in accounts receivable (485,057) 338,463
Decrease in inventory (189,916) (98,388)
Increase in prepaid expenses and other (60,644) (347,858)
Decrease in accounts payable 68,449 335,675
Increase in due to principal shareholder 261,132 810,748
Increase (decrease) in accrued expenses 127,797 (50,796)
Increase (decrease) in customer deposits 581,069 473,581
----------- -----------
Net cash provided by operating activities $ 2,855,998 $ 3,107,500
----------- -----------
Cash Flows from Investing Activities
Net advances to related parties $ (166,205) $ 21,179
Purchase of equipment and leasehold improvements (112,457) (243,954)
Acquisition cost expenditures (15,339) (74,788)
----------- -----------
Net cash used in investing activities (294,001) (297,563)
----------- -----------
Cash Flows from Financing Activities
Payments on note payable (2,720,527) (3,655,153)
Principal payments on long-term debt (17,497) (8,186)
Cash payment for deferred offering costs (314,460)
Proceeds from issuances of preferred and common stock 520,000
Purchase of treasury stock (5,810)
Proceeds from shareholder 500,000
Proceeds from subordinated notes payable 1,034,000
Principal payment on subordinated notes payable (560,000) (534,000)
----------- -----------
Net cash used in financing activities $(2,783,834) $(2,977,799)
----------- -----------
Net decrease in cash $ (221,837) $ (167,862)
Cash, beginning 693,356 335,130
----------- -----------
Cash, ending $ 471,519 $ 167,268
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for interest 96,988 41,504
Cash payments for income taxes $ 138,000 $ 2,388
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
6
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
(a Delaware Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies
Nature of business and recapitalization
- ---------------------------------------
Ragar Corp. (Ragar) was organized under the laws of the state of New York on
July 19, 1988. Ragar 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. 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 acquisition.
An agreement of merger and equity restructuring was approved by the Company's
management and its shareholders on March 19, 1997. The agreement provided for
the merger of Ragar with and into Nations Flooring, Inc., (a newly-formed,
wholly-owned subsidiary of Ragar incorporated in Delaware). Nations Flooring,
Inc. (Nations or Company) is the surviving corporation after the merger. All
assets, liabilities, property, rights, and obligations of Ragar were transferred
to and assumed by Nations. Since Nations had no assets, liabilities or
operations prior to the merger, the financial statements of Nations for periods
prior to the merger are the former financial statements of Ragar.
In the merger, each four (4) shares of Ragar common stock were exchanged for one
(1) share of Nations common stock. The effect of this exchange is similar to a
one for four reverse stock split of Ragar. Accordingly, all references to shares
of the Company's common stock and to per share amounts in the accompanying
financial statements and footnotes have been restated to reflect this one for
four reverse stock split as though it had occurred in the earliest period
presented (January 1, 1996). The Company has authorized 20,000,000 shares of
common stock, par value of $.001 and 1,000,000 shares of preferred stock, par
value of $.001.
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.
7
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
(a Delaware Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies (continued)
A summary of the Company's significant accounting policies follows.
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 92% 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 Company'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 similar to 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 those of CBH after June 2, 1995, the date of the
Exchange.
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 the complete financial
statements. The accompanying unaudited financial statements should be read in
conjunction with the financial statements, including the notes thereto,
appearing in the Company's Annual Report on Form 10-KSB and Form 10-KSB/A-1for
the year ended December 31, 1996. 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, 1997, are not necessarily indicative of the results which will be
reported for the entire year.
Principles of consolidation
- ---------------------------
The consolidated financial statements include the accounts of the Company and
its subsidiaries, CBH and CBI. All material intercompany accounts and
transactions are eliminated in consolidation. The minority interest in the
accompanying consolidated financial statements represents the preferred stock of
CBH not owned by the Company. The CBH preferred stock dividends are included as
a charge to earnings on the consolidated income statements.
Cash
- ----
During the periods presented, the Company maintained cash balances which, at
times, were in excess of federally insured limits. The Company has experienced
no losses in such accounts. At December 31, 1996 and September 30, 1997, the
Company's cash balances were maintained at financial institutions in Nevada and
Illinois.
8
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
(a Delaware Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies (continued)
Inventory
- ---------
Inventory consists primarily of carpet and vinyl and is stated at the lower of
cost (first-in, first-out method) or market.
Equipment and leasehold improvements
- ------------------------------------
Equipment and leasehold improvements are stated at cost, less accumulated
depreciation and amortization. Depreciation is provided on the straight-line and
accelerated methods for financial reporting purposes. Amortization is provided
on the straight-line basis over the shorter of the economic life of the asset or
the lease term. Estimated useful lives for financial reporting purposes are as
follows:
Years
----------------
Furniture and equipment 7
Autos and trucks 5
Leasehold improvements 3-5
Intangibles
- -----------
Cost in excess of net assets of the businesses acquired in connection with the
Company's acquisitions 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. These costs are
being amortized on the effective interest method over the term of the debt.
The Company also entered into a covenant not-to-compete in connection with the
acquisition of the Predecessor Business. 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.
9
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
(a Delaware Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies (continued)
Vendor coop marketing and purchase discounts
- --------------------------------------------
The Company participates in various advertising and marketing programs with
suppliers. Certain of the Company's costs incurred in connection with these
programs are reimbursed. The Company records accounts payable net of anticipated
purchase discounts.
Earnings per common share
- -------------------------
Earnings per share is computed based on the weighted average number of common
shares outstanding during the period and the net income (loss) for the period.
There were no common stock equivalents outstanding during the nine months ended
September 30, 1996 and 1997.
Effective for financial statements issued after December 15, 1997, the Company
will be required to implement FASB Statement No. 128, Earnings per Share. The
Statement establishes standards for computing and presenting earnings per share
(EPS) and applies to entities with publicly held common stock or potential
common stock. It replaces the presentation of basic EPS and also requires dual
presentation of basic and diluted EPS on the face of the income statement for
all entities with complex capital structures. Upon adoption of FASB Statement
No. 128, the EPS presentation for prior periods must be restated. The Company
currently estimates that the adoption of FASB Statement No. 128 will not have a
material effect on its previously reported EPS amounts.
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 expenses during the reporting period.
Actual results could differ from those estimates.
Revenue recognition
- -------------------
Revenue is recorded for commercial and retail floor covering sales upon
installation.
Advertising
- -----------
All costs related to marketing and advertising the Company's products are
expensed in the period incurred.
Advertising expense for the nine months ended September 30, consist of the
following:
1996 1997
---------------------------------------
409,069 $ 475,684
=======================================
10
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
(a Delaware Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies (continued)
Reclassification
- ----------------
Certain 1996 balances have been reclassified to correspond to the balance sheet,
statements of income, and cash flows classifications for 1997. These
reclassifications have no effect on stockholders' equity.
Fair value of financial instruments
- -----------------------------------
The carrying amounts of financial instruments including cash, accounts
receivable, employee and other receivables, subordinated notes payable, note
payable, accounts payable, due to principal stockholder, and accrued expenses
approximate their fair values because of their short maturities.
The carrying amounts of long-term debt and the related party note receivable
approximate their fair values because the interest rates on these instruments
are at market rates.
Recent accounting pronouncements
- --------------------------------
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS
130"), which establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is defined
to include all changes in equity, except those resulting from investments by
owners and distributions to owners. Among other disclosures, SFAS 130 requires
that all items that are required to be recognized under current accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements.
SFAS 130 is effective for financial statements for periods beginning after
December 15, 1997 and requires comparative information for earlier years to be
restated. Because of the recent issuance of this standard, management has been
unable to fully evaluate the impact, if any, the standard may have on future
financial statement disclosures. Results of operations and financial position,
however, will be unaffected by implementation of this standard.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("SFAS 131"), which supersedes Statement of
Financial Accounting Standards No. 14, Financial Reporting for Segments of a
Business Enterprise. SFAS 131 establishes standards for the manner in which
public companies report information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS 131 defines operating segments as
components of a company about which separate financial information is available
that is evaluated regularly by the chief operating decision maker in deciding
how to allocate resources and in assessing performance.
11
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
(a Delaware Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies (continued)
SFAS 131 is effective for financial statements for periods beginning after
December 15, 1997 and requires comparative information for earlier years to be
restated. Because of the recent issuance of this standard, management has been
unable to fully evaluate the impact, if any, the standard may have on future
financial statement disclosures. Results of operations and financial position,
however, will be unaffected by implementation of this standard.
Note 2. Notes Payable - Other
The Company received advances from unrelated parties of $500,000 during August
1997, enabling the Company to make the quarterly principal payment of $875,000
then due on the long-term revolving note. These advances bear interest at the
rate of 12% per annum, payable monthly. Interest expense of $10,000 relating to
these advances has been reflected in the accompanying consolidated financial
statements as of September 30, 1997.
The Company received advances from unrelated parties of $534,000 during February
1997, enabling the Company to make the quarterly principal payment of $875,000
then due on the long-term revolving note. These advances bore interest at the
rate of 12% per annum, payable monthly. In addition to the repayment of the
principal, the lenders were to receive 40% of the dollar amount of the advance
($213,600) in shares of common stock of the Company as additional interest.
These advances were repaid in April 1997. All parties, except one who continued
his election to receive Company stock, agreed to allow Branin to assume this
obligation, and as a result $209,600 of the obligation was reclassified as due
to Branin. The total obligation of $213,600 will be satisfied through the
issuance of 30,514 shares of the Company's common stock in 1997, as per the
terms of the original agreement with the lenders. Total interest expense of
$224,280 relating to these advances has been reflected in the accompanying
consolidated financial statements as of September 30, 1997.
Note 3. Due to Shareholder
During May 1997, the Company received an unsecured advance from a shareholder
and director of the Company in the amount of $500,000, enabling the Company to
make the quarterly principal payment of $875,000 then due on the long-term
revolving note. This advance will be repaid through the issuance of 500 shares
of the Company's preferred stock in 1997. Until such time as the preferred
shares are issued, the advance will bear interest at 12% per annum, payable
monthly. Interest expense of $25,000 relating to these advances has been
reflected in the accompanying consolidated financial statements as of September
30, 1997.
12
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
(a Delaware Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 4. Note Payable - Bank and Long-Term Debt
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. On May 28, 1997, the working
capital note's maturity was extended to May 31, 1998. The Credit Agreement
contains covenants requiring CBI to maintain minimum levels of tangible net
worth, working capital and various financial ratios. The agreement further
requires that a minimum $100,000 cash balance be maintained in a cash collateral
account. 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 commencement of operations (June 2, 1995) through
September 30, 1997 the Company violated the following covenants: 1) adjusted net
worth at June 2, 1995, 2) quarterly annual interest coverage ratios through
December 31, 1995, 3) and substantially all of the financial covenants for the
year ending December 31, 1996 and for the nine months ended September 30, 1997.
To date, First Source has continued to allow the Company to borrow up to the
full capacity of the working capital portion 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.
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 consolidated balance sheets as of December 31, 1996 and September
30, 1997.
If First Source chooses to accelerate the maturity of the debt or if the Company
were to obtain alternate financing, certain unamortized debt issuance costs
classified as intangible assets would be charged to expense. Such unamortized
debt issuance costs totaled $387,875 at September 30, 1997. Additionally, the
Credit Agreement contains a prepayment penalty clause requiring the Company to
pay 1% of the then applicable revolving loan commitment, as defined in the
Credit Agreement, if the Company chooses to terminate the Credit Agreement
between June 2, 1997 and June 1, 1998 and nothing thereafter.
Amounts outstanding under the agreement at December 31, 1996 and September 30,
1997, are as follows:
1996 1997
---------------------------------
Working capital note $ 2,879,581 $ 2,686,527
=================================
Long-Term note $ 8,750,000 $ 6,125,000
=================================
At September 30, 1997, the Company has approximately $313,000 available under
the original working capital note commitment.
13
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
(a Delaware Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 4. Note Payable - Bank and Long-Term Debt (continued)
During the year ended December 31, 1996 and the nine months ended September 30,
1997, the Company made principal payments due on the long-term revolving note by
in part, borrowing these amounts on the working capital note. In addition, the
agreement provided that interest be added to the notes.
CBI also has long-term notes payable of $142,334 and $134,148 outstanding at
December 31, 1996 and September 30, 1997, respectively. The notes bear interest
at an approximate average of 11% and mature between May 1998 and August 2001.
Note 5. Restatement
The Company has restated its 1995 and 1996 financial statements.
The Company previously had reflected the approximate $812,000 difference between
the assigned value in the Asset Purchase Agreement of the land and building
acquired by Realty and the approximate $288,000 note delivered to the Company by
Realty in connection with its purchase of the facility as part of the goodwill
resulting from the purchase of the Predecessor Business. The Company has
retroactively restated the accounting for this transaction to reflect the
$812,000 difference as a deemed return of capital to the stockholders of Realty.
The effect of the adjustment was to decrease additional paid in capital and
goodwill by approximately $812,000 and $793,000, respectively at December 31,
1995 and by approximately $812,000 and $761,000, respectively at December 31,
1996, and to increase net income by $12,504 and $21,437 for the period ended
December 31, 1995 and year ended December 31, 1996, respectively, as compared to
the amounts originally reported.
The Company previously included the outstanding preferred stock of CBH as part
of its stockholders' equity. Since the Company does not hold the CBH preferred
stock, the preferred stock should be reported as a minority interest on the
consolidated balance sheet, and the preferred stock dividends reported as
dividends to preferred stockholders of subsidiary on the consolidated income
statement. The effect of the adjustment was to decrease net income and Preferred
Stock by $203,395 and $3,117,274, respectively, and to increase minority
interest: preferred stock of subsidiary by $3,117,274 for the period ended
December 31, 1995, as compared to amounts originally reported. The adjustment
had no effect on retained earnings of the Company.
The Company issued shares of common stock to its former Chief Financial Officer
and an unrelated party for services provided prior to the June 2, 1995
acquisition disclosed in Note 2 of the financial statements appearing in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1996.
Such shares were issued for cash consideration equal to their par value. The
Company has now recorded these shares at their estimated fair value and has
included them as part of the acquisition costs discussed in such Note 2. The
effect of this adjustment was to increase additional paid in capital by
$246,925, increase goodwill by $241,163, and decrease net income by $5,762 for
the period ended December 31, 1995, as compared to the amounts as originally
reported.
In the current quarter, the Company reported its cash flows using the indirect
method. In 1996, the Company had reported its cash flows under the direct
method. The cash flow statement for 1996 has been restated to the indirect
method to be consistent with the current presentation.
14
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
(a Delaware Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 6. Contingencies
Nevada Department of Employment, Training and Rehabilitation Determination
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 appealed the decision and an appeals hearing
was held on February 5, 1997. The appeals referee agreed with the State of
Nevada and classified the installers as employees. The decision ordered no
retroactive tax or penalties; however, the Company has become responsible for
taxes for periods beginning April 1, 1997. The decision was appealed to the
Board of Review which affirmed the decision in its entirety.
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. Many, though not all, of the Company's competitors also treat
carpet installers working under similar arrangements as independent contractors.
The Company will continue to vigorously defend its position and has appealed the
above decision to the District Court on June 11, 1997. A stay of enforcement was
granted by the Court on July 7, 1997; therefore, payments to the State need not
be made pending the outcome of the appeal. A more substantial cost would be
incurred by the Company if the installers were to be regarded as employees of
the Company for Federal withholding purposes. To date, there has been no
indication that the Federal government intends to require the Company to treat
these carpet installers as employees of the Company. However, there can be no
assurance that the Federal government will not pursue such action in the future.
While the precise amount of any potential liability is unknown, an adverse
outcome could be material.
Termination of Mark Szporka
The employment of Mark Szporka, as the Company's Chief Financial Officer (CFO),
was terminated by the Company in August 1996. In connection with such
termination and pursuant to the terms of Mr. Szporka's employment agreement, the
Company has repurchased 145,250 shares of Common Stock from Mr. Szporka for
$5,810, an amount established in such employment agreement. Mr. Szporka
commenced a suit against CBH, CBI and directors of the Company alleging he was
wrongfully and unlawfully terminated. The Company filed a motion to dismiss the
suit based on the arbitration provision in the CFO's employment agreement. The
dismissal motion was granted by the court on May 1, 1997, enabling the matter to
be pursued in arbitration. The court also dismissed the litigation against the
individual officers. The remaining parties have agreed that the matter may be
submitted to binding arbitration, but no proceedings have been commenced to
date. The Company believes it has meritorious defenses to such allegations and
intends to defend the matter vigorously in arbitration. The range of possible
loss for this contingency is not determinable. No liability has been recorded
for this contingency in the consolidated financial statements.
15
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
(a Delaware Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 6. Contingencies (continued)
Securities and Exchange Commission Inquiry
In a letter dated March 11, 1997, the Company received notice from the
Securities and Exchange Commission (SEC), Division of Enforcement, that an
informal inquiry into the Company as to certain accounting and other matters was
being conducted. The Company was requested to voluntarily provide and did
provide the staff of the SEC with certain documents as outlined in that letter
and in subsequent requests by the staff. The staff's letter to the Company
stated that this inquiry was confidential and should not be construed as an
indication by the SEC or its staff that any violations of law have occurred, or
as a reflection upon any person, entity or security.
Management of the Company fully cooperated with the staff's informal inquiry.
The Company has been advised by the staff of the SEC that, while the inquiry has
not been formally terminated, it is not being actively pursued at this time, and
there are no unresolved issues under consideration. No specific allegations have
been made; therefore no conclusion can be reached as to what impact, if any,
this inquiry may have on the Company or its operations. However, while the
Company's discussions with the staff of the SEC lead it to believe that no
proceeding will be commenced with regard to the matters considered by the SEC,
the commencement or announcement of a formal investigation by the SEC would have
a material adverse effect on the Company's business, financial condition, future
results of operations and ability to obtain adequate financing.
The Company is also subject to various legal proceedings and claims that arise
in the ordinary course of business. The Company believes that the amount of any
ultimate liability with respect to these actions in the aggregate or
individually will not materially affect the results of operations, cash flows or
financial position of the Company.
16
<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 ended September 30, 1996 and 1997 and
should be read in conjunction with the financial statements and notes thereto
included elsewhere in this Report.
Results of Operations
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September 30,
1996.
Total revenues decreased by $2,380,437 to $28,922,733 for the nine months ended
September 30, 1997 from $31,303,170 for the nine months ended September 30,
1996, representing a decrease of 7.6%. This decrease is attributable to a
decrease in New Housing Division sales in 1997 as compared to 1996. The decrease
in New Housing Division sales are due to the following factors: (1) during 1997,
it is estimated that new home unit sales volume decreased by approximately 1.4%
in the Las Vegas market place, (2) several customers have brought their
floorcovering sales in-house, causing a loss in revenues over prior periods and
(3) increased competition in the Las Vegas market. To counteract this downward
trend in New Housing Division Sales, the Company opened two new retail stores
(one in October 1996 and one in July 1997) and opened a commercial flooring
division in April 1997. However, there can be no assurance that these efforts
will maintain or increase the Company's overall sales levels.
The gross profit decreased by $1,042,141 to $7,464,206 for the nine months ended
September 30, 1997 from $8,506,347 for the nine months ended September 30, 1996,
representing a decrease of 12.3%, in significant part as a result of the
decrease in New Housing Division sales. The gross profit percentage declined
from 27.2% in 1996 to 25.8% in 1997. This decline in gross profit percentage is
due to increased competition in the Las Vegas market and to an increase in the
installation labor costs.
Selling, general and administrative expenses increased by $57,873 to $5,416,573
for the nine months ended September 30, 1997 from $5,358,700 for the nine months
ended September 30, 1996. This increase is due to the following approximate
changes: (1) increases in salaries, benefits and related payroll taxes of
$267,000, due primarily to an increase in the number of employees, (2)
professional expenses associated with the annual audit and required public
filings of $12,000, (3) an increase in advertising expense of $67,000, (4) an
increase in rent expense of $158,000, telephone expense of $67,000, auto expense
of $42,000 and office and supplies expense of $96,000 primarily due to the
opening of the new home design center and the additional retail locations, (5)
an increase in travel and entertainment expense of $38,000 and (6) an increase
in bad debt expense of $23,000. These increases were partially offset by (1) a
decrease in workers' compensation expense of $532,000 due to a reduction in the
modification rate, a decrease in volume in 1997 and a refund of approximately
$130,000 from the State of Nevada and (2) a decrease in management and
consulting fees of $159,000.
Amortization and depreciation expense increased from $877,758 in 1996 to
$912,715 in 1997, primarily due to increased depreciation expense on equipment
purchases in 1996 and 1997.
Operating income decreased by $1,134,971 to $1,134,918 for the nine months ended
September 30, 1997 from $2,269,889 for the nine months ended September 30, 1996.
Interest expense decreased by $68,254
17
<PAGE>
from $1,149,482 in 1996 to $1,081,228 in 1997 as a result of a charge of
$224,280 relating to advances received in February 1997 as further described in
"Liquidity and Capital Resources." The reduction in interest expense of $292,534
after adjusting for the interest on these advances is due to principal payments
made on debt obligations. The provision for income taxes decreased by $372,430
due to the net loss for the nine months ended September 30, 1997. Dividends to
preferred stockholders of subsidiary increased from $398,600 in 1996 to $419,400
in 1997 due to the issuance by CBH, a subsidiary of the Company, of additional
shares of its preferred stock in early 1996. Net income (loss) decreased by
$720,485 to $(374,630) for the nine months ended September 30, 1997 from
$345,855 for the nine months ended September 30, 1996. These decreases were due
principally to the above-mentioned decrease in sales/gross profit and gross
profit percentage, increases in selling, general and administrative expenses and
increases in dividends to preferred stockholders of subsidiary partially offset
by a corresponding decrease in income taxes.
Three Months Ended September 30, 1997 Compared to Three Months Ended September
30, 1996.
Total revenues decreased by $483,949 to $10,069,585 for the three months ended
September 30, 1997 from $10,553,534 for the three months ended September 30,
1996, representing a decrease of 4.6%. This decrease is attributable primarily
to a decrease in New Housing Division sales during 1997 as compared to 1996. The
decrease in New Housing Division sales are due to the following factors: (1)
during 1997, it is estimated that new home unit sales volume decreased by
approximately 1.4% in the Las Vegas market place, (2) several customers have
brought their floorcovering sales in-house, causing a loss in revenues over
prior periods and (3) increased competition in the Las Vegas market. To
counteract this downward trend in New Housing Division Sales, the Company opened
two new retail stores (one in October 1996 and one in July 1997) and opened a
commercial flooring division.. However, there can be no assurance that these
efforts will maintain the Company's overall sales levels.
The gross profit decreased by $351,459 to $2,443,888 for the three months ended
September 30, 1997 from $2,795,347 for the three months ended September 30,
1996, representing a decrease of 12.6%, in significant part as a result of the
decrease in New Housing Division sales. The gross profit percentage declined
from 26.5% in 1996 to 24.3% in 1997. This decline in gross profit percentage is
due to increased competition in the Las Vegas market and to an increase in the
installation labor costs.
Selling, general and administrative expenses decreased by $96,898 to $1,881,498
for the three months ended September 30, 1997 from $1,978,396 for the three
months ended September 30, 1996. This decrease is due to the following
approximate changes: (1) a decrease in workers' compensation expense of $156,000
due to a reduction in the modification rate and a decrease in volume in the
third quarter of 1997, (2) a decrease in travel and entertainment of $30,000 and
(3) a decrease in management and consulting fees of $20,000. These decreases
were offset by the following approximate changes: (1) increases in salaries,
benefits and related payroll taxes of $42,000, due primarily to an increase in
the number of employees, (2) an increase in advertising expense of $5,000 and
(3) an increase in rent expense of $64,000, telephone expense of $6,000 and
office and supplies expense of $39,000 primarily due to the opening of the
additional retail locations.
Amortization and depreciation expense decreased from $283,433 in 1996 to
$272,692 in 1997.
18
<PAGE>
Operating income decreased by $243,820 to $289,698 for the three months ended
September 30, 1997 from $533,518 for the three months ended September 30, 1996.
Interest expense decreased by $71,553 from $347,901 in 1996 to $276,348 in 1997.
The reduction in interest expense is due to principal payments made on debt
obligations. The provision for income taxes decreased by $63,373 due to the net
loss for the three months ended September 30, 1997. Net loss increased by
$110,877 to $126,165 for the three months ended September 30, 1997 from $15,288
for the three months ended September 30, 1996. These decreases were due
principally to the above-mentioned decrease in sales/gross profit and gross
profit percentage, increases in selling, general and administrative expenses and
increases in dividends to preferred stockholders of subsidiary partially offset
by a corresponding decrease in income taxes.
Liquidity and Capital Resources
Cash provided by operating activities was $3,107,500 and $2,855,998 for the nine
months ended September 30, 1997 and the nine months ended September 30, 1996
respectively. At September 30, 1997, the Company had a working capital deficit
of $9,956,068. Included in such deficit is $8,811,527 due to First Source under
the credit agreement (the "Credit Agreement") discussed below. The Company's
growth and acquisition strategy will require significant additional cash.
The results of operations of the Company have been impacted as a result of the
restructuring of the Company after the Acquisition. Prior to the Acquisition,
the Predecessor Business had a positive tangible net worth in contrast to the
Company, which has had a negative tangible net worth due to the increase in
intangibles and debt resulting from the Acquisition. The Company is highly
leveraged and is subject to the risks associated with a highly leveraged
Company. The Company's ratio of indebtedness for borrowed money to stockholders
equity at September 30, 1997 was 3.3:1.
On March 19, 1997, the Company's shareholders approved a reincorporation
proposal for the Company. The reincorporation proposal was effected through the
merger of the Ragar Corp. ("Ragar") with Nations Flooring, Inc., ("Nations") a
newly formed wholly owned subsidiary of Ragar incorporated in Delaware. Nations
is the surviving corporation after the merger. All assets, liabilities,
property, rights and obligations of the Ragar were transferred to and assumed by
Nations. Since Nations had no assets, liabilities or operations prior to the
merger, the financial statements of Nations for periods prior to the merger are
the former financial statements of Ragar.
In the merger, each four (4) shares of Ragar common stock were exchanged for one
(1) share of Nations common stock. The effect of this exchange is similar to a
one for four reverse stock split of the Company.
On January 16, 1997, the Company filed with the Securities and Exchange
Commission a Registration Statement on Form S-1 with respect to a proposed
offering of common stock of the Company ("Public Offering"). This Registration
Statement has not yet been declared effective. These securities may not be sold
nor may offers to buy be accepted prior to the time the Registration Statement
becomes effective. This Quarterly Report on Form 10-QSB shall not constitute an
offer to sell or the solicitation of an offer to buy nor shall there be any sale
of these securities in any State in which such offer, solicitation, or sale
would be unlawful prior to registration or qualification under the securities
laws of any such State. These securities will be offered for the account of
Nations Flooring, Inc. Chatfield Dean & Co., which was named as the managing
underwriter of the offering in the registration statement, has resigned. The
19
<PAGE>
Company is currently interviewing other underwriters to manage the proposed
offering. A prospectus relating to such proposed offering of Nations Flooring,
Inc. common stock may be obtained from the Company at its offices set forth on
the cover page of this Quarterly Report. If the Company is unable to complete
the Public Offering, it intends to pursue other financing alternatives that may
be available to it. In addition, deferred offering costs of $470,181 as of
September 30, 1997 would be written off as a charge to operations if the Public
Offering is not consummated.
The term portion of the Credit Agreement is due May 31, 1999 and the revolving
portion was due May 31, 1997, subject to extension in certain circumstances to
May 31, 1999. On May 28, 1997, the maturity date for the revolving portion was
extended to May 31, 1998. All borrowings under the Credit Agreement bear
interest at the base rate per annum announced from time to time by The First
National Bank of Chicago (8.5% at November 3, 1997) plus 2.25% per annum
(currently 10.75% per annum), payable monthly. As of October 31, 1997, the
Company had borrowed approximately $2,687,000, leaving approximately $313,000
available from First Source under a $3,000,000 working capital note and had no
availability from First Source under a $14,000,000 revolving note that had an
outstanding balance and commitment of $6,125,000. The Company received advances
from unrelated parties of $500,000 during August 1997, enabling the Company to
make the quarterly principal payment of $875,000 then due on the long-term
revolving note. These advances bear interest at the rate of 12% per annum,
payable monthly. Interest expense of $10,000 relating to these advances has been
reflected in the accompanying financial statements as of September 30, 1997. The
Company also received advances from unrelated parties of $534,000 during
February 1997, enabling the Company to make the quarterly principal payment of
$875,000 then due on the long-term revolving note. These advances bore interest
at the rate of 12% per annum, payable monthly. Additionally, the lenders were to
receive 40% of the dollar amount of the advance ($213,600) in shares of common
stock of the Company as additional interest. These advances were repaid in April
1997. All parties, except one who continued his election to receive Company
stock, agreed to allow Branin to assume this obligation, and as a result
$209,600 of the obligation was reclassified as due to Branin. The total
obligation of $213,600 will be satisfied through the issuance of 30,514 shares
of the Company's common stock in 1997, as per the terms of the original
agreement with the lenders. Total interest expense of $224,280 relating to these
advances has been reflected in the accompanying financial statements as of
September 30, 1997.
During May 1997, the Company received an unsecured advance from a shareholder
and director of the Company in the amount of $500,000, enabling the Company to
make the quarterly principal payment of $875,000 then due on the long-term
revolving note. This advance will be repaid through the issuance of 500 shares
of the Company's preferred stock in 1997. Until such time as the preferred
shares are issued, the advance will bear interest at 12% per annum, payable
monthly. Interest expense of $25,000 relating to these advances has been
reflected in the accompanying financial statements as of September 30, 1997.
The Credit Agreement contains covenants requiring CBI to maintain minimum levels
of tangible net worth, working capital and various ratios. During the period
from June 2, 1995 (commencement of operations) through September 30, 1997, the
Company has failed to meet the following financial covenants: (1) adjusted net
worth at June 30, 1995, (2) quarterly and annual interest coverage ratios
through December 31, 1995, and (3) substantially all of the financial covenants
for the year ending December 31, 1996 and for the nine months ended September
30, 1997. Payments of the CBH preferred stock dividends have been made by Branin
on behalf of the Company in the amount of $46,600 per month. Consequently, as of
October 31, 1997, the Company was obligated to Branin in the amount of
20
<PAGE>
$885,094. Because the Company and Branin anticipate repayment of these advances
in the near future, no stated interest rate exists on these advances and no
interest has been imputed.
To date, First Source has 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. 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
consolidated balance sheets as of December 31, 1996 and September 30, 1997.
There can be no assurance that First Source will continue to allow the Company
to borrow under the original terms of the Credit Facility, or will not choose to
accelerate the maturity of the Credit Facility.
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 $387,875 at September 30, 1997. Additionally, the
Credit Agreement contains a prepayment penalty clause requiring the Company to
pay 1% of the then applicable revolving loan commitment, as defined in the
Credit Agreement, if the Company chooses to terminate the Credit Agreement
between June 2, 1997 and June 1, 1998 and nothing thereafter.
The Company is currently exploring other financing options which are available
to it. On February 19, 1997, the Company's subsidiary, Carpet Barn, Inc., signed
a commitment letter for a $12,500,000 credit facility with Finova Capital
Corporation ("Finova"). The credit facility would include a revolving line of
credit in the amount $5.5 million secured by eligible accounts receivable and
inventory. The credit facility also would include a term loan portion of $7.0
million due in three years, amortized on a five year straight line basis. The
revolving line of credit would bear interest at Citibank N.A.'s reference rate
(currently 8.50%) plus 1.0% per annum and the term loan would bear interest at
such reference rate plus 2.0% per annum. In addition, the credit facility would
be secured by CBI's present and future tangible and intangible assets and would
include a pledging of the stock of CBI and guarantees by CBH and Nations
Flooring, Inc. The commitment expired June 15, 1997 and further required the
negotiation and execution of the customary documentation and the completion of
the Public Offering. The loan agreement would contain customary representations,
warranties, events of default and remedies. The Company believes that Finova
will waive the June 15, 1997 expiration of the commitment if the Company is able
to complete the Public Offering, but there can be no assurance in this regard.
The proceeds of the Finova credit facility would be used to repay all borrowings
under the First Source credit agreement. Any remaining proceeds will be
available for general corporate purposes, including acquisitions. If the Company
is unable to obtain a waiver of the June 15, 1997 expiration and/or fulfill the
conditions of obtaining this credit facility, it will continue to explore
financing alternatives that may be available to it.
During the nine months ended September 30, 1997, cash used in investing
activities was $297,563. Cash used in financing activities during such period
was $2,977,799, used primarily to make principal payments on the Credit
Agreement, payments for deferred offering costs and repayment of unsecured
advances, offset by proceeds received from the unsecured advances in February,
May and August of 1997.
21
<PAGE>
Branin, which beneficially owns 313,103 shares of Common Stock of the Company
and which is controlled by Philip A. Herman, Chairman, President and a
stockholder of the Company, will be entitled to receive a fee equal to
approximately $650,000 upon consummation of the Public Offering. Branin has
agreed to waive such fee in exchange for increasing its management consulting
fee discussed in the next two sentences to $20,000 per month, effective upon
completion of the Public Offering. In addition, CBI entered into consulting
arrangements with (a) Branin, pursuant to which CBI paid $35,000 per month to
Branin and (b) PAH Marketing, Inc. ("PAH"), a company controlled by Philip A.
Herman, pursuant to which CBI paid $5,000 per month to PAH. As of October 31,
1997, CBI owed Branin and PAH $300,000 in respect of these obligations. These
arrangements were modified as of September 1, 1996 to provide for payments to
Branin of $10,000 per month and to discontinue payments to PAH. These agreements
were entered into for the purpose of receiving management advisory services in
the areas of operations management, financing and acquisitions. In conjunction
with certain advances received from unrelated parties (see previous discussion),
the Company is obligated to Branin in the amount of $189,600, which will be
satisfied through the issuance of 27,086 shares of the Company's common stock in
1997. These shares are in addition to the shares referred to above as
beneficially owned by Branin. Additionally the Company is owed $117,308 for
expenses paid by the Company on behalf of Branin.
Due to principal shareholder (Branin) consists of the following at
October 31, 1997:
Preferred stock dividends paid on behalf of CBH $ 885,094
Management fees 300,000
Expenses paid on behalf of Branin (117,308)
Interest obligations of CBI assumed by Branin 189,600
----------
$1,257,386
==========
Amounts payable to Branin are non-interest bearing and due on
demand.
The Company opened two new locations in Las Vegas during 1996 (a new home design
center in June and a new retail location in October) and one new retail location
in July 1997. The initial capital costs of approximately $70,000 for these
locations were provided in full by the Company's suppliers in exchange for
agreements by the Company to feature the suppliers' products at these
facilities. The Company anticipates that a substantial portion of the capital
requirements for any additional new locations will be funded by its suppliers,
although there can be no assurance that the Company will be able to effect such
an arrangement. While the Company anticipates that a portion of the costs will
be funded by the suppliers, a portion of such costs will be borne by the
Company. Moreover, these new facilities will require additional resources until
they become profitable, and there can be no assurance as to the amount of time
required before they can become profitable, if ever.
As of February 25, 1997, the Company entered into a letter of intent (the
"Letter of Intent"), pursuant to which it may purchase the assets of Nonn's
Flooring, Inc. ("Nonn's"), a floorcovering retailer with 2 stores located in the
Madison, Wisconsin area, for a purchase price of $3,000,000 in cash, subject to
adjustment under certain circumstances (the "Purchase"). The Purchase is subject
to the negotiation and execution of a definitive agreement and to the Company's
satisfactory completion of its due diligence investigation. The Letter of Intent
contemplates that upon completion of the Purchase, employment
22
<PAGE>
agreements will be entered into between the Company and Kenneth Nonn and Janet
Meier, who are both executive officers of Nonn's. The description contained
herein is qualified in its entirety by the complete text of the Letter of
Intent, which is included as Exhibit 10.16 to the Company's December 31, 1996
Annual Report on Form 10-KSB and incorporated herein by reference. The Company's
ability to complete the Purchase is dependent on its completion of the Public
Offering and the consummation of the financing contemplated by the February 19,
1997 commitment letter with Finova Capital Corporation or the consummation of
alternative financing arrangements that will provide sufficient cash resources
to enable the Company to repay the borrowings under the First Source Credit
Agreement and to pay the cash price of the Purchase.
The Company believes that cash flow generated by operations, together with
working capital to be provided by either the Public Offering or an alternative
financing and the refinancing of the First Source debt, will be sufficient for
the Company's working capital needs for 1997. Cash flow from operations should
be sufficient to cover operating expenses and should be maintained or enhanced
by the Company utilizing its business strategies. However, the Company's growth
and acquisition strategy will require substantial cash for capital costs.
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.
23
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Nevada Department of Employment, Training and Rehabilitation Determination
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 appealed the decision and an appeals hearing
was held on February 5, 1997. The appeals referee agreed with the State of
Nevada and classified the installers as employees. The decision ordered no
retroactive tax or penalties; however, the Company has become responsible for
taxes for periods beginning April 1, 1997. The decision was appealed to the
Board of Review which affirmed the decision in its entirety.
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. Many, though not all, of the Company's competitors also treat
carpet installers working under similar arrangements as independent contractors.
The Company will continue to vigorously defend its position and has appealed the
above decision to the District Court on June 11, 1997. A stay of enforcement was
granted by the Court on July 7, 1997; therefore, payments to the State need not
be made pending the outcome of the appeal. A more substantial cost would be
incurred by the Company if the installers were to be regarded as employees of
the Company for Federal withholding purposes. To date, there has been no
indication that the Federal government intends to require the Company to treat
these carpet installers as employees of the Company. However, there can be no
assurance that the Federal government will not pursue such action in the future.
While the precise amount of any potential liability is unknown, an adverse
outcome could be material.
Termination of Mark Szporka
The employment of Mark Szporka, as the Company's Chief Financial Officer (CFO),
was terminated by the Company in August 1996. In connection with such
termination and pursuant to the terms of Mr. Szporka's employment agreement, the
Company has repurchased 145,250 shares of Common Stock from Mr. Szporka for
$5,810, an amount established in such employment agreement. Mr. Szporka
commenced a suit against CBH, CBI and directors of the Company alleging he was
wrongfully and unlawfully terminated. The Company filed a motion to dismiss the
suit based on the arbitration provision in the CFO's employment agreement. The
dismissal motion was granted by the court on May 1, 1997, enabling the matter to
be pursued in arbitration. The court also dismissed the litigation against the
individual officers. The remaining parties have agreed that the matter may be
submitted to binding arbitration, but no proceedings have been commenced to
date. The Company believes it has meritorious defenses to such allegations and
intends to defend the matter vigorously in arbitration. The range of possible
loss for this contingency is not determinable. No liability has been recorded
for this contingency in the consolidated financial statements.
24
<PAGE>
Securities and Exchange Commission Inquiry
In a letter dated March 11, 1997, the Company received notice from the
Securities and Exchange Commission (SEC), Division of Enforcement, that an
informal inquiry into the Company as to certain accounting and other matters was
being conducted. The Company was requested to voluntarily provide and did
provide the staff of the SEC with certain documents as outlined in that letter
and in subsequent requests by the staff. The staff's letter to the Company
stated that this inquiry was confidential and should not be construed as an
indication by the SEC or its staff that any violations of law have occurred, or
as a reflection upon any person, entity or security.
Management of the Company fully cooperated with the staff's informal inquiry.
The Company has been advised by the staff of the SEC that, while the inquiry has
not been formally terminated, it is not being actively pursued at this time, and
there are no unresolved issues under consideration. No specific allegations have
been made; therefore no conclusion can be reached as to what impact, if any,
this inquiry may have on the Company or its operations. However, while the
Company's discussions with the staff of the SEC lead it to believe that no
proceeding will be commenced with regard to the matters considered by the SEC,
the commencement or announcement of a formal investigation by the SEC would have
a material adverse effect on the Company's business, financial condition, future
results of operations and ability to obtain adequate financing.
The Company is also subject to various legal proceedings and claims that arise
in the ordinary course of business. The Company believes that the amount of any
ultimate liability with respect to these actions in the aggregate or
individually will not materially affect the results of operations, cash flows or
financial position of the Company.
25
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. Page
-------- ----
27 - Financial Data Schedule 28
b) Reports on Form 8-K.
-------------------
None
26
<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, 1997 /s/ Philip A. Herman
-----------------------------------------------------
Philip A. Herman
Chairman of the Board and President
(Principal Executive Officer)
November 14, 1997 /s/ William Poccia
-----------------------------------------------------
William Poccia
Chief Financial Officer
(Principal Financial and Accounting Officer)
27
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 167,268
<SECURITIES> 0
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<PP&E> 1,014,768
<DEPRECIATION> 411,465
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<CURRENT-LIABILITIES> 14,912,604
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3,117,274
<COMMON> 3,788
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<OTHER-EXPENSES> 912,715
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<INTEREST-EXPENSE> 1,081,228
<INCOME-PRETAX> 62,680
<INCOME-TAX> 17,910
<INCOME-CONTINUING> (374,630)
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<NET-INCOME> (374,630)
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