<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: March 31, 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
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 May 1, 1997.
Transitional Small Business Disclosure Format: Yes X No
--- ---
<PAGE>
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets 3
Consolidated statements of income 4
Consolidated statements of cash flows 5
Notes to consolidated financial statements 6 - 11
- --------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-16
- --------------------------------------------------------------------------------
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17 - 18
Item 6. Exhibits and Reports on Form 8-K 18
- --------------------------------------------------------------------------------
SIGNATURES 19
- --------------------------------------------------------------------------------
EXHIBIT 27 - Financial Data Schedule 20
- --------------------------------------------------------------------------------
2
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A NEW YORK CORPORATION)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND MARCH 31, 1997
<TABLE>
<CAPTION>
ASSETS (Note 3) December 31, 1996 March 31, 1997
- ------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Current Assets
Cash $ 335,130 $ 215,879
Accounts receivable, less allowance for doubtful
accounts 1996 $347,000; 1997 $352,000 3,281,236 2,731,336
Due from employee 63,104 43,920
Inventory 709,627 523,931
Current portion of related party note receivable 169,169 178,754
Deferred public offering costs 155,721 291,324
Prepaid expenses and other 168,588 466,812
--------------------------------------------------
Total current assets 4,882,575 4,451,956
--------------------------------------------------
Related Party Note Receivable, less current portion 45,327 18,357
Equipment and leasehold improvements, net 549,349 497,980
Intangible Assets, net 17,666,327 17,447,018
--------------------------------------------------
$ 23,143,578 $ 22,415,311
==================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable - bank (Note 3) $ 2,879,581 $ 2,749,272
Notes payable - other (Note 2) - 534,000
Current maturities of long-term debt (Note 3) 8,781,519 7,907,000
Accounts payable 2,250,206 1,782,128
Due to principal shareholder 390,038 580,690
Accrued expenses 413,004 362,982
Customer deposits 916,480 1,089,707
--------------------------------------------------
Total current liabilities 15,630,828 15,005,779
--------------------------------------------------
Deferred Income Taxes 91,000 126,000
--------------------------------------------------
Long-Term Debt, less current maturities (Note 3) 110,815 103,251
--------------------------------------------------
Minority Interest: Preferred Stock of Subsidiary 3,117,274 3,117,274
--------------------------------------------------
Stockholders' Equity
Common stock, $.001 par value, authorized 120,000,000
shares; issued 1996 and 1997; 15,150,586 shares 15,151 15,151
Additional paid-in capital 3,850,869 3,850,869
Retained earnings 333,451 202,797
--------------------------------------------------
4,199,471 4,068,817
Less cost of treasury stock (581,000 shares) 5,810 5,810
--------------------------------------------------
4,193,661 4,063,007
--------------------------------------------------
Total liabilities and stockholders' equity $ 23,143,578 $ 22,415,311
==================================================
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A NEW YORK CORPORATION)
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31,
<TABLE>
<CAPTION>
1996 1997
- ------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Sales $ 9,764,955 $ 9,258,004
Cost of sales 7,084,927 6,833,143
--------------------------------------------------
Gross profit 2,680,028 2,424,861
Selling, general and administrative expenses:
Related party consulting fees 125,000 30,000
Related party rent expense 25,071 25,071
Other 1,411,944 1,633,865
--------------------------------------------------
1,562,015 1,688,936
--------------------------------------------------
Amortization and depreciation 319,015 323,104
--------------------------------------------------
Operating income 798,998 412,821
Other income (expense):
Miscellaneous income 4,509 3,466
Interest expense (414,993) (402,141)
--------------------------------------------------
Income before taxes and dividends to preferred
stockholders of subsidiary 388,514 14,146
Provision for income taxes 134,750 5,000
--------------------------------------------------
Income before dividends to preferred stockholders
of subsidiary 253,764 9,146
Dividends to preferred stockholders of subsidiary 124,200 139,800
--------------------------------------------------
Net income (loss) $ 129,564 $ (130,654)
==================================================
Net income (loss) per common share 0.01 (0.01)
==================================================
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A NEW YORK CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
<TABLE>
<CAPTION>
1996 1997
- -------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Reconciliation of Net Income (Loss) to Net Cash
Provided by Operating Activities
Net income (loss) $ 129,564 $ (130,654)
Depreciation 36,498 75,000
Amortization 282,516 248,105
Accretion of discount on subordinated notes payable 33,434 -
Deferred income taxes 14,226 35,000
Provision for bad debts 16,000 56,645
Interest on long-term debt and notes added to note payable 369,456 297,229
Common stock issued in lieu of interest payment 15,000 -
Rent expense in lieu of note receivable payments from Realty 25,071 25,071
Changes in assets and liabilities
Decrease in accounts receivable 154,184 493,255
Decrease in inventory 91,174 185,758
Increase in prepaid expenses (37,659) (298,224)
Decrease in accounts payable (651,805) (468,079)
Increase in due to principal shareholder - 190,652
Decrease in accrued expenses (39,571) (50,085)
Increase in customer deposits 108,292 173,227
----------------------------------------------
Net cash provided by operating activities $ 546,380 $ 832,900
==============================================
Cash Flows from Investing Activities
Net advances to related parties $ (13,843) $ 11,499
Purchase of equipment and leasehold improvements (24,162) (23,631)
Acquisition cost expenditures - (28,795)
----------------------------------------------
Net cash used in investing activities (38,005) (40,927)
----------------------------------------------
Cash Flows from Financing Activities
Payments on note payable (869,059) (1,302,537)
Principal payments on long-term debt (6,404) (7,084)
Cash payment for deferred offering costs - (135,603)
Proceeds from subordinated notes payable - 534,000
----------------------------------------------
Net cash used in financing activities $ (875,463) $ (911,224)
----------------------------------------------
Net decrease in cash $ (367,088) $ (119,251)
Cash, beginning 693,356 335,130
----------------------------------------------
Cash, ending $ 326,268 $ 215,879
==============================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $ 6,028 $ 7,602
==============================================
</TABLE>
See Notes to Consolidated Financial Statements.
5
<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. 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.
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.
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 Regulations S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for the 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 March 31, 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.
6
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A New York Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies (continued)
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 March 31, 1997, 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.
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 business' 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.
7
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A New York Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies (continued)
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.
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 for the period. There
were no common stock equivalents outstanding during the three months ended
March 31, 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. The Company has not determined
what effect, if any, this new pronouncement will have on the Company's EPS
presentations.
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.
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)
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 quarters ended March 31, consist of the following:
1996 1997
---------------------------------------
62,435 $ 109,097
=======================================
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.
Note 2. Notes Payable - Other
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 bear interest
at the rate of 12% per annum, payable monthly. Additionally, if the advance is
repaid within three months of the date of the advance, the lender will receive
40% of the dollar amount of the advance in shares of common stock of the
Company. This amount increases by 20% for each additional three month period
the advance is outstanding, capping at 100% if the advance is not repaid within
9 months. The per share value of the shares of common stock of the Company
issued to satisfy this obligation will be based on the average bid price of the
stock for the thirty day period prior to the payment date. The value of the
shares to be issued is being accrued over the life of the debt. Interest expense
of $112,140 relating to these advances has been reflected in the accompanying
financial statements as of March 31, 1997.
9
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A New York Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 3. 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. 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 March
31, 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 three months ended March 31, 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 March
31, 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 $468,125 at March 31, 1997.
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 June 1, 1997, 1% between June 2,
1997 and June 1, 1998 and none thereafter.
Amounts outstanding under the agreement at December 31, 1996 and March 31,
1997, are as follows:
1996 1997
--------------------------------
Working capital note $ 2,879,581 $ 2,749,272
================================
Long-term note $ 8,750,000 $ 7,875,000
================================
At March 31, 1997, the Company has approximately $250,000 available under the
original working capital note commitment.
10
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A New York Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 3. Note Payable - Bank and Long-Term Debt (continued)
During the year ended December 31, 1996 and the three months ended March 31,
1997, the Company made principal payments due on the long-term revolving note
by 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 $135,251 outstanding at
December 31, 1996 and March 31, 1997, respectively. The notes bear interest at
an approximate average of 11% and mature between May 1997 and August 2001.
Note 4. Restatement
The Company has restated its 1996 financial statements.
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 Company is required to reflect the preferred stock as a minority
interest on the consolidated balance sheet. The preferred stock dividends are
reflected 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 $124,200 and $2,759,619 respectively, and
increased minority interest: preferred stock of subsidiary by $2,759,619 for
the three months ended March 31, 1996. The adjustment had no effect on retained
earnings of the Company.
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.
11
<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 three months ended March 31, 1996 and 1997 and
should be read in conjunction with the financial statements and notes thereto
included elsewhere in this Report.
Results of Operations
Three Months Ended March 31, 1996 Compared to Three Months Ended March 31,
1997.
Total revenues decreased by $506,951 to $9,258,004 for the three months ended
March 31, 1997 from $9,764,955 for the three months ended March 31, 1996,
representing a decrease of 5.2%. This decrease is attributable primarily to a
decrease in New Housing Division sales for the first three months of 1997 as
compared to first three months of 1996. During the first quarter of 1997, it is
estimated that new home unit sales volume decreased by approximately 2.7% in
the Las Vegas market place. The decrease in revenues was also affected by a
decrease in Replacement Sales Division due to increased competition in the Las
Vegas market.
The gross profit decreased by $255,167 to $2,424,861 for the three months ended
March 31, 1997 from $2,680,028 for the three months ended March 31, 1996,
representing a decrease of 9.5%. Also, the gross profit percentage declined
from 27.6% in 1996 to 25.8% in 1997. This decline in gross profit percentage is
due to the above mentioned decline in sales and to increased competition in the
Las Vegas market.
Selling, general and administrative expenses increased by $126,921 to $1,688,936
for the three months ended March 31, 1997 from $1,562,015 for the three months
ended March 31, 1996. This increase is due to the following approximate
changes: (1) increases in salaries and related payroll taxes of $233,000, due
primarily to an increase in the number of employees, (2) professional expenses
associated with the annual audit and required public filings of $50,000, (3) an
increase in advertising expense of $47,000 and (4) an increase in rent expense
of $45,000 and telephone expense of $31,000 primarily due to the opening of the
new home design center and an additional retail location. These increases were
partially offset by (1) a decrease in workers' compensation expense due to a
reduction in the modification rate, a decrease in volume in the first quarter
of 1997 and a refund of approximately $132,000 and (2) a decrease in management
and consulting fees of $95,000.
Amortization and depreciation expense increased from $319,015 in 1996 to
$323,104 in 1997, primarily due to increased depreciation expense on equipment
purchases in 1996 and 1997.
Operating income decreased by $386,177 to $412,821 for the three months ended
March 31, 1997 from $798,998 for the three months ended March 31, 1996.
Although interest expense decreased by only $12,852 from $414,993 in 1996 to
$402,141 in 1997, included in interest expense in 1997 is a non-cash charge of
$106,800 relating to advances received in February 1997 as further described in
"Liquidity and Capital Resources." The reduction in interest expense of
$119,652, after adjusting for the non-cash interest on these advances, is due to
principal payments made on debt obligations. The provision for income taxes
decreased by $129,750 due to the net loss for the three months ended March 31,
1997. Dividends to preferred stockholders of subsidiary increased from $124,200
in 1996 to $139,800 in 1997 due to the Company's subsidiary CBH's issuance of
additional shares of preferred stock in early 1996. Net income(loss) decreased
by $260,218 to $(130,654) for the three months ended March 31, 1997 from
$129,564 for the
12
<PAGE>
three months ended March 31, 1996. These decreases were due principally to the
above-mentioned decrease in sales/gross profit, increases in selling, general
and administrative expenses and increases in divdends to preferred stockholders
of subsidiary partially offset by corresponding decreases in interest expense
and income taxes.
Liquidity and Capital Resources
Cash provided by operating activities was $832,900 and $546,380 for the three
months ended March 31, 1997 and the three months ended March 31, 1996
respectively. At March 31, 1997, the Company had a working capital deficit of
$10,553,823. Included in such deficit is $10,624,272 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 March 31, 1997 was 2.8:1.
On March 19, 1997, the Company's shareholders approved a rincorporation
proposal for the Company. The reincorporation proposal would be effected
through the merger of the Company with Nations Flooring, Inc., ("Nations") a
newly formed wholly owned subsidiary of the Company incorporated in Delaware.
Nations will be the surviving corporation after the merger. The agreement
provides that all assets, liabilities, property, rights and obligations of the
Company would be transferred to and assumed by Nations.
In the merger, each four (4) shares of the Company's common stock will be
exchanged for one (1) share of Nations common stock. The effect of this
exchange will be similar to a one for four reverse stock split of the Company.
This proposed merger has not been reflected in the accompanying financial
statements.
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 Nations Flooring, Inc. ("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 sold for the account of Nations Flooring, Inc. and the managing
underwriter of such offering is Chatfield Dean & Co. A prospectus relating to
such 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 available to it.
The term portion of the Credit Agreement is due May 31, 1999 and the revolving
portion is due May 31, 1997, subject to extension in certain circumstances to
May 31, 1999. 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 (8.50% at May 12, 1997) plus 2.25% per annum (currently 10.75% per
annum),
13
<PAGE>
payable monthly. As of April 30, 1997, the Company had borrowed approximately
$2,840,000, leaving approximately $160,000 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
$7,875,000. The Company received advances from unrelated parties totaling
$534,000 during February 1997, which enabled it to make the principal payment of
$875,000, due to First Source on February 28, 1997. These advances bear interest
at the rate of 12% per annum, payable monthly. Additionally, if the advance is
repaid within three months of the date of the advance, the lender will receive
40% of the dollar amount of the advance in shares of common stock of the
Company. This amount increases by 20% for each additional three month period the
advance is outstanding, capping at 100% if the advance is not repaid within 9
months. The per share value of the shares of common stock of the Company issued
to satisfy this obligation will be based on the average bid price of the stock
for the thirty day period prior to the payment date. The value of the shares
to be issued is being accrued over the life of the debt. Interest expense of
$112,140 relating to these advances has been reflected in the accompanying
financial statements as of March 31, 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 March 31, 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, 3) and substantially all of the financial convenants
for the year ending December 31, 1996 and for the three months ended March 31,
1997. On April 15, 1996 First Source waived, through June 1, 1996, the covenant
violations occurring prior to such 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. 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 April 30, 1997, the Company was
obligated to Branin in the amount of approximately $559,000. Because the
Company and Branin anticipates 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 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 March 31, 1997
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 $468,125 at March 31, 1997.
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 June 1, 1997, 1% between June 2,
1997 and June 1, 1998 and none 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. The credit facility would include a revolving line of
credit in
14
<PAGE>
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 Ragar. The
commitment expires June 15, 1997 and is conditioned upon the negotiation and
execution of the customary documentation and the completion of the Public
Offering. The loan agreement will contain customary representations, warranties,
events of default and remedies. If the Company is able to complete the Public
Offering and obtain the credit facility, the proceeds will be used to repay all
borrowings under the First Source credit agreement, to redeem all or a
significant portion of the CBH preferred stock, and to repay all amounts owed to
Branin. Any remaining proceeds will be available for general corporate purposes,
including acquisitions. If the Company is unable to fulfill the conditions of
obtaining this credit facility, it will continue to explore financing
alternatives available to it.
During the three months ended March 31, 1997, cash used in investing activities
was $40,927. Cash used in financing activities during such period was $911,224,
used primarily to make principal payments on the Credit Agreement offset by
proceeds received from the unsecured advances in February 1997.
Branin, which beneficially owns 1,252,412 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 April 30,
1997, CBI owed Branin and PAH approximately $11,000 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.
The Company opened two new locations in Las Vegas during 1996. The initial
capital costs for these two 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 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 significant 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 agreements will be entered into between the Company and
Kenneth Nonn and Janet Meier, who are both
15
<PAGE>
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 has been sufficient
for the Company's working capital needs for 1996, and upon consummation of the
Public Offering and refinancing of the First Source debt, is likely to be
sufficient for the Company's working capital needs during 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.
16
<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 will become responsible for
taxes for periods beginning April 1, 1997.
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
intends to appeal the above decision to the Board of Review on or before the
expiration of its term of 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. The amount of
any potential liability is unknown but the Company along with counsel believes
that any adverse outcome will not be material.
Termination of Mark Szporka
The employment of Mark Szporka, as the Company's Chief Financial Officer, 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 581,000 shares of Common Stock from Mr. Szporka for $5,810. Mr.
Szporka has commenced a suit against the Company alleging he was wrongfully and
unlawfully terminated. The Company believes it has meritorious defenses to such
allegations and intends to defend the matter vigorously.
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 has
provided the SEC with certain documents as outlined in that letter. The SEC's
letter to the Company states that this inquiry is 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 intends to fully cooperate with the SEC's informal
inquiry. 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, the commencement or announcement of a formal
investigation by the Commission would have a material adverse effect on the
Company's business, financial condition and results of operations.
17
<PAGE>
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.
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.
May 15, 1997 /s/ Philip A. Herman
--------------------------------------------
Philip A. Herman
Chairman of the Board and President
(Principal Executive Officer)
May 15, 1997 /s/ William Poccia
--------------------------------------------
William Poccia
Chief Financial Officer
(Principal Financial and Accounting Officer)
19
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 215,879
<SECURITIES> 0
<RECEIVABLES> 2,731,336
<ALLOWANCES> 352,000
<INVENTORY> 523,931
<CURRENT-ASSETS> 4,451,956
<PP&E> 497,980
<DEPRECIATION> 296,465
<TOTAL-ASSETS> 22,415,311
<CURRENT-LIABILITIES> 10,660,779
<BONDS> 103,251
0
3,117,274
<COMMON> 15,151
<OTHER-SE> 3,850,869
<TOTAL-LIABILITY-AND-EQUITY> 22,415,311
<SALES> 9,258,004
<TOTAL-REVENUES> 9,258,004
<CGS> 6,833,143
<TOTAL-COSTS> 1,689,136
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 352,000
<INTEREST-EXPENSE> 402,141
<INCOME-PRETAX> 14,146
<INCOME-TAX> 5,000
<INCOME-CONTINUING> (130,654)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (130,654)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
