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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996.
[ ] TRANSITION REPORT PURSUANT TO 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.
(Name of small business issuer in its charter)
New York 2836, 2835 11-2925673
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction Industrial Classification Identification Number)
of Incorporation or Code Number)
Organization)
100 Maiden Lane
New York, New York 10038
(Address of principal
executive offices)
(212) 898-8888
(Issuer's Telephone Number)
Securities registered pursuant to Section 12(g) of the Act:
Name of Each Exchange on
Title of each Class Which Registered
------------------- ----------------
Common Stock, $0.001 par value None
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities 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.
Yes [X] No [ ]
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-KSB or any amendment to
this Form 10-KSB [X]
State issuer's revenues for its most recent fiscal year $42,414,364.
The aggregate market value of the shares of common stock held by non-affiliates
on April 7, 1997 was approximately $6,566,538. As of April 7, 1997, there were
14,569,586 shares of Common Stock, $0.001 par value per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
Transitional small business disclosure format (check one):
Yes [ ] No [X]
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Part 1.
Item 1. Business
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information (including the Financial
Statements and the Notes thereto) appearing elsewhere in this report.
References to the Company herein shall mean the Company, including the
operations of Ragar Corp. and its consolidated subsidiaries, and the operations
of their predecessors, except to the extent that the context requires
otherwise.
The Company
Ragar Corp. (the "Company") is engaged in the business of selling and
installing floor coverings and selling wall coverings, window treatments and
certain related products, primarily for the residential housing market.
Currently, the Company is engaged in business in Las Vegas, Nevada, where its
sales of $40.3 million in 1995 and $42.4 million in 1996 have made it the
largest seller and installer of floor coverings in such market. The Company
believes that its sales represent approximately 63% of the new homes sold in
the Las Vegas market and are approximately 3.5 times those of its nearest
competitor, based on 1995 construction data, the most recent information
available. From its three facilities in Las Vegas, the Company sells
approximately 72% of its products to the new home market to or through new
homebuilders through its New Housing Division and approximately 28% of its
products to the retail replacement market directly to individual homeowners
through its Replacement Sales Division. New Housing Division sales are effected
primarily to or through new home builders who offer purchasers a wide selection
of basic grade floor coverings as part of the unit cost. Customers then visit
the Company's new home design center and, with the assistance of one of the
Company's design consultants, choose possible upgrades on floor coverings, in
addition to purchasing wall coverings, window treatments and related products.
The Company believes that its new retail design center located in Las Vegas
will also enable it to continue to broaden its product lines and expand the
sales of its Replacement Sales Division. The Company has also recently
established a Commercial Division, which is its first entry into the commercial
market, including multi-family, office, retail store and small hotel projects.
The Company believes that the retail floor covering industry is highly
fragmented, with no single floor covering retailer, including national and
large regional chains, accounting for more than ten percent of the total
market. Most floor covering retailers operate a single store generating less
than $1 million in annual sales. The Company believes that small independent
floor covering retailers face competitive disadvantages resulting from limited
purchasing power, ineffective inventory control and inadequate resources for
sales, marketing and store management. Accordingly, the Company believes that
significant opportunities exist for floor covering retailers that can achieve
cost advantages and operating efficiencies through selective acquisitions and
internal growth.
To take advantage of these opportunities the Company is pursuing a
strategy of acquiring existing floor covering businesses that are dominant
competitors in their regions and developing new stores in markets experiencing
significant growth in population and homebuilding that do not have a dominant
floor covering retailer. The Company is reviewing various markets throughout
the United States to determine their desirability for expansion. The Company is
also in the process of negotiating with acquisition candidates in some of those
markets and has recently entered into a non-binding letter of intent to acquire
the assets of Nonn's Flooring, Inc., a floorcovering retailer with 2 stores,
located in the Madison, Wisconsin area. See Item 6. Management's Discussion and
Analysis of Financial Condition and Results of Operations-Liquidity and Capital
Resources. The Company also anticipates opening two new "big-box" facilities in
Phoenix, Arizona in 1997 and is actively exploring the possibility of
developing additional stores in other sites in the southwestern United States
where the Company can expand its relationships with regional homebuilders. The
planned "big-box" facilities will have between 40,000 and 60,000 square feet
per facility and will focus on retail sales of all product lines in a
warehouse-type setting, as well as having a dedicated design center area. The
Company believes that this format will enable it to quickly capture a
significant market share by offering customers a pleasant shopping environment
in which to fulfill all of their floor and wall covering and related needs on a
cash-and-carry or next-day installed basis. However, there can be no assurance
as to the viability of this approach. See "Business-Strategy."
The Company also intends to increase its business in Las Vegas,
through continued advertising and marketing efforts, and recently opened a new
retail facility and a new home design center in other areas of Las Vegas. The
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Company's main facility is located centrally, and the additional retail branch
is located in an area of Las Vegas with a large concentration of mature homes.
Additional retail centers in similar areas are being contemplated. The Company
intends to actively seek to increase its retail replacement sales through
increased consumer advertising, enhanced marketing, the opening of one or more
new retail locations and the addition of new products.
Organizational History
The Company was organized under the laws of the State of New York on
July 19, 1988. On June 2, 1995, Ragar Corp. acquired all of the common stock of
Carpet Barn Holdings, Inc. ("CBH") in exchange (the "Exchange") for the
issuance to the holders of common stock of CBH of an aggregate of 13,363,000
shares of Ragar common stock, par value $.001 per share, pursuant to an
Agreement and Plan of Exchange, dated as of June 1, 1995 (the "Exchange
Agreement"), among Ragar Corp., CBH and the CBH stockholders. The Company's
only substantial operations, CBH and it's wholly-owned subsidiary, Carpet Barn,
Inc. ("CBI"), were formed for the purpose of acquiring the assets and
operations of Carpet Barn, Inc., a Nevada corporation ("Carpet Barn" or the
"Predecessor Business"), a retail carpet sales and installation business
located in Las Vegas, Nevada. Concurrently with completing the Exchange, the
Company completed the acquisition (the "Acquisition") of substantially all of
the assets of Carpet Barn pursuant to that certain Asset Purchase Agreement,
dated as of June 1, 1995 (the "Purchase Agreement"), between CBI and Carpet
Barn. On March 19, 1997, the Company's stockholders approved the merger of the
Company with and into Nations Flooring, Inc., a wholly owned subsidiary of the
Company, organized under the laws of the State of Delaware for the sole purpose
of effecting such merger. As a result of the merger, each share of Ragar common
stock, will be converted into 1/4 share of common stock, par value $.001 per
share, of Nations Flooring, Inc. It is anticipated that the merger will be
consummated in the first half 1997. The current directors and executive
officers of the Company will continue as the directors and executive officers
of Nations Flooring, Inc. following the merger.
Industry Overview
The retail floor covering industry in the United States (which
includes fixed and non-fixed carpeting and marble, ceramic tile, vinyl and wood
flooring) is estimated to have grown from approximately $11.2 billion in 1991
to approximately $14.5 billion in 1995, up 29% over the 1991 level but only up
0.1% over the 1994 level. Carpet and area rugs accounted for 68.7% of total
dollar sales in the industry in 1995 versus 69.4% in 1994. Despite this growth
in size, the industry has remained fragmented. The Company believes that no
single floor covering retailer, including national and large retailers such as
Color Tile, Home Depot and New York Carpet World, accounts for more than ten
percent of the total market. The Company believes that while chains and mass
merchandisers do not dominate the floor covering industry, such companies do
influence pricing, product selection and service innovation. According to the
most recent figures available, U.S. floor covering sales volume reached
approximately 2.5 billion square yards in 1995, down 0.4% from the prior year.
By product sector, change in sales volume in 1995 as compared to 1994 is as
follows: carpet and area rugs declined by 1.7%, hardwood flooring increased by
5.6%, ceramic floor and wall tile increased by 5.2%, and vinyl sheet and floor
tile decreased by 2.4%.
The carpet industry's two primary markets are residential and
commercial, with the residential market (the market currently served by the
Company) accounting for approximately 75% of industry sales in 1995 and the
commercial market accounting for approximately 25% of such sales. A number of
factors influence overall sales levels in the carpet industry, including
consumer spending on durable goods, levels of discretionary spending, interest
rates, housing turnover, the condition of the residential construction industry
and the economy's overall strength.
Strategy
The Company's objective is to maintain its position as the leading
provider of floor coverings, wall coverings, window treatments and related
products in the Las Vegas residential market and to become the leading provider
of floor coverings, wall coverings, window treatments and related products in
selected markets throughout the United States. The Company is also seeking to
become a leading provider of floor coverings in the commercial market in Las
Vegas and in other markets. The Company's strategy includes the following:
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Las Vegas Market
Maintain New Home Market Share in Las Vegas; Increase Replacement
Sales Penetration. The Company intends to increase its core business through
continued advertising and marketing efforts, and recently opened a new retail
facility and a new home design center in other areas of Las Vegas. The
Company's main facility is located centrally, and the additional retail branch
is located in an area of Las Vegas with a large concentration of mature homes.
Additional retail centers in similar areas are being contemplated. The Company
intends to actively seek to increase its retail replacement sales through
increased consumer advertising, enhanced marketing, the opening of one or more
new retail locations and the addition of new products.
The Company also intends to expand upon its existing base of customers
by increasing its sales for new home projects with residential developers.
Homebuilders provide the Company's new home design center with the floor plans
of all the units. This allows the new home design center to then provide a home
buyer with alternatives specifically tailored to the floor plan of the
customer's unit, as well as one-stop shopping for home buyers with respect to
their floor, wall and window covering needs. The Company's new home design
center is a significant element in the Company's plan to enhance service to
homebuilders and home buyers. Based on estimates of the Las Vegas Homebuilder's
Association, over the next 10 years, the total new homes market for carpet in
Las Vegas is projected to grow at an annual rate of 5% to 10%. For 1996, the
Company believes it has maintained its share of the market for floorcovering
for new homes in the Las Vegas market with sales growth of 7.5% over the prior
year. There can be no assurance that the Las Vegas market will grow as
projected or that the Company will be able to retain its market share.
Continue to Offer Superior Service. The Company believes that the most
important factor in its ability to compete is the quality of the customer
service it offers. The Company believes that it offers the highest quality
customer service in Las Vegas. This service begins with the offering of a full
range of floor covering products. In addition, the Company intends to continue
its policy of next-day installation and of guaranteeing free repairs on carpets
it has installed for homeowners and home buyers for as long as they own their
homes. The Company also inspects all floor covering installations in new homes
before the customer moves in and has created a customer service department to
handle all complaints and installation problems. Management believes these
programs have begun to have a very positive effect on the Company's reputation
with builders and home buyers. The Company also intends to continue to offer
what it believes is quality technical service and assistance to its customers
in both the new home and replacement sales markets. Employees of the Company
assist, as needed, in all phases of customers' projects, from
conceptualization, design and product selection to actual installation. In
addition, the Company's design center is staffed with specially trained design
consultants that are highly knowledgeable regarding the broad range of
decorating possibilities provided by the Company's products. The Company
intends to continue to hire salespersons with experience in floor covering or
related trades, and to continue to train such salespersons with respect to its
products and services. The Company believes that such programs will have a
positive effect on results of operations, although there can be no assurance of
this.
Competitive Prices. A second factor affecting the Company's ability to
compete is the pricing of its products. Because of the volume of its purchases,
the Company receives what it believes to be very favorable pricing from its
suppliers, including payment discounts from most suppliers and cooperative
marketing contributions from others, including DuPont, Monsanto and Allied. The
Company is able to pass these savings along to customers and thus generally to
offer the lowest prices in the region while maintaining a high profit margin.
The Company intends to continue to offer low prices and also to continue its
policy of offering to beat any competitor's price.
Addition of New Products; Design Centers. The Company also intends to
attract and maintain customers by adding complementary products to its current
offerings. The Company has targeted wall and window coverings as its first
significant product extensions and is anticipating further growth through the
addition of area rugs and through cleaning and maintenance programs, as well as
expansion of sales of hard floor coverings such as wood and tile. These new
lines will be promoted by sales personnel at the Company's stores and through
the Company's advertising campaigns. To that end, the Company has recently
hired a manager to implement these sales and marketing programs.
The Company further intends to increase market share and gross profit
margins through its operation of
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"design centers" in its retail sales facilities. The design centers provide
customers the opportunity to consult with trained personnel concerning the
multitude of design possibilities utilizing the full range of products offered
by the Company. The Company has also opened a design center in the Las Vegas
area for new home buyers who are selecting floor coverings and other products
to be installed in their new homes. This design center has been opened in
response to requests by builders who are currently customers as well as other
major builders who have expressed a desire to use the Company, should it open
such a center. The design center primarily showcases higher price and higher
profit margin products, particularly area rugs, hard floor surfaces, such as
wood and tile, and window and wall coverings. Early results from operation of
the new home design center show an average increased sale of approximately
$1,000 per new home sale. These sales have a significantly higher gross profit
margin. However, there can be no assurance that the design center will continue
to have a positive impact on the Company's operations.
Inventory Practices. In the Las Vegas market, the Company has been
able to maintain low warehousing costs by stocking small amounts of inventory.
At the same time, the Company has been able to provide its customers with
next-day installation on purchases in the Las Vegas market. These practices are
dependent on the Company's ability to schedule next-day "cut and drop" product
deliveries from its suppliers. To date the Company's suppliers have been able
to satisfy its delivery requirements with overnight shipments to the Company
from distribution centers maintained by such suppliers primarily in California,
and the Company believes that, because of the volume of its purchases, it can
continue to operate in Las Vegas and certain other markets on this basis.
However, there can be no assurance in this regard, and any significant failure
of suppliers to make timely deliveries would adversely affect the Company's
reputation among customers.
Other Markets
Pursuit of Selective Acquisitions and Development of New Stores. The
Company believes that because of the fragmented nature of the marketplace for
floor covering and related sales, significant consolidation opportunities
exist, and the Company is well positioned to achieve financial and operational
efficiencies through selective acquisitions due to favorable working
relationships with its suppliers and major customers. The Company believes that
any such acquisitions will enable it to increase its sales while decreasing its
general and administrative costs as a percentage of such sales due to the
creation of substantial economies of scale. The Company intends to pursue
acquisitions of businesses that provide the same products and services as, or
those complementary to, the Company's existing business. The Company has
identified a number of markets that it intends to explore entering over the
next several years.
The Company has also selectively targeted certain markets throughout
the southwestern United States where there is no dominant competitor for
expansion through the development of new stores. The Company has entered into
an employment agreement with Alan Ember, the former district manager of
CarpetMAX, to develop stores in Phoenix, Arizona and other markets in the
southwestern United States. Like Las Vegas, these areas are experiencing high
growth in population and home building. Expansion into these markets will be
financed in part by the suppliers of the Company's products, with such funding
being applied to the construction costs associated with the new facilities. The
Company believes that it can duplicate its successful concepts in these high
growth markets by strengthening its relationships with its existing builders
who are active in these markets. Additionally, the Company believes that it can
compete in these markets through its demonstrated ability to compete on service
and price. Furthermore, expansion of the Company should generate an increase in
the Company's buying power due to higher volume purchasing. Where the Company
expands into new markets through acquisition of existing companies, this should
allow the Company to provide lower prices than the stores could provide on a
stand-alone basis. However, there can be no assurance that such expansion will
be effected or, if effected, that any new facilities will be operated
profitably.
Big-Box Store Format. The Company's strategy for entering new markets
includes opening "big-box" stores with 40,000 to 60,000 square feet of
warehouse-type space stocked with significant inventories of the full range of
the Company's products, as well as customer service offices, which, among other
things, will provide customers with access to independent contractors who can
install these products on a next-day basis. These stores are intended to
satisfy all of a customer's floor, wall and window covering needs and to serve
the cash-and-carry market as well as the customers requiring installation
service. The Company believes that these stores can enable it quickly to
achieve meaningful market share in markets that do not have dominant
competitors. However, the Company's strategy in this regard is untested, and
there can be no assurance that such stores can be operated profitably or can
achieve the market penetration the Company anticipates.
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In markets in which the Company intends to create "big-box"
facilities, the Company believes it can achieve next-day installation through
the maintenance of broad inventories from which purchases can be made on the
spot by "do-it-yourselfers" or which can be installed in a timely manner by
independent installation contractors who will maintain customer service offices
on the Company's premises. Maintenance of sufficient inventories in these
facilities will require a substantial amount of working capital, which will
adversely affect financial performance relative to the results of the Company's
current practices. The Company believes that these adverse effects will be
fully offset by economies of scale that can be achieved in cost of goods sold,
delivery costs and other operating costs, although there can be no assurance in
this regard.
The Company contemplates that any retail facilities it opens, whether
or not in the "big-box" format, will have a dedicated design center area where
customers can consult with trained personnel concerning the multitude of design
possibilities utilizing the full range of products offered by the Company. The
Company believes that the clean, relaxed environment of these new facilities,
including child care/entertainment centers, will increase the average total
sale price and gross margin for its sales, although there can be no assurance
in this regard.
Operations
Background. The Company operates its business in Las Vegas, Clark
County, Nevada, where its sales represent approximately 63% of the residential
floor covering market. At this time, all of the Company's operations are
located in this area.
The Las Vegas area is one of the fastest growing in the country,
according to regional publications. According to Las Vegas Chamber of Commerce
during 1996, an average of 6,500 persons relocate to Las Vegas each month, and
the Las Vegas population has grown by approximately 7.6% in the one-year period
between 1995 and 1996, with a similar percentage increase in the number of
households during that time. More than 40% of persons in Las Vegas have resided
there for only five years or less, and two-thirds of the area's residents own
their own homes. The above statistics underscore the high numbers of persons
arriving in the Las Vegas area and the potential strength of the retail floor
covering market.
The Phoenix market, into which the Company anticipates expanding
through the development of new stores, is the third fastest growing community
in the United States, according to regional publications. According to such
publications, an average of nearly 7,000 people relocate to the Phoenix area
every month, and building permits have remained steady over the last three
years at a rate of 25,000 single family building permits issued per year.
Because no single retailer dominates the Phoenix floor covering market, the
Company believes that its strategies should enable it to quickly become a
successful retailer in the Phoenix market, although there can be no assurance
in this regard. See "-Strategy."
Divisions. The Company operates through two divisions, the New Housing
Division and the Replacement Sales Division. A Commercial Division, serving the
multi-family, office, retail store and small hotel markets is being developed.
New Housing Division. The Company's New Housing Division is
responsible for installation of carpeting in newly built homes. Salespersons in
this division deal with both home builders and buyers. In servicing the new
home market, the Company generally secures contracts from builders to carpet
new homes. In most cases, when the builder sells a new home, the builder will
direct the home buyer to the Company, which allows the buyer to choose the
color of carpeting represented by a standard allowance provided from the
builder to the home buyer or to upgrade from the standard selection by paying a
higher price. The Company has found that most home buyers choose an upgraded
carpet selection.
The Company receives payment for its carpeting in new homes in one of
two ways. In most cases, the buyer directly pays the upgraded portion of a
carpet sale by generally paying the full amount with the order. In other cases,
the Company bills the upgraded portion of the job to the builder, who then
passes on the carpet's additional cost to the buyer as part of the total price
of the home; this method may allow buyers to finance their flooring through
their mortgage, with little incremental effect on monthly payments. Most of the
Company's accounts receivable result from builders' standard allowances and are
due within thirty days of installation.
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Through its New Housing Division, the Company has relationships with
most of the larger tract home builders in the Clark County area, with its five
largest customers accounting for $15.9 million, $12.3 million and $15.4 million
in sales in 1994, 1995 and 1996, respectively. During the past six years, the
New Housing Division has accounted for Company sales ranging from a low of
$21.8 million in 1990 (56% of total Company sales) to a high of $30.6 million
in 1996 (72.2% of total Company sales). The Company estimates that its new
homes sales in Clark County as a percentage of its total sales was 77%, 74% and
72% in 1994, 1995 and 1996, respectively.
Because the Division's sales are dependent on sales of new homes, such
sales are affected by interest rates prevailing in the home industry and by
building activity generally. Because the Company also services the carpet
replacement market, the adverse effects on the Company's sales by downturns in
the business cycle have been moderated.
Replacement Sales Division. The Replacement Sales Division is
responsible for providing individual consumers who have existing homes with new
or replacement floor coverings. The Company is one of the top three retailers
in such consumer replacement sales in the Las Vegas area, chiefly because of
its large selection, low prices and quick installation time.
Customers contemplating purchasing flooring or window and
wallcoverings will visit one of the Company's retail design centers. Highly
trained retail salespersons will then go to the customer's home to verify
measurements and confirm product selections. Due to the Company's "cut and
drop" program with its suppliers, installation is available at the customer's
convenience.
Generally, the Company requires that replacement carpet buyers provide
a deposit by cash, check or credit card when they place an order, and that they
pay the balance upon installation. For customers who wish to finance their
purchases, the Company refers such customers to a consumer finance company
which issues a check directly to the Company upon completion of installation.
The Company's sales in the replacement sales market grew by $715,127 from
$9,763,024 in 1994 to $10,478,151 in 1995. Although sales in the replacement
sales market during 1996, at $8,789,047, have fallen behind the pace set in
previous years, the Company believes that its retail design center approach can
significantly expand sales by its Replacement Sales Division, although there
can be no assurances in this regard.
Customers
The Company has among its customers most of the larger home builders
in Clark County, Nevada, including Lewis Homes of Nevada, Inc. ("Lewis"),
American West Homes ("AWH") and Pardee Construction Company of Nevada. The
Company has developed its relationships with such builders over the past 24
years. In 1994, 1995 and 1996, five customers accounted for approximately 37%,
31% and 36% of the Company's net sales, respectively. In 1994, 1995 and 1996,
Lewis accounted for 12.5%, 11.3% and 14.2% of net sales, respectively. In 1994,
1995 and 1996, AWH accounted for 11.9%, 8.1% and 9.6% of net sales,
respectively.
Suppliers
The Company currently purchases its carpeting from suppliers outside
Nevada including suppliers located in Georgia and California. The Company
generally pays for its purchases within three weeks of delivery, allowing the
Company to procure substantial discounts from its suppliers. The Company's six
largest suppliers, which include Shaw, Aladdin Mills, Inc. and Tuftex (a
division of Queen Carpet Corp.) accounted for 74.3%, 87.8% and 86.5% of its
total purchases in 1994, 1995 and 1996, respectively. The Company believes that
one of its competitive advantages is its strong relationship with such
suppliers. While the Company continues to have good relations with its
suppliers, management believes that the Company could find alternative sources
of supply should any of the Company's major suppliers cease doing business with
it.
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Marketing, Advertising and Merchandising
The Company's advertising program includes television and radio
commercials and print advertising in local daily newspapers. Expenditures for
advertising and promotion were approximately $349,000, $332,000 and $598,000
(representing 0.8%, 0.8% and 1.4% of net sales) in 1994, 1995 and 1996,
respectively. The Company spent 35% of its 1996 advertising budget on print
advertising (including pre-printed newspaper inserts and print advertisements),
and 65% on television and radio advertising. The Company features in its
advertising its large selection and low prices and also features its free
repair guarantee on installation for as long as buyers own their homes. The
Company also receives cooperative advertising contributions, of up to 50% of
the cost of qualifying advertisements depending on the amount of the relevant
products sold, from mills and yarn companies by including in its advertising
references to brand name yarns (such as DuPont, Monsanto and Allied) or floor
coverings (such as Congoleum). The Company has located its main store on a
centrally located, heavily traveled street.
Training
The Company strives to develop the technical and sales skills of its
store personnel to ensure that customers consistently receive knowledgeable and
courteous assistance. The Company's training programs are oriented toward
emphasizing the importance of customer service and improving selling skills.
The Company provides training for its entry level personnel through an in-house
training program which combines on-the-job training with formal presentations
by the Company's suppliers concerning their products. The suppliers'
contributions in this regard evidence their commitment to the sales and service
efforts of the Company. In addition, ongoing instruction is given to all sales
and customer service personnel.
Competition
The floor covering industry is highly competitive and fragmented.
According to an industry publication, the nations ten largest floor covering
retailers in terms of sales volume accounted for approximately 20% of all floor
covering sales in the United States in 1995, although none of such retailers
dominated the market. In 1996, Clark County, Nevada had approximately 110
outlets through which carpet was sold.
Companies in the floor covering industry compete mainly through their
ability to provide service and selection at reasonable prices. The Company
competes with general merchandise and discount stores, home improvement centers
and specialty retailers operating on a local, regional and national basis. The
Company believes that its chief competitors are local and regional specialty
chains as well as homebuilders' in-house design centers. Competitors include
Carpeteria, Carpets Galore, Cloud Carpets, CarpetMAX, Albright and Adams
Brothers, all of which have stores located in Las Vegas.
In addition to the local and regional specialty chains, the Company
competes with national and regional home improvement centers (such as Home
Depot and Payless Cashways) and national department stores and specialty
retailers (such as Sears and Color Tile) which have branches in Las Vegas. Many
of such regional and national competitors have substantially greater financial
resources than the Company. In addition, expansion by certain regional home
improvement center chains has led to increased price competition for certain of
the Company's products.
A significant new entrant into the retail floor covering market in the
United States is Shaw Industries, Inc., the largest domestic manufacturer of
carpeting. To date, Shaw has not entered the Las Vegas or Madison markets.
While there is intense competition among providers of floor coverings
in the Las Vegas, Nevada market, the Company has successfully competed for
customers on the basis of price, reliability and quality of product, breadth of
product line, service and the fact that the Company has been in business for 25
years.
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Employees
As of March 31, 1997, the Company employed approximately 130 persons,
divided among its accounting, administrative, buying, sales, customer service
and warehousing departments. A substantial portion of the compensation of
replacement sales personnel is commission-based. None of the Company's
employees is covered by a collective bargaining agreement. The Company believes
that its relationship with its employees is satisfactory.
Product Liability and Insurance
The sale of the Company's retail products involves some risk of
product liability claims. The Company has obtained product liability insurance
in the amount of $1.0 million per occurrence with a $2.0 million aggregate
limit. The Company has recently obtained a $4.0 million excess liability
umbrella insurance policy. There can be no assurance that the coverage limits
of the Company's insurance policy and/or any rights of indemnification and
contribution that the Company may have will offset potential claims. A
successful claim against the Company in excess of insurance coverage and not
subject to indemnification could have a material adverse effect on the Company.
Item 2. Properties
The Company rents the property on which its principal Las Vegas
operating facility is located at an annual rent of approximately $100,000. See
"Certain Transactions." On such 44,000 square foot property the Company has
located three contiguous warehouses, a retail facility and administrative
offices. The Company has leased two additional facilities in Las Vegas,
consisting of a retail facility and the design center, containing a total of
9,446 square feet at an annual rental of $111,610.
Prior to June 2, 1995, the Company maintained its business office at
134 West 72nd Street, New York, New York, using these offices on a rent-free
basis. The Company has changed its principal executive offices within New York,
New York to 100 Maiden Lane. These offices are also used on a rent-free basis.
Item 3. 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.
8
<PAGE>
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. See
"Management-Employment Agreements."
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 was being conducted. The Company was requested to voluntarily
provide 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.
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 4. Submission of Matters to a Vote of Security Holders
None.
9
<PAGE>
Part II.
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.
The Common Stock has been quoted on the "electronic bulletin board"
operated by the NASD under the symbol "RAGC" since September 1995. The
following table sets forth, for the periods indicated, the high and low bid
prices of the Common Stock as reported on the "electronic bulletin board"
operated by the NASD. Such over-the-counter quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
<TABLE>
<CAPTION>
-------------------
High Low
------ ------
<S> <C> <C>
Fiscal Year 1997:
First Quarter $ 3.38 $ 1.00
Second Quarter (through April 15, 1997) 3.00 1.00
Fiscal Year 1996:
First Quarter 5.25 4.00
Second Quarter 5.25 3.00
Third Quarter 3.75 2.25
Fourth Quarter 3.75 2.25
Fiscal Year 1995:
Third Quarter 3.00 3.00
Fourth Quarter 4.75 3.00
</TABLE>
As of March 11, 1997, there were approximately 369 record holders of
the Common Stock. The last sale price of the Common Stock on April 7, 1997 was
$1.00 per share as reported by the Automated Confirmation Transaction Service.
10
<PAGE>
Item 6. 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 fiscal years ended December 31, 1996,
1995 and 1994 and should be read in conjunction with the Financial Statements
and Notes thereto included elsewhere in this Annual Report on Form 10-KSB. All
references to full years are to the applicable fiscal year of the Company. All
discussion of 1994 financial information relates to financial results of Carpet
Barn, the Predecessor Business. Discussion of information for 1995 relates to
the pro forma consolidated financial results of the Company and Carpet Barn for
that period.
Predecessor Business results have been adjusted for comparative
purposes in the following discussions. Compensation to the owner of the
Predecessor Business has been adjusted as the former owner is not involved in
the Company's operations and has been replaced by individuals with employment
agreements at salaries considerably less than the former owner's compensation
level. Foreign currency contract losses have also been removed from the
discussion of results from operations as the Predecessor Business speculated in
these contracts only during 1994 and had no positions at either the beginning
or end of such year. The Company is not and has no intention of being involved
in these types of speculative investments. Due to the fact that the Predecessor
Business was a Subchapter S corporation, the amount of owner's compensation
and/or dividends were directly related to personal income tax considerations.
Therefore, the amount of compensation and dividends paid each year by the
Predecessor Business to the former owner varied as his personal earnings
increased or decreased.
Results of Operations
Fiscal Years Ended December 31, 1996 (actual) and 1995 (on a pro forma
basis).
To facilitate the comparison between the years ended December 31, 1996
and 1995, the 1995 results have been adjusted on a pro forma basis assuming the
acquisitions described in Note 2 to the Financial Statements had occurred on
January 1, 1995.
<TABLE>
<CAPTION>
Predecessor
Business Ragar, Corp. Pro Forma Ragar Corp.
January 1, 1995 June 2, 1995 to Pro Forma Year Ended Year Ended
June 1, 1995 December 31, 1995 Adjustments (1) December 31, 1995 December 31, 1996
----------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Sales $ 16,363 $ 23,980 $ 0 $ 40,343 $ 42,414
----------------------------------------------------------------------------------------
Gross margin 5,018 6,017 0 11,035 11,092
Selling, general and
administrative 1,280 3,229 42 (a) 4,551 7,469
Amortization and
depreciation 14 685 429 (b) 1,128 1,256
----------------------------------------------------------------------------------------
Operating income 3,724 2,103 (471) 5,356 2,367
Other income (expense) 13 (1,365) (989)(c) (2,341) (1,459)
Income taxes 0 255 774 (d) 1,029 317
Dividends to preferred
stockholders of subsidiary 0 203 136 (e) 339 538
----------------------------------------------------------------------------------------
Net income 3,737 280 (2,370) 1,647 53
========================================================================================
</TABLE>
(1) The pro forma adjustments reflect the following additional expenses that
would have been incurred had the Acquisition taken place on January 1, 1995:
(a) related party rent expense of $42; (b) amortization and depreciation of
$429; (c) interest expense of $989; (d) corporate income taxes of $774
computed at an assumed rate of 34%; and (e) minority interest in preferred
stock of $136. No compensation was received by the owner of the Predecessor
Business for the period January 1 to June 1, 1995. The pro forma adjustments
for income taxes takes into account that the Predecessor Business was a
Subchapter S corporation for income tax reporting purposes.
11
<PAGE>
Total revenues increased by $2,071,758 to $42,414,364 for the year
ended December 31, 1996 from $40,342,606 for the year ended December 31, 1995,
representing an increase of 5.1%. This increase is attributable primarily to an
increase in New Housing Division sales for fiscal 1996 compared to fiscal 1995
and to a lesser extent, the increase in contract prices to new home buyers.
During 1996, it is estimated that new home unit sales volume increased by
approximately 8.6% in the Las Vegas market place. These increases were offset
by a decrease in Replacement Sales Division due to increased competition in the
Las Vegas market.
The gross margin increased by $56,680 to $11,092,440 for the year
ended December 31, 1996 from $11,035,760 for the year ended December 31, 1995,
representing an increase of 0.5%. However, the gross margin percentage declined
from 27.4% in 1995 to 26.1% in 1996. This decline in gross margin percentage
reflects the fact that increased revenues resulted primarily from an increase
in New Housing Division sales, which generally have a lower gross margin than
replacement sales. This is offset by increase in contract prices to new home
buyers implemented by the Company, and which began to take effect in April
1996, offset by price increases from the Company's vendors.
Selling, general and administrative expenses increased by $2,918,299
to $7,469,568 for the year ended December 31, 1996 from $4,551,269 for the year
ended December 31, 1995. This increase is due to the following approximate
changes: (1) increases in salaries and related payroll taxes of $1,617,000, due
primarily to an increase in the number of employees, (2) an increase in
promotion and travel and entertainment expenses of $130,000, (3) professional
expenses associated with the annual audit and required public filings of
$174,000, (4) an increase in advertising expense of $258,000, (5) an increase
in insurance expenses of $122,000, (6) an increase in bad debt expenses of
$352,000 and (7) an increase in rent expense of $139,000 primarily due to the
opening of the new home design center and an additional retail location.
Amortization and depreciation expense increased from $1,128,000 in
1995 to $1,256,000 in 1996, primarily due to increased depreciation expense on
equipment purchases in 1995 and 1996.
Operating income decreased by $2,988,964 to $2,367,102 for the year
ended December 31, 1996 from $5,356,066 for the year ended December 31, 1995.
Interest expense decreased from $2,341,000 in 1995 to $1,459,000 in 1996, due
to principal payments made on debt obligations. Dividends to preferred
stockholders of subsidiary increased from $339,000 in 1995 to $358,000 in 1996
due to the Company's subsidiary CBH's issuance of additional shares of
preferred stock in late 1995 and early 1996. Net income decreased by $1,594,316
to $53,248 for the year ended December 31, 1996 from $1,647,564 for the year
ended December 31, 1995. These decreases were due principally to the
above-mentioned increases in selling, general and administrative expenses
partially offset by corresponding decreases in interest expense, divdends to
preferred stockholders of subsidiary and income taxes.
12
<PAGE>
Fiscal Years Ended December 31, 1995 and 1994 (on a pro forma basis)
To facilitate the comparison between the years ended December 31, 1995
and 1994, the results of both years have been adjusted on a pro forma basis
assuming the acquisitions described in Note 2 to the Financial Statements
occurred on January 1, 1994 and carried through the year ended December 31,
1995.
<TABLE>
<CAPTION>
Predecessor Business Pro Forma Pro Forma Pro Forma
Year Ended Adjustments (1) Year Ended Year Ended
December 31, 1994 (in thousands) December 31, 1994 December 31, 1995
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $ 42,507 $ 0 $ 42,507 $ 40,343
-----------------------------------------------------------------------------------------
Gross margin 10,841 0 10,841 11,035
Selling, general and
administrative 5,265 (1,930) (a) 3,335 4,551
Amortization and depreciation 28 1,100 (b) 1,128 1,128
-----------------------------------------------------------------------------------------
Operating income 5,548 830 6,378 5,356
Other income (expense) (660) (1,681) (c) (2,341) (2,341)
Income taxes 0 1,376 (d) 1,376 1,029
Dividends to preferred
stockholders of subsidiary 0 339 (e) 339 339
-----------------------------------------------------------------------------------------
Net income 4,888 (2,566) 2,322 1,647
=========================================================================================
</TABLE>
(1) The pro forma adjustments reflect the following changes to expenses that
would have been incurred had the Acquisition taken place on January 1, 1994:
(a) remove compensation of $2,030 paid to the owner of the Predecessor Business
and add related party rent expense of $100; (b) add amortization and
depreciation of $1,100; (c) other income (expense) of $2,337 reduced to
eliminate the effect of loss on the sale of securities of $656; (d) corporate
income taxes of $1,376 computed at an assumed rate of 34%; and (e) add minority
interest in preferred stock of $339. The pro forma adjustments for income taxes
take into account that the Predecessor Business was a Subchapter S corporation
for income tax reporting purposes.
Total revenues decreased from $42,506,987 for the year ended December
31, 1994 to $40,342,606 for the year ended December 31, 1995, representing a
decrease of 5.1%. The decrease can be attributed to a decrease in sales in the
New Housing Division partially offset by an increase in the Replacement Sales
Division. During 1995, it is estimated that new home unit sales volume
decreased by approximately 5.6% in the Las Vegas marketplace.
Although total revenues decreased, gross margin grew from $10,841,351
in 1994 to $11,035,760 in 1995 due to an increase in the gross margin
percentage from 25.5% in 1994 to 27.4% in 1995. This increase in gross margin
percentage can be attributed to an increase in higher margin sales in the
Replacement Sales Division.
Selling, general and administrative expenses increased by $1,215,847
from $3,335,422 in 1994 to $4,551,269 in 1995. This increase is due to the
following approximate changes: (1) increases in salaries and related payroll
taxes of $288,000 due primarily to an increase in the number of employees, (2)
an increase in the modification rate for workers' compensation due to the
change in ownership on June 2, 1995 resulting in an increase of $220,000, (3)
professional fees associated with the acquisition and required public filings
of $305,000 and (4) related party payments consisting of consulting fees and
rents of $315,000.
Operating income decreased by $1,021,438 from $6,377,504 in 1994 to
$5,356,066 in 1995. Net income decreased by $674,150 from $2,321,714 in 1994 to
$1,647,564 in 1995. These decreases were due to the above-mentioned increases
in selling, general and administrative expenses, partially offset by the
increase in gross margin.
13
<PAGE>
Liquidity and Capital Resources
Cash provided by operating activities of the Company's Las Vegas
operations was $4,308,342 and $3,357,073 for the year ended December 31, 1996
and the period ended December 31, 1995 respectively. At December 31, 1996, the
Company had a working capital deficit of $(10,748,253). Included in such
deficit is $11,629,581 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. The
Acquisition resulted in amortization expense and interest expense of
approximately $85,000 and $198,000 per month, respectively. Subsequent to
payment of the Company's subordinated debt in April 1996 as described below,
interest expense has averaged $113,000 per month. 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 December 31, 1996 was 2.8:1.
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 Annual Report on Form
10-KSB shall not constitute an offer to sell or the solicitation of an offer to
by 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 Annual Report. If
the Company is unable to complete the Public Offering, it intends to pursue
other financing alternatives available to it.
In June 1995, in order to consummate its acquisition of Carpet Barn,
the Company, through its indirect subsidiary CBI, entered into the Credit
Agreement with First Source (the "Financing"), pursuant to which First Source
advanced to CBI approximately $15,200,000 in term and revolving loans, and CBH
pledged to First Source all of the common stock of CBI to secure CBI's
obligations under the Credit Agreement and CBH guaranteed CBI's debt
obligations to First Source under the Credit Agreement. Fees and expenses paid
to First Source amounted to $402,000, in addition to incurring other
acquisition fees of $510,619. The Credit Agreement contains covenants that
limit CBI's ability to upstream monies to CBH needed to pay principal and
interest on the $1,940,000 aggregate principal amount of its 12% subordinated
notes (which were retired at par on May 1, 1996) issued by CBH in connection
with the Acquisition (the "Notes") and to pay dividends on the preferred stock,
par value $.01 per share, stated value $1,000 per share (the "CBH Preferred
Stock"), of CBH. 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 March 26, 1997) plus 2.25% per annum
(currently 10.75% per annum), payable monthly. As of March 10, 1997, the
Company had borrowed approximately $2,630,000, leaving approximately $370,000
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 unsecured
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 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 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
December 31, 1996 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. 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
14
<PAGE>
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 March 31, 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.
The Company had certain discussions with First Source in an effort to
amend such covenants but was unable to reach an agreement with First Source.
The discussions are not continuing at present, and the Company believes that
the covenants are not likely to be amended. Moreover, the waiver period has not
been extended beyond June 1, 1996, and, therefore, the Company has been in
violation of the covenants since June 1, 1996. To date, First Source has
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 December 31, 1996 consolidated
balance sheet.
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 $508,125 at December 31, 1996.
Additionally, the Credit Agreement contains a prepayment penalty clause
requiring the Company to pay up to 2% of the then applicable revolving loan
commitment, as defined in the Credit Agreement, if the Company chooses to
terminate the Credit Agreement prior to May 31, 1999.
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 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 on April 30, 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 year ended December 31, 1996, cash used in investing
activities was $558,593. Cash used in financing activities during such period
was $4,107,975, used primarily to make principal payments on the Credit
Agreement and to retire the Notes, offset by proceeds received from the issuance
of additional shares of common stock of the Company and preferred shares of
CBH.
Immediately prior to the consummation of the Exchange and the
Financing, CBH privately sold an aggregate principal amount of $1,940,000 of
its 12% subordinated notes (the "Subordinated Notes") in a private placement
(the "Note Offering"), together with shares of CBH Common Stock, raising
$1,940,000, and privately sold an aggregate of 2,715 shares of CBH Preferred
Stock (the "Preferred Stock Offering"), together with shares of CBH Common
Stock, of which 2,215 shares of CBH preferred stock were sold for an aggregate
of $2,215,000 cash proceeds and of which 500 shares were issued in exchange for
services rendered in connection with the acquisition. The Subordinated Notes
bore interest at 12% per annum payable monthly. The first half of the principal
due on November 30, 1995 was satisfied by the Company making principal payments
of $560,000 and the exchange of $820,000 of the Notes for 820 shares of 12% CBH
Preferred Stock, together with shares of Common Stock. In addition, $1,125,000
was raised in connection with the sale of 1,125 shares of such 12% CBH
Preferred Stock, together with shares of Common Stock
15
<PAGE>
($605,000 of which was raised in November 1995 and $520,000 of which was raised
in May 1996). The proceeds were used to make principal payments on the
Subordinated Notes in November 1995 and May 1996. In connection with the
issuance of the 12% CBH Preferred Stock and Subordinated Notes, the Company
issued 2,750,444 shares of Common Stock. The CBH Preferred Stock pays
cumulative dividends, payable monthly, at an annual rate of 12% of the stated
value thereof and is redeemable upon completion of the Public Offering by the
Company.
CBH contributed the monies it raised in the Note Offering and the
Preferred Stock Offering to CBI in order for CBI to complete the Acquisition.
In connection with the Preferred Stock Offering and the Financing, a finder's
fee of $445,000 was paid to Michael H. Mindlin, a director of the Company.
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 3% of
the aggregate proceeds from the Note Offering, the Preferred Stock Offering and
the Credit Agreement upon the consummation of the Public Offering. The total of
such fees would be approximately $650,000. 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 March 31, 1997, CBI owed Branin
and PAH approximately $1,000 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. In addition,
CBI entered into a consulting agreement with Capital Vision Group, Inc.
("Capital"), a company controlled by Lawrence Fleischman, a former director and
stockholder of the Company, pursuant to which it paid $5,000 per month to
Capital from June 1995 through January 1996. These agreements were entered into
for the purpose of receiving management advisory services in the areas of
operations management, financing and acquisitions. See "Management," "Certain
Transactions" and "Principal Stockholders and Holdings of Management."
Immediately following the Exchange, the Company contributed to CBH
approximately $860,000 in cash, net of expenses (constituting substantially all
of its net assets). CBH, in turn, contributed such cash to CBI in order for CBI
to complete the Acquisition (together with funds provided to it in the
Financing and funds provided to it by CBH from funds raised in the Note
Offering and the Preferred Stock Offering). In connection with the Exchange,
the Company agreed to issue to designees of Gro-Vest Management Consultants,
Inc. ("G-V") an aggregate of 145,252 shares of Common Stock (constituting 1% of
the outstanding shares of Common Stock of the Company) as an advisory fee for
G-V's role in facilitating the consummation of the Exchange, conditioned on
G-V's obtaining, by July 31, 1995, lock-up agreements limiting sales of Common
Stock by the holders of at least 75% of the 1,000,000 shares of outstanding
Common Stock subject to registration rights granted to such holders on
September 23, 1994 in a private offering. The requisite lock-up agreements were
obtained but have since expired.
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. Primarily because of the larger
store size and significant inventory commitment, the investment required to
open "big-box" facilities will be substantially greater than the investment
required to open the two new Las Vegas facilities. 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
Ken 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 annexed hereto as Exhibit 10.16 and
incorporated herein by
16
<PAGE>
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. See "Business-Strategy."
Effect of Accounting Pronouncements Issued but not Yet Adopted
Earnings per Share
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 presentation.
Inflation
The Company believes that its revenues are not materially affected by
inflation and that any increased expenses due to inflationary pressures will be
offset, over time, by corresponding increases in prices it charges to its
customers.
17
<PAGE>
Part III.
Item 9. Directors and Executive Officers of the Registrant
The following table sets forth certain information with respect to the
directors and executive officers of the Company. The Company's prospects are
also substantially dependent on certain key employees. See "-Key Employees."
Name Age Position
- ---- --- --------
Philip A. Herman 51 Chairman of the Board and President
Gary Peiffer 46 Secretary and Director
Michael Mindlin 55 Director
Facundo Bacardi 51 Director
William Poccia 51 Chief Financial Officer
The number of directors on the Board is presently fixed at five.
Philip A. Herman has been Chairman of the Board and President of the
Company since June 2, 1995, the date of consummation of the Exchange and the
Acquisition. Mr. Herman is also sole Voting Trustee of the voting trust that
holds a majority of the Company's outstanding shares of common stock. See
"Principal Stockholders and Holdings of Management." He also has served as a
principal of Branin since 1994. From 1992 to 1994, Mr. Herman served as a
principal of Americorp Securities, Inc. ("Americorp"), a retail brokerage firm,
and from 1989 to 1992 he served as principal of PAH Marketing Consultants Inc.,
a consulting firm. In January 1995, Mr. Herman and PAH entered into a consent
decree, without admitting any violation of law, with the Federal Trade
Commission ("FTC") pursuant to which Mr. Herman and PAH paid $40,000 to the FTC
and consented to being enjoined from participating in certain telemarketing
related activities.
Gary Peiffer has been Secretary and a director of the Company since
June 2, 1995. Mr. Peiffer has served as Vice Chairman of the Board, General
Counsel and a director of The Aegis Consumer Funding Group, Inc. ("Aegis"), a
publicly-traded automobile finance company since January 1994. Prior to joining
Aegis, Mr. Peiffer was a senior partner at the law firm of Jeffer, Hopkinson,
Vogel, Coomber & Peiffer from January 1983 through December 1993.
Michael Mindlin has been a director of the Company since June 2, 1995.
From 1992 to February 1997, Mr. Mindlin served as President of Americorp. Prior
to that time, Mr. Mindlin served as Chief Operating Officer of Aegis.
Facundo Bacardi has been a director of the Company since June 2, 1995.
He also serves as a director of Suramericana de Inversiones, S.A., an
investment company located in Panama, and has served in that capacity since
1990. Mr. Bacardi is also an heir to the controllers of the Bacardi rum
company, a worldwide manufacturer and one of the largest family-owned companies
in the world. He is currently an advisor to the Board of Directors for Bacardi
International, the holding company for all of the Bacardi companies worldwide.
From 1979 to 1991, Mr. Bacardi was in charge of the manufacturing and
distribution division for Central America.
William Poccia has been Chief Financial Officer of the Company since
August 6, 1996. From October 1995 to August 1996, Mr. Poccia served as a
financial consultant to the Company in the employ of Branin. Prior to that
time, Mr. Poccia served as Director of Audit for Participants Trust Company, a
securities depository for mortgage-backed securities.
18
<PAGE>
Item 10. Executive Compensation
Summary Compensation Table
The following table sets forth for the fiscal year ended December 31,
1996, the compensation for services in all capacities to the Company of the
person who was at December 31, 1996 the President of the Company. No executive
officers of the Company received salary and bonus in excess of $100,000 during
the fiscal year ended December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
Annual Compensation
--------------------------------------------------------
Other Annual
Salary $ Bonus $ Compensation $ (1)
-------- ------- ------------------
<S> <C> <C> <C>
Philip A. Herman 0 0 0
Chairman of the Board and President
</TABLE>
(1) Certain entities controlled by Mr. Herman received fees from the Company
for the year ended December 31, 1996 and for the period ended December 31,
1995, as set forth herein under "Certain Transactions" and in "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Executive Compensation
Compensation. Prior to the Exchange, no officer or director of the
Company received remuneration from the Company. Directors do not currently
receive fees or other remuneration from the Company. The Company is currently
contemplating entering into an employment agreement with Mr. Herman pursuant to
which Mr. Herman will initially receive no base salary but may receive bonuses
and may be granted a base salary in the future, within the discretion of the
Board of Directors. William Poccia, Chief Financial Officer of the Company, is
being remunerated by the Company at the rate of $100,000 per year.
Bonus Plan. In June 1995, the Company initiated a Management Bonus
Program (the "Bonus Plan") pursuant to which the Company could make available
for bonuses to certain members of management of the Company (including Steven
Chesin and Jeffrey Wiens) an aggregate amount equal to 2% of the Earnings
Before Income Taxes (as defined below) of the Company for each fiscal year,
with the Company's management to have the right to determine how such bonus
amount would be allocated among its members. If all of the members of the
Company's management issued a written statement recommending allocation, the
bonus would be allocated as such; and if no written statement was issued, the
President of the Company could allocate the bonus in his discretion. "Earnings
Before Income Taxes" meant earnings before income taxes of the Company for the
relevant fiscal year. There were no bonuses paid in 1995 or 1996. The Bonus
Plan was terminated in October 1996. Those officers eligible for bonuses under
the Bonus Plan will be eligible to participate in the Option Plan.
Employment Agreements
Mark Szporka. Pursuant to a five-year employment agreement, dated as
of June 2, 1995, Mr. Szporka was employed as the Company's Chief Financial
Officer at an annual salary of $120,000 per year, subject to annual pay
increases at the Company's discretion. This employment was terminated for cause
by the Company by letter dated August 5, 1996. Pursuant to his employment
agreement, Mr. Szporka was entitled to participate in the Bonus Plan as a
member of "management" for any fiscal year during which he had been employed
for at least six months. Mr. Szporka's termination and severance provisions
were comparable to those for Mr. Chesin. In addition, Mr. Szporka, under the
terms of his employment agreement, purchased at $0.001 per share 290,500 shares
of Common Stock on June 1, 1995. The difference between the amount paid and
market value of the shares was recognized as additional acquisition costs.
Also, pursuant to the employment agreement, 581,000 shares of Common Stock
("Escrow Shares") were deposited into an escrow account on June 1, 1995. All
dividends on and voting rights of the Escrow Shares belonged to the Company
until such time as the Escrow Shares would be released from escrow. Upon the
first anniversary of Mr. Szporka's employment and each of the following four
such anniversaries, 116,200 of the Escrow
19
<PAGE>
Shares were to be released to Mr. Szporka together with all rights and
privileges thereto. In the event the Company did not meet certain operating
goals, as described in the employment agreement, the Company had the right to
repurchase those shares at $.01 per share. As of December 31, 1995, Mr.
Szporka's right to receive 68,120 of the Escrow Shares was canceled because the
Company did not meet certain operating goals described in the employment
agreement during the operating period then ended. As a result of the Company's
termination of Mr. Szporka's employment for cause, it repurchased the 581,000
Escrow Shares from Mr. Szporka for $.01 per share. Such repurchase was effected
in October 1996.
On September 11, 1996, Mr. Szporka sued the Company and its
subsidiaries and the Company's directors in District Court in Clark County,
Nevada alleging that his employment agreement was wrongfully terminated, that
the Company violated duties of good faith and fair dealing with him and that he
was tortuously discharged. He seeks unspecified compensatory damages in excess
of $10,000, punitive damages, injunctive and declaratory relief, attorney's
fees and costs and such other relief as the court deems just and equitable. The
Company believes that it has meritorious defenses and intends to vigorously
pursue them. Moreover, the Company is considering whether it has counterclaims
against Mr. Szporka.
Key Employees
The Company believes that the following employees of the Company are
of special value to the Company's existing floor covering business and to the
implementation of its growth strategy.
Steven Chesin has been Senior Vice President and Chief Operating
Officer of Carpet Barn, Inc. since July 28, 1995. Prior to joining the Company,
Mr. Chesin served as President of Steve's Floor Covering, Inc., a carpet
installer, from its founding in 1977, when Mr. Chesin was only 15 years old, to
the Company's acquisition of Steve's in July 1995.
Pursuant to an employment agreement, dated as of July 28, 1995,
between Mr. Chesin and the Company, Mr. Chesin is serving as Senior Vice
President and Chief Operating Officer of Carpet Barn for a three-year period,
with successive one-year automatic extensions to his employment unless either
party gives the other at least 90 days' notice of termination prior to the end
of any term. His current salary has been increased to $125,000 per year from
its initial $75,000 level and is subject to annual pay increases at the
Company's discretion. Mr. Chesin was eligible to participate in the Bonus Plan
until its termination in October 1996. Mr. Chesin's employment is terminable
for cause which includes the Company's failure (a "Target Failure") to achieve
net income equal to or greater than (a) 75% of the projected net income for any
fiscal quarter or (b) 85% of the projected net income for any two consecutive
fiscal quarters. Mr. Chesin will receive two months' severance pay, plus an
additional month's severance pay for each full year of employment that has
elapsed, if the agreement terminates due to a Target Failure or Mr. Chesin's
total disability.
Jeffrey Wiens has been Controller of the Company since July 1995. From
1988 to July 1995, Mr. Wiens served in various capacities, principally in the
Minneapolis, Minnesota office of McGladrey & Pullen, LLP, the Company's
independent auditors, including serving as a member of the audit staff from
1988 to July 1994 and as Manager from August 1994 to July 1995. Pursuant to an
employment agreement, dated as of July 5, 1995, the Company has employed Mr.
Wiens as its Controller for a two-year period, with successive one-year
automatic extensions of his employment unless either party gives the other at
least 90 days' notice of termination prior to the end of any term. Pursuant to
the agreement, Mr. Wiens' salary has been increased to $75,000 per year from
its initial $50,000 level and is subject to annual pay increases at the
Company's discretion. Until its termination, Mr. Wiens was entitled to
participate in the Bonus Plan.
Alan Ember has extensive experience in the floor covering industry and
was recently hired by the Company to develop retail facilities in Phoenix and
other markets in the southwestern United States. Mr. Ember's responsibilities
includes merchandising, marketing, advertising, sales training and program
development. From September, 1994 until he was hired by the Company, Mr. Ember
was the Divisional President of CarpetMAX in Phoenix, Arizona and was
responsible for the entire operation of that division. Prior to that, from
November 1993, Mr. Ember was the General Manager for Carpeteria in Tucson. From
March 1993, Mr. Ember served as General Manager for Broadway Carpet, also in
Tucson. From September 1992, he was the carpet division and advertising manager
for Tile City in Pittsburgh, Pennsylvania. Prior to that, Mr. Ember was the
General Manager for Apollo Carpet in Tucson, Arizona.
20
<PAGE>
Pursuant to an employment agreement dated May 28, 1996 between Mr.
Ember and the Company, Mr. Ember is serving as Senior Vice President of Carpet
Barn for a three-year period with successive one-year automatic extensions
unless either party gives the other at least 90 days notice of termination
prior to the end of any term. His current salary is $125,000 per year plus a
bonus of 25% of Earnings Before Interest and Taxes, as defined in the
employment agreement ("EBIT"), for the entity managed by Mr. Ember, payable in
Common Stock of the Company 15 days after the Company's financial statements
are finalized. Mr. Ember's employment is terminable for cause, which includes
the failure (a "Target Failure") to achieve EBIT equal to or greater than (a)
75% of the projected EBIT in any fiscal quarter, or (b) 85% of the projected
EBIT for any two consecutive fiscal quarters, in each case for the entity
managed by Mr. Ember. Mr. Ember will receive two months severance pay, plus one
additional month severance pay for each full year of employment, if the
agreement terminates due to a Target Failure or Mr. Ember's total disability.
Judy Hightower has been the design services manager at Carpet Barn,
Inc. since joining the Company in October 1995. Ms. Hightower established the
Company's first window and wallcovering division and was also responsible for
designing, implementing and opening the Company's new design center and retail
facility in Las Vegas. From 1991 until she joined the Company, Ms. Hightower
provided similar design services to several large home builders in the Las
Vegas area.
Robert Smith has extensive experience in operating and managing floor
covering warehouses and distribution centers and was hired by the Company to
manage and operate its warehouses and the distribution of its products in the
Las Vegas market. From January 1995 until he joined the Company in June 1996,
Mr Smith was the Director of Broadloom Installation for Giant Carpet in
Moonachie, New Jersey, where he supervised and coordinated the installation of
carpeting for thirty-eight retail stores. Prior to that, from March 1991, Mr.
Smith was the Terminal Manager and Operations Consultant for Apex Express,
Inc., located in New York, New York. In that capacity, Mr. Smith managed the
warehousing, delivery and assembly of office furniture and exercise equipment
and designed and implemented delivery and in-house assembly programs for United
Stationers in Edison, New Jersey.
1997 Stock Option Plan
The Company adopted the 1997 Stock Option Plan (the "Option Plan") on
February 26, 1997, in order to provide an incentive to non-employee directors
and to officers and certain other key employees of and consultants to the
Company by making available to them an opportunity to acquire a proprietary
interest or to increase their proprietary interest in the Company. Shareholders
approved the adoption of the Option Plan on March 19, 1997. The Option Plan
provides for the award of options (each an "Award") representing or
corresponding to up to 1,250,000 shares of common stock of Nations Flooring,
Inc. after giving effect of the merger of Ragar into Nations Flooring, Inc. Any
Award issued under the Option Plan which is forfeited, expires or terminates
prior to vesting or exercise will again be available for Award under the Option
Plan.
The Option Plan is administered by the Committee, as defined in the
Option Plan. The Committee consists of Gary Peiffer, Michael Mindlin and
Facundo Bacardi. The Committee has the full power and authority, subject to the
provisions of the Option Plan, to designate participants, grant Awards and
determine the terms of all Awards. The Committee has the right to make
adjustments with respect to Awards granted under the Option Plan in order to
prevent dilution of the rights of any holder. Non-employee directors, including
members of the Committee are not eligible to receive discretionary Awards under
the Option Plan but automatically receive upon becoming such a director or upon
stockholder approval of the plan and each year thereafter non-qualified stock
options ("NQSO's) to purchase 10,000 shares of common stock of Nations Flooring,
Inc. at an exercise price equal to the fair market value on the date of
grant. Members of the Committee are disinterested within the meaning of Section
16 of the Securities Exchange Act of 1934, as amended, and outside directors
within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as
amended (the "Code").
Options Issued Under the Option Plan. The terms of specific options
are determined by the Committee. Options granted may be NQSO's or incentive
stock options within the meaning of Code Section 422 ("ISO's"). The exercise
price per share for a non-qualified option is subject to the determination of
the Committee. Incentive stock options may not be granted at less than 100% of
the fair market value at the date of grant. Each option will be exercisable for
the period or periods specified in the option agreement, which will not exceed
10 years from the date of grant.
21
<PAGE>
Upon the exercise of an option, the option holder pays to the Company
the exercise price plus the amount of the required Federal and state
withholding taxes, if any. Options may be exercised and the withholding
obligation may be paid for with cash and, with the consent of the Committee,
shares of common stock of Nations Flooring, Inc., other securities (including
options) or other property. The period after termination of employment during
which an option may be exercised is as determined by the Committee. In the
absence of any specific determination by the Committee, the following rules
will apply. The unexercised portion of any option granted under the Option Plan
will generally be terminated (a) 30 days after the date on which the optionee's
employment is terminated for any reason other than (i) cause, (ii) retirement
or mental or physical disability or (iii) death; (b) immediately upon the
termination of the optionee's employment for cause; (c) three months after the
date on which the optionee's employment is terminated by reason of retirement
or mental or physical disability; or (d)(i) 12 months after the date on which
the optionee's employment is terminated by reason of the death of the employee,
or (ii) three months after the date on which the optionee shall die if such
death shall occur during the three-month period following the termination of
the optionee's employment by reason of retirement or mental or physical
disability.
No options have been granted to date under the Option Plan. Eligible
persons may receive grants under the Option Plan in the future at the
discretion of the Committee. The Committee has agreed to grant options at the
completion of the Public Offering at the offering price.
22
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information as of March 1,
1997, regarding (i) each person known by the Company to be the beneficial owner
of more than 5% of the outstanding shares of common stock, (ii) each director,
nominee and Named Executive Officer of The Company and (iii) all officers and
directors as a group. Unless otherwise indicated the address is deemed to be
that of the Company.
<TABLE>
<CAPTION>
Name and Address Number of Shares Owned Percentage Ownership
---------------------- --------------------
<S> <C> <C>
Philip A. Herman (1) 9,212,692 63.2%
c/o Branin Investments, Inc.
100 Maiden Lane
New York, NY 10038
Branin Investments, Inc. (2) 1,252,412 8.6
100 Maiden Lane
New York, NY 10038
Facundo Bacardi (3) 5,743,984 39.4
c/o Branin Investments, Inc.
100 Maiden Lane
New York, NY 10038
Icarus Investments, Ltd. (4) 3,515,416 24.1
c/o Branin Investments, Inc.
100 Maiden Lane
New York, NY 10038
Michael Mindlin (5) 576,800 4.0
Gary Peiffer (6) 139,852 *
William Poccia 0 *
All Directors and Executive 9,212,692 63.2
Officers as group (5 persons)
</TABLE>
- ----------------------------------
* Less than one percent
(1) Includes an aggregate of 9,212,692 shares issued to Mr. Herman as voting
trustee pursuant to a Voting Trust Agreement, dated May 30, 1995, among Mr.
Herman and certain stockholders of the Company, which shares Mr. Herman is
deemed to beneficially own. 290,000 of such shares are held in the voting trust
for benefit of Mr. Herman and 1,252,412 of such shares are held in the voting
trust for benefit of Branin, of which Mr. Herman is a principal. Excludes 2,904
shares held by each of Richard and Ruth Herman and 62,460 shares held by David
Herman, all members of the immediate family of Mr. Herman. Mr. Herman disclaims
beneficial ownership of the shares held by such family members.
(2) Excludes 290,000 shares held through the voting trust referenced in note 1,
above, for the benefit of Mr. Herman.
(3) Includes an aggregate of 4,872,484 shares held by various affiliates of Mr.
Bacardi (including 3,515,416 shares held by Icarus Investments Ltd., 305,024
shares held by each of Stylish Investments Ltd. and Delphic Investments Ltd.,
and 747,020 shares held by Designed Investments Ltd.). All of such shares are
held in the voting trust referred to in note 1, above.
(4) Excludes shares held by Mr. Bacardi and his other affiliates. Mr. Bacardi
has sole voting and dispositive power with respect to the shares of Common
Stock owned by this entity. All of such shares are held in the voting trust
referred to in note 1, above.
(5) Includes 576,800 shares held by Mr. Mindlin's spouse, as to which he
disclaims beneficial ownership. All of such shares are held in the voting trust
referred to in note 1, above.
(6) All of such shares are held in the voting trust referred to in note 1,
above.
23
<PAGE>
Item 12. Certain Relationships and Related Transactions.
Branin, a principal stockholder of the Company, acted as advisor in
connection with the Financing as well as the concurrent private offerings of
Notes and Preferred Stock of CBH. Branin acted as advisor to the Financing
between CBI and First Source and for its role became entitled to receive a fee
of 3% of the aggregate proceeds received by CBI from the Credit Agreement upon
the consummation of the Offering. On June 2, 1995, CBH completed the concurrent
offerings in the aggregate amount of $4,655,000 consisting of $1,940,000 in
Notes from the Note Offering at a per Note unit price of $200,000 and
$2,715,000 from the Preferred Stock Offering consisting of 2,715 shares of
Preferred Stock at a per share price of $1,000 and a per Preferred Stock unit
price of $250,000. For each Preferred Stock unit sold, the Company issued
145,250 shares of Common Stock, and for each Note unit sold, the Company issued
63,640 shares of Common Stock, for an aggregate of 2,194,730 shares of Common
Stock issued in such Note Offering and Preferred Stock Offering. Branin became
entitled to receive a fee of 3% of the aggregate proceeds from the Note
Offering, the Preferred Stock Offering and the Credit Agreement upon the
consummation of the Offering. Philip A. Herman, the Chairman of the Board and
President of the Company, is a principal of Branin. The total of such fees
would be approximately $650,000. Branin has agreed to waive such fees in
exchange for increasing its management consulting fees described in the next
paragraph, to $20,000 per month, effective upon completion of the Offering. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources."
In connection with the Preferred Stock Offering and the Financing, a
finder's fee of $445,000 was paid to Michael H. Mindlin, a director of the
Company. In addition, CBI entered into consulting arrangements with (a) Branin,
pursuant to which CBI was obligated to pay $35,000 per month to Branin and (b)
PAH Marketing, Inc. ("PAH"), a company controlled by Philip A. Herman, pursuant
to which CBI was obligated to pay $5,000 per month to PAH. These arrangements
were modified as of September 1, 1996 to provide for payment obligations to
Branin of $10,000 per month and to discontinue obligations to PAH. As of March
31, 1997, CBI owed Branin and PAH approximately $1,000 in respect of these
obligations. In addition, CBI entered into a consulting agreement with Capital
Vision Group, Inc. ("Capital"), a company controlled by Lawrence Fleischman, a
former director and stockholder of the Company, pursuant to which it paid
$5,000 per month to Capital from June 1995 through January 1996. These
agreements were entered into for the purpose of receiving management advisory
services in the areas of operations management, financing and acquisitions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources."
C.B. Realty, Inc. ("CB Realty"), which is owned by four stockholders
of the Company (Gary Peiffer, Michael Mindlin, Facundo Bacardi and David
Herman, a son of Philip Herman), acquired the land and building ("Property")
previously owned by the Predecessor Business, concurrently with the Company's
acquisition of the asets of the Predecessor Business. In connection with such
purchase of the Property, the Company loaned $288,000 to CB Realty, payable
over a three-year period in monthly installments of $9,293, including interest
at a rate of 10% per annum. CB Realty simultaneously entered into a lease
agreement with the Company pursuant to which the Company leased the land and
building in which it conducts its operations for a three year term with annual
lease payments of approximately $100,000. Shortly before the completion of the
acquisition of the assets of the Predecessor Business by the Company,
environmental studies revealed certain contamination of the groundwater flowing
below the Property, in excess of permissible limits for tetrachloroethane.
Although the contamination clearly did not originate on the Property, First
Source, the lender providing the acquisition financing for the Company's
purchase of the assets of the Predecessor Business, flatly refused to provide
the financing if the Property were included in the assets purchased. First
Source did, however, approve the acquisition of the Property by CB Realty with
funds borrowed from CBI and the leasing of the Property to CBI by CB Realty. A
subsequent appraisal of the Property as of the time of completion of the
acquisition valued it at $1.325 million. The appraisal was expressly
conditioned on, among other things, the absence of environmental problems. In
light of the known environmental risk to CB Realty, its principals were only
willing to pay $288,000 for the Property. This price was acceptable to First
Source. The Company has received a legal opinion to the effect that the
ownership structure for the Property provides substantial protection for the
Company from environmental law liability.
On July 28, 1995, the Company purchased Steve's Floor Covering, Inc.
("Steve's"), a floor covering repairer, installer, cleaner and retailer from
Steven Chesin, the Chief Operating Officer of CBI, pursuant to an asset
purchase
24
<PAGE>
agreement (the "Steve's Agreement"). Under the Steve's Agreement, the
Company purchased substantially all of the assets of Steve's in exchange for
approximately $267,000. Mr. Chesin entered into an employment agreement with
CBI in connection therewith. The revenues of Steve's are not expected to have a
significant impact on the Company's results of operations. In 1994, the last
full year prior to the Company's acquisition of Steve's, Steve's had total
revenues of $686,480 and employed 25 people. See "Management-Employment
Agreements."
In May 1996, the Company incurred a liability to Branin of $46,600 as
a result of interest and dividend payments on CBH securities made by Branin on
behalf of CBH. Further dividend payments of $46,600 per month thereafter have
been made by Branin on these securities, resulting in an obligation to Branin
as of March 31, 1997 in the approximate amount of $559,000 in respect of these
dividend payments. In May 1996, Branin paid the Company approximately $6,000
for consulting services rendered to Branin by employees of the Company.
The Company's executive offices are located at 100 Maiden Lane, New
York, New York. These offices are rented by Branin, which also occupies these
offices. Branin does not charge the Company rent for this space.
25
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
(a) Reports on Form 8-K
None
(b) Exhibits
2.1 Agreement and Plan of Exchange, dated as of June 1,
1995, among the Company, Carpet Barn Holdings, Inc.
("CBH") and the holders of common stock of CBH
(incorporated by reference from Exhibit 1 of the
Company's Report on Form 8-K (June 2, 1995) (the "June
Form 8-K").
2.2 Asset Purchase Agreement, dated as of June 1, 1995, between
Carpet Barn Acquisition Corp. ("CBAC") and Carpet Barn, Inc.
("Carpet Barn") (incorporated by reference from Exhibit 3 of
the June Form 8-K).
2.3 Amendment, dated June 1, 1995, to Asset Purchase
Agreement (incorporated by reference from Exhibit 4 of
the June Form 8-K).
3.1 Certificate of Incorporation, dated July 19, 1988, of
the Company (incorporated by reference from Exhibit
3(a) of the Company's Registration Statement on Form
S-18 (33-29942-NY) filed October 20, 1989 (the "1989
Registration Statement").
3.2 By-laws of the Company (incorporated by reference from
Exhibit 3(b) of the 1989 Registration Statement).
3.3 Amended and Restated Certificate of Incorporation of
CBH (incorporated by reference from Exhibit 3.3 of the
Company's Annual Report on Form 10-K for the period
ended December 31, 1995 (the "Form 10-K")).
3.4 Certificate of Amendment to Amended and Restated
Certificate of Incorporation of CBH (incorporated by
reference from Exhibit 3.4 of the Form 10-K).
3.6 Certificate of Incorporation of Nations Flooring, Inc.
(incorporated by reference from Exhibit 3.6 of the Company's
Registration Statement on Form S-1 (333-19871) filed January
16, 1997 ("1997 Registration Statement").
3.7 By-laws of Nations Flooring, Inc. (incorporated by reference
from Exhibit 3.7 of the 1997 Registration Statement).
9.1 Voting Trust Agreement, dated May 30, 1995, between
Philip A. Herman and certain shareholders of the
Company (incorporated by reference from Exhibit 2 of
the June Form 8-K).
10.1 Secured Credit Agreement, dated as of June 1, 1995,
between CBAC and with First Source Financial LLP
("First Source") (incorporated by reference from
Exhibit 5 of the June Form 8-K).
10.2 Pledge Agreement, dated as of June 1, 1995, among CBH,
CBAC and First Source (incorporated by reference from
Exhibit 9 of the June Form 8-K).
26
<PAGE>
10.3 Guaranty, dated as of June 1, 1995, by CBH in favor of
First Source (incorporated by reference from Exhibit
10 of the June Form 8-K).
10.4 Revolving Note, dated June 1, 1995, between CBAC and
First Source (incorporated by reference from Exhibit 6
of the June Form 8-K).
10.5 Working Capital Note, dated June 1, 1995, between CBAC
and First Source (incorporated by reference from
Exhibit 7 of the June Form 8-K).
10.6 Security Agreement, dated June 1, 1995, between CBAC
and First Source (incorporated by reference from
Exhibit 8 of the June Form 8-K).
10.7 Terms of preferred stock, par value $.01 per share,
stated value $1,000 per share, of CBH (incorporated by
reference from Exhibit 12 of the June Form 8-K).
10.8 Employment Agreement, dated as of July 28, 1995,
between CBI and Steven Chesin (incorporated by
reference from Exhibit 1 of the Company's Report on
Form 10-Q for the quarterly period ended June 30, 1995
(the "June 1995 Form 10-Q).
10.9 Employment Agreement, dated as of June 1, 1995,
between CBI and Mark Szporka incorporated by reference
from Exhibit 2 of the June 1995 Form 10-Q).
10.10 Amendment, dated June 1, 1995, to employment agreement
between CBAC and Mark Szporka (incorporated by
reference from Exhibit 3 of the June 1995 Form 10-Q).
10.10.1 Amendment, dated March 6, 1996, to employment
agreement between CBAC and Mark Szporka (incorporated
by reference from Exhibit 10.11 of the Form 10-K).
10.11 Form of Promissory Note issued in the offering of
short-term notes of CBH (incorporated by reference
from Exhibit 11 of the June Form 8-K).
10.12 Lease, dated June 1, 1995, between C.B. Realty of Delaware,
Inc. ("CB Realty") and CBAC (incorporated by reference from
Exhibit 10.13 of the Form 10-K).
10.13 First Amendment to Lease Agreement, dated August 1,
1995, between CB Realty and CBAC (incorporated by
reference from Exhibit 10.14 of the Form 10-K).
10.14 Promissory Note, dated June 1, 1995 from CB Realty in
favor of CBAC (incorporated by reference from Exhibit
10.15 of the Form 10-K).
10.15 Employment Agreement, dated as of May 28, 1996, between CBI
and Alan Ember. (incorporated by reference from Exhibit
10.15 of the 1997 Registration Statement).
10.16 Letter of Intent, dated February 25, 1997, between Ragar
Corp. and Nonn's Flooring, Inc.
27
<PAGE>
RAGAR CORP.
(A New York Corporation)
CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 1996
- ------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT F-2
- ------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated balance sheets F-3
Consolidated statements of income F-4
Consolidated statement of stockholders' equity -
Successor Business F-5
Consolidated statement of stockholder's equity -
Predecessor Business F-6
Consolidated statements of cash flows F-7 - F-8
Notes to consolidated financial statements F-9 - F-23
- ------------------------------------------------------------------------------
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Ragar Corp. (A New York Corporation)
New York, New York
We have audited the accompanying consolidated balance sheets of Ragar Corp. and
subsidiaries (Successor Business) as of December 31, 1996 and 1995, and the
related consolidated statements of income, stockholders' equity and cash flows
for the year ended December 31, 1996, and for the period from commencement of
operations (June 2, 1995) to December 31, 1995. We have also audited the
accompanying statement of income, stockholder's equity and cash flows for
Carpet Barn, Inc., a Nevada corporation (Predecessor Business), for the period
from January 1, 1995 to June 1, 1995, and for the year ended December 31, 1994.
These financial statements are the responsibility of the respective Successor
and Predecessor Companies' managements. Our responsibility is to express an
opinion on the respective financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinions.
In our opinion, the Successor Business consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of Ragar Corp. and subsidiaries, as of December 31, 1996 and 1995 and
the results of their operations and their cash flows for the year ended
December 31, 1996, and for the period from commencement of operations (June 2,
1995) to December 31, 1995 in conformity with generally accepted accounting
principles. Also, in our opinion, the Predecessor Business financial statements
referred to above present fairly, in all material respects, the results of its
operations and its cash flows for the period from January 1, 1995 to June 1,
1995, and for the year ended December 31, 1994, in conformity with generally
accepted accounting principles.
Las Vegas, Nevada
February 19, 1997, except for Note 15 as to
which the date is March 19, 1997
F-2
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A New York Corporation)
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1996
<TABLE>
<CAPTION>
December 31, December 31,
ASSETS (Note 6) 1995 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash $ 693,356 $ 335,130
Accounts receivable, less allowance for doubtful
accounts 1995 $44,000, 1996 $347,000 (Note 8) 3,467,282 3,281,236
Due from employee -- 63,104
Inventory 638,295 709,627
Current portion of related party note receivable (Note 12) 132,800 169,169
Deferred public offering costs -- 155,721
Prepaid expenses and other 61,637 168,588
--------------------------------
Total current assets 4,993,370 4,882,575
--------------------------------
Related party note receivable, less current portion (Note 12) 146,736 45,327
Equipment and leasehold improvements (Note 4) 415,738 549,349
Intangible assets, net (Note 5) 18,769,810 17,666,327
--------------------------------
$24,325,654 $23,143,578
================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Note payable (Note 6) $ 1,865,604 $ 2,879,581
Subordinated notes payable (Note 7) 515,422 --
Current maturities of long-term debt (Note 6) 3,527,862 8,781,519
Accounts payable 1,799,764 2,250,206
Due to principal shareholder (Note 12) -- 390,038
Accrued expenses 448,835 413,004
Customer deposits 592,496 916,480
--------------------------------
Total current liabilities 8,749,983 15,630,828
--------------------------------
Deferred Income Taxes (Note 9) 35,616 91,000
--------------------------------
Long-Term Debt, less current maturities (Note 6) 8,811,558 110,815
--------------------------------
Minority Interest: Preferred Stock of Subsidiary (Note 3) 2,759,619 3,117,274
--------------------------------
Commitments and Contingencies (Notes 11 and 12)
Stockholders' Equity (Notes 6 and 14)
Common stock, $.001 par value, authorized 120,000,000
shares; issued 1995 14,932,145 shares; 14,932 15,151
1996 15,150,586 shares
Additional paid-in capital 3,673,743 3,850,869
Retained earnings 280,203 333,451
--------------------------------
3,968,878 4,199,471
Less cost of treasury stock (581,000 shares) (Note 12) -- 5,810
--------------------------------
3,968,878 4,193,661
--------------------------------
$24,325,654 $23,143,578
================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A New York Corporation)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Predecessor Business Ragar Corp.
------------------------------------- -----------------------------------
Year Ended June 2, 1995 to Year Ended
December 31, January 1, 1995 December 31, December 31,
1994 to June 1, 1995 1995 1996
- ----------------------------------------------------------------------------------- -----------------------------------
<S> <C> <C> <C> <C>
Sales (Note 8) $ 42,506,987 $ 16,362,727 $ 23,979,879 $ 42,414,364
Cost of sales 31,665,636 11,344,430 17,962,416 31,321,924
------------------------------------- -----------------------------------
Gross profit 10,841,351 5,018,297 6,017,463 11,092,440
Selling, general and administrative expenses:
Related party consulting fees (Note 12) -- -- 315,000 365,000
Related party rent expense (Note 11) -- -- 58,499 100,284
Other 5,265,138 1,280,445 2,855,540 7,004,284
------------------------------------- -----------------------------------
5,265,138 1,280,445 3,229,039 7,469,568
------------------------------------- -----------------------------------
Amortization and depreciation 28,442 14,195 685,233 1,255,770
------------------------------------- -----------------------------------
Operating income 5,547,771 3,723,657 2,103,191 2,367,102
Other income (expense):
Miscellaneous income 44,681 19,892 20,024 18,454
Interest expense (16,414) (6,405) (1,385,022) (1,477,614)
Loss on sale of securities (Note 10) (656,262) -- -- --
Loss on disposal of equipment (31,435) -- -- --
------------------------------------ ----------------------------------
Income before taxes and dividends to
preferred stockholders of subsidiary 4,888,341 3,737,144 738,193 907,942
Provision for income taxes (Note 9) -- -- 254,595 317,000
------------------------------------- -----------------------------------
Income before dividends
to preferred stockholders
of subsidiary 4,888,341 3,737,144 483,598 590,942
Dividends to preferred stockholders
of subsidiary (Note 3) -- -- 203,395 537,694
------------------------------------- -----------------------------------
Net income $ 4,888,341 $ 3,737,144 $ 280,203 $ 53,248
===================================== ===================================
Net income per common share $ 0.02 $ 0.00
===================================
Unaudited Proforma Information:
Net income before taxes $ 4,888,341 $ 3,737,144
Proforma income tax expense 1,662,036 1,270,629
-------------------------------------
Proforma net income after taxes $ 3,226,305 $ 2,466,515
=====================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A New York Corporation)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - SUCCESSOR BUSINESS
Commencement of operations (June 2, 1995) to December 31, 1995 and the year
ended December 31, 1996
<TABLE>
<CAPTION>
Common Stock
------------------------- Additional
Shares Paid-in Retained Treasury
Outstanding Dollars Capital Earnings Stock Total
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock for
initial capitalization 834 $ 10 $ 925,047 $ -- $ -- $ 925,057
Recapitalization/exchange including
issuance of common stock for acquisition
costs of $1,157,393 (Note 2) 14,524,169 14,515 2,313,159 -- -- 2,327,674
Exchange of subordinated debt for
common stock (Note 7) 234,285 234 246,828 247,062
Issuance of common stock 172,857 173 188,709 -- -- 188,882
Net income -- -- -- 280,203 -- 280,203
------------------------------------------------------------------------------------
Balance, December 31, 1995 14,932,145 14,932 3,673,743 280,203 -- 3,968,878
Issuance of common stock 218,441 219 177,126 -- -- 177,345
Purchase of treasury stock
(581,000 shares) (Note 12) -- -- -- -- (5,810) (5,810)
Net income -- -- -- 53,248 -- 53,248
------------------------------------------------------------------------------------
Balance, December 31, 1996 15,150,586 $ 15,151 $ 3,850,869 $ 333,451 $ (5,810) $ 4,193,661
====================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A New York Corporation)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY - PREDECESSOR BUSINESS
Year ended December 31, 1994 and the period from January 1, 1995 to June 1, 1995
<TABLE>
<CAPTION>
Common Stock
-------------------------------
Shares Retained
Outstanding Dollars Earnings Total
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1993 100 $ 50,000 $ 1,201,531 $ 1,251,531
Dividends paid -- -- (5,352,092) (5,352,092)
Net income -- -- 4,888,341 4,888,341
--------------------------------------------------------------------
Balance, December 31, 1994 100 50,000 737,780 787,780
Dividends paid -- -- (2,400,000) (2,400,000)
Net income -- -- 3,737,144 3,737,144
--------------------------------------------------------------------
Balance, June 1, 1995 100 $ 50,000 $ 2,074,924 $ 2,124,924
====================================================================
</TABLE>
F-6
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A New York Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Predecessor Business Ragar Corp.
--------------------------------- ---------------------------------
Year Ended Year Ended
December 31, January 1, 1995 June 2, 1995 to December 31,
1994 to June 1, 1995 December 31, 1995 1996
- ---------------------------------------------------------------------------------------- ---------------------------------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities
Cash received from customers $ 42,803,429 $ 15,378,509 $ 23,148,474 $ 42,924,394
Cash paid to suppliers and employees (36,757,286) (13,629,493) (19,145,259) (38,276,238)
Cash dividends to preferred stockholders
of subsidiary -- -- (161,995) (160,000)
Interest paid (16,414) (6,405) (130,171) (59,469)
Income taxes paid -- -- (374,000) (138,800)
Miscellaneous income received 44,681 19,892 20,024 18,455
--------------------------------- ---------------------------------
Net cash provided by operating activities 6,074,410 1,762,503 3,357,073 4,308,342
--------------------------------- ---------------------------------
Cash Flows from Investing Activities
Advances to employees and related parties -- -- (338,035) (327,403)
Purchase of equipment and leasehold improvements (62,052) -- (108,237) (231,190)
Payments for acquisition of net assets of
Predecessor Business -- -- (19,257,524) --
Payments for acquisition of net assets of
Steve's Floor Covering -- -- (266,722) --
Acquisition cost expenditures -- -- (96,552) --
Proceeds from sale of equipment -- 72,076 19,000 --
Net cash flows from investments
in securities (656,262) -- -- --
--------------------------------- ---------------------------------
Net cash provided by (used in)
investing activities (718,314) 72,076 (20,048,070) (558,593)
--------------------------------- ---------------------------------
Cash Flows from Financing Activities
Payments on note payable -- -- (1,827,722) (3,879,595)
Principal payment on subordinated notes
payable -- -- (560,000) (560,000)
Minority interest: issuance of preferred stock
of subsidiary -- -- 1,842,781 357,655
Proceeds from issuances of common stock -- -- 188,882 162,345
Cash dividends paid (5,352,092) (2,400,000) -- --
Principal payments on long-term debt (18,532) (8,156) (8,102) (26,849)
Purchase of treasury stock -- -- -- (5,810)
Cash payment for deferred offering costs -- -- -- (155,721)
Proceeds from long-term debt -- -- 14,000,000 --
Proceeds from note payable -- -- 1,152,532 --
Proceeds from subordinated notes payable -- -- 1,569,364 --
Proceeds from issuance of stock in con-
nection with capitalization of Company -- -- 1,939,237 --
Debt issuance costs -- -- (912,619) --
--------------------------------- ---------------------------------
Net cash provided by (used in)
financing activities (5,370,624) (2,408,156) 17,384,353 (4,107,975)
--------------------------------- ---------------------------------
Net increase (decrease) in cash (14,528) (573,577) 693,356 (358,226)
Cash, beginning 679,921 665,393 -- 693,356
--------------------------------- ---------------------------------
Cash, ending $ 665,393 $ 91,816 $ 693,356 $ 335,130
================================= =================================
</TABLE>
F-7
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A New York Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
Predecessor Business Ragar Corp.
------------------------------- ---------------------------------
Year Ended June 2, 1995 to Year Ended
December 31, January 1, 1995 December 31, December 31,
1994 to June 1, 1995 1995 1996
- --------------------------------------------------------------------------------------- ---------------------------------
<S> <C> <C> <C> <C>
Reconciliation of Net Income to Net Cash
Provided by Operating Activities
Net income $ 4,888,341 $ 3,737,144 $ 280,203 $ 53,248
Depreciation 28,442 14,195 44,121 177,344
Amortization -- -- 641,620 1,078,426
Accretion of discount on subordinated
notes payable -- -- 326,058 44,578
Deferred income taxes -- -- 35,616 55,384
Provision for bad debts -- 5,633 44,000 302,900
Interest added to note payable -- -- 790,795 1,393,571
Common stock issued in lieu of interest payment -- -- -- 15,000
Loss on sale of securities 656,262 -- -- --
Rent expense in lieu of note receivable
payments to Realty -- -- 58,499 100,284
Other 31,435 -- -- 25,056
Changes in assets and liabilities:
(Increase) decrease in accounts
receivable 342,098 (603,294) (1,060,247) (116,854)
(Increase) in inventory (141,066) (87,620) (161,757) (71,332)
(Increase) in prepaid expenses -- -- (61,637) (106,951)
Increase (decrease) in accounts
payable 234,123 (599,153) 1,746,045 450,442
Increase in due to principal shareholder -- -- -- 619,094
Increase (decrease) in accrued
expenses 80,431 (323,478) 444,915 (35,832)
Increase (decrease) in customer
deposits (45,656) (380,924) 228,842 323,984
------------------------------- -------------------------------
Net cash provided by
operating activities $ 6,074,410 $ 1,762,503 $ 3,357,073 $ 4,308,342
=============================== ==============================
</TABLE>
See Notes to Consolidated Financial Statements.
F-8
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A New York Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies
Nature of business
Ragar Corp. (Successor Business, Ragar or Company) was organized under the laws
of the state of New York on July 19, 1988. Ragar Corp. had substantially no
operations prior to its exchange, on June 2, 1995, in a reverse acquisition
with Carpet Barn Holdings, Inc., (CBH), which was organized under the laws of
the State of Delaware on May 26, 1995 (see Note 2). CBH and its wholly owned
subsidiary, Carpet Barn, Inc., (CBI), a Delaware corporation, were formed for
the purpose of acquiring the assets and operations of Carpet Barn, Inc., a
Nevada Corporation (Predecessor Business), a retail carpet sales and
installation outlet located in Las Vegas, Nevada. The Company began operations
on June 2, 1995, the date of acquisition, as described in Note 2.
The Company is also related, through common ownership, to C. B. Realty of
Delaware, Inc. (Realty).
The Company sells floor coverings, primarily carpet, to the new home and retail
replacement markets primarily in southern Nevada.
A summary of the Company's significant accounting policies follows. Unless
specifically discussed, the accounting policies apply to both Ragar (and its
subsidiaries) and the Predecessor Business.
The results of operations of the Company are not comparable to those of the
Predecessor Business, due primarily to the amortization of intangible assets
and interest expense incurred on the acquisition debt. Also, the Predecessor
Business financial statements contain no provision for income taxes.
Basis of presentation
On June 2, 1995, the Company acquired all of the common stock of CBH in an
exchange (the Exchange) by the holders of such common stock for newly issued
common stock of the Company, representing 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. See Note 2 for further discussion of the Exchange.
Principles of consolidation
The Successor Business consolidated financial statements include the accounts
of the Company and its subsidiaries, CBH and CBI. All material intercompany
accounts and transactions 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 minority interest in preferred stock dividends of
subsidiary on the consolidated income statements.
F-9
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A New York Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies (continued)
Cash
During the periods presented, the Company and the Predecessor Business
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 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 (see Note 2) is being amortized by the straight-line
method over twenty-five years. The Company periodically reviews the value of
its goodwill to determine if an impairment has occurred. The Company does not
believe that an impairment of its goodwill has occurred based on an evaluation
of operating income, cash flows and business prospects.
The Company incurred financing costs related to the bank financing obtained in
connection with the acquisition of the Predecessor Business (see Note 2). These
costs are being amortized on the effective interest method over the term of the
debt.
The Company also entered into a covenant not-to-compete in connection with the
acquisition of the Predecessor Business (see Note 2). The covenant is being
amortized on the straight-line method over the five-year term of the agreement.
F-10
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A New York Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies (continued)
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.
The Predecessor Business, with the consent of its stockholder, elected to be
taxed under sections of the federal tax law which provide that, in lieu of
corporation income taxes, the stockholder separately accounted for the
Predecessor Business' items of income, deduction, losses and credits.
Therefore, the Predecessor Business financial statements do not include any
provision for corporation income taxes.
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 these reimbursements when earned.
The Company also 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 period from June 2,
1995 to December 31, 1995 and for the year ended December 31, 1996.
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.
F-11
<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 consists of the following:
Predecessor Business Ragar
- --------------------------------- -----------------------------------
Year Ended Year Ended
December 31, January 1, 1995 June 2, 1995 to December 31,
1994 to June 1, 1995 December 31, 1995 1996
- ----------------------------------------------------------------------------
$ 348,828 $ 125,452 $ 206,421 $ 597,960
============================================================================
Reclassification
Certain 1994 and 1995 balances have been reclassified to correspond to the
balance sheet, statements of income, and cash flows classifications for 1996.
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.
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of
The Financial Accounting Standards Board issued SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of. Statement No. 121 is effective for the Company December 31, 1996 and
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used, and for long-lived assets, and certain identifiable intangibles
to be disposed of.
The Company's management has determined there was no impairment of long-lived
assets, including identifiable intangibles, at December 31, 1996.
F-12
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A New York Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies (continued)
Accounting for Stock-Based Compensation
In October 1995, the FASB issued Statement No. 123, Accounting for Stock-Based
Compensation. Statement No. 123 establishes financial accounting and reporting
standards for stock-based employee compensation plans, such as stock options
and stock purchase plans. The statement generally suggests but does not require
stock-based compensation arrangements for employees be accounted for based on
the fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable. Stock-based
compensation for nonemployees is required to be accounted for at the fair value
of the consideration received or the fair value of the equity instruments
issued, whichever is more reliably measurable. Companies that do not elect to
change their accounting for stock-based compensation for employees are required
to disclose the effect on net income and earnings per share as if the provision
of Statement No. 123 were applied. The Company has decided not to adopt the
accounting provision of this Statement.
Note 2. Acquisitions
On June 2, 1995, the Company acquired all of the common stock of CBH in an
exchange by the holders of such common stock for 13,363,000 newly issued shares
of common stock of the Company, representing 92% of the Company's common stock
outstanding after the Exchange. Ragar had no operations prior to the
acquisition of the Predecessor Business. Its only asset was approximately
$860,000 of cash and it had immaterial liabilities.
Concurrent with CBH's stock exchange with the Company, CBI executed an "Asset
Purchase Agreement" to acquire certain assets net of assumed liabilities of the
Predecessor Business, for a cash purchase price of $19,257,524. The acquisition
was accounted for as a purchase.
On July 28, 1995, the Company purchased the net assets of Steve's Floor
Covering, Inc. for approximately $267,000. The acquisition was accounted for as
a purchase.
Unaudited pro forma results of operations for the year ended December 31, 1995
of the Company assuming the acquisitions occurred on January 1, 1995 are
presented below. Pro forma adjustments made to the historical results of
operations consist principally of the amortization of intangible assets and
interest expense related to the acquisition financing and income taxes.
Net sales $ 40,343,000
Gross profit $ 11,035,000
Net income $ 1,500,000
Net income per common share $ 0.10
The net income per common share was computed based on the 14,583,163 weighted
average common shares outstanding during the period from June 2, 1995 to
December 31, 1995.
The above pro forma information does not purport to be indicative of the
results that actually would have been obtained had the acquisitions occurred on
January 1, 1995.
F-13
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A New York Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Note 3. Restatement
The Company has restated its 1995 financial statements.
The Company previously included the outstanding preferred stock of CBH as part
of its stockhoders' 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 $203,395 and $3,117,274 respectively, and
increased minority interest: preferred stock of subsidiary by $3,117,274 for
the period ended December 31, 1995. 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. Such shares were issued for cash consideration
equal to their par value and recorded at that amount. The Company has now
recorded these shares at their estimated fair value and has included them as
part of the acquisition costs discussed in 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.
Note 4. Equipment and Leasehold Improvements
Equipment and leasehold improvements consist of the following at December 31:
<TABLE>
<CAPTION>
1995 1996
--------------------------------------
<S> <C> <C>
Furniture and equipment $ 378,494 $ 556,430
Autos and trucks 65,165 112,334
Leasehold improvements 16,200 102,050
--------------------------------------
459,859 770,814
Less accumulated depreciation and amortization 44,121 221,465
--------------------------------------
$ 415,738 $ 549,349
======================================
</TABLE>
Note 5. Intangible Assets
Intangible assets consist of the following at December 31:
<TABLE>
<CAPTION>
1995 1996
--------------------------------------
<S> <C> <C>
Cost in excess of net assets of business' acquired, including
costs incurred in connection with business acquisitions $ 17,923,811 $ 17,898,754
Covenant not-to-compete 575,000 575,000
Debt issuance costs 912,619 802,500
--------------------------------------
19,411,430 19,276,254
Less accumulated amortization 641,620 1,609,927
--------------------------------------
Intangible assets, net $ 18,769,810 $ 17,666,327
======================================
</TABLE>
F-14
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A New York Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Note 6. Note Payable 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 substantially all of the assets and 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
December 31, 1996 the Company violated the following convenants: 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.
On April 15, 1996 First Source waived these covenant violations, through June
1, 1996. 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, and First Source agreed to amend the covenants to a
level where the Company's business plan would allow it to be in compliance.
The Company had certain discussions with First Source in an effort to amend
such covenants but was unable to reach an agreement with First Source. The
discussions are not continuing at present, and the Company believes that the
covenants are not likely to be amended. Moreover, the waiver period has not
been extended beyond June 1, 1996, and, therefore, the Company has been in
violation of the covenants since June 1, 1996. To date, First Source has
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, and because the Company's commitment for
replacement financing (See Note 13) is dependent on the completion of a public
offering, the Company has classified the debt as current on the December 31,
1996 consolidated balance sheet.
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 $508,125 at December 31, 1996.
Additionally, the Credit Agreement contains a prepayment penalty clause
requiring the Company to pay up to 2% of the then applicable revolving loan
commitment, as defined in the Credit Agreement, if the Company chooses to
terminate the Credit Agreement prior to May 31, 1999.
F-15
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A New York Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Note 6. Note Payable and Long-Term Debt (continued)
Amounts outstanding under the agreement at December 31, are as follows:
1995 1996
-------------------------------------
Working capital note $ 1,865,604 $ 2,879,581
=====================================
Long-term note $ 12,250,000 $ 8,750,000
=====================================
At December 31, 1996 the Company has approximately $120,000 available under the
original working capital note commitment.
During the period ended December 31, 1995 and the year ended December 31, 1996,
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. The Company received unsecured
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
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.
CBI also has long-term notes payable of $89,420 and $142,334 outstanding at
December 31, 1995 and 1996, respectively. The notes bear interest at an
approximate average of 11% and mature between March 1997 and August 2001.
Aggregate maturities required on the long-term debt are due in future years as
follows at December 31, 1996:
1997 $ 8,781,519
1998 31,196
1999 34,523
2000 33,999
2001 11,097
---------------
$ 8,892,334
===============
Note 7. Subordinated Notes Payable
The Company issued unsecured notes payable with a face amount of $1,940,000 in
the June 1995 acquisition discussed in Note 2. The notes were issued in units
that included shares of the common stock of CBH, which were concurrently
exchanged into shares of the Company in the Exchange (See Note 2). The proceeds
of the units attributable to the common stock element resulted in recording the
issuance of the notes at a discount from their face amount of approximately
$371,000 which was amortized to interest expense over the term of the debt.
On November 30, 1995, notes with a face amount of $560,000 were paid in full
and notes with a face amount of $820,000 were exchanged for 820 shares of CBH
preferred stock and 234,285 shares of Ragar common stock. The CBH preferred
stock was recorded at a net value of $572,938 and the Ragar common stock was
recorded at $247,062. The remaining notes with a face amount of $560,000 were
paid in full during 1996.
F-16
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A New York Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Note 8. Major Customers
Sales for Ragar and the Predecessor Business include sales to, and accounts
receivable due from, the following major customers:
<TABLE>
<CAPTION>
Percent to Total Sales
-------------------------------------------------------------------- Percent to Total
Predecessor Business Ragar Accounts Receivable
------------------------------- ------------------------------------ --------------------------------
Ragar
Year Ended Year Ended --------------------------------
December 31, January 1, to June 2, 1995 to December 31, December 31, December 31,
Customer 1994 June 1, 1995 December 31, 1995 1996 1995 1996
- -------------------------------------------- ------------------------------------ --------------------------------
<S> <C> <C> <C> <C> <C> <C>
A 12% 10% 13% 14% 12% 6%
B 12% 8% 9% 10% 3% 3%
</TABLE>
Note 9. Income Taxes
The provision for federal income taxes for the period from commencement of
operations (June 2, 1995) through December 31, 1995 and the year ended December
31, 1996 is comprised of the following:
1995 1996
----------------------------------
Current expense $ 218,979 $ 261,616
Deferred tax expense 35,616 55,384
---------------------------------
$ 254,595 $ 317,000
=================================
The $35,616 and $91,000 deferred tax liability at December 31, 1995 and 1996,
respectively, is principally the result of temporary differences between the
tax bases and reported amounts of intangible assets.
Note 10. Loss on Sale of Securities of Predecessor Business
A summary of net losses on sales of securities (primarily foreign currency
contracts) of the Predecessor Business for the year ended December 31, 1994,
are as follows:
Gross gains $ 1,740,104
Gross losses (2,396,366)
---------------
Net loss on sale of securities $ (656,262)
===============
The Predecessor Business accounted for these securities at market value.
The Successor Business does not enter into foreign currency contracts.
F-17
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A New York Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Note 11. Lease Commitments
Related party lease commitments
The Company leases its main operational premises from Realty under a
noncancelable operating lease expiring in May 1998. Future minimum rental
payments under this lease at December 31, 1996 are as follows:
1997 $ 100,284
1998 41,785
-------------
$ 142,069
=============
Other lease commitments
In 1996 the Company entered into agreements to rent retail space under separate
leases expiring August 1999 and June 2001. Monthly lease payments are net of
taxes, insurance and utilities, and are stated at a rate of $5,632 per month,
and $3,669 per month, respectively. The monthly base rent will be adjusted
annually to predetermined amounts, or to reflect any increases in the Consumer
Price Index.
Future minimum lease commitment under these leases at December 31, 1996 is as
follows:
1997 $ 114,615
1998 120,648
1999 97,029
2000 48,832
------------
$ 381,124
============
Total rent expense under the above leases for the period from commencement of
operations (June 2, 1995) through December 31, 1995 and the year ended December
31, 1996 was $60,199, and $157,149, respectively. This includes related party
rent expense of $58,499 and $100,284, respectively.
Note 12. Commitments, Contingencies and Related Party Transactions
Employment agreements and contingency
The Company has an employment agreement with its Chief Operating Officer (COO).
The agreement, expiring in July 1998, stipulates the annual salary. The
agreement includes a $100,000 bonus provision to be earned during 1997 if the
COO is employed the entire year.
F-18
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A New York Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Note 12. Commitments, Contingencies and Related Party Transactions (continued)
The Company also had an employment agreement with its former Chief Financial
Officer (CFO) who was terminated in 1996. Pursuant to the employment agreement,
the CFO purchased 290,500 shares of common stock for $.001 per share. The
difference between the amount paid and market value of the shares was
recognized as additional acquisition costs in the consolidated financial
statements (Notes 2 and 3). Also pursuant to his employment agreement 581,000
shares (Escrow Shares) were deposited into an escrow account on June 1, 1995.
Upon the first anniversary of the former CFO's employment and each of the
following four such anniversaries, 116,200 of the Escrow Shares were to be
released to the CFO together with all rights and privileges thereto. In the
event the Company did not meet certain operating goals, as described in the
employment agreement, the Company had the right to repurchase those shares at
$.01 per share.
The Company accounted for this escrow share arrangement as a variable stock
option under which the Company would have recorded compensation expense equal
to the difference between the aggregate market price of the Escrow shares
earned, as of the date earned, and the aggregate purchase price of such Escrow
Shares. As of December 31, 1995, and through his termination date, the CFO had
not earned the right to receive any Escrow Shares. No compensation expense
relating to the Escrow Shares has been recognized in the period from June 2,
1995 to December 31, 1995 or the year ended December 31, 1996. In connection
with the former CFO's termination, the Company repurchased the 581,000 Escrow
shares for $5,810.
The former CFO has commenced a suit against CBH, CBI and directors of the
Company alleging wrongful and unlawful termination. The suit is seeking
unspecified compensatory and punitive damages. 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. The motion also
dismissed the litigation against the individual officers. The remaining parties
are entering into binding arbitration. The Company and its legal counsel
believe it has meritorious defenses to such allegations, and the Company
intends to defend the matter vigorously in arbitration. The range of possible
loss for the contingency is not determinable. No liability has been recorded
for this contingency in the consolidated financial statements.
Consulting agreements
The Company has entered into oral month-to-month consulting agreements with
Branin Investments, Inc. (Branin), a principal shareholder of Ragar, PAH
Marketing Consultants, Inc. (PAH), a company controlled by the Chairman of the
Board and President of Ragar, and Capital Vision Group, Inc. (Capital), a
company controlled by a director and shareholder of Ragar, under which the
Company receives management advisory services in the areas of operations
management, financing, and mergers and acquisitions. Pursuant to these
agreements the Company pays $35,000, $5,000 and $5,000 per month to Branin, PAH
and Capital, respectively. The Company modified its agreement with Branin in
September 1996 reducing the management consulting fee to $10,000. The Company
terminated its agreement with Capital in January 1996 and the obligation to PAH
was discontinued in September 1996.
Total consulting expense under these agreements for the period from
commencement of operations (June 2, 1995) to December 31, 1995 and for the year
ended December 31, 1996 was $315,000, and $365,000, respectively.
F-19
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A New York Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Note 12. Commitments, Contingencies and Related Party Transactions (continued)
Related party note receivable
The Company has an unsecured note receivable of $279,536 and $214,496 at
December 31, 1995 and 1996, respectively due from Realty. The note accrues
interest at 10% per annum and is payable in equal monthly installments of
$9,293, including interest through May 1998. In lieu of receiving payments and
with the permission of Realty, the Company is offsetting rental payments due to
Realty (Note 11) against the note receivable.
Branin Investments, Inc.
Branin, which is 100% owned by the Chairman of the Board and President of
Ragar, acted as advisor to the Company in certain financing and equity
transactions consummated concurrently with the acquisition described in Note 2.
In consideration of these advisory services Branin was entitled to fees of
approximately $650,000, representing 3% of the aggregate proceeds received by
the Company from First Source under the Credit Agreement described in Note 6
and 3% of the aggregate proceeds from the Note offering and Preferred Stock
offering described in Note 7, respectively. Branin was entitled to receive
these fees upon the consummation of a public offering of the Company's stock.
Branin agreed to waive such fees in exchange for increasing its management
consulting fee from $10,000 per month to $20,000 per month (see above
consulting agreements.) The increase is to be effective upon the consummation
of a public offering of the Company's stock.
Due to principal shareholder (Branin) consists of the following:
Preferred stock dividends paid on behalf of CBH $ 419,094
Management fees due Branin 200,000
Cash payments made to Branin (229,056)
---------------
Due to Branin $ 390,038
===============
Amounts payable to Branin are non interest bearing and due on demand.
Nevada Department of Employment, Training and Rehabilitation
On September 5, 1996, the Nevada Department of Employment, Training and
Rehabilitation notified the Company that it had changed the status of the
Company's floor covering installers from independent contractors to employees,
subjecting the Company to unemployment tax obligations with respect to such
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 maintains that these installers are not employees of the Company
but rather independent contractors and, as such, the Company is not subject to
payment of unemployment taxes with regard to these installers. The Company 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.
F-20
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A New York Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Note 12. Commitments, Contingencies and Related Party Transactions (continued)
In addition, the potential status change from independent contractors to
employees raises concerns that the Internal Revenue Service will assert the
same claims. If a claim is asserted, the Company will vigorously defend its
position. The amount of any potential liability is unknown but the Company
along with counsel believes that any adverse outcome will not be material.
Predecessor Business Contingency
The Predecessor Business previously engaged an environmental consultant who
informed the Predecessor Business that contaminant levels at its business
location may exceed maximum levels established by The Environmental Protection
Agency. Management of the Predecessor Business believes that it was not and has
not been the source of the contaminants, if any. In the absence of a conclusive
finding concerning the source of and the actual level of contamination, no
accrual was made in the Predecessor Business financial statements.
The business location of the Predecessor Business was not acquired by the
Company in the exchange. The business location was acquired by Realty (see Note
2) and leased to the Company under the operating lease agreement described
above in Note 11. Subsequent to the acquisition, the Company obtained advice
from legal counsel that the Company would not become liable for the potential
contamination even if the Predecessor Business or Realty are found to be
liable.
Note 13. Liquidity and Management's Plans
The Company is in violation of certain debt covenants relating to its primary
credit agreement with First Source. The covenants have not been waived by First
Source. First Source has continued to allow the Company to borrow the full
capacity under the working capital portion of the credit agreement, and the
Company has received no indication from First Source that it intends to
accelerate the maturity of the debt. The credit agreement requires quarterly
principal payments of $875,000 and interest is accrued and added to the note
balance (Note 6).
Management plans with respect to its future financing needs is as follows:
The Company intends to complete a public offering of common stock. The Company
has a letter of intent with an underwriter and expects to execute an
underwriting agreement. The Company currently anticipates net proceeds to the
Company of approximately $12,150,000 from this offering. The net proceeds of the
public offering are intended to be used in part, to reduce the outstanding debt
on the credit agreement to an amount that can be refinanced with another
lender. In addition, the net proceeds are intended to be used to repurchase the
CBH Preferred Stock at the face amount of $4,660,000. There can be no assurances
that the public offering will be completed.
F-21
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A New York Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Note 13. Liquidity and Management's Plans (continued)
On February 19, 1997, the Company obtained a commitment from FINOVA Capital
Corporation for a $12,500,000 credit facility which includes a $7,000,000 term
loan and a $5,500,000 revolving line of credit both bearing interest at a rate
which is approximately 0.75 percent lower than the Company's current credit
agreement. The credit facility would allow the Company to pay off the First
Source credit facility and allow additional revolving credit. The agreement
would require quarterly principal payments of $325,000 on the term note
payable. The credit facility funding is subject to the successful completion of
the above mentioned public offering of common stock and the commitment expires
April 30, 1997. The Company paid $41,666 to FINOVA representing 33% of the loan
fee, subsequent to December 31, 1996.
The Company's long-term plans include a growth strategy through selected
acquisitions and adding other markets. The Company has a letter of intent to
purchase Nonn's Flooring, Inc., a commercial and retail floor covering company
with operations in Madison, Wisconsin. The Company obtained a commitment from
FINOVA Capital Corporation to participate in future acquisitions through working
capital financing, subject to the independent evaluation of each acquisition by
FINOVA. The acquisition of Nonn's Flooring, Inc. is subject to the successful
completion of the above mentioned public offering of common stock.
Note 14. Subsequent Events
Reincorporation
On March 19, 1997 the Company's shareholders approved a reincorporation 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 to four reverse stock split of the Company.
This proposed merger has not been reflected in the accompanying financial
statements.
1997 Stock Option Plan
On March 19, 1997 the Company's shareholders adopted the 1997 Stock Option Plan
(the "Option Plan") to provide an incentive to non-employee directors and to
officers and certain other key employees of and consultants to the Company by
making available to them an opportunity to acquire common stock in the Company.
The Option Plan provides for the award of options representing or corresponding
up to 1,250,000 shares of common stock. All options must be granted at no less
than 100 percent of the fair value of the common stock on the date of the
grant. The options expire at varying dates not to exceed 10 years from the date
of grant. Any award issued under the Option Plan which is forfeited, expires or
terminates prior to vesting or exercise will again be available under the
Option Plan.
F-22
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A New York Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Note 14. Subsequent Events (continued)
Securities and Exchange Commission Matter
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 was being conducted. The Company was requested to voluntarily
provide 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 has 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.
Note 15. Cash Flow Information
The following schedule describes the Company's noncash investing and financing
activities for the period from commencement of operations (June 2, 1995) to
December 31, 1995 and for the year ended December 31, 1996.
Acquisition of net assets of Predecessor Business:
<TABLE>
<CAPTION>
1995 1996
------------------------------
<S> <C> <C>
Ragar common stock and minority interests issued for broker fee $ 500,000 $ --
Liabilities assumed 357,689 --
------------------------------
$ 857,689 $ --
==============================
Acquisition costs, incurred by related and unrelated parties
prior to commencement of operations, contributed to Company $ 1,157,393 $ --
==============================
Exchange of subordinated debt for minority investment in subsidiary $ 572,938 $ --
==============================
Equipment acquired through financing agreement $ -- $ 79,764
==============================
</TABLE>
There were no significant noncash investing or financing activities of the
Predecessor Business during the period from January 1, 1995 to June 1, 1995
and the year ended December 31, 1994.
F-23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Act of 1934, the registrant has duly caused this Annual Report on Form 10-KSB
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of New York, State of New York, on the 29th day of April, 1997.
RAGAR CORP.
By: /s/ Philip A. Herman
-----------------------------------
Philip A. Herman
Chairman of the Board and President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
Registrant in the capacities and on the dates indicated:
Signature Titles Date
- --------- ------ ----
/s/ Philip A. Herman Chairman of the Board April 29, 1997
- -------------------- and President
Philip A. Herman
/s/ Michael Mindlin Director April 29, 1997
- --------------------
Michael Mindlin
/s/ Gary Peiffer Director April 29, 1997
- --------------------
Gary Peiffer
/s/ Facundo Bacardi Director April 29, 1997
- --------------------
Facundo Bacardi
/s/ William Poccia Chief Financial Officer April 29, 1997
- -------------------- (Principal Financial
William Poccia and Accounting Officer)
28
<PAGE>
Exhibit Index
Exhibit Name Page
---- ----
2.1 Agreement and Plan of Exchange, dated as of June 1,
1995, among the Company, Carpet Barn Holdings, Inc.
("CBH") and the holders of common stock of CBH
(incorporated by reference from Exhibit 1 of the
Company's Report on Form 8-K (June 2, 1995) (the "June
Form 8-K").
2.2 Asset Purchase Agreement, dated as of June 1, 1995,
between Carpet Barn Acquisition Corp. ("CBAC") and
Carpet Barn, Inc. ("Carpet Barn") (incorporated by
reference from Exhibit 3 of the June Form 8-K).
2.3 Amendment, dated June 1, 1995, to Asset Purchase
Agreement (incorporated by reference from Exhibit 4 of
the June Form 8-K).
3.1 Certificate of Incorporation, dated July 19, 1988, of
the Company (incorporated by reference from Exhibit
3(a) of the Company's Registration Statement on Form
S-18 (33-29942-NY) filed October 20, 1989 (the "1989
Registration Statement").
3.2 By-laws of the Company (incorporated by reference from
Exhibit 3(b) of the 1989 Registration Statement).
3.3 Amended and Restated Certificate of Incorporation of
CBH (incorporated by reference from Exhibit 3.3 of the
Company's Annual Report on Form 10-K for the period
ended December 31, 1995 (the "Form 10-K")).
3.4 Certificate of Amendment to Amended and Restated
Certificate of Incorporation of CBH (incorporated by
reference from Exhibit 3.4 of the Form 10-K).
3.6 Certificate of Incorporation of Nations Flooring, Inc.
(incorporated by reference from Exhibit 3.6 of the
Company's Registration Statement on Form S-1
(333-19871) filed January 16, 1997 ("1997 Registration
Statement").
3.7 By-laws of Nations Flooring, Inc. (incorporated by
reference from Exhibit 3.7 of the 1997 Registration
Statement).
9.1 Voting Trust Agreement, dated May 30, 1995, between
Philip A. Herman and certain shareholders of the
Company (incorporated by reference from Exhibit 2 of
the June Form 8-K).
10.1 Secured Credit Agreement, dated as of June 1, 1995,
between CBAC and with First Source Financial LLP
("First Source") (incorporated by reference from
Exhibit 5 of the June Form 8-K).
10.2 Pledge Agreement, dated as of June 1, 1995, among CBH,
CBAC and First Source (incorporated by reference from
Exhibit 9 of the June Form 8-K).
10.3 Guaranty, dated as of June 1, 1995, by CBH in favor of
First Source (incorporated by reference from Exhibit
10 of the June Form 8-K).
<PAGE>
10.4 Revolving Note, dated June 1, 1995, between CBAC and
First Source (incorporated by reference from Exhibit 6
of the June Form 8-K).
10.5 Working Capital Note, dated June 1, 1995, between CBAC
and First Source (incorporated by reference from
Exhibit 7 of the June Form 8-K).
10.6 Security Agreement, dated June 1, 1995, between CBAC
and First Source (incorporated by reference from
Exhibit 8 of the June Form 8-K).
10.7 Terms of preferred stock, par value $.01 per share,
stated value $1,000 per share, of CBH (incorporated by
reference from Exhibit 12 of the June Form 8-K).
10.8 Employment Agreement, dated as of July 28, 1995,
between CBI and Steven Chesin (incorporated by
reference from Exhibit 1 of the Company's Report on
Form 10-Q for the quarterly period ended June 30, 1995
(the "June 1995 Form 10-Q).
10.9 Employment Agreement, dated as of June 1, 1995,
between CBI and Mark Szporka incorporated by reference
from Exhibit 2 of the June 1995 Form 10-Q).
10.10 Amendment, dated June 1, 1995, to employment agreement
between CBAC and Mark Szporka (incorporated by
reference from Exhibit 3 of the June 1995 Form 10-Q).
10.10.1 Amendment, dated March 6, 1996, to employment
agreement between CBAC and Mark Szporka (incorporated
by reference from Exhibit 10.11 of the Form 10-K).
10.11 Form of Promissory Note issued in the offering of
short-term notes of CBH (incorporated by reference
from Exhibit 11 of the June Form 8-K).
10.12 Lease, dated June 1, 1995, between C.B. Realty of
Delaware, Inc. ("CB Realty") and CBAC (incorporated by
reference from Exhibit 10.13 of the Form 10-K).
10.13 First Amendment to Lease Agreement, dated August 1,
1995, between CB Realty and CBAC (incorporated by
reference from Exhibit 10.14 of the Form 10-K).
10.14 Promissory Note, dated June 1, 1995 from CB Realty in
favor of CBAC (incorporated by reference from Exhibit
10.15 of the Form 10-K).
10.15 Employment Agreement, dated as of May 28, 1996, between
CBI and Alan Ember. (incorporated by reference from
Exhibit 10.15 of the 1997 Registration Statement).
10.16 Letter of Intent, dated February 25, 1997, between
Ragar Corp. and Nonn's Flooring, Inc.
<PAGE>
BRANIN INVESTMENTS, INC.
February 25, 1997
Mr. Ken Nonn
Ms. Janet Meier
Nonn's Flooring, Inc.
7750 Graber Road
Middleton, WI 53562
Re: Letter of Intent for the Purchase of the Assets
of Nonn's Flooring, Inc. by Ragar Corp.
Dear Mr. Nonn and Ms. Meier:
The purpose of this letter is to confirm our mutual
understanding and agreement in principle with respect to the proposed
acquisition by Ragar Corp. ("Buyer") of substantially all of the assets of
Nonn's Flooring, Inc. ("Seller") on the terms and conditions set forth herein.
This letter is intended to be a nonbinding letter of intent which does not
create enforceable rights or legally binding obligations, except as specifically
set forth in paragraph 11 below. The purchase and sale of the assets shall only
be effected by a definitive Asset Purchase Agreement (the "Purchase Agreement"),
and documents ancillary thereto, to be prepared by counsel for the Seller, and
which will substantially contain the terms and provisions contemplated hereby.
1. Assets to be Purchased
The assets to be purchased (the "Purchased Assets") shall
consist of all of the following assets of Seller, other than the Excluded Assets
(as defined below): accounts receivable, machinery, equipment, vehicles, tools,
supplies, spare parts, office furniture, equipment and supplies; inventory,
contracts, contractual rights, work in process, leases, licenses, permits, and
purchase and sales orders; Seller's corporate name and the goodwill associated
therewith; Seller's telephone and facsimile numbers; Seller's sales, advertising
and promotional materials; all of Seller's books, files, papers and other
information and records, except for those items listed below as Excluded Assets;
and all prepaid items.
2. Assets Excluded from Purchase
The following assets of Seller (collectively, the "Excluded
Assets") shall be excluded from the sale and are not Purchased Assets: all cash,
cash items, marketable securities, certificates of deposit and other investments
of Seller; any corporate franchise, articles of incorporation, corporate seal,
stock books, minute books and other corporate records having to do with the
corporate organization and capitalization of Seller; and all of Seller's
accounting and tax records.
3. Liabilities Assumed.
Buyer shall assume all of Seller's liabilities and obligations
existing as of the Closing Date (as defined below).
4. Purchase Price
The purchase price of the Purchased Assets (the "Purchase
Price") shall be $3,000,000 to be paid in cash at the Closing. The Purchase
Price shall be increased (or decreased) by the amount by which the Purchased
Assets on the Closing Date, less the liabilities assumed, exceed (or are less
than) $1,382,000 [the comparable figure from the June 30, 1996 financials].
<PAGE>
5. Employment Agreements.
5.1 Buyer will enter into employment agreements
with Ken Nonn and Janet Meier (the "Shareholders") in the capacity of executive
officers, which agreements shall include customary industry compensation and
benefits (the "Employment Agreements"). The term of the Employment Agreements
shall commence on the Closing Date (as defined below) and terminate on the third
anniversary thereof, with automatic annual extensions upon achievement of
certain mutually established criteria. The Employment Agreements shall provide
for guaranteed bonus payments to the Shareholders totaling at least $500,000 in
stock and/or cash, to be determined prior to Closing, based upon the
profitability levels mutually established as of the Closing Date.
5.2 Buyer will enter into employment agreements
with all key executives identified by the Shareholders, which agreements shall
include customary industry compensation and benefits, as well as performance
bonuses.
6. Additional Compensation
The Shareholders shall have the following
opportunities to receive additional compensation in connection with their
employment by Buyer:
(a) If, under the Shareholders' leadership, the
business as acquired by Buyer meets or exceeds certain mutually agreed-upon
projections as of each of the first three anniversaries of the Closing Date,
Buyer will pay the Shareholders $166,667 on each such anniversary, to be paid in
cash and/or stock, as agreed by the parties as of the Closing Date.
(b) Buyer invites the Shareholders' assistance
in the overall operation of Buyer in addition to those responsibilities to be
set forth in the Employment Agreements. If the Shareholders accept such
additional responsibilities, they shall be compensated based upon plans
acceptable to the Shareholders and Buyer prior to the performance of those
services.
7. No Solicitation
In consideration of Buyer entering into this Letter
of Intent, and undertaking to negotiate the Purchase Agreement, investigate the
business of Seller, and incur expenses in connection therewith, it is agreed
that from and after the date hereof and for a period of thirty (30) days
hereafter Seller (and any affiliate or representative of Seller) will not
solicit offers from other persons interested in purchasing all or part of the
Purchased Assets or Seller's capital stock, or negotiate any such transaction.
8. Conditions to Buyer Closing
The Purchase Agreement shall provide that the
obligations of Buyer thereunder are expressly subject to the following
conditions precedent:
(a) The net profit of Seller for the fiscal year
ending December 31, 1996 shall be at least $400,000; and
(b) Buyer shall have entered into a five year
triple-net lease with Nonn-Meier Partnership for the building currently used in
Seller's business, which lease shall provide for monthly rent of $16,500, with
annual adjustment for changes in the Consumer Price Index.
9. Due Diligence
9.1 Immediately following the execution of this
Letter of Intent, Seller shall permit Buyer and its representatives reasonable
access during normal business hours to all of Seller's
<PAGE>
facilities, properties, books, contracts, commitments, and records for the
purpose of making such investigations as Buyer may desire with respect to the
business and operations of Seller.
9.2 Buyer agrees to exercise its best efforts in
conducting such due diligence in a manner that will not significantly interfere
or disrupt the normal operations of Seller or arouse suspicions of Seller's
employees, customers or suppliers that either the capital stock or assets of
Seller are for sale. Buyer and its employees, representatives, agents,
attorneys, accountants, and financial advisors (the "Representatives") shall
treat confidentially all information provided to or obtained by any of them in
connection with their investigation of Seller (the "Evaluation Material") and
not disclose the Evaluation Material to any person without the prior written
consent of Seller. Buyer and the Representatives will not use the Evaluation
Material in any way detrimental to Seller, and the Evaluation Material shall not
be used by Buyer or the Representative other than for the purpose of evaluating
the acquisition of the Purchased Assets.
9.3 In the event that the Purchase Agreement is
not executed by the parties hereto or the transaction is not consummated on or
before the Closing Date, Buyer and the Representatives shall return to Seller,
or destroy, all documents obtained by them relating to Seller, and shall return
to Seller, or destroy, all analyses prepared by Buyer or the Representatives
with respect to Seller based upon information obtained from Seller.
10. Timing.
The Purchase Agreement shall provide for a closing date (the
"Closing Date") of April 15, 1997, on which date the transactions contemplated
hereby and thereby will be consummated (the "Closing").
11. Non-Binding Effect.
Other than paragraphs 7, 9, 12 and 14, this Letter of Intent
is not intended to be, and does not constitute, a binding agreement by any of
the parties, nor is it intended to, nor does it, create any rights with respect
to any third parties. Rather, this Letter of Intent is intended solely to
express the current intention of Buyer and Seller to proceed to negotiate,
prepare and, if acceptable to each party, execute a Purchase Agreement which, if
executed, will entirely supersede this Letter of Intent. This Letter of Intent
expresses only the parties' present understanding of terms to be included in the
Purchase Agreement and the terms and conditions of the foregoing must be
acceptable to each of the parties and their respective counsel, which Purchase
Agreement shall be binding in accordance with its terms only when and if duly
executed and delivered by each of the parties named therein. The parties to this
Letter of Intent acknowledge that there are terms and conditions which are not
included herein, but which are expected to be the subject of further
negotiations in connection with the Purchase Agreement. If the Purchase
Agreement has not been executed by all of the parties hereto, and the
transactions contemplated thereby have not been consummated, by April 15, 1997,
for any reason whatsoever, then no party shall have nay further obligation to
the other hereunder, and this Letter of Intent shall be deemed to be of no
further force and effect; provided, however, that the terms hereof relating to
confidentiality shall remain in full force and effect.
This Letter of Intent and the Purchase Agreement will be
governed by and construed in accordance with the internal laws of the state of
Wisconsin, without regard to conflicts of law principles.
12. Conduct of Business.
Unless and until the Purchase Agreement has been duly executed
and delivered by all of the parties, Seller will immediately notify Buyer of (i)
any material adverse change in the business of Seller, (ii) any conduct of
Seller outside of the ordinary course of business; and (iii) any extraordinary
transactions involving Seller.
<PAGE>
13. Definitive Agreement.
The foregoing is subject to execution by Seller and Buyer of a
mutually acceptable definitive detailed Purchase Agreement. The Purchase
Agreement will contain, among other provisions, the customary representations,
covenants and indemnities, on terms and subject to limitations acceptable to the
parties, including without limitation, a representation and warranty that the
Purchased Assets will be conveyed to Buyer free and clear of any and all liens
or encumbrances. Notwithstanding the foregoing, the parties agree to minimize
the length, detail and complexity of the Purchase Agreement whenever possible.
14. Expenses.
Each of the parties hereto agrees to pay its own fees and
expenses and those of respective agents, advisors, attorneys and accountants
with respect to this Letter of Intent and the negotiation and execution of the
Purchase Agreement, and other ancillary agreements, and if the Purchase
Agreement is executed, the closing of the transactions contemplated by the
Purchase Agreement.
Please indicate your acceptance to the foregoing by signing in the space
provided below on the enclosed copy of this Letter of Intent and returning same
to the undersigned.
RAGAR CORP.
By: /s/ PHILIP A. HERMAN
--------------------------------------
Philip A. Herman, Chairman
AGREED AND ACCEPTED:
NONN'S FLOORING, INC.
By: /s/ KEN NONN
--------------------------------
Ken Nonn, President
By: /s/ JANET MEIER
--------------------------------
Janet Meier, Secretary/Treasurer
