<PAGE>
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A-1
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: June 30, 1997
[ ] TRANSITIONAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____________ to ______________
Commission file number: 33-29942-NY
NATIONS FLOORING, INC.
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 11-2925673
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(State or other jurisdiction (IRS Employer Identification Number)
of incorporation)
100 Maiden Lane, New York, New York 10038
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(Address of principal executive offices)
(212) 898-8888
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(Issuer's telephone number)
RAGAR CORP.
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(Former name, former address or former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. X Yes No
--- ---
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 3,642,398 shares of Common Stock, par
value $.001 per share, were outstanding at August 10, 1997.
Transitional Small Business Disclosure Format: Yes X No
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Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets 3
Consolidated statements of income 4 - 5
Consolidated statements of cash flows 6
Notes to consolidated financial statements 7 - 15
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Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16-22
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings 23 - 24
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
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SIGNATURES 26
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EXHIBIT 27 - Financial Data Schedule 27
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2
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<TABLE>
<CAPTION>
NATIONS FLOORING, INC. AND SUBSIDIARIES
(A DELAWARE CORPORATION)
CONSOLIDATED BALANCE SHEETS (Unaudited)
DECEMBER 31, 1996 AND JUNE 30, 1997
ASSETS (Note 3) December 31, 1996 June 30, 1997
---------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash $ 335,130 $ 370,889
Accounts receivable, less allowance for doubtful
accounts 1996 $347,000; 1997 $335,000 3,281,236 3,089,479
Due from employee 63,104 27,493
Inventory 709,627 521,511
Current portion of related party note receivable 169,169 178,485
Deferred public offering costs 155,721 467,458
Prepaid expenses and other 168,588 484,461
------------------------------------
Total current assets 4,882,575 5,139,776
------------------------------------
Related Party Note Receivable, less current portion 45,327 --
Equipment and leasehold improvements, net 549,349 453,701
Intangible Assets, net 16,905,761 16,509,663
------------------------------------
$ 22,383,012 $ 22,103,140
====================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable - bank (Note 4) $ 2,879,581 $ 2,737,014
Current maturities of long-term debt (Note 4) 8,781,519 7,032,000
Accounts payable 2,250,206 2,782,949
Due to principal shareholder 390,038 1,085,584
Accrued expenses 442,145 334,146
Customer deposits 916,480 1,108,950
------------------------------------
Total current liabilities 15,659,969 15,080,643
------------------------------------
Deferred Income Taxes 79,344 145,664
------------------------------------
Due to shareholder (Note 3) - 500,000
------------------------------------
Long-Term Debt, less current maturities (Note 4) 110,815 92,613
------------------------------------
Minority Interest: Preferred Stock of Subsidiary 3,117,274 3,117,274
------------------------------------
Stockholders' Equity
Common stock, $.001 par value, authorized 20,000,000
shares; issued 1996 and 1997; 3,787,647 shares 3,788 3,788
Additional paid-in capital 3,038,877 3,050,240
Retained earnings 367,392 118,728
------------------------------------
3,421,420 3,172,756
Less cost of treasury stock (145,250 shares) 5,810 5,810
------------------------------------
3,415,610 3,166,946
------------------------------------
Total liabilities and stockholders' equity $ 22,383,012 $ 22,103,140
====================================
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
<TABLE>
<CAPTION>
NATIONS FLOORING, INC. AND SUBSIDIARIES
(A DELAWARE CORPORATION)
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Six Months Ended June 30,
1996 1997
---------------------------------------------------------------------------------------------------
<S> <C> <C>
Sales $ 20,749,636 $ 18,853,148
Cost of sales 15,038,636 13,832,830
------------------------------------
Gross profit 5,711,000 5,020,318
Selling, general and administrative expenses:
Related party consulting fees 245,000 60,000
Related party rent expense 50,142 50,142
Other 3,085,163 3,425,132
------------------------------------
3,380,305 3,535,274
------------------------------------
Amortization and depreciation 594,325 640,023
------------------------------------
Operating income 1,736,370 845,021
Other income (expense):
Miscellaneous income 9,732 6,317
Interest expense (801,580) (804,880)
------------------------------------
Income before taxes and dividends to preferred
stockholders of subsidiary 944,522 46,458
Provision for income taxes 324,579 15,522
------------------------------------
Income before dividends to preferred stockholders
of subsidiary 619,943 30,936
Dividends to preferred stockholders of subsidiary 258,800 279,600
------------------------------------
Net income (loss) $ 361,143 $ (248,664)
====================================
Net income (loss) per common share 0.10 (0.07)
====================================
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
<TABLE>
<CAPTION>
NATIONS FLOORING, INC. AND SUBSIDIARIES
(A DELAWARE CORPORATION)
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended June 30,
1996 1997
---------------------------------------------------------------------------------------------------
<S> <C> <C>
Sales $ 10,984,681 $ 9,595,144
Cost of sales 7,951,589 6,999,687
------------------------------------
Gross profit 3,033,092 2,595,457
Selling, general and administrative expenses:
Related party consulting fees 120,000 30,000
Related party rent expense 25,071 25,071
Other 1,675,340 1,791,267
------------------------------------
1,820,411 1,846,338
------------------------------------
Amortization and depreciation 285,899 325,039
------------------------------------
Operating income 926,782 424,080
Other income (expense):
Miscellaneous income 5,223 2,851
Interest expense (386,587) (402,739)
------------------------------------
Income before taxes and dividends to preferred
stockholders of subsidiary 545,418 24,192
Provision for income taxes 187,068 7,761
------------------------------------
Income before dividends to preferred stockholders
of subsidiary 358,350 16,431
Dividends to preferred stockholders of subsidiary 134,600 139,800
------------------------------------
Net income (loss) $ 223,750 $ (123,369)
====================================
Net income (loss) per common share 0.06 (0.03)
====================================
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
<TABLE>
<CAPTION>
NATIONS FLOORING, INC. AND SUBSIDIARIES
(A DELAWARE CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30,
1996 1997
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Reconciliation of Net Income (Loss) to Net Cash
Provided by Operating Activities
Net income (loss) $ 361,143 $ (248,664)
Depreciation 73,412 160,000
Amortization 520,913 461,129
Accretion of discount on subordinated notes payable 44,578 --
Deferred income taxes 29,916 66,320
Provision for bad debts 26,000 94,649
Interest on long-term debt and notes added to note payable 731,227 575,082
Common stock issued in lieu of interest payment 15,000 --
Rent expense in lieu of note receivable payments from Realty 50,142 50,142
Changes in assets and liabilities
(Increase) decrease in accounts receivable (990,106) 97,108
Decrease in inventory 17,271 188,116
Increase in prepaid expenses and other (19,925) (315,873)
Decrease in accounts payable 216,324 532,743
Increase in due to principal shareholder 342,700 695,546
Increase (decrease) in accrued expenses (67,347) (107,999)
Increase (decrease) in customer deposits 372,879 192,470
---------------------------------------------
Net cash provided by operating activities $ 1,724,127 $ 2,440,769
=============================================
Cash Flows from Investing Activities
Net advances to related parties $ (12,537) $ 21,480
Purchase of equipment and leasehold improvements (42,045) (64,352)
Acquisition cost expenditures (15,338) (65,031)
---------------------------------------------
Net cash used in investing activities (69,920) (107,903)
---------------------------------------------
Cash Flows from Financing Activities
Payments on note payable (1,754,655) (2,467,649)
Principal payments on long-term debt (9,809) (17,721)
Cash payment for deferred offering costs -- (311,737)
Proceeds from issuances of preferred and common stock 520,000 --
Proceeds from subordinated notes payable -- 1,034,000
Principal payment on subordinated notes payable (560,000) (534,000)
---------------------------------------------
Net cash used in financing activities $ (1,804,464) $ (2,297,107)
---------------------------------------------
Net increase (decrease) in cash $ (150,257) $ 35,759
Cash, beginning 693,356 335,130
---------------------------------------------
Cash, ending $ 543,099 $ 370,889
=============================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $ 8,877 $ 13,124
=============================================
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
(a Delaware Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies
Nature of business and recapitalization
Ragar Corp. (Ragar) was organized under the laws of the state of New York on
July 19, 1988. Ragar Corp. had substantially no operations prior to its
exchange, on June 2, 1995, in a reverse acquisition with Carpet Barn Holdings,
Inc., (CBH), which was organized under the laws of the State of Delaware on May
26, 1995. CBH and its wholly owned subsidiary, Carpet Barn, Inc., (CBI), a
Delaware corporation, were formed for the purpose of acquiring the assets and
operations of Carpet Barn, Inc., a Nevada Corporation (Predecessor Business), a
retail carpet sales and installation outlet located in Las Vegas, Nevada. The
Company began operations on June 2, 1995, the date of acquisition.
An agreement of merger and equity restructuring was approved by the Company's
management and its shareholders on March 19, 1997. The agreement provided for
the merger of Ragar with and into Nations Flooring, Inc., (a newly-formed,
wholly-owned subsidiary of Ragar incorporated in Delaware). Nations Flooring,
Inc. (Nations or Company) is the surviving corporation after the merger. All
assets, liabilities, property, rights, and obligations of Ragar were transferred
to and assumed by Nations. Since Nations had no assets, liabilities or
operations prior to the merger, the financial statements of Nations for periods
prior to the merger are the former financial statements of Ragar.
In the merger, each four (4) shares of Ragar common stock were exchanged for one
(1) share of Nations common stock. The effect of this exchange is similar to a
one for four reverse stock split of Ragar. Accordingly, all references to shares
of the Company's common stock and to per share amounts in the accompanying
financial statements and footnotes have been restated to reflect this one for
four reverse stock split as though it had occurred in the earliest period
presented (January 1, 1996). The Company has 20,000,000 authorized shares of
common stock, par value of $.001 and 1,000,000 shares of preferred stock, par
value of $.001.
The Company is also related, through common ownership, to C. B. Realty of
Delaware, Inc. (Realty).
The Company sells floor coverings, primarily carpet, to the new home and retail
replacement markets primarily in southern Nevada.
7
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
(a Delaware Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies (continued)
A summary of the Company's significant accounting policies follows.
Basis of presentation
On June 2, 1995, the Company acquired all of the common stock of CBH in an
exchange (the Exchange) by the holders of such common stock for newly issued
common stock of the Company, representing 92% of the Company's common stock
outstanding after the Exchange. For financial reporting and accounting purposes,
the Exchange was recorded as a reverse acquisition, with CBH as the accounting
acquirer. In a reverse acquisition, the accounting acquirer is treated as the
surviving entity, even though the Company's legal existence does not change and
the financial statement titles refer to the Company, not the accounting
acquirer. The accounting acquirer treats the Exchange similar to a purchase
acquisition. As a result, the historical financial information presented is
CBH's and not the Company's, as previously reported. The operating results of
the Company are included with those of CBH after June 2, 1995, the date of the
Exchange.
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-QSB and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for the complete financial
statements. The accompanying unaudited financial statements should be read in
conjunction with the financial statements, including the notes thereto,
appearing in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1996. In management's opinion, the accompanying consolidated
financial statements reflect all material adjustments (consisting only of normal
recurring accruals) necessary for a fair statement of the results for the
interim periods presented. The results for the interim period ended June 30,
1997, are not necessarily indicative of the results which will be reported for
the entire year.
Principles of consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries, CBH and CBI. All material intercompany accounts and
transactions are eliminated in consolidation. The minority interest in the
accompanying consolidated financial statements represents the preferred stock of
CBH not owned by the Company. The CBH preferred stock dividends are included as
a charge to earnings on the consolidated income statements.
Cash
During the periods presented, the Company maintained cash balances which, at
times, were in excess of federally insured limits. The Company has experienced
no losses in such accounts. At December 31, 1996 and June 30, 1997, the
Company's cash balances were maintained at financial institutions in Nevada and
Illinois.
8
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
(a Delaware Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies (continued)
Inventory
Inventory consists primarily of carpet and vinyl and is stated at the lower of
cost (first-in, first-out method) or market.
Equipment and leasehold improvements
Equipment and leasehold improvements are stated at cost, less accumulated
depreciation and amortization. Depreciation is provided on the straight-line and
accelerated methods for financial reporting purposes. Amortization is provided
on the straight-line basis over the shorter of the economic life of the asset or
the lease term. Estimated useful lives for financial reporting purposes are as
follows:
Years
----------------
Furniture and equipment 7
Autos and trucks 5
Leasehold improvements 3-5
Intangibles
Cost in excess of net assets of the business' acquired in connection with the
Company's acquisitions is being amortized by the straight-line method over
twenty-five years. The Company periodically reviews the value of its goodwill to
determine if an impairment has occurred. The Company does not believe that an
impairment of its goodwill has occurred based on an evaluation of operating
income, cash flows and business prospects.
The Company incurred financing costs related to the bank financing obtained in
connection with the acquisition of the Predecessor Business. These costs are
being amortized on the effective interest method over the term of the debt.
The Company also entered into a covenant not-to-compete in connection with the
acquisition of the Predecessor Business. The covenant is being amortized on the
straight-line method over the five-year term of the agreement.
Income taxes
The Company provides for deferred taxes on a liability method whereby deferred
tax assets are recognized for deductible temporary differences and operating
loss and tax credit carryforwards and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities are
adjusted for the effect of changes in tax laws and rates on the date of
enactment.
9
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
(a Delaware Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies (continued)
Vendor coop marketing and purchase discounts
The Company participates in various advertising and marketing programs with
suppliers. Certain of the Company's costs incurred in connection with these
programs are reimbursed. The Company records accounts payable net of anticipated
purchase discounts.
Earnings per common share
Earnings per share is computed based on the weighted average number of common
shares outstanding during the period and the net income for the period. There
were no common stock equivalents outstanding during the six months ended June
30, 1996 and 1997.
Effective for financial statements issued after December 15, 1997, the Company
will be required to implement FASB Statement No. 128, Earnings per Share. The
Statement establishes standards for computing and presenting earnings per share
(EPS) and applies to entities with publicly held common stock or potential
common stock. It replaces the presentation of basic EPS and also requires dual
presentation of basic and diluted EPS on the face of the income statement for
all entities with complex capital structures. Upon adoption of FASB Statement
No. 128, the EPS presentation for prior periods must be restated. The Company
currently estimates that the adoption of FASB Statement No. 128 will not have a
material effect on its previously reported EPS amounts.
Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue recognition
Revenue is recorded for commercial and retail floor covering sales upon
installation.
Advertising
All costs related to marketing and advertising the Company's products are
expensed in the period incurred.
Advertising expense for the six months ended June 30, consist of the following:
1996 1997
--------------------------------------------
211,165 $ 272,953
============================================
10
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
(a Delaware Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies (continued)
Reclassification
Certain 1996 balances have been reclassified to correspond to the balance sheet,
statements of income, and cash flows classifications for 1997. These
reclassifications have no effect on stockholders' equity.
Fair value of financial instruments
The carrying amounts of financial instruments including cash, accounts
receivable, employee and other receivables, subordinated notes payable, note
payable, accounts payable, due to principal stockholder, and accrued expenses
approximate their fair values because of their short maturities.
The carrying amounts of long-term debt and the related party note receivable
approximate their fair values because the interest rates on these instruments
are at market rates.
Note 2. Notes Payable - Other
The Company received advances from unrelated parties of $534,000 during February
1997, enabling the Company to make the quarterly principal payment of $875,000
then due on the long-term revolving note. These advances bore interest at the
rate of 12% per annum, payable monthly. In addition to the repayment of the
principal, the lenders were to receive 40% of the dollar amount of the advance
($213,600) in shares of common stock of the Company as additional interest.
These advances were repaid in April 1997. All parties, except one who continued
his election to receive Company stock, agreed to allow Branin to assume this
obligation, and as a result $209,600 of the obligation was reclassified as due
to Branin. The total obligation of $213,600 will be satisfied through the
issuance of 30,514 shares of the Company's common stock in August 1997, as per
the terms of the original agreement with the lenders. Total interest expense of
$224,280 relating to these advances has been reflected in the accompanying
financial statements as of June 30, 1997.
Note 3. Due to Shareholder
During May 1997, the Company received an unsecured advance from a shareholder
and director of the Company in the amount of $500,000, enabling the Company to
make the quarterly principal payment of $875,000 then due on the long-term
revolving note. This advance will be repaid through the issuance of 500 shares
of the Company's preferred stock in August 1997. Until such time as the
preferred shares are issued, the advance will bear interest at 12% per annum,
payable monthly.
11
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
(a Delaware Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Note Payable - Bank and Long-Term Debt
Concurrent with its acquisition of the Predecessor Business, the Company entered
into a Credit Agreement with First Source Financial, LLP (First Source) under
which the Company obtained a $14,000,000 credit facility due May 31, 1999 and a
$3,000,000 working capital note due May 31, 1997, which, under certain
conditions may be extended through May 31, 1999. On May 28, 1997, the working
capital note's maturity was extended to May 31, 1998. The Credit Agreement
contains covenants requiring CBI to maintain minimum levels of tangible net
worth, working capital and various financial ratios. The agreement further
requires that a minimum $100,000 cash balance be maintained in a cash collateral
account. The agreement also limits payments from CBI to CBH and limits
dividends, redemptions and purchases of capital stock of CBI, CBH and the
Company. CBH pledged to First Source all of the common stock of CBI to secure
CBI's obligations under the Credit Agreement and guaranteed CBI's debt
obligations to First Source under the Credit Agreement.
During the period from commencement of operations (June 2, 1995) through June
30, 1997 the Company violated the following covenants: 1) adjusted net worth at
June 2, 1995, 2) quarterly annual interest coverage ratios through December 31,
1995, 3) and substantially all of the financial covenants for the year ending
December 31, 1996 and for the six months ended June 30, 1997.
To date, First Source has continued to allow the Company to borrow up to the
full capacity of the working capital portion under the original terms of the
Credit Agreement and the Company has received no indication from First Source
that it intends to exercise its right under the Credit Agreement to accelerate
the maturity of the debt.
Because First Source has maintained its right to accelerate the maturity of the
debt due to the covenant violations, the Company has classified the debt as
current on the consolidated balance sheets as of December 31, 1996 and June 30,
1997.
If First Source chooses to accelerate the maturity of the debt or if the Company
were to obtain alternate financing, certain unamortized debt issuance costs
classified as intangible assets would be charged to expense. Such unamortized
debt issuance costs totaled $428,000 at June 30, 1997. Additionally, the Credit
Agreement contains a prepayment penalty clause requiring the Company to pay 1%
of the then applicable revolving loan commitment, as defined in the Credit
Agreement, if the Company chooses to terminate the Credit Agreement between June
2, 1997 and June 1, 1998 and nothing thereafter.
Amounts outstanding under the agreement at December 31, 1996 and June 30, 1997,
are as follows:
1996 1997
----------------------------------------
Working capital note $ 2,879,581 $ 2,737,014
========================================
Long-Term note $ 8,750,000 $ 7,000,000
========================================
At June 30, 1997, the Company has approximately $260,000 available under the
original working capital note commitment.
12
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
(a Delaware Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Note Payable - Bank and Long-Term Debt (continued)
During the year ended December 31, 1996 and the six months ended June 30, 1997,
the Company made principal payments due on the long-term revolving note by in
part, borrowing these amounts on the working capital note. In addition, the
agreement provided that interest be added to the notes.
CBI also has long-term notes payable of $142,334 and $124,613 outstanding at
December 31, 1996 and June 30, 1997, respectively. The notes bear interest at an
approximate average of 11% and mature between July 1997 and August 2001.
Note 5. Restatement
The Company has restated its 1995 and 1996 financial statements.
The Company previously had reflected the approximate $812,000 difference between
the assigned value in the Asset Purchase Agreement of the land and building
acquired by Realty and the approximate $288,000 note delivered to the Company by
Realty in connection with its purchase of the facility as part of the goodwill
resulting from the purchase of the Predecessor Business. The Company has
retroactively restated the accounting for this transaction to reflect the
$812,000 difference as a deemed return of capital to the stockholders of Realty.
The effect of the adjustment was to decrease additional paid in capital and
goodwill by approximately $812,000 and $793,000, respectively at December 31,
1995 and by approximately $812,000 and $761,000, respectively at December 31,
1996, and to increase net income by $12,504 and $21,437 for the period ended
December 31, 1995 and year ended December 31, 1996, respectively, as compared to
the amounts originally reported.
The Company previously included the outstanding preferred stock of CBH as part
of its stockholders' equity. Since the Company does not hold the CBH preferred
stock, the preferred stock should be reported as a minority interest on the
consolidated balance sheet, and the preferred stock dividends reported as
dividends to preferred stockholders of subsidiary on the consolidated income
statement. The effect of the adjustment was to decrease net income and Preferred
Stock by $203,395 and $3,117,274, respectively, and increased minority interest:
preferred stock of subsidiary by $3,117,274 for the period ended December 31,
1995, as compared to amounts originally reported. The adjustment had no effect
on retained earnings of the Company.
The Company issued shares of common stock to its former Chief Financial Officer
and an unrelated party for services provided prior to the June 2, 1995
acquisition disclosed in Note 2. Such shares were issued for cash consideration
equal to their par value. The Company has now recorded these shares at their
estimated fair value and has included them as part of the acquisition costs
discussed in Note 2. The effect of this adjustment was to increase additional
paid in capital by $246,925, increase goodwill by $241,163, and decrease net
income by $5,762 for the period ended December 31, 1995, as compared to the
amounts as originally reported.
In the current quarter, the Company reported its cash flows using the indirect
method. In 1996, the Company had reported its cash flows under the direct
method. The cash flow statement for 1996 has been restated to the indirect
method to be consistent with the current presentation.
13
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
(a Delaware Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Contingencies
Nevada Department of Employment, Training and Rehabilitation Determination
On September 5, 1996, the Nevada Department of Employment, Training and
Rehabilitation notified the Company that it had made a determination that the
Company had failed to pay unemployment taxes with respect to certain floor
covering installers. The Company appealed the decision and an appeals hearing
was held on February 5, 1997. The appeals referee agreed with the State of
Nevada and classified the installers as employees. The decision ordered no
retroactive tax or penalties; however, the Company has become responsible for
taxes for periods beginning April 1, 1997. The decision was appealed to the
Board of Review which affirmed the decision in its entirety.
The Company believes, based in part on a prior determination by such Department
classifying the Predecessor's installers as independent contractors, that these
installers are not employees of the Company and the Company is not subject to
these payments. Many, though not all, of the Company's competitors also treat
carpet installers working under similar arrangements as independent contractors.
The Company will continue to vigorously defend its position and has appealed the
above decision to the District Court on June 11, 1997. A stay of enforcement was
granted by the Court on July 7, 1997; therefore, payments to the State need not
be made pending the outcome of the appeal. A more substantial cost would be
incurred by the Company if the installers were to be regarded as employees of
the Company for Federal withholding purposes. To date, there has been no
indication that the Federal government intends to require the Company to treat
these carpet installers as employees of the Company. However, there can be no
assurance that the Federal government will not pursue such action in the future.
While the precise amount of any potential liability is unknown, an adverse
outcome could be material.
Termination of Mark Szporka
The employment of Mark Szporka, as the Company's Chief Financial Officer (CFO),
was terminated by the Company in August 1996. In connection with such
termination and pursuant to the terms of Mr. Szporka's employment agreement, the
Company has repurchased 145,250 shares of Common Stock from Mr. Szporka for
$5,810. Mr. Szporka commenced a suit against CBH, CBI and directors of the
Company alleging he was wrongfully and unlawfully terminated. The Company filed
a motion to dismiss the suit based on the arbitration provision in the CFO's
employment agreement. The dismissal motion was granted by the court on May 1,
1997, enabling the matter to be pursued in arbitration. The court also dismissed
the litigation against the individual officers. The remaining parties have
agreed that the matter may be submitted to binding arbitration, but no
proceedings have been commenced to date. The Company believes it has meritorious
defenses to such allegations and intends to defend the matter vigorously in
arbitration.
14
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
(a Delaware Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Contingencies (continued)
Securities and Exchange Commission Inquiry
In a letter dated March 11, 1997, the Company received notice from the
Securities and Exchange Commission (SEC), Division of Enforcement, that an
informal inquiry into the Company as to certain accounting and other matters was
being conducted. The Company was requested to voluntarily provide and has
provided the staff of the SEC with certain documents as outlined in that letter
and in subsequent requests by the staff. The staff's letter to the Company
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 has fully cooperated with the staff's informal
inquiry. The Company has recently been advised by the staff of the SEC that,
while the inquiry has not been formally terminated, it is not being actively
pursued at this time, and that any changes in public reporting that may be
required of the Company based on matters reviewed by the SEC's Division of
Enforcement should be resolved by the SEC's Division of Corporation Finance. No
specific allegations have been made; therefore, no conclusion can be reached as
to what impact, if any, this inquiry may have on the Company or its operations.
However, the commencement or announcement of a formal investigation by the
Commission would have a material adverse effect on the Company's business,
financial condition and results of operations.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OPERATIONS
The following discussion of the financial condition and results of operations of
the Company relates to the six months ended June 30, 1996 and 1997 and should be
read in conjunction with the financial statements and notes thereto included
elsewhere in this Report.
Results of Operations
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996.
Total revenues decreased by $1,896,488 to $18,853,148 for the six months ended
June 30, 1997 from $20,749,636 for the six months ended June 30, 1996,
representing a decrease of 9.1%. This decrease is attributable to a decrease in
New Housing Division sales for the first six months of 1997 as compared to first
six months of 1996. The decrease in New Housing Division sales are due to the
following factors: (1) during the first half of 1997, it is estimated that new
home unit sales volume decreased by approximately 1.4% in the Las Vegas market
place, (2) several customers have brought their floorcovering sales in-house,
causing a substantial loss in revenues over prior periods and (3) increased
competition in the Las Vegas market. To counteract this downward trend in New
Housing Division Sales, the Company has opened two new retail stores (one in
October 1996 and one in July 1997) and has opened a commercial flooring division
in April 1997, but there can be no assurance that these efforts will maintain or
increase the Company's overall sales levels.
The gross profit decreased by $690,682 to $5,020,318 for the six months ended
June 30, 1997 from $5,711,000 for the six months ended June 30, 1996,
representing a decrease of 12.1%, in significant part as a result of the
decrease in New Housing Division sales. The gross profit percentage declined
from 27.5% in 1996 to 26.6% in 1997. This decline in gross profit percentage is
due to increased competition in the Las Vegas market and to an increase in the
installation labor costs.
Selling, general and administrative expenses increased by $154,969 to $3,535,274
for the six months ended June 30, 1997 from $3,380,305 for the six months ended
June 30, 1996. This increase is due to the following approximate changes: (1)
increases in salaries, benefits and related payroll taxes of $224,000, due
primarily to an increase in the number of employees, (2) professional expenses
associated with the annual audit and required public filings of $36,000, (3) an
increase in advertising expense of $62,000, (4) an increase in rent expense of
$94,000, telephone expense of $60,000, auto expense of $21,000 and office and
supplies expense of $57,000 primarily due to the opening of the new home design
center and an additional retail location, (5) an increase in travel expense of
$52,000 and (6) an increase in bad debt expense of 40,000. These increases were
partially offset by (1) a decrease in workers' compensation expense of $376,000
due to a reduction in the modification rate, a decrease in volume in the first
half of 1997 and a refund of approximately $130,000 from the State of Nevada and
(2) a decrease in management and consulting fees of $185,000.
Amortization and depreciation expense increased from $594,325 in 1996 to
$640,023 in 1997, primarily due to increased depreciation expense on equipment
purchases in 1996 and 1997.
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<PAGE>
Operating income decreased by $891,349 to $845,021 for the six months ended June
30, 1997 from $1,736,370 for the six months ended June 30, 1996. Interest
expense increased by $3,300 from $801,580 in 1996 to $804,880 in 1997 as a
result of a charge of $224,280 relating to advances received in February 1997 as
further described in "Liquidity and Capital Resources." The reduction in
interest expense of $220,980 after adjusting for the interest on these advances
is due to principal payments made on debt obligations. The provision for income
taxes decreased by $309,057 due to the net loss for the six months ended June
30, 1997. Dividends to preferred stockholders of subsidiary increased from
$258,800 in 1996 to $279,600 in 1997 due to the issuance by CBH, a subsidiary of
the Company, of additional shares of its preferred stock in early 1996. Net
income (loss) decreased by $609,807 to $(248,664) for the six months ended June
30, 1997 from $361,143 for the six months ended June 30, 1996. These decreases
were due principally to the above-mentioned decrease in sales/gross profit,
increases in selling, general and administrative expenses and increases in
dividends to preferred stockholders of subsidiary partially offset by a
corresponding decrease in income taxes.
Three Months Ended June 30, 1997 Compared to Three Months Ended June 30, 1996.
Total revenues decreased by $1,389,537 to $9,595,144 for the three months ended
June 30, 1997 from $10,984,681 for the three months ended June 30, 1996,
representing a decrease of 12.6%. This decrease is attributable primarily to a
decrease in New Housing Division sales for the first three months of 1997 as
compared to first three months of 1996. The decrease in New Housing Division
sales are due to the following factors: (1) during the first half of 1997, it is
estimated that new home unit sales volume decreased by approximately 1.4% in the
Las Vegas market place, (2) several customers have brought their floorcovering
sales in-house, causing a substantial loss in revenues over prior periods and
(3) increased competition in the Las Vegas market. To counteract this downward
trend in New Housing Division Sales, the Company has opened two new retail
stores (one in October 1996 and one in July 1997) and has opened a commercial
flooring division, but there can be no assurance that these efforts will
maintain the Company's overall sales levels.
The gross profit decreased by $437,635 to $2,595,457 for the three months ended
June 30, 1997 from $3,033,092 for the three months ended June 30, 1996,
representing a decrease of 14.4%, in significant part as a result of the
decrease in New Housing Division sales. The gross profit percentage declined
from 27.6% in 1996 to 27.0% in 1997. This decline in gross profit percentage is
due to increased competition in the Las Vegas market and to an increase in the
installation labor costs.
Selling, general and administrative expenses increased by $25,927 to $1,846,338
for the three months ended June 30, 1997 from $1,820,411 for the three months
ended June 30, 1996. This increase is due to the following approximate changes:
(1) an increase in advertising expense of $15,000, (2) an increase in rent
expense of $49,000, telephone expense of $29,000 and office and supplies expense
of $23,000 primarily due to the opening of the new home design center and an
additional retail location and (3) an increase in travel expense of $67,000.
These increases were partially offset by (1) a decrease in workers' compensation
expense of $130,000 due to a reduction in the modification rate and a decrease
in volume in the second quarter of 1997 and (2) a decrease in management and
consulting fees of $90,000.
Amortization and depreciation expense increased from $285,899 in 1996 to
$325,039 in 1997, primarily due to increased depreciation expense on equipment
purchases in 1996 and 1997.
17
<PAGE>
Operating income decreased by $502,702 to $424,080 for the three months ended
June 30, 1997 from $926,782 for the three months ended June 30, 1996. Interest
expense increased by $16,152 from $386,587 in 1996 to $402,739 in 1997 as a
result of a charge of $112,140 relating to advances received in February 1997 as
further described in "Liquidity and Capital Resources." The reduction in
interest expense of $95,988 after adjusting for the interest on these advances
is due to principal payments made on debt obligations. The provision for income
taxes decreased by $179,307 due to the net loss for the three months ended June
30, 1997. Dividends to preferred stockholders of subsidiary increased from
$134,600 in 1996 to $139,800 in 1997 due to the issuance by CBH, a subsidiary of
the Company, of additional shares of its preferred stock in early 1996. Net
income (loss) decreased by $347,119 to $(123,369) for the three months ended
June 30, 1997 from $223,750 for the three months ended June 30, 1996. These
decreases were due principally to the above-mentioned decrease in sales/gross
profit, increases in selling, general and administrative expenses and increases
in dividends to preferred stockholders of subsidiary partially offset by a
corresponding decrease in income taxes.
Liquidity and Capital Resources
Cash provided by operating activities was $2,440,769 and $1,724,127 for the six
months ended June 30, 1997 and the six months ended June 30, 1996 respectively.
At June 30, 1997, the Company had a working capital deficit of $9,940,867.
Included in such deficit is $9,737,014 due to First Source under the credit
agreement (the "Credit Agreement") discussed below. The Company's growth and
acquisition strategy will require significant additional cash.
The results of operations of the Company have been impacted as a result of the
restructuring of the Company after the Acquisition. Prior to the Acquisition,
the Predecessor Business had a positive tangible net worth in contrast to the
Company, which has had a negative tangible net worth due to the increase in
intangibles and debt resulting from the Acquisition. The Company is highly
leveraged and is subject to the risks associated with a highly leveraged
Company. The Company's ratio of indebtedness for borrowed money to stockholders
equity at June 30, 1997 was 3.3:1.
On March 19, 1997, the Company's shareholders approved a reincorporation
proposal for the Company. The reincorporation proposal was effected through the
merger of the Ragar Corp. ("Ragar") with Nations Flooring, Inc., ("Nations") a
newly formed wholly owned subsidiary of the Ragar incorporated in Delaware.
Nations is the surviving corporation after the merger. All assets, liabilities,
property, rights and obligations of the Ragar were transferred to and assumed by
Nations. Since Nations had no assets, liabilities or operations prior to the
merger, the financial statements of Nations for periods prior to the merger are
the former financial statements of Ragar.
In the merger, each four (4) shares of Ragar common stock were exchanged for one
(1) share of Nations common stock. The effect of this exchange is similar to a
one for four reverse stock split of the Company.
On January 16, 1997, the Company filed with the Securities and Exchange
Commission a Registration Statement on Form S-1 with respect to a proposed
offering of common stock of the Company ("Public Offering"). This Registration
Statement has not yet been declared effective. These securities may not be sold
nor may offers to buy be accepted prior to the time the Registration Statement
becomes effective. This Quarterly Report on Form 10-QSB shall not constitute an
offer to sell or the solicitation of an offer
18
<PAGE>
to buy nor shall there be any sale of these securities in any State in which
such offer, solicitation, or sale would be unlawful prior to registration or
qualification under the securities laws of any such State. These securities will
be offered for the account of Nations Flooring, Inc. Chatfield Dean & Co., which
was named as the managing underwriter of the offering in the registration
statement, has resigned. The Company is currently interviewing other
underwriters to manage the proposed offering. A prospectus relating to such
proposed offering of Nations Flooring, Inc. common stock may be obtained from
the Company at its offices set forth on the cover page of this Quarterly Report.
If the Company is unable to complete the Public Offering, it intends to pursue
other financing alternatives that may be available to it. In addition, deferred
offering costs of $467,458 as of June 30, 1997 would be written off as a charge
to operations if the Public Offering is not consummated.
The term portion of the Credit Agreement is due May 31, 1999 and the revolving
portion was due May 31, 1997, subject to extension in certain circumstances to
May 31, 1999. On May 28, 1997, the maturity date for the revolving portion was
extended to May 31, 1998. All borrowings under the Credit Agreement bear
interest at the base rate per annum announced from time to time by The First
National Bank of Chicago (8.5% at August 6, 1997) plus 2.25% per annum
(currently 10.75% per annum), payable monthly. As of July 31, 1997, the Company
had borrowed approximately $2,740,000, leaving approximately $260,000 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 $7,000,000. The Company received advances
from unrelated parties of $534,000 during February 1997, enabling the Company to
make the quarterly principal payment of $875,000 then due on the long-term
revolving note. These advances bore interest at the rate of 12% per annum,
payable monthly. Additionally, the lenders were to receive 40% of the dollar
amount of the advance ($213,600) in shares of common stock of the Company as
additional interest. These advances were repaid in April 1997. All parties,
except one who continued his election to receive Company stock, agreed to allow
Branin to assume this obligation, and as a result $209,600 of the obligation was
reclassified as due to Branin. The total obligation of $213,600 will be
satisfied through the issuance of 30,514 shares of the Company's common stock in
August 1997, as per the terms of the original agreement with the lenders. Total
interest expense of $224,280 relating to these advances has been reflected in
the accompanying financial statements as of June 30, 1997.
During May 1997, the Company received an unsecured advance from a shareholder
and director of the Company in the amount of $500,000, enabling the Company to
make the quarterly principal payment of $875,000 then due on the long-term
revolving note. This advance will be repaid through the issuance of 500 shares
of the Company's preferred stock in August 1997. Until such time as the
preferred shares are issued, the advance will bear interest at 12% per annum,
payable monthly.
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 June 30, 1997, the
Company has failed to meet the following financial covenants: (1) adjusted net
worth at June 30, 1995, (2) quarterly and annual interest coverage ratios
through December 31, 1995, and (3) substantially all of the financial covenants
for the year ending December 31, 1996 and for the six months ended June 30,
1997. On April 15, 1996 First Source waived, through June 1, 1996, the covenant
violations occurring prior to such time and agreed to negotiate in good faith to
amend such covenants by June 1, 1996 so that the Company could reasonably expect
to be in compliance with the amended covenants based on its operating and cash
flow budgets. In connection with obtaining
19
<PAGE>
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 July 31, 1997, the Company
was obligated to Branin in the amount of $745,294. Because the Company and
Branin anticipate repayment of these advances in the near future, no stated
interest rate exists on these advances and no interest has been imputed.
To date, First Source has allowed the Company to borrow up to the full capacity
under the original terms of the Credit Agreement, and the Company has received
no indication from First Source that it intends to exercise its right under the
Credit Agreement to accelerate the maturity of the debt. Because First Source
has maintained its right to accelerate the maturity of the debt due to the
covenant violations, the Company has classified the debt as current on the
consolidated balance sheets as of December 31, 1996 and June 30, 1997. There can
be no assurance that First Source will continue to allow the Company to borrow
under the original terms of the Credit Facility, or will not choose to
accelerate the maturity of the Credit Facility.
If First Source chooses to accelerate the maturity of the debt or if the Company
were to obtain alternate financing certain unamortized debt acquisition costs
classified as intangible assets would be charged to expense. Such unamortized
debt acquisition costs totaled $428,000 at June 30, 1997. Additionally, the
Credit Agreement contains a prepayment penalty clause requiring the Company to
pay 1% of the then applicable revolving loan commitment, as defined in the
Credit Agreement, if the Company chooses to terminate the Credit Agreement
between June 2, 1997 and June 1, 1998 and nothing thereafter.
The Company is currently exploring other financing options which are available
to it. On February 19, 1997, the Company's subsidiary, Carpet Barn, Inc., signed
a commitment letter for a $12,500,000 credit facility with Finova Capital
Corporation ("Finova"). The credit facility would include a revolving line of
credit in the amount $5.5 million secured by eligible accounts receivable and
inventory. The credit facility also would include a term loan portion of $7.0
million due in three years, amortized on a five year straight line basis. The
revolving line of credit would bear interest at Citibank N.A.'s reference rate
(currently 8.50%) plus 1.0% per annum and the term loan would bear interest at
such reference rate plus 2.0% per annum. In addition, the credit facility would
be secured by CBI's present and future tangible and intangible assets and would
include a pledging of the stock of CBI and guarantees by CBH and Nations
Flooring, Inc. The commitment expired June 15, 1997 and further required the
negotiation and execution of the customary documentation and the completion of
the Public Offering. The loan agreement would contain customary representations,
warranties, events of default and remedies. The Company believes that Finova
will waive the June 15, 1997 expiration of the commitment if the Company is able
to complete the Public Offering, but there can be no assurance in this regard.
The proceeds of the Finova credit facility would be used to repay all borrowings
under the First Source credit agreement. Any remaining proceeds will be
available for general corporate purposes, including acquisitions. If the Company
is unable to obtain a waiver of the June 15, 1997 expiration and/or fulfill the
conditions of obtaining this credit facility, it will continue to explore
financing alternatives that may be available to it.
During the six months ended June 30, 1997, cash used in investing activities was
$107,903. Cash used in financing activities during such period was $2,297,107,
used primarily to make principal payments on
20
<PAGE>
the Credit Agreement, payments for deferred offering costs and repayment of
unsecured advances, offset by proceeds received from the unsecured advances in
February 1997.
Branin, which beneficially owns 313,103 shares of Common Stock of the Company
and which is controlled by Philip A. Herman, Chairman, President and a
stockholder of the Company, will be entitled to receive a fee equal to
approximately $650,000 upon consummation of the Public Offering. Branin has
agreed to waive such fee in exchange for increasing its management consulting
fee discussed in the next two sentences to $20,000 per month, effective upon
completion of the Public Offering. In addition, CBI entered into consulting
arrangements with (a) Branin, pursuant to which CBI paid $35,000 per month to
Branin and (b) PAH Marketing, Inc. ("PAH"), a company controlled by Philip A.
Herman, pursuant to which CBI paid $5,000 per month to PAH. As of April 30,
1997, CBI owed Branin and PAH $270,000 in respect of these obligations. These
arrangements were modified as of September 1, 1996 to provide for payments to
Branin of $10,000 per month and to discontinue payments to PAH. These agreements
were entered into for the purpose of receiving management advisory services in
the areas of operations management, financing and acquisitions. In conjunction
with certain advances received from unrelated parties (see previous discussion),
the Company is obligated to Branin in the amount of $209,600, which will be
satisfied through the issuance of 29,943 shares of the Company's common stock in
August 1997. Additionally the Company is owed $77,710 for expenses paid by the
Company on behalf of Branin.
Due to principal shareholder (Branin) consists of the following at July 31,
1997:
Preferred stock dividends paid on behalf of CBH $ 745,294
Management fees 270,000
Expenses paid on behalf of Branin (77,710)
Interest obligations of CBI assumed by Branin 209,600
-------------------
$ 1,147,184
===================
Amounts payable to Branin are non-interest bearing and due on demand.
The Company opened two new locations in Las Vegas during 1996 and one new
location in July 1997. The initial capital costs of approximately $70,000 for
these locations were provided in full by the Company's suppliers in exchange for
agreements by the Company to feature the suppliers' products at these
facilities. The Company anticipates that a substantial portion of the capital
requirements for any additional new locations will be funded by its suppliers,
although there can be no assurance that the Company will be able to effect such
an arrangement. While the Company anticipates that a portion of the costs will
be funded by the suppliers, a portion of such costs will be borne by the
Company. Moreover, these new facilities will require additional resources until
they become profitable, and there can be no assurance as to the amount of time
required before they can become profitable, if ever.
As of February 25, 1997, the Company entered into a letter of intent (the
"Letter of Intent"), pursuant to which it may purchase the assets of Nonn's
Flooring, Inc. ("Nonn's"), a floorcovering retailer with 2 stores located in the
Madison, Wisconsin area, for a purchase price of $3,000,000 in cash, subject to
adjustment under certain circumstances (the "Purchase"). The Purchase is subject
to the negotiation and execution of a definitive agreement and to the Company's
satisfactory completion of its due diligence
21
<PAGE>
investigation. The Letter of Intent contemplates that upon completion of the
Purchase, employment agreements will be entered into between the Company and
Kenneth Nonn and Janet Meier, who are both executive officers of Nonn's. The
description contained herein is qualified in its entirety by the complete text
of the Letter of Intent, which is included as Exhibit 10.16 to the Company's
December 31, 1996 Annual Report on Form 10-KSB and incorporated herein by
reference. The Company's ability to complete the Purchase is dependent on its
completion of the Public Offering and the consummation of the financing
contemplated by the February 19, 1997 commitment letter with Finova Capital
Corporation or the consummation of alternative financing arrangements that will
provide sufficient cash resources to enable the Company to repay the borrowings
under the First Source Credit Agreement and to pay the cash price of the
Purchase.
The Company believes that cash flow generated by operations, together with
working capital to be provided by either the Public Offering or an alternative
financing and the refinancing of the First Source debt, will be sufficient for
the Company's working capital needs for 1997. Cash flow from operations should
be sufficient to cover operating expenses and should be maintained or enhanced
by the Company utilizing its business strategies. However, the Company's growth
and acquisition strategy will require substantial cash for capital costs.
Impact of Inflation
The Company believes that its revenues are not materially affected by inflation
and that any increased expenses due to inflationary pressures will be offset,
over time, by corresponding increases in prices it charges to its customers.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Nevada Department of Employment, Training and Rehabilitation Determination
On September 5, 1996, the Nevada Department of Employment, Training and
Rehabilitation notified the Company that it had made a determination that the
Company had failed to pay unemployment taxes with respect to certain floor
covering installers. The Company appealed the decision and an appeals hearing
was held on February 5, 1997. The appeals referee agreed with the State of
Nevada and classified the installers as employees. The decision ordered no
retroactive tax or penalties; however, the Company has become responsible for
taxes for periods beginning April 1, 1997. The decision was appealed to the
Board of Review which affirmed the decision in its entirety.
The Company believes, based in part on a prior determination by such Department
classifying the Predecessor's installers as independent contractors, that these
installers are not employees of the Company and the Company is not subject to
these payments. Many, though not all, of the Company's competitors also treat
carpet installers working under similar arrangements as independent contractors.
The Company will continue to vigorously defend its position and has appealed the
above decision to the District Court on June 11, 1997. A stay of enforcement was
granted by the Court on July 7, 1997; therefore, payments to the State need not
be made pending the outcome of the appeal. A more substantial cost would be
incurred by the Company if the installers were to be regarded as employees of
the Company for Federal withholding purposes. To date, there has been no
indication that the Federal government intends to require the Company to treat
these carpet installers as employees of the Company. However, there can be no
assurance that the Federal government will not pursue such action in the future.
While the precise amount of any potential liability is unknown, an adverse
outcome could be material.
Termination of Mark Szporka
The employment of Mark Szporka, as the Company's Chief Financial Officer (CFO),
was terminated by the Company in August 1996. In connection with such
termination and pursuant to the terms of Mr. Szporka's employment agreement, the
Company has repurchased 145,250 shares of Common Stock from Mr. Szporka for
$5,810. Mr. Szporka commenced a suit against CBH, CBI and directors of the
Company alleging he was wrongfully and unlawfully terminated. The Company filed
a motion to dismiss the suit based on the arbitration provision in the CFO's
employment agreement. The dismissal motion was granted by the court on May 1,
1997, enabling the matter to be pursued in arbitration. The court also dismissed
the litigation against the individual officers. The remaining parties have
agreed that the matter may be submitted to binding arbitration, but no
proceedings have been commenced to date. The Company believes it has meritorious
defenses to such allegations and intends to defend the matter vigorously in
arbitration.
Securities and Exchange Commission Inquiry
In a letter dated March 11, 1997, the Company received notice from the
Securities and Exchange Commission (SEC), Division of Enforcement, that an
informal inquiry into the Company as to certain
23
<PAGE>
accounting and other matters was being conducted. The Company was requested to
voluntarily provide and has provided the staff of the SEC with certain documents
as outlined in that letter and in subsequent requests by the staff. The staff's
letter to the Company 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 has fully cooperated with the staff's informal
inquiry. The Company has recently been advised by the staff of the SEC that,
while the inquiry has not been formally terminated, it is not being actively
pursued at this time, and that any changes in public reporting that may be
required of the Company based on matters reviewed by the SEC's Division of
Enforcement should be resolved by the SEC's Division of Corporation Finance. No
specific allegations have been made; therefore, no conclusion can be reached as
to what impact, if any, this inquiry may have on the Company or its operations.
However, the commencement or announcement of a formal investigation by the
Commission would have a material adverse effect on the Company's business,
financial condition and results of operations.
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.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of the stockholders of the Company (Special Meeting) was held
on March 19, 1997 at the Company's offices at 100 Maiden Lane, New York, New
York. Two matters were submitted to a vote: (1) a reincorporation proposal and
(2) adoption of the Company's 1997 stock option plan.
The reincorporation proposal relates to the merger of the Company with Ragar
Corp. This matter was approved at the Special Meeting with 12,141,923 votes for,
12,500 votes against and 11,000 votes abstaining. All assets, liabilities,
property, rights and obligations of Ragar Corp. were transferred to and assumed
by Nations.
The proposed Stock Option Plan (Option Plan) was approved by the Board of
Directors of the Company on February 26, 1997 in order to provide an incentive
to non-employee directors and to officers and certain 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.
This matter was approved at the Special Meeting with 11,930,899 votes for,
182,713 votes against and 51,811 votes abstaining. The Option Plan provides for
the award of options representing or corresponding to up to 1,250,000 shares of
Common Stock. The Option Plan is administered by the Committee, as defined in
the Option Plan.
ITEM 5. OTHER INFORMATION
On June 25, 1997, Gary Peiffer submitted his resignation, effective immediately,
as an officer and director of the Company and any of its subsidiaries.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. Page
27 - Financial Data Schedule 26
b) Reports on Form 8-K.
None
25
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant had duly caused this report to be signed by the undersigned,
thereunto duly authorized.
April 14, 1998 /s/ Philip A. Herman
----------------------------------------
Philip A. Herman
Chairman of the Board and President
(Principal Executive Officer)
26
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
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0
3,117,274
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