<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998.
[ ] 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 registrant as specified in its charter)
DELAWARE 11-2925673
- --------------------------------------------------------------------------------
(State or other jurisdiction (IRS Employer
of incorporation) Identification Number)
100 MAIDEN LANE, NEW YORK, NEW YORK 10038
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(212) 898-8888
- --------------------------------------------------------------------------------
(Issuer's telephone number)
- --------------------------------------------------------------------------------
(Former name, former address or former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes /X/ No / /
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 3,670,054 shares of Common
Stock, par value $.001 per share, were outstanding at November 6, 1998.
<PAGE>
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets 3
Consolidated statements of operations 4 - 5
Consolidated statements of cash flows 6 - 7
Notes to consolidated financial statements 8 - 17
- --------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 18-25
- --------------------------------------------------------------------------------
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 6. Exhibits and Reports on Form 8-K 26
- --------------------------------------------------------------------------------
SIGNATURES 27
- --------------------------------------------------------------------------------
2
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
DECEMBER 31, 1997 AND SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
ASSETS (Note 3) December 31, 1997 September 30, 1998
- ------------------------------------------------------------------ ----------------- ------------------
<S> <C> <C>
Current Assets
Cash $ 230,223 $ 246,277
Accounts receivable, less allowance for doubtful
accounts 1997 $230,000; 1998 $260,000 3,460,992 3,797,863
Due from employee 16,851 492
Inventory 777,600 1,203,274
Current portion of related party note receivable 142,658 25,000
Prepaid expenses and other 314,137 308,214
----------------- ------------------
TOTAL CURRENT ASSETS 4,942,461 5,581,120
----------------- ------------------
Related Party Note Receivable, less current portion - 79,955
Equipment and Leasehold Improvements, net 614,090 717,229
Intangible Assets, net 15,905,698 15,392,196
----------------- ------------------
$ 21,462,249 $ 21,770,500
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Note payable (Note 3) $ 2,899,453 $ 3,155,179
Note payable-principal stockholder (Note 2(a)) 1,000,000 -
Current maturities of long-term debt (Note 3) 3,534,535 749,000
Accounts payable 2,934,737 1,843,040
Advances from principal stockholder (Note 2(b)) 1,291,285 739,931
Accrued expenses 282,993 635,747
Customer deposits 1,061,493 1,440,303
----------------- ------------------
TOTAL CURRENT LIABILITIES 13,004,496 8,563,200
----------------- ------------------
Deferred Income Taxes 235,000 326,000
Due to Stockholder (Note 2(c)) 500,000 500,000
Related Party Note Payable (Note 2(d)) - 500,000
Notes Payable and Advances from Principal Stockholder,
less current portion (Notes 2(a) and (b)) - 2,000,000
Long-Term Debt, less current maturities (Note 3) 1,842,173 4,221,928
Minority Interest: Preferred Stock of Subsidiary 3,117,274 3,117,274
Stockholders' Equity
Preferred stock, $.001 par value,
authorized 1,000,000 shares; none issued - -
Common stock, $.001 par value, authorized 20,000,000
shares; issued 1997 3,787,647; 1998 3,815,304 shares 3,788 3,815
Additional paid-in capital 3,050,240 3,243,813
Retained earnings (deficit) (284,912) (699,720)
----------------- ------------------
2,769,116 2,547,908
Less cost of treasury stock (145,250 shares) 5,810 5,810
----------------- ------------------
2,763,306 2,542,098
----------------- ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 21,462,249 $ 21,770,500
================= ==================
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
1997 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Sales $ 28,922,733 $ 32,907,885
Cost of sales 21,458,527 24,876,890
----------------- ------------------
GROSS PROFIT 7,464,206 8,030,995
Selling, general and administrative expenses:
Related party consulting fees 90,000 192,500
Related party rent expense 75,213 85,071
Other 5,251,559 5,692,564
----------------- ------------------
5,416,772 5,970,135
----------------- ------------------
Amortization and depreciation 912,715 1,090,704
----------------- ------------------
OPERATING INCOME 1,134,719 970,156
Other income (expense):
Miscellaneous 8,990 (55,363)
Related party interest expense (25,000) (200,750)
Interest expense (1,056,228) (701,624)
----------------- ------------------
INCOME BEFORE TAXES AND DIVIDENDS TO PREFERRED
STOCKHOLDERS OF SUBSIDIARY 62,481 12,419
Provision for income taxes 17,910 7,827
----------------- ------------------
INCOME BEFORE DIVIDENDS TO PREFERRED STOCKHOLDERS
OF SUBSIDIARY 44,571 4,592
Dividends to preferred stockholders of subsidiary 419,400 419,400
----------------- ------------------
NET LOSS $ (374,829) $ (414,808)
================= ==================
Basic and Dilutive net loss per common share (0.10) (0.11)
================= ==================
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
1997 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Sales $ 10,069,585 $ 11,811,807
Cost of sales 7,625,697 8,909,659
----------------- ------------------
GROSS PROFIT 2,443,888 2,902,148
Selling, general and administrative expenses:
Related party consulting fees 30,000 60,000
Related party rent expense 25,071 30,000
Other 1,826,427 1,964,749
----------------- ------------------
1,881,498 2,054,749
----------------- ------------------
Amortization and depreciation 272,692 267,110
----------------- ------------------
OPERATING INCOME 289,698 580,289
Other income (expense):
Miscellaneous 2,673 (31,333)
Related party interest expense (20,000) (78,750)
Interest expense (256,348) (207,593)
----------------- -------------------
INCOME BEFORE TAXES AND DIVIDENDS TO PREFERRED
STOCKHOLDERS OF SUBSIDIARY 16,023 262,613
Provision for income taxes 2,388 87,000
----------------- ------------------
INCOME BEFORE DIVIDENDS TO PREFERRED STOCKHOLDERS
OF SUBSIDIARY 13,635 175,613
Dividends to preferred stockholders of subsidiary 139,800 139,800
----------------- ------------------
NET INCOME (LOSS) $ (126,165) $ 35,813
================= ==================
Basic and Dilutive net income (loss) per common share (0.03) 0.01
================= ==================
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
1997 1,998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Provided by Operating Activities
Net loss $ (374,829) $ (414,808)
Depreciation 190,000 167,000
Amortization 722,714 923,704
Deferred income taxes 66,320 91,000
Provision for bad debts 129,355 103,931
Interest on long-term debt and notes added to note payable 837,099 594,887
Rent expense in lieu of note receivable payments from Realty 75,213 85,071
Changes in assets and liabilities
(Increase) decrease in accounts receivable 338,463 (421,126)
Increase in inventory (98,326) (395,986)
(Increase) decrease in prepaid expenses and other (347,860) 5,923
Increase (decrease) in accounts payable 335,675 (1,091,697)
Increase in advances from principal stockholder 810,748 142,246
Increase (decrease) in accrued expenses (50,655) 352,754
Increase in customer deposits 473,581 354,445
----------------- ------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 3,107,498 $ 497,344
----------------- ------------------
Cash Flows from Investing Activities
Net advances (to) from related parties $ 21,179 $ (31,009)
Purchase of equipment and leasehold improvements (243,954) (184,335)
Payments for acquisition of net assets of Merrill's - (164,254)
Acquisition cost expenditures (74,786) (23,870)
----------------- ------------------
NET CASH USED IN INVESTING ACTIVITIES (297,561) (403,468)
----------------- ------------------
Cash Flows from Financing Activities
Payments on note payable (3,655,153) (3,373,717)
Proceeds from unrelated party advances 1,034,000 -
Repayment of unrelated party advances (534,000) -
Principal payments on long-term debt (8,186) (4,712,144)
Cash payment for deferred offering costs (314,460) -
Proceeds from note payable - 2,269,371
Proceeds from long-term debt - 5,000,000
Debt issuance costs - (261,332)
Proceeds from related party advance - 500,000
Proceeds from notes payable-principal stockholder - 500,000
Proceeds from stockholder advance 500,000 -
----------------- ------------------
NET CASH USED IN FINANCING ACTIVITIES $ (2,977,799) $ (77,822)
----------------- ------------------
NET INCREASE (DECREASE) IN CASH $ (167,862) $ 16,054
Cash, beginning 335,130 230,223
----------------- ------------------
Cash, ending $ 167,268 $ 246,277
================= ==================
</TABLE>
6
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
1997 1,998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $ 46,504 $ 110,029
================= ==================
Income taxes $ 2,388 $ 1,827
================= ==================
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES
Preferred stock dividends paid through increase in advances
from principal stockholder (Note 2(b)) $ 419,400 $ 419,400
================= ==================
Interest obligation paid through issuance of common stock $ - $ 193,600
================= ==================
</TABLE>
See Notes to Consolidated Financial Statements
7
<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
Nations Flooring, Inc. (Nations, Company or Successor Business) was organized
under the laws of the State of Delaware.
The Company is also related, through common ownership, to C. B. Realty of
Delaware, Inc. (Realty).
The Company sells floor coverings and related products to the new home and
retail replacement markets primarily in southern Nevada. The Company grants
credit principally to new home builders.
A summary of the Company's significant accounting policies follows.
Basis of presentation
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-Q 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. 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 periods 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, Carpet Barn Holdings, Inc. (CBH) and Carpet Barn, Inc.
(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 dividends to
preferred stockholders of subsidiary on the consolidated statements of
operations.
The 12% cumulative preferred stock of CBH is divided into two classes, one
designated as Series A and the other undesignated. The Series A preferred
stockholders have an aggregate of 6% of the votes of the outstanding shares of
the common stock of CBH. The other preferred stockholders have an aggregate of
10% of the votes of the outstanding shares of the common stock of CBH. Both
classes of preferred stock contain the identical provisions as described
below.
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)
In the event CBH is liquidated, no distributions shall be made to the
holders of shares of stock ranking junior to the preferred stock, unless,
prior thereto, the holders of shares of preferred stock shall have received
a liquidation preference payment of $1,000 per share plus all accrued and
unpaid dividends through the date of such payment. Also, until all accrued
and unpaid dividends and distributions on preferred stock have been paid in
full, CBH shall not declare or pay dividends on, make any other
distributions on, or redeem, purchase or otherwise acquire for consideration
any shares of stock ranking junior to the preferred stock.
The preferred stock may be redeemed at the option of the Board of Directors
at a call price per share equal to its stated value plus any accrued and
unpaid dividends through the date of redemption. If no call has been made,
CBH is required to call the preferred stock for redemption at the call price
on a date not later than seven days after the closing of an underwritten
public offering.
The preferred shares were issued in units that included shares of the common
stock of the Company. The proceeds of the units attributable to the common
stock element resulted in recording the issuance of the shares of preferred
stock at a discount of $1,542,726 from their face amount at December 31,
1997 and September 30, 1998.
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.
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, 1997 and September
30, 1998, the Company's cash balances were maintained at financial
institutions in Nevada, Arizona 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.
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)
Equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
Depreciation December 31, September 30,
Lives 1997 1998
------------ ------------ -------------
<S> <C> <C> <C>
Furniture and equipment 7 $ 755,307 $ 902,288
Autos and trucks 5 130,334 149,043
Leasehold improvements 3 -5 157,734 262,183
------------ -------------
1,043,375 1,313,514
Less accumulated depreciation and amortization 429,285 596,285
------------ -------------
Equipment and leasehold improvements, net $ 614,090 $ 717,229
============ =============
</TABLE>
In accordance with Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of, the Company assesses the impairment of long-lived assets,
identifiable intangibles and costs in excess of net assets of business'
acquired (goodwill), by comparison to the projected undiscounted cash flows
to be derived from the related assets. The Company has concluded that no
impairment in the carrying amount of long-lived assets, and of identifiable
intangibles and goodwill existed at September 30, 1998.
Intangible assets
Intangible assets consist of the following:
December 31, September 30,
1997 1998
------------ -------------
Goodwill $ 17,086,762 $ 17,210,632
Covenants not-to-compete 575,000 600,000
Debt issuance costs 802,500 261,332
------------ -------------
18,464,262 18,071,964
Less accumulated amortization 2,558,564 2,679,768
------------ -------------
Intangible assets, net $ 15,905,698 $ 15,392,196
============ =============
Goodwill in connection with the Company's acquisitions is being amortized by
the straight-line method over twenty-five years.
The Company incurred financing costs related to the bank financing obtained
in connection with refinancing the Company's long-term debt. These costs are
being amortized on the effective interest method over the term of the debt.
Previous financing costs were written off (see Note 3).
The Company also entered into covenants not-to-compete in connection with
certain business acquisitions. The covenants are being amortized on the
straight-line method over the five-year terms of the agreements.
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)
Income taxes
The Company provides for deferred taxes on a liability method whereby deferred
tax assets are recognized for deductible temporary differences and operating
loss and tax credit carryforwards and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion
of management, it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Deferred tax assets and liabilities
are adjusted for the effect of changes in tax laws and rates on the date of
enactment.
Vendor coop marketing and purchase discounts
The Company participates in various advertising and marketing programs with
suppliers. Certain of the Company's costs incurred in connection with these
programs are reimbursed. The Company records these reimbursements when
earned. The Company also records accounts payable net of anticipated
purchase discounts.
Basic and dilutive loss per common share
The Company implemented the provisions of Statement of Financial Accounting
Standard No. 128, Earnings Per Share (SFAS 128), effective December 31,
1997. Basic and dilutive net income (loss) per common share is computed
based on net income (loss) and the weighted average number of common shares
outstanding of 3,670,054 and 3,642,397 during the nine and three months
ended September 30, 1998 and 1997, respectively. During 1997 and 1998,
options to purchase 635,000 shares of the Company's common stock, of which
595,000 remain outstanding at September 30, 1998, were granted to directors,
officers and employees of the Company. The potential common shares issuable
on account of options were not considered due to their anti-dilutive affect.
The retroactive application of SFAS 128 to the nine and three months ended
September 30, 1997 had no effect on previously reported net loss per common
share amounts.
Revenue recognition
Revenue is recorded upon installation.
Advertising
All costs related to marketing and advertising the Company's products are
expensed in the period incurred. Advertising expense was $475,684 and
$614,820 for the nine months ended September 30, 1997 and 1998,
respectively.
11
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accounting for Stock-Based Compensation
The Company measures compensation expense related to the grant of stock
options and stock-based awards to employees and directors in accordance with
the provisions of Accounting Principles Board Opinion No. 25, under which
compensation expense, if any, is based on the difference between the
exercise price of an option, or the amount paid for an award, and the market
price or fair value of the underlying common stock at the date of the award
or at the measurement date for variable awards. Stock-based compensation
arrangements involving non-employees are accounted for under Statement of
Financial Accounting Standard No. 123, Accounting for Stock-Based
Compensation, (SFAS 123) under which such arrangements are accounted for
based on the fair value of the option or award.
During 1997 options to purchase 50,000 shares, and in 1998, options to
purchase 60,000 shares of the Company's common stock, were granted to
directors of the Company at exercise prices equal to market price on the
grant date, ranging from $2 to $10 per common share. In addition, in 1998,
options to purchase 525,000 shares of the Company's common stock, were
granted to the President, CFO and other key employees of the Company at
exercise prices equal to the market price of $2, on the grant date. To date,
40,000 options at an average exercise price of $6.50 per common share have
terminated. 595,000 options at an average exercise price of $2.17 are
outstanding at September 30, 1998. No options were exercised during 1997 or
1998.
Fair value of financial instruments
The carrying amounts of financial instruments including cash, accounts
receivable, employee and other receivables, notes payable, accounts payable,
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.
Since the amounts due to stockholders are subordinated to the Company's
primary lender, the timing of repayments is not predictable, and therefore,
the fair value of these instruments is not readily determinable. Management
does not believe fair value of such amounts, if determined, would differ
materially from their recorded amounts.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS
130), which establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is
defined to include all changes in equity, except those resulting from
investments by owners and distributions to owners.
12
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SFAS 130 is effective for financial statements for the Company's year ending
December 31, 1998, and requires comparative information for earlier years to
be presented on a comparative basis. The Company currently estimates that
the adoption of SFAS 130 will not have a material effect on its financial
statement disclosures since historically the Company has not had items
considered part of other comprehensive income. Results of operations and
financial position will be unaffected by implementation of this standard.
Segment Reporting
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information (SFAS 131), which supersedes Statement of
Financial Accounting Standards No. 14, Financial Reporting for Segments of a
Business Enterprise. SFAS 131 establishes standards for the manner in which
public companies report information about operating segments in annual
financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public. It
also establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS 131 defines operating segments as
components of a company about which separate financial information is
available that is evaluated regularly by the chief operating decision maker
in deciding how to allocate resources and in assessing performance.
SFAS 131 is effective for financial statements for the Company's year ending
December 31, 1998, and requires comparative information about operating
segments for earlier years. Because the Company does not believe it has
reportable operating segments, the adoption of SFAS 131 will have no affect
on the Company's financial reporting. Results of operations and financial
position will be unaffected by implementation of this standard.
Derivative Instruments and Hedging Activities
In June, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS 133). The company will first be
required to apply SFAS 133 in the first quarter of 2000. SFAS 133 in general
requires that entities recognize all derivative financial instruments as
assets or liabilities, measured at fair value, and include in earnings the
changes in the fair value of such assets and liabilities. SFAS 133 also
provides that changes in the fair value of assets or liabilities being
hedged with recognized derivative instruments be recognized and included in
earnings. The Company does not utilize derivative instruments, either for
hedging or other purposes, and therefore anticipates that the adoption of
the requirements of SFAS 133 will not have a material affect on its
consolidated financial statements.
13
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. INDEBTEDNESS TO STOCKHOLDERS
(a) Note payable - principal stockholder
In both August and November of 1997 and in February of 1998, the Company
received unsecured advances of $500,000 (aggregate total of $1,500,000) from
Branin Investments, Inc. (Branin), which is 100% owned by the Chairman of
the Board and President of Nations, enabling the Company to make the
quarterly principal payment then due on the revolving note. The 1998 advance
bears interest at 15% per annum, payable monthly, while the 1997 advances
bear interest at 12% per annum, payable monthly. These advances are due on
demand. However, Branin has agreed to subordinate its rights to receive
principal and interest payments to the obligation owed pursuant to the
Credit Facility with Fleet as described in Note 3. Pursuant to such Credit
Facility, Branin can receive payments out of excess cash flow commencing no
earlier than December, 1998, subject to the terms and conditions contained
within the Credit Facility (see Note 3). Due to these restrictions the
$1,500,000 has been classified at September 30, 1998 as long term. Total
interest expense of $133,750 relating to these advances has been reflected
in the accompanying consolidated statement of operations for the nine months
ended September 30, 1998.
(b) Advances from principal stockholder
During the nine months ended September 30, 1998, Branin and PAH Marketing
Consultants, Inc. (PAH), a company controlled by the Chairman of the Board
and President of the Nations, also made certain non-interest bearing
advances to the Company. Such advances are also subject to the subordination
and payment limitations described in Note 2(a). Activity in the advances for
the nine months ended September 30, 1998 is as follows:
Balance, December 31, 1997 $ 1,291,285
Settlement of obligation through issuance of stock (193,600)
Dividends on CBH preferred stock paid for CBH by Branin 419,400
Management fees payable to Branin and PAH 132,500
Payments to Branin and PAH (409,654)
--------------
Balance, September 30, 1998 $ 1,239,931
==============
Due to the subordination and payment limitations, $500,000 of the balance
has been classified as long term at September 30, 1998.
14
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. INDEBTEDNESS TO STOCKHOLDERS (CONTINUED)
(c) Due to stockholder
During May 1997, the Company received an unsecured advance from a
stockholder and director of the Company in the amount of $500,000, enabling
the Company to make the quarterly principal payment then due on the
revolving note. This advance will be repaid through the issuance of 500
shares of the Company's preferred stock in 1998. Until such time as the
preferred shares are issued, the advance will bear interest at 12% per
annum, payable monthly. Branin has agreed to advance such interest amounts
at least through November, 1998. Repayment of Branin's advance is also
subject to the subordination and payment limitations described in Note 2(a).
Total interest expense of $45,000 relating to the stockholder advance has
been reflected in the accompanying consolidated statement of operations for
the nine months ended September 30, 1998.
(d) Related party note payable
In May 1998, the Company received an advance from Realty in the amount of
$500,000. This advance bears interest at 12% per annum, payable monthly.
This advance is subordinated and subject to payment limitations as described
in Note 2(a). Total interest of $22,000 relating to this advance has been
reflected in the accompanying consolidated statement of operations for the
nine months ended September 30, 1998.
NOTE 3. NOTE PAYABLE AND LONG-TERM DEBT
On May 19, 1998, the Company, through its indirect subsidiary CBI, entered
into a credit agreement (the "Credit Facility") with Fleet Capital
Corporation ("Fleet"), pursuant to which Fleet advanced to CBI $5,000,000
under a term loan and approximately $2,300,000 under a $5,000,000 revolving
line of credit, which revolving line of credit includes an overadvance
subline availability of $750,000 (currently undrawn). The term loan requires
quarterly payments of $175,000 and the overadvance subline, if drawn upon,
requires semi-annual payments of $187,500. CBI pledged to Fleet
substantially all of CBI's assets to secure its obligations under the Credit
Facility, and CBH guaranteed CBI's debt obligations to Fleet under the
Credit Facility. CBH also pledged substantially all of its assets, including
all of the common stock of CBI, to secure its guarantee. Fees payable to
Fleet totaled $125,000, one-half paid at closing and the balance due on
November 18, 1998. In addition, a finders fee of $100,000 was paid to a
person associated with Branin. The term and revolving portions of the Credit
Facility are due on May 18, 2003 while the overadvance availability expires
on May 18, 2000. All borrowings under the Credit Facility bear interest at
the base rate per annum announced from time to time by Fleet (8.0% at
November 6, 1998) plus 1.25%, 1.75% and 2.0% per annum, in connection with
advances under the term loan, revolving line and overadvance subline,
respectively, payable monthly. The Credit Facility also contains provisions
that excess cash flow over certain defined levels will be used to repay
principal under the term loan.
15
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. NOTE PAYABLE AND LONG-TERM DEBT (CONTINUED)
As a condition of closing, the Company received an advance of $500,000 from
Realty (see Note 2(d)). This advance bears interest at 12% per annum,
payable monthly. This advance is subordinated to the Company's obligations
under the Credit Facility, whereby the Company has agreed that principal,
which is nominally payable on demand, may not be repaid until the Company
has terminated its overadvance subline and repaid the term loan of the
Credit Facility. The Credit Facility contains covenants requiring CBI to
maintain minimum levels of tangible net worth and debt coverage. In
connection with this Credit Facility, Branin has agreed that the notes
payable to and advances from it (see Notes 2(a) and (b)) will also be
subject to these subordination and payment limitation requirements.
Amounts outstanding under the agreement are as follows:
September 30,
1998
-------------
Revolving line of credit $ 3,155,179
=============
Overadvance subline $ -
=============
Term loan $ 4,825,000
=============
The proceeds of the Credit Facility were used to payoff the financing
obtained from First Source Financial ("First Source") of approximately
$7,300,000. Certain unamortized debt acquisition costs classified as
intangible assets of $232,390 were charged to expense as of the date of the
refinancing.
The Company received advances from unrelated parties of $534,000 during
February 1997, enabling the Company to make the quarterly principal payment
then due on the long-term revolving note. These advances bore interest at
the rate of 12% per annum, payable monthly. These advances were repaid in
April 1997. In addition to the repayment of the principal, the lenders were
to receive $213,600 in shares of common stock of the Company as additional
interest. All parties, except one who continued his election to receive
Company stock and one who elected to receive cash, agreed to allow Branin to
acquire the right to receive the common stock of the Company, and as a
result $189,600 of the obligation was reclassified as due to Branin. The
total remaining obligation of $193,600 was satisfied through the issuance of
27,657 shares of the Company's common stock in August 1998, which represents
the number of common shares the lenders would have received under the terms
of the original agreement.
CBI also has long-term notes payable of $126,708 and $145,928 outstanding at
December 31, 1997 and September 30, 1998, respectively. The notes are
secured by equipment and bear interest at an approximate average of 20% and
mature between December 1999 and August 2003.
16
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. ACQUISITION
On September 18, 1998, the Company purchased the net assets of Merrill's
Carpet and Tile, Inc. (Merrill's), a floorcovering retailer located in St.
George, Utah pursuant to an asset purchase agreement. Under the purchase
agreement, the Company purchased substantially all of the assets of
Merrill's in exchange for $280,000, of which approximately $164,000 was paid
at closing with additional amounts contingently payable over the next three
years based on earnings. The acquisition was accounted for as a purchase.
Approximately $125,000 of the purchase price was allocated to costs in
excess of net assets of business acquired and a covenant not-to-compete. For
the year ended December 31, 1997, Merrill's recorded a net loss of
approximately $24,000 on revenues of approximately $656,000. The acquisition
of Merrill's at January 1, 1997 and 1998 would not have had a material
affect on revenues, net income (loss) or net income (loss) per common share.
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company relates to the nine months ended September 30,
1998 and 1997 and should be read in conjunction with the financial
statements and notes thereto included elsewhere in this Report.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September
30, 1997.
Total revenues increased by $3,985,152 to $32,907,885 for the nine months
ended September 30, 1998 from $28,922,733 for the nine months ended
September 30, 1997, representing an increase of 13.8%.
The components of this increase are as follows:
New Housing $ 365,959
Retail Replacement 1,557,471
Commercial 1,164,989
Other 896,733
------------
$ 3,985,152
============
The increases in Retail Replacement, Commercial and Other sales result from
the Company's efforts, begun in fiscal 1997, to diversify its market and
sales. Since 1997, the growth in the Company's New Housing Division sales
has been adversely affected by increased competition, and an increase in
"in-house" sourcing and installation by Las Vegas area new home builders. To
attempt to counteract these developments and reduce the Company's reliance
on business generated by the New Housing Division, the Company opened two
new retail stores (one in October 1996 and one in July 1997) and opened a
Las Vegas commercial flooring division in April 1997 and a Phoenix, Arizona
commercial flooring division in April 1998, which openings contributed
directly to the increased sales in these areas.. In addition, on September
18, 1998, the Company acquired Merrill's, which acquisition added a new
home, retail and commercial operation in St. George, Utah. Management
believes that these diversification efforts and the acquisition of Merrill's
(which did not have a material affect on revenues or the results of
operations for the nine and three months ended September 30, 1998) will
allow it to lessen the adverse effects of any increases in competition, or
decreases in demand, in any one of the Company's markets (i.e., new housing,
retail replacement or commercial) or geographic locations. However, there
can be no assurance that these efforts will maintain or continue to increase
the Company's overall sales levels over time. Prices for the Company's
products were not significantly changed.
The gross profit increased by $566,789 to $8,030,995 for the nine months
ended September 30, 1998 from $7,464,206 for the nine months ended September
30 1997, representing an increase of 7.6%. The Company's gross profit
percentage declined to 24.4% in 1998 from 25.8% in 1997. Liquidity
constraints that existed before, and were alleviated by, the May 1998
refinancing (see Note 3 of Notes to Consolidated Financial Statements)
prevented the Company from taking advantage, during the first half of fiscal
1998, of early payment discounts offered by vendors, and the absence of
these discounts,
18
<PAGE>
together with certain price concessions made to maintain or
attract New Home sales and increases in installation costs, were the
principal causes of the decline in the gross profit percentage.
Selling, general and administrative expenses increased by $553,363 to
$5,970,135 for the nine months ended September 30, 1998 from $5,416,772 for
the nine months ended September 30 1997. This increase is due to the
following approximate increases: (1) rent expense of $140,000, insurance of
$14,000, auto expense of $12,000 and office expense of $88,000, each
primarily due to the opening of an additional warehouse facility and an
additional retail location, (2) management and consulting fees of $17,000,
(3) finance charges of $58,000 relating to the new third-party finance
programs offered to customers, (4) advertising of $139,000 and (5) salaries
and related payroll taxes and benefits of $158,000 due to normal increases
in wage and salary rates and to additional sales personnel. These increases
were partially offset by the following approximate decreases (1) travel
expenses of $29,000, (2) bad debts of $25,000 and miscellaneous expenses of
44,000.
Amortization and depreciation expense increased to $1,090,704 in 1998 from
$912,715 in 1997, due to a one time write off of unamortized debt issuance
costs of approximately $230,000 and to a decrease in amortization and
depreciation expense of approximately $54,000 in 1998.
Operating income decreased by $164,563 to $970,156 for the nine months ended
September 30, 1998 from $1,134,719 for the nine months ended September 30,
1997. Interest expense decreased to $902,374 for the nine months ended
September 30, 1998 from $1,081,228 for the nine months ended September 30,
1997, due to reductions in the Company's senior debt made in part with the
proceeds of advances from related and unrelated parties. Income tax expense
decreased to $7,827 in 1998 from $17,910 in 1997 due to the decrease in
income before income taxes. Net loss increased by $39,979 to $414,808 for
the nine months ended September 30, 1998 from $374,829 for the nine months
ended September 30, 1997.
Three Months Ended September 30, 1998 Compared to Three Months Ended
September 30, 1997.
Total revenues increased by $1,742,222 to $11,811,807 for the three months
ended September 30 1998 from $10,069,585 for the three months ended
September 30, 1997, representing an increase of 17.3%.
The components of this increase are as follows:
New Housing $ 766,115
Retail Replacement 527,506
Commercial 291,909
Other 156,692
-------------
$ 1,742,222
=============
The increases in Retail Replacement, Commercial and Other sales result from
the Company's efforts, begun in fiscal 1997, to diversify its market and
sales. New Housing sales increased in the third quarter of fiscal 1998 as
the result of following: 1) an increase in the number of builders where the
Company has an exclusive on their business and 2) certain of the Company's
builders acquired land and developments from other builders that are not
customers of the Company, therefore increasing their own market share in the
region.
19
<PAGE>
The gross profit increased by $458,260 to $2,902,148 for the three months
ended September 30, 1998 from $2,443,888 for the three months ended September
30, 1997, representing a increase of 18.8%. The Company's gross profit
percentage increased to 24.6% in 1998 from 24.3% in 1997.
Selling, general and administrative expenses increased by $173,251 to
$2,054,749 for the three months ended September 30, 1998 from $1,881,498 for
the three months ended September 30, 1997. This increase is due to the
following approximate increases: (1) advertising of $20,000, (2) rent
expense of $34,000 and office expense of $34,000, each primarily due to the
opening of an additional warehouse facility and an additional retail
location, (3) salaries and related payroll taxes and benefits of $75,000 due
to normal increases in wage and salary rates, (4) finance charges of $20,000
relating to the new finance programs offered to customers and (5) disposal
services of $10,000. These increases were partially offset by the following
approximate decreases (1) workers' compensation expense of $44,000 due to a
reduction in rates assessed per payroll dollar and (2) miscellaneous
expenses of $20,000.
Amortization and depreciation expense decreased to $267,110 in 1998 from
$272,692 in 1997.
Operating income increased by $290,591 to $580,289 for the three months
ended September 30, 1998 from $289,698 for the three months ended September
30, 1997. Interest expense increased to $286,343 for the three months ended
September 30, 1998 from $276,348 for the three months ended September 30,
1997, due to reductions in the Company's senior debt made in part with the
proceeds of advances from related and unrelated parties. Income tax expense
increased to $87,000 in 1998 from $2,388 in 1997 due to the increase in
income before income taxes. Net income (loss) increased by $161,978 to
$35,813 for the three months ended September 30, 1998 from $(126,165) for
the three months ended September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities of the Company's operations was
$497,344 and $3,107,498 for the nine months ended September 30, 1998 and
1997, respectively. The decrease in cash provided by operations for the nine
months ended September 30, 1998, as compared to the first three quarters of
fiscal 1997, reflects the effects of significant reductions in accounts
payable, as well as increases in the investment in inventories and accounts
receivable (due to increases in sales), during 1998. At September 30, 1998,
the Company had a working capital deficit of $2,982,080. Included in such
deficit is $3,855,179 due to Fleet Capital Corporation ("Fleet") under the
credit facility (the "Credit Facility") discussed below. The Company's growth
and acquisition strategy will require significant additional cash.
During the nine months ended September 30, 1998 and 1997, cash used in
investing activities was $403,468 and $297,561, respectively, used primarily
to purchase equipment and leasehold improvements and in 1998 to acquire the
net assets of Merrill's Carpet and Tile, Inc. ("Merrill's") in St. George,
Utah. Cash used in financing activities during the 1998 period was $77,822,
primarily as the result of the proceeds of the Fleet Credit Facility and
related party advances, offset by the retirement of the borrowings under the
First Source Credit Agreement. Financing activities absorbed cash of
$2,977,799 in the first three quarters of fiscal 1997, primarily for the
reduction of borrowings under the First Source Credit Agreement.
20
<PAGE>
The Company is highly leveraged and is subject to the risks associated with
a highly leveraged business. The Company's ratio of indebtedness for
borrowed money to stockholders' equity at September 30, 1998 was 4.7:1.
On May 19, 1998, the Company, through its indirect subsidiary CBI, entered
into a credit agreement (the "Credit Facility") with Fleet Capital
Corporation ("Fleet"), pursuant to which Fleet advanced to CBI $5,000,000
under a term loan and approximately $2,300,000 under a $5,000,000 revolving
line of credit, which revolving line of credit includes an overadvance
subline availability of $750,000 (currently undrawn). The term loan requires
quarterly payments of $175,000 and the overadvance subline, if drawn upon,
requires semi-annual payments of $187,500. CBI pledged to Fleet
substantially all of CBI's assets to secure its obligations under the Credit
Facility, and CBH guaranteed CBI's debt obligations to Fleet under the
Credit Facility. CBH also pledged substantially all of its assets, including
all of the common stock of CBI, to secure its guarantee. Fees payable to
Fleet totaled $125,000, one-half paid at closing and the balance due on
November 18, 1998. In addition, a finders fee of $100,000 was paid to a
person associated with Branin. The term and revolving portions of the Credit
Facility are due on May 18, 2003 while the overadvance availability expires
on May 18, 2000. All borrowings under the Credit Facility bear interest at
the base rate per annum announced from time to time by Fleet (8.0% at
November 6, 1998) plus 1.25%, 1.75% and 2.0% per annum, in connection with
advances under the term loan, revolving line and overadvance subline,
respectively, payable monthly. The Credit Facility also contains provisions
that excess cash flow over certain defined levels will be used to repay
principal under the term loan. As a condition of closing, the Company
received an advance of $500,000 from Realty (see Note 2(d)). This advance
bears interest at 12% per annum, payable monthly. This advance is
subordinated to the Company's obligations under the Credit Facility, whereby
the Company has agreed that principal, which is nominally payable on demand,
may not be repaid until the Company has terminated its overadvance subline
and repaid the term loan of the Credit Facility. Total interest of $22,000
relating to this advance has been reflected in the accompanying consolidated
statement of operations for the nine months ended September 30, 1998. The
Credit Facility contains covenants requiring CBI to maintain minimum levels
of tangible net worth and debt coverage. In connection with this Credit
Facility, Branin has agreed that the notes payable to and advances from it
(see Notes 2(a) and (b)) will also be subject to these subordination and
payment limitation requirements. As of October 31, 1998, the Company had
borrowed approximately $3,200,000, leaving approximately $1,800,000
available from Fleet under the $5,000,000 revolving line of credit and had
no availability from Fleet under the $5,000,000 term loan that had an
outstanding balance and commitment of $4,825,000.
The proceeds of the Credit Facility were used to payoff the financing
obtained from First Source Financial ("First Source") of approximately
$7,300,000. Certain unamortized debt acquisition costs classified as
intangible assets of $232,390 were charged to expense as of the date of the
refinancing.
The Company received advances from unrelated parties of $534,000 during
February 1997, enabling the Company to make the quarterly principal payment
then due on the revolving note. These advances bore interest at the rate of
12% per annum, payable monthly. These advances were repaid in April 1997. In
addition to the repayment of the principal, the lenders were to receive
$213,600 in shares of common stock of the Company as additional interest.
All parties, except one who continued his election to receive Company stock
and one who elected to receive cash, agreed to allow Branin Investments,
Inc. ("Branin"), which is 100% owned by the Chairman of the Board and
President of Nations, to acquire the right to receive the common stock of
the Company, and as a result $189,600 of the obligation was
21
<PAGE>
reclassified as due to Branin. The total remaining obligation of $193,600 was
satisfied through the issuance of 27,657 shares of the Company's common stock
in August 1998, which represents the number of common shares the lenders would
have received under the terms of the original agreement.
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 then due on the
revolving note (see Note 2(c) of Notes to the Consolidated Financial
Statements). This advance will be repaid through the issuance of 500 shares
of the Company's preferred stock in 1998. Until such time as the preferred
shares are issued, the advance will bear interest at 12% per annum, payable
monthly. Branin has agreed to advance such interest amounts at least through
November, 1998. Repayment of Branin's advance is subordinated and subject to
payment limitations as described in Note 2(a) of Notes to the Consolidated
Financial Statements. Total interest expense of $45,000 relating to this
advance has been reflected in the accompanying consolidated financial
statements for the nine months ended September, 30, 1998.
In both August and November of 1997 and in February of 1998, the Company
received an unsecured advance of $500,000 (aggregate total of $1,500,000)
from Branin, enabling the Company to make the quarterly principal payment
then due on the revolving note. The 1997 advances bear interest at 12% per
annum, payable monthly and the 1998 advance bears interest at 15% per annum,
payable monthly. These advances are due on demand. However, Branin has
agreed to subordinate its rights to receive principal and interest payments,
to the obligation owed pursuant to the Credit Facility with Fleet as
described in Note 3 of Notes to the Consolidated Financial Statements.
Pursuant to such Credit Facility, Branin can receive payments out of excess
cash flow commencing no earlier than December, 1998, subject to the terms
and conditions contained within the Credit Facility. Total interest expense
of $133,750 relating to these advances has been reflected in the
accompanying consolidated financial statements for the nine months ended
September 30, 1998.
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. As a result of
these payments, and management fees and other amounts advanced from or due
to Branin and PAH Marketing, Inc. ("PAH"), a company controlled by Philip A.
Herman, the Company was indebted to Branin and PAH, for $2,739,931 at
September 30, 1998 (see Notes 2(a) and 2(b) of Notes to the Consolidated
Financial Statements). As of October 31, 1998, the Company was indebted to
Branin and PAH for $2,807,782. These advances are subordinated and subject to
payment limitations as described in Notes 2 and 3 of Notes to Consolidated
Financial Statements. However, Branin has agreed to continue to advance such
dividend payments on behalf of CBH at least through November, 1998.
Branin, which beneficially owns 330,189 shares of Common Stock of the
Company, will be entitled to receive a fee equal to 3% of the aggregate
proceeds from the debt offerings on June 1, 1995, upon the consummation of
an underwritten public offering. The total of such fees would be
approximately $650,000. In June 1995, CBI agreed to pay for consulting
services of a) $35,000 per month (reduced to $10,000 per month as of
September 1, 1996 and increased to $20,000 per month as of June 1, 1998) to
Branin and b) $5,000 per month through August 31, 1996, and at the rate of
$12,500 per month beginning May 1, 1997 through May 31, 1998 to PAH. These
agreements were entered into for the purpose of receiving management
advisory services in the areas of operations management, financing and
acquisitions.
22
<PAGE>
The Company opened two new locations in Las Vegas during 1996 and one in 1997.
A substantial portion of the initial capital costs for these locations were
provided 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. Any 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.
On September 18, 1998, the Company purchased the net assets of Merrill's
Carpet and Tile, Inc. ("Merrill's"), a floorcovering retailer located in St.
George, Utah pursuant to an asset purchase agreement. Under the purchase
agreement, the Company purchased substantially all of the assets of
Merrill's in exchange for $280,000, of which approximately $164,000 was paid
at closing with additional amounts contingently payable over the next three
years based on earnings. The acquisition was accounted for as a purchase.
Approximately $125,000 of the purchase price was allocated to costs in
excess of net assets of business acquired and a covenant not-to-compete. For
the year ended December 31, 1997, Merrill's recorded a net loss of
approximately $24,000 on revenues of approximately $656,000. The acquisition
of Merrill's at January 1, 1997 and 1998 would not have had a material
affect on revenues, net income (loss) or net income (loss) per common share.
The Company is also continuing its pursuit of selective acquisitions that
will enable the Company to expand nationwide and in that regard is in an
advanced stage in discussions with several candidates that meet the
Company's goals. The Company intends to finance these acquisitions by
utilizing any unused portion of the Fleet Credit Facility and by raising
debt and equity funds through private or public offerings.
The funds available from the Fleet Credit Facility have substantially
lessened the liquidity constraints that the Company experienced in 1996 and
1997. The Company believes that the Fleet Credit Facility will be
sufficient, together with cash generated by operations to meets its working
capital needs for the remainder of 1998 and 1999, and to a limited extent
the funds necessary to pursue its strategy of expansion and acquisitions.
However, the Company's growth and acquisitions strategy will require
substantial cash for capital costs, and the failure to obtain capital
resources would adversely affect the Company's pursuit of its growth
strategy.
The foregoing discussion and analysis contains forward-looking statements
regarding the Company. Because such statements include risks and
uncertainties, actual results may differ materially from those expressed or
implied by such forward-looking statements. Factors that could cause actual
results to differ materially include, but are not limited to, general
economic conditions in the United States and in the Las Vegas marketplace in
particular, as well as market conditions affecting costs and prices related
to the Company's business and the Company's ability to obtain additional
financing.
23
<PAGE>
EFFECT OF ACCOUNTING PRONOUNCEMENTS ISSUED BUT NOT YET ADOPTED
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income
("SFAS 130"), which establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity, except those resulting
from investments by owners and distributions to owners.
SFAS 130 is effective for financial statements for the Company's year ended
December 31, 1998, and requires comparative information for earlier years to
be presented on a comparative basis. The Company currently estimates that
the adoption of SFAS 130 will not have a material effect on its financial
statement disclosures since historically the Company has not had items
considered part of comprehensive income. Results of operations and financial
position will be unaffected by implementation of this standard.
Segment Reporting
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("SFAS 131"), which supersedes Statement
of Financial Accounting Standards No. 14, Financial Reporting for Segments
of a Business Enterprise. SFAS 131 establishes standards for the manner in
which public companies report information about operating segments in annual
financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public. It
also establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS 131 defines operating segments as
components of a company about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance.
SFAS 131 is effective for financial statements for the Company's year ending
December 31, 1998, and requires comparative information about operating
segments for earlier years. Because the Company does not believe it has
reportable operating segments, the adoption of SFAS 131 will have no affect
on the Company's financial reporting. Results of operations and financial
position will be unaffected by implementation of this standard.
Derivative Instruments and Hedging Activities
In June, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"). The company will first be
required to apply SFAS 133 in the first quarter of 2000. SFAS 133 in general
requires that entities recognize all derivative financial instruments as
assets or liabilities, measured at fair value, and include in earnings the
changes in the fair value of such assets and liabilities. SFAS 133 also
provides that changes in the fair value of assets or liabilities being
hedged with recognized derivative instruments be recognized and included in
earnings. The Company does not utilize derivative
24
<PAGE>
instruments, either for hedging or other purposes, and therefore anticipates
that the adoption of the requirements of SFAS 133 will not have a material
affect on its consolidated financial statements.
Other
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.
The Company has conducted a review of its computer system to identify the
systems that could be affected by the "Year 2000" issue. The Company
presently believes that the Year 2000 issue will not pose significant
operational problems for the Company's computer systems and any costs
associated with the Year 2000 issue will not be significant.
25
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27 - Financial Data Schedule
(b) Reports on Form 8-K.
None
26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant had duly caused this report to be signed by the undersigned,
thereunto duly authorized.
November 6, 1998 /s/ Philip A. Herman
---------------------------------------
Philip A. Herman
Chairman of the Board and President
(Principal Executive Officer)
November 6, 1998 /s/ William Poccia
---------------------------------------
William Poccia
Chief Financial Officer
(Principal Financial and Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 246,277
<SECURITIES> 0
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0
3,117,274
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</TABLE>
