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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A-1
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________.
Commission File Number: 33-29942-NY
RAGAR CORP.
(Name of small business issuer in its charter)
New York 2836, 2835 11-2925673
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction Industrial Classification Identification Number)
of Incorporation or Code Number)
Organization)
100 Maiden Lane
New York, New York 10038
(Address of principal
executive offices)
(212) 898-8888
(Issuer's Telephone Number)
Securities registered pursuant to Section 12(g) of the Act:
Name of Each Exchange on
Title of each Class Which Registered
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Common Stock, $0.001 par value None
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past (90) days.
Yes [X] No [ ]
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-KSB or any amendment to
this Form 10-KSB [X]
State issuer's revenues for its most recent fiscal year $42,414,364.
The aggregate market value of the shares of common stock held by non-affiliates
on April 7, 1997 was approximately $6,566,538. As of April 7, 1997, there were
14,569,586 shares of Common Stock, $0.001 par value per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
Transitional small business disclosure format (check one):
Yes [ ] No [X]
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Part 1.
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Item 1. Business
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The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information (including the Financial
Statements and the Notes thereto) appearing elsewhere in this report. References
to the Company herein shall mean the Company, including the operations of Ragar
Corp. and its consolidated subsidiaries, and the operations of their
predecessors, except to the extent that the context requires otherwise.
The Company
Ragar Corp. (the "Company") is engaged in the business of selling and
installing floor coverings and selling wall coverings, window treatments and
certain related products, primarily for the residential housing market.
Currently, the Company is engaged in business in Las Vegas, Nevada, where its
sales of $40.3 million in 1995 and $42.4 million in 1996 have made it the
largest seller and installer of floor coverings in such market. The Company
believes that its sales represent approximately 63% of the new homes sold in the
Las Vegas market and are approximately 3.5 times those of its nearest
competitor, based on 1995 construction data, the most recent information
available. From its three facilities in Las Vegas, the Company sells
approximately 72% of its products to the new home market to or through new
homebuilders through its New Housing Division and approximately 28% of its
products to the retail replacement market directly to individual homeowners
through its Replacement Sales Division. New Housing Division sales are effected
primarily to or through new home builders who offer purchasers a wide selection
of basic grade floor coverings as part of the unit cost. Customers then visit
the Company's new home design center and, with the assistance of one of the
Company's design consultants, choose possible upgrades on floor coverings, in
addition to purchasing wall coverings, window treatments and related products.
The Company believes that its new retail design center located in Las Vegas will
also enable it to continue to broaden its product lines and expand the sales of
its Replacement Sales Division. The Company has also recently established a
Commercial Division, which is its first entry into the commercial market,
including multi-family, office, retail store and small hotel projects.
The Company believes that the retail floor covering industry is highly
fragmented, with no single floor covering retailer, including national and large
regional chains, accounting for more than ten percent of the total market. Most
floor covering retailers operate a single store generating less than $1 million
in annual sales. The Company believes that small independent floor covering
retailers face competitive disadvantages resulting from limited purchasing
power, ineffective inventory control and inadequate resources for sales,
marketing and store management. Accordingly, the Company believes that
significant opportunities exist for floor covering retailers that can achieve
cost advantages and operating efficiencies through selective acquisitions and
internal growth.
To take advantage of these opportunities the Company is pursuing a
strategy of acquiring existing floor covering businesses that are dominant
competitors in their regions and developing new stores in markets experiencing
significant growth in population and homebuilding that do not have a dominant
floor covering retailer. The Company is reviewing various markets throughout the
United States to determine their desirability for expansion. The Company is also
in the process of negotiating with acquisition candidates in some of those
markets and has recently entered into a non-binding letter of intent to acquire
the assets of Nonn's Flooring, Inc., a floorcovering retailer with 2 stores,
located in the Madison, Wisconsin area. See Item 6. Management's Discussion and
Analysis of Financial Condition and Results of Operations-Liquidity and Capital
Resources. The Company also anticipates opening two new "big-box" facilities in
Phoenix, Arizona in 1997 and is actively exploring the possibility of developing
additional stores in other sites in the southwestern United States where the
Company can expand its relationships with regional homebuilders. The planned
"big-box" facilities will have between 40,000 and 60,000 square feet per
facility and will focus on retail sales of all product lines in a warehouse-type
setting, as well as having a dedicated design center area. The Company believes
that this format will enable it to quickly capture a significant market share by
offering customers a pleasant shopping environment in which to fulfill all of
their floor and wall covering and related needs on a cash-and-carry or next-day
installed basis. However, there can be no assurance as to the viability of this
approach. See "Business-Strategy."
The Company also intends to increase its business in Las Vegas, through
continued advertising and marketing efforts, and recently opened a new retail
facility and a new home design center in other areas of Las Vegas. The
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Company's main facility is located centrally, and the additional retail branch
is located in an area of Las Vegas with a large concentration of mature homes.
Additional retail centers in similar areas are being contemplated. The Company
intends to actively seek to increase its retail replacement sales through
increased consumer advertising, enhanced marketing, the opening of one or more
new retail locations and the addition of new products.
Organizational History
The Company was organized under the laws of the State of New York on
July 19, 1988. On June 2, 1995, Ragar Corp. acquired all of the common stock of
Carpet Barn Holdings, Inc. ("CBH") in exchange (the "Exchange") for the issuance
to the holders of common stock of CBH of an aggregate of 13,363,000 shares of
Ragar common stock, par value $.001 per share, pursuant to an Agreement and Plan
of Exchange, dated as of June 1, 1995 (the "Exchange Agreement"), among Ragar
Corp., CBH and the CBH stockholders. The Company's only substantial operations,
CBH and it's wholly-owned subsidiary, Carpet Barn, Inc. ("CBI"), were formed for
the purpose of acquiring the assets and operations of Carpet Barn, Inc., a
Nevada corporation ("Carpet Barn" or the "Predecessor Business"), a retail
carpet sales and installation business located in Las Vegas, Nevada.
Concurrently with completing the Exchange, the Company completed the acquisition
(the "Acquisition") of substantially all of the assets of Carpet Barn pursuant
to that certain Asset Purchase Agreement, dated as of June 1, 1995 (the
"Purchase Agreement"), between CBI and Carpet Barn. On March 19, 1997, the
Company's stockholders approved the merger of the Company with and into Nations
Flooring, Inc., a wholly owned subsidiary of the Company, organized under the
laws of the State of Delaware for the sole purpose of effecting such merger. As
a result of the merger, each share of Ragar common stock, will be converted into
1/4 share of common stock, par value $.001 per share, of Nations Flooring, Inc.
It is anticipated that the merger will be consummated in the first half 1997.
The current directors and executive officers of the Company will continue as the
directors and executive officers of Nations Flooring, Inc. following the merger.
Industry Overview
The retail floor covering industry in the United States (which includes
fixed and non-fixed carpeting and marble, ceramic tile, vinyl and wood flooring)
is estimated to have grown from approximately $11.2 billion in 1991 to
approximately $14.5 billion in 1995, up 29% over the 1991 level but only up 0.1%
over the 1994 level. Carpet and area rugs accounted for 68.7% of total dollar
sales in the industry in 1995 versus 69.4% in 1994. Despite this growth in size,
the industry has remained fragmented. The Company believes that no single floor
covering retailer, including national and large retailers such as Color Tile,
Home Depot and New York Carpet World, accounts for more than ten percent of the
total market. The Company believes that while chains and mass merchandisers do
not dominate the floor covering industry, such companies do influence pricing,
product selection and service innovation. According to the most recent figures
available, U.S. floor covering sales volume reached approximately 2.5 billion
square yards in 1995, down 0.4% from the prior year. By product sector, change
in sales volume in 1995 as compared to 1994 is as follows: carpet and area rugs
declined by 1.7%, hardwood flooring increased by 5.6%, ceramic floor and wall
tile increased by 5.2%, and vinyl sheet and floor tile decreased by 2.4%.
The carpet industry's two primary markets are residential and
commercial, with the residential market (the market currently served by the
Company) accounting for approximately 75% of industry sales in 1995 and the
commercial market accounting for approximately 25% of such sales. A number of
factors influence overall sales levels in the carpet industry, including
consumer spending on durable goods, levels of discretionary spending, interest
rates, housing turnover, the condition of the residential construction industry
and the economy's overall strength.
Strategy
The Company's objective is to maintain its position as the leading
provider of floor coverings, wall coverings, window treatments and related
products in the Las Vegas residential market and to become the leading provider
of floor coverings, wall coverings, window treatments and related products in
selected markets throughout the United States. The Company is also seeking to
become a leading provider of floor coverings in the commercial market in Las
Vegas and in other markets. The Company's strategy includes the following:
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Las Vegas Market
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Maintain New Home Market Share in Las Vegas; Increase Replacement Sales
Penetration. The Company intends to increase its core business through continued
advertising and marketing efforts, and recently opened a new retail facility and
a new home design center in other areas of Las Vegas. The Company's main
facility is located centrally, and the additional retail branch is located in an
area of Las Vegas with a large concentration of mature homes. Additional retail
centers in similar areas are being contemplated. The Company intends to actively
seek to increase its retail replacement sales through increased consumer
advertising, enhanced marketing, the opening of one or more new retail locations
and the addition of new products.
The Company also intends to expand upon its existing base of customers
by increasing its sales for new home projects with residential developers.
Homebuilders provide the Company's new home design center with the floor plans
of all the units. This allows the new home design center to then provide a home
buyer with alternatives specifically tailored to the floor plan of the
customer's unit, as well as one-stop shopping for home buyers with respect to
their floor, wall and window covering needs. The Company's new home design
center is a significant element in the Company's plan to enhance service to
homebuilders and home buyers. Based on estimates of the Las Vegas Homebuilder's
Association, over the next 10 years, the total new homes market for carpet in
Las Vegas is projected to grow at an annual rate of 5% to 10%. For 1996, the
Company believes it has maintained its share of the market for floorcovering for
new homes in the Las Vegas market with sales growth of 7.5% over the prior year.
There can be no assurance that the Las Vegas market will grow as projected or
that the Company will be able to retain its market share.
Continue to Offer Superior Service. The Company believes that the most
important factor in its ability to compete is the quality of the customer
service it offers. The Company believes that it offers the highest quality
customer service in Las Vegas. This service begins with the offering of a full
range of floor covering products. In addition, the Company intends to continue
its policy of next-day installation and of guaranteeing free repairs on carpets
it has installed for homeowners and home buyers for as long as they own their
homes. The Company also inspects all floor covering installations in new homes
before the customer moves in and has created a customer service department to
handle all complaints and installation problems. Management believes these
programs have begun to have a very positive effect on the Company's reputation
with builders and home buyers. The Company also intends to continue to offer
what it believes is quality technical service and assistance to its customers in
both the new home and replacement sales markets. Employees of the Company
assist, as needed, in all phases of customers' projects, from conceptualization,
design and product selection to actual installation. In addition, the Company's
design center is staffed with specially trained design consultants that are
highly knowledgeable regarding the broad range of decorating possibilities
provided by the Company's products. The Company intends to continue to hire
salespersons with experience in floor covering or related trades, and to
continue to train such salespersons with respect to its products and services.
The Company believes that such programs will have a positive effect on results
of operations, although there can be no assurance of this.
Competitive Prices. A second factor affecting the Company's ability to
compete is the pricing of its products. Because of the volume of its purchases,
the Company receives what it believes to be very favorable pricing from its
suppliers, including payment discounts from most suppliers and cooperative
marketing contributions from others, including DuPont, Monsanto and Allied. The
Company is able to pass these savings along to customers and thus generally to
offer the lowest prices in the region while maintaining a high profit margin.
The Company intends to continue to offer low prices and also to continue its
policy of offering to beat any competitor's price.
Addition of New Products; Design Centers. The Company also intends to
attract and maintain customers by adding complementary products to its current
offerings. The Company has targeted wall and window coverings as its first
significant product extensions and is anticipating further growth through the
addition of area rugs and through cleaning and maintenance programs, as well as
expansion of sales of hard floor coverings such as wood and tile. These new
lines will be promoted by sales personnel at the Company's stores and through
the Company's advertising campaigns. To that end, the Company has recently hired
a manager to implement these sales and marketing programs.
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The Company further intends to increase market share and gross profit
margins through its operation of "design centers" in its retail sales
facilities. The design centers provide customers the opportunity to consult with
trained personnel concerning the multitude of design possibilities utilizing the
full range of products offered by the Company. The Company has also opened a
design center in the Las Vegas area for new home buyers who are selecting floor
coverings and other products to be installed in their new homes. This design
center has been opened in response to requests by builders who are currently
customers as well as other major builders who have expressed a desire to use the
Company, should it open such a center. The design center primarily showcases
higher price and higher profit margin products, particularly area rugs, hard
floor surfaces, such as wood and tile, and window and wall coverings. Early
results from operation of the new home design center show an average increased
sale of approximately $1,000 per new home sale. These sales have a significantly
higher gross profit margin. However, there can be no assurance that the design
center will continue to have a positive impact on the Company's operations.
Inventory Practices. In the Las Vegas market, the Company has been able
to maintain low warehousing costs by stocking small amounts of inventory. At the
same time, the Company has been able to provide its customers with next-day
installation on purchases in the Las Vegas market. These practices are dependent
on the Company's ability to schedule next-day "cut and drop" product deliveries
from its suppliers. To date the Company's suppliers have been able to satisfy
its delivery requirements with overnight shipments to the Company from
distribution centers maintained by such suppliers primarily in California, and
the Company believes that, because of the volume of its purchases, it can
continue to operate in Las Vegas and certain other markets on this basis.
However, there can be no assurance in this regard, and any significant failure
of suppliers to make timely deliveries would adversely affect the Company's
reputation among customers.
Other Markets
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Pursuit of Selective Acquisitions and Development of New Stores. The
Company believes that because of the fragmented nature of the marketplace for
floor covering and related sales, significant consolidation opportunities exist,
and the Company is well positioned to achieve financial and operational
efficiencies through selective acquisitions due to favorable working
relationships with its suppliers and major customers. The Company believes that
any such acquisitions will enable it to increase its sales while decreasing its
general and administrative costs as a percentage of such sales due to the
creation of substantial economies of scale. The Company intends to pursue
acquisitions of businesses that provide the same products and services as, or
those complementary to, the Company's existing business. The Company has
identified a number of markets that it intends to explore entering over the next
several years.
The Company has also selectively targeted certain markets throughout
the southwestern United States where there is no dominant competitor for
expansion through the development of new stores. The Company has entered into an
employment agreement with Alan Ember, the former district manager of CarpetMAX,
to develop stores in Phoenix, Arizona and other markets in the southwestern
United States. Like Las Vegas, these areas are experiencing high growth in
population and home building. Expansion into these markets will be financed in
part by the suppliers of the Company's products, with such funding being applied
to the construction costs associated with the new facilities. The Company
believes that it can duplicate its successful concepts in these high growth
markets by strengthening its relationships with its existing builders who are
active in these markets. Additionally, the Company believes that it can compete
in these markets through its demonstrated ability to compete on service and
price. Furthermore, expansion of the Company should generate an increase in the
Company's buying power due to higher volume purchasing. Where the Company
expands into new markets through acquisition of existing companies, this should
allow the Company to provide lower prices than the stores could provide on a
stand-alone basis. However, there can be no assurance that such expansion will
be effected or, if effected, that any new facilities will be operated
profitably.
Big-Box Store Format. The Company's strategy for entering new markets
includes opening "big-box" stores with 40,000 to 60,000 square feet of
warehouse-type space stocked with significant inventories of the full range of
the Company's products, as well as customer service offices, which, among other
things, will provide customers with access to independent contractors who can
install these products on a next-day basis. These stores are intended to satisfy
all of a customer's floor, wall and window covering needs and to serve the
cash-and-carry market as well as the customers requiring installation service.
The Company believes that these stores can enable it quickly to achieve
meaningful
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market share in markets that do not have dominant competitors. However, the
Company's strategy in this regard is untested, and there can be no assurance
that such stores can be operated profitably or can achieve the market
penetration the Company anticipates.
In markets in which the Company intends to create "big-box" facilities,
the Company believes it can achieve next-day installation through the
maintenance of broad inventories from which purchases can be made on the spot by
"do-it-yourselfers" or which can be installed in a timely manner by independent
installation contractors who will maintain customer service offices on the
Company's premises. Maintenance of sufficient inventories in these facilities
will require a substantial amount of working capital, which will adversely
affect financial performance relative to the results of the Company's current
practices. The Company believes that these adverse effects will be fully offset
by economies of scale that can be achieved in cost of goods sold, delivery costs
and other operating costs, although there can be no assurance in this regard.
The Company contemplates that any retail facilities it opens, whether
or not in the "big-box" format, will have a dedicated design center area where
customers can consult with trained personnel concerning the multitude of design
possibilities utilizing the full range of products offered by the Company. The
Company believes that the clean, relaxed environment of these new facilities,
including child care/entertainment centers, will increase the average total sale
price and gross margin for its sales, although there can be no assurance in this
regard.
Operations
Background. The Company operates its business in Las Vegas, Clark
County, Nevada, where its sales represent approximately 63% of the residential
floor covering market. At this time, all of the Company's operations are located
in this area.
The Las Vegas area is one of the fastest growing in the country,
according to regional publications. According to Las Vegas Chamber of Commerce
during 1996, an average of 6,500 persons relocate to Las Vegas each month, and
the Las Vegas population has grown by approximately 7.6% in the one-year period
between 1995 and 1996, with a similar percentage increase in the number of
households during that time. More than 40% of persons in Las Vegas have resided
there for only five years or less, and two-thirds of the area's residents own
their own homes. The above statistics underscore the high numbers of persons
arriving in the Las Vegas area and the potential strength of the retail floor
covering market.
The Phoenix market, into which the Company anticipates expanding
through the development of new stores, is the third fastest growing community in
the United States, according to regional publications. According to such
publications, an average of nearly 7,000 people relocate to the Phoenix area
every month, and building permits have remained steady over the last three years
at a rate of 25,000 single family building permits issued per year. Because no
single retailer dominates the Phoenix floor covering market, the Company
believes that its strategies should enable it to quickly become a successful
retailer in the Phoenix market, although there can be no assurance in this
regard. See "-Strategy."
Divisions. The Company operates through two divisions, the New Housing
Division and the Replacement Sales Division. A Commercial Division, serving the
multi-family, office, retail store and small hotel markets is being developed.
New Housing Division. The Company's New Housing Division is responsible
for installation of carpeting in newly built homes. Salespersons in this
division deal with both home builders and buyers. In servicing the new home
market, the Company generally secures contracts from builders to carpet new
homes. In most cases, when the builder sells a new home, the builder will direct
the home buyer to the Company, which allows the buyer to choose the color of
carpeting represented by a standard allowance provided from the builder to the
home buyer or to upgrade from the standard selection by paying a higher price.
The Company has found that most home buyers choose an upgraded carpet selection.
The Company receives payment for its carpeting in new homes in one of
two ways. In most cases, the buyer directly pays the upgraded portion of a
carpet sale by generally paying the full amount with the order. In other cases,
the
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Company bills the upgraded portion of the job to the builder, who then passes on
the carpet's additional cost to the buyer as part of the total price of the
home; this method may allow buyers to finance their flooring through their
mortgage, with little incremental effect on monthly payments. Most of the
Company's accounts receivable result from builders' standard allowances and are
due within thirty days of installation.
Through its New Housing Division, the Company has relationships with
most of the larger tract home builders in the Clark County area, with its five
largest customers accounting for $15.9 million, $12.3 million and $15.4 million
in sales in 1994, 1995 and 1996, respectively. During the past six years, the
New Housing Division has accounted for Company sales ranging from a low of $21.8
million in 1990 (56% of total Company sales) to a high of $30.6 million in 1996
(72.2% of total Company sales). The Company estimates that its new homes sales
in Clark County as a percentage of its total sales was 77%, 74% and 72% in 1994,
1995 and 1996, respectively.
Because the Division's sales are dependent on sales of new homes, such
sales are affected by interest rates prevailing in the home industry and by
building activity generally. Because the Company also services the carpet
replacement market, the adverse effects on the Company's sales by downturns in
the business cycle have been moderated.
Replacement Sales Division. The Replacement Sales Division is
responsible for providing individual consumers who have existing homes with new
or replacement floor coverings. The Company is one of the top three retailers in
such consumer replacement sales in the Las Vegas area, chiefly because of its
large selection, low prices and quick installation time.
Customers contemplating purchasing flooring or window and wallcoverings
will visit one of the Company's retail design centers. Highly trained retail
salespersons will then go to the customer's home to verify measurements and
confirm product selections. Due to the Company's "cut and drop" program with its
suppliers, installation is available at the customer's convenience.
Generally, the Company requires that replacement carpet buyers provide
a deposit by cash, check or credit card when they place an order, and that they
pay the balance upon installation. For customers who wish to finance their
purchases, the Company refers such customers to a consumer finance company which
issues a check directly to the Company upon completion of installation. The
Company's sales in the replacement sales market grew by $715,127 from $9,763,024
in 1994 to $10,478,151 in 1995. Although sales in the replacement sales market
during 1996, at $8,789,047, have fallen behind the pace set in previous years,
the Company believes that its retail design center approach can significantly
expand sales by its Replacement Sales Division, although there can be no
assurances in this regard.
Customers
The Company has among its customers most of the larger home builders in
Clark County, Nevada, including Lewis Homes of Nevada, Inc. ("Lewis"), American
West Homes ("AWH") and Pardee Construction Company of Nevada. The Company has
developed its relationships with such builders over the past 24 years. In 1994,
1995 and 1996, five customers accounted for approximately 37%, 31% and 36% of
the Company's net sales, respectively. In 1994, 1995 and 1996, Lewis accounted
for 12.5%, 11.3% and 14.2% of net sales, respectively. In 1994, 1995 and 1996,
AWH accounted for 11.9%, 8.1% and 9.6% of net sales, respectively.
Suppliers
The Company currently purchases its carpeting from suppliers outside
Nevada including suppliers located in Georgia and California. The Company
generally pays for its purchases within three weeks of delivery, allowing the
Company to procure substantial discounts from its suppliers. The Company's six
largest suppliers, which include Shaw, Aladdin Mills, Inc. and Tuftex (a
division of Queen Carpet Corp.) accounted for 74.3%, 87.8% and 86.5% of its
total purchases in 1994, 1995 and 1996, respectively. The Company believes that
one of its competitive advantages is its strong relationship with such
suppliers. While the Company continues to have good relations with its
suppliers, management believes that the Company could find alternative sources
of supply should any of the Company's major
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suppliers cease doing business with it.
Marketing, Advertising and Merchandising
The Company's advertising program includes television and radio
commercials and print advertising in local daily newspapers. Expenditures for
advertising and promotion were approximately $349,000, $332,000 and $598,000
(representing 0.8%, 0.8% and 1.4% of net sales) in 1994, 1995 and 1996,
respectively. The Company spent 35% of its 1996 advertising budget on print
advertising (including pre-printed newspaper inserts and print advertisements),
and 65% on television and radio advertising. The Company features in its
advertising its large selection and low prices and also features its free repair
guarantee on installation for as long as buyers own their homes. The Company
also receives cooperative advertising contributions, of up to 50% of the cost of
qualifying advertisements depending on the amount of the relevant products sold,
from mills and yarn companies by including in its advertising references to
brand name yarns (such as DuPont, Monsanto and Allied) or floor coverings (such
as Congoleum). The Company has located its main store on a centrally located,
heavily traveled street.
Training
The Company strives to develop the technical and sales skills of its
store personnel to ensure that customers consistently receive knowledgeable and
courteous assistance. The Company's training programs are oriented toward
emphasizing the importance of customer service and improving selling skills. The
Company provides training for its entry level personnel through an in-house
training program which combines on-the-job training with formal presentations by
the Company's suppliers concerning their products. The suppliers' contributions
in this regard evidence their commitment to the sales and service efforts of the
Company. In addition, ongoing instruction is given to all sales and customer
service personnel.
Competition
The floor covering industry is highly competitive and fragmented.
According to an industry publication, the nations ten largest floor covering
retailers in terms of sales volume accounted for approximately 20% of all floor
covering sales in the United States in 1995, although none of such retailers
dominated the market. In 1996, Clark County, Nevada had approximately 110
outlets through which carpet was sold.
Companies in the floor covering industry compete mainly through their
ability to provide service and selection at reasonable prices. The Company
competes with general merchandise and discount stores, home improvement centers
and specialty retailers operating on a local, regional and national basis. The
Company believes that its chief competitors are local and regional specialty
chains as well as homebuilders' in-house design centers. Competitors include
Carpeteria, Carpets Galore, Cloud Carpets, CarpetMAX, Albright and Adams
Brothers, all of which have stores located in Las Vegas.
In addition to the local and regional specialty chains, the Company
competes with national and regional home improvement centers (such as Home Depot
and Payless Cashways) and national department stores and specialty retailers
(such as Sears and Color Tile) which have branches in Las Vegas. Many of such
regional and national competitors have substantially greater financial resources
than the Company. In addition, expansion by certain regional home improvement
center chains has led to increased price competition for certain of the
Company's products.
A significant new entrant into the retail floor covering market in the
United States is Shaw Industries, Inc., the largest domestic manufacturer of
carpeting. To date, Shaw has not entered the Las Vegas or Madison markets.
While there is intense competition among providers of floor coverings
in the Las Vegas, Nevada market, the Company has successfully competed for
customers on the basis of price, reliability and quality of product, breadth of
product line, service and the fact that the Company has been in business for 25
years.
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Employees
As of March 31, 1997, the Company employed approximately 130 persons,
divided among its accounting, administrative, buying, sales, customer service
and warehousing departments. A substantial portion of the compensation of
replacement sales personnel is commission-based. None of the Company's employees
is covered by a collective bargaining agreement. The Company believes that its
relationship with its employees is satisfactory.
Product Liability and Insurance
The sale of the Company's retail products involves some risk of product
liability claims. The Company has obtained product liability insurance in the
amount of $1.0 million per occurrence with a $2.0 million aggregate limit. The
Company has recently obtained a $4.0 million excess liability umbrella insurance
policy. There can be no assurance that the coverage limits of the Company's
insurance policy and/or any rights of indemnification and contribution that the
Company may have will offset potential claims. A successful claim against the
Company in excess of insurance coverage and not subject to indemnification could
have a material adverse effect on the Company.
Item 2. Properties
- ------------------
The Company rents the property on which its principal Las Vegas
operating facility is located at an annual rent of approximately $100,000. See
"Certain Transactions." On such 44,000 square foot property the Company has
located three contiguous warehouses, a retail facility and administrative
offices. The Company has leased two additional facilities in Las Vegas,
consisting of a retail facility and the design center, containing a total of
9,446 square feet at an annual rental of $111,610.
Prior to June 2, 1995, the Company maintained its business office at
134 West 72nd Street, New York, New York, using these offices on a rent-free
basis. The Company has changed its principal executive offices within New York,
New York to 100 Maiden Lane. These offices are also used on a rent-free basis.
Item 3. Legal Proceedings
- -------------------------
Nevada Department of Employment, Training and Rehabilitation
Determination
On September 5, 1996, the Nevada Department of Employment, Training and
Rehabilitation notified the Company that it had made a determination that the
Company had failed to pay unemployment taxes with respect to certain floor
covering installers. The Company appealed the decision and an appeals hearing
was held on February 5, 1997. The appeals referee agreed with the State of
Nevada and classified the installers as employees. The decision ordered no
retroactive tax or penalties, however, the Company will become responsible for
taxes for periods beginning April 1, 1997.
The Company believes, based in part on a prior determination by such
Department classifying the Predecessor's installers as independent contractors,
that these installers are not employees of the Company and the Company is not
subject to these payments. Many, though not all, of the Company's competitors
also treat carpet installers working under similar arrangements as independent
contractors. The Company will continue to vigorously defend its position and
intends to appeal the above decision to the Board of Review on or before the
expiration of its term of appeal. A more substantial cost would be incurred by
the Company if the installers were to be regarded as employees of the Company
for Federal withholding purposes. To date, there has been no indication that the
Federal government intends to require the Company to treat these carpet
installers as employees of the Company. However, there can be no assurance that
the Federal government will not pursue such action in the future. The amount of
any potential liability is unknown but the Company along with counsel believes
that any adverse outcome will not be material.
8
<PAGE>
Termination of Mark Szporka
The employment of Mark Szporka, as the Company's Chief Financial
Officer, was terminated by the Company in August 1996. In connection with such
termination and pursuant to the terms of Mr. Szporka's employment agreement, the
Company has repurchased 581,000 shares of Common Stock from Mr. Szporka for
$5,810. Mr. Szporka has commenced a suit against the Company alleging he was
wrongfully and unlawfully terminated. The Company believes it has meritorious
defenses to such allegations and intends to defend the matter vigorously. See
"Management-Employment Agreements."
Securities and Exchange Commission Inquiry
In a letter dated March 11, 1997, the Company received notice from the
Securities and Exchange Commission (SEC), Division of Enforcement, that an
informal inquiry was being conducted. The Company was requested to voluntarily
provide the SEC with certain documents as outlined in that letter. The SEC's
letter to the Company states that this inquiry is confidential and should not be
construed as an indication by the SEC or its staff that any violations of law
have occurred, or as a reflection upon any person, entity or security.
Management of the Company intends to fully cooperate with the SEC's
informal inquiry. No specific allegations have been made; therefore, no
conclusion can be reached as to what impact, if any, this inquiry may have on
the Company or its operations.
The Company is also subject to various legal proceedings and claims
that arise in the ordinary course of business. The Company believes that the
amount of any ultimate liability with respect to these actions in the aggregate
or individually will not materially affect the results of operations, cash flows
or financial position of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
None.
9
<PAGE>
Part II.
--------
Item 5. Market for the Registrant's Common Equity and Related Stockholder
- -------------------------------------------------------------------------
Matters.
- --------
The Common Stock has been quoted on the "electronic bulletin board"
operated by the NASD under the symbol "RAGC" since September 1995. The following
table sets forth, for the periods indicated, the high and low bid prices of the
Common Stock as reported on the "electronic bulletin board" operated by the
NASD. Such over-the-counter quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not necessarily represent actual
transactions.
-----------------------
High Low
---------- ----------
Fiscal Year 1997:
First Quarter $ 3.38 $ 1.00
Second Quarter (through April 15, 1997) 3.00 1.00
Fiscal Year 1996:
First Quarter 5.25 4.00
Second Quarter 5.25 3.00
Third Quarter 3.75 2.25
Fourth Quarter 3.75 2.25
Fiscal Year 1995:
Third Quarter 3.00 3.00
Fourth Quarter 4.75 3.00
As of March 11, 1997, there were approximately 369 record holders of
the Common Stock. The last sale price of the Common Stock on April 7, 1997 was
$1.00 per share as reported by the Automated Confirmation Transaction Service.
10
<PAGE>
Item 6. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations
- -------------
The following discussion of the financial condition and results of
operations of the Company relates to the fiscal years ended December 31, 1996,
1995 and 1994 and should be read in conjunction with the Financial Statements
and Notes thereto included elsewhere in this Annual Report on Form 10-KSB. All
references to full years are to the applicable fiscal year of the Company. All
discussion of 1994 financial information relates to financial results of Carpet
Barn, the Predecessor Business. Discussion of information for 1995 relates to
the pro forma consolidated financial results of the Company and Carpet Barn for
that period.
Predecessor Business results have been adjusted for comparative
purposes in the following discussions. Compensation to the owner of the
Predecessor Business has been adjusted as the former owner is not involved in
the Company's operations and has been replaced by individuals with employment
agreements at salaries considerably less than the former owner's compensation
level. Foreign currency contract losses have also been removed from the
discussion of results from operations as the Predecessor Business speculated in
these contracts only during 1994 and had no positions at either the beginning or
end of such year. The Company is not and has no intention of being involved in
these types of speculative investments. Due to the fact that the Predecessor
Business was a Subchapter S corporation, the amount of owner's compensation
and/or dividends were directly related to personal income tax considerations.
Therefore, the amount of compensation and dividends paid each year by the
Predecessor Business to the former owner varied as his personal earnings
increased or decreased.
Results of Operations
Fiscal Years Ended December 31, 1996 (actual) and 1995 (on a pro forma
basis).
To facilitate the comparison between the years ended December 31, 1996
and 1995, the 1995 results have been adjusted on a pro forma basis assuming the
acquisitions described in Note 2 to the Financial Statements had occurred on
January 1, 1995.
<TABLE>
<CAPTION>
Predecessor
Business Ragar, Corp. Pro Forma Ragar Corp.
January 1, 1995 June 2, 1995 to Pro Forma Year Ended Year Ended
June 1, 1995 December 31, 1995 Adjustments (1) December 31, 1995 December 31, 1996
-----------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Sales $ 16,363 $ 23,980 $ 0 $ 40,343 $ 42,414
-----------------------------------------------------------------------------------------------
Gross margin 5,018 6,017 0 11,035 11,092
Selling, general and
administrative 1,280 3,229 42 (a) 4,551 7,469
Amortization and
depreciation 14 666 429 (b) 1,109 1,223
-----------------------------------------------------------------------------------------------
Operating income 3,724 2,122 (471) 5,375 2,400
Other income (expense) 13 (1,365) (989)(c) (2,341) (1,459)
Income taxes 0 261 771 (d) 1,032 328
Dividends to preferred
stockholders of subsidiary 0 203 136 (e) 339 538
-----------------------------------------------------------------------------------------------
Net income 3,737 293 (2,367) 1,663 75
===============================================================================================
</TABLE>
(1) The pro forma adjustments reflect the following additional expenses that
would have been incurred had the Acquisition taken place on January 1, 1995: (a)
related party rent expense of $42; (b) amortization and depreciation of $429 ;
(c) interest expense of $989; (d) corporate income taxes of $771 computed at an
assumed rate of 34%; and (e) minority interest in preferred stock of $136. No
compensation was received by the owner of the Predecessor Business
11
<PAGE>
for the period January 1 to June 1, 1995. The pro forma adjustments for income
taxes takes into account that the Predecessor Business was a Subchapter S
corporation for income tax reporting purposes.
Total revenues increased by $2,071,758 to $42,414,364 for the year
ended December 31, 1996 from $40,342,606 for the year ended December 31, 1995,
representing an increase of 5.1%. This increase is attributable primarily to an
increase in New Housing Division sales for fiscal 1996 compared to fiscal 1995
and to a lesser extent, the increase in contract prices to new home buyers.
During 1996, it is estimated that new home unit sales volume increased by
approximately 8.6% in the Las Vegas market place. These increases were offset by
a decrease in Replacement Sales Division due to increased competition in the Las
Vegas market.
The gross margin increased by $56,680 to $11,092,440 for the year ended
December 31, 1996 from $11,035,760 for the year ended December 31, 1995,
representing an increase of 0.5%. However, the gross margin percentage declined
from 27.4% in 1995 to 26.1% in 1996. This decline in gross margin percentage
reflects the fact that increased revenues resulted primarily from an increase in
New Housing Division sales, which generally have a lower gross margin than
replacement sales. This is offset by increase in contract prices to new home
buyers implemented by the Company, and which began to take effect in April 1996,
offset by price increases from the Company's vendors.
Selling, general and administrative expenses increased by $2,918,299 to
$7,469,568 for the year ended December 31, 1996 from $4,551,269 for the year
ended December 31, 1995. This increase is due to the following approximate
changes: (1) increases in salaries and related payroll taxes of $1,617,000, due
primarily to an increase in the number of employees, (2) an increase in
promotion and travel and entertainment expenses of $130,000, (3) professional
expenses associated with the annual audit and required public filings of
$174,000, (4) an increase in advertising expense of $258,000, (5) an increase in
insurance expenses of $122,000, (6) an increase in bad debt expenses of $352,000
($275,000 of this increase was recorded in the fourth quarter which decreased
net income by approximately $182,000 or $0.05 per share) and (7) an increase in
rent expense of $139,000 primarily due to the opening of the new home design
center and an additional retail location.
Amortization and depreciation expense increased from $1,109,000 in 1995
to $1,223,000 in 1996, primarily due to increased depreciation expense on
equipment purchases in 1995 and 1996.
Operating income decreased by $2,975,430 to $2,399,582 for the year
ended December 31, 1996 from $5,375,012 for the year ended December 31, 1995.
Interest expense decreased from $2,341,000 in 1995 to $1,459,000 in 1996, due to
principal payments made on debt obligations. Dividends to preferred stockholders
of subsidiary increased from $339,000 in 1995 to $358,000 in 1996 due to the
Company's subsidiary CBH's issuance of additional shares of preferred stock in
late 1995 and early 1996. Net income decreased by $1,588,383 to $74,685 for the
year ended December 31, 1996 from $1,663,068 for the year ended December 31,
1995. These decreases were due principally to the above-mentioned increases in
selling, general and administrative expenses partially offset by corresponding
decreases in interest expense, dividends to preferred stockholders of subsidiary
and income taxes.
12
<PAGE>
Fiscal Years Ended December 31, 1995 and 1994 (on a pro forma basis)
To facilitate the comparison between the years ended December 31, 1995
and 1994, the results of both years have been adjusted on a pro forma basis
assuming the acquisitions described in Note 2 to the Financial Statements
occurred on January 1, 1994 and carried through the year ended December 31,
1995.
<TABLE>
<CAPTION>
Predecessor Business Pro Forma Pro Forma Pro Forma
Year Ended Adjustments (1) Year Ended Year Ended
December 31, 1994 (in thousands) December 31, 1994 December 31, 1995
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $ 42,507 $ 0 $ 42,507 $ 40,343
---------------------------------------------------------------------------------
Gross margin 10,841 0 10,841 11,035
Selling, general and
administrative 5,265 (1,930)(a) 3,335 4,551
Amortization and depreciation 28 1,081(b) 1,109 1,109
----------------------------------------------------------------------------------
Operating income 5,548 849 6,397 5,375
Other income (expense) (660) (1,681)(c) (2,341) (2,341)
Income taxes 0 1,379(d) 1,379 1,032
Dividends to preferred
stockholders of subsidiary 0 339(e) 339 339
----------------------------------------------------------------------------------
Net income 4,888 (2,550) 2,338 1,663
=================================================================================
</TABLE>
(1) The pro forma adjustments reflect the following changes to expenses that
would have been incurred had the Acquisition taken place on January 1, 1994: (a)
remove compensation of $2,030 paid to the owner of the Predecessor Business and
add related party rent expense of $100; (b) add amortization and depreciation of
$1,081; (c) other income (expense) of $2,337 reduced to eliminate the effect of
loss on the sale of securities of $656; (d) corporate income taxes of $1,379
computed at an assumed rate of 34%; and (e) add minority interest in preferred
stock of $339. The pro forma adjustments for income taxes take into account that
the Predecessor Business was a Subchapter S corporation for income tax reporting
purposes.
Total revenues decreased from $42,506,987 for the year ended December
31, 1994 to $40,342,606 for the year ended December 31, 1995, representing a
decrease of 5.1%. The decrease can be attributed to a decrease in sales in the
New Housing Division partially offset by an increase in the Replacement Sales
Division. During 1995, it is estimated that new home unit sales volume decreased
by approximately 5.6% in the Las Vegas marketplace.
Although total revenues decreased, gross margin grew from $10,841,351
in 1994 to $11,035,760 in 1995 due to an increase in the gross margin percentage
from 25.5% in 1994 to 27.4% in 1995. This increase in gross margin percentage
can be attributed to an increase in higher margin sales in the Replacement Sales
Division.
Selling, general and administrative expenses increased by $1,215,847
from $3,335,422 in 1994 to $4,551,269 in 1995. This increase is due to the
following approximate changes: (1) increases in salaries and related payroll
taxes of $288,000 due primarily to an increase in the number of employees, (2)
an increase in the modification rate for workers' compensation due to the change
in ownership on June 2, 1995 resulting in an increase of $220,000, (3)
professional fees associated with the acquisition and required public filings of
$305,000 and (4) related party payments consisting of consulting fees and rents
of $315,000.
Operating income decreased by $1,021,492 from $6,396,504 in 1994 to
$5,375,012 in 1995. Net income decreased by $674,646 from $2,337,714 in 1994 to
$1,663,068 in 1995. These decreases were due to the above-mentioned increases in
selling, general and administrative expenses, partially offset by the increase
in gross margin.
13
<PAGE>
Liquidity and Capital Resources
Cash provided by operating activities of the Company's Las Vegas
operations was $4,308,342 and $3,357,073 for the year ended December 31, 1996
and the period ended December 31, 1995 respectively. At December 31, 1996, the
Company had a working capital deficit of $(10,777,394). Included in such deficit
is $11,629,581 due to First Source under the credit agreement (the "Credit
Agreement") discussed below. The Company's growth and acquisition strategy will
require significant additional cash.
The results of operations of the Company have been impacted as a result
of the restructuring of the Company after the Acquisition. The Acquisition
resulted in amortization expense and interest expense of approximately $85,000
and $198,000 per month, respectively. Subsequent to payment of the Company's
subordinated debt in April 1996 as described below, interest expense has
averaged $113,000 per month. Prior to the Acquisition, the Predecessor Business
had a positive tangible net worth in contrast to the Company, which has had a
negative tangible net worth due to the increase in intangibles and debt
resulting from the Acquisition. The Company is highly leveraged and is subject
to the risks associated with a highly leveraged Company. The Company's ratio of
indebtedness for borrowed money to stockholders equity at December 31, 1996 was
3.4:1.
On January 16, 1997, the Company filed with the Securities and Exchange
Commission a Registration Statement on Form S-1 with respect to a proposed
offering of common stock of Nations Flooring, Inc. ("Public Offering"). This
Registration Statement has not yet been declared effective. These securities may
not be sold nor may offers to buy be accepted prior to the time the Registration
Statement becomes effective. This Annual Report on Form 10-KSB shall not
constitute an offer to sell or the solicitation of an offer to by nor shall
there be any sale of these securities in any State in which such offer,
solicitation, or sale would be unlawful prior to registration or qualification
under the securities laws of any such State. These securities will be sold for
the account of Nations Flooring, Inc. and the managing underwriter of such
offering is Chatfield Dean & Co. A prospectus relating to such offering of
Nations Flooring, Inc. common stock may be obtained from the Company at its
offices set forth on the cover page of this Annual Report. If the Company is
unable to complete the Public Offering, it intends to pursue other financing
alternatives available to it.
In June 1995, in order to consummate its acquisition of Carpet Barn,
the Company, through its indirect subsidiary CBI, entered into the Credit
Agreement with First Source (the "Financing"), pursuant to which First Source
advanced to CBI approximately $15,200,000 in term and revolving loans, and CBH
pledged to First Source all of the common stock of CBI to secure CBI's
obligations under the Credit Agreement and CBH guaranteed CBI's debt obligations
to First Source under the Credit Agreement. Fees and expenses paid to First
Source amounted to $402,000, in addition to incurring other acquisition fees of
$510,619. The Credit Agreement contains covenants that limit CBI's ability to
upstream monies to CBH needed to pay principal and interest on the $1,940,000
aggregate principal amount of its 12% subordinated notes (which were retired at
par on May 1, 1996) issued by CBH in connection with the Acquisition (the
"Notes") and to pay dividends on the preferred stock, par value $.01 per share,
stated value $1,000 per share (the "CBH Preferred Stock"), of CBH. The term
portion of the Credit Agreement is due May 31, 1999 and the revolving portion is
due May 31, 1997, subject to extension in certain circumstances to May 31, 1999.
All borrowings under the Credit Agreement bear interest at the base rate per
annum announced from time to time by The First National Bank of Chicago (8.50%
at March 26, 1997) plus 2.25% per annum (currently 10.75% per annum), payable
monthly. As of March 10, 1997, the Company had borrowed approximately
$2,630,000, leaving approximately $370,000 available from First Source under a
$3,000,000 working capital note and had no availability from First Source under
a $14,000,000 revolving note that had an outstanding balance and commitment of
$7,875,000. The Company received unsecured advances from unrelated parties
totaling $534,000 during February 1997, which enabled it to make the principal
payment of $875,000, due to First Source on February 28, 1997. These advances
bear interest at the rate of 12% per annum, payable monthly. Additionally, if
the advance is repaid within three months of the date of the advance, the lender
will receive 40% of the dollar amount of the advance in shares of common stock
of the Company. This amount increases by 20% for each additional three month
period the advance is outstanding, capping at 100% if the advance is not repaid
within 9 months. The value of the shares of common stock of the Company issued
to satisfy this obligation will be based on the average bid price of the stock
for the thirty day period prior to the payment date.
14
<PAGE>
The Credit Agreement contains covenants requiring CBI to maintain
minimum levels of tangible net worth, working capital and various ratios. During
the period from June 2, 1995 (commencement of operations) through December 31,
1996 the Company has failed to meet the following financial covenants: (1)
adjusted net worth at June 30, 1995, (2) quarterly and annual interest coverage
ratios through December 31, 1995, 3) and substantially all of the financial
covenants for the year ending December 31, 1996. On April 15, 1996 First Source
waived, through June 1, 1996, the covenant violations occurring prior to such
time and agreed to negotiate in good faith to amend such covenants by June 1,
1996 so that the Company could reasonably expect to be in compliance with the
amended covenants based on its operating and cash flow budgets. In connection
with obtaining the waiver the Company agreed to limit certain payments,
including principal payments of CBH's subordinated debt, with the exception that
such payments could be made from the proceeds of newly acquired capital, if any.
Payments of the CBH preferred stock dividends have been made by Branin on behalf
of the Company in the amount of $46,600 per month. Consequently, as of March 31,
1997, the Company was obligated to Branin in the amount of approximately
$559,000. Because the Company and Branin anticipates repayment of these advances
in the near future, no stated interest rate exists on these advances and no
interest has been imputed.
The Company had certain discussions with First Source in an effort to
amend such covenants but was unable to reach an agreement with First Source. The
discussions are not continuing at present, and the Company believes that the
covenants are not likely to be amended. Moreover, the waiver period has not been
extended beyond June 1, 1996, and, therefore, the Company has been in violation
of the covenants since June 1, 1996. To date, First Source has allowed the
Company to borrow up to the full capacity under the original terms of the Credit
Agreement, and the Company has received no indication from that it intends to
exercise its right under the Credit Agreement to accelerate the maturity of the
debt. Because First Source has maintained its right to accelerate the maturity
of the debt due to the covenant violations, the Company has classified the debt
as current on the December 31, 1996 consolidated balance sheet.
If First Source chooses to accelerate the maturity of the debt or if
the Company were to obtain alternate financing certain unamortized debt
acquisition costs classified as intangible assets would be charged to expense.
Such unamortized debt acquisition costs totaled $508,125 at December 31, 1996.
Additionally, the Credit Agreement contains a prepayment penalty clause
requiring the Company to pay up to 2% of the then applicable revolving loan
commitment, as defined in the Credit Agreement, if the Company chooses to
terminate the Credit Agreement prior to May 31, 1999.
The Company is currently exploring other financing options which are
available to it. On February 19, 1997, the Company's subsidiary, Carpet Barn,
Inc., signed a commitment letter for a $12,500,000 credit facility with Finova
Capital Corporation. The credit facility would include a revolving line of
credit in the amount $5.5 million secured by eligible accounts receivable and
inventory. The credit facility also would include a term loan portion of $7.0
million due in three years, amortized on a five year straight line basis. The
revolving line of credit would bear interest at Citibank N.A.'s reference rate
(currently 8.50%) plus 1.0% per annum and the term loan would bear interest at
such reference rate plus 2.0% per annum. In addition, the credit facility would
be secured by CBI's present and future tangible and intangible assets and would
include a pledging of the stock of CBI and guarantees by CBH and Ragar. The
commitment expires on April 30, 1997 and is conditioned upon the negotiation and
execution of the customary documentation and the completion of the Public
Offering. The loan agreement will contain customary representations, warranties,
events of default and remedies. If the Company is able to complete the Public
Offering and obtain the credit facility, the proceeds will be used to repay all
borrowings under the First Source credit agreement, to redeem all or a
significant portion of the CBH preferred stock, and to repay all amounts owed to
Branin. Any remaining proceeds will be available for general corporate purposes,
including acquisitions. If the Company is unable to fulfill the conditions of
obtaining this credit facility, it will continue to explore financing
alternatives available to it.
During the year ended December 31, 1996, cash used in investing
activities was $558,593. Cash used in financing activities during such period
was $4,107,975, used primarily to make principal payments on the Credit
Agreement and to retire the Notes, offset by proceeds received from the issuance
of additional shares of common stock of the Company and preferred shares of CBH.
Immediately prior to the consummation of the Exchange and the
Financing, CBH privately sold an aggregate principal amount of $1,940,000 of its
12% subordinated notes (the "Subordinated Notes") in a private placement (the
"Note Offering"), together with shares of CBH Common Stock, raising $1,940,000,
and privately sold an aggregate of
15
<PAGE>
2,715 shares of CBH Preferred Stock (the "Preferred Stock Offering"), together
with shares of CBH Common Stock, of which 2,215 shares of CBH preferred stock
were sold for an aggregate of $2,215,000 cash proceeds and of which 500 shares
were issued in exchange for services rendered in connection with the
acquisition. The Subordinated Notes bore interest at 12% per annum payable
monthly. The first half of the principal due on November 30, 1995 was satisfied
by the Company making principal payments of $560,000 and the exchange of
$820,000 of the Notes for 820 shares of 12% CBH Preferred Stock, together with
shares of Common Stock. In addition, $1,125,000 was raised in connection with
the sale of 1,125 shares of such 12% CBH Preferred Stock, together with shares
of Common Stock ($605,000 of which was raised in November 1995 and $520,000 of
which was raised in May 1996). The proceeds were used to make principal payments
on the Subordinated Notes in November 1995 and May 1996. In connection with the
issuance of the 12% CBH Preferred Stock and Subordinated Notes, the Company
issued 2,750,444 shares of Common Stock. The CBH Preferred Stock pays cumulative
dividends, payable monthly, at an annual rate of 12% of the stated value thereof
and is redeemable upon completion of the Public Offering by the Company.
CBH contributed the monies it raised in the Note Offering and the
Preferred Stock Offering to CBI in order for CBI to complete the Acquisition. In
connection with the Preferred Stock Offering and the Financing, a finder's fee
of $445,000 was paid to Michael H. Mindlin, a director of the Company. Branin,
which beneficially owns 1,252,412 shares of Common Stock of the Company and
which is controlled by Philip A. Herman, Chairman, President and a stockholder
of the Company, will be entitled to receive a fee equal to 3% of the aggregate
proceeds from the Note Offering, the Preferred Stock Offering and the Credit
Agreement upon the consummation of the Public Offering. The total of such fees
would be approximately $650,000. Branin has agreed to waive such fee in exchange
for increasing its management consulting fee discussed in the next two sentences
to $20,000 per month, effective upon completion of the Public Offering. In
addition, CBI entered into consulting arrangements with (a) Branin, pursuant to
which CBI paid $35,000 per month to Branin and (b) PAH Marketing, Inc. ("PAH"),
a company controlled by Philip A. Herman, pursuant to which CBI paid $5,000 per
month to PAH. As of March 31, 1997, CBI owed Branin and PAH approximately $1,000
in respect of these obligations. These arrangements were modified as of
September 1, 1996 to provide for payments to Branin of $10,000 per month and to
discontinue payments to PAH. In addition, CBI entered into a consulting
agreement with Capital Vision Group, Inc. ("Capital"), a company controlled by
Lawrence Fleischman, a former director and stockholder of the Company, pursuant
to which it paid $5,000 per month to Capital from June 1995 through January
1996. These agreements were entered into for the purpose of receiving management
advisory services in the areas of operations management, financing and
acquisitions. See "Management," "Certain Transactions" and "Principal
Stockholders and Holdings of Management."
Immediately following the Exchange, the Company contributed to CBH
approximately $860,000 in cash, net of expenses (constituting substantially all
of its net assets). CBH, in turn, contributed such cash to CBI in order for CBI
to complete the Acquisition (together with funds provided to it in the Financing
and funds provided to it by CBH from funds raised in the Note Offering and the
Preferred Stock Offering). In connection with the Exchange, the Company agreed
to issue to designees of Gro-Vest Management Consultants, Inc. ("G-V") an
aggregate of 145,252 shares of Common Stock (constituting 1% of the outstanding
shares of Common Stock of the Company) as an advisory fee for G-V's role in
facilitating the consummation of the Exchange, conditioned on G-V's obtaining,
by July 31, 1995, lock-up agreements limiting sales of Common Stock by the
holders of at least 75% of the 1,000,000 shares of outstanding Common Stock
subject to registration rights granted to such holders on September 23, 1994 in
a private offering. The requisite lock-up agreements were obtained but have
since expired.
The Company opened two new locations in Las Vegas during 1996. The
initial capital costs for these two locations were provided in full by the
Company's suppliers in exchange for agreements by the Company to feature the
suppliers' products at these facilities. The Company anticipates that a
substantial portion of the capital requirements for any new locations will be
funded by its suppliers, although there can be no assurance that the Company
will be able to effect such an arrangement. Primarily because of the larger
store size and significant inventory commitment, the investment required to open
"big-box" facilities will be substantially greater than the investment required
to open the two new Las Vegas facilities. While the Company anticipates that a
portion of the costs will be funded by the suppliers, a significant portion of
such costs will be borne by the Company. Moreover, these new facilities will
require additional resources until they become profitable, and there can be no
assurance as to the amount of time required before they can become profitable,
if ever.
16
<PAGE>
As of February 25, 1997, the Company entered into a letter of intent
(the "Letter of Intent"), pursuant to which it may purchase the assets of Nonn's
Flooring, Inc. ("Nonn's"), a floorcovering retailer with 2 stores located in the
Madison, Wisconsin area, for a purchase price of $3,000,000 in cash, subject to
adjustment under certain circumstances (the "Purchase"). The Purchase is subject
to the negotiation and execution of a definitive agreement and to the Company's
satisfactory completion of its due diligence investigation. The Letter of Intent
contemplates that upon completion of the Purchase, employment agreements will be
entered into between the Company and Ken Nonn and Janet Meier, who are both
executive officers of Nonn's. The description contained herein is qualified in
its entirety by the complete text of the Letter of Intent, which is annexed
hereto as Exhibit 10.16 and incorporated herein by reference. The Company's
ability to complete the Purchase is dependent on its completion of the Public
Offering and the consummation of the financing contemplated by the February 19,
1997 commitment letter with Finova Capital Corporation or the consummation of
alternative financing arrangements that will provide sufficient cash resources
to enable the Company to repay the borrowings under the First Source Credit
Agreement and to pay the cash price of the Purchase.
The Company believes that cash flow generated by operations has been
sufficient for the Company's working capital needs for 1996, and upon
consummation of the Public Offering and refinancing of the First Source debt, is
likely to be sufficient for the Company's working capital needs during 1997.
Cash flow from operations should be sufficient to cover operating expenses and
should be maintained or enhanced by the Company utilizing its business
strategies. However, the Company's growth and acquisition strategy will require
substantial cash for capital costs. See "Business-Strategy."
Effect of Accounting Pronouncements Issued but not Yet Adopted
Earnings per Share
Effective for financial statements issued after December 15, 1997, the
Company will be required to implement FASB Statement No. 128, Earnings per
Share. The Statement establishes standards for computing and presenting earnings
per share (EPS) and applies to entities with publicly held common stock or
potential common stock. It replaces the presentation of basic EPS and also
requires dual presentation of basic and diluted EPS on the face of the income
statement for all entities with complex capital structures. The Company has not
determined what effect, if any, this new pronouncement will have on the
Company's EPS presentation.
Inflation
The Company believes that its revenues are not materially affected by
inflation and that any increased expenses due to inflationary pressures will be
offset, over time, by corresponding increases in prices it charges to its
customers.
17
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Part III.
---------
Item 9. Directors and Executive Officers of the Registrant
- ----------------------------------------------------------
The following table sets forth certain information with respect to the
directors and executive officers of the Company. The Company's prospects are
also substantially dependent on certain key employees. See "-Key Employees."
Name Age Position
---- --- --------
Philip A. Herman 51 Chairman of the Board and President
Gary Peiffer 46 Secretary and Director
Michael Mindlin 55 Director
Facundo Bacardi 51 Director
William Poccia 51 Chief Financial Officer
The number of directors on the Board is presently fixed at five.
Philip A. Herman has been Chairman of the Board and President of the
Company since June 2, 1995, the date of consummation of the Exchange and the
Acquisition. Mr. Herman is also sole Voting Trustee of the voting trust that
holds a majority of the Company's outstanding shares of common stock. See
"Principal Stockholders and Holdings of Management." He also has served as a
principal of Branin since 1994. From 1992 to 1994, Mr. Herman served as a
principal of Americorp Securities, Inc. ("Americorp"), a retail brokerage firm,
and from 1989 to 1992 he served as principal of PAH Marketing Consultants Inc.,
a consulting firm. In January 1995, Mr. Herman and PAH entered into a consent
decree, without admitting any violation of law, with the Federal Trade
Commission ("FTC") pursuant to which Mr. Herman and PAH paid $40,000 to the FTC
and consented to being enjoined from participating in certain telemarketing
related activities.
Gary Peiffer has been Secretary and a director of the Company since
June 2, 1995. Mr. Peiffer has served as Vice Chairman of the Board, General
Counsel and a director of The Aegis Consumer Funding Group, Inc. ("Aegis"), a
publicly-traded automobile finance company since January 1994. Prior to joining
Aegis, Mr. Peiffer was a senior partner at the law firm of Jeffer, Hopkinson,
Vogel, Coomber & Peiffer from January 1983 through December 1993.
Michael Mindlin has been a director of the Company since June 2, 1995.
From 1992 to February 1997. Mr. Mindlin served as President of Americorp. Prior
to that time, Mr. Mindlin served as Chief Operating Officer of Aegis.
Facundo Bacardi has been a director of the Company since June 2, 1995.
He also serves as a director of Suramericana de Inversiones, S.A., an investment
company located in Panama, and has served in that capacity since 1990. Mr.
Bacardi is also an heir to the controllers of the Bacardi rum company, a
worldwide manufacturer and one of the largest family-owned companies in the
world. He is currently an advisor to the Board of Directors for Bacardi
International, the holding company for all of the Bacardi companies worldwide.
From 1979 to 1991, Mr. Bacardi was in charge of the manufacturing and
distribution division for Central America.
William Poccia has been Chief Financial Officer of the Company since
August 6, 1996. From October 1995 to August 1996, Mr. Poccia served as a
financial consultant to the Company in the employ of Branin. Prior to that time,
Mr. Poccia served as Director of Audit for Participants Trust Company, a
securities depository for mortgage-backed securities.
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<PAGE>
Item 10. Executive Compensation
Summary Compensation Table
The following table sets forth for the fiscal year ended
December 31, 1996, the compensation for services in all capacities to
the Company of the person who was at December 31, 1996 the President of
the Company. No executive officers of the Company received salary and
bonus in excess of $100,000 during the fiscal year ended December 31,
1996, 1995 and 1994.
Annual Compensation
---------------------------------------
Other Annual
Salary $ Bonus $ Compensation $ (1)
-------- ------- ------------------
Philip A. Herman 0 0 0
Chairman of the Board and President
(1) Certain entities controlled by Mr. Herman received fees from the
Company for the year ended December 31, 1996 and for the period ended
December 31, 1995, as set forth herein under "Certain Transactions" and
in "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Executive Compensation
Compensation. Prior to the Exchange, no officer or director of
the Company received remuneration from the Company. Directors do not
currently receive fees or other remuneration from the Company. The
Company is currently contemplating entering into an employment
agreement with Mr. Herman pursuant to which Mr. Herman will initially
receive no base salary but may receive bonuses and may be granted a
base salary in the future, within the discretion of the Board of
Directors. William Poccia, Chief Financial Officer of the Company, is
being remunerated by the Company at the rate of $100,000 per year.
Bonus Plan. In June 1995, the Company initiated a Management
Bonus Program (the "Bonus Plan") pursuant to which the Company could
make available for bonuses to certain members of management of the
Company (including Steven Chesin and Jeffrey Wiens) an aggregate amount
equal to 2% of the Earnings Before Income Taxes (as defined below) of
the Company for each fiscal year, with the Company's management to have
the right to determine how such bonus amount would be allocated among
its members. If all of the members of the Company's management issued a
written statement recommending allocation, the bonus would be allocated
as such; and if no written statement was issued, the President of the
Company could allocate the bonus in his discretion. "Earnings Before
Income Taxes" meant earnings before income taxes of the Company for the
relevant fiscal year. There were no bonuses paid in 1995 or 1996. The
Bonus Plan was terminated in October 1996. Those officers eligible for
bonuses under the Bonus Plan will be eligible to participate in the
Option Plan.
Employment Agreements
Mark Szporka. Pursuant to a five-year employment agreement,
dated as of June 2, 1995, Mr. Szporka was employed as the Company's
Chief Financial Officer at an annual salary of $120,000 per year,
subject to annual pay increases at the Company's discretion. This
employment was terminated for cause by the Company by letter dated
August 5, 1996. Pursuant to his employment agreement, Mr. Szporka was
entitled to participate in the Bonus Plan as a member of "management"
for any fiscal year during which he had been employed for at least six
months. Mr. Szporka's termination and severance provisions were
comparable to those for Mr. Chesin. In addition, Mr. Szporka, under the
terms of his employment agreement, purchased at $0.001 per share
290,500 shares of Common Stock on June 1, 1995. The difference between
the amount paid and market value of the shares was recognized as
additional acquisition costs. Also, pursuant to the employment
agreement, 581,000 shares of Common Stock ("Escrow Shares") were
deposited into an escrow account on June 1, 1995. All dividends on and
voting rights of the Escrow Shares belonged to the Company until such
time as the Escrow Shares would be released from escrow. Upon the first
anniversary of
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Mr. Szporka's employment and each of the following four such
anniversaries, 116,200 of the Escrow Shares were to be released to Mr.
Szporka together with all rights and privileges thereto. In the event
the Company did not meet certain operating goals, as described in the
employment agreement, the Company had the right to repurchase those
shares at $.01 per share. As of December 31, 1995, Mr. Szporka's right
to receive 68,120 of the Escrow Shares was canceled because the
Company did not meet certain operating goals described in the
employment agreement during the operating period then ended. As a
result of the Company's termination of Mr. Szporka's employment for
cause, it repurchased the 581,000 Escrow Shares from Mr. Szporka for
$.01 per share. Such repurchase was effected in October 1996.
On September 11, 1996, Mr. Szporka sued the Company and its
subsidiaries and the Company's directors in District Court in Clark
County, Nevada alleging that his employment agreement was wrongfully
terminated, that the Company violated duties of good faith and fair
dealing with him and that he was tortuously discharged. He seeks
unspecified compensatory damages in excess of $10,000, punitive
damages, injunctive and declaratory relief, attorney's fees and costs
and such other relief as the court deems just and equitable. The
Company believes that it has meritorious defenses and intends to
vigorously pursue them. Moreover, the Company is considering whether
it has counterclaims against Mr. Szporka.
Key Employees
The Company believes that the following employees of the
Company are of special value to the Company's existing floor covering
business and to the implementation of its growth strategy.
Steven Chesin has been Senior Vice President and Chief
Operating Officer of Carpet Barn, Inc. since July 28, 1995. Prior to
joining the Company, Mr. Chesin served as President of Steve's Floor
Covering, Inc., a carpet installer, from its founding in 1977, when Mr.
Chesin was only 15 years old, to the Company's acquisition of Steve's
in July 1995.
Pursuant to an employment agreement, dated as of July 28,
1995, between Mr. Chesin and the Company, Mr. Chesin is serving as
Senior Vice President and Chief Operating Officer of Carpet Barn for a
three-year period, with successive one-year automatic extensions to his
employment unless either party gives the other at least 90 days' notice
of termination prior to the end of any term. His current salary has
been increased to $125,000 per year from its initial $75,000 level and
is subject to annual pay increases at the Company's discretion. Mr.
Chesin was eligible to participate in the Bonus Plan until its
termination in October 1996. Mr. Chesin's employment is terminable for
cause which includes the Company's failure (a "Target Failure") to
achieve net income equal to or greater than (a) 75% of the projected
net income for any fiscal quarter or (b) 85% of the projected net
income for any two consecutive fiscal quarters. Mr. Chesin will receive
two months' severance pay, plus an additional month's severance pay for
each full year of employment that has elapsed, if the agreement
terminates due to a Target Failure or Mr. Chesin's total disability.
Jeffrey Wiens has been Controller of the Company since July
1995. From 1988 to July 1995, Mr. Wiens served in various capacities,
principally in the Minneapolis, Minnesota office of McGladrey & Pullen,
LLP, the Company's independent auditors, including serving as a member
of the audit staff from 1988 to July 1994 and as Manager from August
1994 to July 1995. Pursuant to an employment agreement, dated as of
July 5, 1995, the Company has employed Mr. Wiens as its Controller for
a two-year period, with successive one-year automatic extensions of his
employment unless either party gives the other at least 90 days' notice
of termination prior to the end of any term. Pursuant to the agreement,
Mr. Wiens' salary has been increased to $75,000 per year from its
initial $50,000 level and is subject to annual pay increases at the
Company's discretion. Until its termination, Mr. Wiens was entitled to
participate in the Bonus Plan.
Alan Ember has extensive experience in the floor covering
industry and was recently hired by the Company to develop retail
facilities in Phoenix and other markets in the southwestern United
States. Mr. Ember's responsibilities includes merchandising, marketing,
advertising, sales training and program development. From September,
1994 until he was hired by the Company, Mr. Ember was the Divisional
President of CarpetMAX in Phoenix, Arizona and was responsible for the
entire operation of that division. Prior to that, from November 1993,
Mr. Ember was the General Manager for Carpeteria in Tucson. From March
1993, Mr. Ember served as General Manager for Broadway Carpet, also in
Tucson. From September 1992, he was the carpet division and advertising
manager for Tile City in Pittsburgh,
20
<PAGE>
Pennsylvania. Prior to that, Mr. Ember was the General Manager for
Apollo Carpet in Tucson, Arizona.
Pursuant to an employment agreement dated May 28, 1996 between
Mr. Ember and the Company, Mr. Ember is serving as Senior Vice
President of Carpet Barn for a three-year period with successive
one-year automatic extensions unless either party gives the other at
least 90 days notice of termination prior to the end of any term. His
current salary is $125,000 per year plus a bonus of 25% of Earnings
Before Interest and Taxes, as defined in the employment agreement
("EBIT"), for the entity managed by Mr. Ember, payable in Common Stock
of the Company 15 days after the Company's financial statements are
finalized. Mr. Ember's employment is terminable for cause, which
includes the failure (a "Target Failure") to achieve EBIT equal to or
greater than (a) 75% of the projected EBIT in any fiscal quarter, or
(b) 85% of the projected EBIT for any two consecutive fiscal quarters,
in each case for the entity managed by Mr. Ember. Mr. Ember will
receive two months severance pay, plus one additional month severance
pay for each full year of employment, if the agreement terminates due
to a Target Failure or Mr. Ember's total disability.
Judy Hightower has been the design services manager at Carpet
Barn, Inc. since joining the Company in October 1995. Ms. Hightower
established the Company's first window and wallcovering division and
was also responsible for designing, implementing and opening the
Company's new design center and retail facility in Las Vegas. From 1991
until she joined the Company, Ms. Hightower provided similar design
services to several large home builders in the Las Vegas area.
Robert Smith has extensive experience in operating and
managing floor covering warehouses and distribution centers and was
hired by the Company to manage and operate its warehouses and the
distribution of its products in the Las Vegas market. From January 1995
until he joined the Company in June 1996, Mr Smith was the Director of
Broadloom Installation for Giant Carpet in Moonachie, New Jersey, where
he supervised and coordinated the installation of carpeting for
thirty-eight retail stores. Prior to that, from March 1991, Mr. Smith
was the Terminal Manager and Operations Consultant for Apex Express,
Inc., located in New York, New York. In that capacity, Mr. Smith
managed the warehousing, delivery and assembly of office furniture and
exercise equipment and designed and implemented delivery and in-house
assembly programs for United Stationers in Edison, New Jersey.
1997 Stock Option Plan
The Company adopted the 1997 Stock Option Plan (the "Option
Plan") on February 26, 1997, in order to provide an incentive to
non-employee directors and to officers and certain other key employees
of and consultants to the Company by making available to them an
opportunity to acquire a proprietary interest or to increase their
proprietary interest in the Company. Shareholders approved the adoption
of the Option Plan on March 19, 1997. The Option Plan provides for the
award of options (each an "Award") representing or corresponding to up
to 1,250,000 shares of common stock of Nations Flooring, Inc. after
giving effect of the merger of Ragar into Nations Flooring, Inc. Any
Award issued under the Option Plan which is forfeited, expires or
terminates prior to vesting or exercise will again be available for
Award under the Option Plan.
The Option Plan is administered by the Committee, as defined
in the Option Plan. The Committee consists of Gary Peiffer, Michael
Mindlin and Facundo Bacardi. The Committee has the full power and
authority, subject to the provisions of the Option Plan, to designate
participants, grant Awards and determine the terms of all Awards. The
Committee has the right to make adjustments with respect to Awards
granted under the Option Plan in order to prevent dilution of the
rights of any holder. Non-employee directors, including members of the
Committee are not eligible to receive discretionary Awards under the
Option Plan but automatically receive upon becoming such a director or
upon stockholder approval of the plan and each year thereafter
non-qualified stock options ("NQSO's) to purchase 10,000 shares of
common stock of Nations Flooring , Inc. at an exercise price equal to
the fair market value on the date of grant. Members of the Committee
are disinterested within the meaning of Section 16 of the Securities
Exchange Act of 1934, as amended, and outside directors within the
meaning of Section 162(m) of the Internal Revenue Code of 1986, as
amended (the "Code").
Options Issued Under the Option Plan. The terms of specific
options are determined by the Committee. Options granted may be NQSO's
or incentive stock options within the meaning of Code Section 422
("ISO's"). The exercise price per share for a non-qualified option is
subject to the determination of the Committee. Incentive stock options
may not be
21
<PAGE>
granted at less than 100% of the fair market value at the date of
grant. Each option will be exercisable for the period or periods
specified in the option agreement, which will not exceed 10 years from
the date of grant.
Upon the exercise of an option, the option holder pays to the
Company the exercise price plus the amount of the required Federal and
state withholding taxes, if any. Options may be exercised and the
withholding obligation may be paid for with cash and, with the consent
of the Committee, shares of common stock of Nations Flooring, Inc.,
other securities (including options) or other property. The period
after termination of employment during which an option may be exercised
is as determined by the Committee. In the absence of any specific
determination by the Committee, the following rules will apply. The
unexercised portion of any option granted under the Option Plan will
generally be terminated (a) 30 days after the date on which the
optionee's employment is terminated for any reason other than (i)
cause, (ii) retirement or mental or physical disability or (iii) death;
(b) immediately upon the termination of the optionee's employment for
cause; (c) three months after the date on which the optionee's
employment is terminated by reason of retirement or mental or physical
disability; or (d)(i) 12 months after the date on which the optionee's
employment is terminated by reason of the death of the employee, or
(ii) three months after the date on which the optionee shall die if
such death shall occur during the three-month period following the
termination of the optionee's employment by reason of retirement or
mental or physical disability.
No options have been granted to date under the Option Plan.
Eligible persons may receive grants under the Option Plan in the future
at the discretion of the Committee. The Committee has agreed to grant
options at the completion of the Public Offering at the offering price.
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<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information as of March 1, 1997,
regarding (i) each person known by the Company to be the beneficial owner of
more than 5% of the outstanding shares of common stock, (ii) each director,
nominee and Named Executive Officer of The Company and (iii) all officers and
directors as a group. Unless otherwise indicated the address is deemed to be
that of the Company.
Name and Address Number of Shares Owned Percentage Ownership
---------------------- --------------------
Philip A. Herman (1) 9,212,692 63.2%
c/o Branin Investments, Inc.
100 Maiden Lane
New York, NY 10038
Branin Investments, Inc. (2) 1,252,412 8.6
100 Maiden Lane
New York, NY 10038
Facundo Bacardi (3) 5,743,984 39.4
c/o Branin Investments, Inc.
100 Maiden Lane
New York, NY 10038
Icarus Investments, Ltd. (4) 3,515,416 24.1
c/o Branin Investments, Inc.
100 Maiden Lane
New York, NY 10038
Michael Mindlin (5) 576,800 4.0
Gary Peiffer (6) 139,852 *
William Poccia 0 *
All Directors and Executive 9,212,692 63.2
Officers as group (5 persons)
--------------------------------------------------------------
* Less than one percent
(1) Includes an aggregate of 9,212,692 shares issued to Mr. Herman as
voting trustee pursuant to a Voting Trust Agreement, dated May 30,
1995, among Mr. Herman and certain stockholders of the Company, which
shares Mr. Herman is deemed to beneficially own. 290,000 of such shares
are held in the voting trust for benefit of Mr. Herman and 1,252,412 of
such shares are held in the voting trust for benefit of Branin, of
which Mr. Herman is a principal. Excludes 2,904 shares held by each of
Richard and Ruth Herman and 62,460 shares held by David Herman, all
members of the immediate family of Mr. Herman. Mr. Herman disclaims
beneficial ownership of the shares held by such family members.
(2) Excludes 290,000 shares held through the voting trust referenced
in note 1, above, for the benefit of Mr. Herman.
(3) Includes an aggregate of 4,872,484 shares held by various
affiliates of Mr. Bacardi (including 3,515,416 shares held by Icarus
Investments Ltd., 305,024 shares held by each of Stylish Investments
Ltd. and Delphic Investments Ltd., and 747,020 shares held by Designed
Investments Ltd.). All of such shares are held in the voting trust
referred to in note 1, above.
(4) Excludes shares held by Mr. Bacardi and his other affiliates. Mr.
Bacardi has sole voting and dispositive power with respect to the
shares of Common Stock owned by this entity. All of such shares are
held in the voting trust referred to in note 1, above.
(5) Includes 576,800 shares held by Mr. Mindlin's spouse, as to which
he disclaims beneficial ownership. All of such shares are held in the
voting trust referred to in note 1, above.
(6) All of such shares are held in the voting trust referred to in
note 1, above.
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<PAGE>
Item 12. Certain Relationships and Related Transactions.
Branin, a principal stockholder of the Company, acted as advisor in
connection with the Financing as well as the concurrent private offerings of
Notes and Preferred Stock of CBH. Branin acted as advisor to the Financing
between CBI and First Source and for its role became entitled to receive a fee
of 3% of the aggregate proceeds received by CBI from the Credit Agreement upon
the consummation of the Offering. On June 2, 1995, CBH completed the concurrent
offerings in the aggregate amount of $4,655,000 consisting of $1,940,000 in
Notes from the Note Offering at a per Note unit price of $200,000 and $2,715,000
from the Preferred Stock Offering consisting of 2,715 shares of Preferred Stock
at a per share price of $1,000 and a per Preferred Stock unit price of $250,000.
For each Preferred Stock unit sold, the Company issued 145,250 shares of Common
Stock, and for each Note unit sold, the Company issued 63,640 shares of Common
Stock, for an aggregate of 2,194,730 shares of Common Stock issued in such Note
Offering and Preferred Stock Offering. Branin became entitled to receive a fee
of 3% of the aggregate proceeds from the Note Offering, the Preferred Stock
Offering and the Credit Agreement upon the consummation of the Offering. Philip
A. Herman, the Chairman of the Board and President of the Company, is a
principal of Branin. The total of such fees would be approximately $650,000.
Branin has agreed to waive such fees in exchange for increasing its management
consulting fees described in the next paragraph, to $20,000 per month, effective
upon completion of the Offering. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Liquidity and Capital Resources."
In connection with the Preferred Stock Offering and the Financing, a
finder's fee of $445,000 was paid to Michael H. Mindlin, a director of the
Company. In addition, CBI entered into consulting arrangements with (a) Branin,
pursuant to which CBI was obligated to pay $35,000 per month to Branin and (b)
PAH Marketing, Inc. ("PAH"), a company controlled by Philip A. Herman, pursuant
to which CBI was obligated to pay $5,000 per month to PAH. These arrangements
were modified as of September 1, 1996 to provide for payment obligations to
Branin of $10,000 per month and to discontinue obligations to PAH. As of March
31, 1997, CBI owed Branin and PAH approximately $1,000 in respect of these
obligations. In addition, CBI entered into a consulting agreement with Capital
Vision Group, Inc. ("Capital"), a company controlled by Lawrence Fleischman, a
former director and stockholder of the Company, pursuant to which it paid $5,000
per month to Capital from June 1995 through January 1996. These agreements were
entered into for the purpose of receiving management advisory services in the
areas of operations management, financing and acquisitions. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources."
C.B. Realty, Inc. ("CB Realty"), which is owned by four stockholders of the
Company (Gary Peiffer, Michael Mindlin, Facundo Bacardi and David Herman, a son
of Philip Herman), acquired the land and building ("Property") previously owned
by the Predecessor Business, concurrently with the Company's acquisition of the
assets of the Predecessor Business. The payments made by the Company to the
owner of the Predecessor Business on June 2, 1995, included $288,000 paid on
behalf of CB Realty, for which the Company received from CB Realty a first lien
mortgage note on the property payable over three years in monthly installments
of $9,293, including interest at 10% per annum. Since the Purchase Agreement had
contemplated that CBI would acquire the Property along with the other assets of
the Predecessor Business for a fixed aggregate purchase price, all of which was
paid out of funds invested in or borrowed by the Company, and in light of the
value assigned in the Purchase Agreement of $1,100,000 to the Property, the
Company has accounted for CB Realty's purchase of the Property as if it were
paid for by (i) a loan by the Company of approximately $288,000 to CB Realty,
and (ii) a return of invested capital of approximately $812,000 to the
stockholders of CB Realty. As of May 15, 1997, the balance remaining on such
loan was $189,700. Simultaneously with its purchase of the Property, CB Realty
entered into a lease with the Company pursuant to which the Company leased the
land and building in which it conducts its principal operations for a three-year
term with annual lease payments of approximately $100,000.
On July 28, 1995, the Company purchased Steve's Floor Covering, Inc.
("Steve's"), a floor covering repairer, installer, cleaner and retailer from
Steven Chesin, the Chief Operating Officer of CBI, pursuant to an asset purchase
agreement (the "Steve's Agreement"). Under the Steve's Agreement, the Company
purchased substantially all of the assets of Steve's in exchange for
approximately $267,000. Mr. Chesin entered into an employment agreement with CBI
in connection therewith. The revenues of Steve's are not expected to have a
significant impact on the Company's results of operations. In 1994, the last
full year prior to the Company's acquisition of Steve's, Steve's had total
revenues of
24
<PAGE>
$686,480 and employed 25 people. See "Management-Employment Agreements."
In May 1996, the Company incurred a liability to Branin of $46,600 as a
result of interest and dividend payments on CBH securities made by Branin on
behalf of CBH. Further dividend payments of $46,600 per month thereafter have
been made by Branin on these securities, resulting in an obligation to Branin as
of March 31, 1997 in the approximate amount of $559,000 in respect of these
dividend payments. In May 1996, Branin paid the Company approximately $6,000 for
consulting services rendered to Branin by employees of the Company in connection
with Branin's exploration of the possibility of acquiring a large East coast
floorcovering retailer out of bankruptcy. A company controlled by an employee of
Branin also explored the possibility of acquiring a tile company based in Las
Vegas during the summer of 1996. Neither of these acquisitions was completed,
and neither of these potential transactions resulted in any net costs to the
Company, since any amounts expended, including, without limitations, advances of
approximately $76,000 to the potential acquirer of the tile company, were offset
against amounts due by the Company to Branin.
The Company's executive offices are located at 100 Maiden Lane, New York,
New York. These offices are rented by Branin, which also occupies these offices.
Branin does not charge the Company rent for this space.
25
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Item 13. Exhibits and Reports on Form 8-K
(a) Reports on Form 8-K
None
(b) Exhibits
2.1 Agreement and Plan of Exchange, dated as of June 1, 1995, among the
Company, Carpet Barn Holdings, Inc. ("CBH") and the holders of common
stock of CBH (incorporated by reference from Exhibit 1 of the
Company's Report on Form 8-K (June 2, 1995) (the "June Form 8-K").
2.2 Asset Purchase Agreement, dated as of June 1, 1995, between Carpet
Barn Acquisition Corp. ("CBAC") and Carpet Barn, Inc. ("Carpet Barn")
(incorporated by reference from Exhibit 3 of the June Form 8-K).
2.3 Amendment, dated June 1, 1995, to Asset Purchase Agreement
(incorporated by reference from Exhibit 4 of the June Form 8-K).
3.1 Certificate of Incorporation, dated July 19, 1988, of the Company
(incorporated by reference from Exhibit 3(a) of the Company's
Registration Statement on Form S-18 (33-29942-NY) filed October 20,
1989 (the "1989 Registration Statement").
3.2 By-laws of the Company (incorporated by reference from Exhibit 3(b) of
the 1989 Registration Statement).
3.3 Amended and Restated Certificate of Incorporation of CBH (incorporated
by reference from Exhibit 3.3 of the Company's Annual Report on Form
10-K for the period ended December 31, 1995 (the "Form 10-K")).
3.4 Certificate of Amendment to Amended and Restated Certificate of
Incorporation of CBH (incorporated by reference from Exhibit 3.4 of
the Form 10-K).
3.6 Certificate of Incorporation of Nations Flooring, Inc. (incorporated
by reference from Exhibit 3.6 of the Company's Registration Statement
on Form S-1 (333-19871) filed January 16, 1997 ("1997 Registration
Statement").
3.7 By-laws of Nations Flooring, Inc. (incorporated by reference from
Exhibit 3.7 of the 1997 Registration Statement).
9.1 Voting Trust Agreement, dated May 30, 1995, between Philip A. Herman
and certain shareholders of the Company (incorporated by reference
from Exhibit 2 of the June Form 8-K).
10.1 Secured Credit Agreement, dated as of June 1, 1995, between CBAC and
with First Source Financial LLP ("First Source") (incorporated by
reference from Exhibit 5 of the June Form 8-K).
10.2 Pledge Agreement, dated as of June 1, 1995, among CBH, CBAC and First
26
<PAGE>
Source (incorporated by reference from Exhibit 9 of the June Form
8-K).
10.3 Guaranty, dated as of June 1, 1995, by CBH in favor of First Source
(incorporated by reference from Exhibit 10 of the June Form 8-K).
10.4 Revolving Note, dated June 1, 1995, between CBAC and First Source
(incorporated by reference from Exhibit 6 of the June Form 8-K).
10.5 Working Capital Note, dated June 1, 1995, between CBAC and First
Source (incorporated by reference from Exhibit 7 of the June Form
8-K).
10.6 Security Agreement, dated June 1, 1995, between CBAC and First Source
(incorporated by reference from Exhibit 8 of the June Form 8-K).
10.7 Terms of preferred stock, par value $.01 per share, stated value
$1,000 per share, of CBH (incorporated by reference from Exhibit 12 of
the June Form 8-K).
10.8 Employment Agreement, dated as of July 28, 1995, between CBI and
Steven Chesin (incorporated by reference from Exhibit 1 of the
Company's Report on Form 10-Q for the quarterly period ended June 30,
1995 (the "June 1995 Form 10-Q).
10.9 Employment Agreement, dated as of June 1, 1995, between CBI and Mark
Szporka incorporated by reference from Exhibit 2 of the June 1995 Form
10-Q).
10.10 Amendment, dated June 1, 1995, to employment agreement between CBAC
and Mark Szporka (incorporated by reference from Exhibit 3 of the June
1995 Form 10-Q).
10.10.1 Amendment, dated March 6, 1996, to employment agreement between
CBAC and Mark Szporka (incorporated by reference from Exhibit 10.11 of
the Form 10-K).
10.11 Form of Promissory Note issued in the offering of short-term notes of
CBH (incorporated by reference from Exhibit 11 of the June Form 8-K).
10.12 Lease, dated June 1, 1995, between C.B. Realty of Delaware, Inc. ("CB
Realty") and CBAC (incorporated by reference from Exhibit 10.13 of the
Form 10-K).
10.13 First Amendment to Lease Agreement, dated August 1, 1995, between CB
Realty and CBAC (incorporated by reference from Exhibit 10.14 of the
Form 10-K).
10.14 Promissory Note, dated June 1, 1995 from CB Realty in favor of CBAC
(incorporated by reference from Exhibit 10.15 of the Form 10-K).
10.15 Employment Agreement, dated as of May 28, 1996, between CBI and Alan
Ember. (incorporated by reference from Exhibit 10.15 of the 1997
Registration Statement).
10.16 Letter of Intent, dated February 25, 1997, between Ragar Corp. and
Nonn's Flooring, Inc.
27
<PAGE>
RAGAR CORP.
(A New York Corporation)
CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 1996
-------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT F-2
-------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated balance sheets F-3
Consolidated statements of income F-4
Consolidated statement of stockholders' equity -
Successor Business F-5
Consolidated statement of stockholder's equity -
Predecessor Business F-6
Consolidated statements of cash flows F-7 - F-8
Notes to consolidated financial statements F-9 - F-24
-------------------------------------------------------------------------------
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Ragar Corp. (A New York Corporation)
New York, New York
We have audited the accompanying consolidated balance sheets of Ragar Corp. and
subsidiaries (Successor Business) as of December 31, 1996 and 1995, and the
related consolidated statements of income, stockholders' equity and cash flows
for the year ended December 31, 1996, and for the period from commencement of
operations (June 2, 1995) to December 31, 1995. We have also audited the
accompanying statement of income, stockholder's equity and cash flows for Carpet
Barn, Inc., a Nevada corporation (Predecessor Business), for the period from
January 1, 1995 to June 1, 1995, and for the year ended December 31, 1994. These
financial statements are the responsibility of the respective Successor and
Predecessor Companies' management. Our responsibility is to express an opinion
on the respective financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinions.
In our opinion, the Successor Business consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of Ragar Corp. and subsidiaries, as of December 31, 1996 and 1995 and
the results of their operations and their cash flows for the year ended December
31, 1996, and for the period from commencement of operations (June 2, 1995) to
December 31, 1995 in conformity with generally accepted accounting principles.
Also, in our opinion, the Predecessor Business financial statements referred to
above present fairly, in all material respects, the results of its operations
and its cash flows for the period from January 1, 1995 to June 1, 1995, and for
the year ended December 31, 1994, in conformity with generally accepted
accounting principles.
As is more fully described in Note 3 to the consolidated financial statements,
the Company has restated its 1996 and 1995 consolidated financial statements.
/s/ McGladrey & Pullen, LLP
Las Vegas, Nevada
February 19, 1997, except for Note 14 as to
which the date is March 19, 1997, and the fourth
paragraph above, as to which the date is
October 8, 1997.
F-2
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A New York Corporation)
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1996
<TABLE>
<CAPTION>
December 31, December 31,
ASSETS (Note 6) 1995 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash $ 693,356 $ 335,130
Accounts receivable, less allowance for doubtful
accounts 1995 $44,000, 1996 $347,000 (Note 8) 3,467,282 3,281,236
Due from employee - 63,104
Inventory 638,295 709,627
Current portion of related party note receivable (Note 12) 132,800 169,169
Deferred public offering costs - 155,721
Prepaid expenses and other 61,637 168,588
----------------------------------------
Total current assets 4,993,370 4,882,575
----------------------------------------
Related party note receivable, less current portion (Note 12) 146,736 45,327
Equipment and leasehold improvements (Note 4) 415,738 549,349
Intangible assets, net (Note 5) 17,976,764 16,905,761
----------------------------------------
$ 23,532,608 $ 22,383,012
========================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Note payable (Note 6) $ 1,865,604 $ 2,879,581
Subordinated notes payable (Note 7) 515,422 -
Current maturities of long-term debt (Note 6) 3,527,862 8,781,519
Accounts payable 1,799,764 2,250,206
Due to principal shareholder (Note 12) - 390,038
Accrued expenses 459,571 442,145
Customer deposits 592,496 916,480
----------------------------------------
Total current liabilities 8,760,719 15,659,969
----------------------------------------
Deferred Income Taxes (Note 9) 31,322 79,344
----------------------------------------
Long-Term Debt, less current maturities (Note 6) 8,811,558 110,815
----------------------------------------
Minority Interest: Preferred Stock of Subsidiary (Note 3) 2,759,619 3,117,274
----------------------------------------
Commitments and Contingencies (Notes 11 and 12)
Stockholders' Equity (Notes 6 and 14)
Common stock, $.001 par value, authorized 120,000,000
shares; issued 1995 14,932,142 shares; 14,932 15,151
1996 15,150,586 shares
Additional paid-in capital 2,861,751 3,038,877
Retained earnings 292,707 367,392
----------------------------------------
3,169,390 3,421,420
Less cost of treasury stock (581,000 shares) (Note 12) - 5,810
----------------------------------------
3,169,390 3,415,610
----------------------------------------
$ 23,532,608 $ 22,383,012
========================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A New York Corporation)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Predecessor Business Ragar Corp.
--------------------------------------- ----------------------------------------
Year Ended June 2, 1995 to Year Ended
December 31, January 1, 1995 December 31, December 31,
1994 to June 1, 1995 1995 1996
------------------------------------------------------------------------------------ ----------------------------------------
<S> <C> <C> <C> <C>
Sales (Note 8) $ 42,506,987 $ 16,362,727 $ 23,979,879 $ 42,414,364
Cost of sales 31,665,636 11,344,430 17,962,416 31,321,924
--------------------------------------- ----------------------------------------
Gross profit 10,841,351 5,018,297 6,017,463 11,092,440
Selling, general and administrative expenses:
Related party consulting fees (Note 12) - - 315,000 365,000
Related party rent expense (Note 11) - - 58,499 100,284
Other 5,265,138 1,280,445 2,855,540 7,004,284
--------------------------------------- ----------------------------------------
5,265,138 1,280,445 3,229,039 7,469,568
--------------------------------------- ----------------------------------------
Amortization and depreciation 28,442 14,195 666,287 1,223,290
--------------------------------------- ----------------------------------------
Operating income 5,547,771 3,723,657 2,122,137 2,399,582
Other income (expense):
Miscellaneous income 44,681 19,892 20,024 18,454
Interest expense (16,414) (6,405) (1,385,022) (1,477,614)
Loss on sale of securities (Note 10) (656,262) - - -
Loss on disposal of equipment (31,435) - - -
--------------------------------------- ----------------------------------------
Income before taxes and dividends to
preferred stockholders of subsidiary 4,888,341 3,737,144 757,139 940,422
Provision for income taxes (Note 9) - - 261,037 328,043
--------------------------------------- ----------------------------------------
Income before dividends
to preferred stockholders
of subsidiary $ 4,888,341 $ 3,737,144 $ 496,102 $ 612,379
Dividends to preferred stockholders
of subsidiary (Note 3) - - 203,395 537,694
--------------------------------------- ----------------------------------------
Net income 4,888,341 3,737,144 292,707 74,685
======================================= ========================================
Net income per common share $ 0.02 $ 0.00
========================================
Unaudited Proforma Information:
Net income before taxes $ 4,888,341 $ 3,737,144
Proforma income tax expense 1,662,036 1,270,629
---------------------------------------
Proforma net income after taxes $ 3,226,305 $ 2,466,515
=======================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A New York Corporation)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - SUCCESSOR BUSINESS
Commencement of Operations (June 2, 1995) to December 31, 1995 and the year
ended December 31, 1996
<TABLE>
<CAPTION>
Common Stock
------------------------- Additional
Shares Paid-in Retained Treasury
Outstanding Dollars Capital Earnings Stock Total
<S> <C> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------------------------------------------
Issuance of common stock for
initial capitalization 834 $ 10 $ 925,047 $ - $ - $ 925,057
Recapitalization/exchange including
issuance of common stock for acquisition
costs of $1,157,393 (Note 2) 14,524,169 14,515 2,313,159 - - 2,327,674
Return of capital (Note 2) - - (811,992) - - (811,992)
Exchange of subordinated debt for
common stock (Note 7) 234,285 234 246,828 247,062
Issuance of common stock 172,857 173 188,709 - - 188,882
Net income - - - 292,707 - 292,707
------------------------------------------------------------------------------------
Balance, December 31, 1995 14,932,145 14,932 2,861,751 292,707 - 3,169,390
Issuance of common stock 218,444 219 177,126 - - 177,345
Purchase of treasury stock
(581,000 shares) (Note 12) - - - - (5,810) (5,810)
Net income - - - 74,685 - 74,685
------------------------------------------------------------------------------------
Balance, December 31, 1996 15,150,589 $ 15,151 $ 3,038,877 $ 367,392 $ (5,810) $ 3,415,610
====================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A New York Corporation)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY - PREDECESSOR BUSINESS
Year ended December 31, 1994 and period from January 1, 1995 to June 1, 1995
Period from January 1, 1995 to June 1, 1995 and Years Ended December 31, 1994
and 1993
<TABLE>
<CAPTION>
Common Stock
----------------------------
Shares Retained
Outstanding Dollars Earnings Total
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1993 100 $ 50,000 $ 1,201,531 $ 1,251,531
Dividends paid - - (5,352,092) (5,352,092)
Net income - - 4,888,341 4,888,341
--------------------------------------------------------------------
Balance, December 31, 1994 100 50,000 737,780 787,780
Dividends paid - - (2,400,000) (2,400,000)
Net income - - 3,737,144 3,737,144
--------------------------------------------------------------------
Balance, June 1, 1995 100 $ 50,000 $ 2,074,924 $ 2,124,924
====================================================================
</TABLE>
F-6
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A New York Corporation)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Predecessor Business Ragar Corp.
-------------------------------------- ------------------------------------------
Year Ended Year Ended
December 31, January 1, 1995 June 2, 1995 to December 31,
1994 to June 1, 1995 December 31, 1995 1996
--------------------------------------------------------------------------------------- ------------------------------------------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities
Cash received from customers $ 42,803,429 $ 15,378,509 $ 23,148,474 $ 42,924,394
Cash paid to suppliers and employees (36,757,286) (13,629,493) (19,145,259) (38,276,238)
Cash dividends to preferred stockholders
of subsidiary - - (161,995) (160,000)
Interest paid (16,414) (6,405) (130,171) (59,469)
Income taxes paid - - (374,000) (138,800)
Miscellaneous income received 44,681 19,892 20,024 18,455
------------------------------------ --------------------------------------
Net cash provided by operating activities 6,074,410 1,762,503 3,357,073 4,308,342
------------------------------------ --------------------------------------
Cash Flows from Investing Activities
Advances to employees and related parties - - (338,035) (327,403)
Purchase of equipment and leasehold (62,052) - (108,237) (231,190)
Payments for acquisition of net assets of
Predecessor Business - - (18,445,532) -
Payments for acquisition of net assets of
Steve's Floor Covering - - (266,722) -
Acquisition cost expenditures - - (96,552) -
Proceeds from sale of equipment - 72,076 19,000 -
Net cash flows from investments
in securities (656,262) - - -
------------------------------------ --------------------------------------
Net cash provided by (used in)
investing activities (718,314) 72,076 (19,236,078) (558,593)
------------------------------------ --------------------------------------
Cash Flows from Financing Activities
Payments on note payable - - (1,827,722) (3,879,595)
Principal payment on subordinated notes
payable - - (560,000) (560,000)
Minority interest: issuance of preferred stock
of subsidiary - - 1,842,781 357,655
Proceeds from issuances of common stock - - 188,882 162,345
Return of capital - - (811,992) -
Cash dividends paid (5,352,092) (2,400,000) - -
Principal payments on long-term debt (18,532) (8,156) (8,102) (26,849)
Purchase of treasury stock - - - (5,810)
Cash payment for deferred offering costs - - - (155,721)
Proceeds from long-term debt - - 14,000,000 -
Proceeds from note payable - - 1,152,532 -
Proceeds from subordinated notes payable - - 1,569,364 -
Proceeds from issuance of stock in con-
nection with capitalization of Company - - 1,939,237 -
Debt issuance costs - - (912,619) -
------------------------------------ --------------------------------------
Net cash provided by (used in)
financing activities (5,370,624) (2,408,156) 16,572,361 (4,107,975)
------------------------------------ --------------------------------------
Net increase (decrease) in cash (14,528) (573,577) 693,356 (358,226)
Cash, beginning 679,921 665,393 - 693,356
------------------------------------ --------------------------------------
Cash, ending $ 665,393 $ 91,816 $ 693,356 $ 335,130
==================================== ======================================
</TABLE>
F-7
<PAGE>
RAGAR CORP. AND SUBSIDIARY
(A New York Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
Predecessor Business Ragar Corp.
--------------------------------- ----------------------------------------
Year Ended June 2, 1995 to Year Ended
December 31, January 1, 1995 December 31, December 31,
1994 to June 1, 1995 1995 1996
-------------------------------------------------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C>
Reconciliation of Net Income to Net Cash
Provided by Operating Activities
Net income $ 4,888,341 $ 3,737,144 $ 292,707 $ 74,685
Depreciation 28,442 14,195 44,121 177,344
Amortization - - 622,674 1,045,946
Accretion of discount on subordinated
notes payable - - 326,058 44,578
Deferred income taxes - - 31,322 48,022
Provision for bad debts - 5,633 44,000 302,900
Interest added to note payable - - 790,795 1,393,571
Common stock issued in lieu of interest payment - - - 15,000
Loss on sale of securities 656,262 - - -
Rent expense in lieu of note receivable
payments to Realty - - 58,499 100,284
Other 31,435 - - 25,056
Changes in assets and liabilities:
(Increase) decrease in accounts
receivable 342,098 (603,294) (1,060,247) (116,854)
(Increase) in inventory (141,066) (87,620) (161,757) (71,332)
(Increase) in prepaid expenses - - (61,637) (106,951)
Increase (decrease) in accounts
payable 234,123 (599,153) 1,746,045 450,442
Increase in due to principal shareholder - - - 619,094
Increase (decrease) in accrued
expenses 80,431 (323,478) 455,651 (17,427)
Increase (decrease) in customer
deposits (45,656) (380,924) 228,842 323,984
------------------------------ --------------------------------
Net cash provided by
operating activities $ 6,074,410 $ 1,762,503 $ 3,357,073 $ 4,308,342
================================ ===============================
</TABLE>
See Notes to Consolidated Financial Statements.
F-8
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A New York Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies
Nature of business
Ragar Corp. (Successor Business, Ragar or Company) was organized under the laws
of the state of New York on July 19, 1988. Ragar Corp. had substantially no
operations prior to its exchange, on June 2, 1995, in a reverse acquisition with
Carpet Barn Holdings, Inc., (CBH), which was organized under the laws of the
State of Delaware on May 26, 1995 (see Note 2). CBH and its wholly owned
subsidiary, Carpet Barn, Inc., (CBI), a Delaware corporation, were formed for
the purpose of acquiring the assets and operations of Carpet Barn, Inc., a
Nevada Corporation (Predecessor Business), a retail carpet sales and
installation outlet located in Las Vegas, Nevada. The Company began operations
on June 2, 1995, the date of acquisition, as described in Note 2.
The Company is also related, through common ownership, to C. B. Realty of
Delaware, Inc. (Realty).
The Company sells floor coverings, primarily carpet, to the new home and retail
replacement markets primarily in southern Nevada.
A summary of the Company's significant accounting policies follows. Unless
specifically discussed, the accounting policies apply to both Ragar (and its
subsidiaries) and the Predecessor Business.
The results of operations of the Company are not comparable to those of the
Predecessor Business, due primarily to the amortization of intangible assets and
interest expense incurred on the acquisition debt. Also, the Predecessor
Business financial statements contain no provision for income taxes.
Basis of presentation
On June 2, 1995, the Company acquired all of the common stock of CBH in an
exchange (the Exchange) by the holders of such common stock for newly issued
common stock of the Company, representing 92% of the Company's common stock
outstanding after the Exchange. For financial reporting and accounting purposes,
the Exchange was recorded as a reverse acquisition, with CBH as the accounting
acquirer. In a reverse acquisition, the accounting acquirer is treated as the
surviving entity, even though the Company's legal existence does not change and
the financial statement titles refer to the Company, not the accounting
acquirer. The accounting acquirer treats the Exchange similar to a purchase
acquisition. As a result, the historical financial information presented is
CBH's and not the Company's, as previously reported. The operating results of
the Company are included with those of CBH after June 2, 1995, the date of the
Exchange. See Note 2 for further discussion of the Exchange.
F-9
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A New York Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies (continued)
Principles of consolidation
The Successor Business consolidated financial statements include the accounts of
the Company and its subsidiaries, CBH and CBI. All material intercompany
accounts and transactions are eliminated in consolidation. The minority interest
in the accompanying consolidated financial statements represents the preferred
stock of CBH not owned by the Company. The CBH preferred stock dividends are
included as a minority interest in preferred stock dividends of subsidiary on
the consolidated income statements.
Cash
During the periods presented, the Company and the Predecessor Business
maintained cash balances which, at times, were in excess of federally insured
limits. The Company has experienced no losses in such accounts. At December 31,
1996 the Company's cash balances were maintained at financial institutions in
Nevada and Illinois.
Inventory
Inventory consists primarily of carpet and vinyl and is stated at the lower of
cost (first-in, first-out method) or market.
Equipment and leasehold improvements
Equipment and leasehold improvements are stated at cost, less accumulated
depreciation and amortization. Depreciation is provided on the straight-line and
accelerated methods for financial reporting purposes. Amortization is provided
on the straight-line basis over the shorter of the economic life of the asset or
the lease term. Estimated useful lives for financial reporting purposes are as
follows:
Years
----------------
Furniture and equipment 7
Autos and trucks 5
Leasehold improvements
3-5
Intangibles
Cost in excess of net assets of the business' acquired in connection with the
Company's acquisitions (see Note 2) is being amortized by the straight-line
method over twenty-five years. The Company periodically reviews the value of its
goodwill to determine if an impairment has occurred. The Company does not
believe that an impairment of its goodwill has occurred based on an evaluation
of operating income, cash flows and business prospects.
The Company incurred financing costs related to the bank financing obtained in
connection with the acquisition of the Predecessor Business (see Note 2).
These costs are being amortized on the effective interest method over the term
of the debt.
F-10
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A New York Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies (continued)
The Company also entered into a covenant not-to-compete in connection with the
acquisition of the Predecessor Business (see Note 2). The covenant is being
amortized on the straight-line method over the five-year term of the agreement.
Income taxes
The Company provides for deferred taxes on a liability method whereby deferred
tax assets are recognized for deductible temporary differences and operating
loss and tax credit carryforwards and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities are
adjusted for the effect of changes in tax laws and rates on the date of
enactment.
The Predecessor Business, with the consent of its stockholder, elected to be
taxed under sections of the federal tax law which provide that, in lieu of
corporation income taxes, the stockholder separately accounted for the
Predecessor Business' items of income, deduction, losses and credits. Therefore,
the Predecessor Business financial statements do not include any provision for
corporation income taxes.
Vendor coop marketing and purchase discounts
The Company participates in various advertising and marketing programs with
suppliers. Certain of the Company's costs incurred in connection with these
programs are reimbursed. The Company records accounts payable net of anticipated
purchase discounts.
Earnings per common share
Earnings per share is computed based on the weighted average number of common
shares outstanding during the period and the net income for the period. There
were no common stock equivalents outstanding during the period from June 2, 1995
to December 31, 1995 and for the year ended December 31, 1996.
Effective for financial statements issued after December 15, 1997, the Company
will be required to implement FASB Statement No. 128, Earnings per Share. The
Statement establishes standards for computing and presenting earnings per share
(EPS) and applies to entities with publicly held common stock or potential
common stock. It replaces the presentation of basic EPS and also requires dual
presentation of basic and diluted EPS on the face of the income statement for
all entities with complex capital structures. The Company has not determined
what effect, if any, this new pronouncement will have on the Company's EPS
presentations.
F-11
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A New York Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies (continued)
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.
Significant change in estimate
In the fourth quarter of 1996, the Company revised its estimate of the allowance
for doubtful accounts for trade accounts receivable. The effect of the revision
increased the allowance for doubtful accounts by approximately $275,000 at
December 31, 1996 and to decrease net income by approximately $182,000 ($0.05
per share) for the three months ended December 31, 1996.
Revenue recognition
Revenue is recorded for commercial and retail floor covering sales upon
installation.
Advertising
All costs related to marketing and advertising the Company's products are
expensed in the period incurred.
Advertising expense consists of the following:
Predecessor Business Ragar
-------------------------------------- -------------------------------------
Year Ended Year Ended
December 31, January 1, 1995 June 2, 1995 to December 31,
1994 to June 1, 1995 December 31, 1995 1996
------------------------------------------------------------------------------
$ 348,828 $ 125,452 $ 206,421 $ 597,960
==============================================================================
Reclassification
Certain 1994 and 1995 balances have been reclassified to correspond to the
balance sheet, statements of income, and cash flows classifications for 1996.
These reclassifications have no effect on stockholders' equity.
F-12
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A New York Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies (continued)
Fair value of financial instruments
The carrying amounts of financial instruments including cash, accounts
receivable, employee and other receivables, subordinated notes payable, note
payable, accounts payable, due to principal stockholder, and accrued expenses
approximate their fair values because of their short maturities.
The carrying amounts of long-term debt and the related party note receivable
approximate their fair values because the interest rates on these instruments
are at market rates.
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of
The Financial Accounting Standards Board issued SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of. Statement No. 121 is effective for the Company December 31, 1996 and
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used, and for long-lived assets, and certain identifiable intangibles
to be disposed of.
The Company's management has determined there was no impairment of long-lived
assets, including identifiable intangibles, at December 31, 1996.
Accounting for Stock-Based Compensation
In October 1995, the FASB issued Statement No. 123, Accounting for Stock-Based
Compensation. Statement No. 123 establishes financial accounting and reporting
standards for stock-based employee compensation plans, such as stock options and
stock purchase plans. The statement generally suggests but does not require
stock-based compensation arrangements for employees be accounted for based on
the fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable. Stock-based
compensation for nonemployees is required to be accounted for at the fair value
of the consideration received or the fair value of the equity instruments
issued, whichever is more reliably measurable.. Companies that do not elect to
change their accounting for stock-based compensation for employees are required
to disclose the effect on net income and earnings per share as if the provision
of Statement No. 123 were applied. The Company has decided not to adopt the
accounting provision of this Statement.
Note 2. Acquisitions
On June 2, 1995, the Company acquired all of the common stock of CBH in an
exchange by the holders of such common stock for 13,363,000 newly issued shares
of common stock of the Company, representing 92% of the Company's common stock
outstanding after the Exchange. Ragar had no operations prior to the acquisition
of the Predecessor Business. Its only asset was approximately $860,000 of cash
and it had immaterial liabilities.
F-13
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A New York Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 2. Acquisitions (continued)
Concurrent with CBH's stock exchange with the Company, CBI executed an "Asset
Purchase Agreement" to acquire certain assets net of assumed liabilities of the
Predecessor Business, for a cash purchase price of $18,445,532, all of which was
paid in cash at closing out of funds invested in or borrowed by the Company. The
acquisition was accounted for as a purchase. Land and building, which were
assigned a value of $1,100,000 in the Asset Purchase Agreement between the
Company and the Predecessor Business, were transferred by Predecessor Business
directly to Realty in consideration of a note issued to the Company in the
approximate amount of $288,000. The approximate $812,000 difference between the
assigned value in the Asset Purchase Agreement and the face amount of the note
has been recorded as a deemed return of capital to the stockholders of Realty,
reducing additional paid in capital in the accompanying consolidated financial
statements.
On July 28, 1995, the Company purchased the net assets of Steve's Floor
Covering, Inc. for approximately $267,000. The acquisition was accounted for
as a purchase.
Unaudited pro forma results of operations for the year ended December 31, 1995
of the Company assuming the acquisitions occurred on January 1, 1995 are
presented below. Pro forma adjustments made to the historical results of
operations consist principally of the amortization of intangible assets and
interest expense related to the acquisition financing and income taxes.
Net sales $ 40,343,000
Gross profit $ 11,035,000
Net income $ 1,663,000
Net income per common share $ 0.11
The net income per common share was computed based on the 14,583,163 weighted
average common shares outstanding during the period from June 2, 1995 to
December 31, 1995.
The above pro forma information does not purport to be indicative of the results
that actually would have been obtained had the acquisitions occurred on January
1, 1995.
Note 3. 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.
F-14
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A New York Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 3. Restatement (continued)
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.
Note 4. Equipment and Leasehold Improvements
Equipment and leasehold improvements consist of the following at December 31:
1995 1996
------------------------------
Furniture and equipment $ 245,341 $ 306,204
Autos and trucks 214,518 378,759
Leasehold improvements - 85,851
----------------------------
459,859 770,814
Less accumulated depreciation and amortization 44,121 221,465
----------------------------
$ 415,738 $ 549,349
============================
Note 5. Intangible Assets
Intangible assets consist of the following at December 31:
1995 1996
-----------------------------
Cost in excess of net assets of business'
acquired, including costs incurred in
connection with business acquisitions $ 17,111,819 $ 17,086,762
Covenant not-to-compete 575,000 575,000
Debt issuance costs 912,619 802,500
-----------------------------
18,599,438 18,464,262
Less accumulated amortization 622,674 1,558,501
-----------------------------
Intangible assets, net $ 18,976,764 $ 16,905,761
=============================
F-15
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A New York Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 6. Note Payable and Long-Term Debt
Concurrent with its acquisition of the Predecessor Business, the Company entered
into a Credit Agreement with First Source Financial, LLP (First Source) under
which the Company obtained a $14,000,000 credit facility due May 31, 1999 and a
$3,000,000 working capital note due May 31, 1997, which, under certain
conditions may be extended through May 31, 1999. The Credit Agreement contains
covenants requiring CBI to maintain minimum levels of tangible net worth,
working capital and various financial ratios. The agreement further requires
that a minimum $100,000 cash balance be maintained in a cash collateral account.
The agreement also limits payments from CBI to CBH and limits dividends,
redemptions and purchases of capital stock of CBI, CBH and the Company. CBH
pledged to First Source all of the common stock of CBI to secure CBI's
obligations under the Credit Agreement and guaranteed CBI's debt obligations to
First Source under the Credit Agreement.
During the period from commencement of operations (June 2, 1995) through
December 31, 1996 the Company violated the following 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.
On April 15, 1996 First Source waived these covenant violations, through June 1,
1996. In connection with obtaining the waiver, the Company agreed to limit
certain payments including principal payments of CBH's subordinated debt, with
the exception that such payments could be made from the proceeds of newly
acquired capital if any, and First Source agreed to amend the covenants to a
level where the Company's business plan would allow it to be in compliance.
The Company had certain discussions with First Source in an effort to amend such
covenants but was unable to reach an agreement with First Source. The
discussions are not continuing at present, and the Company believes that the
covenants are not likely to be amended. Moreover, the waiver period has not been
extended beyond June 1, 1996, and, therefore, the Company has been in violation
of the covenants since June 1, 1996. To date, First Source has continued to
allow the Company to borrow up to the full capacity of the working capital
portion under the original terms of the Credit Agreement and the Company has
received no indication from First Source that it intends to exercise its right
under the Credit Agreement to accelerate the maturity of the debt.
Because First Source has maintained its right to accelerate the maturity of the
debt due to the covenant violations, and because the Company's commitment for
replacement financing (See Note 13) is dependent on the completion of a public
offering, the Company has classified the debt as current on the December 31,
1996 consolidated balance sheet.
If First Source chooses to accelerate the maturity of the debt or if the Company
were to obtain alternate financing, certain unamortized debt issuance costs
classified as intangible assets would be charged to expense. Such unamortized
debt issuance costs totaled $508,125 at December 31, 1996. Additionally, the
Credit Agreement contains a prepayment penalty clause requiring the Company to
pay up to 2% of the then applicable revolving loan commitment, as defined in the
Credit Agreement, if the Company chooses to terminate the Credit Agreement prior
to May 31, 1999.
F-16
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A New York Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 6. Note Payable and Long-Term Debt (continued)
Amounts outstanding under the agreement at December 31, are as follows:
1995 1996
----------------------------------------
Working capital note $ 1,865,604 $ 2,879,581
========================================
Long-term note $ 12,250,000 $ 8,750,000
========================================
At December 31, 1996 the Company has approximately $120,000 available under
the original working capital note commitment.
During the period ended December 31, 1995 and the year ended December 31, 1996,
the Company made principal payments due on the long-term revolving note by
borrowing these amounts on the working capital note. In addition, the agreement
provided that interest be added to the notes. The Company received advances from
unrelated parties of $534,000 during February 1997, enabling the Company to make
the quarterly principal payment of $875,000 then due on the long-term revolving
note. These advances bear interest at the rate of 12% per annum, payable
monthly. In addition to repayment of the principal, if the advance is repaid
within three months of the date of the advance, the lender will receive 40% of
the dollar amount of the advance in shares of common stock of the Company. The
value of the common stock will be recorded as additional interest. This amount
increases by 20% for each additional three month period the advance is
outstanding, capping at 100% if the advance is not repaid within 9 months. The
value of the shares of common stock of the Company issued to satisfy this
obligation will be based on the average bid price of the stock for the thirty
day period prior to the payment date.
CBI also has long-term notes payable of $89,420 and $142,334 outstanding at
December 31, 1995 and 1996, respectively. The notes bear interest at an
approximate average of 11% and mature between March 1997 and August 2001.
Aggregate maturities required on the long-term debt are due in future years as
follows at December 31, 1996:
1997 $ 8,781,519
1998 31,196
1999 34,523
2000 33,999
2001 11,097
--------------
$ 8,892,334
==============
F-17
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A New York Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 7. Subordinated Notes Payable
The Company issued unsecured notes payable with a face amount of $1,940,000 in
the June 1995 acquisition discussed in Note 2. The notes were issued in units
that included shares of the common stock of CBH, which were concurrently
exchanged into shares of the Company in the Exchange (See Note 2). The proceeds
of the units attributable to the common stock element resulted in recording the
issuance of the notes at a discount from their face amount of approximately
$371,000 which was amortized to interest expense over the term of the debt.
On November 30, 1995, notes with a face amount of $560,000 were paid in full and
notes with a face amount of $820,000 were exchanged for 820 shares of CBH
preferred stock and 234,285 shares of Ragar common stock. The CBH preferred
stock was recorded at a net value of $572,938 and the Ragar common stock was
recorded at $247,062. The remaining notes with a face amount of $560,000 were
paid in full during 1996.
Note 8. Major Customers
Sales for Ragar and the Predecessor Business include sales to, and accounts
receivable due from, the following major customers:
<TABLE>
<CAPTION>
Percent to Total Sales
-------------------------------------------------------------------- Percent to Total
Predecessor Business Ragar Accounts Receivable
------------------------------- ------------------------------------ --------------------------------
Year Ended Year Ended Ragar
--------------------------------
<S> <C> <C> <C> <C> <C> <C>
December 31, January 1, to June 2, 1995 to December 31, December 31, December 31,
Customer 1994 June 1, 1995 December 31, 1995 1996 1995 1996
------------------------------------------- ------------------------------------ --------------------------------
A 12% 10% 13% 14% 12% 6%
B 12% 8% 9% 10% 3% 3%
</TABLE>
Note 9. Income Taxes
The provision for federal income taxes for the period from commencement of
operations (June 2, 1995) through December 31, 1995 and the year ended December
31, 1996 is comprised of the following:
1995 1996
---------------------------------------
Current expense $ 229,715 $ 280,021
Deferred tax expense 31,322 48,022
---------------------------------------
$ 261,037 $ 328,043
=======================================
The $31,322 and $79,344 deferred tax liability at December 31, 1995 and 1996,
respectively, is principally the result of temporary differences between the tax
bases and reported amounts of intangible assets.
F-18
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A New York Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 10. Loss on Sale of Securities of Predecessor Business
A summary of net losses on sales of securities (primarily foreign currency
contracts) of the Predecessor Business for the year ended December 31, 1994, are
as follows:
Gross gains $ 1,740,104
Gross losses (2,396,366)
--------------------
Net loss on sale of securities $ (656,262)
====================
The Predecessor Business accounted for these securities at market value.
The Successor Business does not enter into foreign currency contracts.
Note 11. Lease Commitments
Related party lease commitments
The Company leases its main operational premises from Realty under a
noncancelable operating lease expiring in May 1998. Future minimum rental
payments under this lease at December 31, 1996 are as follows:
1997 $ 100,284
1998 41,785
--------------------
$ 142,069
====================
Other lease commitments
In 1996 the Company entered into agreements to rent retail space under separate
leases expiring August 1999 and June 2001. Monthly lease payments are net of
taxes, insurance and utilities, and are stated at a rate of $5,632 per month,
and $3,669 per month, respectively. The monthly base rent will be adjusted
annually to predetermined amounts, or to reflect any increases in the Consumer
Price Index.
Future minimum lease commitment under these leases at December 31, 1996 is as
follows:
1997 $ 114,615
1998 120,648
1999 97,029
2000 48,832
====================
$ 381,124
====================
Total rent expense under the above leases for the period from commencement of
operations (June 2, 1995) through December 31, 1995 and the year ended
December 31, 1996 was $60,199, and $157,149, respectively. This includes
related party rent expense of $58,499 and $100,284, respectively.
F-19
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A New York Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 12.
Commitments, Contingencies and Related Party Transactions
Employment agreements and contingency
The Company has an employment agreement with its Chief Operating Officer (COO).
The agreement, expiring in July 1998, stipulates the annual salary. The
agreement includes a $100,000 bonus provision to be earned during 1997 if the
COO is employed the entire year.
The Company also had an employment agreement with its former Chief Financial
Officer (CFO) who was terminated in 1996. Pursuant to the employment agreement,
the CFO purchased 290,500 shares of common stock for $.001 per share. The CFO
had the right to purchase the common stock regardless of his employment status
with the Company. The difference between the amount paid and market value of the
shares was recognized as additional acquisition costs in the consolidated
financial statements (Notes 2 and 3). Also pursuant to his employment agreement
581,000 shares (Escrow Shares) were deposited into an escrow account on June 1,
1995. Upon the first anniversary of the former CFO's employment and each of the
following four such anniversaries, 116,200 of the Escrow Shares were to be
released to the CFO together with all rights and privileges thereto. In the
event the Company did not meet certain operating goals, as described in the
employment agreement, the Company had the right to repurchase those shares at
$.01 per share.
The Company accounted for this escrow share arrangement as a variable stock
option under which the Company would have recorded compensation expense equal to
the difference between the aggregate market price of the Escrow shares earned,
as of the date earned, and the aggregate purchase price of such Escrow Shares.
As of December 31, 1995, and through his termination date, the CFO had not
earned the right to receive any Escrow Shares. No compensation expense relating
to the Escrow Shares has been recognized in the period from June 2, 1995 to
December 31, 1995 or the year ended December 31, 1996. In connection with the
former CFO's termination, the Company repurchased the 581,000 Escrow shares for
$5,810.
The former CFO has commenced a suit against CBH, CBI and directors of the
Company alleging wrongful and unlawful termination. The suit is seeking
unspecified compensatory and punitive damages. The Company filed a motion to
dismiss the suit based on the arbitration provision in the CFO's employment
agreement. The dismissal motion was granted by the court. The motion also
dismissed the litigation against the individual officers. The remaining parties
are entering into binding arbitration. The Company and its legal counsel believe
it has meritorious defenses to such allegations, and the Company intends to
defend the matter vigorously in arbitration. The range of possible loss for the
contingency is not determinable. No liability has been recorded for this
contingency in the consolidated financial statements.
F-20
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A New York Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 12. Commitments, Contingencies and Related Party Transactions (continued)
Consulting agreements
The Company has entered into oral month-to-month consulting agreements with
Branin Investments, Inc. (Branin), a principal shareholder of Ragar, PAH
Marketing Consultants, Inc. (PAH), a company controlled by the Chairman of the
Board and President of Ragar, and Capital Vision Group, Inc. (Capital), a
company controlled by a director and shareholder of Ragar, under which the
Company receives management advisory services in the areas of operations
management, financing, and mergers and acquisitions. Pursuant to these
agreements the Company pays $35,000, $5,000 and $5,000 per month to Branin, PAH
and Capital, respectively. The Company modified its agreement with Branin in
September 1996 reducing the management consulting fee to $10,000. The Company
terminated its agreement with Capital in January 1996 and the obligation to PAH
was discontinued in September 1996.
Total consulting expense under these agreements for the period from commencement
of operations (June 2, 1995) to December 31, 1995 and for the year ended
December 31, 1996 was $315,000, and $365,000, respectively.
Related party note receivable
The Company has an unsecured note receivable of $279,536 and $214,496 at
December 31, 1995 and 1996, respectively due from Realty. The note accrues
interest at 10% per annum and is payable in equal monthly installments of
$9,293, including interest through May 1998. In lieu of receiving payments and
with the permission of Realty, the Company is offsetting rental payments due to
Realty (Note 11) against the note receivable.
Branin Investments, Inc.
Branin, which is 100% owned by the Chairman of the Board and President of Ragar,
acted as advisor to the Company in certain financing and equity transactions
consummated concurrently with the acquisition described in Note 2. In
consideration of these advisory services Branin was entitled to fees of
approximately $650,000, representing 3% of the aggregate proceeds received by
the Company from First Source under the Credit Agreement described in Note 6 and
3% of the aggregate proceeds from the Note offering and Preferred Stock offering
described in Note 7, respectively. Branin was entitled to receive these fees
upon the consummation of a public offering of the Company's stock. Branin agreed
to waive such fees in exchange for increasing its management consulting fee from
$10,000 per month to $20,000 per month (see above consulting agreements.) The
increase is to be effective upon the consummation of a public offering of the
Company's stock.
Due to principal shareholder (Branin) consists of the following:
Preferred stock dividends paid on behalf of CBH $ 419,094
Management fees due Branin 200,000
Cash payments made to Branin (229,056)
--------------------
Due to Branin $ 390,038
====================
Amounts payable to Branin are non interest bearing and due on demand.
F-21
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A New York Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 12. Commitments, Contingencies and Related Party Transactions (continued)
Nevada Department of Employment, Training and Rehabilitation
On September 5, 1996, the Nevada Department of Employment, Training and
Rehabilitation notified the Company that it had changed the status of the
Company's floor covering installers from independent contractors to employees,
subjecting the Company to unemployment tax obligations with respect to such
installers. The Company appealed the decision and an appeals hearing was held on
February 5, 1997. The appeals hearing referee agreed with the State of Nevada
and classified the installers as employees. The decision ordered no retroactive
tax or penalties, however, the Company will become responsible for taxes for
periods beginning April 1, 1997.
The Company maintains that these installers are not employees of the Company but
rather independent contractors and, as such, the Company is not subject to
payment of unemployment taxes with regard to these installers. The Company will
continue to vigorously defend its position and intends to appeal the above
decision to the Board of Review on or before the expiration of its term of
appeal.
In addition, the potential status change from independent contractors to
employees raises concerns that the Internal Revenue Service will assert the same
claims. If a claim is asserted, the Company will vigorously defend its position.
The amount of any potential liability is unknown but the Company along with
counsel believes that any adverse outcome will not be material.
Predecessor Business Contingency
The Predecessor Business previously engaged an environmental consultant who
informed the Predecessor Business that contaminant levels at its business
location may exceed maximum levels established by The Environmental Protection
Agency. Management of the Predecessor Business believes that it was not and has
not been the source of the contaminants, if any. In the absence of a conclusive
finding concerning the source of and the actual level of contamination, no
accrual was made in the Predecessor Business financial statements.
The Company subsequently engaged an environmental consultant who, in a report
dated May 24, 1995, concluded that it was not probable that the Nevada
Department of Enviornmental Protection would require a cleanup plan to be
initiated. Accordingly, no accrual for any potential clean up costs is required
in the accompanying consolidated financial statements.
Note 13. Liquidity and Management's Plans
The Company is in violation of certain debt covenants relating to its primary
credit agreement with First Source. The covenants have not been waived by First
Source. First Source has continued to allow the Company to borrow the full
capacity under the working capital portion of the credit agreement, and the
Company has received no indication from the lender that it intends to accelerate
the maturity of the debt. The credit agreement requires quarterly principal
payments of $875,000 and interest is accrued and added to the note balance (Note
6).
F-22
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A New York Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 13. Liquidity and Management's Plans (continued)
Management plans with respect to its future financing needs is as follows:
The Company intends to complete a public offering of common stock. The Company
has a letter of intent with an underwriter and expects to execute an
underwriting agreement. The Company currently anticipates net proceeds to the
Company of approximately $12,150,000 from this offering. The net proceeds of the
public offering are intended to be used in part, to reduce the outstanding debt
on the credit agreement to an amount that can be refinanced with another lender.
The Company filed an S-1 Registration Statement with the Securities and Exchange
Commission on January 16, 1997. In addition, the net proceeds are intended to be
used to repurchase the CBH Preferred Stock at the face amount of $4,660,000.
There can be no assurances that the public offering will be completed.
On February 19, 1997, the Company obtained a commitment from FINOVA Capital
Corporation for a $12,500,000 credit facility which includes a $7,000,000 term
loan and a $5,500,000 revolving line of credit both bearing interest at a rate
which is approximately 0.75 percent lower than the Company's current credit
agreement. The credit facility would allow the Company to pay off the First
Source credit facility and allow additional revolving credit. The agreement
would require quarterly principal payments of $325,000 on the term note payable.
The credit facility funding is subject to the successful completion of the above
mentioned public offering of common stock and the commitment expires April 30,
1997. The Company paid $41,666 to FINOVA representing 33% of the loan fee,
subsequent to December 31, 1996.
The Company's long-term plans include a growth strategy through selected
acquisitions and adding other markets. The Company has a letter of intent to
purchase Nonn's Flooring, Inc., a Madison Wisconsin commercial and retail floor
covering company. The Company obtained a commitment from FINOVA Capital
Corporation to participate in future acquisitions through working capital
financing, subject to the independent evaluation of each acquisition by FINOVA.
The acquisition of Nonn's Flooring, Inc. is subject to the successful completion
of the above mentioned public offering of common stock.
Note 14. Subsequent Events
Reincorporation
On March 19, 1997 the Company's shareholders approved a reincorporation proposal
for the Company. The reincorporation proposal would be effected through the
merger of the Company with Nations Flooring, Inc., (Nations) a newly formed
wholly owned subsidiary of the Company that will be incorporated in Delaware.
Nations will be the surviving corporation after the merger. Through the merger,
the Company will reincorporate in Delaware. The agreement provides that all
assets, liabilities, property, rights and obligations of the Company would be
transferred to and assumed by Nations.
In the merger, each four (4) shares of the Company's common stock will be
exchanged for one (1) share of Nations common stock. The effect of this exchange
will be similar to a one to four reverse stock split of the Company.
F-23
<PAGE>
RAGAR CORP. AND SUBSIDIARIES
(A New York Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 14. Subsequent Events (continued)
1997 Stock Option Plan
On March 19, 1997 the Company's shareholders adopted the 1997 Stock Option Plan
(the "Option Plan") to provide an incentive to non-employee directors and to
officers and certain other key employees of and consultants to the Company by
making available to them an opportunity to acquire common stock in the Company.
The Option Plan provides for the award of options representing or corresponding
up to 1,250,000 shares of common stock. All options must be granted at no less
than 100 percent of the fair value of the common stock on the date of the grant.
The options expire at varying dates not to exceed 10 years from the date of
grant. Any award issued under the Option Plan which is forfeited, expires or
terminates prior to vesting or exercise will again be available under the Option
Plan.
Securities and Exchange Commission Matter
In a letter dated March 11, 1997, the Company received notice from the
Securities and Exchange Commission (SEC), Division of Enforcement, that an
informal inquiry was being conducted. The Company was requested to voluntarily
provide the SEC with certain documents as outlined in that letter. The SEC's
letter to the Company states that this inquiry is confidential and should not be
construed as an indication by the SEC or its staff that any violations of law
has occurred, or as a reflection upon any person, entity or security.
Management of the Company intends to fully cooperate with the SEC's informal
inquiry. No specific allegations have been made; therefore, no conclusion can be
reached as to what impact, if any, this inquiry may have on the Company or its
operations.
Note 15. Cash Flow Information
The following schedule describes the Company's noncash investing and financing
activities for the period from commencement of operations (June 2, 1995) to
December 31, 1995 and for the year ended December 31, 1996.
Acquisition of net assets of Predecessor Business:
<TABLE>
<CAPTION>
1995 1996
-----------------------------------
<S> <C> <C>
Ragar common stock and minority interests issued for broker fee $ 500,000 $ -
Liabilities assumed 357,689 -
-----------------------------------
$ 857,689 $ -
===================================
Acquisition costs, incurred by related and unrelated parties
prior to commencement of operations, contributed to Company $ 1,157,393 $ -
===================================
Exchange of subordinated debt for minority investment in subsidiary $ 572,938 $ -
===================================
Equipment acquired through financing agreement $ - $ 79,764
===================================
</TABLE>
There were no significant noncash investing or financing activities of the
Predecessor Business the period from January 1, 1995 to June 1, 1995 and the
year ended December 31, 1994.
F-24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the registrant has duly caused this Annual Report on Form 10-KSB/A-1 to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, State of New York, on the 14th day of April, 1998.
RAGAR CORP.
By: /s/ Philip A. Herman
Philip A. Herman
Chairman of the Board and President
29
<PAGE>
Exhibit Index
Exhibit Name Page
2.1 Agreement and Plan of Exchange, dated as of June 1,
1995, among the Company, Carpet Barn Holdings, Inc.
("CBH") and the holders of common stock of CBH
(incorporated by reference from Exhibit 1 of the
Company's Report on Form 8-K (June 2, 1995) (the "June
Form 8-K").
2.2 Asset Purchase Agreement, dated as of June 1, 1995, between
Carpet Barn Acquisition Corp. ("CBAC") and Carpet Barn, Inc.
("Carpet Barn") (incorporated by reference from Exhibit 3 of
the June Form 8-K).
2.3 Amendment, dated June 1, 1995, to Asset Purchase
Agreement (incorporated by reference from Exhibit 4 of
the June Form 8-K).
3.1 Certificate of Incorporation, dated July 19, 1988, of
the Company (incorporated by reference from Exhibit
3(a) of the Company's Registration Statement on Form
S-18 (33-29942-NY) filed October 20, 1989 (the "1989
Registration Statement").
3.2 By-laws of the Company (incorporated by reference from
Exhibit 3(b) of the 1989 Registration Statement).
3.3 Amended and Restated Certificate of Incorporation of
CBH (incorporated by reference from Exhibit 3.3 of the
Company's Annual Report on Form 10-K for the period
ended December 31, 1995 (the "Form 10-K")).
3.4 Certificate of Amendment to Amended and Restated
Certificate of Incorporation of CBH (incorporated by
reference from Exhibit 3.4 of the Form 10-K).
3.6 Certificate of Incorporation of Nations Flooring, Inc.
(incorporated by reference from Exhibit 3.6 of the
Company's Registration Statement on Form S-1
(333-19871) filed January 16, 1997 ("1997 Registration
Statement").
3.7 By-laws of Nations Flooring, Inc. (incorporated by reference
from Exhibit 3.7 of the 1997 Registration Statement).
9.1 Voting Trust Agreement, dated May 30, 1995, between
Philip A. Herman and certain shareholders of the
Company (incorporated by reference from Exhibit 2 of
the June Form 8-K).
10.1 Secured Credit Agreement, dated as of June 1, 1995,
between CBAC and with First Source Financial LLP
("First Source") (incorporated by reference from
Exhibit 5 of the June Form 8-K).
10.2 Pledge Agreement, dated as of June 1, 1995, among CBH,
CBAC and First Source (incorporated by reference from
Exhibit 9 of the June Form 8-K).
<PAGE>
10.3 Guaranty, dated as of June 1, 1995, by CBH in favor of
First Source (incorporated by reference from Exhibit 10
of the June Form 8-K).
10.4 Revolving Note, dated June 1, 1995, between CBAC and
First Source (incorporated by reference from Exhibit 6
of the June Form 8-K).
10.5 Working Capital Note, dated June 1, 1995, between CBAC
and First Source (incorporated by reference from
Exhibit 7 of the June Form 8-K).
10.6 Security Agreement, dated June 1, 1995, between CBAC
and First Source (incorporated by reference from
Exhibit 8 of the June Form 8-K).
10.7 Terms of preferred stock, par value $.01 per share,
stated value $1,000 per share, of CBH (incorporated by
reference from Exhibit 12 of the June Form 8-K).
10.8 Employment Agreement, dated as of July 28, 1995,
between CBI and Steven Chesin (incorporated by
reference from Exhibit 1 of the Company's Report on
Form 10-Q for the quarterly period ended June 30, 1995
(the "June 1995 Form 10-Q).
10.9 Employment Agreement, dated as of June 1, 1995, between
CBI and Mark Szporka incorporated by reference from
Exhibit 2 of the June 1995 Form 10-Q).
10.10 Amendment, dated June 1, 1995, to employment agreement
between CBAC and Mark Szporka (incorporated by
reference from Exhibit 3 of the June 1995 Form 10-Q).
10.10.1 Amendment, dated March 6, 1996, to employment agreement
between CBAC and Mark Szporka (incorporated by
reference from Exhibit 10.11 of the Form 10-K).
10.11 Form of Promissory Note issued in the offering of
short-term notes of CBH (incorporated by reference from
Exhibit 11 of the June Form 8-K).
10.12 Lease, dated June 1, 1995, between C.B. Realty of
Delaware, Inc. ("CB Realty") and CBAC (incorporated by
reference from Exhibit 10.13 of the Form 10-K).
10.13 First Amendment to Lease Agreement, dated August 1,
1995, between CB Realty and CBAC (incorporated by
reference from Exhibit 10.14 of the Form 10-K).
10.14 Promissory Note, dated June 1, 1995 from CB Realty in
favor of CBAC (incorporated by reference from Exhibit
10.15 of the Form 10-K).
10.15 Employment Agreement, dated as of May 28, 1996, between
CBI and Alan Ember. (incorporated by reference from
Exhibit 10.15 of the 1997 Registration Statement).
10.16 Letter of Intent, dated February 25, 1997, between Ragar Corp.
and Nonn's Flooring, Inc.
