<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998.
[ ] TRANSITIONAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission file number: 33-29942-NY
----------------------------
NATIONS FLOORING, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
Delaware 11-2925673
- ----------------------------------------------- -------------------------------
(State or other jurisdiction of incorporation) (IRS Employer Identification Number)
</TABLE>
100 Maiden Lane, New York, New York 10038
- -------------------------------------------------------------------------------
(Address of principal executive offices)
(212) 898-8888
- -------------------------------------------------------------------------------
(Issuer's telephone number)
- -------------------------------------------------------------------------------
(Former name, former address or former fiscal year, if changed
since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. X Yes No
------ -----
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 3,642,397 shares of Common
Stock, par value $.001 per share, were outstanding at August 14, 1998.
<PAGE>
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets 3
Consolidated statements of operations 4 - 5
Consolidated statements of cash flows 6 - 7
Notes to consolidated financial statements 8 - 16
-----------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17-23
-----------------------------------------------------------------------------
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
-----------------------------------------------------------------------------
SIGNATURES 25
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2
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
<TABLE>
<CAPTION>
ASSETS (Note 3) December 31, 1997 June 30, 1998
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash $ 230,223 $ 329,318
Accounts receivable, less allowance for doubtful
accounts 1997 and 1998 $240,000 3,460,992 3,896,145
Due from employee 16,851 2,091
Inventory 777,600 1,012,410
Current portion of related party note receivable 142,658 25,000
Prepaid expenses and other 314,137 367,328
----------------------------------------------
Total current assets 4,942,461 5,632,292
----------------------------------------------
Related party note receivable, less current portion - 89,173
Equipment and leasehold improvements, net 614,090 581,195
Intangible assets, net 15,905,698 15,448,083
----------------------------------------------
$ 21,462,249 $ 21,750,743
==============================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable (Note 3) $ 2,899,453 $ 3,340,685
Notes payable-principal stockholder (Note 2(a)) 1,000,000 --
Current maturities of long-term debt (Note 3) 3,534,535 737,000
Accounts payable 2,934,737 2,096,840
Advances from principal stockholder (Note 2(b)) 1,291,285 470,722
Accrued expenses 282,993 153,938
Customer deposits 1,061,493 1,353,102
----------------------------------------------
Total current liabilities 13,004,496 8,152,287
----------------------------------------------
Deferred Income Taxes 235,000 296,000
Due to Stockholder (Note 2(c)) 500,000 500,000
Related Party Note Payable (Note 2(d)) -- 500,000
Note Payable and Advances from Principal Stockholder,
less current portion (Notes 2(a) and (b)) -- 2,500,000
Long-Term Debt, less current maturities (Note 3) 1,842,173 4,372,497
Minority Interest: Preferred Stock of Subsidiary 3,117,274 3,117,274
Stockholders' Equity
Preferred stock, $.001 par value,
authorized 1,000,000 shares; none issued -- --
Common stock, $.001 par value, authorized 20,000,000
shares; issued 1997 and 1998; 3,787,647 shares 3,788 3,788
Additional paid-in capital 3,050,240 3,050,240
Retained earnings (deficit) (284,912) (735,533)
----------------------------------------------
2,769,116 2,318,495
Less cost of treasury stock (145,250 shares) 5,810 5,810
----------------------------------------------
2,763,306 2,312,685
----------------------------------------------
Total liabilities and stockholders' equity $ 21,462,249 $ 21,750,743
==============================================
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Six Months Ended June 30,
<TABLE>
<CAPTION>
1997 1998
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Sales $ 18,853,148 $ 21,096,078
Cost of sales 13,832,830 15,967,231
--------------------------------------------------
Gross profit 5,020,318 5,128,847
Selling, general and administrative expenses:
Related party consulting fees 60,000 132,500
Related party rent expense 50,142 55,071
Other 3,425,132 3,727,815
--------------------------------------------------
3,535,274 3,915,386
--------------------------------------------------
Amortization and depreciation 640,023 823,594
--------------------------------------------------
Operating income 845,021 389,867
Other income (expense):
Miscellaneous 6,317 (24,030)
Related party interest expense (5,000) (122,000)
Interest expense (799,880) (494,031)
--------------------------------------------------
Income (loss) before taxes and dividends to
preferred stockholders of subsidiary 46,458 (250,194)
Provision (benefit) for income taxes 15,522 (79,173)
--------------------------------------------------
Income (loss) before dividends to preferred
stockholders of subsidiary 30,936 (171,021)
Dividends to preferred stockholders of subsidiary 279,600 279,600
--------------------------------------------------
Net loss $ (248,664) $ (450,621)
==================================================
Basic and Dilutive net loss per common share (0.07) (0.12)
==================================================
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended June 30,
<TABLE>
<CAPTION>
1997 1998
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Sales $ 9,595,144 $ 11,324,329
Cost of sales 6,999,687 8,469,889
--------------------------------------------------
Gross profit 2,595,457 2,854,440
Selling, general and administrative expenses:
Related party consulting fees 30,000 65,000
Related party rent expense 25,071 30,000
Other 1,791,267 1,967,035
--------------------------------------------------
1,846,338 2,062,035
--------------------------------------------------
Amortization and depreciation 325,039 520,578
--------------------------------------------------
Operating income 424,080 271,827
Other income (expense):
Miscellaneous 2,851 (25,343)
Related party interest expense (5,000) (70,750)
Interest expense (397,739) (236,683)
--------------------------------------------------
Income (loss) before taxes and dividends to
preferred stockholders of subsidiary 24,192 (60,949)
Provision (benefit) for income taxes 7,761 (16,331)
--------------------------------------------------
Income (loss) before dividends to preferred
stockholders of subsidiary 16,431 (44,618)
Dividends to preferred stockholders of subsidiary 139,800 139,800
--------------------------------------------------
Net loss $ (123,369) $ (184,418)
==================================================
Basic and Dilutive net loss per common share (0.03) (0.05)
==================================================
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30,
<TABLE>
<CAPTION>
1997 1998
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Provided by (Used In) Operating Activities
Net loss $ (248,664) $ (450,621)
Depreciation 160,000 111,000
Amortization 461,129 712,594
Deferred income taxes 66,320 61,000
Provision for bad debts 94,649 57,262
Interest on long-term debt and notes added to note payable 575,082 439,160
Rent expense in lieu of note receivable payments from Realty 50,142 55,071
Changes in assets and liabilities
(Increase) decrease in accounts receivable 97,108 (492,415)
(Increase) decrease in inventory 188,116 (234,810)
Increase in prepaid expenses and other (315,873) (53,191)
Increase (decrease) in accounts payable 532,743 (837,897)
Increase in advances from principal stockholder 695,546 179,437
Decrease in accrued expenses (107,999) (129,055)
Increase in customer deposits 192,470 291,609
-----------------------------------------------
Net cash provided by (used in) operating activities $ 2,440,769 $ (290,856)
-----------------------------------------------
Cash Flows from Investing Activities
Net advances (to) from related parties $ 21,480 $ (11,826)
Purchase of equipment and leasehold improvements (64,352) (78,105)
Acquisition cost expenditures (65,031) (4,979)
-----------------------------------------------
Net cash used in investing activities (107,903) (94,910)
-----------------------------------------------
Cash Flows from Financing Activities
Payments on note payable (2,467,649) (3,142,300)
Proceeds from unrelated party advances 534,000 --
Repayment of unrelated party advances (534,000) --
Principal payments on long-term debt (17,721) (4,392,210)
Cash payment for deferred offering costs (311,737) --
Proceeds from note payable -- 2,269,371
Proceeds from long-term debt -- 5,000,000
Debt issuance costs -- (250,000)
Proceeds from related party advance -- 500,000
Proceeds from notes payable-principal stockholder -- 500,000
Proceeds from stockholder advance 500,000 --
-----------------------------------------------
Net cash provided by (used in) financing activities $ (2,297,107) $ 484,861
-----------------------------------------------
Net increase in cash $ 35,759 $ 99,095
Cash, beginning 335,130 230,223
-----------------------------------------------
Cash, ending $ 370,889 $ 329,318
===============================================
</TABLE>
6
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (Unaudited)
Six Months Ended June 30,
<TABLE>
<CAPTION>
1997 1998
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $ 8,877 $ 106,034
==============================================
Income taxes $ - $ 1,877
==============================================
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Preferred stock dividends paid through increase in advances from
principal stockholder (Note 2(b)) $ 279,600 $ 279,600
==============================================
</TABLE>
See Notes to Consolidated Financial Statements.
7
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies
Nature of business
- ------------------
Nations Flooring, Inc. (Nations, Company or Successor Business) was organized
under the laws of the State of Delaware on December 26, 1996.
The Company is also related, through common ownership, to C. B. Realty of
Delaware, Inc. (Realty).
The Company sells floor coverings and related products to the new home and
retail replacement markets primarily in southern Nevada. The Company grants
credit principally to new home builders.
A summary of the Company's significant accounting policies follows.
Basis of presentation
- ---------------------
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for the
complete financial statements. In management's opinion, the accompanying
consolidated financial statements reflect all material adjustments (consisting
only of normal recurring accruals) necessary for a fair statement of the
results for the interim periods presented. The results for the interim periods
are not necessarily indicative of the results which will be reported for the
entire year.
Principles of consolidation
- ---------------------------
The consolidated financial statements include the accounts of the Company and
its subsidiaries, Carpet Barn Holdings, Inc. (CBH) and Carpet Barn, Inc.
(CBI). All material intercompany accounts and transactions are eliminated in
consolidation. The minority interest in the accompanying consolidated
financial statements represents the preferred stock of CBH not owned by the
Company. The CBH preferred stock dividends are included as dividends to
preferred stockholders of subsidiary on the consolidated statements of
operations.
The 12% cumulative preferred stock of CBH is divided into two classes, one
designated as Series A and the other undesignated. The Series A preferred
stockholders have an aggregate of 6% of the votes of the outstanding shares of
the common stock of CBH. The other preferred stockholders have an aggregate of
10% of the votes of the outstanding shares of the common stock of CBH. Both
classes of preferred stock contain the identical provisions as described
below.
8
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies (continued)
In the event CBH is liquidated, no distributions shall be made to the holders
of shares of stock ranking junior to the preferred stock, unless, prior
thereto, the holders of shares of preferred stock shall have received a
liquidation preference payment of $1,000 per share plus all accrued and unpaid
dividends through the date of such payment. Also, until all accrued and unpaid
dividends and distributions on preferred stock have been paid in full, CBH
shall not declare or pay dividends on, make any other distributions on, or
redeem, purchase or otherwise acquire for consideration any shares of stock
ranking junior to the preferred stock.
The preferred stock may be redeemed at the option of the Board of Directors at
a call price per share equal to its stated value plus any accrued and unpaid
dividends through the date of redemption. If no call has been made, CBH is
required to call the preferred stock for redemption at the call price on a
date not later than seven days after the closing of an underwritten public
offering.
The preferred shares were issued in units that included shares of the common
stock of the Company. The proceeds of the units attributable to the common
stock element resulted in recording the issuance of the preferred stock at a
discount from their face amount of $1,542,726 at December 31, 1997 and June
30, 1998.
Use of estimates in the preparation of financial statements
- -----------------------------------------------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash
- ----
During the periods presented, the Company maintained cash balances which, at
times, were in excess of federally insured limits. The Company has experienced
no losses in such accounts. At December 31, 1997 and June 30, 1998, 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.
9
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies (continued)
Equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
Depreciation December 31, June 30,
Lives 1997 1998
---------------------------------------------------------
<S> <C> <C> <C>
Furniture and equipment 7 $ 755,307 $ 813,155
Autos and trucks 5 130,334 131,834
Leasehold improvements 3 -5 157,734 176,491
-----------------------------------------
1,043,375 1,121,480
Less accumulated depreciation and amortization 429,285 540,285
-----------------------------------------
Equipment and leasehold improvements, net $ 614,090 $ 581,195
=========================================
</TABLE>
In accordance with Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of, the Company assesses the impairment of long-lived assets,
identifiable intangibles and costs in excess of net assets of business'
acquired (goodwill), by comparison to the projected undiscounted cash flows to
be derived from the related assets. The Company has concluded that no
impairment in the carrying amount of long-lived assets, and of identifiable
intangibles and goodwill existed at June 30, 1998.
Intangible assets
- -----------------
Intangible assets consist of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
-------------------------------------
<S> <C> <C>
Goodwill $ 17,086,762 $ 17,091,742
Covenant not-to-compete 575,000 575,000
Debt issuance costs 802,500 250,000
-------------------------------------
18,464,262 17,916,742
Less accumulated amortization 2,558,564 2,468,659
-------------------------------------
Intangible assets, net $ 15,905,698 $ 15,448,083
=====================================
</TABLE>
Goodwill in connection with the Company's acquisitions is being amortized by
the straight-line method over twenty-five years.
The Company incurred financing costs related to the bank financing obtained in
connection with refinancing the Company's long-term debt. These costs are
being amortized on the effective interest method over the term of the debt.
Previous financing costs were written off (see Note 3).
The Company also entered into a covenant not-to-compete in connection with the
acquisition of the Predecessor Business. The covenant is being amortized on
the straight-line method over the five-year term of the agreement.
10
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies (continued)
Income taxes
- ------------
The Company provides for deferred taxes on a liability method whereby deferred
tax assets are recognized for deductible temporary differences and operating
loss and tax credit carryforwards and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion
of management, it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Deferred tax assets and liabilities
are adjusted for the effect of changes in tax laws and rates on the date of
enactment.
Vendor coop marketing and purchase discounts
- --------------------------------------------
The Company participates in various advertising and marketing programs with
suppliers. Certain of the Company's costs incurred in connection with these
programs are reimbursed. The Company records these reimbursements when earned.
The Company also records accounts payable net of anticipated purchase
discounts.
Basic and dilutive loss per common share
- ----------------------------------------
The Company implemented the provisions of Statement of Financial Accounting
Standard No. 128, Earnings Per Share (SFAS 128), effective December 31, 1997.
Basic net loss per common share is computed based on net loss and the weighted
average number of common shares outstanding of 3,642,397 during the six and
three months ended June 30, 1998 and 1997. During 1998 and 1997, options to
purchase 70,000 shares of the Company's common stock, of which 40,000 remain
outstanding at June 30, 1998, were granted to directors of the Company. There
is no impact on reported net loss per common share as a result of potential
common shares. Dilutive net loss per common share is computed based on net
loss and the weighted average number of common shares and potential common
shares outstanding of 3,700,054, 3,710,054, 3,648,095 and 3,653,013 during the
six and three months ended June 30, 1998 and 1997, respectively. The
retroactive application of SFAS 128 to the six and three months ended June 30,
1997 had no effect on previously reported net loss per common share amounts.
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 was $272,953 and $384,598
for the six months ended June 30, 1997 and 1998, respectively.
11
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies (continued)
Accounting for Stock-Based Compensation
- ---------------------------------------
The Company measures compensation expense related to the grant of stock
options and stock-based awards to employees and directors in accordance with
the provisions of Accounting Principles Board Opinion No. 25, under which
compensation expense, if any, is based on the difference between the exercise
price of an option, or the amount paid for an award, and the market price or
fair value of the underlying common stock at the date of the award or at the
measurement date for variable awards. Stock-based compensation arrangements
involving non-employees are accounted for under Statement of Financial
Accounting Standard No. 123, Accounting for Stock-Based Compensation, (SFAS
123) under which such arrangements are accounted for based on the fair value
of the option or award.
During 1997 options to purchase 50,000 shares, and in March 1998, options to
purchase 20,000 shares of the Company's common stock, were granted to
directors of the Company at exercise prices equal to market price on the grant
date, ranging from $2 to $10 per common share. In addition, in April 1998,
options to purchase 425,000 shares of the Company's common stock, were granted
to the President and CFO of the Company at exercise prices equal to the market
price of $2, on the grant date. 30,000 options at an average exercise price of
$8 per common share have terminated. 465,000 options at an average exercise
price of $2.22 are outstanding at June 30, 1998.
No options were exercised during 1997 or 1998.
Fair value of financial instruments
- -----------------------------------
The carrying amounts of financial instruments including cash, accounts
receivable, employee and other receivables, notes payable, accounts payable,
and accrued expenses approximate their fair values because of their short
maturities.
The carrying amounts of long-term debt and the related party note receivable
approximate their fair values because the interest rates on these instruments
are at market rates.
Although management expects a substantial portion of amounts due to
stockholders to be paid in the near term, it is not practicable to estimate
the fair value of these amounts as they have no stated repayment terms.
Management does not believe fair value of such amounts, if determined, would
differ materially from their recorded amounts.
Comprehensive Income
- --------------------
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS
130), which establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is
defined to include all changes in equity, except those resulting from
investments by owners and distributions to owners.
12
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies (continued)
SFAS 130 is effective for financial statements for the Company's year ending
December 31, 1998, and requires comparative information for earlier years to
be presented on a comparative basis. The Company currently estimates that the
adoption of SFAS 130 will not have a material effect on its financial
statement disclosures since historically the Company has not had items
considered part of other comprehensive income. Results of operations and
financial position will be unaffected by implementation of this standard.
Segment Reporting
- -----------------
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information (SFAS 131), which supersedes Statement of
Financial Accounting Standards No. 14, Financial Reporting for Segments of a
Business Enterprise. SFAS 131 establishes standards for the manner in which
public companies report information about operating segments in annual
financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public. It
also establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS 131 defines operating segments as
components of a company about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance.
SFAS 131 is effective for financial statements for the Company's year ending
December 31, 1998, and requires comparative information about operating
segments for earlier years. The Company currently estimates that the adoption
of SFAS 131 will not require it to report information about operating
segments. Results of operations and financial position will be unaffected by
implementation of this standard.
Derivative Instruments and Hedging Activities
- ---------------------------------------------
In June, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS 133). The company will first be required to apply
SFAS 133 in the first quarter of 2000. SFAS 133 in general requires that
entities recognize all derivative financial instruments as assets or
liabilities, measured at fair value, and include in earnings the changes in
the fair value of such assets and liabilities. SFAS 133 also provides that
changes in the fair value of assets or liabilities being hedged with
recognized derivative instruments be recognized and included in earnings. The
Company does not utilize derivative instruments, either for hedging or other
purposes, and therefore anticipates that the adoption of the requirements of
SFAS 133 will not have a material affect on its consolidated financial
statements.
13
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 2. Indebtedness to Stockholders
(a) Note payable - principal stockholder
In both August and November of 1997 and in February of 1998, the Company
received unsecured advances of $500,000 (aggregate total of $1,500,000) from
Branin Investments, Inc. (Branin), which is 100% owned by the Chairman of the
Board and President of Nations, enabling the Company to make the quarterly
principal payment then due on the revolving note. The 1998 advance bears
interest at 15% per annum, payable monthly, while the 1997 advances bear
interest at 12% per annum, payable monthly. These advances are due on demand.
However, Branin has agreed to subordinate its rights to receive principal and
interest payments to the obligation owed pursuant to the Credit Facility with
Fleet as described in Note 3. Pursuant to such Credit Facility, Branin can
receive payments out of excess cash flow commencing no earlier than December,
1998, subject to the terms and conditions contained within the Credit Facility
(see Note 3). Due to these restrictions the amount has been classified at June
30, 1998 as long term. Total interest expense of $85,000 relating to these
advances has been reflected in the accompanying consolidated statement of
operations for the six months ended June 30, 1998.
(b) Advances from principal stockholder
During the six months ended June 30, 1998, Branin and PAH Marketing
Consultants, Inc. (PAH), a company controlled by the Chairman of the Board and
President of the Nations, also made certain non-interest bearing advances to
the Company. Such advances are also subject to the subordination and payment
limitations described in Note 2(a). Activity in the advances for the six months
ended June 30, 1998 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Balance, December 31, 1997 1,291,285
Dividends on CBH preferred stock paid for CBH by Branin 279,600
Management fees payable to Branin and PAH 132,500
Payments to Branin and PAH (232,663)
--------------------------
Balance, June 30, 1998 $ 1,470,722
==========================
</TABLE>
Due to the subordination and payment limitations, $1,000,000 of the balance
has been classified as long term at June 30, 1998.
14
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 2. Indebtedness to Stockholders (continued)
(c) Due to stockholder
During May 1997, the Company received an unsecured advance from a stockholder
and director of the Company in the amount of $500,000, enabling the Company to
make the quarterly principal payment then due on the revolving note. This
advance will be repaid through the issuance of 500 shares of the Company's
preferred stock in 1998. Until such time as the preferred shares are issued,
the advance will bear interest at 12% per annum, payable monthly. Branin has
agreed to advance such interest amounts at least through November, 1998.
Branin's advance is also subject to the subordination and payment limitations
described in Note 2(a). Total interest expense of $30,000 relating to the
stockholder advance has been reflected in the accompanying consolidated
statement of operations for the six months ended June 30, 1998.
(d) Related party note payable
In May 1998, the Company received an advance from Realty in the amount of
$500,000. This advance bears interest at 12% per annum, payable monthly. This
advance is subordinated and subject to payment limitations as described in
Note 2(a). Total interest of $7,000 relating to this advance has been
reflected in the accompanying consolidated statement of operations for the six
months ended June 30, 1998.
Note 3. Note Payable and Long-Term Debt
On May 19, 1998, the Company, through its indirect subsidiary CBI, entered
into a credit agreement (the "Credit Facility") with Fleet Capital Corporation
("Fleet"), pursuant to which Fleet advanced to CBI $5,000,000 under a term
loan and approximately $2,300,000 under a $5,000,000 revolving line of credit,
which revolving line of credit includes an overadvance subline capacity
(currently undrawn) of $750,000. The term loan requires quarterly payments of
$175,000 and the overadvance subline, if drawn upon, requires semi-annual
payments of $187,500. CBI pledged to Fleet substantially all of CBI's assets
to secure its obligations under the Credit Facility, and CBH guaranteed CBI's
debt obligations to Fleet under the Credit Facility and CBH pledged
substantially all of its assets, including all of the common stock of CBI, to
secure its guarantee. Fees payable to Fleet totaled $125,000, one-half paid at
closing and the balance due on November 18, 1998. In addition, a finders fee
of $100,000 was paid to a person associated with Branin. The term and
revolving portions of the Credit Facility are due on May 18, 2003 while the
overadvance capacity expires on May 18, 2000. All borrowings under the Credit
Facility bear interest at the base rate per annum announced from time to time
by Fleet (8.5% at August 5, 1998) plus 1.25%, 1.75% and 2.0% per annum, in
connection with advances under the term loan, revolving line and overadvance
subline, respectively, payable monthly. The Credit Facility also contains
provisions that excess cash flow over certain defined levels will be used to
accelerate payments of principal under the term loan. As a condition of
closing, the Company received an advance of $500,000 from Realty (see Note
2(d)). This advance bears interest at 12% per annum, payable monthly. This
advance is subordinated to the Company's obligations under the Credit
Facility, whereby the Company has agreed that principal, which is nominally
payable on demand, may not be repaid until the Company has terminated its
overadvance subline and repaid the term loan of the Credit Facility. The
Credit Facility contains covenants requiring CBI to maintain minimum levels of
tangible net worth and debt coverage. In connection with this Credit Facility,
Branin has agreed that the notes payable to and advances from it (see Notes
2(a) and (b)) will also be subject to these subordination and payment
limitation requirements.
15
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 3. Note Payable and Long-Term Debt (continued)
Amounts outstanding under the agreement are as follows:
June 30, 1998
------------------------
Revolving line of credit $ 3,340,685
========================
Overadvance subline $ --
========================
Term loan $ 5,000,000
========================
The proceeds of the Credit Facility were used to payoff the financing obtained
from First Source Financial ("First Source") of approximately $7,300,000.
Certain unamortized debt acquisition costs classified as intangible assets of
$232,390 were charged to expense as of the date of the refinancing. The
Company, through its indirect subsidiary CBI, entered into the Credit
Agreement with First Source, pursuant to which First Source advanced to CBI
approximately $15,200,000 in term and revolving loans, in June 1995, in order
to consummate its acquisition of Carpet Barn.
The Company received advances from unrelated parties of $534,000 during
February 1997, enabling the Company to make the quarterly principal payment
then due on the long-term revolving note. These advances bore interest at the
rate of 12% per annum, payable monthly. These advances were repaid in April
1997. In addition to the repayment of the principal, the lenders were to
receive $213,600 in shares of common stock of the Company as additional
interest. All parties, except one who continued his election to receive
Company stock and one who elected to receive cash, agreed to allow Branin to
acquire the right to receive common stock of the Company, and as a result
$189,600 of the obligation was reclassified as due to Branin. The total
obligation of $193,600 will be satisfied through the issuance of 27,657 shares
of the Company's common stock in 1998, which represents the number of common
shares the lenders would have received under the terms of the original
agreement.
CBI also has long-term notes payable of $126,708 and $109,497 outstanding at
December 31, 1997 and June 30, 1998, respectively. The notes are secured by
equipment and bear interest at an approximate average of 20% and mature
between August 1998 and March 2002.
16
<PAGE>
1ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations
of the Company relates to the six and three months ended June 30, 1998 and
1997 and should be read in conjunction with the financial statements and notes
thereto included elsewhere in this Report.
Results of Operations
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997.
Total revenues increased by $2,242,930 to $21,096,078 for the six months ended
June 30, 1998 from $18,853,148 for the six months ended June 30, 1997,
representing an increase of 11.9%. The components of this increase are as
follows:
Increase
(Decrease)
-------------------
New Housing $ (400,426)
Retail Replacement 1,030,234
Commercial 873,079
Other 740,043
-------------------
$ 2,242,930
===================
The decline in the New Housing Division Sales in 1998 is attributed to a
decline in sales of $546,822 in the first quarter of 1998 which resulted from
delays in construction caused by poor weather in the Las Vegas valley. New
Housing Division sales in the second quarter of 1998 increased by $146,397
over the corresponding quarter of 1997. Weather related construction delays
can occur from time to time, although the geographic areas in which the
Company operates are generally temperate in climate and therefore not subject
to significant weather delays. Since 1997, the growth in the Company's New
Housing Division sales has been adversely affected by increased competition,
and an increase in "in-house" sourcing and installation by Las Vegas area new
home builders. To attempt to counteract these developments and reduce the
Company's reliance on business generated by the New Housing Division, the
Company opened two new retail stores (one in October 1996 and one in July
1997) and opened a commercial flooring division in April 1997, which openings
contributed directly to the increased sales in these areas.. However, there
can be no assurance that these efforts will maintain or continue to increase
the Company's overall sales levels over time. Prices for the Company's
products were not significantly changed.
The gross profit increased by $108,529 to $5,128,847 for the six months ended
June 30, 1998 from $5,020,318 for the six months ended June 30 1997,
representing an increase of 2.2%. The Company gross profit percentage declined
to 24.3% in 1998 from 26.6% in 1997. Liquidity constraints that existed
before, and were alleviated by, the May 1998 refinancing (see Note 3 of Notes
to Consolidated Financial Statements) prevented the Company from taking
advantage of early payment discounts offered by vendors, and the absence of
these discounts, together with certain price concessions made to maintain or
17
<PAGE>
attract New Home sales and increases in installation costs, were the principal
causes of the decline in the gross profit percentage.
Selling, general and administrative expenses increased by $380,112 to
$3,915,386 for the six months ended June 30, 1998 from $3,535,274 for the six
months ended June 30 1997. This increase is due to the following approximate
increases: (1) workers' compensation expense of $58,000 due primarily to a
refund of approximately $132,000 received in the first quarter of 1997, (2)
rent expense of $106,000 and office expense of $54,000 primarily due to the
opening of an additional warehouse facility and an additional retail location,
(3) management and consulting fees of $35,000, (4) finance charges of $28,000
relating to the new finance programs offered to customers, (5) advertising of
$112,000 and (6) salaries and related payroll taxes and benefits of $74,000
due to anticipated increases in wage and salary rates. These increases were
partially offset by the following approximate decreases (1) professional
expenses associated with the annual audit and required public filings of
$22,000, (2) travel expenses of $34,000 and (3) bad debts of $37,000.
Amortization and depreciation expense increased to $823,594 in 1998 from
$640,023 in 1997, due to a one time write off of unamortized debt issuance
costs of approximately $230,000 and to a decrease in depreciation expense of
approximately $50,000 in 1998.
Operating income decreased by $455,154 to $389,867 for the six months ended
June 30, 1998 from $845,021 for the six months ended June 30, 1997. Interest
expense decreased to $616,031 for the six months ended June 30, 1998 from
$804,880 for the six months ended June 30, 1997, due to reductions in the
Company's senior debt made in part with the proceeds of advances from related
and unrelated parties. Income tax expense (benefit) decreased to $(79,173) in
1998 from $15,522 in 1997 due to the decrease in income before income taxes.
Net loss increased by $201,957 to $450,621 for the six months ended June 30,
1998 from $248,664 for the six months ended June 30, 1997.
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997.
Total revenues increased by $1,729,185 to $11,324,329 for the three months
ended June 30 1998 from $9,595,144 for the three months ended June 30, 1997,
representing an increase of 18.0%. The components of this increase are as
follows:
New Housing $ 146,397
Retail Replacement 689,185
Commercial 517,517
Other 376,086
-------------------
$ 1,729,185
===================
These increases, in addition to reflecting a small increase in New Housing
Division sales resulting from increases in new home construction, also reflect
the Company's diversification into Retail Replacement and Commercial.
18
<PAGE>
The gross profit increased by $258,983 to $2,854,440 for the three months
ended June 30, 1998 from $2,595,457 for the three months ended June 30, 1997,
representing a increase of 10.0%. The Company gross profit percentage declined
to 25.2% in 1998 from 27.0% in 1997. Liquidity constraints that existed
before, and were alleviated by, the May 1998 refinancing (see Note 3 of Notes
to Consolidated Financial Statements) prevented the Company from taking
advantage of early payment discounts offered by vendors, and the absence of
these discounts, together with certain price concessions made to maintain or
attract New Home sales and increases in installation costs, were the principal
causes of the decline in the gross profit percentage.
Selling, general and administrative expenses increased by $215,697 to
$2,062,035 for the three months ended June 30, 1998 from $1,8476,338 for the
three months ended June 30, 1997. This increase is due to the following
approximate increases: (1) advertising of $72,000, (2) rent expense of $54,000
and office expense of $64,000 primarily due to the opening of an additional
warehouse facility and an additional retail location, (3) salaries and related
payroll taxes and benefits of $49,000 due to anticipated increases in wage and
salary rates and (4) finance charges of $17,000 relating to the new finance
programs offered to customers. These increases were partially offset by the
following approximate decreases (1) workers' compensation expense of $50,000
due to a reduction in rates assessed per payroll dollar and (2) travel
expenses of $14,000.
Amortization and depreciation expense increased to $520,578 in 1998 from
$325,039 in 1997, due to a one-time write off of unamortized debt issuance
costs of approximately $230,000 and to a decrease in depreciation expense of
approximately $27,000 in 1998.
Operating income decreased by $152,253 to $271,827 for the three months ended
June 30, 1998 from $424,080 for the three months ended June 30, 1997. Interest
expense decreased to $307,433 for the three months ended June 30, 1998 from
$402,739 for the three months ended June 30, 1997, due to reductions in the
Company's senior debt made in part with the proceeds of advances from related
and unrelated parties. Income tax expense (benefit) decreased to $(16,331) in
1998 from $7,761 in 1997 due to the decrease in income before income taxes.
Net loss increased by $61,049 to $184,418 for the three months ended June 30,
1998 from $123,369 for the three months ended June 30, 1997.
Liquidity and Capital Resources
Cash provided by (used in) operating activities of the Company's operations
was $(290,856) and $2,440,769 for the six months ended June 30, 1998 and 1997,
respectively. At June 30, 1998, the Company had a working capital deficit of
$2,519,995. Included in such deficit is $4,040,685 due to Fleet Capital
Corporation ("Fleet") under the credit facility (the "Credit Facility")
discussed below. The Company's growth and acquisition strategy will require
significant additional cash.
During the six months ended June 30, 1998 and 1997, cash used in investing
activities was $94,910 and $107,903, respectively, used primarily to purchase
equipment and leasehold improvements. Cash provided by (used in) financing
activities during such periods was $484,861 (provided by replacement of the
First Source Financial ("First Source") debt with the Fleet Credit Facility in
May 1998, described below, of approximately $515,000 offset by proceeds from
advances from related parties of $1,000,000) and $(2,297,107) used primarily
to make principal payments on the First Source Credit Agreement, offset by
proceeds received from advances from unrelated parties, respectively.
19
<PAGE>
The Company is highly leveraged and is subject to the risks associated with a
highly leveraged business. The Company's ratio of indebtedness for borrowed
money to stockholders' equity at June 30, 1998 was 5.4:1.
On May 19, 1998, the Company, through its indirect subsidiary CBI, entered
into a credit agreement (the "Credit Facility") with Fleet Capital Corporation
("Fleet"), pursuant to which Fleet advanced to CBI $5,000,000 under a term
loan and approximately $2,300,000 under a $5,000,000 revolving line of credit,
which revolving line of credit includes an overadvance subline capacity
(currently undrawn) of $750,000. The term loan requires quarterly payments of
$175,000 and the overadvance subline, if drawn upon, requires semi-annual
payments of $187,500. CBI pledged to Fleet substantially all of CBI's assets
to secure its obligations under the Credit Facility, and CBH guaranteed CBI's
debt obligations to Fleet under the Credit Facility and CBH pledged
substantially all of its assets, including all of the common stock of CBI, to
secure its guarantee. Fees payable to Fleet totaled $125,000, one-half paid at
closing and the balance due on November 18, 1998. In addition, a finders fee
of $100,000 was paid to a person associated with Branin. The term and
revolving portions of the Credit Facility are due on May 18, 2003 while the
overadvance capacity expires on May 18, 2000. All borrowings under the Credit
Facility bear interest at the base rate per annum announced from time to time
by Fleet (8.5% at August 5, 1998) plus 1.25%, 1.75% and 2.0% per annum, in
connection with advances under the term loan, revolving line and overadvance
subline, respectively, payable monthly. The Credit Facility also contains
provisions that excess cash flow over certain defined levels will be used to
accelerate payments of principal under the term loan. As a condition of
closing, the Company received an advance of $500,000 from Realty (see Note
2(d)). This advance bears interest at 12% per annum, payable monthly. This
advance is subordinated to the Company's obligations under the Credit
Facility, whereby the Company has agreed that principal, which is nominally
payable on demand, may not be repaid until the Company has terminated its
overadvance subline and repaid the term loan of the Credit Facility. The
Credit Facility contains covenants requiring CBI to maintain minimum levels of
tangible net worth and debt coverage. In connection with this Credit Facility,
Branin has agreed that the notes payable to and advances from it (see Notes
2(a) and (b)) will also be subject to these subordination and payment
limitation requirements. As of July 31, 1998, the Company had borrowed
approximately $3,490,000, leaving approximately $1,510,000 available from
Fleet under the $5,000,000 revolving line of credit and had no availability
from Fleet under the $5,000,000 term loan that had an outstanding balance and
commitment of $5,000,000.
The proceeds of the Credit Facility were used to payoff the financing obtained
from First Source Financial ("First Source") of approximately $7,300,000.
Certain unamortized debt acquisition costs classified as intangible assets of
$232,390 were charged to expense as of the date of the refinancing.
The Company received advances from unrelated parties of $534,000 during
February 1997, enabling the Company to make the quarterly principal payment
then due on the revolving note. These advances bore interest at the rate of
12% per annum, payable monthly. These advances were repaid in April 1997. In
addition to the repayment of the principal, the lenders were to receive
$213,600 in shares of common stock of the Company as additional interest. All
parties, except one who continued his election to receive Company stock and
one who elected to receive cash, agreed to allow Branin Investments, Inc.
("Branin"), which is 100% owned by the Chairman of the Board and President of
Nations, to acquire the right to receive common stock of the Company, and as a
result $189,600 of the obligation was reclassified as due to Branin. The total
obligation of $193,600 will be satisfied through the issuance of
20
<PAGE>
27,657 shares of the Company's common stock in 1998, which represents the
number of common shares the lenders would have received under the terms of the
original agreement.
During May 1997, the Company received an unsecured advance from a shareholder
and director of the Company in the amount of $500,000, enabling the Company to
make the quarterly principal payment then due on the revolving note (see Note
2(c) of Notes to the Consolidated Financial Statements). This advance will be
repaid through the issuance of 500 shares of the Company's preferred stock in
1998. Until such time as the preferred shares are issued, the advance will
bear interest at 12% per annum, payable monthly. Branin has agreed to advance
such interest amounts at least through November, 1998. These advances will be
subordinated and subject to payment limitations as described in Note 2(a) of
Notes to the Consolidated Financial Statements. Total interest expense of
$30,000 relating to this advance has been reflected in the accompanying
consolidated financial statements for the six months ended June, 30, 1998.
In both August and November of 1997 and in February of 1998, the Company
received an unsecured advance of $500,000 (aggregate total of $1,500,000) from
Branin, enabling the Company to make the quarterly principal payment then due
on the revolving note. The 1997 advances bear interest at 12% per annum,
payable monthly and the 1998 advance bears interest at 15% per annum, payable
monthly. These advances are due on demand. However, Branin has agreed to
subordinate its rights to receive principal and interest payments, to the
obligation owed pursuant to the Credit Facility with Fleet as described in
Note 3 of Notes to the Consolidated Financial Statements. Pursuant to such
Credit Facility, Branin can receive payments out of excess cash flow
commencing no earlier than December, 1998, subject to the terms and conditions
contained within the Credit Facility. Total interest expense of $85,000
relating to these advances has been reflected in the accompanying consolidated
financial statements for the six months ended June 30, 1998.
Payments of the CBH preferred stock dividends have been made by Branin on
behalf of the Company in the amount of $46,600 per month. As a result of these
payments, and management fees and other amounts advanced from or due to Branin
and PAH Marketing, Inc. ("PAH"), a company controlled by Philip A. Herman, the
Company was indebted to Branin and PAH, for $2,970,722 at June 30, 1998 (see
Notes 2(a) and 2(b) of Notes to the Consolidated Financial Statements). As of
July 31, 1998, the Company was indebted to Branin and PAH for $2,835,276.
These advances are subordinated and subject to payment limitations as
described in Notes 2 and 3 of Notes to Consolidated Financial Statements.
However, Branin has agreed to continue to advance such dividend payments on
behalf of CBH at least through November, 1998.
Branin, which beneficially owns 303,103 shares of Common Stock of the Company,
will be entitled to receive a fee equal to 3% of the aggregate proceeds from
the debt offerings on June 1, 1995, upon the consummation of an underwritten
public offering. The total of such fees would be approximately $650,000. In
June 1995, CBI agreed to pay for consulting services of a) $35,000 per month
(reduced to $10,000 per month as of September 1, 1996 and increased to $20,000
per month as of June 1, 1998) to Branin and b) $5,000 per month through August
31, 1996, and at the rate of $12,500 per month beginning May 1, 1997 through
May 31, 1998 to PAH. These agreements were entered into for the purpose of
receiving management advisory services in the areas of operations management,
financing and acquisitions.
21
<PAGE>
The Company opened two new locations in Las Vegas during 1996 and one in 1997.
A substantial portion of the initial capital costs for these locations were
provided by the Company's suppliers in exchange for agreements by the Company
to feature the suppliers' products at these facilities. The Company
anticipates that a substantial portion of the capital requirements for any new
locations will be funded by its suppliers, although there can be no assurance
that the Company will be able to effect such an arrangement. Any new
facilities will require additional resources until they become profitable, and
there can be no assurance as to the amount of time required before they can
become profitable, if ever.
The Company is also continuing its pursuit of selective acquisitions that will
enable the Company to expand nationwide and in that regard is in an advanced
stage in discussions with several candidates that meet the Company's goals.
The Company intends to finance these acquisitions by utilizing any unused
portion of the Fleet Credit Facility and by raising debt and equity funds
through private or public offerings.
The Company anticipates that the liquidity constraints it has experienced in
1996 and 1997 will be substantially resolved by the funds available from the
Fleet Credit Facility. The Company believes that the Credit Facility will fund
any 1998 operating cash deficit, and to a limited extent the funds necessary
to pursue its strategy of expansion and acquisitions. However, the Company's
growth and acquisitions strategy will require substantial cash for capital
costs, and the failure to obtain capital resources would adversely affect the
Company's pursuit of its growth strategy.
The foregoing discussion and analysis contains forward-looking statements
regarding the Company. Because such statements include risks and
uncertainties, actual results may differ materially from those expressed or
implied by such forward-looking statements. Factors that could cause actual
results to differ materially include, but are not limited to, general economic
conditions in the United States and in the Las Vegas marketplace in
particular, as well as market conditions affecting costs and prices related to
the Company's business and the Company's ability to obtain additional
financing.
Effect of Accounting Pronouncements Issued but not Yet Adopted
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS
130"), which establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is
defined to include all changes in equity, except those resulting from
investments by owners and distributions to owners.
SFAS 130 is effective for financial statements for the Company's year ended
December 31, 1998, and requires comparative information for earlier years to
be presented on a comparative basis. The Company currently estimates that the
adoption of SFAS 130 will not have a material effect on its financial
statement disclosures since historically the Company has not had items
considered part of comprehensive income. Results of operations and financial
position will be unaffected by implementation of this standard.
22
<PAGE>
Segment Reporting
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("SFAS 131"), which supersedes Statement of
Financial Accounting Standards No. 14, Financial Reporting for Segments of a
Business Enterprise. SFAS 131 establishes standards for the manner in which
public companies report information about operating segments in annual
financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public. It
also establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS 131 defines operating segments as
components of a company about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance.
SFAS 131 is effective for financial statements for the Company's year ending
December 31, 1998, and requires comparative information about operating
segments for earlier years . The Company currently estimates that the adoption
of SFAS 131 will not require it to report information about operating
segments. Results of operations and financial position will be unaffected by
implementation of this standard.
Derivative Instruments and Hedging Activities
In June, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS 133"). The company will first be required to
apply SFAS 133 in the first quarter of 2000. SFAS 133 in general requires that
entities recognize all derivative financial instruments as assets or
liabilities, measured at fair value, and include in earnings the changes in
the fair value of such assets and liabilities. SFAS 133 also provides that
changes in the fair value of assets or liabilities being hedged with
recognized derivative instruments be recognized and included in earnings. The
Company does not utilize derivative instruments, either for hedging or other
purposes, and therefore anticipates that the adoption of the requirements of
SFAS 133 will not have a material affect on its consolidated financial
statements.
Other
The Company believes that its revenues are not materially affected by
inflation and that any increased expenses due to inflationary pressures will
be offset, over time, by corresponding increases in prices it charges to its
customers.
The Company has conducted a review of its computer system to identify the
systems that could be affected by the "Year 2000" issue. The Company presently
believes that the Year 2000 issue will not pose significant operational
problems for the Company's computer systems and any costs associated with the
Year 2000 issue will not be significant.
23
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is also subject to various legal proceedings and claims that arise
in the ordinary course of business. The Company believes that the amount of
any ultimate liability with respect to these actions in the aggregate or
individually will not materially affect the results of operations, cash flows
or financial position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
On July 27, 1998, Michael Mindlin submitted his resignation, effective
immediately, as an officer and director of the Company and any of its
subsidiaries.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
27 - Financial Data Schedule
b) Reports on Form 8-K.
--------------------
None
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant had duly caused this report to be signed by the undersigned,
thereunto duly authorized.
August 14, 1998 /s/ Philip A. Herman
-----------------------------------------
Philip A. Herman
Chairman of the Board and President
(Principal Executive Officer)
August 14, 1998 /s/ William V. Poccia
-----------------------------------------
William V. Poccia
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer
25
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 329,318
<SECURITIES> 0
<RECEIVABLES> 3,896,145
<ALLOWANCES> 240,000
<INVENTORY> 1,012,410
<CURRENT-ASSETS> 5,632,292
<PP&E> 1,121,480
<DEPRECIATION> 540,285
<TOTAL-ASSETS> 21,750,743
<CURRENT-LIABILITIES> 8,152,287
<BONDS> 7,872,297
0
3,117,274
<COMMON> 3,788
<OTHER-SE> 2,308,897
<TOTAL-LIABILITY-AND-EQUITY> 21,750,743
<SALES> 21,096,078
<TOTAL-REVENUES> 21,096,078
<CGS> 15,967,231
<TOTAL-COSTS> 3,915,386
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 57,262
<INTEREST-EXPENSE> 616,031
<INCOME-PRETAX> (250,194)
<INCOME-TAX> (79,173)
<INCOME-CONTINUING> (450,621)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (450,621)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
