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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year
ended December 31, 1997.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period
from _________ to _________.
Commission File Number: 33-29942-NY
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NATIONS FLOORING, INC.
[Exact name of registrant as specified in its charter]
Delaware 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 10038
New York, New York (Zip Code)
(Address of principal
executive offices)
Registrant's telephone number, including area code: (212) 898-8888
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of Each Exchange on
Title of each Class Which Registered
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $0.001 par value
(Title of each class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 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 [ ]
Indicate by check mark 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-K or any
amendment to this Form 10-K [X]
As of March 15, 1998, the aggregate market value of the voting stock held by
non-affiliates (1,339,224 shares) of the registrant was $5,356,896 (based on
the last such date that quotes were available on July 7, 1997, of $4.00 per
share).
As of March 15, 1998, there were 3,642,397 shares of Common Stock, $0.001 par
value per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
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This Annual Report on Form 10-K contains forward-looking statements which
include risks and uncertainties. The Company's actual operations may differ
significantly from those discussed in the forward-looking statements. Factors
that might cause such a difference include, but are not limited to, leverage,
capital requirements, dependence on manufacturers and suppliers, relationships
with customers, dependence on key operating personnel, uncertainties related
to the Company's growth strategies and those discussed in "Management's
Discussion and Analysis of Financial condition and Results of Operations" and
"Certain Relationships and Related Transactions."
Part I.
Item 1. Business
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information (including the Financial
Statements and the Notes thereto) appearing elsewhere in this report.
References to the Company herein shall mean the Company, including the
operations of Nations Flooring, Inc. and its consolidated subsidiaries, and
the operations of their predecessors, except to the extent that the context
requires otherwise.
The Company
Nations Flooring, Inc. (the "Company" or "Nations") 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, $42.4 million in 1996 and
$40.8 million in 1997 have made it the largest seller and installer of floor
coverings in such market. The Company believes that its new home sales
represent approximately 43.5% of the new homes sold in the Las Vegas market in
1997 and 48.0% in 1996 based on market information compiled by Home Builders
Research, Inc. From its five facilities in Las Vegas, the Company sells
approximately 70% of its products to the new home market to or through new
homebuilders through its New Housing Division, approximately 22% of its
products to the retail replacement market directly to individual homeowners
through its Replacement Sales Division and approximately 8% in other areas
such as commercial and window and wall coverings. 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 from the basic
floor coverings offered, or often from possible upgrades on floor coverings,
in addition to purchasing wall coverings, window treatments and related
products. The Company believes that its new retail design centers located in
Las Vegas will also enable it to continue to broaden its product lines and
expand the sales of its Replacement Sales Division. In 1997, the Company
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. The Company is opening a commercial facility in Phoenix,
Arizona in April 1998 and will develop a new home design center in St. George,
Utah, and additional stores in other sites in the southwestern United States
where the Company can expand its relationships with regional homebuilders
which it already services in Las Vegas. However, there can be no assurance as
to the viability of this approach. See "Business-Strategy."
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The Company also intends to increase its business in Las Vegas, through
continued advertising and marketing efforts, and opened two retail design
centers, (one in 1996 and one in 1997) and a new home design center in 1996.
The Company's main facility is located centrally, and the new retail design
centers are located in areas of Las Vegas with large concentrations of mature
homes. Additional retail design centers in similar areas are being
contemplated. The Company intends to actively seek to increase its retail
replacement sales through 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 Delaware on
December 26, 1996, as a wholly owned subsidiary of Ragar Corp. ("Ragar"). On
March 19, 1997, the stockholders of Ragar approved the merger of Ragar with
and into the Company. The merger was completed on May 22, 1997. As a result of
the merger, each share of Ragar common stock was converted into 1/4 share of
common stock, par value $.001 per share, of the Company. All assets,
liabilities, property, rights, and obligations of Ragar were transferred to
and assumed by Nations, and Nations was the surviving corporation after the
merger. Since Nations had no assets, liabilities or operations prior to the
merger, the merger has been accounted for in a manner similar to a
one-for-four reverse split of the outstanding common stock of Ragar, with all
share and per share amounts restated, and the financial statements of Nations
for periods prior to the merger are the former financial statements of Ragar.
The directors and executive officers of Ragar continued as the directors and
executive officers of the Company following the merger.
Ragar was organized under the laws of the State of New York on July 19,
1988. Ragar had substantially no operations prior to the acquisition in a
reverse acquisition on June 2, 1995, of Carpet Barn Holdings, Inc., ("CBH"),
which was organized under the laws of the State of Delaware on May 26, 1995.
CBH and its wholly owned subsidiary, Carpet Barn, Inc., ("CBI"), a Delaware
corporation, were formed for the purpose of acquiring the assets and
operations of Carpet Barn, Inc., a Nevada Corporation ("Predecessor
Business"), a retail carpet sales and installation outlet located in Las
Vegas, Nevada. On June 2, 1995, Ragar Corp. acquired all of the common stock
of 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, among Ragar Corp., CBH and the CBH stockholders. 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, between CBI
and Carpet Barn.
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 $14.9 billion in 1997, reflecting a cumulative increase of
33% over the six year 1991 to 1997 period, and a 3% increase from 1996 to
1997. 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 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, the changes in sales volume in 1995 as
compared to 1994 are as follows: carpet and area rug sales declined by 1.7%,
hardwood flooring sales increased by 5.6%, ceramic floor and wall tile sales
increased by 5.2%, and vinyl sheet and floor tile sales decreased by 2.4%.
The carpet industry's two primary markets are residential and commercial,
with the residential market (the market primarily 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.
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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:
Las Vegas Market
Maintain New Home Market Share in Las Vegas; Increase Replacement Sales
Penetration. The Company 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, the total new homes market for carpet in Las Vegas
is projected to grow at an annual rate of 5% to 10% over the next 10 years.
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.
The Company's share of the Las Vegas new home market declined from 48.0%
in 1996 to 43.5% in 1997, which resulted both from competition from other
floorcovering retailers and the shift to "in-house" floorcovering sourcing and
installation by certain 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.
The Company intends to increase its business in Las Vegas, through
continued advertising and marketing efforts, and opened two retail design
centers, (one in 1996 and one in 1997) and a new home design center in 1996.
The Company's main facility is located centrally, and the new retail design
centers are located in areas of Las Vegas with large concentrations of mature
homes. Additional retail design centers in similar areas are being
contemplated. The Company intends to actively seek to increase its retail
replacement sales through consumer advertising, enhanced marketing, the
opening of one or more new retail locations and the addition of new products.
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 continued to have a very positive effect on the
Company's reputation with builders and home buyers which enhances the
Company's ability to be selected as the floorcovering referral for subsequent
new home developments. 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.
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Because of the volume of its purchases, the Company receives what it believes
to be 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 is able 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 and countertops
and wall tile as its first significant product extensions and is anticipating
further product expansion 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.
The Company also seeks to increase market share and 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 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 was
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. There can be no assurance that these design centers
will have a positive impact on the Company's operations.
Inventory Practices. In the Las Vegas market, the Company has been able
to maintain low warehousing costs by stocking small amounts of inventory. At
the same time, the Company has been able to provide its customers with
next-day installation on purchases in the Las Vegas market. These practices
are dependent on the Company's ability to schedule next-day "cut and drop"
product deliveries from its suppliers. To date the Company's suppliers have
been able to satisfy its delivery requirements with overnight shipments to the
Company from distribution centers maintained by such suppliers primarily in
California, and the Company believes that because of the volume of its
purchases, it can continue to operate in Las Vegas and certain other markets
on this basis. However, there can be no assurance in this regard, and any
significant failure of suppliers to make timely deliveries would adversely
affect the Company's reputation among customers.
Other Markets
Pursuit of Selective Acquisitions and Development of New Stores. The
Company is opening a commercial facility in Phoenix, Arizona in April 1998 and
will open a location to service various home builders in St. George, Utah in
May 1998.
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 intends to develop stores
in Phoenix, Arizona and other markets in the southwestern United States.
Phoenix and other targeted southwestern United States markets are, like Las
Vegas, 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
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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 which would also benefit the operations in which the Company has
expanded into a new market through an acquisition by allowing the Company to
reduce costs and offer lower pricing than was previously offered by that
operation. However, there can be no assurance that such expansion will be
effected or, if effected, that any new facilities will be operated profitably.
The Company contemplates that any retail facilities it opens 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 43.5% of the new homes sold in
the Las Vegas 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 Review Journal
during 1997, an average of 5,000 persons relocated to Las Vegas each month,
and the Las Vegas (Clark County) population has increased to 1.2 million. More
than 31% of persons in Las Vegas have resided there for only five years or
less, and nearly 50% have resided there for less than 10 years 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, in which the Company is opening a commercial facility
in April 1998 and anticipates expanding through the development of retail
design centers, is the third fastest growing community in the United States,
according to regional publications. According to such publications, the
Phoenix population increased to 2.7 million in 1997, an increase of 3.1% over
1996, 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 27,000 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 primarily 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 was
developed during 1997 and will be expanding to Phoenix, Arizona in April 1998.
New Housing Division. The Company's New Housing Division is responsible
for installation of carpeting in newly built homes. Salespersons in this
division deal with both home builders and buyers. In servicing the new home
market, the Company generally secures contracts from builders to carpet new
homes. In most cases, when the builder sells a new home, the builder will
direct the home buyer to the Company, which allows the buyer to choose the
color of carpeting represented by a standard allowance provided from the
builder to the home buyer or to upgrade from the standard selection by paying
a higher price. The Company has found that most home buyers choose an upgraded
carpet selection.
The Company receives payment for its carpeting in new homes in one of two
ways. In most cases, the buyer directly pays the upgraded portion of a carpet
sale by generally paying the full amount with the order. In other cases, the
Company bills the upgraded portion of the job to the builder, who then passes
on the carpet's additional cost to the buyer as part of the total price of the
home; this method may allow buyers to finance their flooring upgrades through
their mortgage, with little incremental effect on monthly payments. Most of
the Company's accounts receivable result
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from New Housing Division billings to home builders of the 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 home builders in the Clark County area, with its five largest
customers accounting for $12.3 million, $15.4 million and $15.1 million in
sales in 1995, 1996 and 1997, respectively. During the past eight 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). During 1997, New Housing Division
sales accounted for $28.7 million, or 70.3% of the Company's sales. The
Company's new homes sales in Clark County as a percentage of its total sales
was 74%, 72% and 70% in 1995, 1996 and 1997, respectively.
Because the New Housing 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. However, because the Company also
services the carpet replacement market, the adverse effects on the Company's
sales by downturns in the building cycle may be moderated by offsetting trends
in the redecoration of existing homes.
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 wall coverings
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 were $10,478,151,
$8,789,047 and $8,883,495 in 1995, 1996 and 1997, respectively. Although the
Company's level of replacement market sales was lower in both 1996 and 1997
when compared to the 1995 level, 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") and
American West Homes ("AWH"). The Company has developed its relationships with
such builders over the past 24 years. In 1995, 1996 and 1997, five customers
accounted for approximately 31%, 36% and 37% of the Company's net sales,
respectively. In 1995, 1996 and 1997, Lewis accounted for 11.3%, 14.2% and
15.2% of net sales, respectively. In 1995, 1996 and 1997, AWH accounted for
8.1%, 9.6% and 9.7% 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 87.8%, 86.5% and 77.4% of its
total purchases in 1995, 1996 and 1997, respectively. The Company believes
that one of its competitive advantages is its strong relationship with such
suppliers. While the Company continues to have good relations with its
suppliers, management believes that the Company could find alternative sources
of supply should any of the Company's major suppliers cease doing business
with it.
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Marketing, Advertising and Merchandising
The Company's advertising program includes television and radio
commercials and print advertising in local daily newspapers. Expenditures for
advertising and promotion were approximately $332,000, $598,000 and $586,000
(representing 0.8%, 1.4% and 1.4% of net sales) in 1995, 1996 and 1997,
respectively. In its advertising, the Company features its large selection and
low prices and also features its guarantee against installation defects for as
long as the buyer owns the home. 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).
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 1996, although none of such
retailers dominated the market. In 1997, Clark County, Nevada had
approximately 100 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) 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 market.
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 26 years.
Employees
As of March 15, 1998, the Company employed approximately 141 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.
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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 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 $120,000. See "Certain
Transactions." The 44,000 square foot property includes a retail design
center, a warehouse retail outlet and administrative offices. The Company has
leased other additional facilities in Las Vegas, consisting of two retail
design centers, an additional warehouse and a new home design center,
containing a total of approximately 27,000 square feet at an annual rental of
approximately $260,000.
The Company maintains its principal executive offices within New York,
New York at 100 Maiden Lane.
Item 3. Legal Proceedings
The employment of Mark Szporka, as the Company's Chief Financial Officer
(CFO), was terminated by the Company in August 1996. In connection with such
termination and pursuant to the terms of Mr. Szporka's employment agreement,
the Company has repurchased 145,250 shares of Common Stock from Mr. Szporka
for $5,810. Mr. Szporka commenced a suit against CBH, CBI and directors of the
Company alleging he was wrongfully and unlawfully terminated. The Company
filed a motion to dismiss the suit based on the arbitration provision in Mr.
Szporka's employment agreement. The dismissal motion was granted by the court
on May 1, 1997, enabling the matter to be pursued in arbitration. The court
also dismissed the litigation against the individual officers. No arbitration
proceedings were ever filed. On March 20, 1998, the parties reached an
agreement in principal to settle this matter at an approximate cost to the
Company of $14,000. In connection with the agreement, Mr. Szporka's remaining
shares of the Company's stock would be repurchased by unaffiliated persons at a
price negotiated at arms length.
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 "CRPT" since May 1997. From September
1995 to May 1997, the Company's Common stock was quoted on the electronic
bulletin board under the symbol "RAGC." The following table sets forth, for
the periods indicated, the high and low bid prices, after adjustment for the
one-for-four reverse stock split, 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 1996:
First Quarter $ 21.00 $ 16.00
Second Quarter 21.00 12.00
Third Quarter 15.00 9.00
Fourth Quarter 15.00 9.00
Fiscal Year 1997:
First Quarter 13.52 4.00
Second Quarter 13.00 4.00
Third Quarter (through July 7, 1997) 7.50 * 2.00 *
Fourth Quarter * *
Fiscal Year 1998:
First Quarter * *
Second Quarter (through April 10, 1998) * *
* No reported trading after July 7, 1997
As of March 15, 1998, there were approximately 369 record holders of the
Common Stock. The last sale price of the Common Stock on July 3, 1997, was
$4.00 per share as reported by the Automated Confirmation Transaction Service.
10
<PAGE>
Item 6. Summary Financial Information
(in thousands, except share and per share data)
The summary financial information presented below has been derived from
the financial statements of the Company and the Predecessor Business. This
information should be read in conjunction with the Consolidated Financial
Statements and the Notes thereto included elsewhere in this Annual Report on
Form 10-K. 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 on the debt incurred in connection with
the Acquisition. In addition, certain information below is not shown for the
Predecessor Business where such information would not present a meaningful
comparison. See "Management's Discussion and Analysis of Financial condition
and Results of Operations."
<TABLE>
<CAPTION>
Predecessor Business Nations Flooring, Inc.
-------------------------------------------------------------------------------------------------
Pro Forma
Period Period for Year
Ended Ended Ended
Year Ended December 31, June 1, December 31, December 31, Year Ended December 31,
---------------------------- -------------------------
1993 1994 1995 (1) 1995 (2) 1995 (3) 1996 1997
-------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales $ 34,530 $ 42,507 $ 16,363 $ 23,980 $ 40,343 $ 42,414 $ 40,836
Gross margin 9,598 10,841 5,018 6,017 11,035 11,092 10,299
Income from operations 1,096 5,548 3,724 2,122 5,375 2,400 1,858
Dividends to preferred
stockholders of subsidiary 203 339 538 559
Net income (loss) 1,114 4,888 3,737 293 1,663 75 (652)
Basic and dilutive net income
(loss) per common share (4) 0.08 0.46 0.02 (0.18)
Weighted average common
shares outstanding (4) 3,645,791 3,639,732 3,773,097 3,642,397
Pro forma income tax effect (5) 379 1,662 1,271
Pro forma net income after tax (5) 735 3,226 2,466
</TABLE>
<TABLE>
<CAPTION> December 31,
---------------------------------------------
1995 1996 1997
---------------------------------------------
<S> <C> <C> <C>
Balance Sheet Data:
Working capital (deficit) $ (3,767) $ (10,777) $ (8,062)
Total assets 23,533 22,383 21,462
Long-term debt and capital lease obligations, less current 8,812 111 1,842
maturities
Stockholders' equity 3,169 3,416 2,763
</TABLE>
(1) Information is presented for the Predecessor Business for the period from
January 1, 1995 through June 1, 1995, the date of the Acquisition, which
was accounted for as a reverse acquisition of the Company by CBH.
(2) Information is presented for the Company for the period from June 2, 1995
through December 31, 1995, due to the Acquisition.
(3) Gives effect to the Acquisition and the Financing (as described herein)
as if such transactions had occurred on January 1, 1995. see
"Management's Discussion and Analysis of Financial condition and Results
of Operations-Liquidity and Capital resources" and the Financial
Statements.
(4) The weighted average common shares outstanding and net income per common
share for the Predecessor Business are not presented as they are not
comparable to those of the Company.
(5) The Predecessor Business was taxed as an S corporation under Subchapter S
of the Internal Revenue Code of 1986, as amended, (the "Code") so that in
lieu of payment of income taxes at the corporate level the stockholders
individually reported their pro rata share of the Predecessor Business'
items of income, deduction, loss and credit. Pro forma income tax has
been computed at an assumed rate of 34%.
11
<PAGE>
Item 7. 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, 1997,
1996 and 1995 and should be read in conjunction with the Financial Statements
and Notes thereto included elsewhere in this Annual Report on Form 10-K. All
references to full years are to the applicable fiscal year of the Company.
Discussion of information for 1995 relates to the pro forma consolidated
financial results of the Company and Carpet Barn for that period.
Results of Operations
Fiscal Years Ended December 31, 1997 and 1996.
Total revenues decreased by $1,578,740 to $40,835,624 for the year ended
December 31, 1997 from $42,414,364 for the year ended December 31, 1996,
representing a decrease of 3.7%. This decrease is attributable primarily to a
decrease in New Housing Division sales for fiscal 1997 compared to fiscal
1996, while prices for the Company's products were not significantly changed.
The decline in the New Housing Division Sales in 1997 primarily reflects a
decline in its share of the Las Vegas new home market, from 48.0% in 1996 to
43.5% in 1997, which resulted both from competition from other floorcovering
retailers and the shift to "in-house" floorcovering sourcing and installation
by certain 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. Although retail sales increased slightly from $8,789,047 in 1996 to
$8,883,495 in 1997, the Company believes that the opening of its new retail
design centers contributed to maintaining the 1996 sales level, and will in
the future allow it to increase the sales to this market. The Company's new
commercial division accounted for approximately $1.3 million in sales during
1997. However, there can be no assurance that these efforts will maintain or
increase the Company's overall sales levels.
The gross margin decreased by $793,441 to $10,298,999 for the year ended
December 31, 1997 from $11,092,440 for the year ended December 31, 1996,
representing a decrease of 7.2%. The gross margin percentage declined from
26.1% in 1996 to 25.2% in 1997. The Company's inability to take advantage of
all vendor offered early payment discounts due to its current debt structure,
and price rebates and reductions offered to attract certain new homebuilders
to move floorcovering previously performed "in-house" to the Company's New
Housing Division were the principal causes of the decline in the gross profit
percentage.
Selling, general and administrative expenses decreased by $236,571 to
$7,232,997 for the year ended December 31, 1997 from $7,469,568 for the year
ended December 31, 1996. This decrease is due to the approximate decreases in:
(1) workers compensation of $700,000, due largely to the Company becoming a
member of a self insured group which is set up under the State's supervision
and to a refund of $130,000 received from the State during 1997, (2) bad debt
expense of $240,000 due to the Company improving its billing and collection
functions which has allowed the Company to bill and collect its receivables
more timely and (3) management fees of $145,000. These decreases were offset
by the following approximate increases in: (1) salaries and related payroll
taxes of $340,000, due primarily to an increase in the number of employees and
increase in pay levels during 1997, (2) rent expense of $200,000 primarily due
to the opening of the new retail design centers, (3) telephone of $77,000,
office and supplies expense of $99,000, auto expense of $55,000 and equipment
rental of $30,000 due to the opening of the new retail design centers, and (4)
finance charges of $38,000 relating to the new finance programs offered to
customers.
Amortization and depreciation expense decreased to $1,207,883 in 1997
from $1,223,290 in 1996, due to decreased depreciation expense in 1997.
Operating income decreased by $541,463 to $1,858,119 for the year ended
December 31, 1997 from $2,399,582 for the year ended December 31, 1996. Other
income (expense) increased by $656,429 to ($637,975) for the year ended
December 31, 1997 from $18,454 for the year ended December 31, 1996 due to one
time charges
12
<PAGE>
relating to write off of offering costs of $468,566, pre-acquisition costs for
uncompleted acquisitions of $83,131, lawsuit settlement costs of $14,190 and
write off of loan fees of $81,666 in the fourth quarter of 1997. These
adjustments had the effect of reducing net income by approximately $418,000
($0.11 per share). Interest expense decreased to $1,356,248 in 1997 from
$1,477,614 in 1996, due to reductions in the indebtedness to First Source made
in part with the proceeds of advances from related parties aggregating
$1,000,000, offset by the interest expense related to those advances and
interest of $224,280 relating to $534,000 of advances from unrelated lenders
outstanding from February 1997 to April 1997. Income taxes decreased to
$(43,000) in 1997 from $328,043 in 1996 due to the decrease in income before
income taxes. Dividends to preferred stockholders of subsidiary increased to
$559,200 in 1997 from $537,694 in 1996 due to the Company's subsidiary CBH's
issuance of additional shares of preferred stock in 1996. Net income (loss)
decreased by $726,989 to ($652,304) for the year ended December 31, 1997 from
$74,685 for the year ended December 31, 1996. Included in the net loss for
1997 are one time charges relating to write off of deferred offering costs,
pre-acquisition costs and loan fees, aggregating $633,363, (approximately
$418,000 net of tax). Excluding these one time charges, the net loss for the
year ended December 31, 1997 was approximately $234,000 or a decrease of
approximately $309,000.
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 Nations Pro Forma Nations
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) dividends to preferred
stockholders of subsidiary of $136. No compensation was received by the owner
of the Predecessor Business for the period January 1 to June 1, 1995. The pro
forma adjustment 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
13
<PAGE>
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 increases 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 $538,000 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.
14
<PAGE>
Liquidity and Capital Resources
Cash provided by operating activities of the Company's Las Vegas
operations was $3,610,291 and $4,308,342 for the years ended December 31, 1997
and 1996, respectively. At December 31, 1997, the Company had a working capital
deficit of $8,062,035. Included in such deficit is $6,399,453 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.
During the years ended December 31, 1997 and 1996, cash used in investing
activities was $319,885 and $558,593, respectively, used primarily to purchase
equipment and leasehold improvements. Cash used in financing activities during
such periods was $3,395,313 and $4,107,975, respectively, used primarily to
make principal payments on the Credit Agreement, offset in 1997 by net
proceeds received from advances from stockholders and other unrelated
advances.
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 $83,000
and $136,000 per month, respectively through April 1996. Subsequent to payment
of the Company's subordinated debt in April 1996 as described below,
amortization expense and interest expense has averaged $83,000 and $113,000
per month, respectively. 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 December 31, 1997
was 3.5:1.
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 substantially all of the Company's assets and 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 term portion of
the Credit Agreement is due May 31, 1999 and the revolving portion is due May
31, 1998, 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 15, 1998) plus 2.25% per annum (currently 10.75% per annum), payable
monthly. As of March 15, 1998, the Company had borrowed approximately
$2,964,000, leaving approximately $36,000 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 $4,375,000.
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. In addition to the repayment of the principal,
the lenders were to receive 40% of the dollar amount of the advance ($213,600)
in shares of common stock of the Company as additional interest. These
advances were repaid in April 1997. All parties, except one who continued his
election to receive Company stock, agreed to allow Branin 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 $209,600 of the obligation was reclassified as due to Branin. The total
obligation of $213,600, included in advances from principal stockholder at
December 31, 1997, will be satisfied through the issuance of 30,514 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. Total interest expense of $224,280 relating to these advances has
been reflected in the accompanying consolidated financial statements for the
year ended December 31, 1997.
During May 1997, the Company received an unsecured advance from a
shareholder and director of the Company in the amount of $500,000, enabling
the Company to make the quarterly principal payment 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
15
<PAGE>
monthly. Total interest expense of $40,000 relating to this advance has been
reflected in the accompanying consolidated financial statements for the year
ended December 31, 1997.
In both August and November of 1997, the Company received an unsecured
advance of $500,000 from Branin, 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 12% per annum, payable monthly. Total interest
expense of $25,000 relating to these advances has been reflected in the
accompanying consolidated financial statements for the year ended December 31,
1997.
The First Source 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, 1997 the Company failed to meet substantially all of its
financial covenants. On April 14, 1998, First Source waived the covenant
violations that existed at December 31, 1997 and all prior dates, and also
amended the existing covenants so that the Company will be in compliance with
such amended covenants based on its current operating and cash flow budgets.
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 $2,291,285 at December 31, 1997
(see Notes 3(a) and 3(b) of Notes to the Consolidated Financial Statements).
In February 1998, the Company received an advance from Branin of $500,000,
enabling the Company to make the quarterly principal payment then due on the
revolving note. The note is due on demand and bears interest at a rate of 15%
per annum, payable monthly. As of March 15, 1998, the Company was indebted to
Branin and PAH for $2,921,985. Because the Company and Branin and PAH
anticipate repayment of these advances in the near term, no stated interest
rate exists on these advances and no interest has been imputed.
On March 27, 1998, the Company obtained a commitment from Fleet Capital
Corporation ("Fleet") for a $10,000,000 credit facility which includes a
$5,000,000 term loan and a $5,000,000 revolving line of credit both bearing
interest at a rate which is approximately 0.50 percent per annum lower than the
Company's current credit agreement. The agreement would require quarterly
principal payments of $175,000 on the term note, with a balloon payment of
$1,500,000 at the end of the five year term. The commitment also contains a two
year overadvance subline of the revolving line of credit of $750,000 which would
require semi-annual payments of $187,500. The credit facility would be secured
by substantially all of the Company's assets. The loan agreement would contain
customary representations, warranties, events of default and remedies. The loan
commitment contains provisions that excess cash flow over certain defined levels
will be used to accelerate payments of principal under the term loan and as a
condition of closing, Branin is to advance an additional $500,000 to the
Company. The commitment expires on April 30, 1998 and the arrangement is
expected to close on or before such date.
The Company would use the borrowings available under the proposed credit
facility with Fleet to eliminate the indebtedness under the First Source
Credit Agreement. If the Company were to so use the borrowings from Fleet, or
were to obtain and so use other alternative financing, certain unamortized
debt acquisition costs classified as intangible assets would be charged to
expense. Such unamortized debt acquisition costs totaled $307,625 and $257,469
at December 31, 1997 and March 31, 1998, respectively.
Immediately prior to the consummation of the Exchange and the Financing,
CBH privately sold an aggregate principal amount of $1,940,000 of its 12%
subordinated notes (the "Subordinated Notes") in a private placement (the
"Note Offering"), together with shares of CBH Common Stock, raising
$1,940,000, and privately sold an aggregate of 2,715 shares of CBH Preferred
Stock (the "Preferred Stock Offering"), together with shares of CBH Common
Stock, of which 2,215 shares of CBH Preferred Stock were sold for an aggregate
of $2,215,000 cash proceeds and of which 500 shares were issued in exchange
for services rendered in connection with the acquisition. The Subordinated
Notes bore interest at 12% per annum payable monthly. The first half of the
principal due on November 30, 1995 was satisfied by the Company making
principal payments of $560,000 and the exchange of $820,000 of the Notes for
820 shares of 12% CBH Preferred Stock, together with shares of Common Stock.
In addition, $1,125,000 was raised in connection with the
16
<PAGE>
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 an underwritten
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.
Branin, which beneficially owns 1,252,412 shares of Common Stock 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 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) 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 to PAH. 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."
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.
Beginning in 1996, the Company incurred costs relating to a possible
public offering of the Company's common stock. In 1998, the Company withdrew
its public offering before the offering was declared effective, and in
conjunction has written off the costs associated with the offering of
$468,566. The Company is continuing to explore the possibility or raising
funds through a private offering of debt or equity securities that will enable
the Company to pursue its growth strategies.
The Company anticipates that the liquidity constraints it has experienced
in 1996 and 1997 will be resolved by the funds available from the proposed
Fleet credit facility. The Company believes that the proceeds of the Fleet
financing will be sufficient to allow the Company to retire the First Source
indebtedness, fund any 1998 operating cash deficit, and to a limited extent
pursue its strategy of expansion and acquisitions. Should the proposed Fleet
financing not be completed, the Company nonetheless believes that its cash
flow from operations will be adequate to fund planned operations for 1998, or
that to the extent they are not sufficient the Company will be able to obtain
supplementing financing from related parties. However, the failure to obtain
those or alternative capital resources would adversely affect the Company's
pursuit of its growth strategies.
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
17
<PAGE>
that the adoption of SFAS 130 will not have a material effect on its financial
statement disclosures since historically the Company has not had items
considered part of comprehensive income. Results of operations and financial
position will be unaffected by implementation of this standard.
Segment Reporting
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("SFAS 131"), which supersedes Statement of
Financial Accounting Standards No. 14, Financial Reporting for Segments of a
Business Enterprise. SFAS 131 establishes standards for the manner in which
public companies report information about operating segments in annual
financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public. It
also establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS 131 defines operating segments as
components of a company about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance.
SFAS 131 is effective for financial statements for the Company's year
ending December 31, 1998, and requires comparative information about operating
segments for earlier years . 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.
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 does not utilize derivative financial instruments.
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.
18
<PAGE>
Part III.
Item 10. 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 52 Chairman of the Board and President
Michael Mindlin 56 Director
Facundo Bacardi 52 Director
John Katz 59 Director
Paul Kramer 65 Director
William Poccia 52 Secretary and 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.
Michael Mindlin has been a director of the Company since June 2, 1995.
Since February 1997, Mr. Mindlin has been involved in certain investment
banking activities. 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 Holding Corp. a finance company specializing in
high risk loans.
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.
John Katz has been a director since March 1998. Mr. Katz also serves as
director of the Legends Fund, a series of mutual funds which serve as
investment vehicles for variable annuities. Since 1991, Mr. Katz has been an
investment banker and business consultant. From 1975 to 1991, Mr. Katz held
various positions with Equitable Life Insurance Society and its subsidiaries,
including acting as Senior Vice President and the Executive Vice President of
Equitable Investment Corporation between 1986 and 1991.
Paul Kramer has been a director since March 1998. Mr. Kramer also serves
as a director of SFX Broadcasting, Inc. and SFX Entertainment, Inc. Since
August 1994, Mr. Kramer has been a principal of Kramer & Love, a consulting
19
<PAGE>
firm providing advisory services in the areas of acquisitions and
restructuring. Prior thereto, from October 1992, Mr. Kramer also provided
financial advisory services. From 1954 to 1968, Mr. Kramer was employed by,
and from 1968 to 1992, was a partner in Ernst & Young, the accounting firm.
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.
20
<PAGE>
Item 11. Executive Compensation
Summary Compensation Table
The following table sets forth for the fiscal year ended December 31,
1997, the compensation for services in all capacities to the Company of the
person who was at December 31, 1997 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, 1997, 1996 and 1995.
Annual Compensation (1)
--------------------------------------
Other Annual
Salary $ Bonus $ Compensation $
---------- --------- ----------------
Philip A. Herman
Chairman of the Board and President
Period ended December 31, 1995 0 0 0
Year Ended December 31, 1996 0 0 0
Year Ended December 31, 1997 13,269 0 0
(1) Certain entities controlled by Mr. Herman received fees from the Company
for the years ended December 31, 1997 and 1996 and for the period ended
December 31, 1995. See "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. William Poccia, Chief
Financial Officer of the Company, is being remunerated by the Company at the
rate of $100,000 per year.
Employment Agreements and 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 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 annual salary is $125,000 per year and may be increased
at the Company's discretion. 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 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
21
<PAGE>
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' annual salary is $75,000 per year and
may be increased at the Company's discretion.
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
include merchandising, marketing, advertising, sales training and program
development. From September, 1994 until he was hired by the Company, Mr. Ember
was the Divisional President of CarpetMAX in Phoenix, Arizona and was
responsible for the entire operation of that division. Prior to that, from
November 1993, Mr. Ember was the General Manager for Carpeteria in Tucson.
From March 1993, Mr. Ember served as General Manager for Broadway Carpet, also
in Tucson. From September 1992, he was the carpet division and advertising
manager for Tile City in Pittsburgh, Pennsylvania. Prior to that, Mr. Ember
was the General Manager for Apollo Carpet in Tucson, Arizona.
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.. 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 Mr. Ember's
total disability.
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 the Company. 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 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 the Company at
an exercise price equal to the fair market value on the date of grant. Members
of the Committee are disinterested within the meaning of Section 16 of the
Securities Exchange Act of 1934, as amended, and outside directors within the
meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended
(the "Code").
Options Issued Under the Option Plan. The terms of specific options are
determined by the Committee. Options granted may be NQSO's or incentive stock
options within the meaning of Code Section 422 ("ISO's"). The exercise price
per share for a non-qualified option is subject to the determination of the
Committee. Incentive stock options may not be granted at less than 100% of the
fair market value at the date of grant. Each option will be exercisable for
the period or periods specified in the option agreement, which will not exceed
10 years from the date of grant.
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
22
<PAGE>
(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.
During 1997, options to purchase 50,000 shares of the Company's common
stock were granted to the directors of the Company, of which 10,000 terminated
and 40,000 are outstanding as of December 31, 1997. No options were exercised
during 1997.
23
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information as of March
1, 1998, 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) 2,303,173 63.2%
c/o Branin Investments, Inc.
100 Maiden Lane
New York, NY 10038
Branin Investments, Inc. (2) 313,103 8.6
100 Maiden Lane
New York, NY 10038
Facundo Bacardi (3) 1,435,996 39.4
c/o Branin Investments, Inc.
100 Maiden Lane
New York, NY 10038
Icarus Investments, Ltd. (4) 878,854 24.1
c/o Branin Investments, Inc.
100 Maiden Lane
New York, NY 10038
Michael Mindlin (5) 144,200 4.0
William Poccia 0 *
All Directors and Executive 2,303,173 63.2
Officers as group (5 persons)
--------------------------------------------------------------
* Less than one percent
(1) Includes an aggregate of 2,303,173 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. 72,500 of such shares are held in the voting trust
for benefit of Mr. Herman and 313,103 of such shares are held in the voting
trust for benefit of Branin, of which Mr. Herman is a principal. Excludes 726
shares held by each of Richard and Ruth Herman and 15,615 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 72,500 shares held through the voting trust referenced in note 1,
above, for the benefit of Mr. Herman.
(3) Includes an aggregate of 1,218,121 shares held by various affiliates of Mr.
Bacardi (including 878,854 shares held by Icarus Investments Ltd., 76,256 shares
held by each of Stylish Investments Ltd. and Delphic Investments Ltd., and
186,755 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 144,200 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.
24
<PAGE>
Item 13. 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 an underwritten public offering. The total of such fees
would be approximately $650,000. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Liquidity and Capital Resources."
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) 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 to PAH. 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, a former director of the Company, 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 those stockholders of the Company who are
also stockholders of CB Realty. As of March 15, 1998, the balance remaining on
such loan was $127,873. 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. The lease
was extended to April 1, 2004 with annual lease payments of $120,000.
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. As a result of these payments, and
management fees and other amounts advanced from or due to Branin and PAH, the
Company was indebted to Branin and PAH, for $2,291,285 at December 31, 1997 (see
Notes 3(a) and 3(b) of Notes to Consolidated Financial Statements. In February
1998, the Company received an advance from Branin of $500,000, enabling the
Company to make the quarterly principal payment then due on the revolving note.
The note is due on demand and bears interest at a rate of 15% per annum, payable
monthly. As of March 15, 1998, the Company was indebted to Branin and PAH for
$2,921,985.
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.
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. Total interest
expense of $40,000 relating to this advance has been reflected in the
accompanying consolidated financial statements for the year ended December 31,
1997.
The Company's executive offices are located at 100 Maiden Lane, New
York, New York. Branin also occupies these offices.
25
<PAGE>
Item 14. 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 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).
10.10 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).
10.11 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).
10.12 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).
10.13 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).
27
<PAGE>
NATIONS FLOORING, INC.
CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 1997
-------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT F-2
-------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated balance sheets F-3
Consolidated statements of operations F-4
Consolidated statement of stockholders' equity -
Successor Business F-5
Consolidated statement of stockholder's equity -
Predecessor Business F-6
Consolidated statements of cash flows F-7 - F-8
Notes to consolidated financial statements F-9 - F-23
-------------------------------------------------------------------------------
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Nations Flooring, Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of Nations
Flooring, Inc. and subsidiaries (Successor Business) as of December 31, 1997 and
1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for the years ended December 31, 1997 and 1996, and for
the period from commencement of operations (June 2, 1995) to December 31, 1995.
We have also audited the accompanying statements of operations, 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. 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 Nations Flooring, Inc. and subsidiaries, as of December 31, 1997 and
1996 and the results of their operations and their cash flows for the years
ended December 31, 1997 and 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, in conformity with generally accepted accounting
principles.
/s/ McGladrey & Pullen, LLP
McGladrey & Pullen, LLP
Las Vegas, Nevada
February 19, 1998, except for the first paragraph of Note 8 as to which the date
is March 20 1998, and the second, third and fourth paragraphs of Note 4 as to
which the date is April 14,1998.
F-2
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1997
<TABLE>
<CAPTION>
December 31, December 31,
ASSETS (Note 4) 1996 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash $ 335,130 $ 230,223
Accounts receivable, less allowance for doubtful
accounts 1996 $347,000, 1997 $240,000 (Note 5) 3,281,236 3,460,992
Due from employees 63,104 16,851
Inventory 709,627 777,600
Current portion of related party note receivable (Note 8) 169,169 142,658
Deferred public offering costs 155,721 -
Prepaid expenses and other 168,588 314,137
-----------------------------------------------
Total current assets 4,882,575 4,942,461
-----------------------------------------------
Related Party Note Receivable, less current portion (Note 8) 45,327 -
Equipment and Leasehold Improvements, net (Note 1) 549,349 614,090
Intangible Assets, net (Note 1) 16,905,761 15,905,698
-----------------------------------------------
$ 22,383,012 $ 21,462,249
===============================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Note payable (Note 4) $ 2,879,581 $ 2,899,453
Notes payable - principal stockholder (Note 3(a)) - 1,000,000
Current maturities of long-term debt (Note 4) 8,781,519 3,534,535
Accounts payable 2,250,206 2,934,737
Advances from principal stockholder (Note 3(b)) 390,038 1,291,285
Accrued expenses 442,145 282,993
Customer deposits 916,480 1,061,493
-----------------------------------------------
Total current liabilities 15,659,969 13,004,496
-----------------------------------------------
Deferred Income Taxes (Note 6) 79,344 235,000
-----------------------------------------------
Due to Stockholder (Note 3(c)) - 500,000
-----------------------------------------------
Long-Term Debt, less current maturities (Note 4) 110,815 1,842,173
-----------------------------------------------
Minority Interest-Preferred Stock of Subsidiary 3,117,274 3,117,274
-----------------------------------------------
Commitments and Contingencies (Notes 7 and 8)
Stockholders' Equity (Notes 1 and 9)
Preferred stock, $.001 par value,
authorized 1,000,000 shares; none issued - -
Common stock, $.001 par value, authorized 20,000,000
shares; issued 1996 and 1997 3,787,647 shares 3,788 3,788
Additional paid-in capital 3,050,240 3,050,240
Retained earnings (deficit) 367,392 (284,912)
-----------------------------------------------
3,421,420 2,769,116
Less cost of treasury stock (145,250 shares) (Note 8) 5,810 5,810
-----------------------------------------------
3,415,610 2,763,306
-----------------------------------------------
$ 22,383,012 $ 21,462,249
===============================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nations Flooring, Inc.
Predecessor -------------------------------------------------------------
Business June 2, 1995 to Year Ended Year Ended
January 1, 1995 December 31, December 31, December 31,
to June 1, 1995 1995 1996 1997
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales (Note 5) $ 16,362,727 $ 23,979,879 $ 42,414,364 $ 40,835,624
Cost of sales 11,344,430 17,962,416 31,321,924 30,536,625
---------------------------------------------------------------------------------
Gross profit 5,018,297 6,017,463 11,092,440 10,298,999
Selling, general and administrative expenses:
Related party consulting fees (Note 8) - 315,000 365,000 220,000
Related party rent expense (Note 7) - 58,499 100,284 100,284
Other 1,280,445 2,855,540 7,004,284 6,912,713
---------------------------------------------------------------------------------
1,280,445 3,229,039 7,469,568 7,232,997
---------------------------------------------------------------------------------
Amortization and depreciation 14,195 666,287 1,223,290 1,207,883
---------------------------------------------------------------------------------
Operating income 3,723,657 2,122,137 2,399,582 1,858,119
Other income (expense):
Other income (expense), net (Note 10) 19,892 20,024 18,454 (637,975)
Related party interest expense - - - (65,000)
Interest expense (6,405) (1,385,022) (1,477,614) (1,291,248)
-------------------- -----------------------------------------------------------
Income (loss) before taxes and
dividends to preferred
stockholders of subsidiary 3,737,144 757,139 940,422 (136,104)
Provision for income
taxes (benefit) (Note 6) - 261,037 328,043 (43,000)
---------------------------------------------------------------------------------
Income (loss) before dividends
to preferred stockholders
of subsidiary $ 3,737,144 $ 496,102 $ 612,379 $ (93,104)
Dividends to preferred stockholders
of subsidiary - 203,395 537,694 559,200
---------------------------------------------------------------------------------
Net income (loss) 3,737,144 292,707 74,685 (652,304)
=================================================================================
Basic and Dilutive net income
(loss) per common share (Note 1) $ 0.08 $ 0.02 $ (0.18)
===========================================================
Unaudited Proforma Information:
Net income before taxes $ 3,737,144
Proforma income tax expense 1,270,629
--------------------
Proforma net income after taxes $ 2,466,515
====================
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - SUCCESSOR BUSINESS
Commencement of Operations (June 2, 1995) to December 31, 1995 and the years
ended December 31, 1996 and 1997
<TABLE>
<CAPTION>
Common Stock Additional Retained
-------------------------
Shares Paid-in Earnings Treasury
Outstanding Dollars Capital (Deficit) Stock Total
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock for
initial capitalization 209 $ 1 $ 925,056 $ - $ - $ 925,057
Recapitalization/exchange including
issuance of common stock for acquisition
costs of $1,157,393 (Note 2) 3,631,042 3,630 2,324,044 - - 2,327,674
Return of capital (Note 2) - - (811,992) - - (811,992)
Exchange of subordinated debt for
common stock 58,571 59 247,003 247,062
Issuance of common stock 43,214 43 188,839 - - 188,882
Net income - - - 292,707 - 292,707
------------------------------------------------------------------------------------
Balance, December 31, 1995 3,733,036 3,733 2,872,950 292,707 - 3,169,390
Issuance of common stock 54,611 55 177,290 - - 177,345
Purchase of treasury stock
(145,250 shares) (Note 8) - - - - (5,810) (5,810)
Net income - - - 74,685 - 74,685
------------------------------------------------------------------------------------
Balance, December 31, 1996 3,787,647 $ 3,788 $ 3,050,240 $ 367,392 $ (5,810) $ 3,415,610
Net loss - - - (652,304) - (652,304)
------------------------------------------------------------------------------------
Balance, December 31, 1997 3,787,647 $ 3,788 $ 3,050,240 $ (284,912) $ (5,810) $ 2,763,306
====================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY - PREDECESSOR BUSINESS
Period from January 1, 1995 to June 1, 1995
<TABLE>
<CAPTION>
Common Stock
-------------------------------
Shares Retained
Outstanding Dollars Earnings Total
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 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>
NATIONS FLOORING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nations Flooring, Inc.
Predecessor -----------------------------------------------------------
Business Year Ended Year Ended
January 1, 1995 June 2, 1995 to December 31, December 31,
to June 1, 1995 December 31, 1995 1996 1997
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities
Net income (loss) $ 3,737,144 $ 292,707 $ 74,685 $ (652,304)
Depreciation 14,195 44,121 177,344 207,820
Amortization - 622,674 1,045,946 1,000,063
Accretion of discount on subordinated
notes payable - 326,058 44,578 -
Deferred income taxes - 31,322 48,022 155,656
Provision for bad debts 5,633 44,000 302,900 165,019
Interest added to note payable - 790,795 1,393,571 1,068,714
Common stock issued in lieu of interest - - 15,000 -
Rent expense in lieu of note receivable
payments to Realty - 58,499 100,284 100,284
Write off of pre-acquisition costs - - 25,056 83,131
Write off of deferred offering costs - - - 468,566
Changes in assets and liabilities:
Increase in accounts receivable (603,294) (1,060,247) (116,854) (344,775)
Increase in inventory (87,620) (161,757) (71,332) (67,973)
Increase in prepaid expenses and other - (61,637) (106,951) (145,549)
Increase (decrease) in accounts payable (599,153) 1,746,045 450,442 684,531
Increase in advances from
principal stockholder - - 619,094 901,247
Increase (decrease) in accrued expenses (323,478) 455,651 (17,427) (159,152)
Increase (decrease) in customer deposits (380,924) 228,842 323,984 145,013
----------------------------------------------------------------------------------
Net cash provided by
operating activities 1,762,503 3,357,073 4,308,342 3,610,291
----------------------------------------------------------------------------------
Cash Flows from Investing Activities
Advances to employees and related
parties, net - (338,035) (327,403) 17,807
Purchase of equipment and leasehold
improvements - (108,237) (231,190) (254,561)
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) - (83,131)
Proceeds from sale of equipment 72,076 19,000 - -
----------------------------------------------------------------------------------
Net cash provided by (used in)
investing activities 72,076 (19,236,078) (558,593) (319,885)
----------------------------------------------------------------------------------
</TABLE>
F-7
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
Nations Flooring, Inc.
Predecessor --------------------------------------------------------
Business Year Ended Year Ended
January 1, 1995 June 2, 1995 to December 31, December 31,
to June 1, 1995 December 31, 1995 1996 1997
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash Flows from Financing Activities
Payments on note payable - (1,827,722) (3,879,595) (4,548,842)
Proceeds from unrelated party advances - - - 534,000
Repayment of unrelated party advances - (560,000) (560,000) (534,000)
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 (2,400,000) - - -
Principal payments on long-term debt (8,156) (8,102) (26,849) (33,626)
Purchase of treasury stock - - (5,810) -
Cash payment for deferred offering costs - - (155,721) (312,845)
Proceeds from long-term debt - 14,000,000 - -
Proceeds from note payable - 1,152,532 - -
Proceeds from notes payable-principal
stockholder - 1,569,364 - 1,000,000
Proceeds from stockholder advance - - - 500,000
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 (2,408,156) 16,572,361 (4,107,975) (3,395,313)
-----------------------------------------------------------------------------
Net increase (decrease) in cash (573,577) 693,356 (358,226) (104,907)
Cash, beginning 665,393 - 693,356 335,130
-----------------------------------------------------------------------------
Cash, ending $ 91,816 $ 693,356 $ 335,130 $ 230,223
=============================================================================
Cash payments for:
Interest $ 6,405 $ 130,171 $ 59,469 $ 48,950
=============================================================================
Income taxes $ - $ 374,000 $ 138,800 $ 3,388
=============================================================================
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Acquisition of net assets of Predecessor Business:
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 $ - $ -
=============================================================================
Preferred stock dividends paid through increase
in advances from principal
stockholder (Note 3(b)) $ - $ - $ 419,094 $ 559,200
=============================================================================
Equipment acquired through financing agreement $ - $ - $ 79,764 $ 18,000
=============================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-8
<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, as a wholly owned
subsidiary of Ragar Corp. (Ragar).
On March 19, 1997, the stockholders of Ragar approved the merger of Ragar with
and into the Company. The merger was completed on May 22, 1997. As a result of
the merger, each share of Ragar common stock was converted into 1/4 share of
common stock, par value $.001 per share, of the Company. All assets,
liabilities, property, rights, and obligations of Ragar were transferred to and
assumed by Nations, and Nations was the surviving corporation after the merger.
Since Nations had no assets, liabilities or operations prior to the merger, the
merger has been accounted for in a manner similar to a one-for-four reverse
split of the outstanding common stock of Ragar, with all share and per share
amounts restated, and the financial statements of Nations for periods prior to
the merger are the former financial statements of Ragar. The directors and
executive officers of Ragar continued as the directors and executive officers of
the Company following the merger.
Ragar was organized under the laws of the state of New York on July 19, 1988.
Ragar 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. Ragar 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 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. Unless
specifically discussed, the accounting policies apply to both Nations (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, Ragar 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 Ragar, representing 92% of Ragar'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 (CBH) is treated as the surviving
entity, even though the legal acquirer's (Ragar's) legal existence does not
change. The accounting acquirer treats the Exchange similar to a purchase
acquisition and the results of operations and cash flows for periods prior to
the date of the acquisition are those of the accounting acquirer (CBH).
F-9
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
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 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.
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, 1996 and 1997.
Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-10
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies (continued)
Significant fourth quarter adjustments
Beginning in 1996, the Company incurred costs relating to a possible public
offering of the Company's common stock. In 1998, the Company withdrew its public
offering before the offering was declared effective, and in conjunction has
written off the costs associated with the offering of $468,566. Also during
1997, the Company terminated discussions with several acquisition candidates and
wrote off pre-acquisition costs of $83,131. The effect of these write offs was
to decrease net income by approximately $364,000 ($0.10 per share) for the three
months ended December 31, 1997.
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,
1997 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.
Equipment and leasehold improvements consist of the following at December 31:
<TABLE>
<CAPTION>
Depreciation
Lives 1996 1997
---------------------------------------------------------
<S> <C> <C> <C>
Furniture and equipment 7 $ 556,430 $ 755,307
Autos and trucks 5 112,334 130,334
Leasehold improvements 3 -5 102,050 157,734
-----------------------------------------
770,814 1,043,375
Less accumulated depreciation and amortization 221,465 429,285
-----------------------------------------
Equipment and leasehold improvements, net $ 549,349 $ 614,090
=========================================
</TABLE>
F-11
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies (continued)
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 December 31, 1997.
Intangible assets
Intangible assets consist of the following at December 31:
1996 1997
-----------------------------------------
Goodwill $ 17,086,762 $ 17,086,762
Covenant not-to-compete 575,000 575,000
Debt issuance costs 802,500 802,500
-----------------------------------------
18,464,262 18,464,262
Less accumulated amortization 1,558,501 2,558,564
-----------------------------------------
Intangible assets, net $ 16,905,761 $ 15,905,698
=========================================
Goodwill in connection with the Company's acquisitions (see Note 2) 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 the acquisition of the Predecessor Business (see Note 2). These
costs are being amortized on the effective interest method over the term of the
debt.
The Company also entered into a covenant not-to-compete in connection with the
acquisition of the Predecessor Business (see Note 2). The covenant is being
amortized on the straight-line method over the five-year term of the agreement.
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.
F-12
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies (continued)
The Predecessor Business, with the consent of its stockholder, elected to be
taxed under sections of the federal tax law which provide that, in lieu of
corporation income taxes, the stockholder separately accounted for the
Predecessor Business' items of income, deduction, losses and credits. Therefore,
the Predecessor Business financial statements do not include any provision for
corporation income taxes.
Vendor coop marketing and purchase discounts
The Company participates in various advertising and marketing programs with
suppliers. Certain of the Company's costs incurred in connection with these
programs are reimbursed. The Company records these reimbursements when earned.
The Company also records accounts payable net of anticipated purchase discounts.
Basic and dilutive net income <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 income <loss> per common share is computed based on net income and the
weighted average number of common shares outstanding of, 3,645,791, 3,773,097
and 3,642,397 during the period from June 2, 1995 to December 31, 1995, and the
years ended December 31, 1996 and 1997, respectively. There were no potential
common shares outstanding during the period from June 2, 1995 to December 31,
1995 and for the year ended December 31, 1996. During 1997, options to purchase
50,000 shares of the Company's common stock, of which 40,000 remain outstanding
at December 31, 1997, were granted to directors of the Company. There is no
impact on reported net income <loss> per common share as a result of potential
common shares. Dilutive net income <loss> per common share is computed based on
net income and the weighted average number of common shares and potential common
shares outstanding of 3,645,791, 3,773,097 and 3,668,123 during the period from
June 2, 1995 to December 31, 1995 and the years ended December 31, 1996 and
1997, respectively. The retroactive application of SFAS 128 to the period June
2, 1995 to December 31, 1995 and to the year ended December 31, 1996 had no
effect on previously reported net income
<loss> per common share amounts.
Revenue recognition
Revenue is recorded for commercial and retail floor covering sales upon
installation.
F-13
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies (continued)
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 Nations Flooring, Inc.
- ----------------------- ------------------------------------------------------
June 2, 1995 to Year Ended Year Ended
January 1, 1995 to December 31, December 31, December 31,
to June 1, 1995 1995 1996 1997
- -------------------------------------------------------------------------------
$ 125,452 $ 206,421 $ 597,960 $ 585,668
===============================================================================
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 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 $4 to $10 per common share. During 1997,
10,000 options at an average exercise price of $10 per common share terminated,
and 40,000 options at an average exercise price of $7 per common share are
outstanding and exercisable at December 31, 1997. No options were exercised
during 1997. Had compensation expense for the grant of such options been
measured using the fair value requirements of SFAS 123 (and assuming an option
life, volatility and risk free interest rate and dividends of 10 years, 1.0%,
5.47% and $0, respectively), the 1997 compensation expense and increase in net
loss per share would have been approximately $116,000 and $0.03, respectively.
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.
F-14
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies (continued)
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.
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.
F-15
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
Note 2. Acquisitions
On June 2, 1995, Ragar 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 Ragar, representing 92% of Ragar's common stock outstanding after the
Exchange. Ragar had no operations prior to the acquisition of the Predecessor
Business. Its only asset was approximately $860,000 of cash and it had
immaterial liabilities.
Concurrent with CBH's stock exchange with Ragar, 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 Ragar. 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 CBI and
the Predecessor Business, were transferred by Predecessor Business directly to
Realty in consideration of a note issued to CBI 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 stockholders of the Company who are also 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 $ 0.46
The net income per common share was computed based on the 3,645,791 average
common shares outstanding during the period from June 2, 1995 to December 31,
1995.
The above pro forma information does not purport to be indicative of the results
that actually would have been obtained had the acquisitions occurred on January
1, 1995.
F-16
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
Note 3. Indebtedness to Stockholders
(a) Note payable - principal stockholder
In both August and November of 1997, the Company received unsecured advances of
$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. These advances bear
interest at 12% per annum, payable monthly and are due on demand. Total interest
expense of $25,000 relating to these advances has been reflected in the
accompanying consolidated statement of operations for the year ended December
31, 1997.
(b) Advances from principal stockholder
During the years ended December 31, 1996 and 1997, 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, as follows:
Dividends on CBH preferred stock paid for CBH by Branin $ 419,094
Management fees payable to Branin and PAH 200,000
Payments to Branin and PAH (229,056)
----------------
Balance, December 31, 1996 390,038
Dividends on CBH preferred stock paid for CBH by Branin 559,200
Management fees payable to Branin and PAH 220,000
Interest obligation of CBI assumed by Branin (Note 4) 213,600
Payments to Branin and PAH (91,553)
----------------
Balance, December 31, 1997 $ 1,291,285
================
(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 in cash monthly. Total
interest expense of $40,000 relating to this advance has been reflected in the
accompanying consolidated statement of operations for the year ended December
31, 1997.
F-17
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
Note 3. Indebtedness to Stockholders (continued)
(d) Additional advance from principal stockholder
In February 1998, the Company received an advance from Branin of $500,000,
enabling the Company to make the quarterly principal payment then due on the
revolving note. The note is due on demand and bears interest at a rate of 15%
per annum, payable monthly.
Note 4. 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, 1998, which, under certain
conditions may be extended through May 31, 1999. The Credit Agreement contains
covenants requiring CBI to maintain minimum levels of tangible net worth,
working capital and various financial ratios. The agreement further requires
that a minimum $100,000 cash balance be maintained in a cash collateral account.
The agreement also limits payments from CBI to CBH and limits dividends,
redemptions and purchases of capital stock of CBI, CBH and the Company. CBH
pledged to First Source substantially all of the assets and all of the common
stock of CBI to secure CBI's obligations under the Credit Agreement and
guaranteed CBI's debt obligations to First Source under the Credit Agreement.
During the period from commencement of operations (June 2, 1995) through
December 31, 1997 the Company violated substantially all of its financial
covenants. On April 14, 1998, First Source waived the covenant violations that
existed at December 31, 1997 and all prior dates, and also amended the existing
covenants so that the Company will be in compliance with such amended covenants
based on its current operating and cash flow budgets.
On March 27, 1998, the Company obtained a commitment from Fleet Capital
Corporation ("Fleet") for a $10,000,000 credit facility which includes a
$5,000,000 term loan and a $5,000,000 revolving line of credit both bearing
interest at a rate which is approximately 0.50 percent per annum lower than the
Company's current credit agreement. The agreement would require quarterly
principal payments of $175,000 on the term note, with a balloon payment of
$1,500,000 at the end of the five year term. The commitment also contains a two
year overadvance subline of the revolving line of credit of $750,000 which would
require semi-annual payments of $187,500. The credit facility would be secured
by substantially all of the Company's assets. The loan agreement would contain
customary representations, warranties, events of default and remedies. The loan
commitment contains provisions that excess cash flow over certain defined levels
will be used to accelerate payments of principal under the term loan and as a
condition of closing, Branin is to advance an additional $500,000 to the
Company. The commitment expires on April 30, 1998 and the arrangement with Fleet
is expected to close on or before such date.
F-18
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
Note 4. Note Payable and Long-Term Debt (continued)
The Company would use the borrowings available under the proposed credit
facility with Fleet to eliminate the indebtedness under the First Source Credit
Agreement. If the Company were to so use the borrowings from Fleet, or were to
obtain and so use other alternative financing, certain unamortized debt issuance
costs classified as intangible assets would be charged to expense. Such
unamortized debt issuance costs totaled $307,625 and $257,469 at December 31,
1997 and March 31, 1998, respectively.
Amounts outstanding under the agreement at December 31, are as follows:
1996 1997
----------------------------------------
Working capital note $ 2,879,581 $ 2,899,453
========================================
Credit facility $ 8,750,000 $ 5,250,000
========================================
At December 31, 1997, the Company has approximately $100,000 available under the
original working capital note commitment.
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 15, 1998) plus 2.25% per annum (currently 10.75% per annum), payable
monthly. In addition, the agreement provides that interest on the note and
credit facility be added to the note.
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. In addition to the repayment of the principal, the
lenders were to receive 40% of the dollar amount of the advance ($213,600) in
shares of common stock of the Company as additional interest. These advances
were repaid in April 1997. All parties, except one who continued his election to
receive Company stock, agreed to allow Branin to acquire the right to receive
common stock of the Company, and as a result $209,600 of the obligation was
reclassified as due to Branin. The total obligation of $213,600, included in
advances from principal stockholder (see Note 3(b)) at December 31, 1997, will
be satisfied through the issuance of 30,514 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. Total interest expense of
$224,280 relating to these advances has been reflected in the accompanying
consolidated statement of operations for the year ended December 31, 1997.
CBI also has long-term notes payable of $142,334 and $126,708 outstanding at
December 31, 1996 and 1997, respectively. The notes bear interest at an
approximate average of 20% and mature between August 1998 and March 2002.
F-19
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
Note 4. Note Payable and Long-Term Debt (continued)
Aggregate maturities required on the long-term debt are due in future years as
follows at December 31, 1997:
1998 $ 3,534,535
1999 1,787,391
2000 37,894
2001 15,639
2002 1,249
-----------------------
$ 5,376,708
=======================
Note 5. Major Customers
Sales for Nations 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 Nations Flooring, Inc. Accounts Receivable
--------------------------------------------------- --------------------------------
Business June 2, 1995 to Year Ended Year Ended Nations Flooring, Inc.
--------------------------------
<S> <C> <C> <C> <C> <C> <C>
January 1, to December 31, December 31, December 31, December 31, December 31,
Customer June 1, 1995 1995 1996 1997 1996 1997
------------------------------------------------------------------------------- --------------------------------
A 10% 13% 14% 15% 6% 13%
B 8% 9% 10% 10% 3% 3%
</TABLE>
Note 6. Income Taxes
The provision for income taxes (benefit) for the years ended December 31, 1996
and 1997 is comprised of the following:
1996 1997
---------------------------------------
Current expense (benefit) $ 280,021 $ (198,656)
Deferred tax expense 48,022 155,656
---------------------------------------
$ 328,043 $ (43,000)
=======================================
The $79,344 and $235,000 deferred tax liability at December 31, 1996 and 1997,
respectively, is principally the result of temporary differences between the tax
bases and reported amounts of intangible assets.
F-20
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
Note 7. Lease Commitments
Related party lease commitments
The Company leases its main operating premises from Realty under a noncancelable
operating lease expiring in April 2004. Future minimum rental payments under
this lease at December 31, 1997 are as follows:.
1998 $ 115,071
1999 120,000
2000 120,000
2001 120,000
2002 120,000
Thereafter 150,000
---------------------
Total $ 745,071
=====================
Other lease commitments
In 1996 and 1997, the Company entered into agreements to rent retail and
warehouse space under separate leases expiring through June 2002. Monthly lease
payments are net of taxes, insurance and utilities, and total $23,692. 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, 1997 is as
follows:
1998 $ 285,763
1999 249,024
2000 165,538
2001 133,010
2002 54,564
====================
$ 887,899
====================
Total rent expense under the above leases for the period from commencement of
operations (June 2, 1995) through December 31, 1995 and the years ended December
31, 1996 and 1997, was 60,199, $157,149 and $379,766 respectively.
F-21
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
Note 8. Commitments, Contingencies and Related Party Transactions
Litigation
The Company's former CFO was terminated in August, 1996. The former CFO
commenced a suit against the Company alleging he was wrongfully and unlawfully
terminated. On March 20, 1998, the parties reached an agreement in principal to
settle this matter at an approximate cost to the Company of $14,000. In
connection with the agreement, the former CFO's remaining shares of the
Company's stock would be repurchased by unaffiliated persons at a price
negotiated at arms length.
Consulting agreements
In June 1995, the Company orally agreed to pay for consulting services of a)
$35,000 per month (reduced to $10,000 per month as of September 1, 1996) 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 to PAH. The Company had an arrangement
with Capital Vision Group, Inc. (Capital), a company controlled by a former
director and shareholder of Nations, for consulting services of $5,000 per month
from June 1, 1995 through January 31, 1996. These agreements were entered into
for the purpose of receiving management advisory services in the areas of
operations management, financing, and acquisitions.
Related party note receivable
The Company has an unsecured note receivable of $214,496 and $142,658 at
December 31, 1996 and 1997, 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 7) against the note receivable.
Financing advisory fees
Branin 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 is entitled to fees of
approximately $650,000. These fees would only be earned upon the consummation of
an underwritten public offering of the Company's stock.
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.
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 Environmental Protection would require a cleanup plan to be
initiated. In the absence of a conclusive finding concerning the source of and
the actual level of contamination, no accrual for any potential clean up costs
is recorded in the accompanying consolidated financial statements or in the
Predecessor Business financial statements..
Year 2000 Issue
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.
F-22
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
Note 9. Stock Option Plan
On March 19, 1997 the Company's stockholders 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. During 1997, options to purchase 50,000 shares of the Company's common
stock, of which 10,000 terminated and 40,000 are outstanding at December 31,
1997, were granted to directors of the Company. No options were exercised during
1997.
Note 10. Other Income (Expense)
Other income (expense) consists of the following at December 31:
<TABLE>
<CAPTION>
1995 1996 1997
-----------------------------------------------------------
<S> <C> <C> <C>
Miscellaneous income $ 20,024 $ 18,454 $ 9,578
Write off of the following:
Deferred offering costs - - (468,566)
Pre-acquisition costs - - (83,131)
Loan fees - - (81,666)
Lawsuit settlement - - (14,190)
-----------------------------------------------------------
$ 20,024 $ 18,454 $ (637,975)
===========================================================
</TABLE>
F-23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, State of New York, on the 15th day of April, 1998.
NATIONS FLOORING, INC.
By: /s/ Philip A. Herman
-------------------------------------
Philip A. Herman
Chairman of the Board and President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
Registrant in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Titles Date
--------- ------ ----
<S> <C> <C>
/s/ Philip A. Herman Chairman of the Board and President April 15, 1998
--------------------
Philip A. Herman
/s/ Michael Mindlin Director April 15, 1998
-------------------
Michael Mindlin
/s/ Facundo Bacardi Director April 15, 1998
-------------------
Facundo Bacardi
/s/ John Katz Director April 15, 1998
-------------
John Katz
/s/ Paul Kramer Director April 13, 1998
---------------
Paul Kramer
/s/ William Poccia Chief Financial Officer and Secretary April 15, 1998
------------------
William Poccia (Principal Financial and Accounting Officer)
</TABLE>
28
<PAGE>
Exhibit Index
Exhibit Name Page
- ------- ---- ----
2.1 Agreement and Plan of Exchange, dated as of June 1,
1995, among the Company, Carpet Barn Holdings, Inc.
("CBH") and the holders of common stock of CBH
(incorporated by reference from Exhibit 1 of the
Company's Report on Form 8-K (June 2, 1995) (the "June
Form 8-K").
2.2 Asset Purchase Agreement, dated as of June 1, 1995,
between Carpet Barn Acquisition Corp. ("CBAC") and
Carpet Barn, Inc. ("Carpet Barn") (incorporated by
reference from Exhibit 3 of the June Form 8-K).
2.3 Amendment, dated June 1, 1995, to Asset Purchase
Agreement (incorporated by reference from Exhibit 4 of
the June Form 8-K).
3.1 Certificate of Incorporation, dated July 19, 1988, of
the Company (incorporated by reference from Exhibit
3(a) of the Company's Registration Statement on Form
S-18 (33-29942-NY) filed October 20, 1989 (the "1989
Registration Statement").
3.2 By-laws of the Company (incorporated by reference from
Exhibit 3(b) of the 1989 Registration Statement).
3.3 Amended and Restated Certificate of Incorporation of
CBH (incorporated by reference from Exhibit 3.3 of the
Company's Annual Report on Form 10-K for the period
ended December 31, 1995 (the "Form 10-K")).
3.4 Certificate of Amendment to Amended and Restated
Certificate of Incorporation of CBH (incorporated by
reference from Exhibit 3.4 of the Form 10-K).
3.6 Certificate of Incorporation of Nations Flooring, Inc.
(incorporated by reference from Exhibit 3.6 of the
Company's Registration Statement on Form S-1
(333-19871) filed January 16, 1997 ("1997 Registration
Statement").
3.7 By-laws of Nations Flooring, Inc. (incorporated by
reference from Exhibit 3.7 of the 1997 Registration
Statement).
9.1 Voting Trust Agreement, dated May 30, 1995, between
Philip A. Herman and certain shareholders of the
Company (incorporated by reference from Exhibit 2 of
the June Form 8-K).
10.1 Secured Credit Agreement, dated as of June 1, 1995,
between CBAC and with First Source Financial LLP
("First Source") (incorporated by reference from
Exhibit 5 of the June Form 8-K).
10.2 Pledge Agreement, dated as of June 1, 1995, among CBH,
CBAC and First Source (incorporated by reference from
Exhibit 9 of the June Form 8-K).
29
<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 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).
10.10 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).
10.11 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).
10.13 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).
10.14 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).
30
