<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999.
[ ] TRANSITIONAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission file number: 33-29942-NY
-----------------------------------
NATIONS FLOORING, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 11-2925673
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation)
100 Maiden Lane, New York, New York 10038
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(212) 898-8888
- --------------------------------------------------------------------------------
(Issuer's telephone number)
- --------------------------------------------------------------------------------
(Former name, former address or former fiscal year, if changed since
last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. __X__ Yes ____ No
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 3,729,779 shares of Common Stock, par
value $.001 per share, were outstanding at July 31, 1999.
<PAGE>
INDEX
Page
----
Part I - Financial Information
Item 1. Financial Statements
Consolidated balance sheets 3
Consolidated statements of operations 4-5
Consolidated statements of cash flows 6-7
Notes to consolidated financial statements 8-14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15-20
Part II - Other Information
Item 1. Legal Proceedings 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
2
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
---------------------------------
<S> <C> <C>
ASSETS (Note 4)
- ---------------
Current Assets
Cash $ 212,183 $ 264,504
Accounts receivable, less allowance for doubtful
accounts 1998 $310,000, 1999 $369,000 4,185,360 4,657,318
Due from employees 275 2,896
Inventory 1,319,148 1,614,111
Related party note receivable (Note 4) 79,940 -
Prepaid expenses and other 258,087 327,227
---------------------------------
Total current assets 6,054,993 6,866,056
---------------------------------
Property and Equipment, net (Note 1) 800,301 2,327,995
Intangible Assets, net (Note 1) 15,155,994 14,773,390
==================================
$ 22,011,288 $ 23,967,441
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Note payable (Note 3) $ 3,812,213 $ 3,328,084
Current maturities of long-term debt (Note 3) 751,000 777,149
Accounts payable 1,816,138 2,475,553
Advances from principal stockholder (Note 2b) 653,339 564,779
Accrued expenses 519,043 915,414
Customer deposits 1,344,135 1,785,205
----------------------------------
Total current liabilities 8,895,868 9,846,184
----------------------------------
Deferred Income Taxes 355,000 600,000
Related Party Advance (Note 4) 500,000 -
Long-Term Debt, less current maturities (Note 3) 4,035,539 4,133,364
Advances from and Notes Payable-Principal Stockholder,
less current portion (Notes 2a and 2b) 2,000,000 2,000,000
Commitments and Contingencies (Note 4)
Stockholders' Equity (Note 1)
Preferred stock, 12% cumulative; $.001 par value, authorized 1,000,000
shares; issued 5,160 shares; total liquidation
preference of outstanding shares $5,160,000 5 5
Common stock, $.001 par value, authorized 20,000,000
shares; issued 1998 3,670,054 shares; 1999 3,729,779 shares 3,670 3,730
Additional paid-in capital 8,398,143 9,652,241
Retained earnings (deficit) (2,176,937) (2,268,083)
----------------------------------
6,224,881 7,387,893
----------------------------------
$ 22,011,288 $ 23,967,441
==================================
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Six Months Ended June 30,
<TABLE>
<CAPTION>
1998 1999
----------------------------------
<S> <C> <C>
Net sales (Note 4) $21,096,078 $25,222,130
Cost of sales 15,967,231 18,779,038
----------------------------------
Gross profit 5,128,847 6,443,092
Selling, general and administrative expenses:
Related party consulting fees 132,500 120,000
Related party rent expense (Note 4) 55,071 30,000
Other 3,727,815 4,917,018
----------------------------------
3,915,386 5,067,018
Amortization and depreciation 591,204 547,807
----------------------------------
Operating income 622,257 828,267
Other Income (expense):
Other income (expense), net (256,420) 4,681
Related party interest expense (122,000) (112,500)
Interest expense (494,031) (369,614)
----------------------------------
Income (loss) before income taxes, dividends to preferred
stockholders of subsidiary (250,194) 350,834
Provision for income taxes (benefit) (79,173) 132,380
----------------------------------
Income (loss) before dividends to preferred
stockholders of subsidiary (171,021) 218,454
Dividends to preferred stockholders of subsidiary 279,600 -
----------------------------------
Net income (loss) (450,621) 218,454
Dividends on preferred stock - 309,600
----------------------------------
Net loss applicable to common stockholders $ (450,621) $ (91,146)
==================================
Basic and dilutive net loss
per common share (Note 1) $ (0.12) $ (0.02)
==================================
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three Months Ended June 30,
<TABLE>
<CAPTION>
1998 1999
-------------------------------------
<S> <C> <C>
Net sales $ 11,324,329 $ 13,223,636
Cost of sales 8,469,889 9,881,093
-------------------------------------
Gross profit 2,854,440 3,342,543
Selling, general and administrative expenses:
Related party consulting fees 65,000 60,000
Related party rent expense (Note 4) 30,000 -
Other 1,967,035 2,493,504
-------------------------------------
2,062,035 2,553,504
Amortization and depreciation 288,188 279,575
-------------------------------------
Operating income 504,217 509,464
Other Income (expense):
Other income (expense), net (257,733) 3,325
Related party interest expense (70,750) (48,750)
Interest expense (236,683) (191,289)
-------------------------------------
Income (loss) before income taxes, dividends to preferred
stockholders of subsidiary (60,949) 272,750
Provision for income taxes (benefit) (16,331) 98,380
-------------------------------------
Income (loss) before dividends to preferred
stockholders of subsidiary (44,618) 174,370
Dividends to preferred stockholders of subsidiary 139,800 -
-------------------------------------
Net income (loss) (184,418) 174,370
Dividends on preferred stock - 154,800
-------------------------------------
Net income (loss) applicable to common stockholders $ (184,418) $ 19,570
=====================================
Basic net income (loss) per common share (Note 1) $ (0.05) $ 0.01
=====================================
Dilutive net income (loss) per common share (Note 1) $ (0.05) $ 0.00
=====================================
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Six Months ended June 30,
<TABLE>
<CAPTION>
1998 1999
------------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income (loss) $ (450,621) $ 218,454
Depreciation 111,000 115,765
Amortization 480,204 432,042
Deferred income taxes 61,000 60,000
Provision for bad debts 57,262 130,532
Rent expense in lieu of note receivable payments to Realty 55,071 30,000
Write off of loan fees 232,390 -
Changes in assets and liabilities, net of business acquisition:
Increase in accounts receivable (492,415) (602,490)
Increase in inventory (234,810) (294,963)
Increase in prepaid expenses and other (53,191) (69,140)
Increase (decrease) in accounts payable (837,897) 659,415
Increase (decrease) in advances from principal stockholder 179,437 (55,792)
Increase (decrease) in accrued expenses (129,055) 392,371
Increase in customer deposits 291,609 441,070
------------------------------
Net cash provided by (used in) operating activities $ (730,016) $ 1,457,264
------------------------------
Cash Flows from Investing Activities
Advances to employees and related parties, net $ (11,826) (33,460)
Purchase of property and equipment (78,105) (180,459)
Acquisition cost expenditures (4,979) (23,339)
------------------------------
Net cash used in investing activities $ (94,910) $ (237,258)
------------------------------
Cash Flows from Financing Activities
Payments on note payable $(2,703,140) (834,128)
Principal payments on long-term debt (4,392,210) (23,957)
Proceeds from note payable 2,269,371 -
Proceeds from long-term debt 5,000,000 -
Debt issuance costs (250,000) -
Proceeds from related party advance 500,000 -
Proceeds from notes payable-principal stockholder 500,000 -
Cash dividends paid - (309,600)
------------------------------
Net cash provided by (used in) financing activities $ 924,021 $(1,167,685)
------------------------------
Net increase in cash $ 99,095 $ 52,321
Cash, beginning 230,223 212,183
==============================
Cash, ending $ 329,318 $ 264,504
==============================
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (unaudited)
Six Months ended June 30,
<TABLE>
<CAPTION>
1998 1999
--------------------------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $ 492,131 $ 315,587
Income taxes 1,877 10,380
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES AND
FINANCING ACTIVITIES
Preferred stock dividends paid through increase in advances
from principal stockholder (Note 2(b)) $ 279,600 $ -
================================
Realty acquisition: (Note 4)
Common stock issued $ - 1,254,158
Liabilities assumed - 668,930
Elimination of intercompany amounts - (451,989)
Assets acquired - $(1,471,099)
================================
Net cash paid $ - $ -
================================
</TABLE>
See Notes to Consolidated Financial Statements.
7
<PAGE>
NATIONS FLOORING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies
Nature of business
- ------------------
Nations Flooring, Inc. (Nations or Company) was organized under the laws of the
State of Delaware.
On November 16, 1998, the stockholders of Nations approved the merger of Carpet
Barn Holdings, Inc. (CBH), a subsidiary of Nations, into Nations. All assets,
liabilities, property, rights and obligations of CBH were transferred to and
assumed by Nations, and Nations was the surviving corporation after the merger.
Prior to such merger CBH had outstanding shares of preferred stock. Such CBH
preferred stock had been issued in units that also included shares of the common
stock of Nations. As a result of the allocation of such issuance between the
components of the units, the CBH preferred stock had been recorded at a discount
from its face amount of $1,542,726. As an element of the merger each share of
CBH preferred stock was converted into a share of Nations $.001 par value, 12%
cumulative preferred stock. As a result, the discount related to the previously
outstanding CBH preferred stock was charged against the results of operations
for the year ended December 31, 1998, in a manner similar to dividends on
subsidiary preferred stock.
The Company was also related, through common ownership, to C. B. Realty of
Delaware, Inc. (Realty) (see Note 4).
The Company sells floorcoverings and related products to new home and retail
replacement markets in Nevada, Utah and Idaho. The Company grants credit
principally to new homebuilders. Segment information is not presented since all
of the Company's revenue is attributed to a single reportable segment.
A summary of the Company's significant accounting policies follows.
Principles of consolidation
- ---------------------------
The consolidated financial statements include the accounts of the Company and
its subsidiary, Carpet Barn, Inc. (CBI). All material intercompany accounts and
transactions are eliminated in consolidation.
The holders of the 12% cumulative preferred stock of Nations have an aggregate
of 16% of the votes of the outstanding shares of the common stock of Nations.
In the event the Company 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, the
Company 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 liquidation value plus any accrued and unpaid
dividends through the date of redemption. If no call has been made, the Company
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.
Use of estimates in the preparation of financial statements
- -----------------------------------------------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash
- ----
During the periods presented, the Company maintained cash balances which, at
times, were in excess of federally insured limits. The Company has experienced
no losses in such accounts. At June 30, 1999 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.
8
<PAGE>
NATIONS FLOORING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies (continued)
Property and equipment
- ----------------------
Building, 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.
Property and equipment consist of the following:
<TABLE>
<CAPTION>
Depreciation December 31, June 30,
Lives 1998 1999
----- ---- ----
<S> <C> <C> <C>
Land - $ - $ 664,000
Building 20 - 781,000
Furniture and equipment 7 951,255 1,111,371
Autos and trucks 5 149,043 155,543
Leasehold improvements 3-5 352,019 383,862
------------------------------
1,452,317 3,095,776
Less accumulated depreciation and amortization 652,016 767,781
==============================
Property and equipment, net $ 800,301 $2,327,995
==============================
</TABLE>
The Company assesses the impairment of long-lived assets, identifiable
intangibles and costs in excess of net assets of business' acquired (goodwill),
by comparison to the projected undiscounted cash flows to be derived from the
related assets. The Company has concluded that no impairment in the carrying
amount of long-lived assets, and of identifiable intangibles and goodwill
existed at June 30, 1999.
Intangible assets
- -----------------
Intangible assets consist of the following:
December 31, June 30,
1998 1999
---- ----
Goodwill $17,192,326 $17,215,665
Covenant not-to-compete 600,000 600,000
Debt issuance costs 261,332 292,904
----------- -----------
18,053,658 18,108,569
Less accumulated amortization 2,897,664 3,335,179
----------- -----------
Intangible assets, net $15,155,994 14,773,390
=========== ===========
Goodwill is being amortized by the straight-line method over twenty-five years.
The Company incurred financing costs related to bank financing (see Note 3).
These costs are being amortized on the effective interest method over the term
of the debt.
The Company has also entered into covenants not-to-compete in connection with
certain business acquisitions. The covenants are being amortized on the
straight-line method over the five-year terms of the agreements.
Income taxes
- ------------
The Company provides for deferred taxes on a liability method whereby deferred
tax assets are recognized for deductible temporary differences and operating
loss and tax credit carryforwards and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities are
adjusted for the effect of changes in tax laws and rates on the date of
enactment.
9
<PAGE>
NATIONS FLOORING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies (continued)
Vendor coop marketing and purchase discounts
- --------------------------------------------
The Company participates in various advertising and marketing programs with
suppliers. Certain of the Company's costs incurred in connection with these
programs are reimbursed. The Company records these reimbursements when earned.
The Company also records accounts payable net of anticipated purchase discounts.
Basic and dilutive net income (loss) per common share
- -----------------------------------------------------
Basic and dilutive net income (loss) per common share is computed based on net
income (loss) and the following weighted average number of common shares
outstanding:
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
----------------------------- ------------------------------
1998 1999 1998 1999
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Basic net income (loss) per common share 3,642,397 3,699,916 3,642,397 3,729,779
Dilutive net income (loss) per common share 3,642,397 3,699,916 3,642,397 4,294,779
</TABLE>
Dividends on preferred stock, which totaled none and $309,600 for the six months
ended June 30, 1998 and 1999, respectively, reduced the earnings available to
common stockholders in the computation. Except for the three months ended June
30, 1999, shares of common stock issuable upon exercise of outstanding stock
options have not been included in the computation because their inclusion would
have an anti-dilutive effect. For the three months ended June 30, 1999, 565,000
incremental shares were included in the computation of dilutive net income per
share.
Revenue recognition
- -------------------
Revenue is recorded for commercial and retail floorcovering sales upon
installation.
Advertising
- -----------
All costs related to marketing and advertising the Company's products are
expensed in the period incurred.
Advertising expense, net of cooperative advertising earned, consists of the
following for the six months ended June 30:
1998 1999
---- ----
$384,598 $552,369
Self Insurance
- --------------
The Company is a member of a self-insured group for its workers compensation
coverage. Estimated costs resulting from any non-insured losses are accrued by a
charge to income when the incident that gives rise to the loss occurs. To date
there have been no non-insured losses.
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 (APB) 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.
10
<PAGE>
NATIONS FLOORING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies (continued)
Fair value of financial instruments
- -----------------------------------
The carrying amounts of financial instruments including cash, accounts
receivable, employee 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.
It is not practicable to estimate the fair value of the amounts due to
stockholders, 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.
Reclassification
- ----------------
Certain 1998 balances have been reclassified to correspond to the statement of
operations contained in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998.
New accounting pronouncements
- -----------------------------
In June 1998 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS 133). The company will first be required to apply
SFAS 133, as amended by SFAS 137, in the first quarter of 2001. SFAS 133 in
general requires that entities recognize all derivative financial instruments as
assets or liabilities, measured at fair value, and include in earnings the
changes in the fair value of such assets and liabilities. SFAS 133 also provides
that changes in the fair value of assets or liabilities being hedged with
recognized derivative instruments be recognized and included in earnings. The
Company does not derivative instruments, either for hedging or other purposes,
and therefore anticipates that the adoption of the requirements of SFAS 133 will
not have a material affect on its consolidated financial statements.
Note 2. Indebtedness to Stockholders
(a) Notes payable - principal stockholder
In both 1997 and 1998, the Company received unsecured advances totaling
$1,500,000 from Branin Investments, Inc. (Branin), which is 100% owned by the
Chairman of the Board and President of Nations. The 1998 advance bears interest
at 15% per annum, payable monthly, while the 1997 advances bear interest at 12%
per annum, payable monthly; all advances are due on demand. However, Branin has
agreed to subordinate its rights to receive principal and interest payments to
the obligation owed pursuant to the Credit Facility with Fleet as described in
Note 3. Pursuant to such Credit Facility, Branin can only receive payments out
of excess cash flow, subject to the terms and conditions contained within the
Credit Facility. Due to these restrictions the aggregate advances of $1,500,000
has been classified as long term at December 31, 1998 and June 30, 1999. Total
interest expense of $85,000, and $97,500 relating to these advances has been
reflected in the accompanying consolidated statements of operations for the six
months ended June 30, 1998 and 1999, respectively.
(b) Advances from principal stockholder
During the year ended December 31, 1998, Branin made certain non-interest
bearing advances to the Company. Such advances are also subject to the
subordination and payment limitations described in (a) above. Activity in the
advances for the six months ended June 30, 1999 are as follows:
Balance, December 31, 1998 $ 1,153,339
Interest on notes payable (Note 2(a)) 90,300
Effect of Realty merger (Note 4) (32,768)
Payments to Branin and PAH (146,092)
------------
Balance, June 30, 1999 $ 1,064,779
============
11
<PAGE>
NATIONS FLOORING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Indebtedness to Stockholders (continued)
Due to the subordination and payment limitations, $500,000 of the balance has
been classified as long term at December 31, 1998 and June 30, 1999.
(c) Due to stockholder
The Company had an unsecured advance from a stockholder and director of the
Company in the amount of $500,000, which was repaid through the issuance of 500
shares of the Company's preferred stock on December 1, 1998. This advance bore
interest at 12% per annum, payable monthly. Total interest expense of $30,000
relating to this advance has been reflected in the accompanying consolidated
statement of operations for the six months ended June 30, 1998.
Note 3. Note Payable and Long-Term Debt
On May 19, 1998, the Company, through its subsidiary CBI, entered into a credit
agreement (the "Credit Facility") with Fleet Capital Corporation ("Fleet"),
consisting of a $5,000,000 term loan and a $5,000,000 revolving line of credit
which includes an overadvance subline availability of $375,000 (currently
undrawn). The term loan requires quarterly payments of $175,000 and the
overadvance subline, if drawn upon, requires semi-annual payments of $187,500.
CBI pledged substantially all of its assets to secure the Credit Facility and
Nations has pledged all of the common stock of CBI to secure its guarantee of
the Credit Facility. The term and revolving portions of the Credit Facility are
due on May 18, 2003 while the overadvance availability expires on May 18, 2000.
All borrowings under the Credit Facility bear interest, payable monthly, at the
base rate per annum announced from time to time by Fleet (7.75% at June 30,
1999) plus 1.25%, 1.75% and 2.0% per annum, in connection with advances under
the revolving line, term loan and overadvance subline, respectively. The Credit
Facility also contains provisions that excess cash flow over certain defined
levels will be used to repay principal under the term loan. The Credit Facility
contains covenants requiring CBI to maintain minimum levels of tangible net
worth and debt coverage. In connection with this Credit Facility, Branin has
agreed that the notes payable to and advances from it (see Notes 2(a) and (b))
will be subject to certain subordination and payment limitation requirements. As
a condition of consummating the Credit Facility, the Company received an advance
of $500,000 from Realty (see Note 4).
Amounts outstanding under the Credit Facility are as follows:
December 31, June 30,
1998 1999
---- ----
Revolving line of credit $3,812,213 3,328,084
Overadvance subline - -
Term loan $4,650,000 4,300,000
At June 30, 1999, the Company had no availability under the term loan and
approximately $1,447,000 available under the revolving line of credit.
The proceeds of the Credit Facility were used to retire the financing previously
obtained from First Source Financial ("First Source") of approximately
$7,300,000. Unamortized debt acquisition costs classified as intangible assets
of $232,000 were charged to expense as of the date of the refinancing.
In conjunction with the Realty merger (see Note 4), the Company assumed a
mortgage note payable with a financial institution secured by the Company's land
and building. The note, which has a balance due at June 30, 1999 of $473,611,
bears interest at 9% and is due in monthly payments of principal and interest
totaling $5,690 with the balance due May 2003.
CBI also has long-term obligations including capital leases of $136,539 and
$136,902 outstanding at December 31, 1998 and June 30, 1999, respectively. The
notes bear interest at an approximate average of 20% and mature between December
1999 and June 2003.
12
<PAGE>
NATIONS FLOORING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Acquisitions
Kemper
- ------
As of the close of business on June 30, 1999, CBI entered into an Asset Purchase
Agreement with DuPont Flooring Systems, Inc. (DuPont) (a wholly owned subsidiary
of E.I. DuPont De Nemours and Company) pursuant to which CBI acquired certain
assets of DuPont (the "Assets") for an aggregate purchase price of $1,800,000
plus the assumption of certain liabilities. The source of such funds was the
working capital of CBI, including funds borrowed pursuant to CBI's senior credit
facility with Fleet Capital Corporation.
The Assets purchased by CBI under the Agreement consist of all of the properties
and assets previously used by DuPont in the business of retailing, distributing
and installation of residential floor covering products and flooring systems
under the "Kemper" name in the greater Washington D.C. area.
The acquisition of Kemper was deemed effective as of July 1, 1999 and is being
accounted for as a purchase. Accordingly, Nations will record as of July 1, 1999
the assets acquired and liabilities assumed, at their fair values, and the
results of Kemper's operations will be included in Nations' results of
operations commencing July 1, 1999. The net book value of the assets acquired by
Nations was approximately $1,162,000, comprised of current assets, principally
inventory and accounts receivable, of approximately $934,000, and equipment and
leasehold improvements of approximately $228,000. Nations assumed current
liabilities, comprised of accounts payable, accrued expenses and customer
deposits of approximately $433,000. Additionally, Nations acquired a receivable
from DuPont for cash equal to the customer deposits of approximately $316,000
previously transferred to DuPont by Kemper. The tangible assets acquired and
liabilities assumed were recorded at their book values, which approximated their
fair values, and the remaining purchase price of approximately $755,000 was
recorded as goodwill.
The components of the purchase price and the allocation to the assets acquired
and assumed were as follows:
Components of purchase price:
Cash paid
Financed through borrowings under line of credit $1,500,000
Financed through short term obligation to DuPont 300,000
-----------
1,800,000
Liabilities assumed 432,554
===========
$2,232,554
===========
Allocated to:
Net assets acquired $1,162,203
Receivable from DuPont to fund customer deposits 315,533
Goodwill 754,818
===========
$2,232,554
===========
Realty
- ------
Under the terms of an Agreement and Plan of Merger (the Agreement) filed with
the State of Delaware on March 29, 1999, Realty merged with and into Nations. In
accordance with the Agreement, each shareholder of Realty was issued 597.25
shares of Nations common stock for each share of Realty's common stock. A total
of 59,725 shares of Nations common stock were issued.
13
<PAGE>
NATIONS FLOORING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Acquisitions (continued)
The acquisition was accounted for as a purchase for financial reporting
purposes. Under generally accepted accounting principles, a purchase business
combination is recorded on the basis of the fair value of the consideration paid
(common stock issued) or the fair value of the net assets acquired, whichever is
more readily determinable. The common stock of Nations has not been actively
traded, and, in determining the number of shares of Nations stock to be offered
in the acquisition of Realty, the Board of Directors of Nations, due to the
related party ownership of Realty, determined to offer a number of shares with
an effective per share value above the current fair value of Nations common
stock which would also be antidilutive in nature and would therefore be
beneficial to Nations. Accordingly, the combination was recorded on the basis of
the fair value of Realty's net assets, which reflect recent appraisals of
Realty's land and building.
For income tax purposes the combination was a tax free exchange, as a result of
which the assets of Realty were transferred to Nations at Realty's tax basis. A
deferred tax liability, for the future tax effects of the difference between the
fair value recorded for financial reporting purposes and such tax basis, was
recorded and included in the purchase price.
The components of the purchase price and the allocation to the assets acquired
and assumed were as follows:
Components of purchase price:
Common stock issued $1,254,158
Deferred tax liability recorded 185,000
-----------
1,439,158
Liabilities assumed 564,709
===========
$2,003.867
===========
Allocated to:
Land and building 1,445,000
Related party receivables 532,768
Other 26,099
===========
$2,003,867
===========
Prior to the combination, Nations leased its principal Las Vegas facility from
Realty under an operating lease expiring in April 2004. The results of
operations for the six months ended June 30, 1998 and 1999 include rent expense
paid under such lease of $55,071 and $30,000, respectively.
At the time of the combination, Nations was indebted to Realty under a 12%
unsecured demand note in the amount of $500,000, and Realty was indebted to
Nations under a 10% installment note having a remaining balance of $80,779.
Total interest expense of $7,000 and $15,000 relating to this note has been
reflected in the accompanying consolidated statements of operations for the six
months ended June 30, 1998 and 1999, respectively. Both balances have been
eliminated in recording Nations' acquisition of Realty.
Pro Forma Information
- ---------------------
The following pro forma information indicates what Nations' results of
operations for the six months ended June 30, 1998 and 1999 would have been had
the above acquisitions taken place at January 1, 1998 and 1999, respectively.
This pro forma information is presented for illustrative purposes only, and is
not intended to necessarily indicate what the actual results of operations would
have been if the companies had been combined during those periods, or what the
future results of operations may be:
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1999
------------------ -------------------
<S> <C> <C>
Revenues $ 23,907,052 $ 28,471,985
Net income (loss) applicable to common stockholders $ (369,990) $ 54,016
Basic and dilutive net income (loss) per share $ (0.10) $ 0.01
</TABLE>
14
<PAGE>
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Report on Form 10-Q contains forward-looking statements within the
meaning of the Private Securities Act of 1995. The Company's future results of
operations, as compared to those forward looking statements, is subject to and
will be affected by certain risks and uncertainties. As a result 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, demand for the Company's
products and services, dependence on manufacturers and suppliers, relationships
with customers, dependence on key operating personnel, uncertainties related to
the Company's growth strategies and those discussed below.
The following discussion of the financial condition and results of
operations of the Company relates to the six and three months ended June 30,
1999 and 1998 and should be read in conjunction with the financial statements
and notes thereto included elsewhere in this Report.
Results of Operations
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Total revenues increased by $4,126,052 to $25,222,130 for the six
months ended June 30, 1999 from $21,096,078 for the six months ended June 30,
1998, representing an increase of 19.6%. The components of this increase are as
follows:
Residential Contract $ 1,434,374
Residential Replacement 2,056,381
Commercial 528,322
Other 106,975
===============
$ 4,126,052
===============
In September and November of 1998, the Company acquired floorcovering
operations in Utah and Idaho, respectively, and in January 1999, the Company
opened two retail locations in Las Vegas. Those operations accounted for
$2,448,062 of the total increase in sales, including Residential Contract sales
of $510,754 and Residential Replacement sales of $1,937,308. The remaining
increase of $1,677,990 represents higher sales volume at the Company's other Las
Vegas locations. Prices for the Company's products were not significantly
changed.
Gross profit increased by $1,314,245 to $6,443,092 for the six months
ended June 30, 1999 from $5,128,847 for the six months ended June 30, 1998,
representing an increase of 25.6%. The Company's gross profit percentage
increased to 25.5% in 1999 from 24.3% in 1998 due principally to the Company's
debt restructuring completed in May 1998, which provided the Company with
greater liquidity and thus allowed it to take advantage of vendor offered early
payment discounts.
Selling, general and administrative expenses increased by $1,151,632 to
$5,067,018 for the six months ended June 30, 1999 from $3,915,386 for the six
months ended June 30, 1998. The inclusion of the Utah and Idaho operations
acquired in 1998 and the new retail locations opened in 1999 accounted for
$736,006 of this increase. The remaining increase of $415,626 is due to
increases required in general administrative expenses to accommodate the
increased volume.
Amortization and depreciation expense decreased to $547,807 in 1999
from $591,204 in 1998, due to decreased amortization expense of debt issuance
costs in 1999.
As a result of the above changes, operating income increased by
$206,010 to $828,267 for the six months ended June 30, 1999 from $622,257 for
the six months ended June 30, 1998. Other income (expense) decreased by $261,101
to $4,681 for the six months ended June 30, 1999 from $(256,420) for the six
months ended June 30, 1998 due primarily to a one time charge relating to write
off of loan fees of $232,390 recorded in May 1998. Interest expense decreased to
$482,114 for the six months ended June 30, 1999 from $616,031 for the six months
ended June 30, 1998, due to debt restructuring completed in May 1998. Income
taxes (benefit) increased to $132,380 in 1999 from $(79,173) in 1998 due to the
increase in income before income taxes. Net income (loss) increased by $669,075
to $218,454 for the six months ended June 30, 1999 from $(450,621) for the six
months ended June 30, 1998.
15
<PAGE>
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998.
Total revenues increased by $1,899,307 to $13,223,636 for the three
months ended June 30, 1999 from $11,324,329 for the three months ended June 30,
1998, representing an increase of 16.8%. The components of this increase are as
follows:
Residential Contract $ 546,291
Residential Replacement 1,191,335
Commercial 220,385
Other (58,704)
===============
$ 1,899,307
===============
The Utah and Idaho operations acquired in September and November of
1998, respectively and the retail locations opened in Las Vegas in January 1999
accounted for $1,541,955 of the total increase in sales, including Residential
Contract sales of $312,816 and substantially all of the increase in Residential
Replacement sales of $1,191,335. The remaining increase of $357,352 represents
higher sales volume at the Company's other Las Vegas locations. Prices for the
Company's products were not significantly changed.
Gross profit increased by $488,103 to $3,342,543 for the three months
ended June 30, 1999 from $2,854,440 for the three months ended June 30, 1998,
representing an increase of 17.1%. The Company's gross profit percentage
increased to 25.3% in 1999 from 25.2% in 1998 due principally to the Company's
debt restructuring completed in May 1998, which provided the Company with
greater liquidity and thus allowed it to take advantage of vendor offered early
payment discounts.
Selling, general and administrative expenses increased by $491,469 to
$2,553,504 for the three months ended June 30, 1999 from $2,062,035 for the
three months ended June 30, 1998. The inclusion of the Utah and Idaho operations
acquired in 1998 and the new retail locations opened in 1999 accounted for
$395,361 of this increase. The remaining increase of $96,108 is due to increases
required in general administrative expenses to accommodate the increased volume.
Amortization and depreciation expense decreased to $279,575 in 1999
from $288,188 in 1998, due to decreased amortization expense of debt issuance
costs in 1999.
As a result of the above changes, operating income increased by $5,247
to $509,464 for the three months ended June 30, 1999 from $504,217 for the three
months ended June 30, 1998. Other income (expense) decreased by $261,058 to
$3,325 for the three months ended June 30, 1999 from $(257,733) for the three
months ended June 30, 1998 due primarily to a one time charge relating to write
off of loan fees of $232,390 recorded in May 1998. Interest expense decreased to
$240,039 for the three months ended June 30, 1999 from $307,433 for the three
months ended June 30, 1998, due to debt restructuring completed in May 1998.
Income taxes (benefit) increased to $98,380 in 1999 from $(16,331) in 1998 due
to the increase in income before income taxes. Net income (loss) increased by
$358,788 to $174,370 for the three months ended June 30, 1999 from $(184,418)
for the three months ended June 30, 1998.
Liquidity and Capital Resources
Cash provided by (used in) operating activities was $(730,016) and
$1,457,264 for the six months ended June 30, 1998 and 1999 respectively. Cash
flows from operations differed significantly from net income (loss) in both
periods due to significant non-cash charges and certain significant changes in
working capital items. The changes in the working capital resulted in a working
capital deficit of $2,980,128 at June 30, 1999. Included in such deficit is
$4,028,084, the current portion of the amount due to Fleet Capital Corporation
("Fleet") under the credit agreement (the "Credit Agreement") discussed below.
The Company's growth and acquisition strategy will require significant
additional cash.
For 1999, net income included significant non-cash charges of
amortization of $432,042 and depreciation of $115,765. Additionally, cash was
provided by increases in accounts payable of $659,415, accrued expenses of
$392,371 and customer deposits of $441,070. These sources of cash from
operations were partially offset by the use of cash to reduce the amount owed to
the Company's principal stockholder and the increase in accounts receivable and
inventory to reflect increased operations in 1999. The Company used the
operating cash flows of $1,457,264 for the six months ended June 30, 1999
principally to make net reductions of $834,128 in notes payable, fund the
payment of $309,600 of preferred stock dividends, fund $180,459 of capital
additions and increase cash reserves by $212,183.
16
<PAGE>
The operating cash outflow of $730,016 for the six months ended June
30, 1998 was financed from net financing cash flows of 924,021, principally
representing the net proceeds of the Company's debt refinancing completed in May
1998.
During the six months ended June 30, 1998 and 1999, cash used in
investing activities was $94,910 and $237,258 respectively, used primarily to
purchase equipment and leasehold improvements and reductions in amounts due to
related parties. Cash provided by (used in) financing activities during such
periods was $924,021 and $(1,167,685), respectively, used primarily to make
principal payments on the Credit Agreement and cash dividends paid to the
Company's preferred stockholders, offset in 1998 by proceeds received through
the refinancing of the Company's debt and by net proceeds received from related
party advances.
Under the terms of an Agreement and Plan of Merger (the Agreement)
filed with the State of Delaware on March 29, 1999, C.B. Realty of Delaware,
Inc. ("Realty") merged with and into Nations. In accordance with the Agreement,
each shareholder of Realty was issued 597.25 shares of Nations' common stock for
each share of Realty's common stock. A total of 59,725 shares of Nations' common
stock were issued.
The acquisition was accounted for as a purchase for financial reporting
purposes. Under generally accepted accounting principles, a purchase business
combination is recorded on the basis of the fair value of the consideration paid
(common stock issued) or the fair value of the net assets acquired, whichever is
more readily determinable. The common stock of Nations has not been actively
traded, and, in determining the number of shares of Nations stock to be offered
in the acquisition of Realty, the Board of Directors of Nations, due to the
related party ownership of Realty, determined to offer a number of shares with
an effective per share value above the current fair value of Nations common
stock which would also be antidilutive in nature and would therefore be
beneficial to Nations. Accordingly, the combination was recorded on the basis of
the fair value of Realty's net assets, which reflect recent appraisals of
Realty's land and building. For income tax purposes the combination was a tax
free exchange, as a result of which the assets of Realty were transferred to
Nations at Realty's tax basis. A deferred tax liability, for the future tax
effects of the difference between the fair value recorded for financial
reporting purposes and such tax basis, was recorded and included in the purchase
price. See Note 4 of Notes to Consolidated Financial Statements.
Prior to the combination, Nations leased its principal Las Vegas
facility from Realty under an operating lease expiring in April 2004. The
results of operations for the six months ended June 30, 1998 and 1999 include
rent expense paid under such lease of $25,071 and $30,000, respectively.
Additionally, at the time of the combination, Nations was indebted to Realty
under a 12% unsecured demand note in the amount of $500,000, and Realty was
indebted to Nations under a 10% installment note having a remaining balance of
$80,779. Both balances have been eliminated in recording Nation's acquisition of
Realty.
As of the close of business on June 30, 1999, Carpet Barn, Inc. a
Delaware corporation ("CBI"), a wholly owned subsidiary of Nations Flooring,
Inc. ("Nations"), entered into an Asset Purchase Agreement with DuPont Flooring
Systems, Inc. (DuPont) (a wholly owned subsidiary of E.I. DuPont De Nemours and
Company) pursuant to which CBI acquired certain assets of DuPont (the "Assets")
for an aggregate purchase price of $1,800,000 plus the assumption of certain
liabilities. The source of such funds was the working capital of CBI, including
funds borrowed pursuant to CBI's senior credit facility with Fleet Capital
Corporation.
The Assets purchased by CBI under the Agreement consist of all of the
properties and assets previously used by DuPont in the business of retailing,
distributing and installation of residential floor covering products and
flooring systems under the "Kemper" name in the greater Washington D.C. area.
The acquisition of Kemper was deemed effective as of July 1, 1999, and
is being accounted for as a purchase. Accordingly, Nations will record as of
July 1, 1999 the assets acquired and liabilities assumed, at their fair values,
and the results of Kemper's operations will be included in Nations' results of
operations commencing July 1, 1999.
The Company has previously received advances from Branin Investments,
Inc. ("Branin"), which is 100% owned by the Chairman of the Board and President
of Nations, totaling $2,564,779 at June 30, 1999 (see Notes 2(a) and 2(b) of
Notes to Consolidated Financial Statements). As of July 31, 1999, the Company
was indebted to Branin for $2,515,742. Total interest expense of $85,000 and
$97,500 relating to these advances has been reflected in the accompanying
consolidated statement of operations for the six months ended June 30, 1998 and
1999, respectively.
17
<PAGE>
On May 19, 1998, the Company, through its subsidiary CBI, entered into
a credit agreement (the "Credit Facility") with Fleet Capital Corporation
("Fleet"), consisting of a $5,000,000 term loan and a $5,000,000 revolving line
of credit which includes an overadvance subline availability of $375,000
(currently undrawn). The term loan requires quarterly payments of $175,000 and
the overadvance subline, if drawn upon, requires semi-annual payments of
$187,500. CBI pledged substantially all of its assets to secure the Credit
Facility and Nations has pledged all of the common stock of CBI, to secure its
guarantee of the Credit Facility. The term and revolving portions of the Credit
Facility are due on May 18, 2003 while the overadvance availability expires on
May 18, 2000. All borrowings under the Credit Facility bear interest payable
monthly at the base rate per annum announced from time to time by Fleet (8.0% at
July 31, 1999) plus 1.25%, 1.75% and 2.0% per annum, in connection with advances
under the revolving line, term loan and overadvance subline, respectively. The
Credit Facility also contains provisions that excess cash flow over certain
defined levels will be used to repay principal under the term loan. The Credit
Facility contains covenants requiring CBI to maintain minimum levels of tangible
net worth and debt coverage. In connection with this Credit Facility, Branin
agreed that the notes payable to and advances from it (see Notes 3(a) and (b) of
Notes to the Consolidated Financial Statements) are subject to certain
subordination and payment limitation requirements.
Amounts outstanding under the Credit Facility are as follows:
December 31 June 30,
1998 1999
---- ----
Revolving line of credit $3,812,213 $3,328,084
Overadvance subline - -
Term loan $4,650,000 $4,300,000
At June 30, 1999, the Company had no availability under the term loan
and approximately $1,447,000 available under the revolving line of credit.
The Company has a mortgage note payable with a financial institution
secured by the Company's land and building. The note, which has a balance due at
June 30, 1999 of $473,611, bears interest at 9% and is due in monthly payments
of principal and interest totaling $5,690 with the balance due May 2003.
CBI also has long-term obligations including capital leases of $136,539
and $136,902 outstanding at December 31, 1998 and June 30, 1999, respectively.
The notes bear interest at an approximate average of 20% and mature between
December 1999 and June 2003.
The Company opened several new locations in Las Vegas during 1998 and
the six months ended June 30, 1999. A substantial portion of the initial capital
costs for these locations was 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 additional new locations will be funded by its suppliers,
although there can be no assurance that the Company will be able to effect such
an arrangement. Any new facilities will require additional resources until they
become profitable, and there can be no assurance as to the amount of time
required before they can become profitable, if ever.
The Company believes that the liquidity constraints it experienced in
early 1998 were resolved by the funds available from the Fleet credit facility.
The Company believes that its cash flow from operations and funds available from
the Fleet credit facility will be adequate to fund planned operations for 1999.
Although planned 1999 operations are not projected to eliminate or reduce the
Company's working capital deficit in 1999, the Company believes that the Fleet
credit facility will allow it to operate with a working capital deficit until
such time as operations will eliminate it. The Company also believes that the
Fleet credit facility will be sufficient to allow the Company to pursue to a
limited extent its strategy of expansion and acquisitions. To the extent that
additional capital is needed for expansion and acquisitions, the Company
believes that it will be able to obtain supplementary financing from other debt
and equity sources. However, the failure to obtain those or alternative capital
resources would adversely affect the Company's pursuit of its growth strategies.
18
<PAGE>
Effect of Accounting Pronouncements Issued but not Yet Adopted
Derivative Instruments and Hedging Activities
In June 1998 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS 133). The company will first be required to apply
SFAS 133, as amended by SFAS 137, in the first quarter of 2001. SFAS 133 in
general requires that entities recognize all derivative financial instruments as
assets or liabilities, measured at fair value, and include in earnings the
changes in the fair value of such assets and liabilities. SFAS 133 also provides
that changes in the fair value of assets or liabilities being hedged with
recognized derivative instruments be recognized and included in earnings. The
Company does not derivative instruments, either for hedging or other purposes,
and therefore anticipates that the adoption of the requirements of SFAS 133 will
not have a material affect on its consolidated financial statements.
Year 2000
The Company has conducted a review of its computer system to identify
the systems that could be affected by the "Year 2000" issue. The issue is
whether computer systems will properly recognize date sensitive information when
the year changes to 2000. Systems that do not properly recognize such
information could generate erroneous data or cause a system to fail. Computers
on occasion fail, irrespective of the Year 2000 issue. For this reason, where
appropriate, the Company maintains paper and magnetic backups and the Company
and the Company's employees are trained in the use of manual procedures.
The Predecessor business did not utilize computer hardware or software
in the conduct of its operations. Beginning in 1995, the Company began a
systematic process of computerizing the operations. In conjunction with that
process, all the hardware and software the Company is currently using is already
Year 2000 compliant. Management is relying on the representations of its
hardware and software vendors to form its readiness conclusion. The Company has
also conducted a review of its non-computer systems that may be dependent on
imbedded computer chips affected by the Year 2000 issue. Based on representation
of its suppliers, management believes its non-computer systems will be
functional in the year 2000. In the event of failure of its computer and
non-computer systems, management believes the Company can operate using a manual
system. Management estimates that total costs incurred to date to conduct its
review and remediation of the Year 2000 Issue are less than $10,000, and that
total future costs will be less than $20,000.
The Company is exposed to the risk that one or more of its vendors or
suppliers could experience Year 2000 problems that may impact their ability to
provide goods and services. Although this is not considered as significant a
risk with respect to the suppliers of goods due to the availability of
alternative suppliers, the disruption of certain services, in particular
utilities and financial services could, depending upon the extent of the
disruption, have a material adverse impact on the Company's operations. In the
unlikely event of disruption of supplies or services, management believes that
the Company's customers and competitors will likely be affected in a similar
manner, therefore management believes any short term inability to serve its
customers should not result in a loss of customers or a permanent loss in
revenues. The Company has initiated formal communications with all of its
significant suppliers and customers to determine the extent to which the Company
is vulnerable to those third parties' failure to remediate their own Year 2000
issue. The Company expects to complete this review by the end of the third
quarter of 1999.
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.
19
<PAGE>
Item 3 Quantitative and Qualitative Disclosures about Market Risk
Like virtually all commercial enterprises, the Company is exposed to
the risk ("market risk") that the cash flows to be received or paid relating to
certain financial instruments could change as a result of changes in interest
rate, exchange rates, commodity prices, equity prices and other market changes.
Market risk is attributed to all market risk sensitive financial instruments,
including long term debt.
The Company does not engage in trading activities and does not utilize
interest rate swaps or other derivative financial instruments or buy or sell
foreign currency, commodity or stock indexed futures or options. Additionally,
with the exception of the Fleet credit facility, the interest on all of the
Company's debt is payable at fixed interest rates. Accordingly, the Company's
exposure to market risk is limited to the potential affect of changes in
interest rates on the cash flows (payments) relating to its variable rate debt
with is its debt with Fleet. The Fleet debt consists of a term loan, a revolving
line of credit and an overadvance subline of the revolving line of credit
(currently undrawn). The term loan requires quarterly payments of $175,000. All
borrowings bear interest payable monthly at the base rate per annum as announced
by Fleet (8.0% at July 31, 1999) plus 1.25%, 1.75% and 2.0% per annum, in
connection with advances under the revolving line, term loan and overadvance
subline, respectively. Based upon the balance of the Fleet debt at June 30,
1999, a hypothetical immediate and sustained increase of 1% in Fleet's announced
rate (which generally varies with the interest rates established by the Federal
Reserve Bank) would have the affect of increasing the Company's interest expense
by approximately $77,000 per year.
20
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Financial Data Schedule
(b) Reports on Form 8-K.
1 - Form 8-K and Form 8-K\A-1, dated March 29, 1999, describing
the merger of C.B. Realty of Delaware, Inc. with and into the
Registrant.
2 - Form 8-K, dated June 30, 1999, describing the acquisition of
the net assets of Kemper Carpets.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant had duly caused this report to be signed by the undersigned,
thereunto duly authorized.
August 12, 1999 /s/ Philip A. Herman
--------------------------------------------
Philip A. Herman
Chairman of the Board and President
(Principal Executive Officer)
August 12, 1999 /s/ William V. Poccia
--------------------------------------------
William V. Poccia
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
22
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 264,504
<SECURITIES> 0
<RECEIVABLES> 5,026,318
<ALLOWANCES> 369,000
<INVENTORY> 1,614,111
<CURRENT-ASSETS> 6,866,056
<PP&E> 3,095,776
<DEPRECIATION> 767,781
<TOTAL-ASSETS> 23,967,441
<CURRENT-LIABILITIES> 9,846,184
<BONDS> 4,133,364
0
5
<COMMON> 3,730
<OTHER-SE> 7,384,158
<TOTAL-LIABILITY-AND-EQUITY> 23,967,441
<SALES> 25,222,130
<TOTAL-REVENUES> 25,222,130
<CGS> 18,779,038
<TOTAL-COSTS> 5,614,825
<OTHER-EXPENSES> (4,681)
<LOSS-PROVISION> 130,532
<INTEREST-EXPENSE> 482,114
<INCOME-PRETAX> 350,834
<INCOME-TAX> 132,380
<INCOME-CONTINUING> 218,454
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 218,454
<EPS-BASIC> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
