<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 March 31, 1999.
[ ] TRANSITIONAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 33-29942-NY
----------------------------
NATIONS FLOORING, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware
- --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation)
11-2925673
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(IRS Employer Identification Number)
100 Maiden Lane, New York, New York 10038
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(Address of principal executive offices)
(212) 898-8888
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(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 April 30, 1999.
<PAGE>
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets 3
Consolidated statements of operations 4
Consolidated statements of cash flows 5 - 6
Notes to consolidated financial statements 7 - 12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13 - 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
2
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (unaudited)
<TABLE>
<CAPTION>
December 31, March 31,
ASSETS (Note 4) 1998 1999
- --------------- -----------------------------
<S> <C> <C>
Current Assets
Cash $ 212,183 $ 270,529
Accounts receivable, less allowance for doubtful
accounts 1998 $310,000, 1999 $369,000 4,185,360 4,143,670
Due from employees 275 4,000
Inventory 1,319,148 1,592,524
Related party note receivable (Note 4) 79,940 --
Prepaid expenses and other 258,087 300,004
-----------------------------
Total current assets 6,054,993 6,310,727
-----------------------------
Property and Equipment, net (Note 1) 800,301 2,355,596
Intangible Assets, net (Note 1) 15,155,994 14,966,862
=============================
$ 22,011,288 $ 23,633,185
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Note payable (Note 3) $ 3,812,213 $ 3,716,684
Current maturities of long-term debt (Note 3) 751,000 777,149
Accounts payable 1,816,138 2,301,607
Advances from principal stockholder (Note 2b) 653,339 529,821
Accrued expenses 519,043 570,523
Customer deposits 1,344,135 1,473,150
-----------------------------
Total current liabilities 8,895,868 9,368,934
-----------------------------
Deferred Income Taxes 355,000 570,000
Related Party Advance (Note 4) 500,000 --
Long-Term Debt, less current maturities (Note 3) 4,035,539 4,325,928
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) (2,287,653)
-----------------------------
6,224,881 7,368,323
-----------------------------
$ 22,011,288 $ 23,633,185
=============================
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three Months Ended March 31,
<TABLE>
<CAPTION>
1998 1999
------------------------------
<S> <C> <C>
Net sales $ 9,771,749 $ 11,998,494
Cost of sales 7,497,342 8,897,945
------------------------------
Gross profit 2,274,407 3,100,549
Selling, general and administrative expenses:
Related party consulting fees 67,500 60,000
Related party rent expense (Note 4) 25,071 30,000
Other 1,760,780 2,423,514
------------------------------
1,853,351 2,513,514
Amortization and depreciation 303,016 268,232
------------------------------
Operating income 118,040 318,803
Other Income (expense):
Other income (expense), net 1,313 1,356
Related party interest expense (51,250) (63,750)
Interest expense (257,348) (178,325)
------------------------------
Income (loss) before income taxes, dividends to preferred
Stockholders of subsidiary (189,245) 78,084
Provision for income taxes (benefit) (62,842) 34,000
------------------------------
Income (loss) before dividends to preferred
Stockholders of subsidiary (126,403) 44,084
Dividends to preferred stockholders of subsidiary 139,800 --
------------------------------
Net income (loss) (266,203) 44,084
Dividends on preferred stock -- 154,800
------------------------------
Net loss applicable to common stockholders $ (266,203) $ (110,716)
==============================
Basic and Dilutive net loss
per common share (Note 1) $ (0.07) $ (0.03)
==============================
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Three Months ended March 31,
<TABLE>
<CAPTION>
1998 1999
----------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income (loss) $ (266,203) $ 44,084
Depreciation 53,000 53,000
Amortization 250,016 215,232
Deferred income taxes 27,000 30,000
Provision for bad debts 14,099 70,100
Rent expense in lieu of note receivable payments to Realty 25,071 30,000
Changes in assets and liabilities, net of business acquisition:
(Increase) decrease in accounts receivable 426,322 (28,410)
Increase in inventory (198,863) (273,376)
Increase in prepaid expenses and other (263,758) (41,917)
Increase in accounts payable 70,387 485,469
Increase (decrease) in advances from principal stockholder 103,935 (90,750)
Increase in accrued expenses 4,009 51,479
Increase in customer deposits 299,924 129,016
----------------------------
Net cash provided by operating activities $ 544,939 $ 673,927
----------------------------
Cash Flows from Investing Activities
Advances to or repayments from employees and related parties, net $ (389) $ 118,435
Purchase of property and equipment (24,250) (145,295)
----------------------------
Net cash used in investing activities $ (24,639) $ (26,860)
----------------------------
Cash Flows from Financing Activities
Payments on note payable $(1,020,562) $ (270,529)
Principal payments on long-term debt (9,335) (163,392)
Proceeds from notes payable-principal stockholder 500,000 --
Cash dividends paid -- (154,800)
----------------------------
Net cash used in financing activities $ (529,897) $ (588,721)
----------------------------
Net increase (decrease) in cash $ (9,597) $ 58,346
Cash, beginning 230,223 212,183
============================
Cash, ending $ 220,626 $ 270,529
============================
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (unaudited)
Three Months ended March 31,
1998 1999
---------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $ 218,694 $ 202,701
Income taxes $ 158 $ 7,570
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES AND FINANCING ACTIVITIES
Preferred stock dividends paid through increase in
advances from principal Stockholder (Note 2(b)) $ 139,800 $ --
===========================
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 $ -- $ --
===========================
See Notes to Consolidated Financial Statements.
6
<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 March 31, 1999 the Company's cash balances were
maintained at financial institutions in Nevada and Illinois.
7
<PAGE>
NATIONS FLOORING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies (continued)
Inventory
Inventory consists primarily of carpet and vinyl and is stated at the lower of
cost (first-in, first-out method) or market.
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, March 31,
Lives 1998 1999
----- ---- ----
<S> <C> <C> <C>
Land -- $ -- $ 664,000
Building 20 -- 781,000
Furniture and equipment 7 951,255 1,078,759
Autos and trucks 5 149,043 155,543
Leasehold improvements 3 - 5 352,019 381,310
---------------------------
1,452,317 3,060,612
Less accumulated depreciation and amortization 652,016 705,016
---------------------------
Property and equipment, net $ 800,301 $2,355,596
===========================
</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 March 31, 1999.
Intangible assets
Intangible assets consist of the following:
December 31, March 31,
1998 1999
---- ----
Goodwill $17,192,326 $17,192,326
Covenant not-to-compete 600,000 600,000
Debt issuance costs 261,332 292,904
---------------------------
18,053,658 18,085,230
Less accumulated amortization 2,897,664 3,118,368
---------------------------
Intangible assets, net $15,155,994 $14,966,862
===========================
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.
8
<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 weighted average number of common shares outstanding of
3,642,397 and 3,670,054 for the three months ended March 31, 1998, and 1999,
respectively. Dividends on preferred stock, which totaled none and $154,800 for
the three months ended March 31, 1998 and 1999, respectively, reduced the
earnings available to common stockholders in the computation. 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.
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 three months ended March 31:
1998 1999
---- ----
$ 155,534 $ 286,649
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.
9
<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 and other receivables, notes payable, accounts payable, and
accrued expenses approximate their fair values because of their short
maturities.
The carrying amounts of long-term debt and the related party note receivable
approximate their fair values because the interest rates on these instruments
are at market rates.
Although management expects a substantial portion of amounts due to stockholders
to be paid in the near term, it is not practicable to estimate the fair value of
these amounts, as they have no stated repayment terms. Management does not
believe fair value of such amounts, if determined, would differ materially from
their recorded amounts.
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 March 31, 1999. Total
interest expense of $36,250, and $48,750 relating to these advances has been
reflected in the accompanying consolidated statements of operations for the
three months ended March 31, 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 three months ended March 31, 1999 are as follows:
Balance, December 31, 1998 $1,153,339
Interest on notes payable (Note 2(a)) 45,150
Effect of Realty merger (Note 4) (32,768)
Payments to Branin and PAH (135,900)
----------
Balance, March 31, 1999 $1,029,821
==========
Due to the subordination and payment limitations, $500,000 of the balance has
been classified as long term at December 31, 1998 and March 31, 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 $15,000
relating to this advance has been reflected in the accompanying consolidated
statement of operations for the three months ended March 31, 1998.
10
<PAGE>
NATIONS FLOORING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $750,000 (currently
undrawn). The term loan requires quarterly payments of $175,000 and the
overadvance subline, if drawn upon, requires semi-annual payments of $187,500.
CBI pledged 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 March 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 has
agreed that the notes payable to and advances from it (see Notes 3(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, March 31,
1998 1999
---- ----
Revolving line of credit $ 3,812,213 3,716,684
Overadvance subline -- --
Term loan $ 4,650,000 4,475,000
At March 31, 1999, the Company had no availability under the term loan and
approximately $823,000 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 March 31, 1999 of $479,930,
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
$148,147 outstanding at December 31, 1998 and March 31, 1999, respectively. The
notes bear interest at an approximate average of 20% and mature between December
1999 and June 2003.
Note 4. Acquisition of 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.
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.
11
<PAGE>
NATIONS FLOORING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Acquisition of Realty (continued)
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
Elimination of receivable from Realty 80,779
Liabilities assumed 483,930
Deferred tax liability recorded 185,000
-----------
$ 2,003,867
===========
Allocated to:
Land and building $ 1,445,000
Elimination of payable to Realty 500,000
Other 58,867
-----------
$ 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 three months ended March 31, 1998 and 1999 include rent
expense paid under such lease of $25,071 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 $15,000 relating to this note has been reflected in
the accompanying consolidated statements of operations for the three months
ended March 31, 1999. Both balances have been eliminated in recording Nations'
acquisition of Realty.
The following pro forma information indicates what Nations' results of
operations for the three months ended March 31, 1998 and 1999 would have been
had the combination of Nations and Realty 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:
March 31, 1998 March 31, 1999
--------------- --------------
Revenues $ 9,771,749 $ 11,998,494
Net loss applicable to common stockholders $ (259,142) $ (98,597)
Basic and dilutive net loss per share $ (0.07) $ (0.03)
12
<PAGE>
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Report on Form 10-Q 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 below.
The following discussion of the financial condition and results of
operations of the Company relates to the three months ended March 31, 1999 and
1998 and should be read in conjunction with the financial statements and notes
thereto included elsewhere in this Report.
Results of Operations
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998.
Total revenues increased by $2,226,745 to $11,998,494 for the three months
ended March 31, 1999 from $9,771,749 for the three months ended March 31, 1998,
representing an increase of 22.8%. The components of this increase are as
follows:
Residential Contract $ 888,083
Residential Replacement 865,045
Commercial 307,937
Other 165,680
------------
$ 2,226,745
============
In September and November of 1998, the Company acquired floorcovering
operations in Utah and Idaho, respectively and opened two retail locations in
Las Vegas in January 1999. Those operations accounted for $906,107 of the total
increase in sales, including Residential Contract (previously referred to as New
Housing) sales of $197,938 and Residential Replacement sales of $708,169. The
remaining increase of $1,320,638 represent 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 $826,142 to $3,100,549 for the three months ended
March 31, 1999 from $2,274,407 for the three months ended March 31, 1998,
representing an increase of 36.3%. The Company's gross profit percentage
increased to 25.8% in 1999 from 23.3% in 1998 due principally to the Company's
debt restructure in May 1998, which allowed the Company to take advantage of all
vendor offered early payment discounts.
Selling, general and administrative expenses increased by $660,163 to
$2,513,514 for the three months ended March 31, 1999 from $2,274,407 for the
three months ended March 31, 1998. The inclusion of the Utah and Idaho
operations acquired in 1998 and the new retail locations began in 1999 accounted
for $337,773 of this increase. The remaining increase of $322,390 is due to
increases required in general administrative expenses to accommodate the
increased volume.
Amortization and depreciation expense decreased to $268,232 in 1999 from
$303,016 in 1998, due to decreased amortization expense of debt issuance costs
in 1999.
Operating income increased by $200,763 to $318,803 for the three months
ended March 31, 1999 from $118,040 for the three months ended March 31, 1998.
Interest expense decreased to $242,075 for the three months ended March 31, 1999
from $308,598 for the three months ended March 31, 1998, due to debt
restructuring in May 1998. Income taxes (benefit) increased to $34,000 in 1999
from $(62,842) in 1998 due to the increase in income before income taxes. Net
income (loss) increased by $310,287 to $44,084 for the three months ended March
31, 1999 from $(266,203) for the three months ended March 31, 1998.
13
<PAGE>
Liquidity and Capital Resources
Cash provided by operating activities was $544,939 and $673,927 for the
three months ended March 31, 1998 and 1999 respectively. In each of the 1998 and
1999 periods operations provided positive cash flows despite the net losses due
to the inclusion of non-cash charges in net income and certain significant
changes in working capital items. The changes in the working capital resulted in
a working capital deficit of $3,058,207 at March 31, 1999. Included in such
deficit is $4,416,684, 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 $215,232 and depreciation of $53,000. Additionally, cash was provided by
increases in accounts payable of $485,469, accrued expenses of $51,479 and
customer deposits of $129,016. 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 the first quarter of 1999.
For 1998, the cash provided by operations of $544,939 reflects the
inclusion in the net loss of significant non-cash charges of $250,016 for
amortization and $53,000 for depreciation and cash inflows provided by increases
in accounts payable of $70,387, advances from principal stockholder of $103,935
and customer deposits of $299,924 and a decrease in accounts receivable of
$426,322 partially offset by an increase in inventory of $198,863.
During the three months ended March 31, 1998 and 1999, cash used in
investing activities was $24,639 and $26,860 respectively, used primarily to
purchase equipment and leasehold improvements and offset in 1999 by reductions
in amounts due from related parties. Cash used in financing activities during
such periods was $529,897 and $588,721, respectively, used primarily to make
principal payments on the Credit Agreement, offset in 1998 by net proceeds
received from advances from the Company's principal stockholder.
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 three months ended March 31, 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.
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 $2,529,821 at March 31, 1999 (see Notes 2(a) and 2(b) of Notes
to Consolidated Financial Statements). As of April 30, 1999, the Company was
indebted to Branin for $2,484,821. Total interest expense of $36,250 and $48,750
relating to these advances has been reflected in the accompanying consolidated
statement of operations for the three months ended March 31, 1998 and 1999,
respectively.
14
<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 $750,000
(currently undrawn). The term loan requires quarterly payments of $175,000 and
the overadvance subline, if drawn upon, requires semi-annual payments of
$187,500. CBI pledged 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 April 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 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 March 31,
1998 1999
---- ----
Revolving line of credit $ 3,812,213 $ 3,716,684
Overadvance subline $ -- $ --
Term loan $ 4,650,000 $ 4,475,000
At March 31, 1999, the Company had no availability under the term loan and
approximately $823,000 available under the revolving line of
credit.
In conjunction with the Realty merger, 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 March 31, 1999 of $479,930, 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 $148,147 outstanding at December 31, 1998 and March 31, 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. 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 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.
15
<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 in the first quarter of 2000. SFAS 133 in general requires that
entities recognize all derivative financial instruments as assets or
liabilities, measured at fair value, and include in earnings the changes in the
fair value of such assets and liabilities. SFAS 133 also provides that changes
in the fair value of assets or liabilities being hedged with recognized
derivative instruments be recognized and included in earnings. The Company does
not utilize derivative instruments, either for hedging or other purposes, and
therefore anticipates that the adoption of the requirements of SFAS 133 will not
have a material affect on its consolidated financial statements.
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 second
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.
16
<PAGE>
Item 7a 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 bears interest payable monthly at the base rate per annum as
announced by Fleet (7.75% at March 15, 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
December 31, 1998, 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.
17
<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.
18
<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.
May 10, 1999 /s/ Philip A. Herman
------------------------------------------------
Philip A. Herman
Chairman of the Board and President
(Principal Executive Officer)
May 10, 1999 /s/ William V. Poccia
------------------------------------------------
William V. Poccia
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
19
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 270,529
<SECURITIES> 0
<RECEIVABLES> 4,512,670
<ALLOWANCES> 369,000
<INVENTORY> 1,592,524
<CURRENT-ASSETS> 6,310,727
<PP&E> 3,060,612
<DEPRECIATION> 705,016
<TOTAL-ASSETS> 23,633,185
<CURRENT-LIABILITIES> 9,368,934
<BONDS> 5,103,077
0
5
<COMMON> 3,730
<OTHER-SE> 7,364,588
<TOTAL-LIABILITY-AND-EQUITY> 23,633,185
<SALES> 11,998,494
<TOTAL-REVENUES> 11,998,494
<CGS> 8,897,945
<TOTAL-COSTS> 2,781,746
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 70,100
<INTEREST-EXPENSE> 242,075
<INCOME-PRETAX> 78,084
<INCOME-TAX> 34,000
<INCOME-CONTINUING> 44,084
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 44,084
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
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