<PAGE>
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UNITED STATES
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 September 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 (IRS Employer
of incorporation) Identification Number)
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 October 31, 1999.
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<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 8-15
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16-21
PART II - OTHER INFORMATION 22
SIGNATURES 23
2
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (unaudited)
<TABLE>
<CAPTION>
December 31, September 30,
ASSETS (Note 4) 1998 1999
- --------------- -----------------------------
<S> <C> <C>
Current Assets
Cash $ 212,183 $ 362,018
Accounts receivable, less allowance for doubtful
accounts 1998 $310,000, 1999 $369,000 4,185,360 5,733,314
Due from employees 275 6,469
Inventory 1,319,148 2,325,958
Related party note receivable (Note 4) 79,940 -
Prepaid expenses and other 258,087 507,936
----------------------------
Total current assets 6,054,993 8,935,695
----------------------------
Property and Equipment, net (Note 1) 800,301 2,500,557
Intangible Assets, net (Note 1) 15,155,994 15,299,606
----------------------------
$ 22,011,288 $ 26,735,858
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Note payable (Note 3) $ 3,812,213 $ 4,971,657
Current maturities of long-term debt (Note 3) 751,000 787,149
Accounts payable 1,816,138 2,416,372
Advances from principal stockholder (Note 2b) 653,339 548,785
Accrued expenses 519,043 1,353,885
Customer deposits 1,344,135 2,377,822
----------------------------
Total current liabilities 8,895,868 12,455,670
----------------------------
Deferred Income Taxes 355,000 630,000
Related Party Advance (Note 4) 500,000 -
Long-Term Debt, less current maturities (Note 3) 4,035,539 3,963,911
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) (1,969,699)
----------------------------
6,224,881 7,686,277
----------------------------
$ 22,011,288 $ 26,735,858
============================
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Nine Months Ended September 30,
<TABLE>
<CAPTION>
1998 1999
----------------------------
<S> <C> <C>
Net sales (Note 4) $ 32,907,885 $ 41,208,493
Cost of sales 24,876,890 30,664,804
----------------------------
Gross profit 8,030,995 10,543,689
Selling, general and administrative expenses:
Related party consulting fees 192,500 180,000
Related party rent expense (Note 4) 85,071 30,000
Other 5,692,564 7,701,401
----------------------------
5,970,135 7,911,401
Amortization and depreciation 858,314 854,480
----------------------------
Operating income 1,202,546 1,777,808
Other Income (expense):
Other income (expense), net (287,753) 4,581
Related party interest expense (200,750) (161,250)
Interest expense (701,624) (579,121)
----------------------------
Income before income taxes and dividends to preferred
stockholders of subsidiary 12,419 1,042,018
Provision for income taxes 7,827 370,380
----------------------------
Income before dividends to preferred
stockholders of subsidiary 4,592 671,638
Dividends to preferred stockholders of subsidiary 419,400 -
----------------------------
Net income (loss) (414,808) 671,638
Dividends on preferred stock - 464,400
----------------------------
Net income (loss) applicable to common stockholders $ (414,808) $ 207,238
============================
Basic net income (loss) per common share (Note 1) (0.11) 0.06
============================
Dilutive net income (loss) per common share (Note 1) $ (0.11) $ 0.05
============================
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three Months Ended September 30,
<TABLE>
<CAPTION>
1998 1999
-------------------------------
<S> <C> <C>
Net sales $ 11,811,807 $ 15,986,363
Cost of sales 8,909,659 11,885,766
-------------------------------
Gross profit 2,902,148 4,100,597
Selling, general and administrative expenses:
Related party consulting fees 60,000 60,000
Related party rent expense (Note 4) 30,000 -
Other 1,964,749 2,784,383
-------------------------------
2,054,749 2,844,383
Amortization and depreciation 267,110 306,673
-------------------------------
Operating income 580,289 949,541
Other Income (expense):
Other income (expense), net (31,333) (100)
Related party interest expense (78,750) (48,750)
Interest expense (207,593) (209,507)
-------------------------------
Income before income taxes and dividends to preferred
stockholders of subsidiary 262,613 691,184
Provision for income taxes 87,000 238,000
-------------------------------
Income before dividends to preferred
stockholders of subsidiary 175,613 453,184
Dividends to preferred stockholders of subsidiary 139,800 -
-------------------------------
Net income 35,813 453,184
Dividends on preferred stock - 154,800
-------------------------------
Net income applicable to common stockholders $ 35,813 $ 298,384
===============================
Basic and dilutive net income per common share (Note 1) $ 0.01 $ 0.08
===============================
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Nine Months ended September 30,
<TABLE>
<CAPTION>
1998 1999
--------------------------------
Cash Flows from Operating Activities
<S> <C> <C>
Net income (loss) $ (414,808) $ 671,638
Depreciation 167,000 193,852
Amortization 691,314 660,628
Deferred income taxes 91,000 90,000
Provision for bad debts 103,931 198,241
Rent expense in lieu of note receivable payments to Realty 85,071 30,000
Write off of loan fees 232,390 -
Changes in assets and liabilities, net of business acquisition:
Increase in accounts receivable (421,126) (1,235,706)
Increase in inventory (395,986) (427,429)
(Increase) decrease in prepaid expenses and other 5,923 (202,129)
Increase (decrease) in accounts payable (1,091,697) 423,370
Increase (decrease) in advances from principal stockholder 142,246 (71,786)
Increase in accrued expenses 352,754 739,709
Increase in customer deposits 354,445 802,868
--------------------------------
Net cash provided by (used in) operating activities $ (97,543) $ 1,873,256
--------------------------------
Cash Flows from Investing Activities
Advances to employees and related parties, net $ (31,009) $ (37,033)
Purchase of property and equipment (184,335) (261,107)
Payments for Acquisition for Merrill's (164,254) -
Payments for Acquisition for Kemper - (1,500,000)
Acquisition cost expenditures (23,870) (49,636)
--------------------------------
Net cash used in investing activities $ (403,468) $ (1,847,776)
--------------------------------
Cash Flows from Financing Activities
Advances (payments) on note payable, net $ (2,778,830) $ 634,444
Principal payments on long-term debt (4,712,144) (45,689)
Proceeds from note payable 2,269,371 -
Proceeds from long-term debt 5,000,000 -
Debt issuance costs (261,332) -
Proceeds from related party advance 500,000 -
Proceeds from notes payable-principal stockholder 500,000 -
Cash dividends paid - (464,400)
--------------------------------
Net cash provided by financing activities $ 517,065 $ 124,355
--------------------------------
Net increase in cash $ 16,054 $ 149,835
Cash, beginning 230,223 212,183
--------------------------------
Cash, ending $ 246,277 $ 362,018
================================
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (unaudited)
Nine Months ended September 30,
<TABLE>
<CAPTION>
1998 1999
-----------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
<S> <C> <C>
Interest $ 110,029 $ 595,296
Income taxes $ 1,827 $ 60,530
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES AND FINANCING ACTIVITIES
Preferred stock dividends paid through increase in advances from principal
stockholder (Note 2(b)) $ 419,400 $ -
=============================
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, Idaho and Washington, D.C. 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.
Basis of presentation
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In management's opinion, the accompanying consolidated financial statements
reflect all material adjustments (consisting only of normal recurring accruals)
necessary for a fair statement of the results for the interim periods presented.
The results for the interim periods are not necessarily indicative of the
results which will be reported for the entire year.
Principles of consolidation
The consolidated financial statements include the accounts of the Company and
its 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.
8
<PAGE>
NATIONS FLOORING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies (continued)
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 September 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.
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, September 30,
Lives 1998 1999
----- ---- ----
<S> <C> <C> <C>
Land - $ - $ 664,000
Building 20 - 781,000
Furniture and equipment 7 951,255 1,273,916
Autos and trucks 5 149,043 170,543
Leasehold improvements 3-5 352,019 456,966
----------------------------
1,452,317 3,346,425
Less accumulated depreciation and amortization 652,016 845,868
----------------------------
Property and equipment, net $ 800,301 2,500,557
============================
</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 September 30, 1999.
Intangible assets
Intangible assets consist of the following:
December 31, September 30,
1998 1999
---- ----
Goodwill $ 17,192,326 17,870,467
Covenant not-to-compete 600,000 700,000
Debt issuance costs 261,332 292,904
----------------------------
18,053,658 18,863,371
Less accumulated amortization 2,897,664 3,563,765
----------------------------
Intangible assets, net $ 15,155,994 15,299,606
============================
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.
9
<PAGE>
NATIONS FLOORING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies (continued)
Income taxes
The Company provides for deferred taxes on a liability method whereby deferred
tax assets are recognized for deductible temporary differences and operating
loss and tax credit carryforwards and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities are
adjusted for the effect of changes in tax laws and rates on the date of
enactment.
Vendor coop marketing and purchase discounts
The Company participates in various advertising and marketing programs with
suppliers. Certain of the Company's costs incurred in connection with these
programs are reimbursed. The Company records these reimbursements when earned.
The Company also records accounts payable net of anticipated purchase discounts.
Basic and dilutive 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>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- ---------------------------
1998 1999 1998 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Basic net income (loss) per common share 3,670,054 3,729,779 3,670,054 3,709,870
Dilutive net income (loss) per common share 3,670,054 3,908,227 3,670,054 3,888,319
</TABLE>
Dividends on preferred stock, which totaled $0 and $464,400 for the nine months
ended September 30, 1998 and 1999, respectively, reduced the earnings available
to common stockholders in the computation of earnings per share. Dilutive net
income (loss) per share reflects the effect of the inclusion of the incremental
shares issuable upon the exercise of outstanding stock options. Dilutive net
income (loss) per share for the three and nine months ended September 30, 1998
is the same as the basic net income (loss) per share as the inclusion of
incremental shares for outstanding stock options would have been anti-dilutive.
On July 1, 1999, in accordance with the Company's 1997 Stock Option Plan,
options to purchase 405,000 shares of the Company's common stock were granted to
officers and directors of the Company at an exercise price of $3.15, equal to
the fair value on the date of grant.
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, was $614,820 and
$768,660 for the nine months ended September 30, 1998, and 1999, respectively.
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.
10
<PAGE>
NATIONS FLOORING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies (continued)
Accounting for Stock-Based Compensation
The Company measures compensation expense related to the grant of stock options
and stock-based awards to employees and directors in accordance with the
provisions of Accounting Principles Board Opinion (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.
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 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.
(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 advance of $1,500,000
has been classified as long term at December 31, 1998 and September 30, 1999.
Total interest expense of $133,750 and $146,250 relating to these advances has
been reflected in the accompanying consolidated statements of operations for the
nine months ended September 30, 1998 and 1999, respectively.
11
<PAGE>
NATIONS FLOORING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Indebtedness to Stockholders (continued)
(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 nine months ended September 30, 1999 are as follows:
Balance, December 31, 1998 $ 1,153,339
Interest on notes payable (Note 2(a)) 146,250
Effect of Realty merger (Note 4) (32,768)
Payments to Branin (218,036)
------------
Balance, September 30, 1999 $ 1,048,785
============
Due to the subordination and payment limitations, $500,000 of the balance has
been classified as long term at December 31, 1998 and September 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 $45,000
relating to this advance has been reflected in the accompanying consolidated
statement of operations for the nine months ended September 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 (9.5% at September 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, September 30,
1998 1999
---- ----
Revolving line of credit $3,812,213 $ 4,971,657
Overadvance subline - -
Term loan $4,650,000 $4,125,000
At September 30, 1999, the Company had no availability under the term loan and
approximately $30,000 available under the revolving line of credit.
12
<PAGE>
NATIONS FLOORING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Note Payable and Long-Term Debt (continued)
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 September 30, 1999 of
$467,149 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
$158,911 outstanding at December 31, 1998 and September 30, 1999, respectively.
The notes bear interest at an approximate average of 11% and mature between
December 1999 and June 2003.
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 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 recorded as of July 1, 1999
the assets acquired and liabilities assumed, at their fair values, and the
results of Kemper's operations have been 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
==============
13
<PAGE>
NATIONS FLOORING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Acquisitions (continued)
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.
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 nine months ended September 30, 1998 and 1999 include rent
expense paid under such lease of $85,071 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 $22,000 and $15,000 relating to this note has been
reflected in the accompanying consolidated statements of operations for the nine
months ended September 30, 1998 and 1999, respectively. Both balances have been
eliminated in recording Nations' acquisition of Realty.
14
<PAGE>
NATIONS FLOORING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Acquisitions (continued)
Pro Forma Information
The following pro forma information indicates what Nations' results of
operations for the nine months ended September 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>
September 30, September 30,
1998 1999
-------------- -------------
<S> <C> <C>
Revenues $ 37,463,606 $ 44,458,348
Net income (loss) applicable to common stockholders $ (233,475) $ 342,693
Basic and dilutive net income (loss) per share $ (0.06) $ 0.09
</TABLE>
15
<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 nine and three months ended September
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
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998
Total revenues increased by $8,300,608 to $41,208,493 for the nine
months ended September 30, 1999 from $32,907,885 for the nine months ended
September 30, 1998, representing an increase of 25.2%. The components of this
increase are as follows:
Residential Contract $ 3,619,876
Residential Replacement 3,837,643
Commercial 584,485
Other 258,604
------------
$ 8,300,608
============
In September and November of 1998 and in June 1999 the Company acquired
floorcovering operations in Utah, Idaho, and Washington, DC respectively, and in
January 1999, the Company opened two retail locations in Las Vegas. Those
operations accounted for $5,857,116 of the total increase in sales, including
Residential Contract sales of $1,909,364 and Residential Replacement sales of
$3,947,752. The remaining increase of $2,443,492 represents higher sales volume
at the Company's other Las Vegas locations. As the Company continues to open
additional retail locations in the Las Vegas market, sales at some existing Las
Vegas locations have declined. Prices for the Company's products were not
significantly changed.
Gross profit increased by $2,512,694 to $10,543,689 for the nine months
ended September 30, 1999 from $8,030,995 for the nine months ended September 30,
1998, representing an increase of 31.3%. The Company's gross profit percentage
increased to 25.6% in 1999 from 24.4% 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 $1,941,266 to
$7,911,401 for the nine months ended September 30, 1999 from $5,970,135 for the
nine months ended September 30, 1998. The inclusion of the Utah, Idaho and
Washington, DC operations acquired in 1998 and 1999 and the new retail locations
accounted for $1,458,416 of this increase. The remaining increase of $482,850 is
due to increases in general administrative expenses required to accommodate the
increased volume.
Amortization and depreciation expense decreased to $854,480 in 1999
from $858,314 in 1998, due to decreased amortization expense of debt issuance
costs in 1999 partially offset by amortization and depreciation relating to the
Kemper and Realty acquisitions of $44,065.
As a result of the above changes, operating income increased by
$575,262 to $1,777,808 for the nine months ended September 30, 1999 from
$1,202,546 for the nine months ended September 30, 1998. Other income (expense)
changed by $292,334 to income of $4,581 for the nine months ended September 30,
1999 from expenses of $287,753 for the nine months ended September 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 $740,371 for the nine months
ended September 30, 1999 from $902,374 for the nine months ended September 30,
1998, due to debt restructuring completed in May 1998 and to the reduction in
related party payables of $1,000,000 ($500,000 in December, 1998 through the
issuance of preferred stock and $500,000 in March, 1999 through the Realty
merger). Income taxes
16
<PAGE>
increased to $370,380 in 1999 from $7,827 in 1998 due to the increase in income
before income taxes. Net income (loss) increased by $1,086,446 to $671,638 for
the nine months ended September 30, 1999 from $(414,808) for the nine months
ended September 30, 1998 due to the above changes and to the treatment of
dividends on preferred stock of subsidiary ($419,400) which prior to the
Company's reorganization in December 1998 were charged to net income.
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998.
Total revenues increased by $4,174,556 to $15,986,363 for the three
months ended September 30, 1999 from $11,811,807 for the three months ended
September 30, 1998, representing an increase of 35.3%. The components of this
increase are as follows:
Residential Contract $ 2,185,503
Residential Replacement 1,781,262
Commercial 56,161
Other 151,630
------------
$ 4,174,556
============
The Utah and Idaho operations acquired in 1998, the Washington, DC
operation acquired in 1999 and the retail locations opened in Las Vegas in 1999
accounted for $3,409,054 of the total increase in sales, including Residential
Contract sales of $1,398,610 and Residential Replacement sales of $2,010,444.
The remaining increase of $765,502 represents higher sales volume at the
Company's other Las Vegas locations. As the Company continues to open additional
retail locations in the Las Vegas market, sales at some existing Las Vegas
locations have declined. Prices for the Company's products were not
significantly changed.
Gross profit increased by $1,198,449 to $4,100,597 for the three months
ended September 30, 1999 from $2,902,148 for the three months ended September
30, 1998, representing an increase of 41.3%. The Company's gross profit
percentage increased to 25.7% in 1999 from 24.6% 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 $789,634 to
$2,844,383 for the three months ended September 30, 1999 from $2,054,749 for the
three months ended September 30, 1998. The inclusion of the Utah, Idaho and
Washington, DC operations acquired in 1998 and 1999 and the new retail locations
accounted for $722,410 of this increase. The remaining increase of $67,224 is
due to increases in general administrative expenses required to accommodate the
increased volume.
Amortization and depreciation expense increased to $306,673 in 1999
from $267,110 in 1998, due to increased amortization and depreciation relating
to the acquisitions of Kemper and Realty in 1999 and partially offset by
decreased amortization expense of debt issuance costs in 1999.
As a result of the above changes, operating income increased by
$369,252 to $949,541 for the three months ended September 30, 1999 from $
580,289 for the three months ended September 30, 1998. Other expense changed by
$31,233 to $100 for the three months ended September 30, 1999 from $31,333 for
the three months ended September 30, 1998 due primarily to write off of loan
fees of approximately $26,000. Interest expense decreased to $258,257 for the
three months ended September 30, 1999 from $286,343 for the three months ended
September 30, 1998, due to the reduction in related party payables of
$1,000,000. Income taxes increased to $238,000 in 1999 from $87,000 1998 due to
the increase in income before income taxes. Net income increased by $417,371 to
$453,184 for the three months ended September 30, 1999 from $35,813 for the
three months ended September 30, 1998 due to the above changes and to the
treatment of dividends on preferred stock of subsidiary ($139,800) which prior
to the Company's reorganization in December 1998 were charged to net income.
Liquidity and Capital Resources
Cash provided by (used in) operating activities was $(97,543) and
$1,873,256 for the nine months ended September 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 $3,519,975 at September 30, 1999. Included in such deficit is
$5,671,657, 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.
17
<PAGE>
For the nine months ended September 30, 1999, net income included
significant non-cash charges of amortization of $660,628 and depreciation of
$193,852. Additionally, cash was provided by increases in accounts payable of
$423,370, accrued expenses of $739,709 and customer deposits of $802,868. 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. The increases in accounts receivable,
inventory, accounts payable, accrued expenses and customer deposits reflect the
effects of the Company's expanded operations. The Company used the operating
cash flows of $1,873,256 for the nine months ended September 30, 1999
principally to purchase the net assets of Kemper (see discussion below), fund
the payment of $464,400 of preferred stock dividends, fund $261,107 of capital
additions and increase cash reserves by $149,836.
For the nine months ended September 30, 1998, net income included
significant non-cash charges of amortization of $691,314, depreciation of
$167,000 and write off of loan fees of approximately $232,000 associated with
the debt refinancing completed in May 1998. Additionally, cash was provided by
increases in accrued expenses of $352,754, customer deposits of $354,445 and
amounts owed to the Company's principal stockholder of $142,246. These sources
of cash from operations were partially offset by the use of cash to
significantly reduce accounts payable by $1,091,697 as well as increases in the
investment in inventories and accounts receivable (due to increases in sales),
during 1998.
During the nine months ended September 30, 1998 and 1999, cash used in
investing activities was $403,468 and $1,847,776 respectively, used primarily to
purchase the net assets of the Company's operations in St. George, Utah in 1998
and the net assets of Kemper in 1999 and to purchase equipment and leasehold
improvements. Cash provided by financing activities during 1999 was $124,355,
resulting from advances on the Credit Agreement offset by principal payments on
the Credit Agreement and cash dividends paid to the Company's preferred
stockholders in 1999. In 1998, cash provided by financing activities of $517,065
resulting primarily from the proceeds received through the refinancing of the
Company's debt and by net proceeds received from related party advances.
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 (the "Kemper
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 Credit
Facility with Fleet Capital Corporation.
The Assets purchased by CBI under the Kemper 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 recorded as of July
1, 1999 the assets acquired and liabilities assumed, at their fair values, and
the results of Kemper's operations have been included in Nations' results of
operations commencing July 1, 1999.
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 smaller number of
shares than the number of shares that would have been implied by the fair value
of the assets acquired, resulting in 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 reflected 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.
18
<PAGE>
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 nine months ended September 30, 1998 and 1999
include rent expense paid under such lease of $85,071 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 $2,548,785 at September 30, 1999 (see Notes 2(a) and 2(b)
of Notes to Consolidated Financial Statements). As of October 31, 1999, the
Company was indebted to Branin for $2,556,834. Total interest expense of
$133,750 and $146,250 relating to these advances has been reflected in the
accompanying consolidated statement of operations for the nine months ended
September 30, 1998 and 1999, respectively.
On May 19, 1998, the Company, through its subsidiary CBI, entered into
the Credit Agreement 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 "Credit
Facility"). 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 (9.5% at October 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 2(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 September 30,
1998 1999
---- ----
Revolving line of credit $ 3,812,213 $ 4,971,657
Overadvance subline $ - $ -
Term loan $ 4,650,000 $ 4,125,000
At September 30, 1999, the Company had no availability under the term
loan and approximately $30,000 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
September 30, 1999 of $467,149 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 $158,911 outstanding at December 31, 1998 and September 30, 1999,
respectively. The notes bear interest at an approximate average of 11% and
mature between December 1999 and June 2003.
The Company opened several new locations in Las Vegas during 1998 and
the nine months ended September 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 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.
19
<PAGE>
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. Additional capital is
needed for expansion and acquisitions. The Company is exploring alternatives for
obtaining supplementary financing from other debt and equity sources. However,
there can be no assurance that these efforts will be successful. The failure to
obtain these or alternative capital resources would adversely affect the
Company's pursuit of its growth strategies.
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 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.
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 $1,000.
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 communicated with all of its significant suppliers and
customers and based upon their oral and/or written responses has determined that
the Company has a minimal exposure to those third parties' failure to remediate
their own Year 2000 issue.
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.
20
<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). All borrowings bear interest payable monthly at the base
rate per annum as announced by Fleet (9.5% at October 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 September 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 effect of
increasing the Company's interest expense by approximately $77,000 per year.
21
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Computation of Earnings per Share
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 and Form 8-K\A-1, dated June 30, 1999, describing
the acquisition of the net assets of Kemper Carpets.
22
<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.
November 8, 1999 /s/ Philip A. Herman
--------------------------------------------
Philip A. Herman
Chairman of the Board and President
(Principal Executive Officer)
November 8, 1999 /s/ William V. Poccia
--------------------------------------------
William V. Poccia
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
23
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Description of Exhibits Page No.
- ------ ----------------------- --------
<S> <C> <C>
11 Computation of Earnings per Share 25
27 Financial Data Schedule (filed only electronically with the SEC) 26
</TABLE>
24
<PAGE>
EXHIBIT 11 - COMPUTATION OF EARNINGS PER SHARE
NATIONS FLOORING, INC. AND SUBSIDIARY
(In Thousands, except earnings per share) (Unaudited)
<TABLE>
<CAPTION>
Basic Earnings Per Share
- ----------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ----------------------
1998 1999 1998 1999
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted average number of common shares outstanding 3,670 3,730 3,670 3,710
- ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 36 $ 298 $ (415) $ 207
- ----------------------------------------------------------------------------------------------------------------------------
Earnings per share $ 0.01 $ 0.08 $ (0.11) $ 0.06
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Dilutive Earnings Per Share
- ----------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ----------------------
1998 1999 1998 1999
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted average number of common shares outstanding 3,670 3,730 3,670 3,710
Common stock equivalents - stock options * 178 * 178
- ----------------------------------------------------------------------------------------------------------------------------
Weighted average common and common stock equivalents outstanding 3,670 3,908 3,670 3,888
- ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 36 $ 298 $ (415) $ 207
- ----------------------------------------------------------------------------------------------------------------------------
Earnings per share $ 0.01 0.08 (0.11) 0.05
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Shares of common stock issuable upon exercise of outstanding stock options
have not been included in the computation as their impact is anti-dilutive.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 362,018
<SECURITIES> 0
<RECEIVABLES> 6,223,887
<ALLOWANCES> 490,573
<INVENTORY> 2,325,958
<CURRENT-ASSETS> 8,935,695
<PP&E> 3,346,425
<DEPRECIATION> 845,868
<TOTAL-ASSETS> 26,735,858
<CURRENT-LIABILITIES> 12,455,670
<BONDS> 3,963,911
0
5
<COMMON> 3,730
<OTHER-SE> 7,682,542
<TOTAL-LIABILITY-AND-EQUITY> 26,735,858
<SALES> 41,208,493
<TOTAL-REVENUES> 41,208,493
<CGS> 30,664,804
<TOTAL-COSTS> 7,911,401
<OTHER-EXPENSES> 854,480
<LOSS-PROVISION> 198,241
<INTEREST-EXPENSE> 740,371
<INCOME-PRETAX> 1,042,018
<INCOME-TAX> 370,380
<INCOME-CONTINUING> 671,638
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 671,638
<EPS-BASIC> 0.06
<EPS-DILUTED> 0.05
</TABLE>
