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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 31, 1998.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from
_________ to _________.
Commission File Number: 33-29942-NY
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NATIONS FLOORING, INC.
[Exact name of registrant as specified in its charter]
Delaware 2836, 2835 11-2925673
(State or Other (Primary Standard (IRS Employer
Jurisdiction Industrial Classification Identification Number
Of Incorporation or Code Number)
Organization)
100 Maiden Lane
New York, New York 10038
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (212) 898-8888
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of Each Exchange on
Title of each Class Which Registered
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $0.001 par value
(Title of each class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past (90) days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K [X]
As of March 15, 1999, the aggregate market value of the voting stock held by
non-affiliates (1,838,228 shares) of the registrant was $7,352,912 (based on the
last such date that quotes were available on July 7, 1997, of $4.00 per share).
As of March 15, 1999, there were 3,670,054 shares of Common Stock, $0.001 par
value per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
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This Annual Report on Form 10-K contains forward-looking statements which
include risks and uncertainties. The Company's actual operations may differ
significantly from those discussed in the forward-looking statements. Factors
that might cause such a difference include, but are not limited to, leverage,
capital requirements, dependence on manufacturers and suppliers, relationships
with customers, dependence on key operating personnel, uncertainties related to
the Company's growth strategies and those discussed in Item 7- Management's
Discussion and Analysis of Financial Condition and Results of Operations and
Item 13-Certain Relationships and Related Transactions.
Part I.
Item 1. Business
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information (including the Consolidated
Financial Statements and the Notes thereto) appearing elsewhere in this report.
References to the Company herein shall mean the Company, including the
operations of Nations Flooring, Inc. and its consolidated subsidiaries, and the
operations of their predecessors, except to the extent that the context requires
otherwise.
The Company
Nations Flooring, Inc. (the "Company" or "Nations") is engaged in the
business of selling and installing floor coverings and selling wall coverings,
window treatments and certain related products, primarily for the residential
housing market. The Company had sales of $45.0 million in 1998, $40.8 million in
1997 and $42.4 million in 1996. Currently, the Company is engaged in business in
Las Vegas, Nevada (where its sales have made it the largest seller and installer
of floorcoverings), St. George, Utah and Boise, Idaho. The Company believes that
its new home sales represent approximately 35.0%, 43.5% and 48.0% of the new
homes sold in the Las Vegas market in 1998, 1997 and 1996, respectively, based
on market information compiled by Home Builders Research, Inc. The Company sells
approximately 63% of its products through its New Housing Division,
approximately 25% of its products through its Replacement Sales Division and
approximately 6% through its Commercial Division and approximately 6% in other
areas. New Housing Division sales are effected primarily to or through new
homebuilders who offer purchasers a wide selection of basic grade floor
coverings as part of the unit cost. Customers then visit the Company's new home
design center and, with the assistance of one of the Company's design
consultants, choose from the basic floor coverings offered, or often from
possible upgrades on floor coverings, in addition to purchasing wall coverings,
window treatments and related products. The Company sells to the commercial
market including multi-family, office, retail store and small hotel projects
through its Commercial Division. Additionally, the Company believes that its new
retail showrooms located in Las Vegas will also enable it to continue to broaden
its product lines and expand the sales of its Replacement Sales Division.
The Company believes that the retail floor covering industry is highly
fragmented, with no single floor-covering retailer, including national and large
regional chains, accounting for more than ten percent of the total market. Most
floor-covering retailers operate a single store generating less than $1 million
in annual sales. The Company believes that small independent floor covering
retailers face competitive disadvantages resulting from limited purchasing
power, ineffective inventory control and inadequate resources for sales,
marketing and store management.
The Company believes that significant opportunities exist for floor
covering retailers that can achieve cost advantages and operating efficiencies
through selective acquisitions and internal growth. To take advantage of these
opportunities the Company is pursuing a strategy of acquiring existing floor
covering businesses that are dominant competitors in their regions and
developing new stores in markets experiencing significant growth in population
and homebuilding that do not have a dominant floor covering retailer. The
Company is reviewing various markets throughout the United States to determine
their desirability for expansion, and is in the process of negotiating with
acquisition candidates in some of those markets. The Company acquired a small
retail floorcovering business in St. George, Utah in September 1998 and acquired
a small builder floorcovering business in Boise, Idaho in November 1998. The
Company is also considering internal expansion through the opening of additional
stores in other sites in the southwestern United States where the Company can
expand its relationships with regional homebuilders which it already services in
Las Vegas. However, there can be no assurance as to the viability of this
approach. See "Business-Strategy."
The Company's main facility is located centrally, and the new retail
showrooms are located in areas of Las Vegas with large concentrations of mature
homes. Additional retail showrooms in similar areas are being contemplated. The
Company intends to actively seek to increase its retail replacement sales
through consumer advertising, enhanced marketing, the opening of one or more new
retail locations and the addition of new products.
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Organizational History
The Company was organized under the laws of the State of Delaware and
operates through its wholly owned subsidiary, Carpet Barn, Inc. ("CBI"). CBI had
been acquired in 1995 through the Company's wholly owned subsidiary, Carpet Barn
Holdings, Inc. ("CBH").
On November 16, 1998, Nations approved the merger of 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
the proceeds 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.
Industry Overview
The floorcovering industry in the United States (which includes fixed and
non-fixed carpeting and natural stone, ceramic tile, vinyl, wood and laminate
flooring) is estimated to have steadily grown to approximately $27.5 billion in
1998. Despite this growth in size, the industry has remained fragmented. The
Company believes that no single floor covering retailer, including national and
large retailers such as Home Depot and Carpet Max, accounts for more than ten
percent of the total market. The Company believes that while chains and mass
merchandisers do not dominate the floor covering industry, such companies do
influence pricing, product selection and service innovation. The industry
typically subcontracts the installation of the floorcovering with independent
contractors. The Company utilizes an unrelated outside labor company for its
installations.
The carpet industry's two primary markets are residential and commercial,
with the residential market (the market primarily served by the Company)
accounting for approximately 74% of industry sales in 1997 and the commercial
market accounting for approximately 26% of such sales. A number of factors
influence overall sales levels in the carpet industry, including consumer
spending on durable goods, levels of discretionary spending, interest rates,
housing turnover, the condition of the residential construction industry and the
economy's overall strength.
Strategy
The Company's objective is to maintain its position as the leading provider
of floorcoverings, wall coverings, window treatments and related products in the
Las Vegas builder and retail market and to become the leading provider of
floorcoverings, wall coverings, window treatments and related products in
selected markets throughout the United States. The Company is also seeking to
become a leading provider of floorcoverings in the commercial market in Las
Vegas and in other markets. The Company's strategy includes the following:
Las Vegas Market
Maintain New Home Market Share in Las Vegas; Increase Replacement Sales
Penetration. The Company intends to expand upon its existing base of customers
by increasing its sales for new home projects with homebuilders. Homebuilders
provide the Company's new home design center with the floor plans of all their
units. This allows the new home design center to then provide a home buyer with
alternatives specifically tailored to the floor plan of the customer's unit, as
well as one-stop shopping for home buyers with respect to their floor, wall and
window covering needs. The Company's new home design center is a significant
element in the Company's plan to enhance service to homebuilders and homebuyers.
Based on estimates of the Las Vegas Homebuilder's Association, the total new
homes market for carpet in Las Vegas is projected to grow at an annual rate of
5% to 10% over the next 10 years. There can be no assurance that the Las Vegas
market will grow as projected or that the Company will be able to increase or
maintain its market share.
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The Company's share of the Las Vegas new home market declined from 48.0% in
1996 to 43.5% in 1997, to 35.0% in 1998 which resulted both from competition
from other floor-covering retailers and the shift to "in-house" floor-covering
sourcing and installation by certain Las Vegas area new home builders. To reduce
the Company's reliance on business generated by the New Housing Division, the
Company anticipated the increase in the replacement market and opened additional
retail showrooms and opened a commercial flooring division in April 1997.
The Company plans to increase its business in Las Vegas include continued
advertising and marketing efforts, and the opening of new retail showrooms. The
Company's main facility is located centrally, and the new retail showrooms are
located in areas of Las Vegas with large concentrations of mature homes.
Additional retail showrooms in similar areas are being contemplated. The Company
intends to actively seek to increase its retail replacement sales through
consumer advertising, enhanced marketing, the opening of one or more new retail
locations and the addition of new products.
Continue to Offer Superior Service. The Company believes that the most
important factor in its ability to compete is the quality of the customer
service it offers. The Company believes that it offers the highest quality
customer service in Las Vegas. This service begins with the offering of a full
range of floorcovering products and includes a policy, which the Company intends
to continue, of next-day installation and guarantee against carpet installation
defects for as long as the buyer owns the home (one year on all other products).
The Company also inspects all floor-covering installations in new homes before
the customer moves in and has created a customer service department to handle
all complaints and installation problems. Management believes these programs
have continued to have a positive effect on the Company's reputation with
builders and home buyers which enhances the Company's ability to be selected as
the floor-covering referral for subsequent new home developments and allow the
Company to gain customers for life. The Company also intends to continue to
offer what it believes is quality technical service and assistance to its
customers in both the new home and replacement sales markets. Employees of the
Company assist, as needed, in all phases of customers' projects, from
conceptualization, design and product selection to actual installation. In
addition, the Company's design center is staffed with specially trained design
consultants that are highly knowledgeable regarding the broad range of
decorating possibilities provided by the Company's products. The Company intends
to continue to hire salespersons with experience in floor covering or related
trades, and to continue to train such salespersons with respect to its products
and services. The Company believes that such programs will have a positive
effect on results of operations, although there can be no assurance of this.
Competitive Prices. A second factor affecting the Company's ability to
compete is the pricing of its products. Because of the volume of its purchases,
the Company receives what it believes to be favorable pricing from its
suppliers, including payment discounts from most suppliers and cooperative
marketing contributions from others, including DuPont, Monsanto and Allied. The
Company is able to pass these savings along to customers and thus generally is
able to offer the lowest prices in the region while maintaining a high profit
margin. The Company intends to continue to offer low prices and also to continue
its policy of offering to beat any competitor's price.
Inventory Practices. In the Las Vegas market, the Company has been able to
maintain low warehousing costs by stocking small amounts of inventory while at
the same time providing its customers with next-day installation on purchases in
the Las Vegas market. The ability to maintain low warehousing costs is an
element in the Company's ability to offer what it believes are the lowest prices
in the region.
These practices are dependent on the Company's ability to schedule next-day
"cut and drop" product deliveries from its suppliers. To date the Company's
suppliers have been able to satisfy its delivery requirements with overnight
shipments to the Company from distribution centers maintained by such suppliers
primarily in California, and the Company believes that because of the volume of
its purchases, it can continue to operate in Las Vegas and certain other markets
on this basis. However, there can be no assurance in this regard, and any
significant failure of suppliers to make timely deliveries would adversely
affect the Company's reputation among customers.
Addition of New Products; Showrooms. The Company also plans to attract and
maintain customers by adding complementary products to its current offerings.
The Company targeted wall and window coverings and countertops and wall tile as
its first significant product extensions. These areas accounted for
approximately $2.7 million in sales for 1998, more than doubled the volume in
1996. The Company is anticipating further product expansion through the addition
of area rugs and through the addition of cleaning and maintenance programs, as
well as expansion of sales of hard floor coverings such as wood and tile and
natural stone for both flooring, countertops and wall tile. These new lines will
be promoted by sales personnel at the Company's stores and through the Company's
advertising campaigns.
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The Company also seeks to increase market share and profit margins through
its operation of "showrooms" in its retail sales facilities. The showrooms
provide customers the opportunity to consult with trained personnel concerning
the multitude of design possibilities utilizing the full range of products
offered by the Company. The Company opened a design center in the Las Vegas area
for new homebuyers who are selecting floor coverings and other products to be
installed in their new homes. This design center was opened in response to
requests by builders who are currently customers as well as other major builders
who have expressed a desire to use the Company, should it open such a center.
There can be no assurance that these showrooms will have a positive impact on
the Company's operations.
Other Markets
Pursuit of Selective Acquisitions and Development of New Stores. The
Company acquired a small retail floorcovering business to penetrate the retail
and commercial segments and to service various homebuilders in St. George, Utah
in September 1998, and acquired a small builder floorcovering business in Boise,
Idaho in November 1998.
The Company believes that because of the fragmented nature of the
marketplace for floor covering and related sales, significant consolidation
opportunities exist, and that the Company is well positioned to achieve
financial and operational efficiencies through selective acquisitions due to
favorable working relationships with its suppliers and major customers. The
Company believes that any such acquisitions will enable it to increase its sales
while decreasing its general and administrative costs as a percentage of such
sales due to the creation of substantial economies of scale. The Company intends
to pursue acquisitions of businesses that provide the same products and services
as, or those complementary to, the Company's existing business. The Company has
identified a number of markets that it intends to explore entering over the next
several years.
The Company believed that it could penetrate the Phoenix commercial market
through the opening of its own commercial operation and did so in April 1998.
The Company discovered that the Phoenix market is extremely competitive and that
the Company was not able to compete with margins adequate to cover its overhead.
The Company is currently completing a plan to close the Phoenix operation by
May 1999. The Company is continuing to seek out an established business in the
Phoenix area and may return to Phoenix as soon as the correct business
opportunity can be consummated.
The Company has also selectively targeted certain markets throughout the
United States where there is no dominant competitor for expansion through the
development of new stores. Targeted markets are, like Las Vegas, experiencing
high growth in population and home building. The Company believes that it can
duplicate its successful concepts in these high growth markets by strengthening
its relationships with its existing builders who are active in these markets.
Additionally, the Company believes that it can compete in these markets through
its demonstrated ability to compete on service and price. Furthermore, expansion
of the Company should generate an increase in the Company's buying power due to
higher volume purchasing which would also benefit the operations in which the
Company has expanded into a new market through an acquisition by allowing the
Company to reduce costs and offer lower pricing than was previously offered by
that operation. However, there can be no assurance that such expansion will be
effected or, if effected that any new facilities will be operated profitably.
Expansion through the opening of new facilities in new markets requires the
Company to incur costs to lease or build and equip a facility. However, in some
markets the Company has been able to, and believes that in the future may
continue to be able to, obtain cooperative funding of such costs from suppliers
of the Company's products.
The Company contemplates that any retail facilities it opens will have a
dedicated showroom area where customers can consult with trained personnel
concerning the multitude of design possibilities utilizing the full range of
products offered by the Company. The Company believes that the clean, relaxed
environment of these new facilities, including child care/entertainment centers,
will increase the average total sale price and gross margin for its sales,
although there can be no assurance in this regard.
Operations
Background. The Company primarily operates its business in Las Vegas,
Nevada (Clark County). This market accounted for approximately 98.6% of the
Company's 1998 sales. Approximately 63.7% of its Nevada sales are to new
homebuyers in the Las Vegas market.
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The Las Vegas area is one of the fastest growing in the country, according
to regional publications. According to Las Vegas Review Journal during 1998, an
average of 4,600 persons relocated to Las Vegas each month, and the Las Vegas
(Clark County) population has increased to 1.2 million. Such statistics
illustrate the high numbers of persons arriving in the Las Vegas area and the
potential strength of the retail floor covering market.
The Company also began operations in St. George, Utah, and Boise, Idaho
during 1998. These other markets accounted for 1.4% of the Company's total sales
in 1998.
The St. George, Utah market, in which the Company acquired a small retail
floorcovering business in September 1998 is a resort community located in
southern Utah, two hours north of Las Vegas. The Company expects to increase the
retail business and expand into the builder and commercial markets during 1999.
The Boise, Idaho market, in which the Company acquired a small builder
floorcovering business in November 1998, is a fast growing community, the state
capital and is located near several resort towns. The city has been experiencing
an estimated annual population growth of approximately 4.1%, and is home to such
companies as Micron and Hewlett-Packard. Other major industries include
manufacturing, service, government and high tech. The Company expects to
increase the existing builder business and to expand into retail and commercial
during 1999.
Divisions. The Company primarily operates through three divisions, the New
Housing Division, the Replacement Sales Division and the Commercial Division.
New Housing Division. The Company's New Housing Division is responsible for
installation of floorcovering and related products in newly built homes.
Salespersons in this division deal with both homebuilders and buyers. In
servicing the new home market, the Company generally secures contracts from
builders to provide floorcovering in their new homes. In most cases, when the
builder sells a new home, the builder will direct the home buyer to the Company,
which allows the buyer to choose the floorcovering represented by a standard
allowance provided from the builder to the home buyer or to upgrade from the
standard selection by paying a higher price. The Company has found that most
homebuyers choose an upgraded floorcovering selection.
The Company receives payment for its carpeting in new homes in one of two
ways. In most cases, the buyer directly pays the upgraded portion of a carpet
sale by generally paying the full upgrade amount with the order. In other cases,
the Company bills the upgraded portion of the job to the builder, who then
passes on the additional cost to the buyer as part of the total price of the
home; this method may allow buyers to finance their flooring upgrades through
their mortgage, with little incremental effect on monthly payments. Most of the
Company's accounts receivable result from New Housing Division billings to
homebuilders of the builders' standard allowances and are due within thirty days
of installation.
Through its New Housing Division, the Company has relationships with most
of the larger home builders in the Clark County area, with its five largest
customers accounting for $15.4 million, $15.1 million and $16.5 million in sales
in 1996, 1997 and 1998, respectively. During the past nine years, the New
Housing Division has accounted for Company sales ranging from a low of $21.8
million in 1990 (56% of total Company sales) to a high of $30.6 million in 1996
(72% of total Company sales). During 1998, New Housing Division sales accounted
for $28.3 million, or 63% of the Company's sales. The Company's new homes sales
in Clark County as a percentage of its total sales was 72%, 70%, and 63% in
1996, 1997 and 1998, respectively.
Because the New Housing Division's sales are dependent on sales of new
homes, such sales are affected by population growth, mortgage interest rates,
and the other factors that generally affect the level of new home construction
and sales. However, because the Company also services the carpet replacement
market, the adverse effects on the Company's sales by downturns in the building
cycle may be moderated by offsetting trends in the redecoration of existing
homes.
Replacement Sales Division. The Replacement Sales Division is responsible
for providing individual consumers who have existing homes with new or
replacement floor coverings. The Company is one of the three largest consumer
replacement retailers in the Las Vegas area, chiefly because of its large
selection, low prices, quick installation time and name recognition.
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Customers contemplating purchasing flooring or window and wall coverings
will visit one of the Company's retail showrooms strategically placed throughout
Las Vegas. Highly trained retail salespersons will then go to the customer's
home to verify measurements and confirm product selections. Due to the Company's
"cut and drop" program with its suppliers, installation is available at the
customer's convenience.
Generally, the Company requires that Replacement Sales Division buyers
provide a deposit by cash, check or credit card when they place an order, and
that they pay the balance upon installation. For customers who wish to finance
their purchases, the Company refers such customers to a consumer finance
company, which issues a payment directly to the Company upon completion of
installation. The Company's sales in the replacement market were $8,487,466,
$8,883,495, and $11,108,620 in 1996, 1997 and 1998, respectively. The Company
believes that its retail showroom approach is the primary reason for the
increase in sales by its Replacement Sales Division.
Commercial Division. The Commercial Division is responsible for providing
floorcovering and related products to the multi-family, office, retail store and
small hotel markets.
Highly trained commercial salespersons call on potential customers
including general contractors, developers and real estate brokers to bid
projects. Commercial projects have a duration ranging from one week to several
months. Short duration contracts are billed upon completion and others are
billed as they progress; all billings are done on a net thirty basis. The
Company's sales in the commercial market were $300,000, $1,557,670 and
$2,793,938 in 1996, 1997 and 1998, respectively. The Company believes that it
can maintain or increase its sales in the Commercial Division during 1999,
however there can be no assurance of this.
Other. The Company sells other products and services including window
treatments, countertop and wall tile and floor cleaning services. These products
and services are distributed much the same as other Company products. The
Company's sales in the other areas were $1,319,743, $1,687,181 and $2,724,205 in
1996, 1997 and 1998, respectively.
Customers
The Company has among its customers most of the larger home builders in
Clark County, Nevada, including Lewis Homes of Nevada, Inc. ("Lewis") and
American West Homes ("AWH"). The Company has developed its relationships with
such builders over the past 25 years. In 1996, 1997 and 1998, five customers
accounted for approximately 36%, 37%, and 37% of the Company's net sales,
respectively. In 1996, 1997 and 1998, Lewis accounted for 14.2%, 15.2% and 15.3%
of net sales, respectively. In 1996, 1997 and 1998, AWH accounted for 9.6%,
9.7%, and 9.5% of net sales, respectively.
Suppliers
The Company currently purchases its carpeting from suppliers outside Nevada
including suppliers located in Georgia and California. The Company generally
pays for its purchases within three weeks of delivery, allowing the Company to
procure substantial discounts from its suppliers. The Company's six largest
suppliers, which include Shaw Industries, Mohawk Industries and Beaulieu United
accounted for 86.5%, 77.4% and 80.1% of its total purchases in 1996, 1997 and
1998, respectively. The Company believes that one of its competitive advantages
is its strong relationship with such suppliers. While the Company continues to
have good relations with its suppliers, management believes that the Company
could find alternative sources of supply should any of the Company's major
suppliers cease doing business with it.
Marketing, Advertising and Merchandising
The Company's advertising program includes television and radio commercials
and print advertising in local daily newspapers. Expenditures for advertising
and promotion, net of cooperative advertising contributions, were approximately
$598,000, $586,000, and $785,000 (representing 1.4%, 1.4%, and 1.7% of net
sales) in 1996, 1997 and 1998, respectively. In its advertising, the Company
features its large selection, low prices and also features its guarantee against
carpet installation defects for as long as the buyer owns the home (one year on
all other products). The Company also receives cooperative advertising
contributions (up to 50% of the cost of qualifying advertisements depending on
the amount of the relevant products sold), from certain mills and yarn companies
by including in its advertising references to brand name yarns (such as DuPont,
Monsanto and Allied) or floor coverings (such as Congoleum).
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Training
The Company strives to develop the technical and sales skills of its store
personnel to ensure that customers consistently receive knowledgeable and
courteous assistance. The Company's training programs are oriented toward
emphasizing the importance of customer service, improving selling skills and
creating realistic expectations. The Company provides training for its
entry-level personnel through an in-house training program, which combines
on-the-job training with formal presentations by the Company's suppliers
concerning their products. The suppliers' contributions in this regard evidence
their commitment to the sales and service efforts of the Company. In addition,
ongoing instruction is given to all sales and customer service personnel.
Competition
The floorcovering industry is highly competitive and fragmented. According
to an industry publication, the nations ten largest floorcovering retailers in
terms of sales volume accounted for approximately 31% of all floorcovering sales
in the United States in 1996, although none of such retailers dominated the
market. In 1998, Clark County, Nevada had approximately 100 outlets through
which carpet was sold.
Companies in the floorcovering industry compete mainly through their
ability to provide service and selection at reasonable prices. The Company
competes with general merchandise and discount stores, home improvement centers
and specialty retailers operating on a local, regional and national basis. The
Company believes that its chief competitors are local and regional specialty
chains as well as homebuilders' in-house design centers. Competitors in the
builder market include Adams Brothers, DuPont Flooring Systems and Bairs Carpet
Valley. Competitors in the retail market include Carpet Max, Cloud Carpets and
Carpeteria.
In addition to the local and regional specialty chains, the Company
competes with national and regional home improvement centers (such as Home Depot
and Home Base) and national department stores and specialty retailers (such as
Sears) which have branches in Las Vegas. Many of such regional and national
competitors have substantially greater financial resources than the Company. In
addition, expansion by certain regional home improvement center chains has led
to increased price competition for certain of the Company's products.
While there is intense competition among providers of floorcoverings in the
Las Vegas, Nevada market, the Company has successfully competed for customers on
the basis of price, reliability and quality of product, breadth of product line,
service and the fact that the Company has been in business for 27 years.
Employees
As of March 15, 1999, the Company employed approximately 180 persons,
divided among its accounting, administrative, buying, sales, customer service
and warehousing departments. A substantial portion of the compensation of
replacement sales personnel is commission-based. None of the Company's employees
is covered by a collective bargaining agreement. The Company believes that its
relationship with its employees is satisfactory.
Product Liability and Insurance
The sale of the Company's retail products involves some risk of product
liability claims. The Company has obtained product liability insurance in the
amount of $1.0 million per occurrence with a $2.0 million aggregate limit. The
Company has a $4.0 million excess liability umbrella insurance policy. There can
be no assurance that the coverage limits of the Company's insurance policy
and/or any rights of indemnification and contribution that the Company may have
will offset potential claims. A successful claim against the Company in excess
of insurance coverage and not subject to indemnification could have a material
adverse effect on the Company.
Item 2. Properties
Through March 1999, the Company leased from C.B. Realty of Delaware, Inc.
("Realty") the property at which its principal Las Vegas facility is located.
The property was leased under a lease, extended through April 1, 2004, having an
annual rental of $120,000. The 44,000 square foot property includes a retail
showroom, a warehouse retail outlet and administrative offices. In April 1999,
the Company anticipates acquiring the ownership of Realty, which is owned by
certain stockholders of the Company, and as a result thereof will acquire
ownership of the facility. See Item 13-Certain Relationships and Related
Transactions.
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The Company has leased additional facilities in Las Vegas, consisting of
two retail showrooms, an additional warehouse, a commercial location and a new
home design center, containing a total of approximately 27,000 square feet at an
annual rental of approximately $260,000. The Company also leases facilities in
Phoenix, Arizona, St. George, Utah and Boise, Idaho containing a total of
approximately 20,000 square feet at an annual rent of approximately $134,000.
The Company believes that its facilities are adequate for their intended
purposes.
The Company maintains its principal executive offices within New York, New
York at 100 Maiden Lane.
Item 3. Legal Proceedings
None
Item 4. Submission of Matters to a Vote of Security Holders
None
9
<PAGE>
Part II.
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.
The Common Stock has been quoted on the "electronic bulletin board"
operated by the NASD under the symbol "CRPT" since May 1997 and, prior to that,
under the symbol "RAGC." The following table sets forth, for the periods
indicated, the high and low bid prices, after adjustment for the one-for-four
reverse stock split in May 1997, of the Common Stock as reported on the
"electronic bulletin board" operated by the NASD. Such quotations reflect
inter-dealer prices, without retail mark-up, markdown or commission and may not
necessarily represent actual transactions.
High Low
------- ------
Fiscal Year 1997:
First Quarter $13.52 $4.00
Second Quarter 13.00 4.00
Third Quarter (through July 7, 1997) 7.50* 2.00*
Fourth Quarter * *
Fiscal Year 1998:
First Quarter
* *
Second Quarter
* *
Third Quarter
* *
Fourth Quarter
* *
Fiscal Year 1999:
First Quarter (through March 15, 1999)
* *
- -----------
* No reported trading or quotes available after July 7, 1997. The last sale
price of the Common Stock on July 3, 1997 was $4.00 per share as reported by
the Automated Confirmation Transaction Service.
As of March 15, 1999, there were approximately 372 record holders of the
Common Stock.
10
<PAGE>
Item 6. Summary Financial Information
(in thousands, except share and per share data)
The summary financial information presented below has been derived from the
financial statements of the Company and the Predecessor Business. This
information should be read in conjunction with the Consolidated Financial
Statements and the Notes thereto included elsewhere in this Annual Report on
Form 10-K. The results of operations of the Company are not comparable to those
of the Predecessor Business, due primarily to the amortization of intangible
assets and interest expense on the debt incurred in connection with the
Acquisition. In addition, certain information below is not shown for the
Predecessor Business where such information would not present a meaningful
comparison. See Item 7-Management's Discussion and Analysis of Financial
Condition and Results of Operations.
<TABLE>
<CAPTION>
Predecessor Business Nations Flooring, Inc.
Pro Forma
Period for Year
Year Ended Period Ended Ended Ended
December 31, June 1, December 31, December 31, Year Ended December 31,
1994 1995 (1) 1995 (2) 1995 (3) 1996 1997 1998
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales $ 42,507 $ 16,363 $ 23,980 $ 40,343 $ 42,414 $ 40,836 $ 45,000
Gross profit 10,841 5,018 6,017 11,035 11,092 10,299 11,093
Income from operations 5,548 3,724 2,122 5,375 2,400 1,858 1,785
Dividends to preferred
stockholders of subsidiary - - 203 339 538 559 466
Amortization of discount
on preferred stock of
subsidiary - - - - - - 1,543
Net income (loss) 4,888 3,737 293 1,663 75 (652) (1,794)
Basic and dilutive net income
(loss) per common share (4) 0.08 0.46 0.02 ( 0.18) (0.52)
Weighted average common
shares outstanding (4) 3,645,791 3,639,732 3,773,097 3,642,397 3,670,054
Pro forma income tax effect (5) 1,662 1,271
Pro forma net income after tax (5) 3,226 2,466
Balance Sheet Data: 1995 1996 1997 1998
--------------------------------------------------
Working capital (deficit) $ (3,767) $ (10,777) $ (8,062) $ (2,841)
Total assets 23,533 22,383 21,462 22,011
Long-term debt and capital lease obligations, less current
maturities 8,812 111 1,842 4,036
Related party debt, less current portion - - - 2,500
Stockholders' equity 3,169 3,416 2,763 6,225
</TABLE>
- ----------------
1) Information is presented for the Predecessor Business for the period from
January 1, 1995 through June 1, 1995, the date of the Acquisition, which was
accounted for as a reverse acquisition of the Company by CBH.
2) Information is presented for the Company for the period from June 2, 1995
through December 31, 1995, due to the Acquisition.
3) Gives effect to the acquisition of the Predecessor Business.
4) The weighted average common shares outstanding and net income per common
share for the Predecessor Business are not presented as they are not
comparable to those of the Company.
5) The Predecessor Business was taxed as an S corporation under Subchapter S
of the Internal Revenue Code of 1986, as amended, (the "Code") so that in
lieu of payment of income taxes at the corporate level the stockholders
individually reported their pro rata share of the Predecessor Business' items
of income, deduction, loss and credit. Pro forma income tax has been computed
at an assumed rate of 34%.
11
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion of the financial condition and results of
operations of the Company relates to the fiscal years ended December 31, 1998,
1997 and 1996 and should be read in conjunction with the Consolidated Financial
Statements and Notes thereto included elsewhere in this Annual Report on Form
10-K. All references to full years are to the applicable fiscal year of the
Company.
Results of Operations
Fiscal Years Ended December 31, 1998 and 1997
Total revenues increased by $4,164,763 to $45,000,387 for the year ended
December 31, 1998 from $40,835,624 for the year ended December 31, 1997,
representing an increase of 10.2%. The components of this increase are as
follows:
New Housing $ (333,654)
Retail Replacement 2,225,125
Commercial 1,236,268
Other 1,037,024
==========
$4,164,763
==========
The increases in Retail Replacement, Commercial and Other sales result from
the Company's efforts, begun in fiscal 1997, to diversify its market and sales.
Since 1997, the growth in the Company's New Housing Division sales has been
adversely affected by increased competition, and an increase in "in-house"
sourcing and installation by Las Vegas area new home builders. To reduce the
Company's reliance on business generated by the New Housing Division, the
Company opened new retail showrooms and opened a Commercial Division. These
openings contributed directly to the increased sales in these areas. In
addition, on September 18, 1998, the Company acquired Merrill's in St. George,
Utah and on November 16, 1998, the Company acquired Trinity in Boise, Idaho.
These acquisitions include new home, retail and commercial operations.
Management believes that these diversification efforts and the acquisition of
Merrill's and Trinity (which did not have a material affect on revenues or the
results of operations for year ended December 31, 1998) will allow it to lessen
the adverse effects of any increases in competition, or decreases in demand, in
any one of the Company's markets (i.e., new housing, retail replacement or
commercial) or geographic locations. However, there can be no assurance that
these efforts will maintain or continue to increase the Company's overall sales
levels over time. Prices for the Company's products were not significantly
changed.
Gross profit increased by $794,095 to $11,093,094 for the year ended
December 31, 1998 from $10,298,999 for the year ended December 31, 1997,
representing an increase of 7.7%. The gross profit percentage declined from
25.2% in 1997 to 24.7% in 1998. Liquidity constraints that existed before, and
were alleviated by the May 1998 refinancing of the Company's debt (see Note 4 of
Notes to Consolidated Financial Statements) prevented the Company from taking
advantage, during the first half of fiscal 1998, of early payment discounts
offered by vendors, and the absence of these discounts, together with certain
price concessions made to maintain or attract New Home sales and increases in
installation costs, were the principal causes of the decline in the gross profit
percentage.
Selling, general and administrative expenses increased by $942,713 (but
remained fairly constant as a percentage of revenues) to $8,175,710 for the year
ended December 31, 1998 from $7,232,997 for the year ended December 31, 1997.
This increase is due to the approximate increases in: (1) salaries and related
payroll taxes of $262,000, due primarily to an increase in the number of
employees and increases in pay levels during 1998, (2) rent expense of $199,000,
office and supplies expense of $166,000 and auto expense of $13,000 primarily
due to the opening of the new retail showrooms and locations in Arizona, Utah
and Idaho, (3) advertising of $199,000, (4) service fees of $84,000 relating
to the external finance programs offered to customers, (5) bad debt expense of
$25,000 and (6) security expenses of $35,000 in the Company's warehouse. These
increases were partially offset by the following approximate decreases in: (1)
workers compensation of $43,000, which resulted from the Company becoming a
member of a self insured group which is set up under the State's supervision,
(2) miscellaneous expenses of $40,000, (3) travel of $25,000 and (4)
professional expenses of $17,000.
12
<PAGE>
Amortization and depreciation expense decreased to $1,132,331 in 1998 from
$1,207,883 in 1997.
As a result of the above changes operating income decreased by $73,066 to
$1,785,053 for the year ended December 31, 1998 from $1,858,119 for the year
ended December 31, 1997. Other income (expense) decreased by $353,164 to
($284,811) for the year ended December 31, 1998 from $(637,975) for the year
ended December 31, 1997. The 1998 expense principally represent charges
relating to the write off of loan fees (due to the May 1998 refinancing) of
$232,000. The 1997 expense principally represented the write off of offering
costs of $468,566, pre-acquisition costs for uncompleted acquisitions of
$83,131, lawsuit settlement costs of $14,190 and write off of loan fees of
$81,666. Interest expense decreased to $1,165,341 in 1998 from $1,356,248 in
1997, due to reductions in the indebtedness to First Source made in part with
the proceeds of advances from related parties, offset by the interest expense
related to those advances and interest of $224,280 relating to $534,000 of
advances from unrelated lenders outstanding from February 1997 to April 1997.
Income taxes (benefit) increased to $120,000 in 1998 from $(43,000) in 1997
due to the increase in income before income taxes. Dividends to preferred
stockholders of subsidiary decreased to $466,000 in 1998 from $559,200 in 1997
due to the merger of the Company's CBH subsidiary into Nations in November 1998.
As a result of the merger the Company exchanged the preferred stock of CBH for
preferred stock of the Company; therefore, the dividends on the preferred stock
since the merger were charged directly to retained earnings. Net loss increased
by $1,141,521 to $1,793,825 for the year ended December 31, 1998 from $652,304
for the year ended December 31, 1997. Included in the net loss for 1998 is a one
time charge of $1,542,726 of amortization of the original discount on the
preferred stock of CBH and the write off of unamortized debt issuance costs of
$232,000 relating to the First Source Debt refinance in May 1998 (approximately
$1,694,000, net of tax). Included in the net loss for 1997 are one-time charges
relating to write off of deferred offering costs, pre-acquisition costs and loan
fees, aggregating $633,363, (approximately $418,000 net of tax). Excluding these
one-time charges, the net losses for the years ended December 31, 1998 and 1997
was approximately $100,000 and $234,000, respectively.
Fiscal Years Ended December 31, 1997 and 1996.
Total revenues decreased by $1,578,740 to $40,835,624 for the year ended
December 31, 1997 from $42,414,364 for the year ended December 31, 1996,
representing a decrease of 3.7%. The components of this decrease are as follows:
New Housing $(3,599,877)
Retail Replacement 396,029
Commercial 1,257,670
Other 367,438
===========
$(1,578,740)
===========
This decrease is attributable primarily to a decrease in New Housing
Division sales for fiscal 1997 compared to fiscal 1996, while prices for the
Company's products were not significantly changed. The decline in the New
Housing Division Sales in 1997 primarily reflects a decline in its share of the
Las Vegas new home market, from 48.0% in 1996 to 43.5% in 1997, which resulted
both from competition from other floor-covering retailers and the shift to
"in-house" floor-covering sourcing and installation by certain Las Vegas area
new home builders. To attempt to counteract these developments and reduce the
Company's reliance on business generated by the New Housing Division, the
Company opened two new retail stores (one in October 1996 and one in July 1997)
and opened a commercial flooring division in April 1997.
Gross profit decreased by $793,441 to $10,298,999 for the year ended
December 31, 1997 from $11,092,440 for the year ended December 31, 1996,
representing a decrease of 7.2%. The gross profit percentage declined from 26.1%
in 1996 to 25.2% in 1997. The Company's inability in 1997 to take advantage of
all vendor offered early payment discounts due to its debt structure, price
rebates, and reductions offered to attract certain new homebuilders to move
floorcovering previously performed "in-house" to the Company's New Housing
Division were the principal causes of the decline in the gross profit
percentage.
13
<PAGE>
Selling, general and administrative expenses decreased by $236,571 to
$7,232,997 for the year ended December 31, 1997 from $7,469,568 for the year
ended December 31, 1996. This decrease is due to the approximate decreases in:
(1) workers compensation of $700,000, due largely to the Company becoming a
member of a self insured group which is set up under the State's supervision and
to a refund of $130,000 received from the State during 1997, (2) bad debt
expense of $240,000 due to the Company improving its billing and collection
functions which has allowed the Company to bill and collect its receivables more
timely and (3) management fees of $145,000. These decreases were offset by the
following approximate increases in: (1) salaries and related payroll taxes of
$340,000, due primarily to an increase in the number of employees and increase
in pay levels during 1997, (2) rent expense of $200,000 primarily due to the
opening of the new retail showrooms, (3) telephone of $77,000, office and
supplies expense of $99,000, auto expense of $55,000 and equipment rental of
$30,000 due to the opening of the new retail showrooms, and (4) service fees
of $38,000 relating to the external finance programs offered to customers.
Amortization and depreciation expense decreased to $1,207,883 in 1997 from
$1,223,290 in 1996, due to decreased depreciation expense in 1997.
As a result of the above changes, operating income decreased by $541,463 to
$1,858,119 for the year ended December 31, 1997 from $2,399,582 for the year
ended December 31, 1996. Other income (expense) increased by $656,429 to
($637,975) for the year ended December 31, 1997 from $18,454 for the year ended
December 31, 1996 due to one time charges relating to write off of offering
costs of $468,566, pre-acquisition costs for uncompleted acquisitions of
$83,131, lawsuit settlement costs of $14,190 and write off of loan fees of
$81,666 in the fourth quarter of 1997. These adjustments had the effect of
reducing income before taxes by approximately $574,000. Interest expense
decreased to $1,356,248 in 1997 from $1,477,614 in 1996, due to reductions in
the indebtedness to First Source made in part with the proceeds of advances from
related parties offset by the interest expense related to those advances and
interest of $224,280 relating to $534,000 of advances from unrelated lenders
outstanding from February 1997 to April 1997.
Income taxes (benefit) decreased to $(43,000) in 1997 from $328,043 in 1996
due to the decrease in income before income taxes. Dividends to preferred
stockholders of subsidiary increased to $559,200 in 1997 from $537,694 in 1996
due to the CBH's issuance of additional shares of preferred stock in 1996. Net
income (loss) decreased by $726,989 to ($652,304) for the year ended December
31, 1997 from $74,685 for the year ended December 31, 1996. Included in the net
loss for 1997 are one-time charges relating to write off of deferred offering
costs, pre-acquisition costs and loan fees, aggregating $633,363, Excluding
these one-time charges, the net loss for the year ended December 31, 1997 was
approximately $234,000 compared to net income of $74,685 in 1996.
Liquidity and Capital Resources
Cash provided by (used in) operating activities was $2,914,771, $2,541,577
and $(479,016) for the years ended December 31, 1996, 1997, and 1998
respectively. In each of 1996, 1997 and 1998 the cash provided by operations
differed significantly from net income, 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
$2,840,875 at December 31, 1998. Included in such deficit is $4,512,213, 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 fiscal 1998, net income included significant non-cash charges of
$1,542,726 for the amortization of the discount relating to CBH's preferred
stock, amortization of $909,600, depreciation of $222,731 and the write off of
loan fees and other of $291,361. Additionally, cash was provided by increases in
accrued expenses of $236,050 and customer deposits of $258,277. These sources of
cash from operations were partially offset by the use of cash to decrease
accounts payable as the result of and using the liquidity added by the May 1998
refinancing, and the increase in accounts receivable and inventory reflect
increased sales in the fourth quarter of 1998.
For 1997, the cash provided by operations of $2,541,577 reflects the
inclusion in the net loss of significant non-cash charges of $1,000,063 for
amortization, $207,820 for depreciation and $468,566 for written-off offering
costs and cash inflows provided by increased in accounts payable and advances
from principal stockholder of $684,531 and $901,247, respectively.
For 1996, the cash provided by operations of $2,914,771 reflects the
inclusion in the net loss of significant non-cash charges of $1,045,946 for
amortization, $177,344 for depreciation and cash inflows provided by increased
in accounts payable and advances from principal stockholder of $45,442 and
$619,094, respectively.
14
<PAGE>
During the years ended December 31, 1998 and 1997, cash used in investing
activities was $528,734 and $319,885, respectively, used primarily to purchase
equipment and leasehold improvements and to acquire the net assets of the
Company's Utah facility. Cash provided by (used in) financing activities during
such periods was $989,710 and (2,326,599), respectively, used primarily to make
principal payments on the Credit Agreement, offset in 1997 by net proceeds
received from advances from stockholders and other unrelated advances.
The Company received advances from unrelated parties of $534,000 during
February 1997, which enabled the Company to make the quarterly principal payment
due to First Source described below. These advances bore interest at the rate of
12% per annum, payable monthly. These advances were repaid in April 1997. In
addition to the repayment of the principal, the lenders were to receive $213,600
in shares of common stock of the Company as additional interest. All parties,
except one who continued his election to receive Company stock and one who
elected to receive cash, agreed to allow Branin to acquire the right to receive
the common stock of the Company, and as a result $189,600 of the obligation was
reclassified as due to Branin. The total $193,600 payable throughout the
issuance of shares of common stock (which included the $189,600 payable to
Branin as a result of the assumption described above, was satisfied in August
1998, through the issuance of 27,657 shares of the Company's common stock
including 27,086 shares issued to Branin, which represents the number of common
shares the lenders would have received under the terms of the original
agreement. Total interest expense of $224,280 relating to these advances has
been reflected in the accompanying consolidated statement of operations for the
year ended December 31, 1997.
During May 1997, the Company received an unsecured advance from a
shareholder and director of the Company in the amount of $500,000, which enabled
the Company to make the quarterly principal payment due to First Source
described below. This advance was repaid through the issuance of 500 shares of
the Company's preferred stock in December 1998. This advance bore interest at
12% per annum, payable monthly. Total interest expense of $55,000 and $40,000
relating to this advance has been reflected in the accompanying consolidated
financial statements for the year ended December 31, 1998 and 1997,
respectively.
In both August and November of 1997, and in February of 1998, the Company
received unsecured advances of $500,000 (an aggregate total of $1,500,000) from
Branin Investments, Inc. (Branin), which is 100% owned by the Chairman of the
Board and President of Nations, which enabled the Company to make the quarterly
principal payment due to First Source described below. 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.
Branin 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 4 of Notes to Consolidated Financial Statements. 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. As Of
December 31, 1998, Branin has received approximately $310,000 out of excess cash
flows. Due to these restrictions the aggregate advances of $1,500,000 has been
classified as long term at December 31, 1998. Total interest expense of $25,000
and $182,500 relating to these advances has been reflected in the accompanying
consolidated statement of operations for the year ended December 31, 1997 and
1998 respectively.
Payments of the CBH and Nations preferred stock dividends have been made by
Branin on behalf of the Company in the amount of $564,200 during 1998. As a
result of these payments, and management fees and other amounts (including the
foregoing $1,500,000) advanced from or due to Branin and PAH Marketing, Inc.
("PAH"), a company controlled by Philip A. Herman, the Company was indebted to
Branin and PAH, for $2,653,339 at December 31, 1998 (see Notes 3(a) and 3(b) of
Notes to Consolidated Financial Statements). As of March 15, 1999, the Company
was indebted to Branin and PAH for $2,538,690. Because the Company and Branin
and PAH anticipate repayment of the non-interest bearing advances in the near
term, no stated interest rate exists on these advances and no interest has been
imputed.
15
<PAGE>
On May 19, 1998, the Company, through its subsidiary CBI, entered into a
credit agreement (the "Credit Facility") with Fleet Capital Corporation
("Fleet"), pursuant to which Fleet advanced to CBI $5,000,000 under a term loan
and approximately $2,300,000 under a $5,000,000 revolving line of credit which
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. Fees payable to Fleet totaled $125,000. In addition, a finder's fee of
$100,000 was paid to a person associated with Branin. The term and revolving
portions of the Credit Facility are due on May 18, 2003 while the overadvance
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 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. 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.
As a condition of consummating the debt refinancing, the Company received
an advance of $500,000 from Realty. See Item 13-Certain Relationships and
Related Transactions.
Amounts outstanding under the Credit Facility at December 31, 1998 are as
follows:
Revolving line of credit $3,812,213
Overadvance subline $ --
Term loan $4,650,000
The proceeds of the Credit Facility were used to payoff the financing
obtained from First Source Financial ("First Source") of approximately
$7,300,000. Certain unamortized debt acquisition costs classified as intangible
assets of $232,000 were charged to expense as of the date of the refinancing.
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.
Beginning in 1996, the Company incurred costs relating to a possible public
offering of the Company's common stock. The Company withdrew its public offering
before the offering was declared effective, and in conjunction wrote off the
costs associated with the offering of $468,566 in 1997. The Company is
continuing to explore the possibility or raising funds through a private
offering of debt or equity securities that will enable the Company to pursue its
growth strategies.
The Company believes that the liquidity constraints it experienced in 1996
and 1997 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 supplementing 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.
16
<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.
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.
17
<PAGE>
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.
Item 8. Financial Statements and Supplementary Data
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated balance sheets F-3
Consolidated statements of operations F-4
Consolidated statements of stockholders' equity F-5
Consolidated statements of cash flows F-6 - F-7
Notes to consolidated financial statements F-8 - F-16
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
18
<PAGE>
Part III.
Item 10. Directors and Executive Officers of the Registrant
The following table sets forth certain information with respect to the
directors and executive officers of the Company.
Name Age Position
- ---- --- --------
Philip A. Herman 53 Chairman of the Board and President
Facundo Bacardi 53 Director
John Katz 60 Director
Paul Kramer 66 Director
William V. Poccia 53 Secretary and Chief Financial Officer
Steven M. Chesin 37 Chief Operating Officer
Jeffrey E. Wiens 37 Corporate Controller
The number of directors on the Board is presently fixed at five, whose
terms are perpetual.
Philip A. Herman has been Chairman of the Board and President of the
Company since June 2, 1995. Mr. Herman is also sole Voting Trustee of the voting
trust that holds a majority of the Company's outstanding shares of common stock.
See "Principal Stockholders and Holdings of Management." He also has served as a
principal of Branin since 1994. From 1992 to 1994, Mr. Herman served as a
principal of Americorp Securities, Inc. ("Americorp"), a retail brokerage firm,
and from 1989 to 1992 he served as principal of PAH Marketing Consultants Inc.,
a consulting firm. In January 1995, Mr. Herman and PAH entered into a consent
decree, without admitting any violation of law, with the Federal Trade
Commission ("FTC") pursuant to which Mr. Herman and PAH paid $40,000 to the FTC
and consented to being enjoined from participating in certain telemarketing
related activities.
Facundo Bacardi has been a director of the Company since June 2, 1995 and
is a member of the Stock Option Plan Committee. He also serves as a director of
Suramericana de Inversiones, S.A., an investment company located in Panama, and
has served in that capacity since 1990. Mr. Bacardi is also an heir to the
controllers of the Bacardi rum company, a worldwide manufacturer and one of the
largest family-owned companies in the world. He is currently an advisor to the
Board of Directors for Bacardi International, the holding company for all of the
Bacardi companies worldwide. From 1979 to 1991, Mr. Bacardi was in charge of the
manufacturing and distribution division for Central America.
John Katz has been a director since March 1998. Mr. Katz also serves as
director of the Legends Fund, a series of mutual funds, which serve as
investment vehicles for variable annuities. Since 1991, Mr. Katz has been an
investment banker and business consultant. From 1975 to 1991, Mr. Katz held
various positions with Equitable Life Assurance Society and its subsidiaries,
including acting as Senior Vice President and the Executive Vice President of
Equitable Investment Corporation between 1986 and 1991.
Paul Kramer has been a director since March 1998. Mr. Kramer also serves as
a director of SFX Entertainment, Inc. Since August 1994, Mr. Kramer has been a
principal of Kramer & Love, a consulting firm providing advisory services in the
areas of acquisitions and restructuring. Prior thereto, from October 1992, Mr.
Kramer also provided financial advisory services. From 1954 to 1968, Mr. Kramer
was employed by, and from 1968 to 1992, was a partner in Ernst & Young, the
accounting firm.
William Poccia has been Chief Financial Officer of the Company since August
6, 1996. From October 1995 to August 1996, Mr. Poccia served as a financial
consultant to the Company in the employ of Branin. Prior to that time, Mr.
Poccia served as Director of Audit for Participants Trust Company, a securities
depository for mortgage-backed securities.
Steven Chesin has been Senior Vice President and Chief Operating Officer of
Carpet Barn, Inc. since July 28, 1995. Prior to joining the Company, Mr. Chesin
served, as President of Steve's Floor Covering, Inc., a floorcovering
installation specialist and senior certified carpet inspector, from its founding
in 1977 to the Company's acquisition of Steve's in July 1995.
19
<PAGE>
Pursuant to an employment agreement dated as of July 1, 1998 between Mr.
Chesin and the Company, Mr. Chesin is serving as Senior Vice President and Chief
Operating Officer of Carpet Barn for a three-year period, with successive
one-year automatic extensions to his employment unless either party gives the
other at least 90 days' notice of termination prior to the end of any term.
Pursuant to the agreement, Mr. Chesin's annual salary is $125,000 per year and
may be increased at the Company's discretion. Mr. Chesin is also eligible to
receive a bonus equal to two percent of the increase in EBITDA over the prior
fiscal year. Mr. Chesin will receive two months' severance pay, plus an
additional month's severance pay for each full year of employment that has
elapsed, if the agreement terminates due to Mr. Chesin's total disability.
Jeffrey Wiens has been Corporate Controller of the Company since July 1995.
From 1988 to July 1995, Mr. Wiens served in various capacities, principally in
the Minneapolis, Minnesota office of McGladrey & Pullen, LLP, the Company's
independent auditors, including serving as a member of the audit staff from 1988
to July 1994 and as Manager from August 1994 to July 1995.
Pursuant to an employment agreement amended as of June 15, 1998, the
Company has employed Mr. Wiens as its Corporate Controller for a three-year
period, with successive one-year automatic extensions of his employment unless
either party gives the other at least 90 days' notice of termination prior to
the end of any term. Pursuant to the agreement, Mr. Wiens' annual salary is
$75,000 per year and may be increased at the Company's discretion.
Item 11. Executive Compensation
Summary Compensation Table
The following table sets forth for the fiscal years ended December 31,
1996, 1997 and 1998 the compensation for services in all capacities to the
Company of the persons who were at December 31, 1998 the Executive officers of
the Company who received salary and bonus in excess of $100,000.
<TABLE>
<CAPTION>
Annual Compensation Other Annual Long-term
Salary $ Bonus $ Compensation $ Compensation(2)
-------- ------- -------------- ---------------
<S> <C> <C> <C> <C>
Philip A. Herman(1)
Chairman of the Board and President
Year ended December 31, 1996 0 0 0 0
Year Ended December 31, 1997 13,269 0 0 0
Year Ended December 31, 1998 108,493 0 0 300,000
William V. Poccia
Secretary and Chief Financial Officer
Year ended December 31, 1996 45,769 0 0 0
Year Ended December 31, 1997 101,923 0 0 0
Year Ended December 31, 1998 116,378 0 0 125,000
Steven M. Chesin
Chief Operating Officer
Year ended December 31, 1996 116,116 0 0 0
Year Ended December 31, 1997 125,000 91,636 0 0
Year Ended December 31, 1998 125,000 10,768 0 75,000
</TABLE>
- -----------------
(1) Certain entities controlled by Mr. Herman received fees from the
Company for the years ended December 31, 1998, 1997 and 1996. In May
1998, the Company's arrangement with PAH was discontinued and Mr.
Herman began to receive salary. See "Certain Transactions" and in
"Management's Discussion and Analysis of Financial Condition and
Results of Operations."
(2) Represents the number of common shares underlying stock options
granted during the year.
Director Compensation
Compensation. Directors do not currently receive fees or other remuneration
from the Company. Directors are eligible to participate in the Company's 1997
Stock Option Plan.
20
<PAGE>
1997 Stock Option Plan
The Company adopted the 1997 Stock Option Plan (the "Option Plan") on
February 26, 1997, in order to provide an incentive to non-employee directors
and to officers and certain other key employees of and consultants to the
Company by making available to them an opportunity to acquire a proprietary
interest or to increase their proprietary interest in the Company. Shareholders
approved the adoption of the Option Plan on March 19, 1997. The Option Plan
provides for the award of options (each an "Award") representing or
corresponding to up to 1,250,000 shares of common stock of the Company. Any
Award issued under the Option Plan, which is forfeited, expires or terminates
prior to vesting or exercise will again be available for Award under the Option
Plan.
The Option Plan is administered by the Committee, as defined in the Option
Plan. The Committee consists of Facundo Bacardi. The Committee has the full
power and authority, subject to the provisions of the Option Plan, to designate
participants, grant Awards and determine the terms of all Awards. The Committee
has the right to make adjustments with respect to Awards granted under the
Option Plan in order to prevent dilution of the rights of any holder.
Non-employee directors, including members of the Committee are not eligible to
receive discretionary Awards under the Option Plan but automatically receive
upon becoming such a director or upon stockholder approval of the plan and each
year thereafter non-qualified stock options ("NQSO's") to purchase 10,000 shares
of common stock of the Company at an exercise price equal to the fair market
value on the date of grant. Members of the Committee are disinterested within
the meaning of Section 16 of the Securities Exchange Act of 1934, as amended,
and outside directors within the meaning of Section 162(m) of the Internal
Revenue Code of 1986, as amended (the "Code").
Options Issued Under the Option Plan. The terms of specific options are
determined by the Committee. Options granted may be NQSO's or incentive stock
options within the meaning of Code Section 422 ("ISO's"). The exercise price per
share for a non-qualified option is subject to the determination of the
Committee. Incentive stock options may not be granted at less than 100% of the
fair market value at the date of grant. Each option will be exercisable for the
period or periods specified in the option agreement, which will not exceed 10
years from the date of grant.
Upon the exercise of an option, the option holder pays to the Company the
exercise price plus the amount of the required Federal and state withholding
taxes, if any. Options may be exercised and the withholding obligation may be
paid for with cash and, with the consent of the Committee, shares of common
stock of Nations Flooring, Inc., other securities (including options) or other
property. The period after termination of employment during which an option may
be exercised is as determined by the Committee. In the absence of any specific
determination by the Committee, the following rules will apply. The unexercised
portion of any option granted under the Option Plan will generally be terminated
(a) 30 days after the date on which the optionee's employment is terminated for
any reason other than (i) cause, (ii) retirement or mental or physical
disability or (iii) death; (b) immediately upon the termination of the
optionee's employment for cause; (c) three months after the date on which the
optionee's employment is terminated by reason of retirement or mental or
physical disability; or (d)(i) 12 months after the date on which the optionee's
employment is terminated by reason of the death of the employee, or (ii) three
months after the date on which the optionee shall die if such death shall occur
during the three-month period following the termination of the optionee's
employment by reason of retirement or mental or physical disability.
21
<PAGE>
During 1997 and 1998, options to purchase 635,000 shares of the Company's
common stock were granted to the directors, officers and employees of the
Company, of which 40,000 terminated and 595,000 are outstanding as of December
31, 1998. No options were exercised during 1998 or 1997.
Options Granted in Last Fiscal Year
<TABLE>
<CAPTION>
Potential realizable
value at assumed
annual rates of stock
price appreciation for
Individual grants option term
- -------------------------------------------------------------------------------------------------------------------
Number of Percent of total
securities options Exercise
underlying granted to or base
options employees in price Expiration
Name granted (#) fiscal year ($/Sh) date 5% 10%
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Phillip Herman 300,000 57.1% $2.00 3/31/08 $ 377,337 $ 956,245
William Poccia 125,000 23.8% $2.00 3/31/08 $ 157,224 $ 398,436
Steven Chesin 75,000 14.3% $2.00 6/30/08 $ 94,334 $ 239,061
</TABLE>
Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values
(see Item 12-Security Ownership of Certain Beneficial Owners and Management).
22
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information as of March 1, 1999,
regarding (i) each person known by the Company to be the beneficial owner of
more than 5% of the outstanding shares of common stock, (ii) each director,
nominee and Named Executive Officer of The Company and (iii) all officers and
directors as a group. Unless otherwise indicated the address is deemed to be
that of the Company.
<TABLE>
<CAPTION>
Number of Percentage Unexercised
Name and Address Shares Owned Ownership Stock Options*
- ---------------- ------------ -----------------------------------
<S> <C> <C> <C>
Philip A. Herman (1) 394,014 10.7% 300,000
c/o Branin Investments, Inc.
100 Maiden Lane
New York, NY 10038
Facundo Bacardi (2) 1,437,812 39.2% 30,000
c/o Branin Investments, Inc.
100 Maiden Lane
New York, NY 10038
William Poccia 0 0% 125,000
John Katz 0 0% 20,000
Paul Kramer 0 0% 20,000
Steven M. Chesin 0 0% 75,000
Jeffrey E. Wiens 0 0% 25,000
All Directors and Executive 1,831,826 49.9% 595,000
Officers as group (7 persons)
</TABLE>
- ----------------
* No options have been exercised during 1997 and 1998 and there has been no
appreciation in the value of the stock; therefore, there are no in-the-money
options at December 31, 1998. All options vest over a three year period with
the exception of options granted to directors, whose options vest over a one
year period.
1) Includes 340,139 shares held by Branin Investments, Inc. Excludes 17,067
shares held by family members of Mr. Herman. Mr. Herman disclaims beneficial
ownership of the shares held by such family members.
2) Includes an aggregate of 1,437,312 shares held by various affiliates of Mr.
Bacardi (including 941,900 shares held by Icarus Investments Ltd., 1,816
shares held by Delphic Investments Ltd., 243,294 shares held by Global
Recovery Assets, Int'l., 186,755 shares held by Designed Investments
Ltd. and 63,547 shares held by Marvest, Inc.). Excludes 500 shares held by
family members of Mr. Bacardi. Mr. Bacardi disclaims beneficial ownership
of the shares held by such family members.
23
<PAGE>
Item 13. Certain Relationships and Related Transactions.
Branin, a principal stockholder of the Company, acted as advisor in
connection with the 1995 acquisition, and in that role became entitled to
receive a fee of approximately $650,000 upon the consummation of an underwritten
public offering.
In June 1995, CBI agreed to pay for consulting services of a) $35,000 per
month (reduced to $10,000 per month as of September 1996 and increased to
$20,000 per month beginning June 1998) to Branin and b) $5,000 per month through
August 1996, and at the rate of $12,500 per month beginning May 1997 through May
1998 to PAH. These agreements were entered into for the purpose of receiving
management advisory services regarding operations management, financing and
acquisitions. See Item 7-Management's Discussion and Analysis of Financial
Condition and Results of Operations-Liquidity and Capital Resources with respect
to these and other advances made by Branin on behalf of the Company and see Item
11-Executive Compensation.
C.B. Realty of Delaware, Inc. ("Realty"), which is owned by four
stockholders of the Company (including a director and a relative of an officer),
acquired the land and building ("Property") concurrently with the Company's 1995
acquisition. Simultaneously with its purchase of the Property, Realty entered
into a lease with the Company pursuant to which the Company leased the land and
building in which it conducts its principal operations for a three-year term
with annual lease payments of approximately $100,000. The lease was extended to
April 1, 2004 with annual lease payments of $120,000. The Company and Realty are
in the process of effecting a statutory merger, which is expected to be
consummated in early April 1999. The stockholders of Realty will receive
approximately 60,000 shares of the Company's common stock in exchange for the
net assets of Realty. The merger will be accounted for as a purchase, as a
result of which the assets and liabilities of Realty will be recorded in the
Company's consolidated financial statements at their fair values. Had the merger
taken place at December 31, 1998, its approximate effects would have been to
increase total tangible assets by $1,249,000, increase current liabilities by
$26,000, decrease long-term debt by $41,000 (representing the assumption of a
mortgage payable of approximately $459,000 and the elimination of the $500,000
advance described below) and increase stockholders equity by $1,264,000.
Payments of the CBH and Nations preferred stock dividends have been made by
Branin on behalf of CBH and the Company in the amount of $564,200 during 1998.
As a result of these payments, and management fees and other amounts (including
the foregoing $1,500,000) advanced from or due to Branin and PAH Marketing, Inc.
("PAH"), a company controlled by Philip A. Herman, the Company was indebted to
Branin and PAH, for $2,653,339 at December 31, 1998 (see Notes 3(a) and 3(b) of
Notes to Consolidated Financial Statements). As of March 15, 1999, the Company
was indebted to Branin and PAH for $2,538,670. Because the Company and Branin
and PAH anticipate repayment of the non-interest bearing advances in the near
term, no stated interest rate exists on these advances and no interest has been
imputed.
During May 1997, the Company received an unsecured advance from a
shareholder and director of the Company in the amount of $500,000, which enabled
the Company to make the quarterly principal payment due to First Source. This
advance was repaid through the issuance of 500 shares of the Company's preferred
stock in December 1998. This advance bore interest at 12% per annum, payable
monthly. Total interest expense of $55,000 and $40,000 relating to this advance
has been reflected in the accompanying consolidated financial statements for the
year ended December 31, 1998 and 1997, respectively.
The Company's executive offices are located at 100 Maiden Lane, New York,
New York. Branin also occupies these offices.
24
<PAGE>
Item 14. Exhibits and Reports on Form 8-K
(a) Consolidated Financial Statements
Consolidated balance sheets F-3
Consolidated statements of operations F-4
Consolidated statements of stockholders' equity F-5
Consolidated statements of cash flows F-6 - F-7
Notes to consolidated financial statements F-8 - F-16
(b) Reports on Form 8-K
None
(c) Exhibits
2.1 Agreement and Plan of Exchange, dated as of June 1, 1995, among the
Company, Carpet Barn Holdings, Inc. ("CBH") and the holders of common
Stock of CBH (incorporated by reference from Exhibit 1 of the
Company's Report on Form 8-K (June 2, 1995) (the "June Form 8-K").
2.2 Asset Purchase Agreement, dated as of June 1, 1995, between Carpet
Barn Acquisition Corp. ("CBAC") and Carpet Barn, Inc. ("Carpet Barn")
(Incorporated by reference from Exhibit 3 of the June Form 8-K).
2.3 Amendment, dated June 1, 1995, to Asset Purchase Agreement
(Incorporated by reference from Exhibit 4 of the June Form 8-K).
3.1 Certificate of Incorporation, dated July 19, 1988, of the Company
(Incorporated by reference from Exhibit 3(a) of the Company's
Registration Statement on Form S-18 (33-29942-NY) filed October 20,
1989 (the "1989 Registration Statement").
3.2 By-laws of the Company (incorporated by reference from Exhibit 3(b)
of the 1989 Registration Statement).
3.3 Amended and Restated Certificate of Incorporation of CBH (incorporated
by reference from Exhibit 3.3 of the Company's Annual Report on Form
10-K for the period ended December 31, 1995 (the "Form 10-K")).
3.4 Certificate of Amendment to Amended and Restated Certificate of
Incorporation of CBH (incorporated by reference from Exhibit 3.4 of
the Form 10-K).
3.6 Certificate of Incorporation of Nations Flooring, Inc. (incorporated
by reference from Exhibit 3.6 of the Company's Registration Statement
on Form S-1 (333-19871) filed January 16, 1997 ("1997 Registration
Statement").
3.7 By-laws of Nations Flooring, Inc. (incorporated by reference from
Exhibit 3.7 of the 1997 Registration Statement).
9.1 Voting Trust Agreement, dated May 30, 1995, between Philip A. Herman
and certain shareholders of the Company (incorporated by reference
from Exhibit 2 of the June Form 8-K).
25
<PAGE>
10.7 Terms of preferred stock, par value $.01 per share, stated value
$1,000 per share, of CBH (incorporated by reference from Exhibit 12 of
the June Form 8-K).
10.8 Employment Agreement, dated as of July 28, 1995, between CBI and
Steven Chesin (incorporated by reference from Exhibit 1 of the
Company's Report on Form 10-Q for the quarterly period ended June 30,
1995 (the "June 1995 Form 10-Q).
10.9 Form of Promissory Note issued in the offering of short-term notes of
CBH (incorporated by reference from Exhibit 11 of the June Form 8-K).
10.10 Lease, dated June 1, 1995, between CB Realty of Delaware, Inc.
("CB Realty") and CBAC (incorporated by reference from Exhibit 10.13
of the Form 10-K).
10.11 First Amendment to Lease Agreement, dated August 1, 1995, between CB
Realty and CBAC (incorporated by reference from Exhibit 10.14 of the
Form 10-K).
10.12 Promissory Note, dated June 1, 1995 from CB Realty in favor of CBAC
(incorporated by reference from Exhibit 10.15 of the Form 10-K).
10.13 Employment Agreement, dated as of May 28, 1996, between CBI and Alan
Ember. (incorporated by reference from Exhibit 10.15 of the 1997
Registration Statement).
10.14 Credit Facility, dated May 19, 1998, between CBI and Fleet Capital
Corporation. (Incorporated by reference from Exhibit1 of the June 1998
Form 10-Q.
27 Financial Data Schedule
26
<PAGE>
NATIONS FLOORING, INC.
CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 1998
INDEPENDENT AUDITOR'S REPORT F-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated balance sheets F-3
Consolidated statements of operations F-4
Consolidated statements of stockholders' equity F-5
Consolidated statements of cash flows F-6 - F-7
Notes to consolidated financial statements F-8 - F-16
<PAGE>
Independent Auditor's Report
To the Board of Directors
Nations Flooring, Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of Nations
Flooring, Inc. and subsidiary as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Nations Flooring,
Inc. and subsidiary as of December 31, 1998 and 1997 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
McGladrey & Pullen, LLP
Las Vegas, Nevada
February 25, 1999
F-2
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1997 and 1998
<TABLE>
<CAPTION>
ASSETS (Note 4) 1997 1998
- --------------- ----------------------------------
Current Assets
<S> <C> <C>
Cash $ 230,223 $ 212,183
Accounts receivable, less allowance for doubtful
accounts 1997 $240,000, 1998 $310,000 (Note 5) 3,460,992 4,185,360
Due from employees 16,851 275
Inventory 777,600 1,319,148
Related party note receivable (Note 11) 142,658 79,940
Prepaid expenses and other 314,137 258,087
----------------------------------
Total current assets 4,942,461 6,054,993
---------------------------------
Equipment and Leasehold Improvements, net (Note 1) 614,090 800,301
Intangible Assets, net (Note 1) 15,905,698 15,155,994
---------------------------------
$ 21,462,249 $ 22,011,288
=================================
Liabilities and Stockholders' Equity
Current Liabilities
Note payable (Note 4) $ 2,899,453 $ 3,812,213
Notes payable - principal stockholder (Note 3a) 1,000,000 -
Current maturities of long-term debt (Note 4) 3,534,535 751,000
Accounts payable 2,934,737 1,816,138
Advances from principal stockholder (Note 3b) 1,291,285 653,339
Accrued expenses 282,993 519,043
Customer deposits 1,061,493 1,344,135
----------------------------------
Total current liabilities 13,004,496 8,895,868
----------------------------------
Deferred Income Taxes (Note 6) 235,000 355,000
Due to Stockholder (Note 3c) 500,000 -
Related Party Advance (Note 11) - 500,000
Long-Term Debt, less current maturities (Note 4) 1,842,173 4,035,539
Advances from and Notes Payable-Principal Stockholder,
less current portion (Notes 3a and 3b) - 2,000,000
Minority Interest-Preferred Stock of Subsidiary 3,117,274 -
Commitments and Contingencies (Notes 7, 8 and 11)
Stockholders' Equity (Notes 1 and 9)
Preferred stock, 12% cumulative; $.001 par value, authorized
1,000,000 shares; issued 1998 5,160 shares; total liquidation
preference of outstanding shares 1998 $5,160,000 - 5
Common stock, $.001 par value, authorized 20,000,000
shares; issued 1997 3,787,647 shares; 1998 3,670,054 shares 3,788 3,670
Additional paid-in capital 3,050,240 8,398,143
Retained earnings (deficit) (284,912) (2,176,937)
----------------------------------
2,769,116 6,224,881
Less cost of treasury stock (145,250 shares) 5,810 -
---------------------------------
2,763,306 6,224,881
---------------------------------
$ 21,462,249 $22,011,288
=================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARY
Consolidated Statements of Operations
Years Ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
1996 1997 1998
--------------------------------------------------------
<S> <C> <C> <C>
Net sales (Note 5) $ 42,414,364 $ 40,835,624 $ 45,000,387
Cost of sales 31,321,924 30,536,625 33,907,293
---------------------------------------------------------
Gross Profit 11,092,440 10,298,999 11,093,094
Selling, general and administrative expenses:
Related party consulting fees (Note 8) 365,000 220,000 252,500
Related party rent expense (Note 11) 100,284 100,284 115,071
Other 7,004,284 6,912,713 7,808,139
---------------------------------------------------------
7,469,568 7,232,997 8,175,710
Amortization and depreciation 1,223,290 1,207,883 1,132,331
---------------------------------------------------------
Operating Income 2,399,582 1,858,119 1,785,053
Other Income (expense):
Other income (expense), net (Note 10) 18,454 (637,975) (284,811
Related party interest expense -- (65,000) (274,500
Interest expense (1,477,614) (1,291,248) (890,841
---------------------------------------------------------
Income (loss) before income taxes, dividends to
preferred stockholders of subsidiary and amortization
of discount on preferred stock of subsidiary 940,422 (136,104) 334,901
Provision for income taxes (benefit) (Note 6) 328,043 (43,000) 120,000
---------------------------------------------------------
Income (loss) before dividends to preferred
stockholders of subsidiary and amortization of
discount on preferred stock of subsidiary
612,379 (93,104) 214,901
Dividends to preferred stockholders of subsidiary 537,694 559,200 466,000
Amortization of discount on preferred stock of
subsidiary (Note 1) -- -- 1,542,726
---------------------------------------------------------
Net income (loss) 74,685 (652,304) (1,793,825
Dividends on preferred stock -- -- 98,200
---------------------------------------------------------
Net income (loss) applicable to common stockholders $ 74,685 $ 652,304) $ (1,892,025)
=========================================================
Basic and Dilutive net income
(loss) per common share (Note 1) $ 0.02 $ (0.18) (0.52)
=========================================================
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARY
Consolidated Statement of Stockholders' Equity
Years ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
Preferred Stock Common Stock Retained
Shares Shares Paid-In Earnings Treasury
Outstanding Dollars Outstanding Dollars Capital (Deficit) Stock Total
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 -- -- $ 3,733,036 $ 3,733 $ 2,872,950 292,707 $-- 3,169,390
Issuance of common stock -- -- 54,611 55 177,290 -- -- 177,345
Purchase of treasury stock
(145,250 shares) -- -- -- -- -- -- (5,810) (5,810)
Net income -- -- -- -- -- 74,685 -- 74,685
-----------------------------------------------------------------------------------------------
Balance, December 31, 1996 -- -- 3,787,647 3,788 3,050,240 367,392 (5,810) 3,415,610
Net loss -- -- -- -- -- (652,304) -- (652,304)
-----------------------------------------------------------------------------------------------
Balance, December 31, 1997 -- -- 3,787,647 3,788 3,050,240 (284,912) (5,810) 2,763,306
Issuance of preferred stock (Note 1) 4,660 5 -- -- 4,659,995 -- -- 4,660,000
Issuance of preferred stock (Note 3c) 500 -- -- -- 500,000 -- -- 500,000
Issuance of common stock (Note 4) -- -- 27,657 27 193,573 -- -- 193,600
Retirement of treasury stock -- -- (145,250) (145) (5,665) -- 5,810 --
Dividends on preferred stock -- -- -- -- -- (98,200) -- (98,200)
Net loss -- -- -- -- -- (1,793,825) -- (1,793,825)
-----------------------------------------------------------------------------------------------
Balance December 31, 1998 5,160 $ 5 $ 3,670,054 3,670 $8,398,143 $(2,176,937) $ -- $ 6,224,881
===============================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended December 31, 1996, 1997, and 1998
<TABLE>
<CAPTION>
1996 1997 1998
-----------------------------------------------
Cash Flows from Operating Activities
<S> <C> <C> <C>
Net income (loss) $ 74,685 $ (652,304) $(1,793,825)
Depreciation 177,344 207,820 222,731
Amortization 1,045,946 1,000,063 909,600
Accretion of discount on subordinated notes payable 44,578 -- --
Deferred income taxes 48,022 155,656 120,000
Provision for bad debts 302,900 165,019 189,836
Common stock issued in lieu of interest 15,000 -- --
Rent expense in lieu of note receivable payments to Realty 100,284 100,284 115,071
Amortization of discount on preferred stock of subsidiary (Note 1) -- -- 1,542,726
Write off of deferred offering costs and other 25,056 647,553 291,361
Changes in assets and liabilities, net of business acquisition:
Increase in accounts receivable (116,854) (344,775) (894,528)
Increase in inventory (71,332) (67,973) (511,859)
(Increase) decrease in prepaid expenses and other (106,951) (241,405) (3,311)
Increase (decrease) in accounts payable 450,442 684,531 (1,118,599)
Increase (decrease) in advances from principal stockholder 619,094 901,247 (42,546)
Increase (decrease) in accrued expenses (17,427) (159,152) 236,050
Increase in customer deposits 323,984 145,013 258,277
-------------------------------------------------
Net cash provided by (used in) operating activities $ 2,914,771 $ 2,541,577 $ (479,016)
-------------------------------------------------
Cash Flows from Investing Activities
Advances to employees and related parties, net $ (327,403) $ 17,807 $ (35,777)
Purchase of equipment and leasehold improvements (231,190) (254,561) (323,139)
Payments for acquisition of net assets of Merrill's -- -- (164,254)
Acquisition cost expenditures -- (83,131) (5,564)
-------------------------------------------------
Net cash used in investing activities $ (558,593) $ (319,885) $ (528,734)
-------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows (Continued)
Years Ended December 31, 1996, 1997, and 1998
<TABLE>
<CAPTION>
1996 1997 1998
----------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Financing Activities
Payments on note payable $(2,486,024) $(3,480,128) $(2,935,943)
Proceeds from related party advance -- -- 500,000
Proceeds from unrelated party advances -- 534,000 --
Repayment of unrelated party advances (560,000) (534,000) --
Minority interest: issuance of preferred stock of subsidiary 357,655 -- --
Proceeds from issuances of common stock 162,345 -- --
Principal payments on long-term debt (26,849) (33,626) (4,436,718)
Purchase of treasury stock (5,810) -- --
Cash payment for deferred offering costs (155,721) (312,845) --
Proceeds from long-term debt -- -- 5,000,000
Proceeds from note payable -- -- 2,487,371
Proceeds from notes payable-principal stockholder -- 1,000,000 500,000
Proceeds from stockholder advance -- 500,000 --
Debt issuance costs -- -- (125,000)
----------------------------------------------------
Net cash provided by (used in) financing activities $(2,714,404) $(2,326,599) $ 989,710
----------------------------------------------------
Net decrease in cash (358,226) (104,907) (18,040)
Cash, beginning 693,356 335,130 230,223
----------------------------------------------------
Cash, ending $ 335,130 $ 230,223 $ 212,183
====================================================
Cash payments for:
Interest $ 1,453,040 $ 1,117,664 $ 934,177
====================================================
Income taxes, net of refunds, none in 1996
and 1997 and $203,296 in 1998 $ 138,800 $ 3,388 $ (201,419)
====================================================
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Preferred stock dividends paid through increase
in advances from principal stockholder (Note 3b) $ 419,094 $ 559,200 $ 564,200
Repayment of advance from stockholder through
issuance of preferred stock $ -- $ -- $ 500,000
Loan fees added to note payable $ -- $ -- $ 136,332
Equipment acquired through financing agreement $ 79,764 $ 18,000 $ 35,803
</TABLE>
See Notes to Consolidated Financial Statements
F-7
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARY
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 is also related, through common ownership, to C. B. Realty of
Delaware, Inc. (Realty) (see Note 11).
The Company sells floor coverings and related products to new home and retail
replacement markets in Nevada, Arizona, 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 minority interest in the
accompanying consolidated financial statements represents the preferred stock of
CBH not owned by the Company prior to the merger of CBH on November 16, 1998
into Nations, and the CBH preferred stock dividends were included as dividends
to preferred stockholders of subsidiary on the consolidated statements of
operations.
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 stated 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 December 31, 1998 the Company's cash balances
were maintained at financial institutions in Nevada, Illinois, and Arizona.
Effective October 1, 1998 the Company changed, for the purposes of the statement
of cash flows, the presentation of interest charges that are added to the
balance of it's Fleet, and were previously added to it's First Source, credit
facilities (see Note 4). The addition of such interest charges are now
classified as an addition to the borrowings, as if the interest was paid on a
current basis with additional principal borrowings. Previously, such interest
charges were classified as an adjustment to net income in arriving at cash
flows provided by operating activities. The statements of cash flows for 1996
and 1997 have been reclassified to conform with the current presentation.
Inventory
Inventory consists primarily of carpet and vinyl and is stated at the lower of
cost (first-in, first-out method) or market.
F-8
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies (Continued)
Equipment and leasehold improvements
Equipment and leasehold improvements are stated at cost, less accumulated
depreciation and amortization. Depreciation is provided on the straight-line and
accelerated methods for financial reporting purposes. Amortization is provided
on the straight-line basis over the shorter of the economic life of the asset or
the lease term.
Equipment and leasehold improvements consist of the following at December 31:
<TABLE>
<CAPTION>
Depreciation
Lives 1997 1998
---- ----
<S> <C> <C> <C>
Furniture and equipment 7 $ 755,307 951,255
Autos and trucks 5 130,334 149,043
Leasehold improvements 3 -5 157,734 352,019
-----------------------
1,043,375 1,452,317
Less accumulated depreciation
and amortization 429,285 652,016
=======================
Equipment and leasehold improvements, net $ 614,090 $ 800,301
=======================
</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 December 31, 1998.
Intangible assets
Intangible assets consist of the following at December 31:
1997 1998
---- ----
Goodwill $17,086,762 $17,192,326
Covenant not-to-compete 575,000 600,000
Debt issuance costs 802,500 261,332
--------------------------
18,464,262 18,053,658
Less accumulated amortization 2,558,564 2,897,664
==========================
Intangible assets, net $15,905,698 $15,155,994
==========================
Goodwill is being amortized by the straight-line method over twenty-five years.
The Company incurred financing costs related to bank financing (see Note 4).
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.
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.
F-9
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies (Continued)
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
3,773,097, 3,642,397 and 3,670,054 for the years ended December 31, 1996, 1997,
and 1998, respectively. Dividends on preferred stock, which totaled none, none
and $98,200 for the years ended December 31, 1996, 1997 and 1998, respectively,
reduced the earnings available to common stockholders in the computation. Shares
of common stock issuable upon exercise of the stock options (see Note 9) have
not been included in the computation because their inclusion would have an
anti-dilutive effect.
Comprehensive Income
The Company does not have any elements of "other comprehensive income," as
defined in Statement of Financial Accounting Standards 130, "Reporting
Comprehensive Income," that are not included in the determination of net income
and accordingly does not present a statement of comprehensive income.
Revenue recognition
Revenue is recorded for commercial and retail floor covering sales upon
installation.
Advertising
All costs related to marketing and advertising the Company's products are
expensed in the period incurred.
Advertising expense, net of cooperative advertising earned, consists of the
following for the years ended December 31:
1996 1997 1998
---- ---- ----
$ 597,960 $ 585,668 $ 784,736
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.
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.
F-10
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies (Continued)
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.
Note 2. Acquisitions
On September 18, 1998, the Company purchased the net assets of Merrill's Carpet
and Tile, Inc. (Merrill's) a floorcovering retailer located in St. George, Utah
pursuant to an asset purchase agreement. Under the purchase agreement, the
Company purchased substantially all the assets of Merrill's in exchange for
$200,000, of which approximately $164,000 was paid at closing with additional
amounts contingently payable over the next three years based on earnings. The
acquisition was accounted for as a purchase and operations of Merrill's
subsequent to the acquisition are included with those of the Company. Net assets
purchased were comprised of equipment of $50,000, and current assets, primarily
inventory and accounts receivable of $25,000. The remaining $125,000 of the
purchase price was allocated to goodwill and a covenant not-to-compete. For the
year ended December 31, 1997, Merrill's recorded a net loss of approximately
$24,000 on revenues of approximately $656,000.
In November 1998, the Company purchased a small builder floorcovering business
in Boise, Idaho (Trinity) by agreeing to complete contracts in progress.
Operations of Trinity prior to its acquisition by the Company were
insignificant.
The acquisition of Merrill's and Trinity at January 1, 1997 and 1998 would not
have had a material affect on revenues,net loss or net loss per common share.
Note 3. Indebtedness to Stockholders
(a) Notes payable - principal stockholder
In both August and November of 1997, and an February of 1998, the Company
received unsecured advances of $500,000 (an aggregate total of $1,500,000) from
Branin Investments, Inc. (Branin), which is 100% owned by the Chairman of the
Board and President of Nations, which enabled the Company to make the quarterly
principal payment due to First Source (see Note 4). 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 4. 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.
Total interest expense of $25,000, and $182,500 relating to these advances has
been reflected in the accompanying consolidated statements of operations for the
year ended December 31, 1997 and 1998 respectively.
F-11
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Indebtedness to Stockholders (Continued)
(b) Advances from principal stockholder
During the years ended December 31, 1996, 1997, and 1998, Branin and PAH
Marketing Consultants, Inc. (PAH), a company controlled by the Chairman of the
Board and President of Nations, 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 years ended
December 31, 1997 and 1998 are as follows:
<TABLE>
<S> <C>
Balance, December 31, 1996 $ 390,038
Dividends on CBH preferred stock paid by Branin 559,200
Management fees payable to Branin and PAH 220,000
Interest obligation of CBI assumed by Branin (see note 4) 213,600
Payments to Branin and PAH (91,553)
----------
Balance, December 31, 1997 $1,291,285
Dividends on CBH and Nations preferred stock paid by Branin 564,200
Management fees payable to Branin (see Note 8) 50,000
Common stock issued in lieu of interest obligation (see Note 4) (193,600)
Interest on advances (see note 3 (a) and 4) 236,300
Payments to Branin and PAH (794,846)
----------
Balance, December 31, 1998 $1,153,339
==========
</TABLE>
Due to the subordination and payment limitations, $500,000 of the balance has
been classified as long term at December 31, 1998.
(c) Due to stockholder
During May 1997, the Company received an unsecured advance from a stockholder
and director of the Company in the amount of $500,000, which enabled the Company
to make the quarterly principal payment due to First Source (see Note 4). This
advance 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 $40,000 and $55,000 relating to this advance
has been reflected in the accompanying consolidated statement of operations for
the years ended December 31, 1997 and 1998, respectively.
Note 4. 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"),
pursuant to which Fleet advanced to CBI $5,000,000 under a term loan and
approximately $2,300,000 under a $5,000,000 revolving line of credit which
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. Fees payable to Fleet totaled $125,000. In addition, a finders fee of
$100,000 was paid to a person associated with Branin. The term and revolving
portions of the Credit Facility are due on May 18, 2003 while the overadvance
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 December 31, 1998) 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 11).
Amounts outstanding under the Credit Facility at December 31, 1998 are as
follows:
Revolving line of credit $3,812,213
Overadvance subline $ -
Term loan $4,650,000
F-12
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Note Payable and Long-Term Debt (Continued)
The proceeds of the Credit Facility were used to retire the financing obtained
from First Source Financial ("First Source") of approximately $7,300,000. The
balances outstanding on the First Source working capital note and credit
facility at December 31, 1997 were $2,899,453 and $5,250,000 respectively.
Unamortized debt acquisition costs classified as intangible assets of $232,000
were charged to expense as of the date of the refinancing.
The Company received advances from unrelated parties of $534,000 during February
1997, which enabled the Company to make the quarterly principal payment due to
First Source. These advances bore interest at the rate of 12% per annum, payable
monthly. These advances were repaid in April 1997. In addition to the repayment
of the principal, the lenders were to receive $213,600 in shares of common stock
of the Company as additional interest. All parties, except one who continued his
election to receive Company common stock and one who elected to receive cash,
agreed to allow Branin to acquire the right to receive the common stock of the
Company, and as a result $189,600 of the obligation was reclassified as due to
Branin. The total $193,600 payable through the issuance of shares of common
stock (which included the $189,600 payable to Branin as a result of the
assumption described above), was satisfied in August 1998 through the issuance
of 27,657 shares of the Company's common stock, including 27,086 shares issued
to Branin, representing the number of common shares the lenders would have
received under the terms of the original agreement. Total interest expense of
$224,280 relating to these advances has been reflected in the accompanying
consolidated statement of operations for the year ended December 31, 1997.
CBI also has long-term notes payable of $126,708 and $136,539 outstanding at
December 31, 1997 and 1998, respectively. The notes bear interest at an
approximate average of 20% and mature between December 1999 and June 2003.
Aggregate maturities required on the long-term debt are due in future years as
follows at December 31, 1998:
1999 $ 751,000
2000 749,471
2001 728,182
2002 705,392
2003 1,852,494
==========
$4,786,539
==========
Note 5. Major Customers
Sales for the Company include sales to, and accounts receivable due from, the
following major customers:
Percent to Total Sales Percent to Total Accounts
Year Ended December 31, Receivable at December 31,
--------------------------- ---------------------------
Customer 1996 1997 1998 1997 1998
- -------- ---- ---- ---- ---- ----
A 14% 15% 15% 13% 11%
B 10% 10% 10% 3% 2%
Note 6. Income Taxes
The provision for income taxes (benefit) for the years ended December 31, 1997
and 1998 is comprised of the following:
1997 1998
---- ----
Current expense (benefit) $(198,656) $ --
Deferred tax expense 155,656 120,000
-------------------------
$(43,000) $120,000
=========================
The $235,000 and $355,000 deferred tax liability at December 31, 1997 and 1998,
respectively, is principally the result of temporary differences between the tax
bases and reported amounts of intangible assets.
F-13
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7. Lease Commitments
The Company has entered into agreements to rent retail and warehouse space under
separate operating leases expiring through March 2005. Monthly lease payments
are net of taxes, insurance and utilities, and total $53,952. The monthly base
rent will be adjusted annually to predetermined amounts, or to reflect any
increases in the Consumer Price Index. Future minimum lease commitment under
these leases at December 31, 1998 is as follows:
1999 $ 604,500
2000 563,341
2001 487,734
2002 372,888
2003 322,529
Thereafter 221,085
==========
$2,572,077
==========
Total rent expense under the above leases for the years ended December 31, 1996,
1997 and 1998 was $56,865, $279,482 and $463,867, respectively.
Note 8. Commitments, Contingencies and Related Party Transactions
Consulting agreements
In June 1995, the Company orally agreed to pay for consulting services of a)
$35,000 per month (reduced to $10,000 per month as of September 1996 and
increased to $20,000 per month beginning May 1998) to Branin and b) $5,000 per
month through August 1996, and at the rate of $12,500 per month from May 1997
through May 1998 to PAH. These agreements were entered into for the purpose of
receiving management advisory services regarding operations management,
financing, and acquisitions.
Financing advisory fees
Branin acted as advisor to the Company in certain financing and equity
transactions consummated in 1995. In consideration of these advisory services
Branin is entitled to fees of approximately $650,000 only payable upon the
consummation of an underwritten public offering of the Company's common stock.
No amounts have been recorded in the accompanying consolidated financial
statements for these fees.
Other
Also see Notes 1, 3, 4, and 11 for additional related party transactions.
Environmental Matter
The Company acquired CBI in 1995. Prior to its acquisition by the Company, an
environmental consultant had informed CBI that contaminant levels at its
business location might exceed the limits established by the Environmental
Protection Agency. The prior management of CBI believed that its operations were
not the source of any such contamination.
The Company subsequently engaged an environmental consultant who, in a report
dated May 24, 1995, concluded that it was not probable that the Nevada
Department of Environmental Protection would require a cleanup plan to be
initiated. In the absence of a conclusive finding concerning the source of and
the actual level of contamination, no accrual for any potential clean up costs
has been recorded in the accompanying consolidated financial statements.
Note 9. Stock Option Plan
On March 19, 1997 the Company's stockholders adopted the 1997 Stock Option Plan
(the "Option Plan") to provide an incentive to non-employee directors and to
officers and certain other key employees of and consultants to the Company by
making available to them an opportunity to acquire common stock in the Company.
The Option Plan provides for the award of options representing or corresponding
up to 1,250,000 shares of common stock. The terms of specific options are
determined by the Committee as defined in the Option Plan. The exercise price
for a non-qualified option is subject to the determination of the Committee.
Incentive stock options may not be granted at less than 100 percent of the fair
value of the common stock on the date of the grant. The options expire at
varying dates not to exceed 10 years from the date of grant. Any award issued
under the Option Plan which is forfeited, expires or terminates prior to vesting
or exercise will again be available under the Option Plan.
F-14
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. Stock Option Plan (Continued)
During 1997 and 1998, options to purchase 635,000 shares of the Company's common
stock were granted to officers and directors of the Company at exercise prices
equal to or greater than market price on the grant date, ranging from $2 to $10
per common share. During 1997 and 1998, 40,000 options at an average exercise
price of $6.50 per common share terminated, and 595,000 options at an average
exercise price of $2.17 per common share are outstanding and exercisable at
December 31, 1998. No options were exercised during 1997 or 1998.
A summary of the status of the Company's fixed stock option plan as of December
31, 1998 and 1997, and changes during the years ending on those dates is
presented below:
<TABLE>
<CAPTION>
1997 1998
---------------------- -------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Fixed Options Shares Price Shares Price
-------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year - - 40,000 $ 7.00
Granted 50,000 $ 7.60 585,000 $ 2.00
Exercised - - - -
Forfeited 10,000 $ 10.00 30,000 $ 5.33
------- -------
Outstanding at end of year 40,000 595,000
======= =======
Options exercisable at year-end 0 $ 7.00 20,000 $ 2.17
======= ======= ======= =======
Weighted-average fair value of
options granted during the year $ 2.19 $ 0.87
======= =======
</TABLE>
All options vest over a three-year period, with the exception of options granted
to directors whose options vest over a one-year period.
The Company accounts for the grant of employee and director stock options using
the intrinsic value model of APB No. 25.
Had compensation expense for the grant of such options been measured using the
minimum value requirements of SFAS 123 (assuming an option life, risk free
interest rate and dividends of 10 years, 5.85% and none respectively), the 1998
compensation expense, net loss and net loss per share would have been
approximately $165,000, $1,959,000 and $0.56 respectively. In 1997 (assuming an
option life, risk free interest rate and dividends of 10 years, 5.47% and none,
respectively), the compensation expense, net loss and net loss per share would
have been approximately $81,000, $733,000 and $0.20, respectively. Management
believes use of the minimum value method is appropriate as the Company's common
stock has not been quoted or traded since July 1997.
The following table summarizes information about fixed stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------- ------------------------------
Weighted-
average Weighted- Weighted-
remaining average average
Number contractual exercise Number exercise
Range of exercise prices outstanding life price exercisable price
- ------------------------ --------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
$ 2.00 575,000 9.3 years $ 2.00 0 $ 2.00
$ 4.00 10,000 8.5 years $ 4.00 10,000 $ 4.00
$ 10.00 10,000 8.2 years $10.00 10,000 $10.00
</TABLE>
F-15
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Other Income (Expense)
Other income (expense) consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1997 1998
---------------------------------------------
<S> <C> <C> <C>
Miscellaneous income, primarily interest $18,454 $ 9,578 $ 6,550
Write off of:
Deferred offering costs - (468,566) -
Pre-acquisition costs - (83,131) -
Loan fees and other - (81,666) (291,361)
Lawsuit settlement - (14,190) -
=============================================
$18,454 $(637,975) $(284,811)
=============================================
</TABLE>
Note 11. C.B. Realty
The Company and Realty are in the process of effecting a statutory merger, which
is expected to be consummated in early April 1999. The stockholders of Realty
will receive approximately 60,000 shares of the Company's common stock in
exchange for the net assets of Realty. The merger will be accounted for as a
purchase, as a result of which the assets an liabilities of Realty will be
recorded in the Company's consolidated financial statements at their fair
values. Had the merger taken place at December 31, 1998, its approximate effects
would have been to increase total tangible assets by $1,249,000, increase
current liabilities by $26,000, decrease long-term debt by $41,000 (representing
the assumption of a mortgage payable of approximately $459,000 and the
elimination of the $500,000 advance described below) and increase stockholders
equity by approximately $1,264,000.
In May 1998, the Company received an advance from Realty in the amount of
$500,000. This advance bears interest at 12% per annum, payable monthly. This
advance is subordinated and subject to payment limitations as described in Note
3 (a). Total interest of $37,000 relating to this advance has been reflected in
the accompanying consolidated statement of operations for the year ended
December 31, 1998.
The Company leases its main operating premises from Realty. Rent expense
relating to this lease was $100,284, $100,284 and $115,071 for the years ended
December 31, 1996, 1997 and 1998 respectively. The lease as amended in April
1998 requires annual payments of $120,000.
The Company has an unsecured note receivable of $142,658 and $79,940 at December
31, 1997 and 1998, respectively, due from Realty. The note accrues interest at
10% per annum and is payable in equal monthly installments of $9,293, including
interest. In lieu of receiving payments and with the permission of Realty, the
Company is offsetting rental payments due to Realty against the note receivable.
F-16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the registrant has duly caused this Annual Report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of New York, State of New York, on the 23rd day of March, 1999.
NATIONS FLOORING, INC.
By: /s/ Philip A. Herman
-------------------------
Philip A. Herman
Chairman of the Board and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant in
the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Titles Date
- --------- ------ ----
<S> <C> <C>
/s/ Philip A. Herman Chairman of the Board and President March 23, 1999
- -----------------------
Philip A. Herman
/s/ Facundo Bacardi Director March 23, 1999
- -----------------------
Facundo Bacardi
/s/ John Katz Director March 23, 1999
- -----------------------
John Katz
/s/ Paul Kramer Director March 23, 1999
- -----------------------
Paul Kramer
/s/ William Poccia Chief Financial Officer and Secretary
- ----------------------- (Principal Financial and Accounting Officer) March 23, 1999
William Poccia
</TABLE>
27
<PAGE>
Exhibit Index
Exhibit Name
2.1 Agreement and Plan of Exchange, dated as of June 1,
1995, among the Company, Carpet Barn Holdings, Inc.
("CBH") and the holders of common stock of CBH
(incorporated by reference from Exhibit 1 of the
Company's Report on Form 8-K (June 2, 1995) (the "June
Form 8-K").
2.2 Asset Purchase Agreement, dated as of June 1, 1995,
between Carpet Barn Acquisition Corp. ("CBAC") and
Carpet Barn, Inc. ("Carpet Barn")(incorporated by
reference from Exhibit 3 of the June Form 8-K).
2.3 Amendment, dated June 1, 1995, to Asset Purchase
Agreement (incorporated by reference from Exhibit 4 of
the June Form 8-K).
3.1 Certificate of Incorporation, dated July 19, 1988, of
the Company (incorporated by reference from Exhibit
3(a) of the Company's Registration Statement on Form
S-18 (33-29942-NY) filed October 20, 1989 (the "1989
Registration Statement").
3.2 By-laws of the Company (incorporated by reference from
Exhibit 3(b) of the 1989 Registration Statement).
3.3 Amended and Restated Certificate of Incorporation of
CBH (incorporated by reference from Exhibit 3.3 of the
Company's Annual Report on Form 10-K for the period
ended December 31, 1995 (the "Form 10-K")).
3.4 Certificate of Amendment to Amended and Restated
Certificate of Incorporation of CBH (incorporated by
reference from Exhibit 3.4 of the Form 10-K).
3.6 Certificate of Incorporation of Nations Flooring, Inc.
(incorporated by reference from Exhibit 3.6 of the
Company's Registration Statement on Form S-1 (333-19871)
filed January 16, 1997 ("1997 Registration Statement").
3.7 By-laws of Nations Flooring, Inc. (incorporated by
reference from Exhibit 3.7 of the 1997 Registration
Statement).
9.1 Voting Trust Agreement, dated May 30, 1995, between
Philip A. Herman and certain shareholders of the
Company (incorporated by reference from Exhibit 2 of
the June Form 8-K).
28
<PAGE>
10.7 Terms of preferred stock, par value $.01 per share,
stated value $1,000 per share, of CBH (incorporated by
reference from Exhibit 12 of the June Form 8-K).
10.8 Employment Agreement, dated as of July 28, 1995,
between CBI and Steven Chesin (incorporated by
reference from Exhibit 1 of the Company's Report on
Form 10-Q for the quarterly period ended June 30, 1995
the "June 1995 Form 10-Q).
10.9 Form of Promissory Note issued in the offering of
short-term notes of CBH (incorporated by reference from
Exhibit 11 of the June Form 8-K).
10.10 Lease, dated June 1, 1995, between CB Realty of
Delaware, Inc. ("CB Realty") and CBAC (incorporated by
reference from Exhibit 10.13 of the Form 10-K).
10.11 First Amendment to Lease Agreement, dated August 1,
1995, between CB Realty and CBAC (incorporated by
reference from Exhibit 10.14 of the Form 10-K).
10.12 Promissory Note, dated June 1, 1995 from CB Realty in
favor of CBAC (incorporated by reference from Exhibit
10.15 of the Form 10-K).
10.13 Employment Agreement, dated as of May 28, 1996, between
CBI and Alan Ember. (incorporated by reference from
Exhibit 10.15 of the 1997 Registration Statement).
10.14 Credit Facility, dated May 19, 1998, between CBI and
Fleet Capital Corporation. (Incorporated by reference
from Exhibit1 of the June 1998 Form 10-Q.
27 Financial Data Schedule
29
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 212,183
<SECURITIES> 0
<RECEIVABLES> 4,495,360
<ALLOWANCES> 310,000
<INVENTORY> 1,319,148
<CURRENT-ASSETS> 6,054,993
<PP&E> 1,452,317
<DEPRECIATION> 652,016
<TOTAL-ASSETS> 22,011,288
<CURRENT-LIABILITIES> 8,895,868
<BONDS> 4,035,539
0
5,160,000
<COMMON> 3,670
<OTHER-SE> 1,061,211
<TOTAL-LIABILITY-AND-EQUITY> 22,011,288
<SALES> 45,000,387
<TOTAL-REVENUES> 45,000,387
<CGS> 33,907,293
<TOTAL-COSTS> 9,308,041
<OTHER-EXPENSES> 284,811
<LOSS-PROVISION> 189,836
<INTEREST-EXPENSE> 1,165,341
<INCOME-PRETAX> 334,901
<INCOME-TAX> 120,000
<INCOME-CONTINUING> 214,901
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,793,825)
<EPS-PRIMARY> (0.52)
<EPS-DILUTED> (0.52)
</TABLE>
