<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
September 30, 2000.
[ ] TRANSITIONAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission file number: 33-29942-NY
----------------------------
NATIONS FLOORING, INC.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 11-2925673
--------------------------------------------------------------------------------
(State or other jurisdiction of incorporation) (IRS Employer
Identification Number)
3325 W. Ali Baba Lane, Suite 603
--------------------------------------------------------------------------------
(Address of principal executive offices)
(702) 384-8551
--------------------------------------------------------------------------------
(Issuer's telephone number)
--------------------------------------------------------------------------------
(Former name, former address or former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. _X_ Yes ____ No
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 3,729,779 shares of Common Stock, par
value $.001 per share, were outstanding at October 31, 2000.
<PAGE>
INDEX
Page
----
Part I - Financial Information
Item 1. Financial Statements
Consolidated balance sheets 3
Consolidated statements of operations 4-5
Consolidated statements of cash flows 6-7
Notes to consolidated financial statements 8-13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14-19
Part II - Other Information 20
Signatures 21
2
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
December 31, 2000
1999 (unaudited)
----------------------------------
<S> <C> <C>
ASSETS (Note 3)
---------------
Current Assets
Cash $ 328,162 $ 500,931
Accounts receivable, less allowance for doubtful
accounts 1999 $475,000, 2000 $482,368 5,744,891 5,899,113
Inventory 2,241,453 2,269,133
Prepaid expenses and other 545,810 640,581
Refundable income taxes - 212,940
Deferred income taxes 151,000 243,000
-------------------------------
Total current assets 9,011,316 9,765,698
-------------------------------
Deferred Income Taxes - 286,000
Property and Equipment, net (Note 1) 2,509,745 2,719,818
Intangible Assets, net (Note 1) 15,067,895 14,397,587
-------------------------------
$ 26,588,956 $27,169,103
===============================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities
Note payable (Note 3) $ 4,751,951 $ 4,923,858
Current maturities of long-term debt (Note 3) 808,000 811,000
Accounts payable 2,606,350 4,338,918
Advances from principal stockholder (Note 2) 574,934 -
Income taxes payable 391,378 -
Accrued expenses 1,226,017 1,496,169
Customer deposits 1,751,395 1,811,515
-------------------------------
Total current liabilities 12,110,025 13,381,460
-------------------------------
Long-Term Debt, less current maturities (Note 3) 3,800,620 3,210,495
Advances from and Note Payable-Principal Stockholder
less current portion (Note 2) 2,000,000 2,733,742
Deferred Income Taxes 789,000 884,000
Commitments and Contingencies (Notes 3 and 5)
Stockholders' Equity (Note 1)
Preferred stock, 12% cumulative; $.001 par value, authorized 1,000,000 shares;
issued 5,160 shares; total liquidation
preference of outstanding shares $5,160,000 5 5
Common stock, $.001 par value, authorized 20,000,000
shares; issued and outstanding 3,729,779 shares 3,730 3,730
Additional paid-in capital 9,652,241 10,160,491
Retained earnings (deficit) (1,766,665) (3,204,820)
-------------------------------
7,889,311 6,959,406
-------------------------------
$ 26,588,956 $27,169,103
===============================
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Nine Months Ended September 30,
<TABLE>
<CAPTION>
1999 2000
-------------------------------
<S> <C> <C>
Net sales (Note 4) $ 41,208,493 $ 45,739,734
Cost of sales 30,664,804 34,469,309
-------------------------------
Gross profit 10,543,689 11,270,425
Selling, general and administrative expenses:
Related party consulting fees 180,000 180,000
Related party rent expense (Note 4) 30,000 -
Executive severance package (Note 6) - 908,250
Other 7,701,401 9,611,219
-------------------------------
7,911,401 10,699,469
Amortization and depreciation 854,480 975,279
-------------------------------
Operating income (loss) 1,777,808 (404,323)
Other Income (expense):
Other income (expense), net 4,581 (194,058)
Related party interest expense (161,250) (157,919)
Interest expense (579,121) (699,455)
-------------------------------
Income (loss) before income taxes 1,042,018 (1,455,755)
Provision (benefit) for income taxes 370,380 (482,000)
-------------------------------
Net income (loss) 671,638 (973,755)
Dividends on preferred stock 464,400 464,400
-------------------------------
Net income (loss) applicable to common stockholders $ 207,238 $ (1,438,155)
===============================
Basic net income (loss) per common share (Note 1) $ 0.06 $ (0.39)
===============================
Dilutive net income (loss) per common share (Note 1) $ 0.05 $ (0.39)
===============================
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three Months Ended September 30,
<TABLE>
<CAPTION>
1999 2000
----------------------------------
<S> <C> <C>
Net sales (Note 4) $ 15,986,363 $ 15,710,208
Cost of sales 11,885,766 11,838,018
----------------------------------
Gross profit 4,100,597 3,872,190
Selling, general and administrative expenses:
Related party consulting fees 60,000 60,000
Executive severance package (Note 6) - 908,250
Other 2,784,383 3,116,387
----------------------------------
2,844,383 4,084,637
Amortization and depreciation 306,673 289,662
----------------------------------
Operating income (loss) 949,541 (502,109)
Other Income (expense):
Other income (expense), net (100) (186,438)
Related party interest expense (48,750) (60,419)
Interest expense (209,507) (241,753)
----------------------------------
Income (loss) before income taxes 691,184 (990,719)
Provision (benefit) for income taxes 238,000 (338,000)
----------------------------------
Net income (loss) 453,184 (652,719)
Dividends on preferred stock 154,800 154,800
----------------------------------
Net income (loss) applicable to common stockholders $ 298,384 $ (807,519)
==================================
Basic and dilutive net income (loss) per common share (Note 1) $ 0.08 $ (0.22)
==================================
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Nine Months ended September 30,
<TABLE>
<CAPTION>
1999 2000
----------------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income (loss) $ 671,638 $ (973,755)
Depreciation 193,852 304,971
Amortization 660,628 670,308
Deferred income taxes 90,000 (283,000)
Provision for bad debts 198,241 251,202
Rent expense in lieu of note receivable payments to Realty 30,000 -
Issuance of stock options for executive severance package (Note 6) - 508,250
Write off of pre-acquisition and other costs - 146,439
Changes in assets and liabilities, net of business acquisition:
Increase in accounts receivable (1,235,706) (405,424)
Increase in inventory (427,429) (27,680)
Increase in prepaid expenses and other (202,129) (210,716)
Increase in refundable income taxes - (212,940)
Increase in accounts payable 423,370 1,732,568
Increase (decrease) in advances from principal stockholder (71,786) 158,808
Decrease in income taxes payable - (391,378)
Increase in accrued expenses 739,709 270,152
Increase in customer deposits 802,868 60,120
----------------------------------
Net cash provided by operating activities $ 1,873,256 $ 1,597,925
----------------------------------
Cash Flows from Investing Activities
Advances to employees and related parties, net $ (37,033) $ -
Purchase of property and equipment (261,107) (488,133)
Payments for Acquisition for Kemper (1,500,000) -
Acquisition cost expenditures (49,636) (30,494)
----------------------------------
Net cash used in investing activities $ (1,847,776) $ (518,627)
----------------------------------
Cash Flows from Financing Activities
Advances (payments) on note payable, net $ 634,444 $ (353,093)
Principal payments on long-term debt (45,689) (89,036)
Cash dividends paid (464,400) (464,400)
----------------------------------
Net cash provided by (used in) financing activities $ 124,355 $ (906,529)
----------------------------------
Net increase in cash $ 149,835 $ 172,769
Cash, beginning 212,183 328,162
----------------------------------
Cash, ending $ 362,018 $ 500,931
==================================
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (unaudited)
Nine Months ended September 30,
<TABLE>
<CAPTION>
1999 2000
----------------------------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $ 595,296 $ 707,273
Income taxes $ 60,530 $ 405,318
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES AND FINANCING ACTIVITIES
Equipment acquired through financing agreement $ - $ 26,911
Realty acquisition: (Note 4)
Common stock issued $ 1,254,158 $ -
Liabilities assumed 668,930 -
Elimination of intercompany amounts (451,989) -
Assets acquired (1,471,099) -
----------------------------------
Net cash paid $ - $ -
==================================
</TABLE>
See Notes to Consolidated Financial Statements.
7
<PAGE>
NATIONS FLOORING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies
Nature of business
------------------
Nations Flooring, Inc. (Nations or Company) was organized under the laws of the
State of Delaware.
The Company sells floorcoverings and related products through its residential
contract, residential replacement and commercial operating segments in Nevada,
Utah, Idaho, South Carolina and metropolitan Washington, DC. The Company
believes that the economic and other characteristics of its three operating
segments meet the aggregation criteria outlined in Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information. Accordingly, segment information is not presented since the
Company's operating segments are aggregated for reporting purposes. The Company
grants credit principally to new homebuilders.
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.
Preferred stock
---------------
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.
Basis of presentation
---------------------
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In management's opinion, the accompanying consolidated financial statements
reflect all material adjustments (consisting only of normal recurring accruals)
necessary for a fair statement of the results for the interim periods presented.
The results for the interim periods are not necessarily indicative of the
results which will be reported for the entire year.
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, 1999 and September 30, 2000 the
Company's cash balances were maintained at financial institutions in Nevada,
Illinois, South Carolina, Utah and Virginia.
8
<PAGE>
NATIONS FLOORING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies (continued)
Inventory
---------
Inventory consists primarily of carpet and vinyl and is stated at the lower of
cost (first-in, first-out method) or market. Included in inventory is
work-in-process of $530,648 and $667,790 at December 31, 1999 and September 30,
2000, respectively.
Property and equipment
----------------------
Building, furniture and equipment, autos and trucks and leasehold improvements
are stated at cost, less accumulated depreciation and amortization. Depreciation
is provided on the straight-line and accelerated methods for financial reporting
purposes. Amortization is provided on the straight-line basis over the shorter
of the economic life of the asset or the lease term.
Property and equipment consist of the following:
<TABLE>
<CAPTION>
Depreciation December 31, September 30,
Lives 1999 2000
----------------------------------------------------------------
<S> <C> <C> <C>
Land - $ 664,000 $ 645,400
Building 20 781,000 781,000
Furniture and equipment 7 1,351,635 1,517,674
Autos and trucks 5 170,543 184,496
Leasehold improvements 3-7 491,492 843,929
--------------------------------------
3,458,670 3,972,499
Less accumulated depreciation and amortization 948,925 1,252,681
--------------------------------------
Property and equipment, net $ 2,509,745 $ 2,719,818
======================================
</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, identifiable intangibles and goodwill existed at
September 30, 2000.
Intangible assets
Intangible assets consist of the following:
December 31, September 30,
1999 2000
------------------------------
Goodwill $ 17,870,417 $ 17,870,417
Covenants not-to-compete 700,000 700,000
Debt issuance costs 292,904 292,904
------------------------------
18,863,321 18,863,321
Less accumulated amortization 3,795,426 4,504,471
------------------------------
Intangible assets, net $ 15,067,895 $ 14,358,850
==============================
Goodwill is being amortized by the straight-line method over fifteen to
twenty-five years.
The Company incurred financing costs related to bank financing (see Note 3).
These costs are being amortized on the effective interest method over the term
of the debt.
The Company has also entered into three 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 and expire
between June 1, 2000 and July 1, 2004.
9
<PAGE>
NATIONS FLOORING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies (continued)
Income taxes
------------
The Company provides for deferred taxes on a liability method whereby deferred
tax assets are recognized for deductible temporary differences and operating
loss and tax credit carryforwards and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities are
adjusted for the effect of changes in tax laws and rates on the date of
enactment.
Vendor cooperative marketing and purchase discounts
---------------------------------------------------
The Company participates in various advertising and marketing programs with
suppliers. Certain of the Company's costs incurred in connection with these
programs are reimbursed. The Company records these reimbursements when earned.
The Company also records accounts payable net of anticipated purchase discounts.
Basic and dilutive net income (loss) per common share
-----------------------------------------------------
Basic and dilutive net income (loss) per common share is computed based on net
income (loss) and the following weighted average number of common shares
outstanding:
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
------------------------------------ -------------------------------
1999 2000 1999 2000
------------------- -------------- -------------- ------------
<S> <C> <C> <C> <C>
Basic shares 3,709,870 3,729,779 3,729,779 3,729,779
Dilutive shares 3,888,319 3,729,779 3,908,227 3,729,779
</TABLE>
Dilutive net income (loss) per share for the three and nine months ended
September 30, 2000 is the same as the basic net income (loss) per share as the
inclusion of incremental shares for outstanding stock options would have been
anti-dilutive. For the three and nine months ended September 30, 1999, 178,449
incremental shares for outstanding stock options were included in the
computation of dilutive net income per share. Dividends on preferred stock,
which totaled $464,400 for both the nine months ended September 30, 1999, and
2000, and $154,800 for both the three months ended September 30, 1999 and 2000,
reduced the earnings available to common stockholders in the computation of
earnings per share. Because the Company's common stock has not been traded since
July 1997, the Company values its common stock for the purpose of calculating
the fair market value of stock options issued using a multiple of EBITDA.
Revenue recognition
-------------------
Revenue is recorded for commercial and retail floorcovering sales upon
installation.
Advertising
-----------
All costs related to marketing and advertising the Company's products are
expensed in the period incurred.
Advertising expense, net of cooperative advertising earned, was $764,228 and
$928,576 for the nine months ended September 30, 1999, and 2000, respectively.
Self Insurance
--------------
Effective January 1, 2000, the Company began to self-insure under its employee
health insurance plan. The Company is reinsured for claims in excess of $20,000
per individual per year. The liability for incurred but not reported claims was
approximately $33,000 as of September 30, 2000.
10
<PAGE>
NATIONS FLOORING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies (continued)
Accounting for Stock-Based Compensation
---------------------------------------
The Company measures compensation expense related to the grant of stock options
and stock-based awards to employees and directors in accordance with the
provisions of Accounting Principles Board Opinion (APB) No. 25, under which
compensation expense, if any, is based on the difference between the exercise
price of an option, or the amount paid for an award, and the market price or
fair value of the underlying common stock at the date of the award or at the
measurement date for variable awards. Stock-based compensation arrangements
involving non-employees are accounted for under Statement of Financial
Accounting Standard No. 123, Accounting for Stock-Based Compensation, (SFAS 123)
under which such arrangements are accounted for based on the fair value of the
option or award.
Fair value of financial instruments
-----------------------------------
The carrying amounts of financial instruments including cash, accounts
receivable, employee and other receivables, accounts payable, accrued expenses
and customer deposits approximate their fair values because of their short
maturities.
The carrying amounts of note payable, long-term debt and the related party note
payable approximate their fair values because the interest rates on these
instruments are at market rates.
Note 2. Note payable - principal stockholder
The Company has an unsecured note payable totaling $2,575,823 from Branin
Investments, Inc. (Branin), which is 100% owned by Philip A. Herman, who until
August 18, 2000 was the Chairman of the Board and President of Nations. Prior to
his resignation, this note payable consisted of interest and non-interest
bearing advances. As an additional consideration of his resignation, the Company
agreed to consolidate all of the advances, both interest and non-interest
bearing into one interest-bearing note. The note bears interest at 13% per
annum, payable monthly and is due at the earlier of May 2003 or the date on
which the Company completes a public offering of its equity securities or a
refinancing of its bank debt owed pursuant to the Credit Facility with Fleet as
describe in Note 3. In addition, Branin has agreed to subordinate its rights to
receive principal and interest payments to the obligation under the Credit
Facility. In light of these terms, $1,500,000 of the advance was classified as
long-term at December 31, 1999 and the entire note has been classified as long
term at September 30, 2000. Total interest expense of $146,250 and $157,919
relating to the amounts owed to Branin has been reflected in the accompanying
consolidated statements of operations for the nine months ended September 30,
1999 and 2000, respectively. Accrued interest of $157,919 is also reflected in
the consolidated financial statements at September 30, 2000 and is included as
Note Payable-Principal Stockholder.
Note 3. Note Payable and Long-Term Debt
The Company, through its subsidiary CBI, has a credit agreement (the "Credit
Facility") with Fleet Capital Corporation ("Fleet"), consisting of a $5,000,000
term loan and a $5,000,000 revolving line of credit. The term loan requires
quarterly payments of $175,000. CBI has pledged substantially all of its assets
to secure the Credit Facility and Nations has pledged all of the common stock of
CBI to secure its guarantee of the Credit Facility. The term and revolving
portions of the Credit Facility are due on May 18, 2003. All borrowings under
the Credit Facility bear interest, payable monthly, at the base rate per annum
announced from time to time by Fleet (9.5% at September 30, 2000) plus 1.25% and
1.75% per annum, in connection with advances under the revolving line and term
loan, 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. As of September 30,
2000, the Company was in violation of certain financial covenants. On December
1, 2000, Fleet waived the covenant violations that existed at September 30,
2000 in return for a fee of $50,000 payable at the earlier of a refinancing or
on the due date of the Credit Facility. In connection with this Credit Facility,
Branin has agreed that the notes payable to and advances from it (see Note 2)
will be subject to certain subordination and payment limitation requirements.
11
<PAGE>
NATIONS FLOORING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Note Payable and Long-Term Debt (continued)
Amounts outstanding under the Credit Facility are as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
-------------------- -------------------
<S> <C> <C>
Revolving line of credit $4,751,951 $ 4,923,858
Term loan $3,950,000 $ 3,425,000
</TABLE>
At September 30, 2000, the Company had no availability under the term loan and
approximately $76,000 available under the revolving line of credit.
The Company has a mortgage note payable with a financial institution secured by
the Company's land and building of $460,540 and $439,801 outstanding at December
31, 1999 and September 30, 2000, respectively. The note bears interest at 9% and
is due in monthly payments of principal and interest totaling $5,690 with the
balance due May 2003.
CBI also has long-term obligations including capital leases of $198,080 and
$156,694 outstanding at December 31, 1999 and September 30, 2000, respectively.
The notes bear interest at an approximate average of 12.9% and mature between
February 2001 and February 2004.
Note 4. Acquisitions
Kemper
------
As of the close of business on June 30, 1999, CBI entered into an Asset Purchase
Agreement with DuPont Flooring Systems, Inc. (DuPont) (a wholly owned subsidiary
of E.I. DuPont De Nemours and Company) pursuant to which CBI acquired certain
assets of DuPont (the "Assets") for an aggregate purchase price of $1,800,000
plus the assumption of certain liabilities. The source of such funds was the
working capital of CBI, including funds borrowed pursuant to the Credit Facility
with Fleet Capital Corporation.
The Assets purchased by CBI under the Agreement consist of all of the properties
and assets previously used by DuPont in the business of retailing, distributing
and installation of residential floor covering products and flooring systems
under the "Kemper" name in the greater Washington D.C. area.
The operations of Kemper came under the control of Nations effective July 1,
1999 and the acquisition was accounted for as a purchase for financial reporting
purposes.
Realty
------
Under the terms of an Agreement and Plan of Merger (the Agreement) filed with
the State of Delaware on March 29, 1999, C.B. Realty of Delaware, Inc. (Realty)
merged with and into Nations. In accordance with the Agreement, each shareholder
of Realty was issued 597.25 shares of Nations' common stock for each share of
Realty's common stock. A total of 59,725 shares of Nations' common stock were
issued. The acquisition was accounted for as a purchase for financial reporting
purposes.
Prior to the combination, Nations leased its principal Las Vegas facility from
Realty under an operating lease expiring in April 2004. The results of
operations for the nine months ended September 30, 1999 include rent expense
paid under such lease of $30,000.
At the time of the combination, Nations was indebted to Realty under a 12%
unsecured demand note in the amount of $500,000, and Realty was indebted to
Nations under a 10% installment note having a remaining balance of $80,779.
Total interest expense of $15,000 relating to this note has been reflected in
the accompanying consolidated statements of operations for the nine months ended
September 30, 1999. Both balances have been eliminated in recording Nations'
acquisition of Realty.
12
<PAGE>
Note 4. Acquisitions (continued)
Pro Forma Information
The following pro forma information indicates what the Company's results of
operations for the nine months ended September 30, 1999 would have been had the
acquisitions of Kemper and Realty taken place at January 1, 1999. This pro forma
information is presented for illustrative purposes only, and is not intended to
necessarily indicate what the actual results of operations would have been if
the companies had been combined during those periods, or what the future results
of operations may be:
September 30, 1999
------------------
Revenues $ 44,539,783
Net income applicable to common stockholders $ 399,000
Basic and dilutive net income per share $ 0.11
Note 5. Contingencies
In December, 1999, BankBoston Development Company, LLC ("BankBoston") filed a
lawsuit in the United States District Court for the District of Massachusetts
against Philip Herman, Branin and the Company. Mr. Herman is the owner of 100%
of the common stock of Branin, and Mr. Herman together with Branin controls
15.2% of the voting stock of the Company. Additionally, until August 18, 2000,
Mr. Herman was the President, Chief Executive Officer and a Director of the
Company. In its complaint, BankBoston alleges, purportedly on behalf of itself
and other stockholders of Millennium Services Corporation ("Millennium"), a
company the majority of whose common stock is owned by Branin, that Mr. Herman
breached his fiduciary duties to BankBoston in connection with its $500,000
investment in Millennium, that Branin and the Company aided and abetted this
breach and that all the defendants engaged in fraudulent activities under
federal securities laws, common law and the Massachusetts blue sky laws in
connection with the investment. The complaint seeks damages of $1.5 million on
the fiduciary duty claims and $500,000 on the fraud claims, together with treble
damages on the Massachusetts blue sky law claim, interest, attorneys' fees and
costs. The Company has filed an answer denying the principal allegations in the
complaint. On April 26, 2000, the Company moved to dismiss due to lack of
personal jurisdiction or in the alternative to transfer the case to the Southern
District of New York based on the doctrine of forum non-conveniens. The Company
has subsequently withdrawn this motion with prejudice. The case is in the
discovery stage, but the Company believes it has meritorious defenses to the
allegations in the complaint and intends to defend against such allegations
vigorously. Therefore, no liability has been recorded in the consolidated
financial statements as of December 31, 1999 and September 30, 2000.
Note 6. Executive Severance Agreement
On August 18, 2000, Philip Herman resigned his position as President and Chief
Executive Officer and relinquished his seat on the Board of Directors. As a
result of Mr. Herman's resignation all 475,000 stock options he held as the
result of previous awards under the Company's stock option plan expired.
Subsequent to Mr. Herman's resignation, the Board of Directors approved a
severance agreement providing for bi-weekly cash payments to Mr. Herman at the
rate of $200,000 per year for two years. As part of the severance agreement, the
Board of Directors approved a grant to Mr. Herman of 475,000 stock options at an
exercise price of $2.50 per share. The new options are fully vested, expire 10
years from the grant date and do not require continued employment for vesting or
exercise. As a result, the Company charged to expense in the third quarter of
fiscal 2000 an aggregate of $908,250, which included $508,250 representing the
fair value of the new stock options.
13
<PAGE>
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Report on Form 10-Q contains forward-looking statements within the
meaning of the Private Securities Act of 1995. The Company's future results of
operations, as compared to those forward looking statements, is subject to and
will be affected by certain risks and uncertainties. As a result the Company's
actual operations may differ significantly from those discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, leverage, capital requirements, demand for the Company's
products and services, dependence on manufacturers and suppliers, relationships
with customers, dependence on key operating personnel, uncertainties related to
the Company's growth strategies and those discussed below. The discussion of
results includes discussions regarding EBITDA.
EBITDA is used by management as a measure of performance and is defined
as operating income excluding any effects of severance agreements plus
amortization and depreciation. Management believes it is meaningful to readers
as a measure of liquidity and allows investors to evaluate the Company's
liquidity using the same measure that is used by the Company's management. The
Company's calculation of EBITDA may or may not be consistent with the
calculation of EBITDA by other public companies. Management views EBITDA as a
meaningful supplemental measure to, but not a replacement of, the primary
measures of financial condition and results of operations and accordingly,
management's discussion of EBITDA should not be viewed as an alternative to the
discussions of results of operations or cash flows as measured or presented
under generally accepted accounting principles. In addition, EBITDA does not
take into effect changes in certain assets and liabilities which can affect cash
flow.
The following discussion of the financial condition and results of
operations of the Company relates to the nine and three months ended September
30, 2000 and 1999 and should be read in conjunction with the financial
statements and notes thereto included elsewhere in this Report.
Results of Operations
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30,
1999.
Total revenues increased by $4,531,241 to $45,739,734 for the nine
months ended September 30, 2000 from $41,208,493 for the nine months ended
September 30, 1999, representing an increase of 11.0%. The components of this
increase are as follows:
Residential Contract $ 3,873,324
Residential Replacement 901,976
Commercial (515,259)
Other 271,200
---------------
$ 4,531,241
===============
The Company acquired a floorcovering operation in Washington, DC in
July 1999 and opened a location in Myrtle Beach, SC in July 2000. These
operations accounted for $3,977,159 of the total increase in sales, including
residential contract sales of $2,340,238, residential replacement sales of
$1,619,349 and commercial sales of $17,572. The remaining increase of $554,083
consists of increases in residential contracts sales of $1,533,086 and increases
in other sales of $271,200, offset by decreases in residential replacement sales
of $717,371 and decreases in commercial sales of $532,831. The decline in
residential replacement sales is primarily due to increased competition from
large do-it-yourself retailers such as Home Depot and Lowes. $142,090 of the
decline in commercial sales is due in part to the April 1999 closing of the
Company's Arizona location with the balance due to a decline in Las Vegas sales.
Prices for the Company's products were not significantly changed.
Gross profit increased by $726,736 to $11,270,425 for the nine months
ended September 30, 2000 from $10,543,689 for the nine months ended September
30, 1999, representing an increase of 6.4%. Although gross profit dollars
increased (due to increased sales), the Company's gross profit percentage
decreased to 24.6% in 2000 from 25.6% in 1999. Four factors contributed to the
decline in the gross profit percentage. First, residential contract sales in the
first quarter included a higher number of model homes, versus production homes.
This change in the mix reduced gross profit as model homes generally generate a
lower gross profit. Second, vendor price increases that took place on January 1,
2000 effectively reduced the gross profit on all outstanding orders written
prior to that date. Starting January 1, 2000, the Company took steps to pass on
some or all of the increases to its customers by raising the prices it charges
to the homebuyers in the residential contract design center. Due to the lag time
of approximately 90 days between the time an order is written and when it is
installed, the effects of those price increases began to be recognized beginning
in the second quarter of 2000. Third, the Company currently has minimal
14
<PAGE>
available working capital borrowing capacity, and as a result, has been unable
to take full advantage of vendor discounts. Fourth, in reaction to the Company's
assessment of the competitive environment in the Las Vegas market, the Company
reduced its pricing in bids on certain new home developments to maintain its
market share. The Company is unable at this time to predict what, if any, effect
these factors will have on future trends in sales, gross profit and gross profit
percentages.
Selling, general and administrative expenses increased to $10,699,469
for the nine months ended September 30, 2000 from $7,911,401 for the nine months
ended September 30, 1999. The charges for the severance agreement with the
Company's former president (see Note 6 of Notes to Consolidated Financial
Statements) accounted for $908,250 of the increase. Excluding the effect of
those charges, selling, general and administrative expenses increased by
$1,879,818 to $9,791,219 for the nine months ended September 30, 2000 from
$7,911,401 for the nine months ended September 30, 1999. The inclusion of the
Washington, DC operation acquired in 1999 and the new location opened in Myrtle
Beach, SC accounted for $1,190,393 of this increase. The remaining increase of
$689,425 is due to increases in general administrative expenses required to
accommodate increased volume and, as discussed below, in anticipation of
increased volume due to future acquisitions. This increase was comprised
primarily of approximate increases in salaries and benefits of $352,000, rent of
$173,000, bank charges of $22,000, advertising of $63,000, and professional fees
of $262,000, partially offset by approximate decreases in third party finance
charges of $98,000, office expenses of $70,000 and travel of $23,000. Excluding
the severance charges discussed above, as a percentage of sales, selling,
general and administrative expenses increased to 21.4% in 2000 from 19.2% in
1999.
In anticipation of the Company obtaining financing that would enable it
to acquire additional operations in the year 2000, the Company expanded its
corporate administrative operation to accommodate the planned growth. As a
result of the Company's failure to date to obtain additional financing, these
acquisitions were not completed as anticipated. Moreover to the likelihood of
obtaining this financing in the near future, the Company has identified certain
administrative expenses, comprised principally of salaries and benefits, that
are being eliminated. These expenses approximate $1,000,000 on an annualized
basis, and the Company believes that these expense reductions together with the
gross profit related actions the Company took in the first and second quarters
of fiscal 2000, as described above, will allow the Company to improve its
operating results. However, there can be no assurance that these actions will be
successful.
Amortization and depreciation expense increased to $975,279 in 2000
from $854,480 in 1999, due to increased amortization expense relating to the
Kemper acquisition and increased depreciation relating to current year equipment
purchases partially offset by decreased amortization expense relating to a
covenant not-to-compete.
As a result of the above changes, and excluding the effects of the
severance charges, operating income decreased by $1,273,881 to $503,927 for the
nine months ended September 30, 2000 from $1,777,808 for the nine months ended
September 30, 1999. Other income (expense) changed by $198,639 to expense of
$194,058 for the nine months ended September 30, 2000 from income of $4,581 for
the nine months ended September 30, 1999. Included in other expense is the write
off of pre-acquisition fees and loan fees of $146,439 relating to financing that
was not obtained. Interest expense increased to $857,374 for the nine months
ended September 30, 2000 from $740,371 for the nine months ended September 30,
1999. Interest expense was affected by higher average borrowings required to
support the increases in the Company's sales, offset by the elimination of
$500,000 of related party debt which was extinguished in March 1999 through the
merger with Realty and to additional interest on related party debt. Income
taxes changed by $852,380 to a benefit of $482,000 in 2000 from expense of
$370,380 in 1999 due to the change in income before income taxes. Net income
(loss) changed by $1,645,393 to a loss of $973,755 for the nine months ended
September 30, 2000 from income of $671,638 for the nine months ended September
30, 1999 due to the above changes.
EBITDA decreased by $1,153,082 to $1,479,206 for the nine months ended
September 30, 2000 from $2,632,288 for the nine months ended September 30, 1999
excluding the effects of the severance charges. This decrease in EBITDA was due
primarily to the increase in selling, general and administrative expenses
incurred to support the higher sales volume and the acquisition or establishment
of new operations as described above. Although the higher sales did increase
gross profits, that increase was exceeded by the increase in selling, general
and administrative expenses.
15
<PAGE>
Three Months Ended September 30, 2000 Compared to
Three Months Ended September 30, 1999.
Total revenues decreased by $276,155 to $15,710,208 for the three
months ended September 30, 2000 from $15,986,363 for the three months ended
September 30, 1999, representing a decrease of 1.7%. The components of this
decrease are as follows:
Residential Contract $ (74,717)
Residential Replacement (446,426)
Commercial 168,235
Other 76,753
---------------
$ (276,155)
===============
The decrease in residential replacement sales was as a result of the
competition from large retailers as discussed above. The decrease in sales was
partially offset by the initial sales of $139,553 from the Company's Myrtle
Beach, SC location, which opened in July 2000.
Gross profit decreased by $228,407 to $3,872,190 for the three months
ended September 30, 2000 from $4,100,597 for the three months ended September
30, 1999, representing a decrease of 5.6%. Additionally, the Company's gross
profit percentage decreased to 24.6% in 2000 from 25.7% in 1999 due principally
to the fact that the Company currently has minimal available working capital
borrowing, and as a result, has been unable to take full advantage of vendor
discounts.
Excluding the severance charges discussed above, selling, general and
administrative expenses increased by $332,004 to $3,176,387 for the three months
ended September 30, 2000 from $2,844,383 for the three months ended September
30, 1999. Of the increase, $117,544 is due to new location in Myrtle Beach, SC
with the remaining increase of $414,460 is due to increases in general
administrative expenses required to in anticipation of increased volume due to
future acquisitions. This increase was comprised primarily of approximate
increases in salaries and benefits of $123,000, rent of $52,000, and
professional fees of $53,000, partially offset by approximate decreases in third
party finance charges of $12,000, office expenses of $35,000 and telephone of
$10,000. As a percentage of sales, selling, general and administrative expenses
increased to 22.3% in 2000 from 19.2% in 1999.
Amortization and depreciation expense decreased to $289,662 in 2000
from $306,673 in 1999, due to increased amortization and depreciation relating
to the acquisitions of Kemper and Realty in 1999 and offset by decreased
amortization expense of debt issuance costs and a covenant not-to-compete.
As a result of the above changes, and excluding the effects of the
severance charges, operating income (loss) decreased by $543,400 to income of
$406,141 for the three months ended September 30, 2000 from income of $949,541
for the three months ended September 30, 1999. Other expense decreased by
$186,338 to $186,438 for the three months ended September 30, 2000 and to the
write off of pre-acquisition fees and loan fees relating to financing that was
not obtained. Interest expense increased to $302,172 for the three months ended
September 30, 2000 from $258,257 for the three months ended September 30, 1999.
Interest expense was affected by higher average borrowings required to support
the current operations. Income taxes changed by $576,000 to a benefit of
$338,000 in 2000 from expense of $238,000 1999 due to the decrease in income
before income taxes. Net income (loss) changed by $1,105,903 to a loss of
$652,719 for the three months ended September 30, 2000 from income of $453,184
for the three months ended September 30, 1999 due to the above changes.
EBITDA decreased by $560,411 to $695,803 for the three months ended
September 30, 2000 from $1,256,214 for the three months ended September 30,
1999. This decrease in EBITDA was due primarily to the increase in selling,
general and administrative expenses incurred to support the higher sales volume
and the establishment of new operations. Although the higher sales did increase
gross profits, that increase was exceeded by the increase in selling, general
and administrative expenses.
16
<PAGE>
Liquidity and Capital Resources
Cash provided by operating activities was $1,597,925 and $1,873,256 for
the nine months ended September 30, 2000 and 1999 respectively. Cash flows from
operations differed significantly from net income (loss) in both periods due to
significant non-cash charges and certain significant changes in working capital
items. The changes in the working capital resulted in a working capital deficit
of $3,615,762 at September 30, 2000. Included in such deficit is $5,623,858, 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 2000, net loss included significant non-cash charges of
amortization of $670,308, depreciation of $304,971, stock option charges of
$508,250 relating to an executive severance agreement (see Note 6 of Notes to
Consolidated Financial Statements) and to write off financing and other costs of
$146,439. Additionally, cash was provided by increases in accounts payable of
$1,732,568, accrued expenses of $220,152, customer deposits of $60,120 and
increases in the amount owed to the Company's principal stockholder. These
sources of cash from operations were partially offset by the increase in
accounts receivable, inventory and prepaids to reflect increased operations in
2000. Accounts payable increased as the Company's borrowings under its revolving
line of credit approached its $5,000,000 limit. At that level, although the
Company's level of accounts receivable and inventory could support higher
borrowings on the basis of typical borrowing terms (including the borrowing base
calculated under the Credit Agreement but for the $5 million revolving credit
limit imposed), the Company currently has minimal available working capital
borrowing capacity, and as a result, while paying within vendor terms, has
increased its reliance on vendor credit to finance its purchases and has been
unable to take full advantage of vendor discounts. The Company used the
operating cash flows of $1,597,925 for the nine months ended September 30, 2000
principally to make net reductions of $442,129 in note payable and long-term
debt, fund the payment of $464,400 of preferred stock dividends, fund $488,133
of capital additions and increase cash reserves by $172,769.
For the nine months ended September 30, 1999, net income included
significant non-cash charges of amortization of $660,628 and depreciation of
$193,852. Additionally, cash was provided by increases in accounts payable of
$423,370, accrued expenses of $739,709 and customer deposits of $802,868. These
sources of cash from operations were partially offset by the use of cash to
reduce the amount owed to the Company's principal stockholder and the increase
in accounts receivable and inventory. The increases in accounts receivable,
inventory, accounts payable, accrued expenses and customer deposits reflect the
effects of the Company's expanded operations. The Company used the operating
cash flows of $1,873,256 for the nine months ended September 30, 1999
principally to purchase the net assets of Kemper (see discussion below), fund
the payment of $464,400 of preferred stock dividends, fund $261,107 of capital
additions and increase cash reserves by $149,836.
During the nine months ended September 30, 2000 and 1999, cash used in
investing activities was $518,627 and $1,847,776 respectively, used primarily to
purchase of property and equipment in 2000 and to purchase the net assets of
Kemper in 1999 and to purchase equipment and leasehold improvements and expenses
incurred for future acquisitions. Cash provided by (used in) financing
activities during such periods was $(906,529) and $124,355, respectively, used
primarily to make principal payments required by or reflecting advances received
under the Credit Agreement and cash dividends paid to the Company's preferred
stockholders.
The Company has an unsecured note payable totaling $2,575,823 from
Branin Investments, Inc. (Branin), which is 100% owned by Philip A. Herman, who
until August 18, 2000 was the Chairman of the Board and President of Nations.
Prior to his resignation, this note payable consisted of interest and
non-interest bearing advances. As an additional consideration of his
resignation, the Company agreed to consolidate all of the advances, both
interest and non-interest bearing into one interest bearing note (see Note 2 of
Notes to Consolidated Financial Statements). Total interest expense of $146,250
and $157,919 relating to the amounts owed to Branin has been reflected in the
accompanying consolidated statements of operations for the nine months ended
September 30, 1999 and 2000, respectively. Accrued interest of $157,919 is also
reflected in the consolidated financial statements at September 30, 2000 and is
included as Note Payable-Principal Stockholder.
17
<PAGE>
The Company, through its subsidiary CBI, has a credit agreement (the
"Credit Facility") with Fleet Capital Corporation ("Fleet"), consisting of a
$5,000,000 term loan and a $5,000,000 revolving line of credit. The term loan
requires quarterly payments of $175,000. CBI has pledged substantially all of
its assets to secure the Credit Facility and Nations has pledged all of the
common stock of CBI, to secure its guarantee of the Credit Facility. The term
and revolving portions of the Credit Facility are due on May 18, 2003. All
borrowings under the Credit Facility bear interest payable monthly at the base
rate per annum announced from time to time by Fleet (9.5% at October 31, 2000)
plus 1.25% and 1.75% per annum, in connection with advances under the revolving
line and term loan, 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. As of
September 30, 2000, the Company was in violation of certain financial covenants.
On December 1, 2000, Fleet waived the covenant violations that existed at
September 30, 2000 in return for a fee of $50,000 payable at the earlier of a
refinancing or on the due date of the Credit Facility. In connection with this
Credit Facility, Branin agreed that the notes payable to and advances from it
(see Note 2 of Notes to the Consolidated Financial Statements) are subject to
certain subordination and payment limitation requirements.
Amounts outstanding under the Credit Facility are as follows:
December 31, September 30,
1999 2000
-------------- -----------------
Revolving line of credit $4,751,951 $ 4,923,858
Term loan $3,950,000 $ 3,425,000
At September 30, 2000, the Company had no availability under the term
loan and approximately $76,000 available under the revolving line of credit.
The Company has a mortgage note payable with a financial institution
secured by the Company's land and building of $460,540 and $439,801 outstanding
at December 31, 1999 and September 30, 2000, respectively. The note bears
interest at 9% and is due in monthly payments of principal and interest totaling
$5,690 with the balance due May 2003.
CBI also has long-term obligations including capital leases of $198,080
and $156,694 outstanding at December 31, 1999 and September 30, 2000,
respectively. The notes bear interest at an approximate average of 12.9% and
mature between February 2001 and February 2004.
The Company opened several new locations in Las Vegas during 1999 and a
location in Myrtle Beach, South Carolina in July 2000. A portion of the initial
capital costs for these locations was provided by the Company's suppliers in
exchange for agreements by the Company to feature the suppliers' products at
these facilities. The Company anticipates that a portion of the capital
requirements for any 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.
In addition to the opening of new locations, the Company's business plan
contemplates growth through acquisitions. Pursuant to this plan, the Company
negotiated with various companies to acquire their operations, and entered into
letters of intent with companies located in South Carolina, all of which have
expired. In light of the termination of negotiations with a lender that was to
provide acquisition financing, the Company is not likely to be in a position to
complete any acquisitions until it can secure an alternate source of financing.
The Company believes that it needs to secure either additional or
replacement financing to its Credit Facility with Fleet in order to supplement
its capital resources. The Company is in the process of seeking both supplements
to and alternatives to the Fleet Credit Facility. While there can be no
assurance, the Company believes that the measures it has taken to improve
operating profits will provide sufficient liquidity to fund existing operations
for remainder of 2000. Although planned 2000 operations are not projected to
eliminate or reduce the Company's working capital deficit which existed at
September 30, 2000, the Company believes that the Fleet Credit Facility along
with measures it has taken to improve operating profits will allow it to operate
with a working capital deficit until such time as operations will eliminate it.
The Company believes that the Fleet Credit Facility will not be
sufficient to allow the Company to pursue its strategy of expansion and
acquisitions. Additional capital is needed for such expansion and acquisitions.
The Company continues to seek sources of debt and equity financing to fund
acquisitions. However, there can be no assurance that any of these efforts will
be successful. The failure to obtain capital resources to fund acquisitions
would adversely affect the Company's pursuit of its growth strategies.
18
<PAGE>
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 3 Quantitative and Qualitative Disclosures about Market Risk
Like virtually all commercial enterprises, the Company is exposed to
the risk ("market risk") that the cash flows to be received or paid relating to
certain financial instruments could change as a result of changes in interest
rate, exchange rates, commodity prices, equity prices and other market changes.
Market risk is attributed to all market risk sensitive financial instruments,
including long term debt.
The Company does not engage in trading activities and does not utilize
interest rate swaps or other derivative financial instruments or buy or sell
foreign currency, commodity or stock indexed futures or options. Additionally,
with the exception of the Fleet credit facility, the interest on all of the
Company's debt is payable at fixed interest rates. Accordingly, the Company's
exposure to market risk is limited to the potential affect of changes in
interest rates on the cash flows (payments) relating to its variable rate debt
with is its debt with Fleet. Based upon the balance of the Fleet debt at
September 30, 2000, 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 $85,000 per year.
19
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In December, 1999, BankBoston Development Company, LLC ("BankBoston")
filed a lawsuit in the United States District Court for the District of
Massachusetts against Philip Herman, Branin and the Company. Mr. Herman is the
owner of 100% of the common stock of Branin, and Mr. Herman together with Branin
controls 15.2% of the voting stock of the Company. Additionally, until August
18, 2000, Mr. Herman was the President, Chief Executive Officer and a Director
of the Company. In its complaint, BankBoston alleges, purportedly on behalf of
itself and other stockholders of Millennium Services Corporation ("Millennium"),
a company the majority of whose common stock is owned by Branin, that Mr. Herman
breached his fiduciary duties to BankBoston in connection with its $500,000
investment in Millennium, that Branin and the Company aided and abetted this
breach and that all the defendants engaged in fraudulent activities under
federal securities laws, common law and the Massachusetts blue sky laws in
connection with the investment. The complaint seeks damages of $1.5 million on
the fiduciary duty claims and $500,000 on the fraud claims, together with treble
damages on the Massachusetts blue sky law claim, interest, attorneys' fees and
costs. The Company has filed an answer denying the principal allegations in the
complaint. On April 26, 2000, the Company moved to dismiss due to lack of
personal jurisdiction or in the alternative to transfer the case to the Southern
District of New York based on the doctrine of forum non-conveniens. The Company
has subsequently withdrawn the motion with prejudice. The case is in the
discovery stage, but the Company believes it has meritorious defenses to the
allegations in the complaint and intends to defend against such allegations
vigorously. Therefore, no liability has been recorded in the consolidated
financial statements as of December 31, 1999 and June 30, 2000.
ITEM 2. CHANGES IN SECURITIES
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
Effective October 24, 2000, Mr. John Katz resigned his position as a
member of the Company's Board of Directors. As a result of his resignation, all
40,000 stock options he held as the result of previous awards under the
Company's stock option plan expired. Subsequent to his resignation, the Board of
Directors approved a grant to Mr. Katz of 40,000 stock options at an exercise
price of $2.50 per share. The new options are fully vested, expire 10 years from
the grant date and do not expire upon termination of his status as a director.
The Board of Directors also approved a one-time payment to Mr. Katz of $15,000.
As a result, the Company anticipates a charge to the statement of operations of
approximately $58,000 in the fourth quarter of fiscal 2000, which will include
$43,000 representing the fair value of the new stock options.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
Computation of Earnings per Share
Financial Data Schedule
(b) Reports on Form 8-K.
-------------------
None
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant had duly caused this report to be signed by the undersigned,
thereunto duly authorized.
November 10, 2000 /s/ Facundo Bacardi
--------------------------------------
Facundo Bacardi
Chairman of the Board and President
(Principal Executive Officer)
November 10, 2000 /s/ William V. Poccia
--------------------------------------
William V. Poccia
Chief Financial Officer and Secretary
(Principal Financial and
Accounting Officer)
21
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Description of Exhibits Page No.
------ ----------------------- --------
<S> <C> <C>
11 Computation of Earnings per Share 23
27 Financial Data Schedule (filed only electronically with the SEC) 24
</TABLE>
22
