<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 March 31, 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 (IRS Employer Identification Number)
of incorporation)
3325 W. Ali Baba Lane, Suite 603, Las Vegas, Nevada 89118
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(702) 384-8551
- --------------------------------------------------------------------------------
(Issuer's telephone number)
100 Maiden Lane, New York, New York 10038
- --------------------------------------------------------------------------------
(Former name, former address or former fiscal year, if
changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. X Yes No
--- ---
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 3,729,779 shares of Common Stock, par
value $.001 per share, were outstanding at April 30, 2000.
<PAGE>
INDEX
Page
Part I - Financial Information
Item 1. Financial Statements
Consolidated balance sheets 3
Consolidated statements of operations 4
Consolidated statements of cash flows 5 - 6
Notes to consolidated financial statements 7 - 12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13 - 16
Part II - Other Information
Item 1. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
2
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
December 31, 2000
ASSETS (Note 3) 1999 (unaudited)
- --------------- ----------------------------------
<S> <C> <C>
Current Assets
Cash $ 328,162 $ 449,934
Accounts receivable, less allowance for doubtful
accounts 1999 $475,000, 2000 $434,000 5,744,891 5,494,193
Inventory 2,241,453 2,009,478
Prepaid expenses and other 545,810 722,703
Refundable income taxes - 127,125
Deferred income taxes 151,000 150,000
----------------------------------
Total current assets 9,011,316 8,953,433
----------------------------------
Property and Equipment, net (Note 1) 2,509,745 2,584,859
Intangible Assets, net (Note 1) 15,067,895 14,852,809
----------------------------------
$ 26,588,956 $ 26,391,101
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Note payable (Note 3) $ 4,751,951 $ 4,946,992
Current maturities of long-term debt (Note 3) 808,000 809,000
Accounts payable 2,606,350 3,057,347
Advances from principal stockholder (Note 2b) 574,934 560,084
Income taxes payable 391,378 -
Accrued expenses 1,226,017 1,321,805
Customer deposits 1,751,395 1,760,817
----------------------------------
Total current liabilities 12,456,045
12,110,025
----------------------------------
Long-Term Debt, less current maturities (Note 3) 3,800,620 3,627,144
Advances from and Notes Payable-Principal Stockholder,
less current portion (Notes 2a and 2b) 2,000,000 2,000,000
Deferred Income Taxes 789,000 804,000
Commitments and Contingencies (Note 3)
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 9,652,241
Retained earnings (deficit) (1,766,665) (2,152,064)
----------------------------------
7,889,311 7,503,912
----------------------------------
$ 26,588,956 $ 26,391,101
==================================
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three Months Ended March 31,
<TABLE>
<CAPTION>
1999 2000
-------------------------------------------
<S> <C> <C>
Net sales $ 11,998,494 $ 14,279,691
Cost of sales 8,897,945 10,915,443
-------------------------------------------
Gross profit 3,100,549 3,364,248
Selling, general and administrative expenses:
Related party consulting fees 60,000 60,000
Related party rent expense (Note 4) 30,000 -
Other 2,423,514 3,036,764
-------------------------------------------
2,513,514 3,096,764
Amortization and depreciation 268,232 354,919
-------------------------------------------
Operating income (loss) 318,803 (87,435)
Other Income (expense):
Other income (expense), net 1,356 1,823
Related party interest expense (Notes 2 (a) and 4) (63,750) (48,750)
Interest expense (178,325) (214,237)
-------------------------------------------
Income (loss) before income taxes 78,084 (348,599)
Provision for income taxes (benefit) 34,000 (118,000)
-------------------------------------------
Net income (loss) 44,084 (230,599)
Dividends on preferred stock 154,800 154,800
-------------------------------------------
Net loss applicable to common stockholders $ (110,716) $ (385,399)
===========================================
Basic and Dilutive net loss
per common share (Note 1) $ (0.03) $ (0.10)
===========================================
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months ended March 31,
<TABLE>
<CAPTION>
1999 2000
------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income (loss) $ 44,084 $ (230,599)
Depreciation 53,000 112,543
Amortization 215,232 242,376
Deferred income taxes 30,000 16,000
Provision for bad debts 70,100 73,410
Rent expense in lieu of note receivable payments to Realty 30,000 -
Changes in assets and liabilities, net of business acquisition:
(Increase) decrease in accounts receivable (28,410) 177,288
(Increase) decrease in inventory (273,376) 231,975
Increase in prepaid expenses and other (41,917) (176,893)
Increase in refundable income taxes - (127,125)
Increase in accounts payable 485,469 450,997
Decrease in advances from principal stockholder (90,750) (14,850)
Decrease in income taxes payable - (391,378)
Increase in accrued expenses 51,479 95,788
Increase in customer deposits 129,016 9,422
------------------------------------
Net cash provided by operating activities $ 673,927 $ 468,954
------------------------------------
Cash Flows from Investing Activities
Repayments from employees and related parties, net $ 118,435 $ -
Purchase of property and equipment (145,295) (160,746)
Acquisition cost expenditures - (27,290)
------------------------------------
Net cash used in investing activities $ (26,860) $ (188,036)
------------------------------------
Cash Flows from Financing Activities
(Payments) advances on note payable $ (270,529) $ 20,041
Principal payments on long-term debt (163,392) (24,387)
Cash dividends paid on preferred stock (154,800) (154,800)
------------------------------------
Net cash used in financing activities $ (588,721) $ (159,146)
------------------------------------
Net increase in cash $ 58,346 $ 121,772
Cash, beginning 212,183 328,162
------------------------------------
Cash, ending $ 270,529 $ 449,934
====================================
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (unaudited)
Three Months ended March 31,
<TABLE>
<CAPTION>
1999 2000
------------------------------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $ 202,701 $ 163,469
Income taxes $ 7,570 $ 384,503
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES AND FINANCING ACTIVITIES
Realty merger (Note 4) $ 2,003,867 $ -
====================================
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
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 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 March 31, 2000 the
Company's cash balances were maintained at financial institutions in Nevada,
Illinois, Utah and Virginia.
7
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
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 $307,217 at December 31, 1999 and March 31,
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, March 31,
Lives 1999 2000
----------------------------------------------------------------
<S> <C> <C> <C>
Land - $ $ 664,000
Building 20 781,000 781,000
Furniture and equipment 7 1,381,110
Autos and trucks 5 170,543 184,196
Leasehold improvements 3 -7 491,492 634,806
---------------------------------------------
3,458,670 3,645,112
Less accumulated depreciation and amortization 948,925 1,060,253
---------------------------------------------
Property and equipment, net $ $ 2,584,859
2,509,745
=============================================
</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
March 31, 2000.
Intangible assets
Intangible assets consist of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
---------------------------------------------
<S> <C> <C>
Goodwill $ 17,870,417 $ 17,897,707
Covenants not-to-compete 700,000 700,000
Debt issuance costs 292,904 292,904
---------------------------------------------
18,863,321 18,890,611
Less accumulated amortization 3,795,426 4,037,802
---------------------------------------------
Intangible assets, net $ 15,067,895 $ 14,852,809
=============================================
</TABLE>
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 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.
8
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
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:
1999 2000
--------------- ----------------
Basic shares 3,670,054 3,729,779
Dilutive shares 3,670,054 3,729,779
Dilutive net income (loss) per share for the three months ended March 31, 1999
and 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. Dividends on preferred stock, which totaled $154,800 for both the
three months ended March 31, 1999, and 2000, reduced the earnings available to
common stockholders in the computation of earnings per share.
Revenue recognition
- -------------------
Revenue is recorded for commercial and retail floorcovering sales upon
installation.
Advertising
- -----------
All costs related to marketing and advertising the Company's products are
expensed in the period incurred.
Advertising expense, net of cooperative advertising earned, was $286,649 and
$254,482 for the three months ended March 31, 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 $50,000 as of March 31, 2000.
Accounting for Stock-Based Compensation
- ---------------------------------------
The Company measures compensation expense related to the grant of stock options
and stock-based awards to employees and directors in accordance with the
provisions of Accounting Principles Board Opinion (APB) No. 25, under which
compensation expense, if any, is based on the difference between the exercise
price of an option, or the amount paid for an award, and the market price or
fair value of the underlying common stock at the date of the award or at the
measurement date for variable awards. Stock-based compensation arrangements
involving non-employees are accounted for under Statement of Financial
Accounting Standard No. 123, Accounting for Stock-Based Compensation, (SFAS 123)
under which such arrangements are accounted for based on the fair value of the
option or award.
9
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
Note 1. Nature of Business and Significant Accounting Policies (continued)
Fair value of financial instruments
- -----------------------------------
The carrying amounts of financial instruments including cash, accounts
receivable, employee and other receivables, 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
receivable approximate their fair values because the interest rates on these
instruments are at market rates.
Although management expects a substantial portion of amounts due to stockholders
to be paid in the near term, it is not practicable to estimate the fair value of
these amounts, as they have no stated repayment terms. Management does not
believe fair value of such amounts, if determined, would differ materially from
their recorded amounts.
Note 2. Indebtedness to Stockholders
(a) Notes payable - principal stockholder
The Company has unsecured advances totaling $1,500,000 from Branin Investments,
Inc. (Branin), which is 100% owned by the Chairman of the Board and President of
Nations. $500,000 of the advances bear interest at 15% per annum and $1,000,000
of the advances bear interest at 12% per annum, both payable monthly; all
advances are due on demand. However, Branin has agreed to subordinate its rights
to receive principal and interest payments to the obligation owed pursuant to
the Credit Facility with Fleet as described in Note 3. Due to these restrictions
the aggregate advances of $1,500,000 has been classified as long term at
December 31, 1999 and March 31, 2000. Total interest expense of $48,750 relating
to these advances has been reflected in the accompanying consolidated statements
of operations for each of the three months ended March 31, 1999 and 2000.
(b) Advances from principal stockholder
Branin has made certain non-interest bearing advances to the Company. Such
advances are also subject to the subordination and payment limitations described
in (a) above. Activity in the advances for the three months ended March 31, 2000
are as follows:
Balance, December 31, 1999 $ 1,074,934
Interest on notes payable (see (a) above) 48,750
Payments to Branin (63,600)
-----------------
Balance, March 31, 2000 $ 1,060,084
=================
Due to the subordination and payment limitations, $500,000 of the balance has
been classified as long term at December 31, 1999 and March 31, 2000.
10
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
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 (9.0% at March 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. In connection with this
Credit Facility, Branin has agreed that the notes payable to and advances from
it (see Notes 2(a) and (b)) will be subject to certain subordination and payment
limitation requirements.
Amounts outstanding under the Credit Facility are as follows:
December 31, March 31,
1999 2000
--------------- ----------------
Revolving line of credit $ 4,751,951 $ 4,946,992
Term loan $ 3,950,000 $ 3,775,000
At March 31, 2000, the Company had no availability under the term loan and
approximately $53,000 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 $453,781 outstanding at December
31, 1999 and March 31, 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
$207,363 outstanding at December 31, 1999 and March 31, 2000, respectively. The
notes bear interest at an approximate average of 12.9% and mature between
September 2000 and December 2003.
The Company's business plan contemplates growth through acquisitions. To
accomplish this goal, the Company obtained from Barbican Capital Partners, LLC
(Barbican) a commitment, subject to the completion of the lender's due diligence
and the preparation of a definitive agreement, to include still to be agreed to
financial covenants, for a $32,000,000 credit facility that includes a
$12,000,000 senior loan and a $20,000,000 mezzanine loan. The senior loan
includes a term loan not to exceed $4,000,000, with the balance of the
$12,000,000 to be structured as a revolving line of credit. The senior loan will
bear interest at LIBOR plus 4.5%. The agreement would require monthly principal
payments of approximately $65,000 on the term note. The mezzanine loan is
intended to be available to the Company to acquire target companies over the 18
month period commencing with the first closing under the facility. The mezzanine
loan will have an effective interest rate of 25% per annum, inclusive of fees
paid and require annual mandatory interest payments equal to the greater of 12%
per annum or the base rate plus 2%. In addition, the Company would grant to the
lender options to acquire up to 15% of the outstanding shares of the Company's
common stock at 110% of the fair market value of the common stock on the date
the options are granted. The Company will have an option to repurchase those
options. If the options are repurchased, the Company would then be required to
pay additional interest beginning at the date of the option repurchase, equal to
10% per annum on the outstanding amount of the mezzanine loan. The credit
facility would be for a five-year term, with options to extend the term for 2
additional one-year terms. The credit facility would be secured by substantially
all of the Company's assets. The credit facility would contain customary
representations, warranties, and events of default and remedies. The credit
facility also would contain provisions that excess cash flow over certain
defined levels will be used to accelerate payments of principal under the credit
facility. The commitment expires on May 31, 2000 and although the arrangement is
not expected to close before such date, the Company expects to obtain an
extension allowing the Company to close before the commitment expires.
The Company would use the borrowings available under the proposed credit
facility with Barbican to repay the indebtedness under the Fleet Credit Facility
and to make additional acquisitions over the next 2 years. If the Company were
to so use the borrowings from Barbican, or were to obtain and so use other
alternative financing, certain unamortized debt acquisition costs classified as
intangible assets would be charged to expense. Such unamortized debt acquisition
costs totaled $163,768 at March 31, 2000.
11
<PAGE>
NATIONS FLOORING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
Note 4. Acquisitions
Kemper
- ------
As of the close of business on June 30, 1999, CBI entered into an Asset Purchase
Agreement with DuPont Flooring Systems, Inc. (DuPont) (a wholly owned subsidiary
of E.I. DuPont De Nemours and Company) pursuant to which CBI acquired certain
assets of DuPont (the "Assets") for an aggregate purchase price of $1,800,000
plus the assumption of certain liabilities. The source of such funds was the
working capital of CBI, including funds borrowed pursuant to Credit Facility
with Fleet Capital Corporation.
The Assets purchased by CBI under the Agreement consist of all of the properties
and assets previously used by DuPont in the business of retailing, distributing
and installation of residential floor covering products and flooring systems
under the "Kemper" name in the greater Washington D.C. area.
The 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 three months ended March 31, 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 three months
ended March 31, 1999. Both balances have been eliminated in recording Nations'
acquisition of Realty.
Pro Forma Information
- ---------------------
The following pro forma information indicates what the Company's results of
operations for the quarter ended March 31, 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:
March 31, 1999
-------------------
Revenues $ 13,664,139
Net loss applicable to common stockholders $ (11,204)
Basic and dilutive net income (loss) per share $ 0.00
12
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Report on Form 10-Q contains forward-looking statements, which
include risks and uncertainties. The Company's actual operations may differ
significantly from those discussed in the forward-looking statements. Factors
that might cause such a difference include, but are not limited to, leverage,
capital requirements, dependence on manufacturers and suppliers, relationships
with customers, dependence on key operating personnel, uncertainties related to
the Company's growth strategies and those discussed below.
The following discussion of the financial condition and results of
operations of the Company relates to the three months ended March 31, 1999 and
2000 and should be read in conjunction with the financial statements and notes
thereto included elsewhere in this Report. The discussion of results includes
discussions regarding EBITDA.
EBITDA is used by management as a measure of performance and is defined
as operating income 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.
Results of Operations
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 2000.
Total revenues increased by $2,281,197 from $11,998,494 for the three
months ended March 31, 1999 to $14,279,691 for the three months ended March 31,
2000, representing an increase of 19.0%. The components of this increase are as
follows:
Residential Contract $ 1,906,080
Residential Replacement 649,839
Commercial (301,952)
Other 27,230
-------------------
$ 2,281,197
===================
The Company acquired a floorcovering operation in Washington, DC in
July 1999. This operation accounted for $1,773,155 of the total increase in
sales, including residential contract sales of $1,088,806 and residential
replacement sales of $684,349. The remaining increase of $508,042 represents
higher sales volume at the Company's other residential contract locations
partially offset by a decrease in commercial sales. Commercial sales declined
partially due to the April 1999 closure of the Company's Phoenix operation.
Prices for the Company's products were not significantly changed.
Gross profit increased by $263,699 from $3,100,549 for the three months
ended March 31, 1999 to $3,364,248 for the three months ended March 31, 2000,
representing an increase of 8.5%. Although gross profit dollars increased (due
to increased sales), the Company's gross profit percentage decreased from 25.8%
in 1999 to 23.6% in 2000. Four factors contributed to the decline in the gross
profit percentage. First, residential contract sales for the three months ended
March 31, 2000 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 orders written prior to that
date. Effective January 1, 2000, the Company took steps to pass on some or the
entire price increases to its customers by raising the prices it charges to the
homebuyers in the residential contract design center. Due to the significant lag
time of approximately 90 days between the time an order is written and when it
is installed, the effects of those efforts will not be recognized until the
second quarter of 2000. Third, for the first time in the quarter ended March 31,
2000, a builder who is material to the Company's sales began to demand a
participation in the profit the Company earns on homeowner purchases of upgraded
products. Finally, 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
13
<PAGE>
last two factors will have on future trends in gross profit percentages.
Selling, general and administrative expenses increased by $583,250 from
$2,513,514 for the three months ended March 31, 1999 to $3,096,764 for the three
months ended March 31, 2000. During the first quarter of 2000, the Company
started work on an operation in Myrtle Beach, S.C. which is expected to be open
in late May 2000. The inclusion of the Washington, DC and Myrtle Beach
operations accounted for $455,207 of this increase. The remaining increase of
$128,043 is due to increases required in general administrative expenses to
accommodate the increased volume. This $128,043 increase was comprised primarily
of approximate increases in salaries and benefits of $91,000, rent of $35,000,
insurance of $26,000 and professional fees of $57,000 partially offset by
approximate decreases in office expenses of $33,000 and advertising of $45,000.
As a percentage of sales, selling, general and administrative expenses increased
from 20.9% in 1999 to 21.7% in 2000.
Amortization and depreciation expense increased from $268,232 in 1999
to $354,919 in 2000, due to increased amortization and depreciation expense
relating to the Washington, DC operation.
As a result of the above changes operating income (loss) changed by
$406,238 from income of $318,803 for the three months ended March 31, 1999 to a
loss of $87,435 for the three months ended March 31, 2000. Interest expense
increased by $20,912 from $242,075 for the three months ended March 31, 1999 to
$262,987 for the three months ended March 31, 2000. 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. Income
taxes (benefit) changed by $152,000 from an expense of $34,000 in 1999 to a
benefit of $118,000 in 2000 due to the decrease in income before income taxes.
Net income (loss) changed by $274,683 from income of $44,084 for the three
months ended March 31, 1999 to a loss of $230,599 for the three months ended
March 31, 2000.
EBITDA decreased by $319,551 from $587,035 for the three months ended
March 31, 1999 to $267,484 for the three months ended March 31, 2000. This
decrease in EBITDA was due primarily to the increase in selling, general and
administrative expenses incurred to support the higher sales volume combined
with the decrease in gross profit previously discussed.
Liquidity and Capital Resources
Cash provided by operating activities was $673,927 and $468,954 for the
three months ended March 31, 1999 and 2000 respectively. In the three months
ended March 31, 2000 operations provided positive cash flows despite the net
loss due to the inclusion of non-cash charges in net income and certain
significant changes in working capital items. The changes in the working capital
resulted in a working capital deficit of $3,502,612 at March 31, 2000 as
compared to a working capital deficit of $3,098,709 at December 31, 1999.
Included in such deficit is $5,646,992, 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 $242,376 and depreciation of $112,543. Additionally, cash was
provided by decreases in accounts receivable of $177,288 and inventory of
$231,975, increases in accounts payable of $450,997, accrued expenses of $95,788
and customer deposits of $9,422. The declines in accounts receivable and
inventory from December 31, 1999, reflect the decline in sales between the
quarter ended March 31, 2000 and the quarter ended December 31, 1999. The
increase in accounts payable reflects the use of trade credit to partially
finance the net loss for the quarter ended March 31, 2000. These sources of cash
from operations were partially offset by the use of cash to reduce the year end
tax liability of $391,378 and the amount owed to the Company's principal
stockholder of $14,850 and the increase in prepaid expenses and other of
$176,893 due primarily to a deposit made against fees owed to Barbican (see
below) and to reflect the tax benefit of $127,125.
For 1999, net income included non-cash charges of amortization of
$215,232 and depreciation of $53,000. Additionally, cash was provided by
increases in accounts payable of $485,469, accrued expenses of $51,479 and
customer deposits of $129,016. These sources of cash from operations were
partially offset by the use of cash to reduce the amount owed to the Company's
principal stockholder and the increase in accounts receivable and inventory to
reflect increased operations in the first quarter of 1999.
During the three months ended March 31, 1999 and 2000, cash used in
investing activities was $26,860 and $188,036, respectively, used primarily to
purchase equipment and leasehold improvements and pay acquisition cost
expenditures. Cash used in financing activities during such periods was $588,721
and $159,146, respectively, used primarily to make payments on the Company's
credit facilities and to pay the dividends on the Company's preferred
14
<PAGE>
stock.
The Company has previously received advances from Branin Investments,
Inc. ("Branin"), which is 100% owned by the Chairman of the Board and President
of Nations, totaling $2,560,084 at March 31, 2000 (see Notes 2(a) and 2(b) of
Notes to Consolidated Financial Statements). As of April 30, 2000, the Company
was indebted to Branin for $2,560,084. Total interest expense of $48,750
relating to these advances has been reflected in the accompanying consolidated
statement of operations for each of the three months ended March 31, 1999 and
2000.
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 (9.0% at April 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. In
connection with this Credit Facility, Branin agreed that the notes payable to
and advances from it (see Notes 2(a) and (b) of Notes to the Consolidated
Financial Statements) are subject to certain subordination and payment
limitation requirements.
Amounts outstanding under the Credit Facility are as follows:
December 31, March 31,
1999 2000
--------------- ----------------
Revolving line of credit $ 4,751,951 $ 4,946,992
Term loan $ 3,950,000 $ 3,775,000
At March 31, 2000, the Company had no availability under the term loan
and approximately $53,000 available under the revolving line of credit. The
Company anticipates the credit facility it is negotiating with Barbican Capital
Partners, LLC ("Barbican") as described below, will provide additional short
term credit for its working capital needs. However there can be no assurance
that the Company will complete such refinancing.
The Company has a mortgage note payable with a financial institution
secured by the Company's land and building of $460,540 and $453,781 at December
31, 1999 and March 31, 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 $207,363 outstanding at December 31, 1999 and March 31, 2000, respectively.
The notes bear interest at an approximate average of 12.9% and mature between
September 2000, and December 2003.
The Company's business plan contemplates growth through acquisitions.
To accomplish this goal, the Company obtained from Barbican a commitment,
subject to the completion of the lender's due diligence and the preparation of a
definitive agreement, to include still to be agreed to financial covenants, for
a $32,000,000 credit facility that includes a $12,000,000 senior loan and a
$20,000,000 mezzanine loan. The senior loan includes a term loan not to exceed
$4,000,000, with the balance of the $12,000,000 to be structured as a revolving
line of credit. The senior loan will bear interest at LIBOR plus 4.5%. The
agreement would require monthly principal payments of approximately $65,000 on
the term note. The mezzanine loan is intended to be available to the Company to
acquire target companies over the 18 month period commencing with the first
closing under the facility. The mezzanine loan will have an effective interest
rate of 25% per annum, inclusive of fees paid and require annual mandatory
interest payments equal to the greater of 12% per annum or the base rate plus
2%. In addition, the Company would grant to the lender options to acquire up to
15% of the outstanding shares of the Company's common stock at 110% of the fair
market value of the common stock on the date the options are granted. The
Company will have an option to repurchase those options. If the options are
repurchased, the Company would then be required to pay additional interest
beginning at the date of the option repurchase, equal to 10% per annum on the
outstanding amount of the mezzanine loan. The credit facility would be for a
five-year term, with options to extend the term for 2 additional one-year terms.
The credit facility would be secured by substantially all of the Company's
assets. The credit facility would contain customary representations, warranties,
and events of default and remedies. The credit facility also would contain
provisions that excess cash flow over certain defined levels will be used to
accelerate payments of principal under the credit facility. The commitment
expires on May 31, 2000 and although the arrangement is not expected to close
before such date, the Company expects to obtain an extension allowing the
Company to close before the
15
<PAGE>
commitment expires.
The Company would use the borrowings available under the proposed
credit facility with Barbican to repay the indebtedness under the Fleet Credit
Facility and to make additional acquisitions over the next 2 years. If the
Company were to so use the borrowings from Barbican, or were to obtain and so
use other alternative financing, certain unamortized debt acquisition costs
classified as intangible assets would be charged to expense. Such unamortized
debt acquisition costs totaled $163,768 at March 31, 2000.
The Company opened several new locations in Las Vegas during 1999. 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.
Currently, the Company has letters of intent to purchase the operations
of companies located in Charleston and Hilton Head, South Carolina. The purchase
price for the Charleston and Hilton Head operations are estimated to be $5.0
million and $4.4 million, respectively. Both the Charleston and the Hilton Head
operations are located in high growth areas and are the dominant floorcovering
provider in their respective markets. Each company has approximately $9 million
in sales from its residential contract, residential replacement and commercial
markets. The Company anticipates financing 75% of these acquisitions with the
proceeds of the proposed new financing arrangement with Barbican with the
remaining 25% held by the sellers. The Company anticipates completing these
acquisitions during the second quarter of 2000. However, there can be no
assurance whether the Company will be able to complete these transactions or the
timing thereof.
The Company believes that its cash flow from operations and any
alternative financing available will be adequate to fund existing operations for
2000. Although planned 2000 operations are not projected to eliminate or reduce
the Company's working capital deficit which existed at March 31, 2000, the
Company believes that the Fleet Credit Facility or its replacement will allow it
to operate with a working capital deficit until such time as operations will
eliminate it. However, 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.
As a result, the Company has been pursuing the credit facility from Barbican
described above, as well as other sources of debt and equity capital. However,
there can be no assurance that any of these efforts will be successful. The
failure to obtain these or alternative capital resources would adversely affect
the Company's pursuit of its growth strategies.
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 March
31, 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 $87,000 per year.
16
<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. 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 case is in the pre-discovery
preliminary 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 March 31, 2000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
---------
Financial Data Schedule
(b) Reports on Form 8-K.
-------------------
None
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant had duly caused this report to be signed by the undersigned,
thereunto duly authorized.
May 22, 2000 /s/ Philip A. Herman
-----------------------------------------------------
Philip A. Herman
Chairman of the Board, Chief Executive Officer and
President
(Principal Executive Officer)
May 22, 2000 /s/ William V. Poccia
-----------------------------------------------------
William V. Poccia
Executive Vice President of Finance and Secretary
(Principal Financial and Accounting Officer)
18
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 449,934
<SECURITIES> 0
<RECEIVABLES> 5,928,193
<ALLOWANCES> 434,000
<INVENTORY> 2,009,478
<CURRENT-ASSETS> 8,953,433
<PP&E> 3,645,112
<DEPRECIATION> 1,060,253
<TOTAL-ASSETS> 26,391,101
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<BONDS> 3,627,144
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<SALES> 14,279,691
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<CGS> 10,915,443
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<INCOME-TAX> (118,000)
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