-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BF6TE5JNMNsxP41Wl98mhcsnOvUAdfGXqcxYND0P/sFhJJcZWwkDqQSyAvt2THu/ N7CQK5WEtt225iZ2OoNVyw== 0000889812-00-001482.txt : 20000331 0000889812-00-001482.hdr.sgml : 20000331 ACCESSION NUMBER: 0000889812-00-001482 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONS FLOORING INC CENTRAL INDEX KEY: 0000853271 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-HOME FURNITURE, FURNISHINGS & EQUIPMENT STORES [5700] IRS NUMBER: 112925673 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-26664 FILM NUMBER: 588001 BUSINESS ADDRESS: STREET 1: 100 MAIDEN LANE 17TH FLOOR STREET 2: C/O BRANIN INVESTMENTS, INC CITY: NEW YORK STATE: NY ZIP: 10038 BUSINESS PHONE: 2128988888 MAIL ADDRESS: STREET 1: 100 MAIDEN LANE 17TH FLOOR STREET 2: C/O BRAIN INVESTMENTS CITY: NEW YORK STATE: NY ZIP: 10038 FORMER COMPANY: FORMER CONFORMED NAME: RAGAR CORP DATE OF NAME CHANGE: 19920703 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [ X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the fiscal year ended December 31, 1999. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from _________ to _________. Commission File Number: 33-29942-NY ------------------------ NATIONS FLOORING, INC. [Exact name of registrant as specified in its charter] Delaware 2836, 2835 11-2925673 (State or Other (Primary Standard (IRS Employer Jurisdiction Industrial Classification Identification Number Of Incorporation or Code Number) Organization) 100 Maiden Lane New York, New York 10038 (Address of principal (Zip Code) executive offices) Registrant's telephone number, including area code: (212) 898-8888 ------------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Name of Each Exchange on Title of each Class Which Registered ------------------- ---------------- None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, $0.001 par value (Title of each class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past (90) days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K [X] As of March 15, 2000, the aggregate market value of the voting stock held by non-affiliates (1,891,417 shares) of the registrant was $7,565,668 (based on the last such date that quotes were available on July 7, 1997, of $4.00 per share). As of March 15, 2000, there were 3,729,779 shares of Common Stock, $0.001 par value per share, outstanding. DOCUMENTS INCORPORATED BY REFERENCE None This Annual Report on Form 10-K contains forward-looking statements which include risks and uncertainties. The Company's actual operations may differ significantly from those discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, leverage, capital requirements, dependence on manufacturers and suppliers, relationships with customers, dependence on key operating personnel, uncertainties related to he Company's growth strategies and those discussed in Item 7- Management's Discussion and Analysis of Financial Condition and Results of Operations and Item 13-Certain Relationships and Related Transactions. Part I. Item 1. Business The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information (including the Consolidated Financial Statements and the Notes thereto) appearing elsewhere in this report. References to the Company herein shall mean the Company, including the operations of Nations Flooring, Inc. and its consolidated subsidiary, except to the extent that the context requires otherwise. The Company Nations Flooring, Inc. (the "Company" or "Nations") is engaged in the business of selling floorcoverings, window treatments and certain related products, primarily for the residential housing market. The Company subcontracts the installation of its products with independent contractors. The practice of subcontracting installation is typical within the industry. The Company had sales of $40.8 million in 1997, $45.0 million in 1998 and $58.1 million in 1999. Currently, the Company is engaged in business in Las Vegas, Nevada (where its sales have made it the largest provider of floorcoverings), St. George, Utah, Boise, Idaho and metropolitan Washington D.C. The Company believes that its new home floorcovering sales represent approximately 43.5%, 35.0% and 34.6% of the floorcovering sold for new homes in the Las Vegas market in 1997, 1998 and 1999, respectively, based on market information compiled by Home Builders Research, Inc. The Company sells approximately 59.7% of its products through its Residential Contract Division, approximately 28.7% of its products through its Residential Replacement Division, approximately 6.2% through its Commercial Division and approximately 5.4% in other areas. Residential Contract Division sales are effected primarily to or through new homebuilders who offer purchasers a wide selection of basic grade floorcoverings as part of the unit cost. Customers then visit the Company's new home design center and, with the assistance of one of the Company's design consultants, choose from the basic floorcoverings offered, or often from possible upgrades on floorcoverings, in addition to purchasing wall coverings, window treatments and related products. The Company sells to the commercial market including multi-family, office, retail store and small hotel projects through its Commercial Division. Sales to the residential replacement market represent the replacement of floorcoverings. The significance of sales to this market increased in 1999 as the result of the opening of new retail showrooms in Las Vegas and the Kemper acquisition, and the Company hopes to continue to expand its sales to this market, and broaden its product offerings, as the result of these and additional new showrooms and through other strategic acquisitions. Organizational History The Company was organized under the laws of the State of Delaware and operates through its wholly owned subsidiary, Carpet Barn, Inc. ("CBI"). Industry Overview The floorcovering industry in the United States (which includes fixed and non-fixed carpeting and natural stone, ceramic tile, vinyl, wood and laminate flooring) is estimated to have steadily grown to approximately $27.5 billion in 1998. Despite this growth in size, the industry has remained fragmented. The Company believes that no single floorcovering retailer, including national and large retailers such as Home Depot and Carpet Max, accounts for more than ten percent of the total market. The Company believes that while chains and mass merchandisers do not dominate the floorcovering industry, such companies do influence pricing, product selection and service innovation and that small independent floorcovering retailers face competitive disadvantages resulting from limited purchasing power, ineffective inventory control and inadequate resources for sales, marketing and store management. 2 The carpet industry's two primary markets are residential (the market primarily served by the Company) and commercial. A number of factors influence overall sales levels in the carpet industry, including consumer spending on durable goods, levels of discretionary spending, interest rates, housing turnover, the condition of the residential construction industry and the economy's overall strength. Strategy The Company's objective is to maintain its position as the leading provider of floorcoverings, window treatments and related products in the Las Vegas builder and retail market and to become the leading provider of floorcoverings, window treatments and related products in selected markets throughout the United States. The Company is also seeking to become a leading provider of floorcoverings in the commercial market in Las Vegas and in other markets. The Company believes that significant opportunities exist for floorcovering retailers that can achieve cost advantages and operating efficiencies through selective acquisitions and internal growth. To take advantage of these opportunities the Company is pursuing a strategy of acquiring existing floorcovering businesses that are dominant competitors in their regions and developing new stores in markets experiencing significant growth in population and homebuilding that do not have a dominant floorcovering retailer. The Company is reviewing various markets throughout the United States to determine their desirability for expansion, and is in the process of negotiating with acquisition candidates in some of those markets. In July 1999, the Company acquired a residential contract and residential replacement business (4 locations with annual sales of approximately $7 million) in the metropolitan Washington DC area. In addition, the Company acquired a small residential replacement business in St. George, Utah in September 1998 and acquired a small residential contract business in Boise, Idaho in November 1998. The Company is also considering internal expansion through the opening of additional stores in other sites in the southwestern United States where the Company believes it can expand its relationships with regional homebuilders which it already services in Las Vegas. However, there can be no assurance as to the viability of this approach. The Company's strategy includes the following: Las Vegas Market Maintain New Home Market Share in Las Vegas; Increase Replacement Sales Penetration. The Company intends to expand upon its existing base of customers by increasing its sales for new home projects with homebuilders. Homebuilders provide the Company's new home design center with the floor plans of all their units. This allows the new home design center to then provide a home buyer with alternatives specifically tailored to the floor plan of the customer's unit, as well as one-stop shopping for home buyers with respect to their floor, wall and window covering needs. The Company's new home design center is a significant element in the Company's plan to enhance service to homebuilders and homebuyers. Based on estimates of the Las Vegas Homebuilder's Association, the total new homes market for carpet in Las Vegas is projected to grow at an annual rate of 5% to 10% over the next 10 years. There can be no assurance that the Las Vegas market will grow as projected or that the Company will be able to increase or maintain its market share. The Company's share of the Las Vegas residential contract market was 43.5% in 1997, 35.0% in 1998 and 34.6% in 1999. These changes resulted both from competition from other floorcovering retailers and the shift to "in-house" floorcovering sourcing and installation by certain Las Vegas area new home builders. To reduce the Company's reliance on business generated by residential contract sales in Las Vegas, the Company anticipated the increase in the residential replacement market and opened new retail showrooms in Las Vegas and entered the commercial flooring market in 1997 and acquired operations in Utah and Idaho in 1998 and in Washington DC in July 1999. 3 Continue to Offer Superior Service. The Company believes that the most important factor in its ability to compete is the quality of the customer service it offers. The Company believes that it offers the highest quality customer service in Las Vegas. This service begins with the offering of a full range of floorcovering products and includes a policy, which the Company intends to continue, of next-day installation and guarantee against carpet installation defects for as long as the buyer owns the home (one year on all other products). The Company also inspects all floorcovering installations in new homes before the customer moves in and has created a customer service department to handle all complaints and installation problems. Management believes these programs have continued to have a positive effect on the Company's reputation with builders and home buyers which enhances the Company's ability to be selected as the floorcovering referral for subsequent new home developments and allow the Company to gain customers for life. The Company also intends to continue to offer what it believes is quality technical service and assistance to its customers in both the new home and replacement sales markets. Employees of the Company assist, as needed, in all phases of customers' projects, from conceptualization, design and product selection to actual installation. In addition, the Company's design center is staffed with specially trained design consultants that are highly knowledgeable regarding the broad range of decorating possibilities provided by the Company's products. The Company intends to continue to hire salespersons with experience in floorcovering or related trades, and to continue to train such salespersons with respect to its products and services. The Company believes that such programs will have a positive effect on results of operations, although there can be no assurance of this. Competitive Prices. A second factor affecting the Company's ability to compete is the pricing of its products. Because of the volume of its purchases, the Company receives what it believes to be favorable pricing from its suppliers, including payment discounts from most suppliers and cooperative marketing contributions from others, including DuPont, Monsanto and Allied. The Company is able to pass these savings along to customers and thus generally is able to offer the lowest prices in the region while maintaining a high profit margin. The Company intends to continue to offer low prices and also to continue its policy of offering to beat any competitor's price. Inventory Practices. In the Las Vegas market, the Company has been able to maintain low warehousing costs by stocking small amounts of inventory while at the same time providing its customers with next-day installation on purchases in the Las Vegas market. The ability to maintain low warehousing costs is an element in the Company's ability to offer what it believes are the lowest prices in the region. These practices are dependent on the Company's ability to schedule next-day "cut and drop" product deliveries from its suppliers. To date the Company's suppliers have been able to satisfy its Las Vegas delivery requirements with overnight shipments to the Company from distribution centers maintained by such suppliers primarily in California, and the Company believes that because of the volume of its purchases, it can continue to operate in Las Vegas and certain other markets on this basis. However, there can be no assurance in this regard, and any significant failure of suppliers to make timely deliveries would adversely affect the Company's reputation among customers. In other markets, the Company schedules its installations upon receipt of the product from the supplier, therefore reducing the amount of inventory on hand. Addition of New Products; Showrooms. The Company also plans to attract and maintain customers by adding complementary products to its current offerings. The Company targeted wall and window coverings and countertops and wall tile as its first significant product extensions. These products accounted for approximately $3.1 million in sales for 1999 as compared to approximately $2.7 million in sales for 1998 and $1.7 million in sales in 1997. The Company is anticipating further product expansion through the addition of area rugs and through the addition of cleaning and maintenance programs, as well as the expansion of sales of hard floorcoverings such as wood and tile and natural stone for both flooring, countertops and wall tile. These new products will be promoted by sales personnel at the Company's stores and through the Company's advertising campaigns. The Company also seeks to increase market share and profit margins through its operation of "showrooms" in its residential replacement facilities. The showrooms provide customers the opportunity to consult with trained personnel concerning the multitude of design possibilities utilizing the full range of products offered by the Company. The Company operates a design center in the Las Vegas area for new homebuyers who are selecting floorcoverings and other products to be installed in their new homes. This design center was opened in 1996 in response to requests by builders who are currently customers as well as other major builders who have expressed a desire to use the Company, should it open such a center. There can be no assurance that these showrooms will have a positive impact on the Company's operations. 4 Other Markets Pursuit of Selective Acquisitions and Development of New Stores. The Company acquired a residential contract and residential replacement business in the Washington, DC area in July 1999 to penetrate the homebuilder, retail and commercial segments in the metropolitan Washington DC market. In 1998, the Company acquired a small residential replacement business to penetrate the retail and commercial segments and to service various homebuilders in St. George, Utah and a small residential contract business in Boise, Idaho. The Company believes that, because of the fragmented nature of the floorcovering industry, significant consolidation opportunities exist and that the Company is well positioned to achieve financial and operational efficiencies through selective acquisitions due to favorable working relationships with its suppliers and major customers. The Company believes that any such acquisitions will enable it to increase its sales while decreasing its general and administrative costs as a percentage of such sales due to the creation of substantial economies of scale. The Company intends to pursue acquisitions of businesses that provide the same products and services as, or those complementary to, the Company's existing business. The Company has identified a number of markets that it intends to explore entering over the next several years. Currently, the Company has signed letters of intent to purchase the operations of companies located in Charleston and Hilton Head, South Carolina. Each company has approximately $8 million in sales from its residential contract, residential replacement and commercial markets. The purchase price for the Charleston and Hilton Head operations are estimated at $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. The Company anticipates financing these purchases with a portion of the proceeds of the proposed new financing agreement with Barbican Capital Partners, LLC (see Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations) and anticipates completing these acquisitions during the second quarter of 2000. The Company has also selectively targeted certain markets throughout the United States where there is no dominant competitor for internal expansion through the development of new stores. Targeted markets are, like Las Vegas, experiencing high growth in population and home building. The Company believes that it can duplicate its successful concepts in these high growth markets by strengthening its relationships with its existing builders who are active in these markets, and that it can compete in these markets through its demonstrated ability to compete on service and price. Additionally, internal expansion which increases the volume of the Company's purchases, and as a result its ability to obtain favorable prices and terms from floorcovering suppliers that also supply operations that the Company has acquired, can allow the Company to also benefit those acquired operations through reduced product costs. However, there can be no assurance that such expansion will be effected or, if effected that any new facilities will be operated profitably. The Company contemplates that any residential replacement facilities it opens will have a dedicated showroom area where customers can consult with trained personnel concerning the multitude of design possibilities utilizing the full range of products offered by the Company. The Company believes that the clean, relaxed environment of these new facilities will increase the average total sale price and gross margin for its sales, although there can be no assurance in this regard. Expansion through the opening of new facilities in new markets requires the Company to incur costs to lease or build and equip a facility. However, in some markets the Company has been able to, and believes that in the future may continue to be able to, obtain cooperative funding of such costs from suppliers of the Company's products. Operations Background. The Las Vegas, Nevada (Clark County) market is the location of the Company's most significant operations. This market accounted for approximately 100%, 98.6% and 88.6% of the Company's 1997, 1998 and 1999 sales, respectively. Approximately 70.3%, 63.7% and 53.3% of its Nevada sales in 1997, 1998 and 1999, respectively, were to new homebuyers in the Las Vegas market. According to regional publications, the Las Vegas area is one of the fastest growing in the country,. According to the Las Vegas Review Journal, during 1999 an average of 5,000 persons relocated to Las Vegas each month, and the Las Vegas (Clark County) population has increased to over 1.2 million. Such statistics illustrate the high numbers of persons arriving in the Las Vegas area and the potential strength of the retail floorcovering market. 5 On July 1, 1999, the Company began operations in the Washington, DC metropolitan area through its acquisition of the Kemper operations. This market accounted for 7.3% of the Company's sales in 1999. Approximately 54.1% of the Kemper sales are to new homebuyers. The remaining sales are replacement sales. The Washington, DC market in which the Company acquired a residential contract and residential replacement business in July 1999 is expected to grow over 7% over the next ten years and was rated as the "Best Place to Live" by Money Magazine in 1998. The Company plans to increase the existing residential contract and residential replacement business by opening a residential contract design center and by redesigning its residential replacement showrooms and opening up to two new residential replacement showrooms during 2000. In addition, the Company believes that adding new flooring products in 2000 such as ceramic tile and marble the Company will increase its sales in this market. The Company began operations in St. George, Utah, and Boise, Idaho during 1998. These markets accounted for 0.5% and 3.9% of the Company's total sales in 1998 and 1999, respectively. St. George, Utah, in which the Company acquired a small residential replacement business in September 1998, is a resort community located in southern Utah, two hours north of Las Vegas. The Company expects to increase the residential replacement business in this market, and expand into the residential contract and commercial markets during 2000. Boise, Idaho, in which the Company acquired a small residential contract business in November 1998, is a fast growing community, the state capital and is located near several resort towns. The city has been experiencing an estimated annual population growth of approximately 4.1%, and is home to such companies as Micron and Hewlett-Packard. Other major industries include manufacturing, service, government and high tech. The Company expects to increase the existing residential contract business and to expand into residential replacement and commercial markets during 2000. Divisions. The Company primarily operates through three divisions, the Residential Contract Division, the Residential Replacement Division and the Commercial Division. Residential Contract Division. The Company's Residential Contract Division is responsible for installation of floorcovering and related products in newly built homes. Salespersons in this division deal with both homebuilders and buyers. In servicing the new home market, the Company generally secures contracts from builders to provide floorcovering in their new homes. In most cases, when the builder sells a new home, the builder will direct the home buyer to the Company, which allows the buyer to choose the floorcovering represented by a standard allowance provided from the builder to the home buyer or to upgrade from the standard selection by paying a higher price. The Company has found that most homebuyers choose an upgraded floorcovering selection. The Company receives payment for its carpeting in new homes in one of two ways. In most cases, the buyer directly pays the upgraded portion of a carpet sale by generally paying the full upgrade amount with the order. In other cases, the Company bills the upgraded portion of the job to the builder, who then passes on the additional cost to the buyer as part of the total price of the home; this method may allow buyers to finance their flooring upgrades through their mortgage, with little incremental effect on monthly payments. The builders' standard allowance and any billable upgrades is billed to the builder, payable within thirty days of installation, and most of the Company's accounts receivable result from residential contract billings to homebuilders. Through its Residential Contract Division, the Company has relationships with most of the larger home builders in the Clark County area, with its five largest customers accounting for $15.1 million, $16.5 million and $18.1 million in sales in 1997, 1998 and 1999, respectively. During the past ten years, the Residential Contract Division has accounted for Company sales ranging from a low of $21.8 million in 1990 (56% of total Company sales) to a high of $34.7 million in 1999 (60% of total Company sales). The Company's new homes sales in Clark County as a percentage of its total sales was 70%, 63%, and 53% in 1997, 1998 and 1999, respectively. Because the Residential Contract Division's sales are dependent on sales of new homes, such sales are affected by population growth, mortgage interest rates, and the other factors that generally affect the level of new home construction and sales. However, because the Company also services the residential replacement market, the adverse effects on the Company's sales by downturns in the building cycle may be moderated by offsetting trends in the redecoration of existing homes. 6 Residential Replacement Division. The Residential Replacement Division is responsible for providing individual consumers who have existing homes with new or replacement floorcoverings. The Company is one of the three largest residential replacement retailers in the Las Vegas area, chiefly because of its large selection, low prices, quick installation time and name recognition. Customers contemplating purchasing flooring or window treatments will visit one of the Company's retail showrooms strategically placed throughout Las Vegas. Highly trained retail salespersons will then go to the customer's home to verify measurements and confirm product selections. Due to the Company's "cut and drop" program with its suppliers, installation is available at the customer's convenience. Generally, the Company requires that Residential Replacement Division buyers provide a deposit by cash, check or credit card when they place an order, and that they pay the balance upon installation. For customers who wish to finance their purchases, the Company refers such customers to a consumer finance company, which issues a payment directly to the Company upon completion of installation. The Company's sales in the residential replacement market were $8,883,495, $11,108,620 and $16,656,866 in 1997, 1998 and 1999, respectively. The increase in 1999 residential replacement sales occurred as a result of a $2,955,416 increase in sales in Nevada, an increase of $651,639 in sales in Utah and the Kemper acquisition which accounted for residential replacement sales of $1,941,191. The Company believes that its retail showroom approach is the primary reason for the increase in the Nevada and Utah sales by its Residential Replacement Division. Commercial Division. The Commercial Division is responsible for providing floorcovering and related products to the multi-family, office, retail store and small hotel markets. Highly trained commercial salespersons call on potential commercial customers including general contractors, developers and real estate brokers to bid projects. Commercial projects have a duration ranging from one week to several months. Short duration contracts are billed upon completion and others are billed as they progress; all billings are payable on a net thirty-day basis. The Company's sales in the commercial market were $1,557,670, $2,793,938 and $3,614,414 in 1997, 1998 and 1999, respectively. The Company believes that it can maintain or increase its sales in the Commercial Division during 2000, however there can be no assurance of this. Other. The Company sells other products and services including window treatments, countertop and wall tile and floor cleaning services. These products and services are distributed much the same as other Company products. The Company's sales in the other areas were $1,687,181, $2,724,205 and $3,136,369 in 1997, 1998 and 1999, respectively. Operating Business Segments. 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. Customers The Company has among its customers most of the larger home builders in Clark County, Nevada, including Kaufman & Broad ("K&B") and American West Homes ("AWH"). The Company has developed its relationships with such builders over the past 28 years. In 1997, 1998 and 1999, five customers accounted for approximately 37%, 37%, and 31% of the Company's net sales, respectively. In 1997, 1998 and 1999, K&B accounted for 15.2%, 15.3% and 14.5% of net sales, respectively. In 1997, 1998 and 1999, AWH accounted for 9.7%, 9.5%, and 5.8% of net sales, respectively. Suppliers The Company currently purchases its carpeting from suppliers outside Nevada including suppliers located in Georgia and California. The Company generally pays for its purchases within three weeks of delivery, allowing the Company to procure substantial discounts from its suppliers. The Company's six largest suppliers, which include Shaw Industries, Mohawk Industries and Beaulieu United accounted for 77.4%, 80.1% and 74.2% of its total purchases in 1997, 1998 and 1999, respectively. The Company believes that one of its competitive advantages is its strong relationship with such suppliers. While the Company continues to have good relations with its suppliers, management believes that the Company could find alternative sources of supply should any of the Company's major suppliers cease doing business with it. 7 Marketing, Advertising and Merchandising The Company's advertising program includes television and radio commercials and print advertising in local daily newspapers. Expenditures for advertising and promotion, net of cooperative advertising contributions, were approximately $586,000, $785,000 and $1,080,000 (representing 1.4%, 1.7%, and 1.9% of net sales) in 1997, 1998 and 1999, respectively. In its advertising, the Company features its large selection, low prices and also features its guarantee against carpet installation defects for as long as the buyer owns the home (one year on all other products). The Company also receives cooperative advertising contributions (up to 50% of the cost of qualifying advertisements depending on the amount of the relevant products sold), from certain mills and yarn companies by including in its advertising references to brand name yarns (such as DuPont, Monsanto and Allied) or floorcoverings (such as Congoleum). Training The Company strives to develop the technical and sales skills of its store personnel to ensure that customers consistently receive knowledgeable and courteous assistance. The Company's training programs are oriented toward emphasizing the importance of customer service, improving selling skills and creating realistic expectations. The Company provides training for its entry-level personnel through an in-house training program, which combines on-the-job training with formal presentations by the Company's suppliers concerning their products. The suppliers' contributions in this regard evidence their commitment to the sales and service efforts of the Company. In addition, ongoing instruction is given to all sales and customer service personnel. Competition The floorcovering industry is highly competitive and fragmented. According to an industry publication, the nations ten largest floorcovering retailers in terms of sales volume accounted for approximately 30% of all floorcovering sales in the United States in 1998, although none of such retailers dominated the market. In 1999, Clark County, Nevada had approximately 100 outlets through which carpet was sold. Companies in the floorcovering industry compete mainly through their ability to provide service and selection at reasonable prices. The Company competes with general merchandise and discount stores, home improvement centers and specialty retailers operating on a local, regional and national basis. The Company believes that its chief competitors are local and regional specialty chains as well as homebuilders' in-house design centers. Competitors in the builder market include Adams Brothers, DuPont Flooring Systems and Bairs Carpet Valley. Competitors in the retail market include Carpet Max, Cloud Carpets and Carpeteria. In addition to the local and regional specialty chains, the Company competes with national and regional home improvement centers (such as Home Depot and Home Base) and national department stores and specialty retailers (such as Sears) which have branches in Las Vegas. Many of such regional and national competitors have substantially greater financial resources than the Company. In addition, expansion by certain regional home improvement center chains has led to increased price competition for certain of the Company's products. While there is intense competition among providers of floorcoverings in the Las Vegas, Nevada market, the Company has successfully competed for customers on the basis of price, reliability and quality of product, breadth of product line, service and the fact that the Company has been in business for 28 years. Employees As of March 15, 2000, the Company employed approximately 210 persons, divided among its accounting, administrative, buying, sales, customer service and warehousing departments. A substantial portion of the compensation of residential replacement sales personnel is commission-based. None of the Company's employees is covered by a collective bargaining agreement. The Company believes that its relationship with its employees is satisfactory. 8 Product Liability and Insurance The sale of the Company's retail products involves some risk of product liability claims. The Company has obtained product liability insurance in the amount of $1.0 million per occurrence with a $2.0 million aggregate limit. The Company has a $4.0 million excess liability umbrella insurance policy. Effective October 1999, the Company obtained directors and officers and employment practices liability insurance in the amount of $3.0 million. There can be no assurance that the coverage limits of the Company's insurance policy and/or any rights of indemnification and contribution that the Company may have will offset potential claims. A successful claim against the Company in excess of insurance coverage and not subject to indemnification could have a material adverse effect on the Company. 9 Item 2. Properties Through March 1999, the Company leased from C.B. Realty of Delaware, Inc. ("Realty") the property at which the Company's original Las Vegas facility is located. The property was leased under a lease, extended through April 1, 2004, having an annual rental of $120,000. The 44,000 square foot property includes a retail and commercial showroom and a warehouse retail outlet. On March 31, 1999, the Company acquired the ownership of Realty, which was owned by certain stockholders of the Company, and as a result thereof acquired ownership of the facility. See Item 13-Certain Relationships and Related Transactions. In August of 1999, the Company moved its administrative offices from the above described location to an office complex at which the Company leases approximately 11,000 square feet at an annual rental of approximately $180,000. The Company also leases additional facilities in Las Vegas, consisting of four retail showrooms, an additional warehouse, and a new home design center, containing a total of approximately 40,000 square feet at an annual rental of approximately $545,000. The Company also leases facilities in the greater Washington, DC metropolitan area, consisting of three retail showrooms and a combination warehouse and administrative offices containing approximately 25,000 square feet at an annual rental of $410,000. In addition, the Company also leases facilities in St. George, Utah and Boise, Idaho containing a total of approximately 15,000 square feet at an annual rent of approximately $85,000. The Company believes that its facilities are adequate for their intended purposes. The Company maintains its principal executive offices within New York, New York at 100 Maiden Lane. Item 3. Legal Proceedings 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. 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. Item 4. Submission of Matters to a Vote of Security Holders None 10 Part II. Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters. The Common Stock has been quoted on the "electronic bulletin board" operated by the NASD under the symbol "CRPT" since May 1997 and, prior to that, under the symbol "RAGC." No reported trading or quotes have been available since July 7, 1997. The last sale price of the Common Stock on July 3, 1997 was $4.00 per share as reported by the Automated Confirmation Transaction Service. As of March 15, 2000, there were approximately 370 record holders of the Common Stock. The Company has and intends to continue making payments of dividends on its preferred stock. In addition, the Company has not and does not intend to declare or pay dividends on its Common Stock for the foreseeable future. 11 Item 6. Summary Financial Information (in thousands, except share and per share data) The summary financial information presented below has been derived from the financial statements of the Company and the Predecessor Business (as defined below). This information should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included elsewhere in this Annual Report on Form 10-K. The results of operations of the Company are not comparable to those of the Predecessor Business, due primarily to the amortization of intangible assets and interest expense on the debt incurred in connection with the Company's 1995 acquisition of the Predecessor Business. In addition, certain information below is not shown for the Predecessor Business where such information would not present a meaningful comparison. See Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operations.
Predecessor Business Nations Flooring, Inc. ----------------------------------------------------------------------------------------- Pro Forma Period For Year Ended Period Ended Ended June 1, December 31, December 31, Year Ended December 31, ------------------------------------------------- 1995 (1) 1995 (2) 1995 (3) 1996 1997 1998 1999 (6) - ---------------------------------------------------------------------------------------------------------------------------- Results of Operations Net sales $ 16,363 $ 23,980 $ 40,343 $ 42,414 $ 40,836 $ 45,000 $ 58,114 Operating income 3,724 2,122 5,375 2,400 1,858 1,785 2,593 Dividends to preferred Stockholders of subsidiary - 203 339 538 559 466 - Amortization of discount on preferred stock of subsidiary - - - - - 1,543 - Net income (loss) 3,737 293 1,663 75 (652) (1,794) 1,029 Pro forma income tax effect (5) 1,271 Pro forma net income after tax (5) 2,466 - ---------------------------------------------------------------------------------------------------------------------------- Earnings per Common Share Income (loss) from continuing Operations Basic (4) $ 0.08 $ 0.46 $ 0.02 $ (0.18) $ (0.52) $ 0.11 Dilutive (4) $ 0.08 $ 0.46 $ 0.02 $ (0.18) $ (0.52) $ 0.10 - ---------------------------------------------------------------------------------------------------------------------------- Assets and Capital Working capital (deficit) $ (3,767) $(10,777) $ (8,062) $ (2,722) $ (3,098) Total assets 23,533 22,383 21,462 22,130 26,589 Long-term debt and capital lease obligations, less current maturities 8,812 111 1,842 4,036 3,801 Related party debt, less current portion - - - 2,500 2,000 Stockholders' equity 3,169 3,416 2,763 6,225 7,889 - ---------------------------------------------------------------------------------------------------------------------------- Other Information EBITDA (7) $ 2,788 $ 3,623 $ 3,066 $ 2,917 $ 3,783 - ----------------------------------------------------------------------------------------------------------------------------
1) Information is presented for the Predecessor Business for the period from January 1, 1995 through June 1, 1995, the date of the acquisition of the Predecessor Business, which was accounted for as a reverse acquisition. 2) Information is presented for the Company for the period from June 2, 1995 through December 31, 1995, subsequent to the acquisition of the Predecessor Business. 3) Pro Forma information for the year ended December 31, 1995 assumed the Company's acquisition of the Predecessor Business had been completed on January 1, 1995. 4) The net income per common share for the Predecessor Business are not presented as they are not comparable to those of the Company. 5) The Predecessor Business was taxed as an S corporation under Subchapter S of the Internal Revenue Code of 1986, as amended, (the "Code") so that in lieu of payment of income taxes at the corporate level the stockholders individually reported their pro rata share of the Predecessor Business' items of income, deduction, loss and credit. Pro forma income tax has been computed at an assumed rate of 34%. 6) Includes the results of operations of the Kemper acquisition from July 1, 1999. See Note 2 of Notes to Consolidated Financial Statements. 7) EBITDA is computed as operating income plus depreciation and amortization. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion of the financial condition and results of operations of the Company relates to the fiscal years ended December 31, 1997, 1998 and 1999 and should be read in conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere in this Annual Report on Form 10-K. All references to full years are to the applicable fiscal year of the Company. 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 Fiscal Years Ended December 31, 1998 and 1999 Total revenues increased by $13,113,394 from $45,000,387 for the year ended December 31, 1998 to $58,113,781 for the year ended December 31, 1999, representing an increase of 29.1%. The components of this increase are as follows: Residential Contract $ 6,332,507 Residential Replacement 5,548,246 Commercial 820,476 Other 412,165 ----------------- $ 13,113,394 ================== In September and November of 1998 and in June 1999 the Company acquired floorcovering operations in Utah, Idaho, and Washington, DC respectively, and in January 1999, the Company opened two additional retail locations in Las Vegas. Those operations accounted for $9,634,022 of the total increase in sales, including residential contract sales of $3,622,326 and residential replacement sales of $6,011,696. The remaining $3,479,372 increase is attributable principally to higher residential contract sales and commercial sales in the Las Vegas market. The Company's existing Las Vegas residential replacement operations incurred small declines in sales, principally as the result of sales diverted from those locations by the Company's new Las Vegas showrooms. Prices for the Company's products were not significantly changed. Gross profit increased by $3,720,670 from $11,093,094 for the year ended December 31, 1998 to $14,813,764 for the year ended December 31, 1999, representing an increase of 33.5%. The Company's gross profit percentage increased from 24.7% in 1998 to 25.5% in 1999 due principally to the Company's debt restructuring completed in May 1998, which provided the Company with greater liquidity and thus allowed it to take advantage of vendor offered early payment discounts. Selling, general and administrative expenses increased by $2,855,518 from $8,175,710 for the year ended December 31, 1998 to $11,031,228 for the year ended December 31, 1999. The inclusion of the Utah, Idaho and Washington, DC operations acquired in 1998 and 1999 and the new retail locations opened in 1999 accounted for $2,363,270 of this increase. The remaining increase of $492,248 is due to increases in general administrative expenses required to accommodate the Company's expanded operations. This $492,248 increase was comprised primarily of approximate increases in salaries of $141,000, supplies of $105,000, travel of $88,000, insurance of $49,000 and bank charges of $29,000. As a percentage of sales, selling, general and administrative expenses increased from 18.2% in 1998 to 19.0% in 1999. Amortization and depreciation expense increased from $1,132,331 in 1998 to $1,189,198 in 1999 primarily as a result of the Company's Kemper acquisition in June 1999. 13 As a result of the above changes operating income increased by $808,285 from $1,785,053 for the year ended December 31, 1998 to $2,593,338 for the year ended December 31, 1999. Other income (expense) changed by $289,392 from expenses of $284,811 for the year ended December 31, 1998 to income of $4,581 for the year ended December 31, 1999, primarily as a result of the effect of the refinancing of the Company's debt in May 1998. Interest expense decreased from $1,165,341 in 1998 to $1,015,447 in 1999. Interest expense was affected by (i) higher average borrowings required to support the increases in the Company's sales, offset by (ii) lower effective interest rates as the result of the Company's May 1998 debt restructuring and (iii) the elimination of $1,000,000 of related party debt, of which $500,000 was extinguished in December 1998 through the issuance of preferred stock and $500,000 was extinguished in March 1999 through the merger with Realty. Income taxes increased from $120,000 in 1998 to $553,000 in 1999 due to the increase in income before income taxes. Net income (loss) changed by $2,823,297 from a net loss of $1,793,825 for the year ended December 31, 1998 to net income of $1,029,472 for the year ended December 31, 1999 due to above changes and to the classification of dividends on preferred stock of $466,000 which prior to the Company's reorganization in November 1998 were recorded as an expense in arriving at net income. After the merger of CBH into the Company those dividends became dividends paid by the parent company, which are charged directly to retained earnings and are accounted for as a deduction from net income (loss) in determining net income (loss) applicable to common stockholders. Included in the net loss for 1998 is a one time charge of $1,542,726 of amortization of the original discount on the preferred stock of CBH resulting from the issuance of Nations' preferred stock for the CBH preferred stock in the November 1998 reorganization (merger of CBH into Nations), and the write off of unamortized debt issuance costs of $232,000 relating to the Company's debt refinance in May 1998 (approximately $1,694,000, net of tax). Excluding these one-time charges, the net income (loss) for the years ended December 31, 1998 and 1999 was approximately $(100,000) and $1,030,000, respectively. EBITDA increased by $865,152 from $2,917,384 for the year ended December 31, 1998 to $3,782,536 for the year ended December 31, 1999. This increase in EBITDA was due primarily to the increases in sales and gross profit previously discussed, offset in part by costs incurred in new locations in Las Vegas, Utah and Myrtle Beach along with other general increases in corporate administrative costs. Fiscal Years Ended December 31, 1997 and 1998 Total revenues increased by $4,164,763 from $40,835,624 for the year ended December 31, 1997 to $45,000,387 for the year ended December 31, 1998, representing an increase of 10.2%. The components of this increase are as follows: Residential Contract $ (333,654) Residential Replacement 2,225,125 Commercial 1,236,268 Other 1,037,024 ----------------- $ 4,164,763 ================== The increases in residential replacement, commercial and other sales result from the Company's efforts, begun in fiscal 1997, to diversify its market and sales. Since 1997, the growth in the Company's residential contract sales has been adversely affected by increased competition, and an increase in "in-house" sourcing and installation by Las Vegas area new home builders. To reduce the Company's reliance on business generated by the residential contract division, the Company opened new retail showrooms and opened a commercial division. These openings contributed directly to the increased sales in these areas. In addition, on September 18, 1998, the Company acquired Merrill's in St. George, Utah and on November 16, 1998, the Company acquired Trinity in Boise, Idaho. These acquisitions include residential contract, residential replacement and commercial operations. Prices for the Company's products were not significantly changed. Gross profit increased by $794,095 from $10,298,999 for the year ended December 31, 1997 to $11,093,094 for the year ended December 31, 1998, representing an increase of 7.7%. The gross profit percentage declined from 25.2% in 1997 to 24.7% in 1998. Liquidity constraints that existed before, and were alleviated by the May 1998 refinancing of the Company's debt (see Note 4 of Notes to Consolidated Financial Statements) prevented the Company from taking advantage, during the first half of fiscal 1998, of early payment discounts offered by vendors, and the absence of these discounts, together with certain price concessions made to maintain or attract residential contract sales and increases in installation costs, were the principal causes of the decline in the gross profit percentage. 14 Selling, general and administrative expenses increased by $942,713 (but remained fairly constant as a percentage of revenues) from $7,232,997 for the year ended December 31, 1997 to $8,175,710 for the year ended December 31, 1998. This increase is due to the approximate increases in: (1) salaries and related payroll taxes of $262,000, due primarily to an increase in the number of employees and increases in pay levels during 1998, (2) rent expense of $199,000, office and supplies expense of $166,000 and auto expense of $13,000 primarily due to the opening of the new retail showrooms and locations in Arizona, Utah and Idaho, (3) advertising of $199,000, (4) service fees of $84,000 relating to the external finance programs offered to customers, (5) bad debt expense of $25,000 and (6) security expenses of $35,000 in the Company's warehouse. These increases were partially offset by the following approximate decreases in: (1) workers compensation of $43,000, which resulted from the Company becoming a member of a self insured group which is set up under the State's supervision, (2) miscellaneous expenses of $40,000, (3) travel of $25,000 and (4) professional expenses of $17,000. Amortization and depreciation expense decreased to $1,132,331 in 1998 from $1,207,883 in 1997. As a result of the above changes operating income decreased by $73,066 from $1,858,119 for the year ended December 31, 1997 to $1,785,053 for the year ended December 31, 1998. Other expense decreased by $353,164 from $637,975 for the year ended December 31, 1997 to $284,811 for the year ended December 31, 1998. The 1998 expense principally represented charges relating to the write off of loan fees due to the May 1998 refinancing of $232,000. The 1997 charges principally represent the write off of offering costs of $468,566, pre-acquisition costs for uncompleted acquisitions of $83,131, lawsuit settlement costs of $14,190 and write off of loan fees of $81,666. Interest expense decreased to $1,165,341 in 1998 from $1,356,248 in 1997, due to reductions in the Company's debt made in part with the proceeds of advances from related parties, offset by the interest expense related to those advances and interest of $224,280 relating to $534,000 of advances from unrelated lenders outstanding from February 1997 to April 1997. Income tax expense (benefit) increased from $(43,000) in 1997 to $120,000 in 1998 due to the increase in income before income taxes. Dividends to preferred stockholders of subsidiary decreased from $559,200 in 1997 to $466,000 in 1998 due to the merger of the Company's CBH subsidiary into Nations in November 1998. As a result of the merger the Company exchanged the preferred stock of CBH for preferred stock of the Company; therefore, the dividends on the preferred stock since the merger were charged directly to retained earnings. Net loss increased by $1,141,521 from $652,304 for the year ended December 31, 1997 to $1,793,825 for the year ended December 31, 1998. Included in the net loss for 1998 is a one time charge of $1,542,726 of amortization of the original discount on the preferred stock of CBH and the write off of unamortized debt issuance costs of $232,000 relating to the Company's debt refinance in May 1998 (approximately $1,694,000, net of tax). Included in the net loss for 1997 are one-time charges relating to write off of deferred offering costs, pre-acquisition costs and loan fees, aggregating $633,363, (approximately $418,000 net of tax). Excluding these one-time charges, the net losses for the years ended December 31, 1997 and 1998 was approximately $234,000 and $100,000, respectively. EBITDA decreased by $148,618 from $3,066,002 for the year ended December 31, 1997 to $2,917,384 for the year ended December 31, 1998. This decrease in EBITDA was primarily due to the costs of opening new locations in Las Vegas and Arizona, partially offset by the increases in sales and gross profit previously discussed. Liquidity and Capital Resources Cash provided by (used in) operating activities was $2,541,577, $(479,016) and $2,462,348 for the years ended December 31, 1997, 1998, and 1999 respectively. In each of 1997, 1998 and 1999 the cash provided by operations differed significantly from net income, due to the inclusion of non-cash charges in net income and certain significant changes in working capital items. The changes in the working capital resulted in a working capital deficit of $3,098,709 at December 31, 1999. Included in such deficit is $5,451,951, the current portion of the amount due to Fleet Capital Corporation ("Fleet") under the credit agreement (the "Credit Agreement") discussed below. The Company's growth and acquisition strategy will require significant additional cash. For fiscal 1999, net income included significant non-cash charges of amortization of $892,289 and depreciation of $296,909. Additionally, cash was provided by increases in accounts payable of $613,348, accrued expenses of $611,842, income taxes payable of $391,378 and customer deposits of $176,441. These sources of cash from operations were partially offset by the increase in accounts receivable and inventory. The increases in accounts payable, accrued expenses, accounts receivable and inventory generally are the result of the expansion of the Company's sales and operations. 15 For fiscal 1998, net income included significant non-cash charges of $1,542,726 for the amortization of the discount relating to CBH's preferred stock, amortization of $909,600, depreciation of $222,731 and the write off of loan fees and other of $291,361. Additionally, cash was provided by increases in accrued expenses of $236,050 and customer deposits of $258,277. These sources of cash from operations were partially offset by the use of cash to decrease accounts payable as the result of and using the liquidity added by the May 1998 refinancing, and the increase in accounts receivable and inventory reflect increased sales in the fourth quarter of 1998. For 1997, the cash provided by operations of $2,541,577 reflects the inclusion in the net loss of significant non-cash charges of $1,000,063 for amortization, $207,820 for depreciation and $468,566 for written-off offering costs and cash inflows provided by increased in accounts payable and advances from principal stockholder of $684,531 and $901,247, respectively. During the years ended December 31, 1997, 1998 and 1999, cash used in investing activities was $319,885, $528,734 and $1,886,574, respectively, used primarily to acquire the net assets of Kemper in 1999, to acquire the net assets of the Company's Utah facility in 1998 and to purchase equipment and leasehold improvements in all three years. Cash provided by (used in) financing activities during such periods was $(2,326,599), $989,710 and $(459,795), respectively. The 1997 financing cash outflows reflected the use of cash to make payments on the Company's credit facilities, partially funded (offset) by advances from both stockholders and unrelated parties. The net financing cash inflows in 1998 were principally the result of additional advances from stockholders or related parties, as the payments required under the Company's credit facility were effectively funded through the Company's May 1998 refinancing. The 1999 net financing cash outflows reflect the funds used to pay the dividends on the Company's preferred stock, partially offset by a net increase in credit facility borrowings. As of the close of business on June 30, 1999, Carpet Barn, Inc. a Delaware corporation ("CBI"), a wholly owned subsidiary of Nations Flooring, Inc. ("Nations"), entered into an Asset Purchase Agreement (the "Kemper Agreement") with DuPont Flooring Systems, Inc. (DuPont) (a wholly owned subsidiary of E.I. DuPont De Nemours and Company) pursuant to which CBI acquired certain assets of DuPont (the "Assets") for an aggregate purchase price of $1,800,000 plus the assumption of certain liabilities. The source of such funds was the working capital of CBI, including primarily funds borrowed pursuant to Credit Facility with Fleet Capital Corporation. The Assets purchased by CBI under the Kemper Agreement consist of all of the properties and assets previously used by DuPont in the business of retailing, distributing and installation of residential floor covering products and flooring systems under the "Kemper" name in the greater Washington D.C. area. The operations of Kemper came under the control of Nations effective as of July 1, 1999, and the acquisition was accounted for as a purchase. Accordingly, Nations recorded the assets acquired and liabilities assumed, at their fair values, and the results of Kemper's operations have been included in Nations' results of operations commencing July 1, 1999. See Note 2 of Notes to Consolidated Financial Statements. 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 Realty acquisition was accounted for as a purchase for financial reporting purposes. Under generally accepted accounting principles, a purchase business combination is recorded on the basis of the fair value of the consideration paid (common stock issued) or the fair value of the net assets acquired, whichever is more readily determinable. The common stock of Nations has not been actively traded, and, in determining the number of shares of Nations stock to be offered in the acquisition of Realty, the Board of Directors of Nations, due to the related party ownership of Realty, determined to offer a smaller number of shares than the number of shares that would have been implied by the fair value of the assets acquired, resulting in an effective per share value above the current fair value of Nations common stock, which would also be antidilutive in nature and would therefore be beneficial to Nations. Accordingly, the combination was recorded on the basis of the fair value of Realty's net assets, which reflected recent appraisals of Realty's land and building. For income tax purposes the combination was a tax free exchange, as a result of which the assets of Realty were transferred to Nations at Realty's tax basis. A deferred tax liability, for the future tax effects of the difference between the fair value recorded for financial reporting purposes and such tax basis, was recorded and included in the purchase price. See Note 2 of Notes to Consolidated Financial Statements. 16 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 years ended December 31, 1997, 1998 and 1999 include rent expense paid under such lease of $100,284, $115,071 and $30,000, respectively. Additionally, at the time of the combination, Nations was indebted to Realty under a 12% unsecured demand note in the amount of $500,000, and Realty was indebted to Nations under a 10% installment note having a remaining balance of $80,779. Both balances were eliminated in recording Nation's acquisition of Realty. During May 1997, the Company received an unsecured advance from a shareholder and director of the Company in the amount of $500,000. This advance was repaid through the issuance of 500 shares of the Company's preferred stock in December 1998. This advance bore interest at 12% per annum, payable monthly. Total interest expense of $55,000 and $40,000 relating to this advance has been reflected in the accompanying consolidated financial statements for the years ended December 31, 1998 and 1997, respectively. In both August and November of 1997, and in February of 1998, the Company received unsecured advances of $500,000 (an aggregate total of $1,500,000) from Branin Investments, Inc. (Branin), which is 100% owned by the Chairman of the Board and President of Nations. The 1998 advance bears interest at 15% per annum, payable monthly, while the 1997 advances bear interest at 12% per annum, payable monthly; all advances are due on demand. Branin agreed to subordinate its rights to receive principal and interest payments to the obligation owed pursuant to the Credit Facility with Fleet as described in Note 4 of Notes to Consolidated Financial Statements. Pursuant to such Credit Facility, Branin can only receive payments out of excess cash flow, subject to the terms and conditions contained within the Credit Facility. During 1998 and 1999, Branin received approximately $310,000 and $241,000 out of excess cash flows, respectively. Due to these restrictions the aggregate advances of $1,500,000 has been classified as long term at December 31, 1999. Total interest expense of $25,000, $182,500 and $195,000 relating to these advances has been reflected in the accompanying consolidated statement of operations for the years ended December 31, 1997, 1998 and 1999 respectively. During 1997 and 1998, Branin made payments of the Company's preferred dividends and made other non-interest bearing advances on behalf of the Company. As of December 31, 1999 the Company was indebted to Branin in the amount of $2,574,934 (including the foregoing $1,500,000) (see Notes 3(a) and 3(b) of Notes to Consolidated Financial Statements). As of February 29, 2000, the Company was indebted to Branin for $2,529,984. Because the Company and Branin anticipate repayment of the non-interest bearing advances in the near term, no stated interest rate exists on these advances and no interest has been imputed. On May 19, 1998, the Company, through its subsidiary CBI, entered into a credit agreement (the "Credit Facility") with Fleet Capital Corporation ("Fleet"), pursuant to which Fleet advanced to CBI $5,000,000 under a term loan and approximately $2,300,000 under a $5,000,000 revolving line of credit. The term loan requires quarterly payments of $175,000. CBI pledged substantially all of its assets to secure the Credit Facility and Nations has pledged all of the common stock of CBI, to secure its guarantee of the Credit Facility. Fees payable to Fleet totaled $125,000. In addition, a finder's fee of $100,000 was paid to a person associated with Branin. The term and revolving portions of the Credit Facility are due on May 18, 2003. All borrowings under the Credit Facility bear interest payable monthly at the base rate per annum announced from time to time by Fleet (5.94% at March 15, 2000) plus 2.75% and 3.25% per annum, in connection with advances under the revolving line and the 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 3(a) and (b) of Notes to the Consolidated Financial Statements) are subject to certain subordination and payment limitation requirements. As a condition of consummating the debt refinancing, the Company received an advance of $500,000 from Realty. See Item 13-Certain Relationships and Related Transactions. Amounts outstanding under the Credit Facility at December 31 are as follows: 1998 1999 ------------------ ------------------ Revolving line of credit $ 3,812,213 $ 4,751,951 Term loan 4,650,000 3,950,000 17 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 the arrangement is expected to close on or before such date. 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 continue to pursue its acquisition strategy, including the financing of the proposed acquisitions described below. 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 $176,835 at December 31, 1999. 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. Each company has approximately $8 million in sales from its residential contract, residential replacement and commercial markets. 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. The Company anticipates financing these acquisitions with a portion of the proceeds of the proposed new financing arrangement with Barbican and anticipates completing these acquisitions during the second quarter of 2000. The Company believes that its cash flow from operations and funds available from the Fleet Credit Facility or its replacement 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 December 31, 1999, 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. 18 Year 2000 Matters The "Year 2000" problem refers to the potential for computational errors or system malfunctions by computer hardware or software that fail to properly recognize dates beginning with January 1, 2000, or which fail to recognize the year 2000 as a leap year. In anticipation of this problem, the Company instituted and followed a Year 2000 readiness program intended to identify, evaluate and address our Year 2000 exposure. At the time that this report was prepared, the Company had not experienced any material Year 2000 problems with its products or internal systems, and was not aware of any such problems experienced by its customers, vendors and other service providers. As a result, no material adverse impact of the Year 2000 problem on the Company's business and operations was expected at the time of this report, based upon the information then available. However, this forward-looking statement may be impacted by the extent to which latent year 2000 problems remained undiscovered, or, in the case of Year 2000 problems with business partners, undisclosed as of such date. Although the Company believes that it is unlikely at the time of this report, there can be no assurance that any such issued will not result in material cost to the Company or have a material, adverse impact on its business, financial condition or results of operations. 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. Effective January 1, 2000, the Company adopted a self-insurance program for its employee health insurance. The plan has a stop loss reinsurance limit of $20,000 per individual per year. Management does not believe that the costs of the self-insurance program will be materially different than the prior program. Item 7a Quantitative and Qualitative Disclosures about Market Risk Like virtually all commercial enterprises, the Company is exposed to the risk ("market risk") that the cash flows to be received or paid relating to certain financial instruments could change as a result of changes in interest rate, exchange rates, commodity prices, equity prices and other market changes. Market risk is attributed to all market risk sensitive financial instruments, including long term debt. The Company does not engage in trading activities and does not utilize interest rate swaps or other derivative financial instruments or buy or sell foreign currency, commodity or stock indexed futures or options. Additionally, with the exception of the Fleet credit facility, the interest on all of the Company's debt is payable at fixed interest rates. Accordingly, the Company's exposure to market risk is limited to the potential affect of changes in interest rates on the cash flows (payments) relating to its variable rate debt with is its debt with Fleet. Based upon the balance of the Fleet debt at December 31, 1999, a hypothetical immediate and sustained increase of 1% in Fleet's announced rate (which generally varies with the interest rates established by the Federal Reserve Bank) would have the affect of increasing the Company's interest expense by approximately $85,000 per year. Item 8. Financial Statements and Supplementary Data CONSOLIDATED FINANCIAL STATEMENTS Consolidated balance sheets F-3 Consolidated statements of operations F-4 Consolidated statements of stockholders' equity F-5 Consolidated statements of cash flows F-6 - F-7 Notes to consolidated financial statements F-8 - F-18 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None 19 Part III. Item 10. Directors and Executive Officers of the Registrant The following table sets forth certain information with respect to the directors and executive officers of the Company. Name Age Position - ---- --- -------- Philip A. Herman 54 Chairman of the Board and President Facundo Bacardi 54 Director John Katz 61 Director Paul Kramer 67 Director Andrew Levinson 51 Director William V. Poccia 54 Secretary and Chief Financial Officer Steven M. Chesin 38 Chief Operating Officer Jeffrey E. Wiens 38 Corporate Controller The number of directors on the Board is presently fixed at five, whose terms are perpetual. Philip A. Herman has been Chairman of the Board and President of the Company since June 2, 1995. He also has served as a principal of Branin since 1994. Since 1999, Mr. Herman has been the Chief Executive Officer of CTA Industries, Inc. (a thermal and acoustic insulation manufacturer). Facundo Bacardi has been a director of the Company since June 2, 1995 and is a member of the Stock Option Plan Committee. He also serves as a director of Suramericana de Inversiones, S.A., an investment company located in Panama, and has served in that capacity since 1990. Mr. Bacardi is also an heir to the controllers of the Bacardi rum company, a worldwide manufacturer and one of the largest family-owned companies in the world. He is currently an advisor to the Board of Directors for Bacardi International, the holding company for all of the Bacardi companies worldwide. From 1979 to 1991, Mr. Bacardi was in charge of the manufacturing and distribution division for Central America. John Katz has been a director since March 1998. Mr. Katz also serves as director of the Legends Fund, a series of mutual funds, which serve as investment vehicles for variable annuities. Since 1991, Mr. Katz has been an investment banker and business consultant. From 1975 to 1991, Mr. Katz held various positions with Equitable Life Assurance Society and its subsidiaries, including acting as Senior Vice President and the Executive Vice President of Equitable Investment Corporation between 1986 and 1991. Paul Kramer has been a director since March 1998. Mr. Kramer also serves as a director of SFX Entertainment, Inc. Since August 1994, Mr. Kramer has been a principal of Kramer & Love, a consulting firm providing advisory services in the areas of acquisitions and restructuring. Prior thereto, from October 1992, Mr. Kramer also provided financial advisory services. From 1954 to 1968, Mr. Kramer was employed by, and from 1968 to 1992, was a partner in Ernst & Young, the accounting firm. Andrew Levinson has been a director since January 2000. Mr. Levinson has been a partner with Herzfeld & Rubin, PC, a law firm, since August 1996. From January 1987 to August 1996, Mr. Levinson was a partner with Shereff, Friedman, Hoffman and Goodman, LLP, a law firm. During 1999 and currently, Herzfeld & Rubin, PC has rendered legal services to the Company. William Poccia has been Chief Financial Officer of the Company since August 6, 1996. From October 1995 to August 1996, Mr. Poccia served as a financial consultant to the Company in the employ of Branin. Prior to that time, Mr. Poccia served as Director of Audit for Participants Trust Company, a securities depository for mortgage-backed securities. Steven Chesin has been Senior Vice President and Chief Operating Officer of Carpet Barn, Inc. since July 28, 1995. Prior to joining the Company, Mr. Chesin served, as President of Steve's Floorcovering, Inc., a floorcovering installation specialist and senior certified carpet inspector, from its founding in 1977 to the Company's acquisition of Steve's in July 1995. 20 Pursuant to an employment agreement dated as of July 1, 1998 between Mr. Chesin and the Company, Mr. Chesin is serving as Senior Vice President and Chief Operating Officer of Carpet Barn, Inc. for a three-year period, with successive one-year automatic extensions to his employment unless either party gives the other at least 90 days' notice of termination prior to the end of any term. Pursuant to the agreement, Mr. Chesin's annual salary is $150,000 per year and may be increased at the Company's discretion. Mr. Chesin is also eligible to receive a bonus equal to two percent of the increase in EBITDA over the prior fiscal year. Mr. Chesin will receive two months' severance pay, plus an additional month's severance pay for each full year of employment that has elapsed, if the agreement terminates due to Mr. Chesin's total disability. Jeffrey Wiens has been Corporate Controller of the Company since July 1995. From 1988 to July 1995, Mr. Wiens served in various capacities, principally in the Minneapolis, Minnesota office of McGladrey & Pullen, LLP, the Company's independent auditors, including serving as a member of the audit staff from 1988 to July 1994 and as Manager from August 1994 to July 1995. Pursuant to an employment agreement amended as of June 15, 1998, the Company has employed Mr. Wiens as its Corporate Controller for a three-year period, with successive one-year automatic extensions of his employment unless either party gives the other at least 90 days' notice of termination prior to the end of any term. Pursuant to the agreement, Mr. Wiens' annual salary is $100,000 per year and may be increased at the Company's discretion. Item 11. Executive Compensation Summary Compensation Table The following table sets forth for the fiscal years ended December 31, 1997, 1998 and 1999 the compensation for services in all capacities to the Company of the persons who were at December 31, 1999 the Executive officers of the Company who received salary and bonus in excess of $100,000.
Annual Compensation Other Annual Long Term Salary $ Bonus $ Compensation $ Compensation (2) -------- ------- -------------- ---------------- Philip A. Herman (1) Chairman of the Board and President Year ended December 31, 1997 13,269 0 0 0 Year Ended December 31, 1998 108,493 0 0 300,000 Year Ended December 31, 1999 182,692 17,500 0 175,000 William V. Poccia Secretary and Chief Financial Officer Year ended December 31, 1997 101,923 0 0 0 Year Ended December 31, 1998 116,378 0 0 125,000 Year Ended December 31, 1999 138,654 12,500 0 75,000 Steven M. Chesin Chief Operating Officer Year ended December 31, 1997 125,000 91,636 0 0 Year Ended December 31, 1998 125,000 10,768 0 75,000 Year Ended December 31, 1999 138,654 12,500 0 75,000
(1) Certain entities controlled by Mr. Herman received fees from the Company for the years ended December 31, 1997, 1998 and 1999. See "Certain Transactions" and in "Management's Discussion and Analysis of Financial Condition and Results of Operations." (2) Represents the number of common shares underlying stock options granted during the year. Director Compensation Compensation. Beginning with the fourth quarter of 1999, directors receive quarterly fees of $3,000 each. Directors are eligible to participate in the Company's 1997 Stock Option Plan. 21 1997 Stock Option Plan The Company adopted the 1997 Stock Option Plan (the "Option Plan") on February 26, 1997, in order to provide an incentive to non-employee directors and to officers and certain other key employees of and consultants to the Company by making available to them an opportunity to acquire a proprietary interest or to increase their proprietary interest in the Company. Shareholders approved the adoption of the Option Plan on March 19, 1997. The Option Plan provides for the award of options (each an "Award") representing or corresponding to up to 1,250,000 shares of common stock of the Company. Any Award issued under the Option Plan, which is forfeited, expires or terminates prior to vesting or exercise will again be available for Award under the Option Plan. The Option Plan is administered by the Committee, as defined in the Option Plan. The Committee consists of Facundo Bacardi. The Committee has the full power and authority, subject to the provisions of the Option Plan, to designate participants, grant Awards and determine the terms of all Awards. The Committee has the right to make adjustments with respect to Awards granted under the Option Plan in order to prevent dilution of the rights of any holder. Non-employee directors, including members of the Committee are not eligible to receive discretionary Awards under the Option Plan but automatically receive upon becoming such a director and each year thereafter non-qualified stock options ("NQSO's") to purchase 10,000 shares of common stock of the Company at an exercise price equal to the fair market value on the date of grant. Members of the Committee are disinterested within the meaning of Section 16 of the Securities Exchange Act of 1934, as amended, and outside directors within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). Options Issued Under the Option Plan. The terms of specific options are determined by the Committee. Options granted may be NQSO's or incentive stock options within the meaning of Code Section 422 ("ISO's"). The exercise price per share for a non-qualified option is subject to the determination of the Committee. Incentive stock options may not be granted at less than 100% of the fair market value at the date of grant. Each option will be exercisable for the period or periods specified in the option agreement, which will not exceed 10 years from the date of grant. Upon the exercise of an option, the option holder pays to the Company the exercise price plus the amount of the required Federal and state withholding taxes, if any. Options may be exercised and the withholding obligation may be paid for with cash and, with the consent of the Committee, shares of common stock of Nations Flooring, Inc., other securities (including options) or other property. The period after termination of employment during which an option may be exercised is as determined by the Committee. In the absence of any specific determination by the Committee, the following rules will apply. The unexercised portion of any option granted under the Option Plan will generally be terminated (a) 30 days after the date on which the optionee's employment is terminated for any reason other than (i) cause, (ii) retirement or mental or physical disability or (iii) death; (b) immediately upon the termination of the optionee's employment for cause; (c) three months after the date on which the optionee's employment is terminated by reason of retirement or mental or physical disability; or (d)(i) 12 months after the date on which the optionee's employment is terminated by reason of the death of the employee, or (ii) three months after the date on which the optionee shall die if such death shall occur during the three-month period following the termination of the optionee's employment by reason of retirement or mental or physical disability. 22 During 1997, 1998 and 1999, options to purchase 1,040,000 shares of the Company's common stock were granted to the directors, officers and employees of the Company, of which 40,000 terminated and 1,000,000 are outstanding as of December 31, 1999. No options have been exercised.
Options Granted in Last Fiscal Year - ------------------------------------------------------------------------------------------------------------- Potential realizable value at assumed annual rates of stock price appreciation for Individual grants option term - ------------------------------------------------------------------------------- -------------------------- Number of Percent of total securities options Exercise underlying granted to or base options employees in price Expiration Name granted (#) fiscal year ($/Sh) date 5% ($) 10% ($) - ------------------------------------------------------------------------------- -------------------------- Phillip Herman 175,000 46.7% 3.15 7/01/09 375,184 923,941 William Poccia 75,000 20.0% 3.15 7/01/09 160,793 395,975 Steven Chesin 75,000 20.0% 3.15 7/01/09 160,793 395,975
Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values - ------------------------------------------------------------------------------------------------------------- Number of securities Value of unexercised underlying unexercised in-the-money options Shares options at FY-End (#) At FY-End ($) acquired on Value --------------------------------------------------------------- Name exercise realized ($) Exercisable Unexercisable Exercisable Unexercisable - ------------------------------------------------------------------------------------------------------------- Phillip Herman 0 0 100,000 375,000 125,000 267,500 William Poccia 0 0 41,667 158,333 52,083 111,667 Steven Chesin 0 0 25,000 125,000 31,250 70,000
23 Item 12. Security Ownership of Certain Beneficial Owners and Management. The following table sets forth certain information as of March 1, 2000, regarding (i) each person known by the Company to be the beneficial owner of more than 5% of the outstanding shares of common stock, (ii) each director, nominee and Named Executive Officer of The Company and (iii) all officers and directors as a group. Unless otherwise indicated the address is deemed to be that of the Company.
Name and Address Shares Shares Under Percentage - ----------------- Beneficially Exercisable Ownership Owned Options (3) ----------------------------------------------------------- Philip A. Herman (1) 397,388 100,000 12.4% c/o Branin Investments, Inc. 100 Maiden Lane New York, NY 10038 Facundo Bacardi (2) 1,440,298 40,000 36.9% c/o Branin Investments, Inc. 100 Maiden Lane New York, NY 10038 William Poccia 675 41,667 1.1% John Katz 0 30,000 * Paul Kramer 0 30,000 * Andrew Levinson 0 10,000 * Steven M. Chesin 0 25,000 * Jeffrey E. Wiens 0 8,333 * All Directors and Executive 1,838,361 275,000 52.9% Officers as group (7 persons)
* Less than 1%. 1) Includes 340,139 shares held by Branin Investments, Inc. Excludes 43,943 shares held by family members of Mr. Herman. Mr. Herman disclaims beneficial ownership of the shares held by such family members. 2) Includes an aggregate of 1,440,798 shares held by various affiliates of Mr. Bacardi (including 941,900 shares held by Icarus Investments Ltd., 1,816 shares held by Delphic Investments Ltd., 246,280 shares held by Global Recovery Assets, Int'l., 186,755 shares held by Designed Investments Ltd. and 63,547 shares held by Marvest, Inc.). Excludes 500 shares held by family members of Mr. Bacardi. Mr. Bacardi disclaims beneficial ownership of the shares held by such family members. 3) Includes shares under options exercisable on December 31, 1999 and options which become exercisable within 60 days thereafter. 24 Item 13. Certain Relationships and Related Transactions. Branin, a principal stockholder of the Company, acted as advisor in connection with the 1995 acquisition, and in that role became entitled to receive a fee of approximately $650,000 upon the consummation of an underwritten public offering. In June 1995, CBI agreed to pay for consulting services a) $35,000 per month (reduced to $10,000 per month as of September 1996 and increased to $20,000 per month beginning June 1998) to Branin and b) $5,000 per month through August 1996, and at the rate of $12,500 per month beginning May 1997 through May 1998 to PAH. These agreements were entered into for the purpose of receiving management advisory services regarding operations management, financing and acquisitions. See Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources with respect to these and other advances made by Branin on behalf of the Company and see Item 11-Executive Compensation. Under the terms of an Agreement and Plan of Merger (the Agreement) filed with the State of Delaware on March 29, 1999, C.B. Realty of Delaware, Inc. ("Realty") merged with and into Nations. In accordance with the Agreement, each shareholder of Realty was issued 597.25 shares of Nations' common stock for each share of Realty's common stock. A total of 59,725 shares of Nations' common stock were issued. The acquisition was accounted for as a purchase for financial reporting purposes. Under generally accepted accounting principles, a purchase business combination is recorded on the basis of the fair value of the consideration paid (common stock issued) or the fair value of the net assets acquired, whichever is more readily determinable. The common stock of Nations has not been actively traded, and, in determining the number of shares of Nations stock to be offered in the acquisition of Realty, the Board of Directors of Nations, due to the related party ownership of Realty, determined to offer a smaller number of shares than the number of shares that would have been implied by the fair value of the assets acquired, resulting in an effective per share value above the current fair value of Nations common stock, which would also be antidilutive in nature and would therefore be beneficial to Nations. Accordingly, the combination was recorded on the basis of the fair value of Realty's net assets, which reflected recent appraisals of Realty's land and building. For income tax purposes the combination was a tax free exchange, as a result of which the assets of Realty were transferred to Nations at Realty's tax basis. A deferred tax liability, for the future tax effects of the difference between the fair value recorded for financial reporting purposes and such tax basis, was recorded and included in the purchase price. See Note 2 of Notes to Consolidated Financial Statements. Prior to the combination, Nations leased its principal Las Vegas facility from Realty under an operating lease expiring in April 2004. The results of operations for the years ended December 31, 1997, 1998 and 1999 include rent expense paid under such lease of $100,284, $115,071 and $30,000, respectively. Additionally, at the time of the combination, Nations was indebted to Realty under a 12% unsecured demand note in the amount of $500,000, and Realty was indebted to Nations under a 10% installment note having a remaining balance of $80,779. Both balances have been eliminated in recording Nation's acquisition of Realty. Realty was owned by four stockholders of the Company (including a director and a relative of an officer), acquired the land and building concurrently with the Company's 1995 acquisition. Payments of the CBH and Nations' preferred stock dividends had been made by Branin on behalf of CBH and the Company in the amount of $564,200 during 1998. As a result of these payments, and management fees and other amounts (including the foregoing $1,500,000) advanced from or due to Branin, the Company was indebted to Branin for $2,574,934 at December 31, 1999 (see Notes 3(a) and 3(b) of Notes to Consolidated Financial Statements). As of February 29, 2000, the Company was indebted to Branin for $2,529,984. Because the Company and Branin anticipate repayment of the non-interest bearing advances in the near term, no stated interest rate exists on these advances and no interest has been imputed. During May 1997, the Company received an unsecured advance from a shareholder and director of the Company in the amount of $500,000. This advance was repaid through the issuance of 500 shares of the Company's preferred stock in December 1998. This advance bore interest at 12% per annum, payable monthly. Total interest expense of $40,000 and $55,000 relating to this advance has been reflected in the accompanying consolidated financial statements for the years ended December 31, 1997 and 1998, respectively. The Company's principal executive offices are located at 100 Maiden Lane, New York, New York. Branin also occupies these offices. 25 Item 14. Exhibits and Reports on Form 8-K (a) Consolidated Financial Statements Consolidated balance sheets F-3 Consolidated statements of operations F-4 Consolidated statements of stockholders' equity F-5 Consolidated statements of cash flows F-6 - F-7 Notes to consolidated financial statements F-8 - F-18 (b) Reports on Form 8-K None (c) Exhibits 2.1 Agreement and Plan of Exchange, dated as of June 1, 1995, among the Company, Carpet Barn Holdings, Inc. ("CBH") and the holders of common Stock of CBH (incorporated by reference from Exhibit 1 of the Company's Report on Form 8-K (June 2, 1995) (the "June Form 8-K"). 2.2 Asset Purchase Agreement, dated as of June 1, 1995, between Carpet Barn Acquisition Corp. ("CBAC") and Carpet Barn, Inc. ("Carpet Barn") (Incorporated by reference from Exhibit 3 of the June Form 8-K). 2.3 Amendment, dated June 1, 1995, to Asset Purchase Agreement (Incorporated by reference from Exhibit 4 of the June Form 8-K). 3.1 Certificate of Incorporation, dated July 19, 1988, of the Company (Incorporated by reference from Exhibit 3(a) of the Company's Registration Statement on Form S-18 (33-29942-NY) filed October 20, 1989 (the "1989 Registration Statement"). 3.2 By-laws of the Company (incorporated by reference from Exhibit 3(b) of the 1989 Registration Statement). 3.3 Amended and Restated Certificate of Incorporation of CBH (incorporated by reference from Exhibit 3.3 of the Company's Annual Report on Form 10-K for the period ended December 31, 1995 (the "Form 10-K")). 3.4 Certificate of Amendment to Amended and Restated Certificate of Incorporation of CBH (incorporated by reference from Exhibit 3.4 of the Form 10-K). 3.6 Certificate of Incorporation of Nations Flooring, Inc. (incorporated by reference from Exhibit 3.6 of the Company's Registration Statement on Form S-1 (333-19871) filed January 16, 1997 ("1997 Registration Statement"). 3.7 By-laws of Nations Flooring, Inc. (incorporated by reference from Exhibit 3.7 of the 1997 Registration Statement). 9.1 Voting Trust Agreement, dated May 30, 1995, between Philip A. Herman and certain shareholders of the Company (incorporated by reference from Exhibit 2 of the June Form 8-K). 26 10.7 Terms of preferred stock, par value $.01 per share, stated value $1,000 per share, of CBH (incorporated by reference from Exhibit 12 of the June Form 8-K). 10.8 Employment Agreement, dated as of July 28, 1995, between CBI and Steven Chesin (incorporated by reference from Exhibit 1 of the Company's Report on Form 10-Q for the quarterly period ended June 30, 1995 (the "June 1995 Form 10-Q). 10.9 Form of Promissory Note issued in the offering of short-term notes of CBH (incorporated by reference from Exhibit 11 of the June Form 8-K). 10.10 Lease, dated June 1, 1995, between CB Realty of Delaware, Inc. ("CB Realty") and CBAC (incorporated by reference from Exhibit 10.13 of the Form 10-K). 10.11 First Amendment to Lease Agreement, dated August 1, 1995, between CB Realty and CBAC (incorporated by reference from Exhibit 10.14 of the Form 10-K). 10.12 Promissory Note, dated June 1, 1995 from CB Realty in favor of CBAC (incorporated by reference from Exhibit 10.15 of the Form 10-K). 10.13 Employment Agreement, dated as of May 28, 1996, between CBI and Alan Ember. (incorporated by reference from Exhibit 10.15 of the 1997 Registration Statement). 10.14 Credit Facility, dated May 19, 1998, between CBI and Fleet Capital Corporation. (Incorporated by reference from Exhibit1 of the June 1998 Form 10-Q. 10.15 Agreement and Plan of Merger, dated March 23, 1999, between the Registrant and Realty. (Incorporated by reference from Exhibit 1 of Form 8-K dated March 29, 1999. 10.16 Promissory Note dated May 19, 1998, between Realty and MetLife. (Incorporated by reference from Exhibit 2 of Form 8-K\A-1 dated March 29, 1999. 10.17 Commercial Deed of Trust, Security Agreement, Assignment of Leases and Rents and Fixture Filing dated May 19, 1998 by Realty in favor of MetLife. (Incorporated by reference from Exhibit 3 of Form 8-K\A-1 dated March 29, 1999. 10.18 Assignment of Rents and Leases dated May 19, 1998 between Realty and MetLife. (Incorporated by reference from Exhibit 4 of Form 8-K\A-1 dated March 29, 1999. 10.19 Loan Modification Agreement dated March 31, 1999 between the Registrant and G.E. Capital. (Incorporated by reference from Exhibit 5 of Form 8-K\A-1 dated March 29, 1999. 10.20 Asset Purchase Agreement effective as of June 30, 1999 by and among Carpet Barn and DuPont. (Incorporated by reference from Exhibit 1 of Form 8-K dated June 30, 1999. 27 Financial Data Schedule 27 NATIONS FLOORING, INC. AND SUBSIDIARY CONSOLIDATED FINANCIAL REPORT DECEMBER 31, 1999 INDEPENDENT AUDITOR'S REPORT F-2 CONSOLIDATED FINANCIAL STATEMENTS Consolidated balance sheets F-3 Consolidated statements of operations F-4 Consolidated statements of stockholders' equity F-5 Consolidated statements of cash flows F-6 - F-7 Notes to consolidated financial statements F-8 - F-18 INDEPENDENT AUDITOR'S REPORT To the Board of Directors Nations Flooring, Inc. New York, New York We have audited the accompanying consolidated balance sheets of Nations Flooring, Inc. and subsidiary as of December 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Nations Flooring, Inc. and subsidiary as of December 31, 1999 and 1998 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles. /s/ McGladrey & Pullen, LLP McGladrey & Pullen, LLP Las Vegas, Nevada March 1, 2000 F-2 NATIONS FLOORING, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS December 31, 1998 and 1999
ASSETS (Note 4) 1998 1999 - --------------- ---------------------------------- Current Assets Cash $ 212,183 $ 328,162 Accounts receivable, less allowance for doubtful accounts 1998 $310,000, 1999 $475,000 (Note 5) 4,185,635 5,744,891 Inventory 1,319,148 2,241,453 Related party note receivable (Note 2) 79,940 - Prepaid expenses and other 258,087 545,810 Deferred income taxes (Note 6) 119,000 151,000 ---------------------------------- Total current assets 6,173,993 9,011,316 ---------------------------------- Property and Equipment, net (Note 1) 800,301 2,509,745 Intangible Assets, net (Note 1) 15,155,994 15,067,895 ---------------------------------- $ 22,130,288 $ 26,588,956 ================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Note payable (Note 4) $ 3,812,213 $4,751,951 Current maturities of long-term debt (Note 4) 751,000 808,000 Accounts payable 1,816,138 2,606,350 Advances from principal stockholder (Note 3b) 653,339 574,934 Income taxes payable (Note 6) - 391,378 Accrued expenses 519,043 1,226,017 Customer deposits 1,344,135 1,751,395 ---------------------------------- Total current liabilities 8,895,868 12,110,025 ---------------------------------- Related Party Advance (Note 2) 500,000 - Long-Term Debt, less current maturities (Note 4) 4,035,539 3,800,620 Advances from and Notes Payable-Principal Stockholder, less current portion (Notes 3a and 3b) 2,000,000 2,000,000 Deferred Income Taxes (Note 6) 474,000 789,000 Commitments and Contingencies (Notes 7 and 8) Stockholders' Equity (Notes 1 and 9) Preferred stock, 12% cumulative; $.001 par value, authorized 1,000,000 shares; issued 1998 and 1999 5,160 shares; total liquidation preference of outstanding shares 1998 and 1999 $5,160,000 5 5 Common stock, $.001 par value, authorized 20,000,000 shares; issued 1998 3,670,054 shares; 1999 3,729,779 shares 3,670 3,730 Additional paid-in capital 8,398,143 9,652,241 Retained earnings (deficit) (2,176,937) (1,766,665) ---------------------------------- 6,224,881 7,889,311 ---------------------------------- $ 22,130,288 $26,588,956 ==================================
See Notes to Consolidated Financial Statements. F-3 NATIONS FLOORING, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31, 1997, 1998, and 1999
1997 1998 1999 ----------------------------------------------------- Net sales (Note 5) $ 40,835,624 $ 45,000,387 $58,113,781 Cost of sales 30,536,625 33,907,293 43,300,017 ----------------------------------------------------- Gross Profit 10,298,999 11,093,094 14,813,764 Selling, general and administrative expenses: Related party consulting fees (Note 8) 220,000 252,500 240,000 Related party rent expense (Note 2) 100,284 115,071 30,000 Other 6,912,713 7,808,139 10,761,228 ----------------------------------------------------- 7,232,997 8,175,710 11,031,228 Amortization and depreciation 1,207,883 1,132,331 1,189,198 ----------------------------------------------------- Operating Income 1,858,119 1,785,053 2,593,338 Other Income (expense): Other income (expense), net (Note 10) (637,975) (284,811) 4,581 Related party interest expense (Notes 2, 3a and 3c) (65,000) (274,500) (210,000) Interest expense (Note 4) (1,291,248) (890,841) (805,447) ----------------------------------------------------- Income (loss) before income taxes, dividends to preferred stockholders of subsidiary and amortization of discount on preferred stock of subsidiary (136,104) 334,901 1,582,472 Provision for income taxes (benefit) (Note 6) (43,000) 120,000 553,000 ----------------------------------------------------- Income (loss) before dividends to preferred stockholders of subsidiary and amortization of discount on preferred stock of subsidiary (93,104) 214,901 1,029,472 Dividends to preferred stockholders of subsidiary 559,200 466,000 - Amortization of discount on preferred stock of subsidiary - 1,542,726 - ----------------------------------------------------- Net income (loss) (652,304) (1,793,825) 1,029,472 Dividends on preferred stock - 98,200 619,200 ----------------------------------------------------- Net income (loss) applicable to common stockholders $ (652,304) $(1,892,025) $ 410,272 ===================================================== Basic net income (loss) per common share (Note 1) $ (0.18) $ (0.52) $ 0.11 ===================================================== Dilutive net income (loss) per common share (Note 1) $ (0.18) $ (0.52) $ 0.10 =====================================================
See Notes to Consolidated Financial Statements. F-4 NATIONS FLOORING, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years ended December 31, 1997, 1998 and 1999
Preferred Stock Common Stock Shares Shares Paid-In Outstanding Dollars Outstanding Dollars Capital ------------------------------------------------------------ Balance, December 31, 1996 - $ - 3,787,647 $ 3,788 $ 3,050,240 Net loss - - - - - ------------------------------------------------------------ Balance, December 31, 1997 - - 3,787,647 3,788 3,050,240 Issuance of preferred stock (Note 1) 4,660 5 - - 4,659,995 Issuance of preferred stock (Note 3c) 500 - - - 500,000 Issuance of common stock (Note 4) - - 27,657 27 193,573 Retirement of treasury stock - - (145,250) (145) (5,665) Dividends on preferred stock - - - - - Net loss - - - - - ------------------------------------------------------------ Balance December 31, 1998 5,160 5 3,670,054 3,670 8,398,143 Issuance of common stock (Note 2) - - 59,725 60 1,254,098 Dividends on preferred stock - - - - - Net income - - - - - ------------------------------------------------------------ Balance December 31, 1999 5,160 $ 5 3,729,779 $ 3,730 $ 9,652,241 ============================================================
Retained Earnings Treasury (Deficit) Stock Total ------------------------------------------- Balance, December 31, 1996 $ 367,392 $ (5,810) $ 3,415,610 Net loss (652,304) - (652,304) ------------------------------------------ Balance, December 31, 1997 (284,912) (5,810) 2,763,306 Issuance of preferred stock (Note 1) - - 4,660,000 Issuance of preferred stock (Note 3c) - - 500,000 Issuance of common stock (Note 4) - - 193,600 Retirement of treasury stock - 5,810 - Dividends on preferred stock (98,200) - (98,200) Net loss (1,793,825) - (1,793,825) ---------------------------------------- Balance December 31, 1998 (2,176,937) - 6,224,881 Issuance of common stock (Note 2) - - 1,254,158 Dividends on preferred stock (619,200) - (619,200) Net income 1,029,472 - 1,029,472 ---------------------------------------- Balance December 31, 1999 $ (1,766,665) $ - $ 7,889,311 ==========================================
See Notes to Consolidated Financial Statements. F-5 NATIONS FLOORING, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 1997, 1998, and 1999
1997 1998 1999 ------------------------------------------------------ Cash Flows from Operating Activities Net income (loss) $ (652,304) $ (1,793,825) $ 1,029,472 Depreciation 207,820 222,731 296,909 Amortization 1,000,063 909,600 892,289 Deferred income taxes 155,656 120,000 98,000 Provision for bad debts 165,019 189,836 289,426 Rent expense in lieu of note receivable payments from Realty 100,284 115,071 30,000 Amortization of discount on preferred stock of subsidiary - 1,542,726 - Write off of deferred offering costs and other 647,553 291,361 - Changes in assets and liabilities, net of business acquisitions: Increase in accounts receivable (344,775) (894,528) (1,338,193) Increase in inventory (67,973) (511,859) (342,924) Increase in prepaid expenses and other (241,405) (3,311) (240,003) Increase (decrease) in accounts payable 684,531 (1,118,599) 613,348 Increase (decrease) in advances from principal stockholder 901,247 (42,546) (45,637) Increase in income taxes payable - - 391,378 Increase (decrease) in accrued expenses (159,152) 236,050 611,842 Increase in customer deposits 145,013 258,277 176,441 ------------------------------------------------------ Net cash provided by (used in) operating activities $ 2,541,577 $ (479,016) $ 2,462,348 ------------------------------------------------------ Cash Flows from Investing Activities Advances to employees and related parties, net $ 17,807 $ (35,777) $ (30,839) Purchase of property and equipment (254,561) (323,139) (306,149) Payments for acquisition of net assets of Kemper - - (1,500,000) Payments for acquisition of net assets of Merrill's - (164,254) - Acquisition cost expenditures (83,131) (5,564) (49,586) ------------------------------------------------------ Net cash used in investing activities $ (319,885) $ (528,734) $(1,886,574) ------------------------------------------------------
See Notes to Consolidated Financial Statements. F-6 NATIONS FLOORING, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) Years Ended December 31, 1997, 1998, and 1999
1997 1998 1999 --------------------------------------------------------- Cash Flows from Financing Activities (Payments) advances on note payable $ (3,480,128) $ (2,935,943) $ 239,738 Proceeds from related party advance - 500,000 - Proceeds from unrelated party advances 534,000 - - Repayment of unrelated party advances (534,000) - - Principal payments on long-term debt (33,626) (4,436,718) (80,333) Cash payment for deferred offering costs (312,845) - - Proceeds from long-term debt - 5,000,000 - Proceeds from note payable - 2,487,371 - Proceeds from notes payable-principal stockholder 1,000,000 500,000 - Proceeds from stockholder advance 500,000 - - Cash dividends paid on preferred stock - - (619,200) Debt issuance costs - (125,000) - --------------------------------------------------------- Net cash provided by (used in) financing activities $ (2,326,599) $ 989,710 $ (459,795) --------------------------------------------------------- Net increase (decrease) in cash (104,907) (18,040) 115,979 Cash, beginning 335,130 230,223 212,183 ========================================================= Cash, ending $ 230,223 $ 212,183 $ 328,162 ========================================================= CASH PAYMENTS FOR: Interest $ 1,117,664 $ 934,177 $ 782,101 ========================================================= Income taxes, net of refunds, none in 1997, $203,296 in 1998 and none in 1999 $ 3,388 $ (201,419) $ 63,390 ========================================================= SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Preferred stock dividends paid through increase in advances from principal stockholder (Note 3b) $ 559,200 $ 564,200 $ - Repayment of advance from stockholder through issuance of preferred stock $ - $ 500,000 $ - Loan fees added to note payable $ - $ 136,332 $ - Equipment acquired through financing agreement $ 18,000 $ 35,803 $ 85,204 Realty merger (Note 2) $ - $ - $2,003,867
See Notes to Consolidated Financial Statements. F-7 NATIONS FLOORING, INC AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Nature of Business and Significant Accounting Policies Nature of business Nations Flooring, Inc. (Nations or Company) was organized under the laws of the State of Delaware. The Company was also related, through common ownership, to C. B. Realty of Delaware, Inc. (Realty) (see Note 2). 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. Prior to the merger on November 16, 1998 of Carpet Barn Holdings, Inc (CBH), a subsidiary of Nations, into Nations, the dividends attributed to CBH preferred stock dividends were included as dividends to preferred stockholders of subsidiary on the consolidated statements of operations. As a result of the merger, the discount related to the previously outstanding CBH preferred stock was charged against the results of operations for the year ended December 31, 1998, in a manner similar to dividends on subsidiary preferred stock. 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. 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 the Company's cash balances were maintained at financial institutions in Nevada, Illinois, Utah and Virginia. 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 $43,960 and $530,648 at December 31, 1998 and 1999, respectively. F-8 NATIONS FLOORING, INC AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Nature of Business and Significant Accounting Policies (continued) 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 at December 31:
Depreciation Lives 1998 1999 --------------------------------- Land - $ - $ 664,000 Building 20 - 781,000 Furniture and equipment 7 951,255 1,351,635 Autos and trucks 5 149,043 170,543 Leasehold improvements 3 - 7 491,492 352,019 --------------------------------- 1,452,317 3,458,670 Less accumulated depreciation and amortization 948,925 652,016 --------------------------------- Property and equipment, net $ 800,301 $2,509,745 =================================
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 December 31, 1999. Intangible assets Intangible assets consist of the following at December 31: 1998 1999 --------------------------------- Goodwill $17,192,326 $17,870,417 Covenants not-to-compete 600,000 700,000 Debt issuance costs 261,332 292,904 --------------------------------- 18,053,658 18,863,321 Less accumulated amortization 2,897,664 3,795,426 --------------------------------- Intangible assets, net $15,155,994 $15,067,895 ================================= 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 4). These costs are being amortized on the effective interest method over the term of the debt. The Company has also entered into covenants not-to-compete in connection with certain business acquisitions. The covenants are being amortized on the straight-line method over the five-year terms of the agreements. Income taxes The Company provides for deferred taxes on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effect of changes in tax laws and rates on the date of enactment. F-9 NATIONS FLOORING, INC AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Nature of Business and Significant Accounting Policies (continued) 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: 1997 1998 1999 ---------------- ------------ ------------- Basic shares 3,642,397 3,670,054 3,714,848 Dilutive shares 3,642,397 3,670,054 3,942,232 Dilutive net income (loss) per share reflects the effect of the inclusion of the incremental shares issuable upon the exercise of outstanding stock options. Dilutive net income (loss) per share for the years ended December 31, 1997 and 1998 is the same as the basic net income (loss) per share as the inclusion of incremental shares for outstanding stock options would have been anti-dilutive. Dividends on preferred stock, which totaled $0, $98,200 and $619,200 for the years ended December 31, 1997, 1998 and 1999, respectively, 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 $585,668, $784,736 and $1,080,494 for the years ended December 31, 1997, 1998 and 1999, respectively. Self Insurance The Company is a member of a self-insured group for its workers compensation coverage. Estimated costs resulting from any non-insured losses are accrued by a charge to income when the incident that gives rise to the loss occurs. To date there have been no non-insured losses. 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. F-10 NATIONS FLOORING, INC AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Nature of Business and Significant Accounting Policies (continued) Fair value of financial instruments The carrying amounts of financial instruments including cash, accounts receivable, employee and other receivables, 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. Reclassification Certain 1998 balances have been reclassified to correspond to the balance sheet classifications for 1999. These reclassifications had no effect on the consolidated statements of operations or stockholders' equity. Note 2. 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. Accordingly, Nations recorded the assets acquired and liabilities assumed, at their fair values, and the results of Kemper's operations have been included in Nations' results of operations commencing July 1, 1999. The net book value of the assets acquired by Nations was approximately $1,308,000, comprised of current assets, principally inventory and accounts receivable, of approximately $1,138,000, and equipment and leasehold improvements of approximately $170,000. Nations assumed current liabilities, comprised of accounts payable, accrued expenses and customer deposits of approximately $467,000. Additionally, Nations acquired a receivable from DuPont for cash equal to the customer deposits of approximately $231,000 previously transferred to DuPont by Kemper. The tangible assets acquired and liabilities assumed were principally recorded at their book values, which approximated their fair values, and the remaining purchase price of approximately $729,000 was recorded as a covenant not-to-compete and goodwill. The components of the purchase price and the allocation to the assets acquired and assumed were as follows: Components of purchase price: Cash paid Financed through borrowings under line of credit $ 1,500,000 Financed through short term obligation to DuPont 300,000 ------------- 1,800,000 Liabilities assumed 466,915 ------------- $ 2,266,915 ============= Allocated to: Fair value of net tangible assets acquired $ 1,307,591 Receivable from DuPont to fund customer deposits 230,819 Covenant not-to-compete 100,000 Goodwill 628,505 ------------- $ 2,266,915 ============= F-11 NATIONS FLOORING, INC AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 2. Acquisitions (continued) Realty Under the terms of an Agreement and Plan of Merger (the Agreement) filed with the State of Delaware on March 29, 1999, Realty merged with and into Nations. In accordance with the Agreement, each shareholder of Realty was issued 597.25 shares of Nations' common stock for each share of Realty's common stock. A total of 59,725 shares of Nations' common stock were issued. The acquisition was accounted for as a purchase for financial reporting purposes. Under generally accepted accounting principles, a purchase business combination is recorded on the basis of the fair value of the consideration paid (common stock issued) or the fair value of the net assets acquired, whichever is more readily determinable. The common stock of Nations has not been actively traded, and, in determining the number of shares of Nations stock to be offered in the acquisition of Realty, the Board of Directors of Nations, due to the related party ownership of Realty, determined to offer a number of shares with an effective per share value above the current fair value of Nations common stock which would also be antidilutive in nature and would therefore be beneficial to Nations. Accordingly, the combination was recorded on the basis of the fair value of Realty's net assets, which reflect recent appraisals of Realty's land and building. For income tax purposes the combination was a tax-free exchange, as a result of which the assets of Realty were transferred to Nations at Realty's tax basis. A deferred tax liability, for the future tax effects of the difference between the fair value recorded for financial reporting purposes and such tax basis, was recorded and included in the purchase price. The components of the purchase price and the allocation to the assets acquired and assumed were as follows: Components of purchase price: Common stock issued $ 1,254,158 Deferred tax liability recorded 185,000 --------------- 1,439,158 Liabilities assumed 564,709 --------------- $ 2,003,867 =============== Allocated to: Land and building $ 1,445,000 Related party receivables 532,768 Other 26,099 --------------- $ 2,003,867 =============== Prior to the combination, Nations leased its principal Las Vegas facility from Realty under an operating lease expiring in April 2004. The results of operations for the years ended December 31, 1997, 1998 and 1999 include rent expense paid under such lease of $100,284, $115,071 and $30,000, respectively. At the time of the combination, Nations was indebted to Realty under a 12% unsecured demand note in the amount of $500,000, and Realty was indebted to Nations under a 10% installment note having a remaining balance of $80,779. Net interest expense of $37,000 and $15,000 relating to these notes has been reflected in the accompanying consolidated statements of operations for the years ended December 31, 1998 and 1999, respectively. Both balances have been eliminated in recording Nations' acquisition of Realty. Other On September 18, 1998, the Company purchased the net assets of Merrill's Carpet and Tile, Inc. (Merrill's) a floorcovering retailer located in St. George, Utah pursuant to an asset purchase agreement. Under the purchase agreement, the Company purchased substantially all the assets of Merrill's in exchange for $200,000, of which approximately $164,000 was paid at closing. The acquisition was accounted for as a purchase and operations of Merrill's subsequent to the acquisition are included with those of the Company. Net assets purchased were comprised of equipment of $50,000, and current assets, primarily inventory and accounts receivable of $25,000. The remaining $125,000 of the purchase price was allocated to goodwill and a covenant not-to-compete. In November 1998, the Company purchased a small builder floorcovering business in Boise, Idaho (Trinity) by agreeing to complete contracts in progress. The operations of Trinity prior to its acquisition by the Company were insignificant. F-12 NATIONS FLOORING, INC AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 2. Acquisitions (continued) Pro Forma Information The following pro forma information indicates what Nations' results of operations for the years ended December 31, 1998 and 1999 would have been had the above acquisitions taken place at January 1, 1998 and 1999, respectively. This pro forma information is presented for illustrative purposes only, and is not intended to necessarily indicate what the actual results of operations would have been if the companies had been combined during those periods, or what the future results of operations may be:
1998 1999 ----------------- ----------------- Revenues $ 51,300,854 $ 61,445,071 Net income (loss) applicable to common stockholders $ (1,598,076) $ 613,034 Basic net income (loss) per share $ (0.44) $ 0.17 Dilutive net income (loss) per share $ (0.44) $ 0.16
Note 3. Indebtedness to Stockholders (a) Notes payable - principal stockholder In both August and November of 1997, and in February of 1998, the Company received unsecured advances of $500,000 (an aggregate total of $1,500,000) from Branin Investments, Inc. (Branin), which is 100% owned by the Chairman of the Board and President of Nations. The 1998 advance bears interest at 15% per annum, payable monthly, while the 1997 advances bear interest at 12% per annum, payable monthly; all advances are due on demand. However, Branin has agreed to subordinate its rights to receive principal and interest payments to the obligation owed pursuant to the Credit Facility with Fleet as described in Note 4. Pursuant to such Credit Facility, Branin can only receive payments out of excess cash flow, subject to the terms and conditions contained within the Credit Facility. Due to these restrictions the aggregate advances of $1,500,000 has been classified as long term at December 31, 1998 and 1999. Total interest expense of $25,000, $182,500 and $195,000 relating to these advances has been reflected in the accompanying consolidated statements of operations for the years ended December 31, 1997, 1998 and 1999, respectively. (b) Advances from principal stockholder During the years ended December 31, 1997 and 1998, Branin made certain non-interest bearing advances to the Company. Such advances are also subject to the subordination and payment limitations described in (a) above. Activity in the advances for the years ended December 31, 1998 and 1999 are as follows: Balance, December 31, 1997 $1,291,285 Dividends on CBH and Nations preferred stock paid by Branin 564,200 Management fees payable to Branin (see Note 8) 50,000 Common stock issued in lieu of interest obligation (see Note 4) (193,600) Interest on advances (see (a) above and Note 4) 236,300 Payments to Branin (794,846) ----------- Balance, December 31, 1998 $1,153,339 Interest on advances (see (a) above) 195,000 Effect of Realty merger (Note 2) (32,768) Payments to Branin (240,637) ----------- Balance, December 31, 1999 $1,074,934 =========== Due to the subordination and payment limitations, $500,000 of the balance has been classified as long term at December 31, 1998 and 1999. F-13 NATIONS FLOORING, INC AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 3. Indebtedness to Stockholders (continued) (c) Due to stockholder During May 1997, the Company received an unsecured advance from a stockholder and director of the Company in the amount of $500,000. This advance was repaid through the issuance of 500 shares of the Company's preferred stock on December 1, 1998. This advance bore interest at 12% per annum, payable monthly. Total interest expense of $40,000 and $55,000 relating to this advance has been reflected in the accompanying consolidated statement of operations for the years ended December 31, 1997 and 1998, respectively. Note 4. Note Payable and Long-Term Debt On May 19, 1998, the Company, through its subsidiary CBI, entered into a credit agreement (the "Credit Facility") with Fleet Capital Corporation ("Fleet"), pursuant to which Fleet advanced to CBI $5,000,000 under a term loan and approximately $2,300,000 under a $5,000,000 revolving line of credit. The term loan requires quarterly payments of $175,000. CBI pledged substantially all of its assets to secure the Credit Facility and Nations has pledged all of the common stock of CBI to secure its guarantee of the Credit Facility. Fees payable to Fleet totaled $125,000. In addition, a finders fee of $100,000 was paid to a person associated with Branin. The term and revolving portions of the Credit Facility are due on May 18, 2003. All borrowings under the Credit Facility bear interest, payable monthly, at the base rate per annum announced from time to time by Fleet (6.16% at December 31, 1999) plus 2.75% and 3.25% per annum, in connection with advances under the revolving line and the 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 3(a) and (b)) will be subject to certain subordination and payment limitation requirements. As a condition of consummating the credit facility, the Company received an advance of $500,000 from Realty (see Note 2). Amounts outstanding under the Credit Facility at December 31 are as follows: 1998 1999 ---------------- ---------------- Revolving line of credit $ 3,812,213 $ 4,751,951 Term loan 4,650,000 3,950,000 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, when considering 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 the arrangement is expected to close on or before such date. 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 $176,835 at December 31, 1999. F-14 NATIONS FLOORING, INC AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4. Note Payable and Long-Term Debt (continued) The Company received advances from unrelated parties of $534,000 during February 1997. These advances bore interest at the rate of 12% per annum, payable monthly. These advances were repaid in April 1997. In addition to the repayment of the principal, the lenders were to receive $213,600 in shares of common stock of the Company as additional interest. All parties, except one who continued his election to receive Company common stock and one who elected to receive cash, agreed to allow Branin to acquire the right to receive the common stock of the Company, and as a result $189,600 of the obligation was reclassified as due to Branin. The total $193,600 payable through the issuance of shares of common stock (which included the $189,600 payable to Branin as a result of the assumption described above), was satisfied in August 1998 through the issuance of 27,657 shares of the Company's common stock, including 27,086 shares issued to Branin, representing the number of common shares the lenders would have received under the terms of the original agreement. Total interest expense of $224,280 relating to these advances has been reflected in the accompanying consolidated statement of operations for the year ended December 31, 1997. In conjunction with the Realty merger (see Note 2), the Company assumed a mortgage note payable with a financial institution secured by the Company's land and building. The note, which has a balance due at December 31, 1999 of $460,540 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 notes payable of $136,539 and $198,080 outstanding at December 31, 1998 and 1999, respectively. The notes bear interest at an approximate average of 12.9% and mature between September 2000 and December 2003. Aggregate maturities required on the long-term debt are due in future years as follows at December 31, 1999: 2000 $ 808,000 2001 797,559 2002 761,854 2003 1,091,207 2004 1,150,000 ---------------- $ 4,608,620 ================= Note 5. Major Customers Sales for the Company include sales to, and accounts receivable due from, the following major customers:
Percent to Total Sales Percent to Total Accounts Year Ended December 31, Receivable at December 31, ----------------------- -------------------------- Customer 1997 1998 1999 1998 1999 - -------- ---- ---- ---- ---- ---- A 15% 15% 15% 11% 15% B 10% 10% 6% 2% 3%
F-15 NATIONS FLOORING, INC AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 6. Income Taxes The provision for income taxes (benefit) for the years ended December 31 is comprised of the following: 1997 1998 1999 -------------- ------------- ------------- Current expense (benefit) $ (198,656) $ - $ 455,000 Deferred tax expense 155,656 120,000 98,000 --------------------------------------------- $ (43,000) $ 120,000 $ 553,000 ============================================= Net deferred tax liabilities consist of the following components as of December 31: 1998 1999 ------------ ------------- Deferred tax liabilities: Property and equipment $ 4,000 $ 390,000 Intangibles 470,000 399,000 ---------------------------- 474,000 789,000 ---------------------------- Deferred tax assets: Allowance for doubtful accounts 105,000 139,000 Accrued expenses 14,000 12,000 ---------------------------- 119,000 151,000 ---------------------------- $ 355,000 $ 638,000 ============================ No valuation reserve was considered necessary at December 31, 1998 and 1999 as management believes it is more likely than not that the deferred tax assets will be realized in future years due to either offsetting deferred tax liabilities or taxes attributable to future taxable income. The deferred tax liabilities are inclusive of the deferred tax liability recorded in 1999 as a result of the Realty merger, (see Note 2). Note 7. Lease Commitments The Company has entered into agreements to rent retail and warehouse space under separate operating leases expiring through December 2006. Monthly lease payments are net of taxes, insurance and utilities, and total approximately $106,000. The monthly base rent will be adjusted annually to predetermined amounts, or to reflect any increases in the Consumer Price Index. Approximate future minimum lease commitment under these leases at December 31, 1999 is as follows: 2000 $ 1,191,000 2001 928,000 2002 678,000 2003 610,000 2004 461,000 Thereafter 198,000 ------------- $ 4,066,000 ============= Total rent expense under the above leases for the years ended December 31, 1997, 1998 and 1999 was $279,482, $463,867 and $1,170,868, respectively. Note 8. Commitments, Contingencies and Related Party Transactions Consulting agreements In June 1995, the Company orally agreed to pay for consulting services of a) $35,000 per month (reduced to $10,000 per month as of September 1996 and increased to $20,000 per month beginning June 1998) to Branin and b) $5,000 per month through August 1996, and $12,500 per month from May 1997 through May 1998, to PAH, a company controlled by the Chairman of the Board and President of Nations. These agreements were entered into for the purpose of receiving management advisory services regarding operations management, financing, and acquisitions. F-16 NATIONS FLOORING, INC AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 8. Commitments, Contingencies and Related Party Transactions (continued) Financing advisory fees Branin acted as advisor to the Company in certain financing and equity transactions consummated in 1995. In consideration of these advisory services Branin is entitled to fees of approximately $650,000 only payable upon the consummation of an underwritten public offering of the Company's common stock. No amounts have been recorded in the accompanying consolidated financial statements for these fees. Other Also see Notes 1, 2, 3 and 4 for additional related party transactions. Litigation 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. The case is in the pre-discovery preliminary stage, but the Company believes it has meritorious defenses to the allegations in the complaint and intend to defend against such allegations vigorously; therefore, no liability has been recorded in the consolidated financial statements as of December 31, 1999. The Company is also subject to various legal proceedings and claims that arise in the ordinary course of business. The Company believes that the amount of any ultimate liability with respect to these actions in the aggregate or individually will not materially affect the results of operations, cash flows or financial position of the Company. Note 9. Stock Option Plan On March 19, 1997 the Company's stockholders adopted the 1997 Stock Option Plan (the "Option Plan") to provide an incentive to non-employee directors and to officers and certain other key employees of and consultants to the Company by making available to them an opportunity to acquire common stock in the Company. The Option Plan provides for the award of options representing or corresponding up to 1,250,000 shares of common stock. The terms of specific options are determined by the Committee as defined in the Option Plan. The exercise price for a non-qualified option is subject to the determination of the Committee. Incentive stock options may not be granted at less than 100 percent of the fair value of the common stock on the date of the grant. The options expire at varying dates not to exceed 10 years from the date of grant. Any award issued under the Option Plan which is forfeited, expires or terminates prior to vesting or exercise will again be available under the Option Plan. A summary of the status of the Company's fixed stock option plan as of December 31, 1998 and 1999, and activity during the years ending on those dates is presented below:
1997 1998 1999 --------------------------- --------------------------- -------------------------- Weighted- Weighted- Weighted- Fixed Options, all of which had Average Average Average Exercise prices equal to market Exercise Exercise Exercise Value on the grant date Shares Price Shares Price Shares Price - ------------------------------------- ------------ -------------- ------------ -------------- ------------ ------------- Outstanding at beginning of year - $ - 40,000 $ 7.00 595,000 $ 2.17 Granted 50,000 7.60 585,000 2.00 405,000 3.15 Exercised - - - - - - Forfeited 10,000 10.00 30,000 5.33 - - -------------------------- -------------------------- -------------------------- Outstanding at end of year 40,000 $ 7.00 595,000 $ 2.17 1,000,000 $ 2.57 =========================== =========================== ========================== Options exercisable at year-end 40,000 $ 7.00 70,000 $ 3.43 275,000 $ 2.49 =========================== =========================== ========================== Weighted-average minimum fair value of options granted during the year $ 2.19 $ 0.87 $ 1.46 ============== ============== =============
F-17 NATIONS FLOORING, INC AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 9. Stock Option Plan (continued) All options vest over a three-year period, with the exception of options granted to directors whose options vest immediately. The Company accounts for the grant of employee and director stock options using the intrinsic value model of APB No. 25. Management believes use of the minimum value method is appropriate as the Company's common stock has not been quoted or traded since July 1997. The following table summarizes the effect on the Company's consolidated financial statements if compensation expense for the grant of such options had been measured using the minimum value requirements of SFAS 123:
1997 1998 1999 ------------------ ------------------- --------------- Option life, in years 10 10 10 Risk free interest rate 5.47% 5.85% 6.45% Dividends 0 0 0 Compensation expense $ 115,600 $ 150,441 $ 287,304 Net income (loss) $ (767,904) $ (1,944,266) $ 742,168 Net income (loss) applicable to common stockholders $ (767,904) $ (2,042,466) $ 122,968 Basic and dilutive net income (loss) per common share $ (0.21) $ (0.56) $ 0.03
The following table summarizes information about fixed stock options outstanding at December 31, 1999:
Options Outstanding Options Exercisable ------------------------------------------------ --------------------------------- Weighted- average Weighted- Weighted- remaining average average Number contractual exercise Number exercise Range of exercise prices outstanding life price exercisable price - ------------------------ ----------------- -------------- --------------- -------------- ------------------ $ 2.00 575,000 8.3 years $ 2.00 225,000 $ 2.00 $ 3.15 405,000 9.5 years $ 3.15 30,000 $ 3.15 $ 4.00 10,000 7.5 years $ 4.00 10,000 $ 4.00 $ 10.00 10,000 7.2 years $10.00 10,000 $10.00
Note 10. Other Income (Expense) Other income (expense) consists of the following at December 31:
1997 1998 1999 ------------------------------------------ Miscellaneous income, primarily interest $ 9,578 $ 6,550 $ 4,581 Write off of: Deferred offering costs (468,566) - - Pre-acquisition costs (83,131) - - Loan fees and other (81,666) (291,361) - Lawsuit settlement (14,190) - - ------------------------------------------ $ (637,975) $(284,811) $ 4,581 ==========================================
F-18 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the 27th day of March, 2000. NATIONS FLOORING, INC. By: /s/ Philip A. Herman -------------------------- Philip A. Herman Chairman of the Board and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated:
Signature Titles Date - --------- ------ ---- /s/ Philip A. Herman Chairman of the Board and President March 27, 2000 - -------------------------- Philip A. Herman /s/ Facundo Bacardi Director March 27, 2000 - -------------------------- Facundo Bacardi /s/ John Katz Director March 27, 2000 - -------------------------- John Katz /s/ Paul Kramer Director March 27, 2000 - -------------------------- Paul Kramer /s/ Andrew Levinson Director March 27, 2000 - -------------------------- Andrew Levinson /s/ William Poccia Chief Financial Officer and Secretary (Principal Financial and March 27, 2000 - -------------------------- Accounting Officer) William Poccia
Exhibit Index Exhibit Name ------- ---- 2.1 Agreement and Plan of Exchange, dated as of June 1, 1995, among the Company, Carpet Barn Holdings, Inc. ("CBH") and the holders of common stock of CBH (incorporated by reference from Exhibit 1 of the Company's Report on Form 8-K (June 2, 1995) (the "June Form 8-K"). 2.2 Asset Purchase Agreement, dated as of June 1, 1995, between Carpet Barn Acquisition Corp. ("CBAC") and Carpet Barn, Inc. ("Carpet Barn") (incorporated by reference from Exhibit 3 of the June Form 8-K). 2.3 Amendment, dated June 1, 1995, to Asset Purchase Agreement (incorporated by reference from Exhibit 4 of the June Form 8-K). 3.1 Certificate of Incorporation, dated July 19, 1988, of the Company (incorporated by reference from Exhibit 3(a) of the Company's Registration Statement on Form S-18 (33-29942-NY) filed October 20, 1989 (the "1989 Registration Statement"). 3.2 By-laws of the Company (incorporated by reference from Exhibit 3(b) of the 1989 Registration Statement). 3.3 Amended and Restated Certificate of Incorporation of CBH (incorporated by reference from Exhibit 3.3 of the Company's Annual Report on Form 10-K for the period ended December 31, 1995 (the "Form 10-K")). 3.4 Certificate of Amendment to Amended and Restated Certificate of Incorporation of CBH (incorporated by reference from Exhibit 3.4 of the Form 10-K). 3.6 Certificate of Incorporation of Nations Flooring, Inc. (incorporated by reference from Exhibit 3.6 of the Company's Registration Statement on Form S-1 (333-19871) filed January 16, 1997 ("1997 Registration Statement"). 3.7 By-laws of Nations Flooring, Inc. (incorporated by reference from Exhibit 3.7 of the 1997 Registration Statement). 9.1 Voting Trust Agreement, dated May 30, 1995, between Philip A. Herman and certain shareholders of the Company (incorporated by reference from Exhibit 2 of the June Form 8-K). 10.7 Terms of preferred stock, par value $.01 per share, stated value $1,000 per share, of CBH (incorporated by reference from Exhibit 12 of the June Form 8-K). 10.8 Employment Agreement, dated as of July 28, 1995, between CBI and Steven Chesin (incorporated by reference from Exhibit 1 of the Company's Report on Form 10-Q for the quarterly period ended June 30, 1995 (the "June 1995 Form 10-Q). 10.9 Form of Promissory Note issued in the offering of short-term notes of CBH (incorporated by reference from Exhibit 11 of the June Form 8-K). 10.10 Lease, dated June 1, 1995, between CB Realty of Delaware, Inc. ("CB Realty") and CBAC (incorporated by reference from Exhibit 10.13 of the Form 10-K). 10.11 First Amendment to Lease Agreement, dated August 1, 1995, between CB Realty and CBAC (incorporated by reference from Exhibit 10.14 of the Form 10-K). 10.12 Promissory Note, dated June 1, 1995 from CB Realty in favor of CBAC (incorporated by reference from Exhibit 10.15 of the Form 10-K). 10.13 Employment Agreement, dated as of May 28, 1996, between CBI and Alan Ember. (incorporated by reference from Exhibit 10.15 of the 1997 Registration Statement). 10.14 Credit Facility, dated May 19, 1998, between CBI and Fleet Capital Corporation. (Incorporated by reference from Exhibit1 of the June 1998 Form 10-Q. 10.15 Agreement and Plan of Merger, dated March 23, 1999, between the Registrant and Realty. (Incorporated by reference from Exhibit 1 of Form 8-K dated March 29, 1999. 10.16 Promissory Note dated May 19, 1998, between Realty and MetLife. (Incorporated by reference from Exhibit 2 of Form 8-K\A-1 dated March 29, 1999. 10.17 Commercial Deed of Trust, Security Agreement, Assignment of Leases and Rents and Fixture Filing dated May 19, 1998 by Realty in favor of MetLife. (Incorporated by reference from Exhibit 3 of Form 8-K\A-1 dated March 29, 1999. 10.18 Assignment of Rents and Leases dated May 19, 1998 between Realty and MetLife. (Incorporated by reference from Exhibit 4 of Form 8-K\A-1 dated March 29, 1999. 10.19 Loan Modification Agreement dated March 31, 1999 between the Registrant and G.E. Capital. (Incorporated by reference from Exhibit 5 of Form 8-K\A-1 dated March 29, 1999. 10.20 Asset Purchase Agreement effective as of June 30, 1999 by and among Carpet Barn and DuPont. (Incorporated by reference from Exhibit 1 of Form 8-K dated June 30, 1999. 27 Financial Data Schedule EX-27 2 FINANCIAL DATA SCHEDULE
5 U.S. DOLLARS 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 1.000 328,162 0 6,219,891 475,000 2,241,453 9,011,316 3,458,670 948,925 26,588,956 12,110,025 3,800,620 0 5 3,730 7,855,576 26,588,956 58,113,781 58,113,781 43,300,017 11,031,228 1,189,198 289,426 1,015,447 1,582,472 553,000 1,029,472 0 0 0 1,029,472 0.11 0.10
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