<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1996.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-21448
NATIONAL HOME CENTERS, INC.
(Exact name of registrant as specified in its charter)
Arkansas 71-0403343
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Highway 265 North
Springdale, Arkansas 72765
(Address of principal executive offices, including zip code)
(501) 756-1700
(Registrant's telephone number, including area code)
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 preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
------- -----
As of December 13, 1996 National Home Centers, Inc. has 7,142,251 shares of
$0.01 par value Common Stock outstanding.
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<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
NATIONAL HOME CENTERS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
1996 1996
ASSETS (Unaudited) (1)
------------- ------------
<S> <C> <C>
Current Assets:
Cash $ 132,028 $ 130,051
Accounts Receivable 14,804,128 11,511,501
Income Tax Refunds Receivable 313,505 1,110,326
Inventories 33,480,211 31,327,877
Other 1,320,705 1,554,135
----------- -----------
Total Current Assets 50,050,577 45,633,890
----------- -----------
Property, Plant and Equipment 51,262,253 50,254,178
Less Accumulated Depreciation 12,692,251 10,555,500
----------- -----------
Net Property, Plant and Equipment 38,570,002 39,698,678
----------- -----------
Other Assets, Net of Amortization 2,206,966 1,428,149
----------- -----------
$90,827,545 $86,760,717
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current Installments of Long-Term Debt $ 7,144,790 $ 8,373,612
Trade Accounts Payable 15,307,050 15,842,415
Accrued Expenses and Other 3,004,776 2,959,016
----------- -----------
Total Current Liabilities 25,456,616 27,175,043
----------- -----------
Long-Term Debt, Excluding Current Installments 37,163,213 30,807,723
Deferred Income Taxes 555,197 510,248
Stockholders' Equity 27,652,519 28,267,703
----------- -----------
$90,827,545 $86,760,717
=========== ===========
</TABLE>
- -----------
(1) January 31, 1996 balances are condensed from the audited consolidated
balance sheet.
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
2
<PAGE>
NATIONAL HOME CENTERS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
------------------------------ ------------------------------
(Unaudited) 1996 1995 1996 1995
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Net Sales $47,040,920 $41,021,127 $141,551,278 $118,780,723
Cost of Sales 35,721,533 30,808,311 107,238,791 88,839,646
----------- ----------- ------------ ------------
Gross Profit 11,319,387 10,212,816 34,312,487 29,941,077
----------- ----------- ------------ ------------
Selling, General and Administrative
Expenses:
Salaries and Benefits 6,897,656 6,289,581 20,633,804 18,116,174
Rent 597,570 597,435 1,790,373 1,828,435
Depreciation and Amortization 852,850 724,368 2,497,679 2,064,827
Other 2,651,529 2,335,064 7,682,234 6,825,792
----------- ----------- ----------- -----------
Total Selling, General and
Administrative Expenses 10,999,605 9,946,448 32,604,090 28,835,228
----------- ----------- ----------- -----------
Operating Income 319,782 266,368 1,708,397 1,105,849
Interest Expense, Net of Amounts Capitalized 919,251 665,432 2,640,494 1,928,975
----------- ----------- ----------- -----------
Loss Before Income Taxes (599,469) (399,064) (932,097) (823,126)
Income Taxes (205,460) (159,625) (316,913) (329,250)
----------- ----------- ----------- -----------
Net Loss $ (394,009) $ (239,439) $ (615,184) $ (493,876)
=========== =========== =========== ===========
Loss Per Share $ (0.06) $ (0.03) $ (0.09) $ (0.07)
=========== =========== =========== ===========
Weighted Average Number of Common
Shares Outstanding 7,142,251 7,142,251 7,142,251 7,142,251
=========== =========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
NATIONAL HOME CENTERS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
OCTOBER 31,
------------------------------
(Unaudited) 1996 1995
------------- ------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Loss $ (615,184) $ (493,876)
Adjustments to Reconcile Net loss to Net Cash
Provided by (Used in) Operating Activities:
Depreciation and Amortization 2,497,679 2,064,827
Loss (Gain) on Disposal of Property,
Plant and Equipment (87,266) 12,003
Deferred Income Tax Expense (Benefit) (6,116) 371,821
Changes in Assets and Liabilities:
Accounts Receivable (3,292,627) (1,610,962)
Inventories (2,152,334) (2,123,266)
Other Current Assets 1,081,316 (1,132,983)
Accounts Payable (535,365) 7,663,542
Other Current Liabilities 45,760 160,475
----------- -----------
Net Cash Provided by (Used in)
Operating Activities (3,064,137) 4,911,581
----------- -----------
Cash Flows from Investing Activities:
Additions to Property, Plant and Equipment (914,185) (12,843,391)
Proceeds from Sale of Property, Plant and
Equipment 142,150 116,190
Increase in Other Assets (581,021) (382,230)
----------- -----------
Net Cash Used in Investing Activites (1,353,056) (13,109,431)
----------- -----------
Cash Flows from Financing Activities:
Proceeds from Long-Term Debt 14,306,852 10,195,911
Repayments of Long-Term Debt (9,887,682) (2,021,881)
=========== ===========
Net Cash Provided by Financing
Activities 4,419,170 8,174,030
----------- -----------
Net Increase (Decrease) in Cash 1,977 (23,820)
Cash at Beginning of Period 130,051 176,795
----------- -----------
Cash at End of Period $ 132,028 $ 152,975
=========== ===========
Supplemental Disclosures:
Interest Paid (Net of Amounts Capitalized) $ 2,436,041 1,872,296
Income Taxes Refunded, Net 1,107,618 117,726
Acquisition of Equipment for Notes Payable 298,712 29,375
Acquisition of Other Assets for Notes Payable 408,786 --
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
NATIONAL HOME CENTERS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
OCTOBER 31, 1996
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X of the Securities and
Exchange Commission. Accordingly, the financial statements do not
include all of the information and notes required by generally accepted
accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Results
of operations for the three months and nine months ended October 31,
1996, are not necessarily indicative of the results to be expected for
the year ending January 31, 1997. For further information, refer to the
consolidated financial statements and related notes thereto included in
the Company's Annual Report on Form 10-K filed with the Commission on
April 29, 1996.
2. Income Taxes
Income taxes for the three months and nine months ended October 31, 1996
and 1995, do not bear a normal relationship to the statutory federal
income tax rate of 34%, primarily because of state income taxes.
3. Subsequent Events
Subsequent to the end of the quarter, in two separate transactions, the
Company completed the sales of its cabinet and truss manufacturing
units.
The sale of the truss manufacturing unit consisted of the sale of
equipment for cash and notes receivable totaling $325,000, resulting in
a gain before income taxes of $202,000. This gain will be recognized in
the fourth quarter of 1996.
The sale of the cabinet manufacturing unit, Cabinet Craft, consisted
principally of the sale of inventory and equipment to American Quality
Manufacturing Corporation ("AQMC") for notes receivable totaling $1.7
million. The notes are due in monthly installments of principal and
interest (7%) through November 2001. In addition, the notes are
collateralized by security interests in the related equipment (first
priority interest), as well as all inventory (second priority interest)
of the Purchaser.
In addition, under a supply contract entered into in conjunction with
the Sales Agreement, the Company has agreed to use its best efforts to
purchase from the Purchaser at least $3 million in cabinets during each
consecutive twelve month term following the date of the agreement for a
period of two years.
5
<PAGE>
SEC Staff Accounting Bulletin (SAB) No. 81 discusses the accounting
treatment relating to gain recognition on the sale of a business or
operating assets to a highly leveraged entity. In such transactions,
significant uncertainties may exist about a seller's ability to realize
noncash proceeds received where the purchaser is a thinly capitalized,
highly leveraged entity. According to SAB No. 81, such uncertainties
raise doubt as to whether immediate gain recognition is appropriate. The
Company will account for this transaction under SAB No. 81 because it
recognizes that such uncertainties similar to those discussed in SAB 81
exist related to the sale of Cabinet Craft assets. The Company will
defer $277,000 in gains from this transaction until it begins to realize
such gains through collections of the notes receivable.
The Cabinet Craft transaction did not impact the accompanying financial
statements as of October 31, 1996. Further, there has been no accrual of
potential losses should AQMC be unable to fulfill its obligations to the
Company as agreed upon. As of December 13, 1996, the Company became
aware that AQMC ceased operations as of December 9, 1996 as its two
Arkansas facilities. If AQMC is unable to fulfill such obligations,
including making payments on the notes, the Company would most likely
incur losses which would impact the Company's financial statements;
however, such potential losses are not quantifiable at this time. During
the fourth quarter, the Company will evaluate the collectibility of the
notes receivable, as well as other issues related to this transaction
which could impact the financial statements for the year ending January
31, 1997, and make any necessary provision for potential losses at that
time.
ITEM 2
- ------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
GENERAL
National Home Centers, Inc. is a full line retailer of home improvement products
and building materials. The Company believes it is unique in its ability to
serve both retail consumers and professional contractors by operating large home
center superstores in tandem with complete building supply operations.
Quarterly results of operations may fluctuate significantly depending on the
timing of new store openings and related preopening expenses. New store
openings are likely to have a relatively greater impact on operating results due
to the Company's small base of existing stores. New stores have shown to be
unprofitable during their first few years of operation. Additionally, because
the Company amortizes store opening costs over the twelve-month period following
the date of opening, such openings can be expected to affect operating results.
No new stores were opened in the first nine months of fiscal 1996.
6
<PAGE>
Over the last year, the Company has experienced increased competition in its
markets from other national and/or regional chains who are seeking to gain or
retain market share by reducing prices. This has continued to place pressure on
all of the Company's stores and their respective sales, gross margins and
operating income. The increased competition may continually and adversely
affect the Company's earnings. There can be no assurance that other larger
national or regional chains will not enter the Company's present or planned
markets which could possibly have an adverse effect on the Company. During the
third quarter Home Depot, Inc. has opened stores in North Little Rock and Little
Rock, Arkansas. Lowes Companies, Inc. has opened a store in Russellville,
Arkansas in October 1996. The Company is also aware of planned openings in
Conway, Arkansas by Lowes Companies, Inc. in early 1997.
RESULTS OF OPERATIONS
Three Months Ended October 31, 1996 and 1995
- --------------------------------------------
Net sales for the third quarter of fiscal 1996 were up 14.7% to $47.0 million,
compared to $41.0 million for the third quarter of fiscal 1995. Comparable
store sales in the third quarter of fiscal 1996 were up 5.9% over the same
period of fiscal 1995. Increased competition has affected sales volume and
pricing.
Gross profit as a percentage of net sales for the third quarter of fiscal 1996
decreased to 24.0% from 24.9% for the same period last year. Increased
competition and promotional pricing led to the decrease in gross margin.
Selling, general and administrative expenses decreased to 23.4% of net sales for
the third quarter of fiscal 1996 compared to 24.3% of net sales for the same
period last year. An emphasis was placed on reducing expenses, which have been
higher than normal due to the opening of four new superstores over the past
three years.
Net interest expense as a percentage of net sales was 2.0% for the quarter ended
October 31, 1996, compared to 1.6% for the same period last year, primarily due
to increased borrowings and higher interest rates. There was no interest
capitalized in the third quarter of 1996 compared to approximately $155,000 in
the third quarter of 1995.
Nine Months Ended October 31, 1996 and 1995
- -------------------------------------------
Net sales for the nine months ended October 31, 1996 were up 19.1% to $141.6
million, compared to $118.8 million for the same period of fiscal 1995.
Comparable store sales for the six months ended October 31, 1996 were up 6.7%
over the same period of fiscal 1995. Increased competition has affected sales
volume and pricing.
Gross profit as a percentage of net sales of the first nine months of fiscal
1996 decreased to 24.2% from 25.2% for the same period last year. Increased
competition and promotional pricing led to the decrease in gross margin.
Selling, general and administrative expenses decreased to 23.0% of net sales for
the first nine months of fiscal 1996 compared to 24.3% of net sales for the same
period last year. An emphasis was placed on reducing expenses, which have been
higher than normal due to the opening of four new superstores over the past
three years.
7
<PAGE>
Net interest expense as a percentage of net sales was 1.9% for the nine months
ended October 31, 1996, compared to 1.6% for the same period last year,
primarily due to increased borrowings and higher interest rates. There was no
interest capitalized in the first nine months of fiscal 1996 compared to
approximately $311,000 for the same period in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital at October 31, 1996 increased to $24.6 million
from $18.5 million at January 31, 1996. This increase is primarily due to
increases in accounts receivable and inventories, and a decrease in accounts
payable, as well as a decrease in current installments of long-term debt
principally due to the refinancing and related reclassification of a real estate
construction note in the second quarter.
The Company's primary capital needs are to finance inventories, accounts
receivable and store expansion. During the nine months ended October 31, 1996,
operating activities used net cash of $3.1 million. Primary sources of cash
from operating activities included $1.9 million from net earnings and
depreciation and amortization, and $1.1 million from decreases in other current
assets resulting primarily from income taxes refunds. The primary uses of cash
were $3.3 million to finance increases in accounts receivable, $2.2 to finance
increases in inventory and 0.5 million from a decrease in accounts payable.
Net cash used in investing activities for the first nine months of fiscal 1996
was $1.4 million, principally due to purchases of equipment and other assets.
Net cash provided by financing activities during the first nine months of fiscal
1996 totaled $4.4 million, due to net long-term borrowings.
At October 31, 1996, the Company owed a bank $24.1 million under its revolving
credit agreement, which expires in December, 1998. The agreement provides the
Company with the option of borrowing rates based on either (a) the London
Interbank Offered Rate ("LIBOR") plus 2.5%, or (b) the bank's Reference Rate,
which reflects the bank's prime rate. The facility limits availability to a
borrowing base of 85% and 55% of eligible accounts receivable and inventory,
respectively. Borrowings under the revolving credit agreement are
collateralized by the Company's accounts receivable and inventory. In addition,
the agreement requires the Company to maintain certain ratios, meet minimum
levels of tangible net worth, and limits amounts of capital expenditures. The
Company was in violation of one of these financial covenants at October 31,
1996, however the lender has agreed to waive compliance with respect to such
default. As of October 31, 1996, the Company had approximately $2.5 million of
additional available borrowing capacity under the revolving credit agreement.
During the third quarter the Company completed a $5 million real estate loan
with a three year term for the Rogers, Arkansas home center superstore. The
interest rate on the loan is 9.42%.
8
<PAGE>
PART II--OTHER INFORMATION
Item 1. Legal Proceedings.
Not applicable.
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8K.
(a) Exhibits
Sequentially
Numbered
Exhibit No. Description of Exhibit Page
----------- ---------------------- ------------
10.1 Term Loan Agreement dated September 11-23
25, 1996 between the Company and
NBD Bank
27.1 Financial Data Schedule 24-25
(b) Reports on Form 8-K.
The Company filed a current report on Form 8-K on October 28, 1996 regarding a
change in the Company's independent public accountants.
9
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
NATIONAL HOME CENTERS, INC.
Date: December 13, 1996 /s/ DWAIN A. NEWMAN
-------------------------------------
Dwain A. Newman
Chief Executive Officer and
Chairman
Date: December 13, 1996 /s/ BRENT A. HANBY
--------------------------------------
Brent A. Hanby
Executive Vice President and
Chief Financial Officer
10
<PAGE>
EXHIBIT 10.1
TERM LOAN AGREEMENT
NBD BANK ("NBD" or the "Bank") whose addresses 701 First National Building,
Detroit, Michigan 48226, has approved the following credit facilities (the
"Credit Facilities") to NATIONAL HOME CENTERS, INC., an Arkansas corporation
(the "Borrower"), whose address is Highway 265 North, Springdale, Arkansas
72765, under the terms and conditions set forth in this Agreement:
1.0 CREDIT FACILITIES.
1.1 TERM LOAN. The Bank agrees to extend to the Borrower a $5,000,000
term loan (the "Term Loan"), which will bear interest and be payable as set
forth in the Term Loan Note attached hereto as Exhibit A and made a part hereof
(as it may be amended, restated, replaced or from time to time, the "Note")
maturing on October 1, 1999. Borrower has advised lender that the Term Loan
will be used by Borrower to term out certain revolving credit facilities and to
acquire certain inventory and equipment of BWA, Inc.
2.0 CONDITIONS PRECEDENT. The Borrower must satisfy the following
conditions prior to the extension of the Term Loan:
2.1 REPRESENTATIONS TRUE. The representations and warranties of the
Borrower contained in this Agreement must be true, correct and complete as of
the date of closing.
2.2 NO DEFAULT. No Event of Acceleration under this Agreement has
occurred nor has any event occurred which, upon the lapse of time or service of
notice, or both, would constitute an Event of Acceleration under this Agreement
or any other agreement with Bank.
2.3 DELIVERY OF OTHER DOCUMENTS, ETC. Prior to or simultaneously with
execution and delivery of this Agreement, the Borrower must cause to be
executed and delivered to the Bank the following documents:
A. A Term Loan Note in the principal amount of $5,000,000, in
substantially the form of Exhibit A attached hereto.
B. A Mortgage and Security Agreement in substantially the form of Exhibit
B attached hereto.
C. UCC-1 Financing Statements, in substantially the form of Exhibit C
attached hereto.
<PAGE>
D. NBD must have participating lenders ("Participating Lenders") who
purchase $1,500,000 of participations in the Term Loan on terms and conditions
satisfactory to NBD.
E. Such other documents as NBD may request, including those identified on
the Preliminary Closing Checklist attached to this Agreement as Exhibit D.
2.4 OTHER CONDITIONS PRECEDENT. Before the disbursement of the Term Loan,
the following conditions must be satisfied:
A. ADDITIONAL APPROVALS, OPINIONS AND DOCUMENTS. The Bank has received
any other approvals, opinions and documents it may reasonably request; and
B. ASSET ACQUISITION. Borrower has advised NBD that it intends to acquire
the certain assets of BWA, Inc. including certain inventory at a price equal to
book value or actual cost or as otherwise provided in that certain letter
agreement dated August 29, 1 996 between Bank and Borrower and certain equipment
for the sum of $285,000 and Borrower acknowledges that the proceeds of such
purchase will be applied to BWA, Inc.'s obligations to NBD.
3.0 [INTENTIONALLY OMITTED.]
4.0 FEES AND EXPENSES.
4.1 [INTENTIONALLY OMITTED.]
4.2 OUT-OF-POCKET EXPENSES. Borrower shall be responsible for the payment
of all fees and out-of-pocket disbursements incurred by NBD in any way arising
from or in connection with this Agreement (or any agreement referred to or
incorporated herein or executed in connection herewith), or any of the
Borrower's liabilities to the Bank whether now existing or hereafter arising and
howsoever evidenced, including, without limitation, the fees of counsel for NBD
for the preparation, examination and approval of documents in connection with
this Agreement, for the payment of all fees and out-of-pocket disbursements
incurred by NBD, including reasonable attorneys' fees, in any way arising from
or in connection with any action taken by NBD or any holder of the Note, to
monitor, advise, enforce or collect the Borrower's liabilities to the Bank, or
enforce any liabilities of Borrower under this Agreement or any other document
or agreement arising from or relating to the business relationship between NBD
and Borrower or otherwise securing any of Borrower's liabilities to NBD,
including any actions to lift the automatic stay or to otherwise in any way
participate in any bankruptcy, reorganization or insolvency proceeding of
Borrower, or in relation to or in defense of any litigation instituted by
Borrower, any guarantor, or one or more of them, or any third party against NBD
arising from or relating to the Borrower's present and future liabilities to the
Bank, this Agreement, any guaranties of Borrower's
2
<PAGE>
liabilities to Bank or any other document or agreement arising from or relating
to the business relationship between Borrower and NBD, including any so-called
"lender liability" actions or any actions arising under the Bankruptcy Code or
any state insolvency statute but excluding any actions arising in connection
with any private UCC sale of assets of BWA, Inc. to Borrower raised by parties
other than Borrower or parties directly or indirectly controlled by Borrower.
All of these expenses and fees shall be part of the Borrower's liabilities to
the Bank and shall be secured by all collateral security granted to Bank by
Borrower or any Guarantor of Borrower's liabilities to Bank. NBD shall be
permitted to charge Borrower's account for such fees, expenses and costs when
paid by NBD. Borrower's agreement to be responsible for the Bank's attorney
fees shall apply regardless of whether or not the Bank prevails in whole or part
in any action or litigation.
5.0 [INTENTIONALLY OMITTED].
6.0 SECURITY.
6.1 REAL ESTATE. Payment of the borrowings under the Credit Facilities
and all other of Borrower's present and future liabilities to the Bank shall be
secured by a first mortgage ("Mortgage") on certain real estate located at 300
N. 46th Street, Rogers, Arkansas together with fixtures thereon ("Property').
The Mortgage is supported by an assignment of rents, subordination of leases and
collateral assignments of land contracts, as applicable. The Borrower shall
provide Bank with an ALTA mortgage title policy, acceptable to Bank, without
exceptions and a survey certified to Bank and the title insurance company all in
form and substance satisfactory to Bank (all of the foregoing collateral is
hereinafter referred to as the "Collateral").
6.2 No forbearance or extension of time granted any subsequent owner of
the Collateral shall release the Borrower from liability.
6.3 ADDITIONAL COLLATERAL/SETOFF. To further secure payment of the
borrowings under the Credit Facilities and all of the Borrower's other present
and future liabilities to the Bank, the Borrower grants to the Bank a continuing
security interest in: (i) all securities and other property of the Borrower in
the custody, possession or control of the Bank's commercial loan department and
(ii) all balances of deposit accounts and certificates of deposit of the
Borrower with the Bank. The Bank is hereby authorized at any time and from time
to time, without notice to the Borrower (any such notice being expressly
waived), to set off and apply any and all deposits (general or special, time or
demand, provisional or final) at any time held and other indebtedness at any
time owing by the Bank (or any affiliate of Bank or any lender participating
with the Bank but excluding any affiliate of such participant) to or for the
credit or the account of the Borrower, as the case may be, against any and all
of the obligations of the Borrower, now or hereafter existing, including those
under
3
<PAGE>
this Agreement or any Note, irrespective of whether or not the Bank shall have
made any demand under this Agreement or any Note or otherwise and although such
obligations may be unmatured. The Bank agrees to promptly notify the Borrower
after any such set off and application, provided that the failure to give such
notice shall not affect the validity of such setoff and application or give
rise to any claim against Bank. The rights of the Bank under this Section are
in addition to other rights and remedies (including, without limitation, other
rights of setoff) which the Bank may have.
6.4 CROSS-DEFAULTS AND CROSS-COLLATERALIZATION. Any of the Borrower's
property in which the Bank now or in the future has a security interest to
secure payment of any other present or future debt, whether absolute,
contingent, direct or indirect, including the Borrower's guaranties of the
debts of others, shall also secure payment of and be part of the Collateral for
the Credit Facilities and all of Borrower's other present and future
liabilities to Bank howsoever evidenced. A default under this Agreement, shall
be considered a default under all other loans and all obligations of Borrower
to NBD as well as all other agreements between NBD and Borrower. A default by
Borrower under any agreements, notes or documents that they may now or in the
future have with Bank shall be a default under this Agreement and shall be
considered a default under all other present and future agreements between NBD
and Borrower.
7.0 [INTENTIONALLY OMITTED]
8.0 [INTENTIONALLY OMITTED.]
9.0 AFFIRMATIVE COVENANTS. So long as any debt remains outstanding under
the Credit Facilities, the Borrower, and its subsidiaries, if any, shall:
9.1 INSURANCE. Maintain insurance with financially sound and reputable
insurers covering its property, including, but not limited to, the Property and
business against those casualties and contingencies in the types and amounts as
shall be in accordance with sound business and industry practices and is
required in the Mortgage or as otherwise required by NBD.
9.2 EXISTENCE. Maintain its existence and business operations as
presently in effect in accordance with all applicable laws and regulations, pay
its debts and obligations when due under normal terms, and pay on or before
their due date, all taxes, assessments, fees and other governmental monetary
obligations, except as may be contested in good faith if they have been
properly reflected on its books and, at the Bank's request, adequate funds or
security has been pledged to insure payment.
4
<PAGE>
9.3 FINANCIAL RECORDS. Maintain proper books and records of account, in
accordance with generally accepted accounting principles where applicable, and
consistent with financial statements previously submitted to the Bank.
9.4 NOTICE. Give prompt notice to the Bank of the currents of (i) any
Event of Acceleration, and (ii) any other development, financial or otherwise,
which would affect the Borrower's business, properties or affairs in a
materially adverse manner.
9.5 FINANCIAL STATEMENTS. Furnish to the Bank whatever information,
books, and records the Bank may request, including, but not limited to:
A. Within 30 days after and as of the end of each quarter, a balance sheet
and statements of income, retained earnings, and cash flows from the beginning
of that fiscal year to the end of that period, certified as correct by one of
Borrower's authorized agents.
B. Within 90 days after and as of the end of each of its fiscal years, a
detailed financial statements, including a balance sheet and statements of
income retained, earnings and cash flows, audited by an independent certified
public accountant of recognized standing.
C. An Environmental Certificate on the Bank's form on and as of the date
of this Agreement, and thereafter on each five-year anniversary of this
Agreement.
10.0 Negative Covenants.
10.1 Definitions. As used in this Agreement the term "Tangible Net Worth"
means total assets less intangible assets and total liabilities. Intangible
assets include good will, patents, copyrights, mailing lists, catalogs,
trademarks, bond discount and underwriting expenses, organization expenses and
all other intangibles.
10.2 Unless otherwise noted, the financial requirements in this section
will be computed in accordance with generally accepted accounting principles
applied on a basis consistent with financial statements previously submitted by
the Borrower to the Bank.
10.3 Without the prior written consent of the Bank, so long as the Term
Loan remains outstanding, the Borrower shall not:
5
<PAGE>
A. DIVIDENDS. Acquire or retire any of its shares of capital stock, or
declare or pay dividends or make any other distributions or options to purchase
or acquire any shares or securities; provided, however, Borrower has publicly
announced a plan to repurchase the equivalent to $650,000 worth in the
aggregate of the shares of its stock at the then market price as set forth in
Exhibit E attached hereto ("Plan") and provided there is no Event of
Acceleration hereunder, Borrower may acquire shares of its stock pursuant to
such Plan.
B. SALE OF SHARES. Issue, sell or otherwise dispose of any shares of its
capital stock or other securities or rights, warrants or options to purchase or
acquire such shares or securities, except in an underwritten secondary offering
of Borrower's stock.
C. DEBT. Incur, or permit to remain outstanding, debt for borrowed money
or installment obligations, except debt reflected in the latest financial
statement of the Borrower furnished to the Bank prior to execution of this
Agreement and, except with respect to the paydown of a BankAmerica Business
Credit ("BankAmerica) revolving loan as set forth in Section 1.1 hereof, not to
be paid with proceeds of the Credit Facilities. For purposes of this covenant,
the sale of any accounts receivable shall be deemed the incurring of debt for
borrowed money. Notwithstanding the foregoing, Borrower may incur additional
purchase money debt for acquisition of equipment provided such amount shall not
exceed $3,000,000 in any fiscal year and other real estate financing in the
ordinary course of Borrower's business provided such amount shall not exceed
$5,000,000 in a fiscal year.
D. GUARANTIES. Guaranty or otherwise become or remain secondarily liable
on the undertaking of another, except for endorsement of drafts for deposit and
collection in the ordinary course of business.
E. LIENS. Create or permit to exist any lien on any of its property,
real or personal, except: existing liens known to the Bank; liens to the Bank;
liens incurred in the ordinary course of business securing current
nondelinquent liabilities for taxes, worker's compensation, unemployment
insurance, social security and pension liabilities; liens for taxes being
contested in good faith; and subject to Section 10.3C. above, liens for
equipment financing and liens on real estate (other than on the Property) in
the ordinary course of Borrower's business.
F. ADVANCES AND INVESTMENTS. Purchase or acquire any securities of, or
make any loans or advances to or investments in any person or business entity,
except obligations of the United States Government, open market commercial
paper rated one of the top two ratings by a rating agency of recognized
standing, or certificates of deposit in insured financial institutions.
6
<PAGE>
G. USE OF PROCEEDS. Use or permit any loan proceeds to be used, directly or
indirectly, for the purpose of "purchasing or carrying any margin stock" within
the meaning of Federal Reserve Board Regulation U. At the Bank's request, the
Borrower shall furnish to the Bank a completed Federal Reserve Board Form U-1.
H. TANGIBLE NET WORTH. Permit its Tangible Net Worth to be less than
$26,400,000 for the period from the date of this Agreement through January 30,
1997; increasing to $27,100,000 for the period from January 31, 1998 through
January 30, 1999, and increasing to $27,700,000 at January 31, 1999 and
remaining at not less than this amount thereafter.
1. LEVERAGE RATIO. Permit the ratio of its total liabilities to Tangible
Net Worth to exceed 3.00:1.00.
J. INTEREST COVERAGE RATIO. Permit its Interest Coverage Ratio to be not
less than .85:1.0 for the period from the date of this Agreement through October
30, 1997; increasing to .95:1.0 for the period from October 31, 1997 through
April 29, 1998; and increasing to 1.0:1.0 at April 30, 1998 and remaining not
less than this amount thereafter. "Interest Coverage Ratio" means for any period
the ratio of Borrower's net income before tax plus interest expense to interest
expense during such period. This ratio is calculated quarterly on a rolling
four-quarter basis, beginning with the quarter ending August 31, 1996.
11.0 REPRESENTATIONS.
11.1 RESTRICTIONS. Borrower represents that the execution and delivery
of this Agreement and the Note and all other documents and instruments executed
in connection therewith, and the performance of the obligations they impose, do
not violate any law and do not conflict with any agreement by which it is bound,
and that no consent or approval of any governmental authority or any third party
is required in connection with the execution or delivery of this Agreement, the
Mortgage or the Note, or the performance of the obligations they impose, and
that this Agreement and the Note are valid and binding agreements, enforceable
in accordance with their terms.
11.2 FINANCIAL STATEMENTS. Borrower represents that all financial
statements furnished to the Bank are accurate and fairly reflect the financial
condition of Borrower on their effective dates, including contingent liabilities
of every type, which financial condition has not changed materially since those
dates.
11.3 TAXES. There have been no audits of Borrower's federal income tax
returns, which have resulted in or are likely to result in the assessment of any
material tax liability against Borrower and all taxes shown by any returns have
been paid.
7
<PAGE>
11.4 ABSENCE OF MATERIAL LITIGATION. The Borrower is not a party to any
litigation or administrative proceeding, nor so far as is known by the Borrower
is any litigation or administrative proceeding threatened against it, which in
either case would, if adversely determined, cause any material adverse change in
its properties or the conduct of its business or create a liability in excess of
$500,000.
11.5 NAME. Borrower's name is exactly as set forth on the signature page
of this Agreement and the Borrower has not changed its name since, nor has it
used any assumed name(s).
11.6 LIENS. Except for liens in favor of the Bank, Borrower has not
granted any other person any lien or other interest in the Collateral. No
financing statements covering any Collateral or proceeds of the Collateral are
on file in any public office except financing statements with NBD listed as
secured party.
11.7 COLLATERAL. Borrower is the sole owner of the Collateral with full
right and authority to mortgage the Collateral to NBD.
12.0 ACCELERATION.
12.1 EVENTS OF ACCELERATION. If any of the following events occurs:
A. The Borrower fails to pay when due any amount payable under the Credit
Facilities or under any agreement or instrument evidencing debt to any creditor
(including NBD) except of Borrower's trade creditors;
B. The Borrower (a) fails to pay when due any amounts due under the Note,
and such default is not cured within ten (1 0) days thereof; or lb) fails to
observe or perform any other term of this Agreement, the Note or any guaranty
agreements in favor of the Bank, which default is not cured within thirty (30)
days after notice thereof to Borrower; or (c) makes any materially incorrect or
misleading representation, warranty, or certificate to the Bank; or (d) makes
any incorrect or misleading representation in any financial statement or other
information delivered to the Bank; or (e) fails to pay when due Borrower's trade
creditors, which default is not cured within thirty (30) days of such due date;
or (f) defaults under the terms of any agreement or instrument relating to any
debt for borrowed money (other than borrowings under the Credit Facilities)
which are not cured within any applicable cure period thereunder or are not
waived by such creditor within thirty (30) days ("Creditor Waiver Period") of
such default; provided, however, notwithstanding the foregoing, in the event a
creditor or BankAmerica commences an Enforcement Action during the Creditor
Waiver Period it shall immediately be an Event of Acceleration hereunder. For
the purposes of this Agreement the term "Enforcement Action" shall mean any
administrative, legal or equitable action against the Borrower, the collateral
for BankAmerica's loan or the collateral for the Term Loan or any
administrative, legal or
8
<PAGE>
equitable action(s) that may adversely affect Borrower or it's interests,
including, without limitation, exercising any legal rights to enforce security
interests, mortgages or liens against the collateral securing the BankAmerica
loan or the collateral securing the Term Loan, or setting off, or upon any part
of such collateral in the possession of or coming into possession of such
creditor, or its agent or bailee;
C. The Borrower defaults (which default is not cured within any applicable
notice and cure period set forth herein) under the terms of any loan agreement,
mortgage, security agreement, guaranty or any other document or agreement with
Bank, or any guaranty of Borrower's liabilities to Bank becomes unenforceable in
whole or in part, any guarantor fails to promptly perform under any guaranty;
D. A "Reportable Event" as defined in the Employee Retirement Income
Security Act of 1974 as amended (occurs that would permit the Pension Benefit
Guaranty Corporation to terminate any employee benefit plan of the Borrower or
any affiliate of the Borrower).
E. The Borrower becomes insolvent or unable to pay its debts as they
become due;
F. The Borrower, (a) makes an assignment for the benefit of creditors; (b)
consents to the appointment of a custodian, receiver or trustee for it or a
substantial part of its assets; or (c) commences any proceeding under any
bankruptcy, reorganization, liquidation or similar laws of any jurisdiction;
G. A custodian, receiver or trustee is appointed for the Borrower, for a
substantial part of its assets without the consent of the party against which
the appointment is made and is not removed within 15 days after such
appointment; or the Borrower, consents to such appointment;
H. Proceedings are commenced against the Borrower, under any bankruptcy,
reorganization, liquidation, or similar laws of any jurisdiction, and such
proceedings remain undismissed for 10 days after commencement; or the Borrower
consents to the commencement of such proceedings;
I. One or more final judgments for the payment of money aggregating in the
excess of $500,000 (whether or not covered by insurance) shall be rendered
against Borrower and the Borrower shall fail to discharge the same within thirty
(30) days from the date of notice of entry thereof or to appear therefrom or any
attachment, levy, tax lien or garnishment is issued against any property of the
Borrower and is outstanding for more than thirty (30) days therefrom.
J. The Borrower, without the Bank's written consent, (a) is dissolved, (b)
merges or consolidates with any third party; (c) sells a material part of its
assets or
9
<PAGE>
business outside the ordinary course of its business; or (d) agrees to do any of
the foregoing;
K. There is a substantial change in the existing or prospective financial
condition or business prospects of the Borrower that the Bank determines to be
materially adverse;
L. The Bank shall deem itself insecure and Borrower fails to grant
additional security for the Term Loan acceptable to NBD, in its sole discretion,
within ten (10) days of notice thereof;
then, whether or not the Bank has made demand, the Credit Facilities shall
terminate and all borrowings thereunder together with all other of Borrower's
present and future liabilities to Bank shall become due immediately, without
notice, except as provided in this Agreement, at the Bank's option and Bank
shall have all other rights and remedies provided by any law or agreement.
12.2 REMEDIES. If the borrowings under the Credit Facilities or any other
of Borrower's present or future liabilities to Bank are not paid at maturity,
whether by acceleration or otherwise, or if any other Event of Acceleration
occurs, the Bank shall have all of the rights and remedies provided by any law
or agreement, The Bank is authorized to cause all or any part of the Collateral
to be transferred to or registered in its name or in the name of any other
person, firm or corporation, with or without designation of the capacity of such
nominee, and without prior notice to the Borrower. The Borrower shall be liable
for any deficiency remaining after disposition of any Collateral.
12.3 BANKAMERICA WAIVER. Notwithstanding anything herein to the contrary,
in the event of a covenant default under section 10.3 1. or 1 0.3 J. hereunder,
which covenant default (i) occurs within one (1) year of the date hereof and
(ii) BankAmerica waives in writing the identical covenant default or within
thirty (30) days of such covenant default, Bank agrees to waive such covenant
default under the same terms and conditions as BankAmerica.
13.0 MISCELLANEOUS.
13.1 Notice from one party to another relating to this Agreement (or any
agreement referred to or incorporated herein or extended in connection herewith
or in furtherance hereof) shall be deemed effective if made in writing
(including telecommunications) and delivered to the recipient's address, telex
number or telecopier number set forth herein by any of the following means: (a)
hand delivery, (b) registered or certified mail, postage prepaid, with return
receipt requested, (c) first class or express mail, postage prepaid, (d) Federal
Express, Purolator Courier or like overnight courier service or (e) telecopy,
telex or other wire transmission with request
10
<PAGE>
for assurance of receipt in a manner typical with respect to communication of
that type. Notice made in accordance with this section shall be deemed
delivered upon receipt if delivered by hand or wire transmission, 3 business
days after mailing if mailed by first class, registered or certified mall or
one business day after mailing or deposit with an overnight courier service if
delivered by express mall or overnight courier.
13.2 No delay on the part of the Bank or any holder of the Note in the
exercise of any right, power or privilege under this Agreement or any other
agreement shall operate as a waiver nor shall any single or partial exercise of
any right, power or privilege under this Agreement or any other agreement
preclude any other future exercise of that right, power or privilege or the
exercise of any other right, power or privilege. No waiver or indulgence by
the Bank of any default shall be effective unless in writing and signed by the
Bank, nor shall a waiver on one occasion be construed as a bar to or waiver of
that right on any future occasion. The rights and remedies specified in this
Agreement are cumulative and not exclusive of any rights or remedies which the
Bank or the holder of the Note would otherwise have.
13.3 This Agreement embodies the entire agreement and understanding
between the Borrower and the Bank and supersedes all prior agreements and
understandings relating to its subject matter. If any one or more of the
obligations of the Borrower under this Agreement or the Note is invalid,
illegal or unenforceable in any jurisdiction, the validity, legality and
enforceability of the remaining obligations of the Borrower shall not in any
way be affected or impaired, and such validity, illegality or unenforceability
in one jurisdiction shall not affect the validity, legality or enforceability
of the obligations of the Borrower under this agreement or the Note in any
other jurisdiction.
13.4 All agreements, representations and warranties made in this
Agreement shall survive the execution of this Agreement, the making of advances
under the Credit Facilities and the execution and delivery of the Note.
13.5 This Agreement is deemed to be made in, and is delivered in the
State of Michigan and shall be governed by the internal laws of the State of
Michigan without regard to conflicts of law principles; provided, however, all
in rem rights, remedies and procedures with respect to the Mortgage or
realizing on any Collateral located in Arkansas shall be governed by the laws
of the State of Arkansas. This Agreement is binding on the Borrower and its
successors, and shall inure to the benefit of the Bank, its successors and
assigns.
13.6 In the event that any payment called for by this Agreement (or any
agreement referred to or incorporated herein) or any other present or future
agreements between NBD and Borrower is not paid when and as called for in the
terms of such agreement, then NBD may debit any of Borrower's accounts at NBD
for
11
<PAGE>
such amount. The fact that NBD has debited any of Borrower's accounts at NBD
shall in no way whatsoever waive or diminish any default or Event of
Acceleration for failure to make such payments when and as due.
13.7 Borrower, on its own behalf and on behalf of its successors and
assigns hereby expressly waives all rights, if any, to require a marshalling of
assets by the Bank or to require that the Bank first resort to some or any
portion of the Collateral before foreclosing upon, selling or otherwise
realizing on any other portion thereof.
13.8 Section headings are for convenience of reference only and shall not
affect the interpretation of this Agreement.
13.9 NBD may sell participation interests in the Term Loan and in advance
of a sale, NBD may disclose to prospective purchasers all information regarding
the Borrower that NBD is aware of, and the Borrower must cooperate in this
effort. Borrower acknowledges that Springdale Bank & Trust and Farmers and
Merchants Bank are the proposed participants with NBD and that Dwain and Glenda
Newman will be providing guaranties to such participants.
13.10 Waiver of Jury Trial. THE BANK AND THE BORROWER, AFTER CONSULTING
OR HAVING HAD THE OPPORTUNITY TO CONSULT WITH COUNSEL, KNOWINGLY, VOLUNTARILY
AND INTENTIONALLY WAIVE ANY RIGHT EITHER OF THEM MAY HAVE TO A TRIAL BY JURY IN
ANY LITIGATION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY RELATED
INSTRUMENT OR AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED BY THIS
AGREEMENT OR ANY COURSE OF CONDUCT, DEALING, STATEMENTS (WHETHER ORAL OR
WRITTEN), OR ACTIONS OF EITHER OF THEM. NEITHER THE BANK NOR THE BORROWER SHALL
SEEK TO CONSOLIDATE, BY COUNTERCLAIM OR OTHERWISE, ANY SUCH ACTION IN WHICH A
JURY TRIAL HAS BEEN WAIVED WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE
OR HAS NOT BEEN WAIVED. THESE PROVISIONS SHALL NOT BE DEEMED TO HAVE BEEN
MODIFIED IN ANY RESPECT OR RELINQUISHED BY EITHER THE BANK OR THE BORROWER
EXCEPT BY A WRITTEN INSTRUMENT EXECUTED BY BOTH OF THEM.
[Signatures on next page]
12
<PAGE>
NBD BANK, NATIONAL HOME CENTERS, INC.,
a Michigan banking corporation an Arkansas corporation
By: By:/s/ Brent A. Hanby
--------------------------- ----------------------------
Name: Name: Brent A. Hanby
----------------- -----------------------
Title: Title: EVP & CFO
-------------- ---------------------
Dated: September 25, 1996
EXHIBITS:
A - Term Loan Note
B - Mortgage and Security Agreement
C - UCC-1 Financing Statements
D - Preliminary Closing Checklist
E - Stock Repurchase Plan
13
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<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> JAN-31-1997 JAN-31-1997
<PERIOD-START> AUG-01-1996 FEB-01-1996
<PERIOD-END> OCT-31-1996 OCT-31-1996
<CASH> 132,028 132,028
<SECURITIES> 0 0
<RECEIVABLES> 14,804,128 14,804,128
<ALLOWANCES> 0 0
<INVENTORY> 33,480,211 33,480,211
<CURRENT-ASSETS> 50,050,577 50,050,577
<PP&E> 51,262,253 51,262,253
<DEPRECIATION> 12,692,251 12,692,251
<TOTAL-ASSETS> 90,827,545 90,827,545
<CURRENT-LIABILITIES> 25,456,616 25,456,616
<BONDS> 0 0
0 0
0 0
<COMMON> 74,660 74,660
<OTHER-SE> 27,577,859 27,577,859
<TOTAL-LIABILITY-AND-EQUITY> 90,827,545 90,827,545
<SALES> 47,040,920 141,551,278
<TOTAL-REVENUES> 47,040,920 141,551,278
<CGS> 35,721,533 107,238,791
<TOTAL-COSTS> 35,721,533 107,238,791
<OTHER-EXPENSES> 10,999,605 32,604,090
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 919,251 2,640,494
<INCOME-PRETAX> (599,469) (932,097)
<INCOME-TAX> (205,460) (316,913)
<INCOME-CONTINUING> (394,009) (615,184)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (394,009) (615,184)
<EPS-PRIMARY> (0.06) (0.09)
<EPS-DILUTED> 0 0
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