<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended January 31, 1997.
[_] 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
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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) (Zip Code)
Registrant's telephone number, including area code: (501) 756-1700
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 par value traded on the NASDAQ National Market System
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 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 pursuant to Item
405 of Regulation S-K ((S) 229.405 of this chapter) (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 this
Form 10-K or any amendment of this Form 10-K. [X]
On April 7, 1997, there were outstanding 7,142,251 shares of the
registrant's Common Stock, $.01 par value.
The aggregate market value of the 2,448,502 shares of Common Stock held by
non-affiliates of the registrant as of April 7, 1997 was $4,590,941.
DOCUMENTS INCORPORATED BY REFERENCE
National Home Centers, Inc. Annual Report for fiscal year ended January 31,
1997 (certain portions incorporated by reference into Part II)
Proxy Statement for Annual Meeting of Stockholders, June 5, 1997 and
Adjournments (certain portions incorporated by reference into Part III)
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<PAGE>
PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES.
-----------------------
THE COMPANY
BACKGROUND
General. National Home Centers, Inc. ("NHC" or the "Company") started its
building supply operations in 1972 and opened its first store, serving primarily
professional contractors, in 1977. In 1983, NHC began implementing a dual-
customer strategy, serving both professional contractors and retail consumers.
Today, the Company operates six large home center superstores in tandem with six
complete building supply operations, all in Arkansas, and approximately 48% of
its sales are to retail consumers. NHC's business strategy capitalizes on the
overlap between retail and professional contractor sales by providing a broad
product assortment and a full range of services in each of its markets, either
at a single location or through an integrated network of stores.
The Company operates its stores in four Arkansas markets: Fayetteville-
Bentonville (five stores); Little Rock (four stores); Russellville (two stores);
and Fort Smith (one store). NHC also operates fabrication facilities for value-
added conversion products such as countertops, pre-hung door units, and window
units. During fiscal 1996, NHC sold its cabinet and truss manufacturing
divisions to unrelated third parties.
Executive Offices. The Company's executive offices are located at Highway
265 North, Springdale, Arkansas 72765. The Company's telephone number is (501)
756-1700.
BUSINESS
GENERAL
NHC 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. Management
believes that NHC is one of Arkansas's largest retailers of home improvement
products and building materials, and that it has one of the largest market
shares in each of its trading areas.
The Company believes that retail and professional contractor sales
complement and frequently reinforce each other. NHC's business strategy
capitalizes on the overlap between these two customer groups by providing a full
range of services either at a single location or through an integrated network
of stores. The key elements of this strategy are to:
. Dominate both retail and professional contractor sales in its markets.
. Maximize synergy between customer groups.
. Emphasize retail sales growth by opening home center superstores.
. Deliver superior service with attention to detail.
Retail consumers and professional contractors have significant and varying
product and service requirements. While most of its competitors focus on a
single customer group, NHC's distinct strategies for serving each group have
allowed it to attract sales in the markets it serves.
1
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Retail consumers expect competitive prices, individualized service, and
broad product selection. To meet the needs of these customers, NHC maintains
large, well-merchandised stores, each with a broad selection of competitively
priced home improvement products and staffed with well-trained employees. The
Company's home center superstores average approximately 125,000 square feet each
with up to 40,000 stock keeping units ("SKUs") fully displayed for the
customer's convenience. NHC's volume purchasing, resulting from combined
purchasing for retail consumers and professional contractors, allows it to offer
its products at competitive, everyday low prices.
Professional contractors are large-volume repeat customers that develop
long-term relationships with suppliers and expect individualized service from
experienced in-store and field salespersons. Professional contractors also
value reliable service, timely delivery, quality products, competitive prices
and individualized credit. NHC meets these demands by providing separate sales
areas for professional contractors in each of its stores, which are staffed with
employees specifically trained to address the needs of these customers. NHC
employs a dedicated professional contractor sales force of approximately 41 in-
store personnel, who take telephone and direct orders, and 39 field sales
representatives, who regularly call on contractors and visit job sites. In
addition, NHC provides reliable, timely delivery of building materials through
scheduled daily and weekly deliveries to job sites within a 125-mile radius of
its stores, including sites in Missouri, Oklahoma and Kansas. The Company also
has rooftop, conveyor delivery of roofing materials as an added feature to the
delivery system.
The Company maintains a variety of store formats in each market it serves.
Its various store formats allow NHC to achieve operational efficiencies while
providing a full range of services for both customer groups, either at a single
location or through its integrated network of stores, and to enhance its overall
market share.
The Company's objective is to maintain an anchor store in each market it
serves to support and facilitate the operations of other store formats in that
market. These anchor stores are the Company's largest and include the most
comprehensive facilities and services for both types of customer. Anchor stores
contain expansive warehouse space allowing them to serve as distribution centers
for NHC's other stores and thus take advantage of discount pricing associated
with special high-volume purchases. In addition, substantial inventories at
each anchor store supplement inventories at other stores in that market which
may focus predominantly on only one customer group.
NHC has implemented the anchor store concept in both the Little Rock and
Fayetteville-Bentonville markets. The Company's North Little Rock store
combines 95,200 square feet of retail selling space with 150,000 square feet of
warehouse space, a complete door and window fabrication shop, and credit and
delivery services for professional contractors. The nearby 38,832 square foot
Little Rock store, which serves primarily retail consumers, depends on the
anchor facility for special product needs or services. Similarly, the Company's
Springdale store includes 50,000 square feet of retail selling space plus
190,000 square feet of warehouse space, fabrication facilities for window units
and doors and complete contractor services. This store functions as an anchor
for smaller stores in nearby Rogers and Bentonville, both of which emphasize
professional contractor sales. It also services the Fayetteville and Rogers
superstores for special product needs or services. Through the Company's
computer system, sales personnel at the Rogers and Bentonville stores can
quickly determine whether a product is available at the anchor store and can
have that product delivered either to the store or directly to the customer.
With its network of stores operating together to provide a full range of sales
and services, NHC believes it benefits from the complementary demands of retail
consumers and professional contractors.
2
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The Company seeks to take advantage of the trend in retail sales growth by
operating home center superstores. Management believes that growth in retail
sales will further insulate the Company from the cyclical nature of the
contractor business, although the Company's growth strategy for new markets may
include the acquisition of smaller contractor locations. This strategy would
provide an immediate entrance into markets where the Company previously has not
solicited business. NHC's fiscal 1996 sales consisted of 52% professional
contractor and 48% retail.
Because its customers have widely diverse service needs, NHC is committed to
staffing its stores with well-trained, specialized personnel who can provide
retail consumers and professional contractors with meaningful information about
the Company's wide array of products and services. Each NHC store includes a
customer service desk which provides retail consumers with a central location
for obtaining product information and other customer assistance. Employees
staffing the customer service desk provide information on location or
availability of merchandise and are trained to assist customers in the selection
of products appropriate for the customer's home improvement project. A separate
customer service desk is located at the professional contractor entrance to each
store and is staffed with employees specially trained to assist the professional
contractor customer.
STORE PROPERTIES
The following table shows the location, opening date, size,
retail/contractor sales mix and approximate number of SKUs of each of the
Company's stores:
<TABLE>
<CAPTION>
AREA IN SQUARE FEET RETAIL/
OPENING ------------------- CONTRACTOR FABRICATION
STORE LOCATION DATE ACREAGE RETAIL WAREHOUSE MIX (%) SKUS OPERATIONS
-------------- ---- ------- ------ --------- ------- ---- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
I. FAYETTEVILLE-BENTONVILLE
Springdale 11/83 21 50,000 190,000 26/74 25,000 door, window
Rogers 02/85 5 8,458 19,000 10/90 11,000 --
Bentonville 06/92 6 20,200 18,000 10/90 20,000 --
Fayetteville 05/94 16 154,901 15,000 80/20 40,000 --
Rogers Superstore 10/95 20 186,406 20,000 75/25 40,000 --
II. FORT SMITH
Fort Smith 12/77 10 31,074 110,000 15/85 11,500 door, window
</TABLE>
3
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<TABLE>
<CAPTION>
AREA IN SQUARE FEET RETAIL/
OPENING ------------------- CONTRACTOR FABRICATION
STORE LOCATION DATE ACREAGE RETAIL WAREHOUSE MIX (%) SKUS OPERATIONS
-------------- ---- ------- ------ --------- ------- ---- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
III. LITTLE ROCK
North Little Rock 10/85 13 95,200 150,000 41/59 35,000 door, window
Little Rock 01/88 3 38,832 8,000 90/10 25,000 --
Conway 02/93 8 85,300 20,000 59/41 35,000
Conway Contractor 05/93 4 0 30,000 0/100 10,000 door
IV. RUSSELLVILLE
Russellville 06/93 14 102,652 80,000 50/50 35,000 door, window
Clarksville 09/95 1 0 14,000 0/100 11,000 --
Total area 773,023 674,000
- ----------------------------
</TABLE>
The Company leases seven of its stores for terms of 10 to 15 years and,
except for Little Rock and Russellville, each has four options to renew for
periods of five years. The Little Rock store lease has an option to renew for
one additional period of eight years and three months. The Russellville store
lease contains one option to renew for a period of 10 years. The Little Rock,
Clarksville and Russellville locations are leased from third parties while the
Bentonville, Fort Smith, North Little Rock, Rogers and Springdale properties are
leased from the Company's Chairman. The Fayetteville, Conway and Rogers
superstores and Conway Contractor are owned by the Company.
In the future, the Company may own the land and buildings for some of its
stores. In the event the Company believes it is advantageous to purchase land
or buildings to secure a new store location, the Company may use cash or
existing financing sources and attempt to secure permanent financing after a
store is opened.
The Company owns a thirty (30) acre parcel in Branson, Missouri, a ten (10)
acre parcel in Fort Smith, Arkansas and a twenty-four (24) acre parcel in
Fayetteville, Arkansas. All three parcels are owned free of debt and have been
placed on the market for sale. The Company has an agreement for sale on the
Fort Smith parcel and has received a good faith deposit. The sale is expected
to take place in July 1997 with estimated net proceeds to the Company of
approximately $2,150,000.
FABRICATION FACILITIES
NHC maintains fabrication facilities in Springdale, Fort Smith,
Russellville, Conway and North Little Rock for value-added conversion products,
such as counter tops, pre-hung door units and window units. Management believes
that this vertical integration provides an advantage in serving professional
contractors by offering them a wide variety of products at competitive prices,
thus encouraging increased sales. The Company's door shops, located in
Springdale, Fort Smith, North Little Rock, Conway and Russellville, are equipped
with modern, automated machinery, and are capable of producing high-quality
interior and exterior door units at competitive prices. The Company manufactures
over 20,000 pre-hung door units per month. Door shops, which also are equipped
and staffed to custom cut and produce laminated kitchen and bath counter tops,
serve both retail customers and professional contractors and enable the Company
to provide prompt, local service at lower costs. Management believes that its
fabrication facilities are adequate to meet existing and foreseeable needs.
4
<PAGE>
In November 1996, the Company entered into an agreement with American Quality
Manufacturing Corporation ("AQMC") to sell its cabinet manufacturing unit,
Cabinet Craft. The transaction consisted of the sale of inventory and equipment
and a cash advance in exchange for notes receivable totaling $1.7 million. The
Company incurred a net loss of approximately $599,000 from this division during
fiscal year 1995 and approximately $1,185,000 during the fiscal year ended
January 31, 1997.
In December 1996, AQMC ceased operations at its two Arkansas facilities,
including Cabinet Craft. In addition the Company has been informed that AQMC
has been placed into an involuntary bankruptcy proceeding. As a result, the
Company has fully reserved the notes receivable. The loss resulting from this
write-off is included in the $1,185,000 above. See Item 3 - Legal Proceedings
for further detail on this transaction.
Also, in November 1996, the Company sold certain truss assembly and
manufacturing equipment to a third party, for $50,000 cash and a promissory note
of $275,000. The note is due on or before November 1, 1998, and is secured by a
lien on all equipment sold to the buyer.
PRODUCTS
The Company's stores offer a large selection of lumber, building materials,
hardware and tools, electrical and plumbing supplies, paint, lighting, home
decor, pre-hung doors, windows, appliances, cabinets, garden supplies and
seasonal items. Each store currently stocks between 11,000 and 40,000 SKUs.
Many of the items sold in the Company's stores are nationally advertised, brand-
name products. NHC classifies its product offerings into five categories:
BUILDING MATERIALS--Dimensional lumber, plywood, roofing, trusses, siding,
windows, finish lumber, pre-hung doors and moldings.
HARDWARE/PLUMBING/ELECTRICAL--Electrical wire and wiring materials, lighting
fixtures, plumbing materials, power and hand tools, and door locks.
HOME DECOR--Paint, wall and floor coverings and housewares.
APPLIANCES/CABINETS--Kitchen appliances, washers, dryers, cabinets and
fireplaces.
LAWN AND GARDEN--Plants, fertilizer, mowers, garden tools and outdoor
furniture.
The percentage of sales accounted for by the merchandise categories for each of
the Company's three most recent fiscal years were as follows:
<TABLE>
<CAPTION>
Fiscal Year Ending January 31,
---------------------------------
Products 1997 1996 1995
- -------- ---- ---- ----
<S> <C> <C> <C>
Building Materials............ 52 53 56
Hardware/Plumbing/Electrical.. 19 18 17
Home Decor.................... 11 10 9
Appliances/Cabinets........... 11 13 12
Lawn and Garden............... 7 6 6
--- ---- ----
Total......................... 100% 100% 100%
</TABLE>
5
<PAGE>
PURCHASING
Except for pre-hung doors which are fabricated by the Company, NHC purchases
its merchandise from more than 800 manufacturers and suppliers. No single
supplier accounted for more than 10% of NHC's total purchases in fiscal 1996.
The Company believes it has good relationships with its suppliers and does not
consider itself dependent upon any single source for its merchandise.
Management does not believe that the loss of any single supplier would have a
material adverse effect on the Company.
The Company's corporate merchandise buyers, located in the Springdale
corporate office, make all decisions on new products to be sold in NHC stores.
Once the corporate buyers have selected a new product, they issue initial
purchase orders for all NHC stores where that product will be sold. Buyers in
each store are responsible for making subsequent orders for all in-stock
merchandise. Each store's computer system tracks the quantity of any product
sold and automatically generates recommended purchase orders which are edited by
store buyers who then issue purchase orders directly to the vendor. Merchandise
is typically shipped directly to the store that will stock the product. In
addition, sales volumes resulting from successful implementation of the
Company's dual-customer strategy permit NHC to maximize economies available from
discount purchases. These large volume purchases may be shipped to the
Company's Springdale or North Little Rock stores for subsequent distribution to
other NHC stores in those markets.
CREDIT
NHC offers credit for professional contractors which allows those customers to
make purchases at any NHC store. Professional contractors make the majority of
their purchases on credit. Subcontractors hired by a professional contractor,
as well as the property owner, may charge materials purchased for that job to
the professional contractor's account. Credit policies and procedures are
established by the Company's credit department, and all professional contractor
sales representatives are trained in those policies and procedures. Each of
NHC's market areas has a dedicated credit manager who interacts with sales
representatives, management and credit agencies to manage and monitor customer
credit. The Company also has a Corporate Credit Manager who oversees five area
credit managers and activities and policies relating to contractor receivables.
NHC's credit policies are designed to maximize extension of credit to
professional contractors without unduly risking bad credit. Credit sales
accounted for substantially all of NHC's total sales to professional contractors
in fiscal 1996, while the Company's credit loss was 0.85% of contractor sales.
In addition, NHC accepts third-party credit cards such as MasterCard, Visa,
American Express and Discover, and maintains a private-label credit program, the
National Home Centers Home Project Plus Card, administered by Household Retail
Services, Inc. Approximately 27% of NHC's retail sales were made on third-party
and proprietary credit cards in fiscal 1996.
MARKETING
Management believes that its strongest marketing tools are exceptional
customer service and everyday low prices. Because many retail customers make
buying decisions in the store, NHC focuses its marketing efforts on maintaining
a well-stocked inventory and superior service to encourage add-on sales which
augment the average purchase. As a result of this approach, NHC spent 0.93% of
sales on advertising in fiscal 1996, primarily on seasonal direct mail
advertising for special promotions, and to reinforce customer awareness of its
everyday low pricing. Television advertising, which has increased in response
to new retail competition, is substantially funded by vendor cooperative
programs.
NHC offers various volume-oriented price levels to professional contractors to
promote larger purchases. The Company's computerized pricing system permits
sales personnel to provide consistent quantity discounts and immediate response
to customer requests for discounts on volume purchases.
6
<PAGE>
For the past 18 years, the Company has offered professional contractors a
travel incentive program in which customers earn, through their purchases,
credit toward trips arranged each year by the Company. The program, which has
been highly successful in helping the Company increase its share of the
professional contractor business, gives the Company an opportunity to present
product seminars during each trip. There are currently 275 customers signed up
for a fall 1997 trip to Kona, Hawaii. Builders qualify for the travel incentive
program by purchasing certain volumes of materials and by making timely payments
each month.
MANAGEMENT INFORMATION SYSTEMS
NHC's management information systems have been designed and developed to
address a wide range of functions including sales analysis, merchandise ordering
and processing, merchandise management and presentation and financial
management. Through these systems, management has access to concise, relevant
information on performance that includes the daily individual store and
department information necessary for financial and merchandising decisions,
strategic planning and analysis.
The Company maintains a fully computerized point-of-sale retail management
system and custom-designed software. The Company utilizes IBM RS-6000 hardware
and special building materials software developed by Computer System Dynamics.
NHC's system provides (1) point-of-sale scanning, (2) sales and inventory
tracking, compiling data by store, employee, product category and individual
SKU, (3) receivables tracking, (4) computer generated purchase orders, and (5)
other operating and management reports. NHC is currently utilizing Electronic
Data Interchange ("EDI") with selected vendors.
NHC's point-of-sale system is a fully integrated sales, credit, receivables,
inventory, purchasing and data collection system. This system includes UPC
scanning for all items sold at NHC stores and provides automatic price check at
the register as well as sales audit reporting, advertised item reporting, item
sales performance and history, daily computer review and suggested purchase
orders. The system also tracks professional contractor receivables and requires
management approval for any transaction which would exceed the customer's
account credit limit. Accounting software handles the Company's payroll,
accounts payable and general ledger. These functions are centralized at the
Company's corporate office. The Company has implemented the Oracle Relational
Database Management System. This system allows integration of the point-of-sale
system and the accounting system. The Company has entered into service
contracts with third parties for service and upgrades of computer software.
Company policies require daily backup at each store which is maintained at
secure off-site locations. In addition, the Company maintains a standby
mainframe unit to operate as backup for its primary system.
COMPETITION
The Company experiences competition from home centers, discount retail stores,
supermarkets, warehouse stores, certain specialty stores, traditional hardware,
plumbing and electrical suppliers and lumberyards. NHC's principal competitors
in Arkansas currently are Lowe's, Home Depot, Sutherlands, Payless Cashways,
McCoy's, Meeks, Ridout and Home Quarters. During fiscal 1996, Lowe's opened
stores in Russellville and Conway, and Home Depot opened stores in North Little
Rock and west Little Rock, Arkansas. These stores opened in the fall of 1996
and could adversely affect the Company's sales in these markets.
Management believes that few of its present or potential competitors are
equipped to serve both retail consumers and professional contractors with the
same level of everyday low pricing, product selection and customer service
capabilities as NHC provides. For more than a decade, the Company has been
developing the skills necessary to manage the dual-customer format. Management
believes that companies which target primarily retail consumers would find
establishing a substantial professional contractor business expensive because of
the large delivery fleets that are required, the complexities associated with
credit management and the special expertise necessary for sales and customer
service. Similarly, companies currently serving
7
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primarily professional contractors would find adding significant retail business
costly in terms of larger retail facilities, added expertise related to
merchandising, and significant competition from large discount retail and home
improvement stores.
PATENTS AND TRADEMARKS
The Company has obtained federal trademark registration for the service mark
National Home Centers(R). The federal registration covers NHC's use of the mark
for retail lumber, building materials and hardware store services, but does not
contemplate use of the mark on other products.
EMPLOYEES AND LABOR RELATIONS
As of January 31, 1997, the Company employed 951 persons, consisting of 803
full-time and 148 part-time personnel. Generally, the Company believes that
relations with its employees are excellent. None of the Company's employees are
represented by a union or covered by a collective bargaining group.
Item 3. Legal Proceedings.
-----------------
In connection with the sale of the Company's cabinet manufacturing unit,
Cabinet Craft, litigation has been threatened and claims have been made by
AQMC's primary lender regarding the sale of assets by the Company to AQMC.
AQMC's primary lender is also one of the Company's lenders. This lender is the
one with which the Company is currently in default regarding a real estate loan.
The lender claims to be a secured creditor of AQMC and has asserted an interest
in certain assets of AQMC with respect to which the Company also has an
interest. Specifically, the lender (i) claims to have a priority interest in
Cabinet Craft's equipment and inventory, (ii) claims to be owed $367,500
pursuant to the Company's purchase of inventory from AQMC under terms of the
Sales Agreement, (iii) claims to be owed in excess of $83,000 by the Company for
other purchases from AQMC, and (iv) asserts a priority interest in all post-sale
accounts receivable owed to AQMC.
As a result of AQMC's bankruptcy proceeding, neither the lender nor the
Company have the present ability to begin litigation against one another on
these claims. However, it is anticipated that if a settlement is not reached
between the Company and the lender, the lender will file a motion asking the
bankruptcy trustee to abandon these claims and allow litigation to begin between
the lender and the Company. The Company has offered a proposed settlement to
the lender concerning these claims, which includes paying a reduced amount in
settlement of the accounts payable and repossessing the inventory; however, the
lender has not provided a written response to this offer.
From time to time, the Company is involved in lawsuits arising in the ordinary
course of business. Such lawsuits have not resulted in any material losses to
date.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
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The Company is authorized to issue 25,000,000 shares of Common Stock, $.01 par
value of which 7,142,251 shares were outstanding as of April 7, 1997, and
5,000,000 shares of Preferred Stock, $1.00 par value, of which no shares were
outstanding as of April 7, 1997.
8
<PAGE>
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Subject to
preferences applicable to any outstanding Preferred Stock, holders of Common
Stock are entitled to receive ratably such dividends as may be declared by the
Board of Directors out of funds legally available therefor. Holders of Common
Stock have no preemptive or subscription rights and there are no redemption or
conversion rights with respect to such shares. The outstanding shares of Common
Stock are fully paid and non-assessable. As of January 31, 1997, the Company's
Chairman beneficially owned approximately 62.9% of the outstanding Common Stock.
The Company has not previously paid any cash dividends on its Common Stock and
does not anticipate paying any cash dividends in the future. See "Dividend
Policy."
At April 7, 1997, the 7,142,251 shares of Common Stock then outstanding were
held by approximately 443 persons (excluding persons holding shares in nominee
names). The Transfer Agent and Registrar for the Common Stock is Boatmen's
Trust Company in St. Louis, Missouri.
The Company's Common Stock is currently traded on the NASDAQ National Market
System under the symbol "NHCI." The following table sets forth the quarterly
high and low sales price for the Common Stock as reported on NASDAQ.
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
FISCAL 1995
-----------
First Quarter.......................... $4.50 $3.38
Second Quarter......................... 4.00 3.00
Third Quarter.......................... 4.00 3.00
Fourth Quarter......................... 3.88 2.13
FISCAL 1996
-----------
First Quarter.......................... 3.13 2.25
Second Quarter......................... 3.25 2.13
Third Quarter.......................... 3.00 2.00
Fourth Quarter......................... 2.50 1.50
FISCAL 1997
-----------
First Quarter (through April 7, 1997).. 2.25 1.50
</TABLE>
PREFERRED STOCK
The Board of Directors is authorized to provide for the issuance of Preferred
Stock in one or more series and to fix the dividend rate, conversion rights,
voting rights, rights and terms of redemption, redemption price or prices,
liquidation preferences and qualifications, limitations and restrictions thereof
with respect to each series. Although the Company has no present intention to
issue shares of Preferred Stock, the issuance of shares of Preferred Stock or
the issuance of rights to purchase such shares could have an anti-takeover
effect and may delay, defer or prevent a tender offer or takeover attempt that a
stockholder might consider in his best interest, including attempts that might
result in a premium over the market price for the shares held by such
stockholder.
9
<PAGE>
DIVIDEND POLICY
The Company has not previously paid cash dividends on its Common Stock. The
Company intends to retain any earnings for use in its business and therefore
does not anticipate paying any cash dividends in the foreseeable future. The
Company's revolving credit facility prohibits the payment of cash dividends on
its Common Stock, unless certain profit goals are met.
Item 6. Selected Financial Data.
-----------------------
Incorporated by reference from the section captioned "Selected Consolidated
Financial Data," page 6 of the National Home Centers, Inc. 1996 Annual Report
(the "1996 Annual Report").
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations.
-------------
Incorporated by reference from the sections captioned "Management's
Discussion and Analysis," pages 7 through 10 of the 1996 Annual Report.
Item 8. Financial Statements and Supplementary Data.
-------------------------------------------
Incorporated by reference from the sections captioned "Consolidated Balance
Sheets, "Consolidated Statements of Operations," "Consolidated Statements of
Stockholders' Equity," "Consolidated Statements of Cash Flows," "Notes to
Consolidated Financial Statements," and "Report of Independent Public
Accountants," pages 11 through 23 of the 1996 Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure.
--------------------
On October 28, 1996, National Home Centers, Inc. (the "Company") changed its
principal independent accounting firm from KPMG Peat Marwick LLP ("KPMG") to
Arthur Andersen LLP ("Andersen"). KPMG's report on the financial statements for
the past two years did not contain an adverse opinion or a disclaimer of
opinion, nor was the report qualified or modified as to uncertainty, audit
scope, or accounting principles. The decision to change accountants was
recommended and approved by the audit committee of the Board of Directors.
During the Company's two most recent fiscal years and the subsequent interim
period preceding this change, there have not been any disagreements with KPMG on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope of procedure.
On October 28, 1996, the Company engaged Andersen as the new independent
accountant to audit the Company's financial statements. During the Company's
two most recent fiscal years, and the subsequent interim period prior to
engaging Andersen, the Company has not consulted Andersen regarding (i) either:
the application of accounting principles to a specified transaction, either
completed or proposed; or the type of audit opinion that might be rendered on
the Company's financial statements, and no written report was provided to the
Company and no oral advice was provided that Andersen concluded was an important
factor considered by the Company in reaching a decision as to the accounting,
auditing or financial reporting issue; or (ii) any matter that was either the
subject of a disagreement (as defined in paragraph 304(a)(1)(iv) of Regulation
S-K) or a reportable event (as described in paragraph 304(a)(1)(v) of Regulation
S-K).
10
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
--------------------------------------------------
Incorporated by reference from the sections captioned "Election of
Directors," "Executive Officers" and "Section 16 Requirements" contained in the
Company's Proxy Statement for Annual Meeting of Stockholders, June 5, 1997 and
Adjournments (the "Proxy Statement").
Item 11. Executive Compensation.
----------------------
Incorporated by reference from the section captioned "Executive
Compensation" contained in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
--------------------------------------------------------------
Incorporated by reference from the section captioned "Principal
Stockholders" contained in the Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
----------------------------------------------
Incorporated by reference from the sections captioned "Executive
Compensation--Compensation Committee Interlocks and Insider Participation" and
"Certain Transactions" contained in the Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
----------------------------------------------------------------
(a) Documents filed as a part of this report.
1. Financial statements.
--------------------
The following consolidated financial statements of National Home
Centers, Inc. and Subsidiary have been incorporated by reference from
the 1996 Annual Report into Item 8 of this Report.
Description
-----------
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
2. Financial Statements Schedules.
------------------------------
No schedules provided for in the applicable accounting regulation of the
Securities and Exchange Commission are required under the related
instructions, or the regulation is inapplicable; therefore, schedules
have been omitted.
11
<PAGE>
3. Exhibits required by Item 601 of Regulation S-K.
-----------------------------------------------
Exhibit No. Description
----------- -----------
3.1 Amended and Restated Articles of Incorporation of the
Company./1/
3.2 Amended and Restated By-Laws of the Company./1/
4.1 Form of the Company's Common Stock Certificate/.1/
4.2 Amended and Restated Articles of Incorporation of the
Company, Sections 5 through 7./1/
10.1 Life Insurance Policy, dated May 15, 1983, issued by
Executive Life Insurance Company on the life of Dwain A.
Newman, in the amount of $1,000,000 with the Company named as
beneficiary, including Assignment, dated September 10, 1992,
to the Arkansas Teachers Retirement System./1/
10.2 Lease Agreement dated September 1, 1992 between Dwain A.
Newman and Glenda R. Newman and the Company for the
Springdale, Arkansas store./1/
10.3 Lease Agreement dated September 1, 1992 between Dwain A.
Newman and Glenda R. Newman and the Company for the North
Little Rock, Arkansas store./1/
10.4 Lease Agreement dated September 1, 1992 between Dwain A.
Newman and Glenda R. Newman and the Company for the Fort
Smith, Arkansas store./1/
10.5 Lease Agreement dated June 1, 1992 between Dwain A. Newman
and Glenda R. Newman and the Company for the Bentonville,
Arkansas store./1/
10.6 Lease Agreement dated June 1, 1992 between Dwain A. Newman
and Glenda R. Newman and the Company for the Rogers, Arkansas
store./1/
10.7 Lease Agreement dated June 1, 1992 between Dwain A. Newman
and Glenda R. Newman and the Company for the Cabinet Craft
facility in Springdale, Arkansas./1/
10.8 Lease Agreement dated July 1, 1993 between Parham Properties,
Inc. and the Company for the Little Rock, Arkansas store./3/
10.9 Lease Agreements dated December 22, 1992 between Valley Park
Limited Partnership and the Company for the Russellville,
Arkansas store./1/
12
<PAGE>
Exhibit No. Description
----------- -----------
10.10 Subordination, Attornment and Non-Disturbance Agreement and
Estoppel Certificate dated September 10, 1992 between ATRS,
the Company, and Dwain A. Newman and Glenda R. Newman for the
Springdale, North Little Rock and Fort Smith Leases./1/
10.11 Form of the 1993 Employee Stock Purchase Plan of National
Home Centers, Inc./1/
10.12 Form of the Company's 1993 Incentive Compensation
Plan./1/
10.13 Loan and Security Agreement dated December 29, 1992 between
the Company and MetLife Capital Corporation with Supplemental
Security Agreement and Term Promissory Note No. One dated
December 29, 1992, and Supplemental Security Agreement and
Term Promissory Note No. Two, dated March 8, 1993./1/
10.14 Loan Agreement dated August 4, 1993 between the
Company and MetLife Capital Corporation./2/
10.15 Supplemental Security Agreement and Term Promissory Note No.
Three between the Company and MetLife Capital Corporation
dated October 25, 1993./3/
10.16 Supplemental Security Agreement and Term Promissory Note No.
Four between the Company and MetLife Capital Corporation
dated December 29, 1993./3/
10.17 Note and Security Agreement dated December 31, 1993 between
the Company and NationsBanc Leasing Corporation./3/
10.18 Promissory Note and Security Agreement dated 5/31/94 between
the Company & Metlife Capital Corporation./4/
10.19 Note & Security Agreement dated 6/15/94 between the
Company and NationsBanc Leasing Corp./4/
10.20 Assignment of Policy dated 5/20/94 between the
Company and the Newman 1994 Family Trust./4/
10.21 Assignment of Policy dated 5/20/94 between the
Company and the Newman 1994 Family Trust./4/
13
<PAGE>
Exhibit No. Description
----------- -----------
10.22 Split Dollar Insurance Agreement dated 5/20/94 between the
Company and the Newman 1994 Family Trust./4/
10.23 Split Dollar Insurance Agreement dated 5/20/94 between the
Company and the Newman 1994 Family Trust./4/
10.24 Guaranty Agreement effective May 20, 1994./5/
10.25 Supplemental Security Agreement and Term Promissory Note No.
1 dated December 6, 1994 between the Company and MetLife
Capital Corporation./6/
10.26 Promissory Note and Mortgage dated May 5, 1995 to
First Bank of Arkansas for Conway, Arkansas Store./7/
10.27 Merchant Agreement dated March 16, 1995 between
the Company and Household Bank (Illinois), N.A./7/
10.28 Note and Security Agreement dated August 30, 1995 between the
Company and NationsBank Leasing Corporation./8/
10.29 Loan and Security Agreement dated December 19, 1995 between
the Company and BankAmerica Business Credit, Inc./9/
10.30 Form of the Company's 401(k) Adoption Agreement
with First Tennessee National Bank as Trustee./9/
10.31 Waiver letter from BankAmerica dated April 8, 1997.
10.32 1996 Long-Term Performance Plan.
10.33 First Amendment to Loan and Security Agreement with
BankAmerica Business Credit, Inc./10/
10.34 Term Loan Agreement dated September 25, 1996
between the Company and NBD Bank./11/
11.1 Computation of Earnings (Loss) Per Share.
13.1 National Home Centers, Inc. 1996 Annual Report (only those
portions specifically incorporated herein by reference shall
be deemed filed with the Commission).
21.1 Subsidiaries of the Company./1/
14
<PAGE>
Exhibit No. Description
----------- -----------
23.1 Consent of Arthur Andersen LLP, Independent Certified Public
Accountants.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
The Company filed two Current Reports on Form 8-K during fiscal 1996.
Exhibit No. Description
----------- ----------
1. Form 8-K disclosing (1) sale of Cabinet Craft Division to
American Quality Manufacturing Corporation on November 1,
1996 and (2) sale of truss assembly and manufacturing
equipment to Latco Construction, Inc. on November 7, 1996 as
filed with the Securities and Exchange Commission on November
18, 1996.
2. Form 8-K disclosing change of principal independent
accounting firm from KPMG Peat Marwick LLP to Arthur Andersen
LLP as filed with the Securities and Exchange Commission on
November 1, 1996.
- -----------------------
/1/ Incorporated by reference from National Home Centers, Inc. Form S-1
Registration Statement No. 33-60078, as amended, filed with the Securities
and Exchange Commission on March 26, 1993.
/2/ Incorporated by reference from National Home Centers, Inc. Quarterly
Report on Form 10-Q for the period ended October 31, 1993, filed with the
Securities and Exchange Commission on December 13, 1993.
/3/ Incorporated by reference from National Home Centers, Inc. Annual Report
on Form 10-K for the fiscal year ended January 31, 1994, filed with the
Securities and Exchange Commission on April 29, 1994.
/4/ Incorporated by reference from National Home Centers, Inc. Quarterly
Report on Form 10-Q for the period ended July 31, 1994, filed with the
Securities and Exchange Commission on September 15, 1994.
/5/ Incorporated by reference from National Home Centers, Inc. Quarterly
Report on Form 10-Q for the period ended October 31, 1994, filed with the
Securities and Exchange Commission on December 15, 1994.
/6/ Incorporated by reference from National Home Centers, Inc. Annual Report
on Form 10-K for the fiscal year ended January 31, 1995, filed with the
Securities and Exchange Commission on April 29, 1995.
/7/ Incorporated by reference from National Home Centers, Inc. Quarterly
Report on Form 10-Q for the period ended April 30, 1995, filed with the
Securities and Exchange Commission on June 12, 1995.
/8/ Incorporated by reference from National Home Centers, Inc. Quarterly
Report on Form 10-Q for the period ended July 31, 1995, filed with the
Securities and Exchange Commission on September 13, 1995.
/9/ Incorporated by reference from National Home Centers, Inc. Annual Report
on Form 10-K for the period ending January 31, 1996, filed with the
Securities and Exchange Commission on April 30, 1996.
/10/ Incorporated by reference from National Home Centers, Inc. Quarterly
Report on Form 10-Q for the period ended April 30, 1996, filed with the
Securities and Exchange Commission on June 13, 1996.
/11/ Incorporated by reference from National Home Centers, Inc. Quarterly
Report on Form 10-Q for the period ended October 31, 1996, filed with the
Securities and Exchange Commission on December 16, 1996.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NATIONAL HOME CENTERS, INC.
April 30, 1997 By /s/ Dwain A. Newman
---------------------
Dwain A. Newman
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
April 30, 1997 By /s/ Dwain A. Newman
--------------------------------------
Dwain A. Newman
Chairman of the Board, Chief Executive
Officer and Director
April 30, 1997 By /s/ Danny R. Funderburg
--------------------------------------
Danny R. Funderburg
President, Chief Operating Officer
and Director
April 30, 1997 By /s/ Roger A. Holman
--------------------------------------
Roger A. Holman
President, Home Center Division
and Director
April 30, 1997 By /s/ Larry C. Chumley
--------------------------------------
Larry C. Chumley
President, Contractor Division and
Director
16
<PAGE>
April 30, 1997 By /s/ Brent A. Hanby
--------------------------------------
Brent A. Hanby
Executive Vice President,
Chief Financial Officer and
Director
April 30, 1997 By
--------------------------------------
Richard D. Denison
Director
April 30, 1997 By
--------------------------------------
David W. Truetzel
Director
17
<PAGE>
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Board of Directors of
National Home Centers, Inc.:
We have audited the accompanying consolidated balance sheet of National Home
Centers, Inc. and subsidiary as of January 31, 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's managements. Our responsibility is to express an opinion on these
financial statements based on our audit. The consolidated financial statements
of National Home Centers, Inc. and subsidiary as of January 31, 1996 and 1995,
were audited by other auditors whose report dated March 1, 1996, expressed
unqualified opinions on those statements.
We conducted our audit 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 audit provides 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 National Home
Centers, Inc. and subsidiary as of January 31, 1997, and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
Fayetteville, Arkansas
March 13, 1997
18
<PAGE>
INDEX OF EXHIBITS
Exhibit No. Description
----------- -----------
3.1 Amended and Restated Articles of Incorporation of the
Company./1/
3.2 Amended and Restated By-Laws of the Company./1/
4.1 Form of the Company's Common Stock Certificate/.1/
4.2 Amended and Restated Articles of Incorporation of the
Company, Sections 5 through 7./1/
10.1 Life Insurance Policy, dated May 15, 1983, issued by
Executive Life Insurance Company on the life of Dwain A.
Newman, in the amount of $1,000,000 with the Company named as
beneficiary, including Assignment, dated September 10, 1992,
to the Arkansas Teachers Retirement System./1/
10.2 Lease Agreement dated September 1, 1992 between Dwain A.
Newman and Glenda R. Newman and the Company for the
Springdale, Arkansas store./1/
10.3 Lease Agreement dated September 1, 1992 between Dwain A.
Newman and Glenda R. Newman and the Company for the North
Little Rock, Arkansas store./1/
10.4 Lease Agreement dated September 1, 1992 between Dwain A.
Newman and Glenda R. Newman and the Company for the Fort
Smith, Arkansas store./1/
10.5 Lease Agreement dated June 1, 1992 between Dwain A. Newman
and Glenda R. Newman and the Company for the Bentonville,
Arkansas store./1/
10.6 Lease Agreement dated June 1, 1992 between Dwain A. Newman
and Glenda R. Newman and the Company for the Rogers, Arkansas
store./1/
10.7 Lease Agreement dated June 1, 1992 between Dwain A. Newman
and Glenda R. Newman and the Company for the Cabinet Craft
facility in Springdale, Arkansas./1/
10.8 Lease Agreement dated July 1, 1993 between Parham Properties,
Inc. and the Company for the Little Rock, Arkansas store./3/
10.9 Lease Agreements dated December 22, 1992 between Valley Park
Limited Partnership and the Company for the Russellville,
Arkansas store./1/
19
<PAGE>
Exhibit No. Description
----------- -----------
10.10 Subordination, Attornment and Non-Disturbance Agreement and
Estoppel Certificate dated September 10, 1992 between ATRS,
the Company, and Dwain A. Newman and Glenda R. Newman for the
Springdale, North Little Rock and Fort Smith Leases./1/
10.11 Form of the 1993 Employee Stock Purchase Plan of National
Home Centers, Inc./1/
10.12 Form of the Company's 1993 Incentive Compensation
Plan./1/
10.13 Loan and Security Agreement dated December 29, 1992 between
the Company and MetLife Capital Corporation with Supplemental
Security Agreement and Term Promissory Note No. One dated
December 29, 1992, and Supplemental Security Agreement and
Term Promissory Note No. Two, dated March 8, 1993./1/
10.14 Loan Agreement dated August 4, 1993 between the
Company and MetLife Capital Corporation./2/
10.15 Supplemental Security Agreement and Term Promissory Note No.
Three between the Company and MetLife Capital Corporation
dated October 25, 1993./3/
10.16 Supplemental Security Agreement and Term Promissory Note No.
Four between the Company and MetLife Capital Corporation
dated December 29, 1993./3/
10.17 Note and Security Agreement dated December 31, 1993 between
the Company and NationsBanc Leasing Corporation./3/
10.18 Promissory Note and Security Agreement dated 5/31/94 between
the Company & Metlife Capital Corporation./4/
10.19 Note & Security Agreement dated 6/15/94 between the Company
and NationsBanc Leasing Corp./4/
10.20 Assignment of Policy dated 5/20/94 between the Company
and the Newman 1994 Family Trust./4/
10.21 Assignment of Policy dated 5/20/94 between the Company
and the Newman 1994 Family Trust./4/
10.22 Split Dollar Insurance Agreement dated 5/20/94 between
the Company and the Newman 1994 Family Trust./4/
20
<PAGE>
Exhibit No. Description
----------- -----------
10.23 Split Dollar Insurance Agreement dated 5/20/94 between
the Company and the Newman 1994 Family Trust./4/
10.24 Guaranty Agreement effective May 20, 1994./5/
10.25 Supplemental Security Agreement and Term Promissory Note No.
1 dated December 6, 1994 between the Company and MetLife
Capital Corporation./6/
10.26 Promissory Note and Mortgage dated May 5, 1995 to
First Bank of Arkansas for Conway, Arkansas Store./7/
10.27 Merchant Agreement dated March 16, 1995 between the
Company and Household Bank (Illinois), N.A./7/
10.28 Note and Security Agreement dated August 30, 1995 between the
Company and NationsBank Leasing Corporation./8/
10.29 Loan and Security Agreement dated December 19, 1995 between
the Company and BankAmerica Business Credit, Inc./9/
10.30 Form of the Company's 401(k) Adoption Agreement with
First Tennessee National Bank as Trustee./9/
10.31 Waiver letter from BankAmerica dated April 8, 1997.
10.32 1996 Long-Term Performance Plan.
10.33 First Amendment to Loan and Security Agreement with
BankAmerica Business Credit, Inc./10/
10.34 Term Loan Agreement dated September 25, 1996 between
the Company and NBD Bank./11/
11.1 Computation of Earnings (Loss) Per Share.
13.1 National Home Centers, Inc. 1996 Annual Report (only those
portions specifically incorporated herein by reference shall
be deemed filed with the Commission).
21.1 Subsidiaries of the Company./1/
23.1 Consent of Arthur Andersen LLP, Independent Certified Public
Accountants.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
The Company filed two Current Reports on Form 8-K during fiscal 1996.
21
<PAGE>
Exhibit No. Description
----------- -----------
1. Form 8-K disclosing (1) sale of Cabinet Craft Division to
American Quality Manufacturing Corporation on November 1,
1996 and (2) sale of truss assembly and manufacturing
equipment to Latco Construction, Inc. on November 7, 1996 as
filed with the Securities and Exchange Commission on November
18, 1996.
2. Form 8-K disclosing change of principal independent
accounting firm from KPMG Peat Marwick LLP to Arthur Andersen
LLP as filed with the Securities and Exchange Commission on
November 1, 1996.
- -----------------------
/1/ Incorporated by reference from National Home Centers, Inc. Form S-1
Registration Statement No. 33-60078, as amended, filed with the Securities
and Exchange Commission on March 26, 1993.
/2/ Incorporated by reference from National Home Centers, Inc. Quarterly
Report on Form 10-Q for the period ended October 31, 1993, filed with the
Securities and Exchange Commission on December 13, 1993.
/3/ Incorporated by reference from National Home Centers, Inc. Annual Report
on Form 10-K for the fiscal year ended January 31, 1994, filed with the
Securities and Exchange Commission on April 29, 1994.
/4/ Incorporated by reference from National Home Centers, Inc. Quarterly
Report on Form 10-Q for the period ended July 31, 1994, filed with the
Securities and Exchange Commission on September 15, 1994.
/5/ Incorporated by reference from National Home Centers, Inc. Quarterly
Report on Form 10-Q for the period ended October 31, 1994, filed with the
Securities and Exchange Commission on December 15, 1994.
/6/ Incorporated by reference from National Home Centers, Inc. Annual Report
on Form 10-K for the fiscal year ended January 31, 1995, filed with the
Securities and Exchange Commission on April 29, 1995.
/7/ Incorporated by reference from National Home Centers, Inc. Quarterly
Report on Form 10-Q for the period ended April 30, 1995, filed with the
Securities and Exchange Commission on June 12, 1995.
/8/ Incorporated by reference from National Home Centers, Inc. Quarterly
Report on Form 10-Q for the period ended July 31, 1995, filed with the
Securities and Exchange Commission on September 13, 1995.
/9/ Incorporated by reference from National Home Centers, Inc. Annual Report
on Form 10-K for the period ending January 31, 1996, filed with the
Securities and Exchange Commission on April 30, 1996.
/10/ Incorporated by reference from National Home Centers, Inc. Quarterly
Report on Form 10-Q for the period ended April 30, 1996, filed with the
Securities and Exchange Commission on June 13, 1996.
/11/ Incorporated by reference from National Home Centers, Inc. Quarterly
Report on Form 10-Q for the period ended October 31, 1996, filed with the
Securities and Exchange Commission on December 16, 1996.
22
<PAGE>
EXHIBIT 10.31
April 8, 1997
Brent A. Hanby, EVP & CFO
National Home Centers, Inc.
Highway 265 North
P.O. Box 789
Springdale, Arkansas 72765
Dear Brent:
The requested waivers of the FYE 1/31/97 Interest Coverage Covenant default and
the waiver of the Tangible New Worth Covenant default, have been approved by
BankAmerica Business Credit, Inc.
The requested restating of the Interest Coverage Covenant and the Tangible Net
Worth Covenant, has been approved by BankAmerica Business Credit, Inc. (See
attached for new covenants)
With the approval of the above mentioned waivers and restatement of the noted
covenants, the Libor and Reference Rate on all loans outstanding will increase
by one percent (1%) over the stated rate in the Loan and Security Agreement,
effective February 1, 1997.
National Home Centers, Inc. also agrees to assign to BankAmerica Business
Credit, Inc. a First Deed of Trust on raw land located in Fayetteville, Arkansas
and a First Deed of Trust on raw land located in Fort Smith, Arkansas if said
land falls out of its current escrow.
Formal documentation of the above mentioned "actions" will follow.
Your concurrence is requested.
Yours sincerely,
/s/ Francesca M. Gastil
- -------------------------------------
Francesca M. Gastil
Senior Account Executive
BankAmerica Business Credit, Inc.
/s/ Brent A. Hanby
- -------------------------------------
I Concur - Brent A. Hanby, EVP & CFO
National Home Centers, Inc.
<PAGE>
ORIGINAL COVENANT NEW COVENANT
- ----------------- ------------
Quarter ending 4/30/97 Quarter ending 4/30/97
Interest Coverage .85 to 1.0 Interest Coverage .60 to 1.0
(rolling 4 quarters)
Quarter ending 7/31/97 Two Quarters ending 7/31/97
Interest Coverage .85 to 1.0 Interest Coverage 1.22 to 1.0
Quarter ending 10/31/97 Three Quarters Ending 10/31/97
Interest Coverage .95 to 1.0 Interest Coverage 1.35 to 1.0
Quarter ending 1/31/98
Interest Coverage .95 to 1.0 Four Quarters Ending 1/31/97
(rolling four quarters) Interest Coverage 1.0 to 1.0
Four Fiscal Quarters ending No change
4/30/98 and on a rolling four
quarter basis each Fiscal Quarter
ending thereafter 1.0 to 1.0
NEW COVENANT
ORIGINAL COVENANT: ------------
- ------------------
Fiscal Year Ending 1/31/98
Fiscal Year Ending 1/31/98 $424,484,000
$28,100,000
Fiscal Year Ending 1/31/99
Fiscal Year Ending 1/31/98 $25,084,000
$28,700,000
In the event that National Home is in compliance with the new covenants for two
successive quarters BABC will reduce the libor and reference rate by 1%,
assuming that monthly unused borrowing availability has averaged at least $750M
for those two quarters.
2
<PAGE>
EXHIBIT 10.32
NATIONAL HOME CENTERS, INC.
1996 LONG-TERM PERFORMANCE PLAN
(Amended and Restated Effective March 1, 1996)
(Approved by Stockholders June 6, 1996)
1. Objectives.
The amended and restated 1996 National Home Centers, Inc. Long-Term
Performance Plan (the "Plan"), formerly the 1993 Long-Term Tandem and Restricted
Stock Incentive Plan of National Home Centers, Inc., is designed to retain
executives and other selected employees and reward them for making major
contributions to the success of the Company. These objectives are accomplished
by making long-term incentive awards under the Plan thereby providing
Participants with a proprietary interest in the growth and performance of the
Company. It is further intended that stock options granted by the Committee (as
defined in Section 2 below) pursuant to Section 7 hereof shall be designated
"incentive stock options" ("Incentive Stock Options") within the meaning of
Section 422 of the Code (as defined in Section 2 below) or "nonqualified stock
options" ("Nonqualified Stock Options") and, together with Incentive Stock
Options, ("Stock Options").
2. Definitions.
(a) "Award"--The grant of any form of stock option, stock appreciation
right, stock or cash award whether granted singly, in combination or in
tandem, to a Plan Participant pursuant to such terms, conditions and
limitations as the Committee may establish in order to fulfill the objectives
of the Plan.
(b) "Award Agreement"--An agreement between the Company and a
Participant that sets forth the terms, conditions and limitations applicable
to an Award.
(c) "Board"--The Board of Directors of National Home Centers, Inc.
(d) "Capital Stock" or "stock"--Authorized and issued or unissued
Capital Stock of the Company.
(e) "Code"--The Internal Revenue Code of 1986, as amended from time to
time, and the Regulations issued thereunder.
(f) "Committee"--The Compensation Committee of the Company's Board, or
such other committee of the Board that is designated by the Board to
administer the Plan. The committee shall consist of two members appointed by
the Board from among its members.
(g) "Company"--National Home Centers, Inc. and its subsidiaries,
including subsidiaries of subsidiaries.
(h) "Fair Market Value"--The closing price of the Company's Capital
Stock on the principal national securities exchange on which the Company's
Capital Stock is then listed or admitted to trading, if the Company's Capital
Stock is then listed or admitted to trading on any national securities
exchange. The closing price shall be the last reported sale price regular
way, or, in case no such sale takes place on such day, the average of the
closing bid and asked prices regular way, as reported by said exchange. If
the Company's Capital Stock is not then so listed on a national securities
exchange, the fair market value per share of the Company's Capital Stock on
any date shall be deemed to be the closing price (the last reported sale
price regular way) in the over-the-counter market as reported by the NASDAQ
National Market, if the Company's Capital Stock closing price is then
reported on the NASDAQ National Market, or, if the closing price of the
Company's Capital Stock is not then reported by the NASDAQ National Market,
shall be deemed to be the mean of the highest closing bid and lowest closing
asked price of the
<PAGE>
Company's Capital Stock in the over-the-counter market as reported by the
National Association of Securities Dealers Automated Quotation System
("NASDAQ"), or, if the Company's Capital Stock is not then quoted by NASDAQ,
as furnished by any member of the National Association of Securities Dealers,
Inc. selected from time to time by the Company for that purpose. If no
member of the National Association of Securities Dealers, Inc. furnishes
quotes with respect to the Capital Stock of the Company, such fair market
value shall be determined by resolution of the Committee. Notwithstanding
the foregoing provisions of this Section 2(h), if the Committee shall at any
time determine that it is impracticable to apply the foregoing methods of
determining fair market value, the Committee is empowered to adopt other
reasonable methods for such purpose. The Committee may, if it deems it
appropriate, engage the services of an independent qualified expert or
experts to appraise the value of the Capital Stock.
(i) "Participant"-- A person eligible to receive an Award pursuant to
the terms of the Plan.
(j) "Ten Percent Stockholder"--A Participant who, at the time an
Incentive Stock Option is granted, owns stock possessing more than 10% of the
total combined voting power of all classes of Capital Stock of the Company.
3. Participants.
Participants shall be employees of the Company (including employees who are
also directors or officers of the Company) who hold positions of responsibility
and whose performance, in the judgment of the Committee or the management of the
Company, can have a significant effect on the success of the Company. In
determining the persons to whom Awards shall be granted, the Committee shall
take into account the duties of the respective persons, their present and
potential contributions to the success of the Company and such other factors as
the Committee shall deem relevant in connection with accomplishing the purpose
of the Plan.
4. Capital Stock Available for Awards.
The aggregate number of shares of Capital Stock that shall be available for
Awards granted wholly or partly in stock under the Plan shall not exceed 300,000
shares. The limitation established hereby shall be subject to adjustment as
provided in Section 15 hereof. From time to time, the Board of Directors and
appropriate officers of the Company shall take whatever actions are necessary to
file required documents with governmental authorities and stock exchanges to
make shares of Capital Stock available for issuance pursuant to Awards. Capital
Stock related to Awards that are forfeited, terminated, expire unexercised,
settled in cash in lieu of stock or in such manner that all or some of the
shares covered by an Award are not issued to a Participant, or are exchanged for
Awards that do not involve Capital Stock, shall (unless the Plan shall have been
terminated) immediately become available for Awards.
5. Administration.
The Plan shall be administered by the Committee which shall have full and
exclusive power to interpret the Plan, to grant waivers of Plan restrictions and
to adopt such rules, regulations and guidelines for carrying out the Plan as it
may deem necessary or proper, all of which powers shall be executed in the best
interests of the Company and in keeping with the objectives of the Plan.
6. Delegation of Authority.
The Committee may delegate to one or more of its members or to the Chief
Executive Officer and to other senior officers of the Company its duties under
the Plan pursuant to such conditions or limitations as the Committee may
establish.
2
<PAGE>
7. Awards.
The Committee shall determine the type or types of Award(s) to be made to
each Participant and shall set forth in the related Award Agreement the terms,
conditions and limitations applicable to each Award. Awards may include but are
not limited to those listed in this Section 7. Awards may be granted singly, in
combination or in tandem as established in the Award Agreement. Awards may also
be made in combination or in tandem with, in replacement of, or as alternatives
to, grants or rights under any other employee plan of the Company, including the
plan of any acquired entity.
(a) Stock Option--A grant of a right to purchase a specified number of
shares of Capital Stock at not less than 100% of Fair Market Value on the
date of grant during a specified period as determined by the Committee. A
Stock Option may be in the form of an Incentive Stock Option or a
Nonqualified Stock Option. An Incentive Stock Option, in addition to being
subject to applicable terms, conditions and limitations established by the
Committee, must comply with Section 422 of the Code which, among other
limitations, provides that the aggregate Fair Market Value (determined at the
time the option is granted) of Capital Stock exercisable for the first time
by a Participant during any calendar year shall not exceed $100,000 (or such
other limit as may be required by the Code); shall be priced at not less than
100% of Fair Market Value on the date of the grant; and shall be exercisable
for a period of not more than 10 years. In the case of an Incentive Stock
Option granted to a 10% Stockholder, (a) the option price shall not be less
than 110% of the Fair Market Value of the shares of Capital Stock of the
Company on the date of grant of such Incentive Stock Option, and (b) the
exercise period shall not exceed five years from the date of grant of such
Incentive Stock Option. Only Participants who are employees of the Company
(including employees who are also officers and directors) may be granted
Incentive Stock Options. A Nonqualified Stock Option is a Stock Option
granted under the Plan which is either not designed to qualify as an
Incentive Stock Option or is specifically designated in the Award Agreement
as a Nonqualified Stock Option, even though the Award by the terms of the
Award Agreement meets the requirements of Internal Revenue Code Section 422.
A Nonqualified Stock Option may be granted to any person eligible to
participate in the Plan.
(b) Stock Appreciation Right--A right to receive a payment, in cash
and/or Capital Stock, equal to the excess of the Fair Market Value or other
specified valuation of a specified number of shares of Capital Stock on the
date the stock appreciation right ("SAR") is exercised over the Fair Market
Value or other specified valuation on the date of grant of the SAR as set
forth in the applicable Award Agreement, except that where the SAR is granted
in tandem with a stock option, the grant and exercise valuations must be no
less than Fair Market Value.
(c) Stock Award--An Award made in stock or denominated in units of
stock. All or part of any stock award may be subject to conditions
established by the Committee, and set forth in the Award Agreement, which may
include, but are not limited to, continuous service with the Company,
achievement of specific business objectives, increases in specified indices,
attaining growth rates and other comparable measurements of Company
performance. Such Awards may be based on Fair Market Value or other specified
valuation.
(d) Cash Award--An Award denominated in cash with the eventual payment
amount subject to future service and such other restrictions and conditions
as may be established by the Committee, and as set forth in the Award
Agreement, including, but not limited to continuous service with the Company,
achievement of specific business objectives, increases in specified indices,
attaining growth rates and other comparable measurements of Company
performance.
3
<PAGE>
8. Payment of Awards.
Payment of Awards may be made in the form of cash, stock or combinations
thereof and may include such restrictions as the Committee shall determine,
including in the case of stock, restrictions on transfer and forfeiture
provisions. When transfer of stock is so restricted or subject to forfeiture
provisions it is referred to as "Restricted Stock." Further, with Committee
approval, payments may be deferred, either in the form of installments or a
future lump sum payment. The Committee may permit selected Participants to elect
to defer payments of some or all types of Awards in accordance with procedures
established by the Committee to assure that such deferrals comply with
applicable requirements of the Code including, at the choice of Participants,
the capability to make further deferrals for payment after retirement. Any
deferred payment, whether elected by the Participant or specified by the Award
Agreement or by the Committee, may require the payment be forfeited in
accordance with the provisions of Section 13 of the Plan. Dividends or dividend
equivalent rights may be extended to and made part of any Award denominated in
stock or units of stock, subject to such terms, conditions and restrictions as
the Committee may establish. The Committee may also establish rules and
procedures for the crediting of interest on deferred cash payments and dividend
equivalents for deferred payments denominated in stock or units of stock. At the
discretion of the Committee, a Participant may be offered an election to
substitute an Award for another Award or Awards of the same or different type.
9. Stock Option Exercise.
The price at which shares of Capital Stock may be purchased under a Stock
Option shall be paid in full at the time of the exercise in cash or, if
permitted by the Committee, by means of tendering Capital Stock or surrendering
another Award, including Restricted Stock, valued at Fair Market Value on the
date of exercise, or any combination thereof. The Committee shall determine
acceptable methods for tendering Capital Stock or other Awards and may impose
such conditions on the use of Capital Stock or other Awards to exercise a Stock
Option as it deems appropriate. In the event shares of Restricted Stock are
tendered as consideration for the exercise of a Stock Option, a number of the
shares issued upon the exercise of the Stock Option, equal to the number of
shares of Restricted Stock used as consideration therefor, shall be subject to
the same restrictions as the Restricted Stock so submitted plus any additional
restrictions that may be imposed by the Committee.
10. Tax Withholding.
The Company shall have the right to deduct applicable taxes from any Award
payment and withhold, at the time of delivery or vesting of shares under the
Plan, an appropriate number of shares for payment of taxes required by law or to
take such other action as may be necessary in the opinion of the Company to
satisfy all obligations for withholding of such taxes. If Capital Stock is used
to satisfy tax withholding, such stock shall be valued based on the Fair Market
Value when the tax withholding is required to be made.
11. Amendment, Modification, Suspension or Discontinuance of this Plan.
The Board may amend, modify, suspend or terminate the Plan for the purpose of
meeting or addressing any changes in legal requirements or for any other purpose
permitted by law. Subject to changes in law or other legal requirements which
would permit otherwise, the Plan may not be amended without the consent of the
holders of a majority of the shares of Capital Stock then outstanding, to (a)
increase the aggregate number of shares of Capital Stock that may be issued
under the Plan (except for adjustments pursuant to Section 15 of the Plan); (b)
decrease the option price; (c) materially modify the requirements as to
eligibility for participation in the Plan; (d) withdraw administration of the
Plan from the Committee or (e) extend the period during which Awards may be
granted.
4
<PAGE>
12. Termination of Employment and Cessation of Service.
If the employment of a Participant terminates, other than pursuant to
paragraphs (a) through (c) of this Section 12, all unexercised, deferred and
unpaid Awards shall be cancelled immediately, unless the Award Agreement
provides otherwise.
(a) Retirement under a Company Retirement Plan. When a Participant's
employment terminates as a result of retirement in accordance with the terms
of a Company retirement plan, the Committee may permit Awards to continue in
effect beyond the date of retirement in accordance with the applicable Award
Agreement and the exercisability and vesting of any Award may be accelerated.
(b) Resignation in the Best Interests of the Company. When a Participant
resigns from the Company and, in the judgment of the Chief Executive Officer
or other senior officer designated by the Committee, the acceleration and/or
continuation of outstanding Awards would be in the best interests of the
Company, the Committee may (i) authorize, where appropriate, the acceleration
and/or continuation of all or any part of Awards granted prior to such
termination, and (ii) permit the exercise, vesting and payment of such Awards
for such period as may be set forth in the applicable Award Agreement,
subject to earlier cancellation pursuant to Section 13 or at such time as the
Committee shall deem the continuation of all or any part of the Participant's
Awards are not in the Company's best interest.
(c) Death or Disability of a Participant.
(i) In the event of a Participant's death, the Participant's estate
or beneficiaries shall have a period up to the expiration date specified
in the Award Agreement within which to receive or exercise any
outstanding Award held by the Participant under such terms as may be
specified in the applicable Award Agreement. Rights to any such
outstanding Awards shall pass by will or the laws of descent and
distribution in the following order: (A) to beneficiaries so designated
by the Participant; if none; then (B) to a legal representative of the
Participant; if none; then (C) to the persons entitled thereto as
determined by a court of competent jurisdiction. Awards so passing shall
be made at such times and in such manner as if the Participant were
living.
(ii) In the event a Participant is deemed by the Company to be
disabled and eligible for benefits pursuant to the terms of a medical
disability income plan, any similar or successor plan, or similar plan of
another employer, as contemplated by paragraph (b) of this Section 12,
Awards and rights to any such Awards may be paid to or exercised by the
Participant, if legally competent, or a committee or other legally
designated guardian or representative if the Participant is legally
incompetent by virtue of such disability.
(iii) After the death or disability of a Participant, the Committee
may in its sole discretion at any time (A) terminate restrictions in
Award Agreements; (B) accelerate any or all installments and rights; and
(C) instruct the Company to pay the total of any accelerated payments in
a lump sum to the Participant, the Participant's estate, beneficiaries or
representative--notwithstanding that, in the absence of such termination
of restrictions or acceleration of payments, any or all of the payments
due under the Awards might ultimately have become payable to other
beneficiaries.
(iv) In the event of uncertainty as to interpretation of or
controversies concerning this paragraph (c) of Section 12, the
Committee's determinations shall be binding and conclusive.
5
<PAGE>
13. Cancellation and Rescission of Awards.
Unless the Award Agreement specifies otherwise, the Committee may cancel any
unexpired, unpaid, or deferred Awards at any time if the Participant is not in
compliance with all other applicable provisions of the Award Agreement, the Plan
and with the following conditions:
(a) A Participant shall not render services for any organization or
engage directly or indirectly in any business which, in the judgment of the
Chief Executive Officer of the Company or other senior officer designated by
the Committee, is or becomes competitive with the Company, or which
organization or business, or the rendering of services to such organization
or business, is or becomes otherwise prejudicial to or in conflict with the
interests of the Company. For Participants whose employment has terminated,
the judgment of the Chief Executive Officer shall be based on the
Participant's position and responsibilities while employed by the Company,
the Participant's postemployment responsibilities and position with the other
organization or business, the extent of past, current and potential
competition or conflict between the Company and the other organization or
business, the effect on the Company's customers, suppliers and competitors
and such other considerations as are deemed relevant given the applicable
facts and circumstances. A Participant who has retired shall be free,
however, to purchase as an investment or otherwise, stock or other securities
of such organization or business so long as they are listed upon a recognized
securities exchange or traded over-the-counter, and such investment does not
represent a substantial investment to the Participant or a greater than 10%
equity interest in the organization or business.
(b) A Participant shall not, without prior written authorization from
the Company, disclose to anyone outside the Company, or use in other than the
Company's business, any confidential information or material relating to the
business of the Company, acquired by the Participant either during or after
employment with the Company.
(c) Upon exercise, payment or delivery pursuant to an Award, the
Participant shall certify on a form acceptable to the Committee that he or
she is in compliance with the terms and conditions of the Plan. Failure to
comply with the provisions of paragraph (a) or (b) of this Section 13 prior
to, or during the six months after, any exercise, payment or delivery
pursuant to an Award shall cause such exercise, payment or delivery to be
rescinded. The Company shall notify the Participant in writing of any such
rescission within two years after such exercise, payment or delivery. Within
ten days after receiving such a notice from the Company, the Participant
shall pay to the Company the amount of any gain realized or payment received
as a result of the rescinded exercise, payment or delivery pursuant to an
Award. Such payment shall be made either in cash or by returning to the
Company the number of shares of Capital Stock that the Participant received
in connection with the rescinded exercise, payment or delivery.
14. Nonassignability.
(a) Except pursuant to paragraph (c) of Section 12 and except as set
forth in paragraph (b) of this Section 14, no Award or any other benefit
under the Plan shall be assignable or transferable, or payable to or
exercisable by, anyone other than the Participant to whom it was granted.
(b) Where a Participant terminates employment and retains Awards
pursuant to paragraph (b) of Section 12 in order to assume a position with a
governmental, charitable or educational institution, the Committee, in its
discretion and to the extent permitted by law, may authorize a third party
(including but not limited to the trustee of a "blind" trust), acceptable to
the applicable governmental or institutional authorities, the Participant and
the Committee, to act on behalf of the Participant with regard to such
Awards.
6
<PAGE>
15. Adjustments.
In the event of any change in the outstanding Capital Stock of the Company by
reason of a stock split, stock dividend, combination or reclassification of
shares, recapitalization, merger, or similar event, the Committee may adjust
proportionally (a) the number of shares of Capital Stock (i) reserved under the
Plan; and (ii) covered by outstanding Awards denominated in stock or units of
stock; (b) the stock prices related to outstanding Awards; and (c) the
appropriate Fair Market Value and other price determinations for such Awards. In
the event of any other change affecting the Capital Stock or any distribution
(other than normal cash dividends) to holders of Capital Stock, such adjustments
as may be deemed equitable by the Committee, including adjustments to avoid
fractional shares, shall be made to give proper effect to such event. In the
event of a corporate merger, consolidation, acquisition of property or stock,
separation, reorganization or liquidation, the Committee shall be authorized to
issue or assume Stock Options, whether or not in a transaction to which Section
424(a) of the Code applies, by means of substitution of new options for
previously issued options or an assumption of previously issued options.
16. Notice.
Any written notice to the Company required by any of the provisions of the
Plan shall be addressed to the Chief Executive Officer or to the Chief Financial
Officer of the Company, and shall become effective when it is received by the
office of the Chief Executive Officer or the Chief Financial Officer.
17. Unfunded Plan.
Insofar as it provides for Awards of cash and Capital Stock, the Plan shall
be unfunded. Although bookkeeping accounts may be established with respect to
Participants who are entitled to cash, Capital Stock or rights thereto under the
Plan, any such accounts shall be used merely as a bookkeeping convenience. The
Company shall not be required to segregate any assets that may at any time be
represented by cash, Capital Stock or rights thereto, nor shall the Plan be
construed as providing for such segregation, nor shall the Company nor the Board
nor the Committee be deemed to be a trustee of any cash, Capital Stock or rights
thereto to be granted under the Plan. Any liability of the Company to any
Participant with respect to a grant of cash, Capital Stock or rights thereto
under the Plan shall be based solely upon any contractual obligations that may
be created by the Plan and any Award Agreement; no such obligation of the
Company shall be deemed to be secured by any pledge or other encumbrance on any
property of the Company. Neither the Company nor the Board nor the Committee
shall be required to give any security or bond for the performance of any
obligation that may be created by the Plan.
18. Governing Law.
The Plan and all determinations made and actions taken pursuant hereto, to
the extent not otherwise governed by the Code or the securities laws of the
United States, shall be governed by the laws of the State of Arkansas and
construed accordingly.
19. Effective and Termination Dates.
The Plan shall take effect upon its adoption by the Board but shall be
subject to the approval of the holders of a majority of the issued and
outstanding shares of Capital Stock of the Company, which approval must occur
within 12 months after the date the Plan is adopted by the Board. The Plan
shall terminate on March 1, 2006, subject to earlier termination by the Board
pursuant to Section 11.
7
<PAGE>
EXHIBIT 11.1
NATIONAL HOME CENTERS, INC.
AND SUBSIDIARY
Computation of Earnings (Loss) Per Share
Years ended January 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Year Ended January 31,
---------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net earnings (loss) $(3,107,723) $(1,597,842) $1,532,422
----------- ----------- ----------
Weighted average number of common
shares outstanding 7,142,251 7,142,251 7,157,018
----------- ----------- ----------
Earnings (loss) per share $ (.44) $ (.22) $ .21
----------- ----------- ----------
</TABLE>
<PAGE>
EXHIBIT 13.1
SELECTED CONSOLIDATED FINANCIAL DATA
In thousands, except selected operating and per share data
<TABLE>
<CAPTION>
Year Ended January 31,
Statement of Operations Data: 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $177,001 154,659 151,356 125,640 88,047
Cost of sales 134,104 115,369 110,321 90,579 62,483
-------- ------- ------- ------- ------
Gross profit 42,897 39,290 41,035 35,061 25,564
Selling, general and
administrative expenses 44,023 39,039 36,777 29,548 20,736
-------- ------- ------- ------- ------
Operating income (1,126) 251 4,258 5,513 4,828
Interest expense, net (3,583) (2,787) (1,735) (623) (1,058)
-------- ------- ------- ------- ------
Earnings (loss) before
income taxes (4,709) (2,536) 2,523 4,890 3,770
Income tax expense (benefit) (1,601) (938) 991 1,883 1,412
-------- ------- ------- ------- ------
Net earnings (loss) $ (3,108) (1,598) 1,532 3,007 2,358
-------- ------- ------- ------- ------
Earnings (loss) per share $(0.44) (0.22) 0.21 0.46 0.44
-------- ------- ------- ------- ------
Weighted average number of
common shares outstanding 7,142 7,142 7,157 6,574 5,318
-------- ------- ------- ------- ------
Selected Financial Data:
Total assets $ 84,838 86,761 73,877 56,314 30,832
Long-term debt 29,320 30,808 30,425 16,748 2,657
Net property, plant
and equipment 37,266 39,699 28,915 16,715 3,429
Stockholders' equity 25,160 28,268 29,866 28,646 6,968
Selected Operating Data:
Number of stores at end of
period 12 12 11 10 7
Average total sales per square
foot -- retail and
contractor (1) $ 229 238 275 324 365
Comparable store sales
increase (decrease) 4.9% (3.6)% 8.6% 23.0% 20.3%
</TABLE>
(1) Net sales divided by average retail square feet for the period.
1
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations
Net sales for the three fiscal years ended January 31, 1997, and the respective
total and comparable store percentage increases (decreases) were:
<TABLE>
<CAPTION>
Total Company Comparable Store
Year Ended January 31, Net Sales Sales Increases Increases (Decreases)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1997 $177,000,584 14% 5%
1996 154,658,767 2% (4)%
1995 151,356,300 20% 9%
</TABLE>
Year Ended January 31, 1997 Compared To Year Ended January 31, 1996
Net Sales
The Company's net sales increased 14.4% to $177.0 million for the year ended
January 31, 1997 (fiscal 1996) from $154.7 million for the year ended January
31, 1996 (fiscal 1995). Comparable store sales in fiscal 1996 increased 4.9%
over fiscal 1995. The overall sales volume increase was primarily due to the
opening of one new home center superstore in late fiscal 1995 versus this store
being open for all of fiscal 1996. The Company had no substantive increase in
the variety of products offered or sales territory other than the new store. The
average annual sales per store for fiscal 1996 was $17.7 million compared to
$16.6 million for fiscal 1995. Competition has become very intense over the past
few years and is expected to continue. During fiscal 1996, Lowe's opened stores
in Russellville and Conway, Arkansas, and The Home Depot Inc. opened stores in
north Little Rock and west Little Rock. These stores have adversely affected the
Company's sales and profit levels in these markets and may continue to do so in
the future.
Gross Profit
Gross profit as a percentage of net sales for fiscal 1996 decreased to 24.2%
from 25.4% in fiscal 1995, due to increased competition in the contractor
division, and continued competitive pricing pressures in central and northwest
Arkansas. If any of the Company's major competitors seek to gain or retain
market share by reducing prices or the new competitor locations mentioned offer
promotional store opening pricing, the Company may be required to lower prices
which would further reduce gross margins and profits.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of net sales
decreased to 24.9% in fiscal 1996 versus 25.2% in fiscal 1995. The Company made
a concentrated effort during fiscal 1996 to reduce expenses as a percent of
sales. The expense ratios as a percent of sales for newer stores were higher
than older stores due to higher expenses such as salaries, advertising and
depreciation.
Interest Expense
Net interest expense as a percentage of net sales in fiscal 1996 increased to
2.0% from 1.8% in fiscal 1995, primarily as a result of higher interest rates on
the variable rate revolving credit facility and additional debt for the new
Rogers superstore. See Note 2 of Notes to Consolidated Financial Statements for
additional information on debt and interest.
Income Taxes
Effective income tax rates were (34.0)% and (37.0)% for fiscal years 1996 and
1995, respectively. The effective rate for fiscal 1996 results from the income
tax benefit due to the net operating loss in fiscal 1996. As a result of the net
operating loss carryback, the Company has filed for a federal tax refund of
approximately $1,300,000, which is expected to be received in the second quarter
of fiscal 1997. See Note 3 of Notes to Consolidated Financial Statements for
additional information on income taxes.
2
<PAGE>
MANAGEMENTS DISCUSSION AND ANALYSIS
Year Ended January 31, 1996 Compared To Year Ended January 31, 1995
Net Sales
The Company's net sales increased 2.2% to $154.7 million for the year ended
January 31, 1996 (fiscal 1995) from $151.4 million for the year ended January
31, 1995 (fiscal 1994). Comparable store sales in fiscal 1995 decreased 3.6%
over fiscal 1994. The overall sales volume increase was primarily due to the
opening of one new home center superstore in October 1995. Increased
competition, unfavorable weather conditions and slowing demand caused decreased
sales at the existing stores. The Company had no substantive increase in the
variety of products offered or sales territory other than the new store. Average
total sales per square foot declined in fiscal 1995 versus fiscal 1994 due to
the additional retail square footage added during the year. The average annual
sales per store for fiscal 1995 was $16.6 million compared to $17.4 million for
fiscal 1994.
Gross Profit
Gross profit as a percentage of net sales for fiscal 1995 decreased to 25.4%
from 27.1% in fiscal 1994, due to increased competition in the contractor
division, special promotional pricing at the new retail superstore opened during
the year and continued competitive pricing pressures in central and northwest
Arkansas.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of net sales
increased to 25.2% in fiscal 1995 versus 24.3% in fiscal 1994. In fiscal 1995,
certain expenses such as rent and supplies were lower as a percentage of sales
while other expenses such as salaries, advertising, depreciation and telephone
were higher. The expense ratios as a percent of sales for newer stores were
higher than older stores due to higher expenses such as salaries, advertising
and depreciation. During the year, the Company adopted the provisions of
American Institute of Certified Public Accountants' Statement of Position
("SOP") No. 93-7, "Reporting of Advertising Costs". The SOP requires all
advertising costs to be expensed in the year in which those costs are incurred,
or the first time the advertising takes place, except for certain direct
response advertising. As a result of adopting SOP 93-7, the Company expensed
approximately $90,000 of advertising expenses in fiscal 1995 related to the new
Rogers superstore that would otherwise have been amortized over twelve months as
preopening costs.
Interest Expense
Net interest expense as a percentage of net sales in fiscal 1995 increased to
1.8% from 1.1% in fiscal 1994. Higher interest rates on the variable rate
revolving credit facility coupled with additional debt for the new Rogers
superstore and the purchase of the Conway superstore led to the increase in
interest expense. See Note 2 of Notes to Consolidated Financial Statements for
additional information on debt and interest.
Income Taxes
Effective income tax rates were (37.0)% and 39.3% for fiscal years 1995 and
1994, respectively. The effective rate for fiscal 1995 results from the income
tax benefit due to the net operating loss in fiscal 1995. As a result of the net
operating loss carryback, the Company received a federal tax refund of
approximately $1,100,000 in the second quarter of fiscal 1996. See Note 3 of
Notes to Consolidated Financial Statements for additional information on income
taxes.
Liquidity and Capital Resources
The Company's working capital at January 31, 1997 decreased to $15.0 million
from $18.5 million at January 31, 1996, primarily due to increases in current
installments of long-term debt. The Rogers real estate loan of $4.9 million has
been reflected as current at January 31, 1997. See Note 2 of Consolidated
Financial Statements for additional information on this loan.
(Continued)
3
<PAGE>
RESULTS OF OPERATIONS
The Company also has a $2.9 million note on the Conway, Arkansas real estate
which becomes due in May 1997. The Company is attempting to refinance this note
through the current lender or a new lender. However, at January 31, 1997 the
Company had no definitive agreement in place and has therefore reflected the
note as current.
The Company's primary capital needs are to finance inventories, accounts
receivable and store expansion. During the year ended January 31, 1997,
operating activities provided net cash of $0.3 million. Primary sources of cash
from operating activities included approximately $0.5 million from decreases in
inventories and $0.5 million from decrease in prepaid expenses. The primary uses
of cash were approximately $0.8 million from decreases in accounts payable.
Net cash used in investing activities for the year ended January 31, 1997 was
approximately $1.3 million, principally due to capital expenditures of $1.2
million.
Net cash provided by financing activities during fiscal 1996 totaled
approximately $0.9 million, primarily from financing under the revolving credit
facility.
The auditor of the State of Arkansas has submitted proposed findings to the
Company resulting from an audit pursuant to the Arkansas Unclaimed Property Act
(the "Act"). The proposed findings, if upheld, would require the Company to pay
$92,724 to the State for unclaimed property which is more than seven (7) years
old and reserve an additional $250,610 for items which are not yet seven (7)
years old. The applicable statutes of limitations set forth in Arkansas law have
run with respect to each of those chooses in action.
On August 20, 1996, an Order was entered by the Honorable Annabelle Clinton
Imber, in the case of Baptist Health, et al v. Gus Wingfield, et al, Pulaski
Chancery No. 95-5627, regarding the Act. According to the decision by Judge
Imber, Ark. Code Ann. 18-28-216 is unconstitutional and it is the Company's
position that the Act cannot be relied upon by the Auditor of the State of
Arkansas to collect from the Company on claims for which the applicable statute
of limitations has run. Recently the General Assembly of Arkansas amended Ark.
Code Ann. 18-28-216 in an attempt to deal with the deficiencies identified by
Judge Imber. It is the Company's belief that the amendment does not have any
retroactive effect and does not speak to the factual situation relating to the
Company.
On March 10, 1997, the Company formally requested the State to abate and nullify
the proposed findings. The Company awaits a reply from the State. If any
litigation is brought by the State of Arkansas, the Company intends to defend
the claim vigorously. The Company currently has no reserve for the proposed
assessment. The Company does plan to comply with the Act, as amended, in future
periods.
At January 31, 1997, the Company owed $21.7 million under its revolving credit
agreement with a bank. This agreement provides a revolving credit loan
commitment not to exceed the lesser of (a) $35 million, or (b) a borrowing base
of 85% and 55% of eligible accounts receivable and eligible inventory,
respectively, with inventory availability capped at $20 million. Based upon
eligible accounts receivable and eligible inventory as of January 31, 1997, the
Company had approximately $1.5 million of additional borrowing capacity under
the revolving credit agreement. The new revolving credit agreement was signed
with BankAmerica Business Credit, Inc. on December 19, 1995, and expires
December 19, 1998. Borrowings under the revolving credit agreement are
collateralized by the Company's accounts receivable and inventory. The agreement
requires that the Company maintain certain financial ratios, meet specified
minimum levels of tangible net worth and limit its amount of capital
expenditures. The Company was in default with two of these financial covenants
(minimum tangible net worth and interest coverage ratio) at January 31, 1997;
however, the bank has agreed to waive compliance with respect to such defaults
and restate the covenants for fiscal 1997.
(Continued)
4
<PAGE>
RESULTS OF OPERATIONS
The Company's current ratio was 1.5 to 1 at January 31, 1997 versus 1.7 to 1 at
January 31, 1996. The Company's total debt to equity ratio increased to 2.37 to
1 at the end of fiscal 1996 versus 2.07 to 1 at the end of the preceding year.
Return on average investment for the three years ended January 31, 1997 ,1996
and 1995 was (17.1%), (8.7%), and 8.6%, respectively.
In November 1996, the Company entered into an agreement with American Quality
Manufacturing Corporation ("AQMC") to sell its cabinet manufacturing unit,
Cabinet Craft. The transaction consisted of the sale of inventory and equipment
and a cash advance in exchange for notes receivable totaling $1.7 million. The
Company incurred a net loss of approximately $599,000 from this division during
fiscal year 1995 and approximately $1,185,000 during the fiscal year ended
January 31, 1997.
In December 1996, AQMC ceased operations at its two Arkansas facilities,
including Cabinet Craft. In addition, the Company has been informed that AQMC
has been placed into an involuntary bankruptcy proceeding. As a result the
Company has fully reserved the notes receivable. The loss resulting from this
write-off and the sale of Cabinet Craft was $1,056,000 and is included in the
$1,185,000 above. See Note 6 to the Consolidated Financial Statements for
further detail on this transaction.
Also, in November 1996, the Company sold certain truss assembly and
manufacturing equipment to a third party, for $50,000 cash and a promissory note
of $275,000. The note is due on or before November 1, 1998 and is secured by a
lien in all equipment sold to the buyer.
5
<PAGE>
CONSOLIDATED BALANCE SHEETS
January 31, 1997 and 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 134,086 130,051
Accounts receivable, less allowance for doubtful
accounts of $174,250 in 1997 and $147,000 in
1996 (notes 2 and 8) 11,346,279 11,511,501
Income tax refunds receivable 1,333,892 1,110,326
Inventories (note 2) 30,809,531 31,327,877
Prepaid expenses and other 592,615 1,137,152
Deferred income taxes (note 3) 674,237 416,983
----------- ----------
Total current assets 44,890,640 45,633,890
----------- ----------
Property, plant and equipment (notes 2 and 6):
Land 9,638,196 9,660,910
Buildings and improvements 21,268,132 21,226,619
Machinery and equipment 18,343,886 19,302,323
Construction in progress 102,822 64,326
----------- ----------
49,353,036 50,254,178
Less accumulated depreciation 12,086,745 10,555,500
----------- ----------
Net property, plant and equipment 37,266,291 39,698,678
----------- ----------
Other assets, at cost less amortization of $744,122
in 1997 and $459,619 in 1996 (notes 6 and 7) 2,680,855 1,428,149
----------- ----------
Total assets $84,837,786 86,760,717
----------- ----------
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt (note 2) 11,513,475 8,373,612
Accounts payable 14,994,945 15,842,415
Accrued expenses 3,351,420 2,959,016
----------- ----------
Total current liabilities 29,859,840 27,175,043
----------- ----------
Long-term debt, excluding current installments
(note 2) 29,320,227 30,807,723
Deferred income taxes (note 3) 497,739 510,248
Commitments and contingencies
(notes 2, 4, 5, 6 and 7)
Stockholders' equity (notes 2 and 5):
Preferred stock, $1.00 par value. Authorized
5,000,000 shares; no shares issued -- --
Common stock, $.01 par value. Authorized
25,000,000 shares; issued 7,465,958 shares 74,660 74,660
Additional paid-in capital 20,831,739 20,831,739
Retained earnings 5,517,025 8,624,748
----------- ----------
26,423,424 29,531,147
Treasury stock; 323,707 common shares at cost (1,263,444) (1,263,444)
----------- ----------
Total stockholders' equity 25,159,980 28,267,703
----------- ----------
Total liabilities and stockholders' equity $84,837,786 86,760,717
----------- ----------
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended January 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $177,000,584 154,658,767 151,356,300
Cost of sales 134,103,601 115,368,590 110,321,167
------------ ----------- -----------
Gross profit 42,896,983 39,290,177 41,035,133
------------ ----------- -----------
Selling, general and
administrative expenses:
Salaries and benefits (note 7) 26,825,258 24,494,923 23,116,393
Rent (including $1,633,200 in 1997,
$1,652,500 in 1996 and $1,652,200
in 1995 to related parties) (note 4) 2,330,686 2,417,359 2,598,886
Depreciation and amortization 3,315,560 2,882,620 2,229,074
Other (note 6) 11,551,374 9,244,202 8,832,313
------------ ----------- -----------
44,022,878 39,039,104 36,776,666
------------ ----------- -----------
Operating income (loss) (1,125,895) 251,073 4,258,467
Interest expense, net of amounts capitalized 3,582,776 2,787,331 1,735,609
------------ ----------- -----------
Earnings (loss) before income taxes (4,708,671) (2,536,258) 2,522,858
Income taxes (note 3) (1,600,948) (938,416) 990,436
------------ ----------- -----------
Net earnings (loss) $(3,107,723) (1,597,842) 1,532,422
------------ ----------- -----------
Earnings (loss) per share $ (0.44) (0.22) 0.21
------------ ----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
7
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Year ended January 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Total
Additional stockholders'
Preferred Common paid-in Retained Treasury equity
stock stock capital earnings stock (notes 2 and 5)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at January 31, 1994 $ -- 74,660 20,831,739 8,690,168 (950,314) 28,646,253
Purchase of 40,000 treasury shares -- -- -- -- (313,130) (313,130)
Net earnings -- -- -- 1,532,422 -- 1,532,422
----------------------------------------------------------------------------------
Balances at January 31, 1995 $ -- 74,660 20,831,739 10,222,590 (1,263,444) 29,865,545
Net loss -- -- -- (1,597,842) -- (1,597,842)
----------------------------------------------------------------------------------
Balances at January 31, 1996 $ -- 74,660 20,831,739 8,624,748 (1,263,444) 28,267,703
Net loss -- -- -- (3,107,723) -- (3,107,723)
----------------------------------------------------------------------------------
Balances at January 31, 1997 $ -- 74,660 20,831,739 5,517,025 (1,263,444) 25,159,980
----------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these statements.
8
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended January 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $(3,107,723) (1,597,842) 1,532,422
Adjustments to reconcile net earnings
(loss) to net cash provided by (used in)
operating activities:
Provision for losses on accounts receivable 785,743 702,438 694,024
Depreciation 3,023,330 2,703,783 2,085,355
Amortization of other assets 292,230 178,837 143,719
Loss (gain) on sale of property, plant and equipment (29,108) (408,055) 1,237
Increase in cash surrender value of life insurance (138,978) (70,210) (64,766)
Deferred income tax expense (benefit) (269,763) 171,910 226,029
Changes in assets and liabilities:
Accounts receivable (620,521) 319,282 (2,565,943)
Income tax refunds receivable (223,566) (992,599) (27,390)
Inventories 518,346 (1,896,405) (3,705,088)
Prepaid expenses and other 544,537 (68,679) 92,728
Accounts payable (847,470) 8,452,932 1,213,288
Accrued expenses 392,404 33,169 135,422
---------- ----------- -----------
Net cash provided by (used in) operating activities 319,461 7,528,561 (238,963)
---------- ----------- -----------
Cash flows from investing activities:
Additions to property, plant and equipment (1,165,431) (13,474,115) (13,889,900)
Proceeds from sale of property, plant and equipment 277,308 604,412 66,342
Increase in other assets (372,172) (302,829) (94,801)
---------- ----------- -----------
Net cash used in investing activities (1,260,295) (13,172,532) (13,918,359)
---------- ----------- -----------
Cash flows from financing activities:
Proceeds from long-term debt 15,016,840 29,264,626 28,440,375
Repayments of long-term debt (14,071,971) (23,667,399) (14,158,322)
Purchase of treasury stock -- -- (313,130)
---------- ----------- -----------
Net cash provided by financing activities 944,869 5,597,227 13,968,923
---------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 4,035 (46,744) (188,399)
Cash and cash equivalents at beginning of year 130,051 176,795 365,194
---------- ----------- -----------
Cash and cash equivalents at end of year $ 134,086 130,051 176,795
---------- ----------- -----------
Supplemental disclosures:
Interest paid, net of amounts capitalized $ 3,398,526 2,896,348 1,625,897
Income taxes paid, net of refunds received (1,107,619) (117,727) 791,796
Noncash investing and financing activities:
Sale of fixed assets for note receivable 275,000 -- --
Acquisition of equipment by repossession (note 6) 350,000 -- --
Acquisition of fixed assets for notes payable 298,712 209,402 463,560
Acquisition of other assets for notes payable 408,786 -- --
---------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 1997, 1996 and 1995
(1) Summary of Significant Accounting Policies
National Home Centers, Inc. ("Company"), is a full-line retailer of home
improvement products and building materials, with twelve locations in Arkansas.
The Company serves retail consumers and professional contractors primarily in
Arkansas, Oklahoma, Missouri and Kansas.
(a) Basis of Presentation
The consolidated financial statements include the financial statements of
National Home Centers, Inc. and its wholly-owned subsidiary, Crystal Valley
Properties, Inc., whose operations are insignificant. All intercompany balances
and transactions have been eliminated in consolidation. Certain previously
reported amounts have been reclassified to conform to the current year
presentation, with no effect on previously reported net earnings (loss).
(b) Cash Equivalents
Cash equivalents include cash and short-term, highly liquid investments with
maturities of three months or less when acquired.
(c) Inventories
Inventories, which are comprised primarily of merchandise purchased for resale,
are stated at the lower of average cost or market.
(d) Store Preopening Costs
Store preopening costs, which consist primarily of payroll and other general and
administrative costs, are deferred until stores are open and then amortized over
a period of twelve months. Unamortized preopening costs are included in prepaid
expenses and other current assets and amount to $441,329 at January 31, 1996
(none at January 31, 1997). Amortization of preopening costs is included in
other selling, general and administrative expenses and amounted to $441,329,
$521,792 and $664,583 in 1997, 1996 and 1995, respectively.
(e) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Equipment under capital leases
is stated at the lower of the present value of minimum lease payments at the
beginning of the lease term or fair value at the inception of the lease.
Depreciation is calculated on the straight-line method over the estimated useful
lives of the assets, as follows: buildings, 40 years; improvements, 10 years;
and machinery and equipment, 5 to 10 years. Equipment under capital leases is
amortized using the straight-line method over the shorter of the lease term or
estimated useful lives of the assets. Leasehold improvements are amortized using
the straight-line method over the shorter of the lease term, including renewal
options, or the estimated useful lives of the assets.
The Company capitalizes interest as part of the cost of assets which it
constructs for its own use. Interest of $311,329 and $243,504 was capitalized in
1996 and 1995, respectively (none in 1997).
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets Expected to be
Disposed of," was issued in March 1995. The Company adopted this statement in
1997. The adoption of SFAS No. 121 did not have a material effect on the
Company's financial position and results of operations.
(f) Other Assets
Other assets include cash surrender values of life insurance policies, covenants
not to compete, notes receivable, deferred loan costs, premiums advanced on life
insurance policies (note 7) and miscellaneous other assets. Amortization of
covenants not to compete and deferred loan costs is provided on the straight-
line method, which in the case of deferred loan costs is not significantly
different from the interest method, over the terms of the agreements.
10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(g) Advertising Costs
In 1996, the Company adopted the provisions of American Institute of Certified
Public Accountants' Statement of Position ("SOP") No. 93-7, "Reporting of
Advertising Costs". The SOP requires all advertising costs to be expensed in the
year in which those costs are incurred, or the first time the advertising takes
place, except for certain direct response advertising. Prior to the adoption of
SOP 93-7, which did not have a significant impact on earnings, the Company
expensed advertising costs over the related useful periods.
(h) Accrued Expenses
Accrued expenses include the estimated costs of the Company's uninsured portion
of unpaid claims incurred for workers' compensation and employee medical
expenses. The amount at year end is adequate to cover unpaid expenses relating
to these claims.
(i) Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(j) Earnings (Loss) Per Share
Earnings (loss) per share are based upon the weighted average number of shares
of common stock outstanding during each year (7,142,251 in 1997 and 1996, and
7,157,018 in 1995).
(k) Credit Risk
Financial instruments which potentially subject the Company to concentrations of
credit risk consist primarily of trade receivables. Substantially all of the
Company's receivables are from a large number of building contractors located in
Arkansas. Accordingly, the Company's credit risk is affected by general economic
conditions in Arkansas and in the construction industry.
(l) Fair Value of Financial Instruments
The carrying value of cash equivalents, accounts receivable, income tax refunds
receivable, accounts payable and accrued expenses approximated fair value as of
January 31, 1997 and 1996, because of the relatively short-term maturity of
these instruments. The fair value of long-term debt, including current
installments, is calculated by discounting future principal and interest
payments at the interest rate currently available to the Company for debt with
similar terms and remaining maturities. The fair value of long-term debt does
not significantly differ from its carrying value.
(m) Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported assets and liabilities and disclosure
of contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
(Continued)
11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Notes payable to bank under revolving credit agreement $21,720,292 22,176,905
Notes payable, secured by real estate:
9.42% note (Rogers property); principal and interest payable
monthly; balance due October 1999 4,901,960 --
8.75% note (Fayetteville property); principal and interest payable
monthly; balance due August 1999 4,049,044 5,333,676
10.26% note (Conway property); principal and interest payable
monthly; balance due May 1997 2,879,712 2,928,982
Notes payable, secured by equipment:
6.25%-8.36% notes; principal and interest payable
monthly through March 2001 2,950,992 4,128,026
9.85% notes; principal and interest payable
monthly through October 2000 1,497,844 1,818,704
8.12% notes; principal and interest payable
monthly through June 1999 724,339 1,328,431
Other notes payable; weighted average interest rate of 8.05%;
principal and interest payable monthly through various dates 2,109,519 1,466,611
----------- ----------
40,833,702 39,181,335
Less current installments 11,513,475 8,373,612
----------- ----------
Long-term debt, excluding current installments $29,320,227 30,807,723
----------- ----------
</TABLE>
12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's revolving credit agreement with a bank provides a revolving credit
loan commitment not to exceed the lesser of (a) $35 million, or (b) a borrowing
base of 85% and 55% of eligible accounts receivable and eligible inventory,
respectively, with inventories capped at $20 million. The agreement provides the
Company with the option of borrowing rates based on either (a) the London
Interbank Offered Rate ("LIBOR") plus 2.50%, or (b) the bank's Reference Rate,
which reflects the bank's prime rate (8.25% at January 31, 1997). As of January
31, 1997, $14 million of the Company's outstanding borrowings under the
agreement were based on LIBOR plus 2.50%, or a weighted average interest rate of
8.125%. Interest on the balance of outstanding borrowings was based on the
bank's Reference Rate. The spread over LIBOR is subject to adjustment annually
based upon the Company's profitability. In addition, the Company pays a
commitment fee of 0.25% based on the unused portion of the line.
Borrowings under the revolving credit agreement are collateralized by the
Company's accounts receivable and inventory. In addition, the agreement requires
that the Company comply with the following financial covenants: (i) minimum
interest coverage ratio, (ii) minimum adjusted tangible net worth, and (iii)
debt-to-adjusted tangible net worth ratio. The Company was in default with
respect to items (i) and (ii) at January 31, 1997, however, the bank has agreed
to permanently waive compliance with respect to such defaults and to amend the
covenants. Management of the Company believes it will be in compliance with the
amended debt covenants up to and including January 31, 1998. However, there can
be no assurance that the lender will not require additional waivers in the
future or, if required, that the lender will grant them.
Based upon eligible accounts receivable and eligible inventory as of January 31,
1997, the Company had approximately $1.5 million of additional available
borrowing capacity under the revolving credit agreement as of that date. The
current revolving credit agreement expires on December 19, 1998.
The Rogers real estate loan agreement calls for monthly principal payments of
$24,510, plus accrued interest, through September 1999, with a final payment of
unpaid principal and interest due October 1999. The loan agreement requires the
Company to comply with certain financial covenants, which are basically
identical to those contained in the revolving credit agreement described above.
The Company was in default with two of these covenants at January 31, 1997;
however, as a result of the primary working capital lender waiving defaults
under the revolving credit agreement, as discussed above, one of the defaults
with respect to the real estate loan agreement is waived under terms of the
agreement. With respect to the remaining default, the agreement provides that
such defaults constitute "events of acceleration" whereby the note becomes due
on demand. The Company has requested that the lender waive this default;
however, the Company has not yet received a waiver, and as a result, has
included the entire outstanding principal balance of $4,901,960 in current
installments of long-term debt at January 31, 1997, even though no notice of
demand by the lender has been received. The Company is current with respect to
all payments called for under the loan agreement, and no other events of default
have occurred with respect to the terms of the agreement. If the lender were to
demand payment, management believes alternative sources of financing would be
available.
Borrowings under the other real estate loan agreements are secured by first real
estate mortgages on the Company's retail facilities in Fayetteville and Conway,
Arkansas, respectively. Substantially all of the Company's furniture, fixtures,
machinery and equipment, as well as certain real estate, are pledged as
collateral under the Company's long-term debt agreements.
The aggregate annual maturities of long-term debt for the five years subsequent
to January 31, 1997, are as follows: 1998, $11,513,475; 1999, $24,814,582; 2000,
$3,581,979; 2001, $914,762; and 2002, $8,904. Annual maturities for year 1999
include borrowings under the Company's revolving credit agreement described
above.
13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) Income Taxes
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $(1,329,235) (1,106,946) 634,759
State (1,950) (3,380) 129,648
----------- ---------- -------
(1,331,185) (1,110,326) 764,407
----------- ---------- -------
Deferred:
Federal (6,866) 327,018 187,659
State (262,897) (155,108) 38,370
----------- ---------- -------
(269,763) 171,910 226,029
----------- ---------- -------
$(1,600,948) (938,416) 990,436
----------- ---------- -------
</TABLE>
Income tax expense (benefit) differs from the amounts computed by applying the
U.S. Federal income tax rate of 34 percent to pretax earnings (loss) from
operations as a result of the following:
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed "expected" income taxes $(1,600,948) (862,328) 857,772
Increase (decrease) in income taxes resulting from:
State income taxes, net of Federal income
tax effect (174,799) (104,602) 110,892
Increase in valuation allowance 203,699 -- --
Other, net (28,900) 28,514 21,772
----------- -------- -------
$(1,600,948) (938,416) 990,436
----------- -------- -------
</TABLE>
The tax effect of temporary differences that give rise to significant portions
of deferred tax assets and liabilities at January 31, 1997 and 1996 are
presented below:
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, due to allowance for
doubtful accounts $ 66,720 61,668
Inventories, due to costs not currently deductible
for tax purposes 217,491 257,986
Accrued expenses not currently deductible 390,026 266,314
Net operating loss and other carryforwards 434,177 136,979
Other 15,653 14,280
---------- --------
Total gross deferred tax assets 1,124,067 737,227
Valuation allowance (229,402) --
---------- --------
Net deferred tax assets 894,665 737,227
---------- --------
Deferred tax liabilities:
Property, plant and equipment, due to
differences in depreciation 718,167 661,507
Store preopening costs currently deductible -- 168,985
---------- --------
Total gross deferred tax liabilities 718,167 830,492
---------- --------
Net deferred tax asset (liability) $ 176,498 (93,265)
---------- --------
Presented in the accompanying consolidated balance sheet as:
Current deferred asset, net 674,237 416,983
Noncurrent deferred liability, net (497,739) (510,248)
---------- --------
$176,498 (93,265)
---------- --------
</TABLE>
14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At January 31, 1997, the Company had approximately $7.2 million in net operating
loss (NOL) carryforwards for state (primarily Arkansas) income tax purposes, of
which $3.1 million and $4.1 million expire in 2001 and 2002, respectively.
Ultimate realization of these NOL carryforwards is dependent upon the Company's
ability to generate adequate future taxable income in specific taxing
jurisdictions within the carryforward periods. A valuation allowance has been
established for that portion of deferred tax assets relating to NOL carryforward
amounts which management believes may ultimately not be realized due to the
short expiration dates of the carryforwards. Remaining deferred tax assets are
attributable to an alternative minimum tax credit carryforward of $91,000, which
has an indefinite carryforward period, and deductible temporary differences,
which are offset by existing taxable temporary differences reversing within the
carryforward period. As a result, management believes it is more likely than not
the Company will realize the benefits of those deductible temporary differences.
(4) Leases
The Company's principal stockholder ("stockholder") owns certain real property
which he leases to the Company under various operating lease agreements. The
following table summarizes these related party leases:
<TABLE>
<CAPTION>
Rent expense for year
ended January 31
Monthly -------------------------------------
Property location Lease expiration rental 1997 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Springdale August, 2002 $ 36,000 432,000 432,000 432,000
Fort Smith August, 2002 20,000 240,000 240,000 240,000
North Little Rock August, 2002 52,000 624,000 624,000 624,000
Springdale -- cabinet facility May, 2002 9,500 114,000 114,000 110,000
Bentonville May, 2002 9,000 108,000 108,000 104,000
Rogers May, 2002 6,200 74,400 74,400 74,400
Oklahoma City (expired in 1997) -- 40,800 60,100 67,800
-------- --------- --------- ---------
$132,700 1,633,200 1,652,500 1,652,200
-------- --------- --------- ---------
</TABLE>
The leases for the Springdale, Fort Smith and North Little Rock properties are
assigned as collateral under a loan agreement between the stockholder and the
Arkansas Teacher Retirement System ("ATRS"). Proceeds from this loan were used
by the stockholder to finance the purchase of the Springdale and Fort Smith
properties from the Company, to retire his mortgage indebtedness on the North
Little Rock property and to pay off other loans to the Company for various real
estate financing. The ATRS loan is also secured by a mortgage and security
agreement on these properties and an assignment of a $1 million life insurance
policy on the stockholder.
The lease agreements for the Bentonville property and the cabinet manufacturing
facility provide escalation provisions which increase the monthly rentals over
the lease terms. Monthly rentals for the other related party leases remain the
same over the lease terms.
The Company also leases properties from unrelated parties under noncancelable
operating lease agreements which expire at various dates through 2008. Future
minimum lease payments required under operating leases that have initial or
remaining noncancelable lease terms in excess of one year as of January 31, 1997
are as follows:
<TABLE>
<CAPTION>
Year ending January 31 Related party Other Total
- -----------------------------------------------------------------------
<S> <C> <C> <C>
1998 $1,600,400 458,160 2,058,560
1999 1,604,400 459,660 2,064,060
2000 1,604,400 426,660 2,031,060
2001 1,604,400 407,210 2,011,610
2002 1,604,400 374,760 1,979,160
Later years 858,800 1,682,920 2,541,720
---------- --------- ----------
Total minimum lease payments $8,876,800 3,809,370 12,686,170
---------- --------- ----------
</TABLE>
15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) Capital Stock
The Company's Articles of Incorporation authorize the Board of Directors to
issue shares of preferred stock in series, and to determine the number of shares
in each series and to fix the designation, preferences, rights, voting powers,
restrictions, dividends, qualifications and terms and conditions thereof. As of
January 31, 1997, the Company has issued no shares of its preferred stock.
The Company has an employee stock purchase plan, a long-term performance plan
and an incentive compensation plan. Under the employee stock purchase plan,
employees are eligible, through payroll deductions up to a maximum of $2,400
annually, to purchase shares of the Company's common stock at the current market
price of the stock. The Company contributes an amount equal to ten percent (in
cash or stock) of the amounts contributed by employees.
Under the long-term performance plan, certain directors and key employees are
eligible for awards granted under the plan in the form of, or combination
thereof, stock options, stock appreciation rights, or restricted shares of the
Company's common stock. The Company has authorized 300,000 shares to be awarded
under the plan. The amount, terms and conditions of any award under the plan are
subject to certain limitations set forth therein. As of January 31, 1997, no
options for shares of the Company's common stock had been issued under the long-
term performance plan.
Under the incentive compensation plan, certain salaried employees of the Company
are eligible to receive a bonus each fiscal year based on the Company's
performance in that year. Bonuses may be paid, at the Company's option, either
in cash or stock units. Bonuses awarded in the form of stock units will be
converted into cash or common stock upon termination of the participant's
employment. As of January 31, 1997, no awards had been made under the incentive
compensation plan.
(6) Disposals of Assets
During November 1996, the Company entered into an agreement with American
Quality Manufacturing Corporation ("AQMC") to sell its cabinet manufacturing
unit, Cabinet Craft. The transaction consisted of the sale of inventory for
$900,000, the sale of equipment for $700,000, and a cash advance of $100,000, in
exchange for notes receivable totaling $1.7 million. The notes are due in
monthly installments of principal and interest (7%) through November 2001, and
are collateralized by security interests in the related equipment and inventory.
In December 1996, AQMC ceased operations at its two Arkansas facilities,
including Cabinet Craft. In addition, the Company has been informed that AQMC
has been placed into an involuntary bankruptcy proceeding. As a result, the
Company has fully reserved the notes receivable as part of a pre-tax charge of
$1,056,000 for fiscal year ended January 31, 1997. This amount is net of
recoverable assets and is included in other selling, general and administrative
expenses, as follows:
Notes receivable charged-off $1,700,000
Fair market value of equipment recoverable (350,000)
Deferred gain from sale of inventory and equipment (294,000)
----------
Total $1,056,000
----------
Litigation has been threatened and claims have been made by AQMC's primary
lender regarding the sale of assets by the Company to AQMC. AQMC's primary
lender is also one of the Company's lenders, and is the lender which the Company
is currently in default with regarding the real estate loan discussed in note 2.
The lender claims to be a secured creditor of AQMC and has asserted an interest
in certain assets of AQMC with respect to which the Company also has an
interest. Specifically, the lender (i) claims to have a priority interest in
Cabinet Craft's equipment and inventory, (ii) claims to be owed $367,500
pursuant to the Company's purchase of inventory from AQMC under terms of the
Sales Agreement, (iii) claims to be owed in excess of $83,000 by the Company for
other purchases from AQMC, and (iv) asserts a priority interest to all post-sale
accounts receivable owed to AQMC.
16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As a result of AQMC's bankruptcy proceeding, neither the lender nor the Company
have the present ability to begin litigation against one another on these
claims. However, it is anticipated that if a settlement is not reached between
the Company and the lender, the lender will file a motion asking the bankruptcy
trustee to abandon these claims and allow litigation to begin between the lender
and the Company. The Company has offered a proposed settlement to the lender
concerning these claims, which includes paying a reduced amount in settlement of
the accounts payable, and repossessing the inventory; however, the lender has
not provided a written response to this offer.
It is the Company's opinion that it will prevail on its claim to Cabinet Craft's
equipment and, as a result, has recorded this equipment at its fair market value
of $350,000 in other assets in the accompanying balance sheet at January 31,
1997; however, no recognition has been given to any reduction in accounts
payable or any amounts of inventory which might ultimately be recovered.
Also during November 1996, the Company completed the sale of its truss
manufacturing unit. The transaction consisted of the sale of equipment for cash
and notes receivable totaling $325,000, resulting in a gain before income taxes
of $202,000.
(7) Commitments and Contingencies
The Company advances premiums under a split-dollar life insurance agreement with
a trust which owns two $10 million joint life insurance policies on the lives of
the Company's principal stockholder and his wife. The Company has a security
interest in the policies' cash surrender values and death benefits and, upon
termination of the policies, is entitled to reimbursement of the amounts
advanced, without interest. The Company has a guarantee from the stockholder
securing any deficiency in cash surrender value if the policies are terminated
before cash surrender value exceeds actual premiums advanced. The Company had
advanced premiums of $912,498 and $546,057 as of January 31, 1997 and 1996,
respectively, which are included in other assets in the accompanying
consolidated balance sheets.
The Company sponsors the National Home Centers, Inc. 401 (k) Retirement Plan, in
which employees are eligible to participate after they complete one year of
service and reach age 21. Company contributions to the plan each year are made
at a discretionary amount determined by the Company's Board of Directors. The
Company's contributions to the plan were $52,935, $38,697 and $40,000 in 1997,
1996 and 1995, respectively.
The Company is involved in certain claims and pending litigation arising from
the normal conduct of business. Based on the present knowledge of the facts,
management believes the resolution of claims and pending litigation will not
have a material adverse effect on the Company's consolidated financial
statements.
(8) Valuation and Qualifying Accounts
The following provides an analysis of the Company's allowances for doubtful
trade accounts receivable and notes receivable for the years ended January 31,
1997, 1996 and 1995:
<TABLE>
<CAPTION>
Balance at Additions Write-offs, Balance at
beginning charged net of end of
of period to expense recoveries period
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Allowance for doubtful trade
accounts receivable:
Year ended January 31, 1997 $147,000 785,743 758,493 174,250
Year ended January 31, 1996 150,000 702,438 705,438 147,000
Year ended January 31, 1995 207,500 694,024 751,524 150,000
Allowance for doubtful
notes receivables:
Year ended January 31, 1997 -- 1,700,000 1,700,000 --
Year ended January 31, 1996 -- -- -- --
Year ended January 31, 1995 -- -- -- --
</TABLE>
The Company charged off notes receivable totaling $1,700,000 in fiscal year
ended January 31, 1997, in conjunction with the sale of its cabinet
manufacturing division (see note 6).
17
<PAGE>
Exhibit 23.1
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement Form
S-8 No. 33-25646 pertaining to the 1993 Employees Stock Purchase Plan of
National Home Centers, Inc. of our report dated March 13, 1997, with respect to
the consolidated financial statements of National Home Centers, Inc. included in
the Annual Report (Form 10-K) for the year ended January 31, 1997.
/s/Arthur Andersen LLP
Fayetteville, Arkansas
April 30, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS
<FISCAL-YEAR-END> JAN-31-1997 JAN-31-1997
<PERIOD-START> NOV-01-1996 FEB-01-1996
<PERIOD-END> JAN-31-1997 JAN-31-1997
<CASH> 134,086 134,086
<SECURITIES> 0 0
<RECEIVABLES> 11,346,279 11,346,279
<ALLOWANCES> 0 0
<INVENTORY> 30,809,531 30,809,531
<CURRENT-ASSETS> 44,890,640 44,890,640
<PP&E> 49,353,036 49,353,036
<DEPRECIATION> 12,086,745 12,086,745
<TOTAL-ASSETS> 84,837,786 84,837,786
<CURRENT-LIABILITIES> 29,859,840 29,859,840
<BONDS> 0 0
0 0
0 0
<COMMON> 74,660 74,660
<OTHER-SE> 25,085,320 25,085,320
<TOTAL-LIABILITY-AND-EQUITY> 84,837,786 84,837,786
<SALES> 35,449,306 177,000,584
<TOTAL-REVENUES> 35,449,306 177,000,584
<CGS> 26,864,810 134,103,601
<TOTAL-COSTS> 26,864,810 134,103,601
<OTHER-EXPENSES> 11,418,788 44,022,878
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 942,282 3,582,776
<INCOME-PRETAX> (3,776,574) (4,708,671)
<INCOME-TAX> (1,284,035) (1,600,948)
<INCOME-CONTINUING> (2,492,539) (3,107,723)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,492,539) (3,107,723)
<EPS-PRIMARY> (0.35) (0.44)
<EPS-DILUTED> 0 0
</TABLE>
