<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1997.
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-21448
NATIONAL HOME CENTERS, INC.
(Exact name of registrant as specified in its charter)
ARKANSAS 71-0403343
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
HIGHWAY 265 NORTH
SPRINGDALE, ARKANSAS 72765
(Address of principal executive offices, including zip code)
(501) 756-1700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
----- -----.
As of September 12, 1997 National Home Centers, Inc. had 7,142,251 shares
of $0.01 par value Common Stock outstanding.
================================================================================
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
NATIONAL HOME CENTERS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
================================================================================
<TABLE>
<CAPTION>
JULY 31, JANUARY 31,
1997 1997
(Unaudited) (1)
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 132,761 134,086
Accounts Receivable 15,108,395 11,346,279
Income Tax Refunds Receivable 253,520 1,333,892
Inventories 29,501,975 30,809,531
Other 1,137,802 1,266,852
- --------------------------------------------------------------------------------
Total Current Assets 46,134,453 44,890,640
- --------------------------------------------------------------------------------
Property, Plant and Equipment 49,276,614 49,353,036
Less Accumulated Depreciation 13,342,008 12,086,745
- --------------------------------------------------------------------------------
Net Property, Plant and Equipment 35,934,606 37,266,291
- --------------------------------------------------------------------------------
Other Assets, Net of Amortization 2,423,107 2,680,855
- --------------------------------------------------------------------------------
$84,492,166 84,837,786
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Current Liabilities:
Current Installments of Long-Term Debt $ 3,919,817 11,513,475
Accounts Payable 16,527,237 14,994,945
Accrued Expenses 3,647,758 3,351,420
- --------------------------------------------------------------------------------
Total Current Liabilities 24,094,812 29,859,840
- --------------------------------------------------------------------------------
Long-Term Debt, Excluding Current
Installments 36,028,383 29,320,227
Deferred Income Taxes 129,993 497,739
Stockholders' Equity 24,238,978 25,159,980
- -------------------------------------------------------------------------------
$84,492,166 84,837,786
===============================================================================
</TABLE>
(1) January 31, 1997 balances are condensed from the audited consolidated
balance sheet.
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
2
<PAGE>
<TABLE>
<CAPTION>
NATIONAL HOME CENTERS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
(Unaudited) JULY 31, JULY 31,
1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET SALES $ 43,667,104 51,986,866 79,882,830 94,510,358
COST OF SALES 33,681,775 39,303,228 61,343,712 71,517,258
- --------------------------------------------------------------------------------------------------------------
GROSS PROFIT 9,985,329 12,683,638 18,539,118 22,993,100
- --------------------------------------------------------------------------------------------------------------
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES:
Salaries and Benefits 5,946,128 7,300,449 11,478,281 13,736,148
Rent 557,490 596,449 1,137,647 1,192,803
Depreciation and Amortization 815,094 834,481 1,633,543 1,644,829
Other 2,261,344 2,671,527 3,810,969 5,030,705
- --------------------------------------------------------------------------------------------------------------
TOTAL SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 9,580,056 11,402,906 18,060,440 21,604,485
- --------------------------------------------------------------------------------------------------------------
OPERATING INCOME 405,273 1,280,732 478,678 1,388,615
Interest Expense 977,799 893,410 1,874,136 1,721,243
- --------------------------------------------------------------------------------------------------------------
Earnings (Loss) Before Income Taxes (572,526) 387,322 (1,395,458) (332,628)
Income Taxes (194,658) 154,929 (474,456) (111,453)
- --------------------------------------------------------------------------------------------------------------
NET EARNINGS (LOSS) $(377,868) 232,393 (921,002) (221,175)
==============================================================================================================
EARNINGS (LOSS) PER SHARE (0.05) 0.03 (0.13) (0.03)
==============================================================================================================
Weighted Average Number of
Common Shares Outstanding 7,142,251 7,142,251 7,142,251 7,142,251
==============================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
<TABLE>
<CAPTION>
NATIONAL HOME CENTERS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
===================================================================================================
SIX MONTHS ENDED
JULY 31,
----------------------------------
(Unaudited) 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (921,002) (221,175)
Adjustments to Reconcile Net Loss to Net Cash
Provided by (Used in) Operating Activities:
Depreciation and Amortization 1,633,543 1,644,829
Gain on Disposal of Property, Plant and Equipment (81,854) (88,016)
Increase in Cash Surrender Value of Life Insurance (12,000) (8,978)
Deferred Income Tax Benefit (220,937) (42,866)
Changes in Assets and Liabilities:
Accounts Receivable (3,424,454) (3,368,980)
Inventories 1,307,556 (2,182,305)
Other Current Assets 1,062,613 1,269,497
Accounts Payable 1,732,292 1,192,872
Accrued Expenses 296,338 686,940
- ---------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Operating
Activities 1,372,095 (1,118,182)
- ---------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to Property, Plant and Equipment (166,193) (668,308)
Proceeds from Sale of Property, Plant and Equipment 65,814 138,400
Increase in Other Assets (187,539) (312,598)
- ---------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (287,918) (842,506)
- ---------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Long-Term Debt 3,057,257 5,942,787
Repayments of Long-Term Debt (4,142,759) (3,979,805)
- ---------------------------------------------------------------------------------------------------
Net Cash Provided by (Used In) Financing
Activities (1,085,502) 1,962,982
- ---------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH (1,325) 2,294
Cash at Beginning of Period 134,086 130,051
- ---------------------------------------------------------------------------------------------------
Cash at End of Period $ 132,761 132,345
- ---------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES:
Interest Paid $ 1,860,855 1,559,194
Acquisition of Other Assets for Notes Payable - 408,786
Accounts Receivable for Sale of Other Assets 337,662 -
Issuance of Notes Payable for Payment of Account Payable 200,000 -
- ---------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
NATIONAL HOME CENTERS, INC. ("THE COMPANY") AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
JULY 31, 1997
1. Basis of Presentation
---------------------
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X of the Securities and Exchange Commission.
Accordingly, the financial statements do not include all of the information
and notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Results of operations for the three
months and six months ended July 31, 1997, are not necessarily indicative
of the results to be expected for the fiscal year ending January 31, 1998.
For further information, refer to the consolidated financial statements and
related notes thereto included in the Company's Annual Report on Form 10-K
--------------------------
filed with the Commission on May 1, 1997.
2. Income Taxes
------------
Income taxes for the three months and six months ended July 31, 1997 and
1996, do not bear a normal relationship to the statutory federal income tax
rate of 34%, primarily because of state income taxes.
ITEM 2
- ------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
--------------------------------------------------
OPERATIONS AND FINANCIAL CONDITION
----------------------------------
GENERAL
-------
National Home Centers, Inc. is a full line retailer of home improvement products
and building materials. The Company believes it is unique in its ability to
serve both retail consumers and professional contractors by operating large home
center superstores in tandem with complete building supply operations.
In recent years, the Company has experienced increased competition in its
markets from other national and/or regional chains who are seeking to gain or
retain market share by reducing prices. This has continued to place pressure on
all of the Company's stores and their respective sales, gross margins and
operating income. The increased competition may continually and adversely
affect the Company's earnings. There can be no assurance that other larger
national or regional chains will not enter the Company's present or planned
markets which could possibly have an adverse effect on the Company. During
fiscal 1996, Lowe's opened stores in Russellville and Conway, Arkansas, and Home
Depot opened stores in North Little Rock and west Little Rock, Arkansas. The
opening of these stores has adversely affected the Company's sales and profit
levels in these markets.
5
<PAGE>
RESULTS OF OPERATIONS
---------------------
Three Months Ended July 31, 1997 and 1996
- -----------------------------------------
Net sales for the second quarter of fiscal 1997 were down 16% to $43.7 million,
compared to $52.0 million for the second quarter of fiscal 1996. Comparable
store sales in the second quarter of fiscal 1997 were down 15% over the same
period of fiscal 1996. Increased competition has affected sales volume and
pricing. Net loss for the second quarter of fiscal 1997 was $378,000 or $0.05
per share, compared with net income for the second quarter of fiscal 1996 of
$232,000, or $0.03 per share.
Gross profit as a percentage of net sales for the second quarter of fiscal 1997
decreased to 22.9% from 24.4% for the same period last year. Increased
competition and promotional pricing led to the decrease in gross margin.
As a result of continuing emphasis on expense reduction, selling, general and
administrative expenses remained stable at 21.9% of net sales for the second
quarter of fiscal 1997 and for the second quarter of fiscal 1996.
Net interest expense as a percentage of net sales was 2.2% for the quarter ended
July 31, 1997, compared to 1.7% for the same period last year, primarily due to
increased borrowings and increased interest rates.
Six Months Ended July 31, 1997 and 1996
- ---------------------------------------
Net sales for the six months ended July 31, 1997 were down 15% to $79.9 million,
compared to $94.5 million for the same period of fiscal 1996. Comparable store
sales for the six months ended July 31, 1997 were down 14% over the same period
of fiscal 1996. Increased competition has affected sales volume and pricing.
Gross profit as a percentage of net sales for the first six months of fiscal
1997 decreased to 23.2% from 24.3% for the same period last year. Increased
competition and promotional pricing led to the decrease in gross margin.
As a result of continuing emphasis on expense reduction, selling, general and
administrative expenses decreased to 22.6% of net sales for the first six months
of fiscal 1997, compared to 22.9% of net sales for the same period last year.
Net interest expense as a percentage of net sales was 2.3% for the six months
ended July 31, 1997, compared to 1.8% for the same period last year, primarily
due to increased borrowings and higher interest rates.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company's working capital at July 31, 1997 increased to $22.0 million from
$15.0 million at January 31, 1997, primarily due to increases in accounts
receivable. Current installments of long-term debt decreased as a result of the
refinancing of a note which was classified as a current maturity at January 31,
1997, which has been reclassified as long-term debt at July 31, 1997.
6
<PAGE>
The Company's primary capital needs are to finance inventories, accounts
receivable and store expansion. During the six months ended July 31, 1997,
operating activities provided net cash of $1.4 million. Primary sources of cash
from operating activities included approximately $0.7 million from net earnings
and depreciation and approximately $1.7 million from increases in accounts
payable and $1.3 million from decreases in inventories. The primary uses of
cash were approximately $3.4 million to finance increases in accounts
receivable.
Net cash used in investing activities for the first six months of fiscal 1997
was approximately $0.3 million, principally due to purchases of equipment and
increases in other assets. Net cash used in financing activities during the
first six months of fiscal 1997 totaled approximately $1.1 million, primarily
from net repayments of long-term borrowings.
At July 31, 1997, the Company owed a bank $22.8 million under its revolving
credit agreement, which expires in December, 1998. The agreement provides the
Company with the option of borrowing rates based on either (a) the London
Interbank Offered Rate ("LIBOR") plus 2.5%, or (b) the bank's Reference Rate,
which reflects the bank's prime rate. The facility limits availability to a
borrowing base of 85% and 55% of eligible accounts receivable and inventory,
respectively, with inventories capped at $20 million. Effective February 1,
1997, the LIBOR and Reference Rate were raised by 100 basis points. As of July
31, 1997, the Company had approximately $2.0 million of additional available
borrowing capacity under the revolving credit agreement.
Borrowings under the revolving credit agreement are collateralized by the
Company's accounts receivable and inventory. In addition, the agreement requires
the Company to 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 item (i) at July 31, 1997, however, the bank agreed to waive the
default.
During the second quarter, the Company settled a dispute with a bank who holds
the west Rogers, Arkansas real estate mortgage. As a result, the Company
obtained a waiver of the fiscal year end covenant default and received a two
year renewal on the mortgage. The Company also regained title to the Cabinet
Craft inventory and equipment which were recently auctioned.
Forward-looking statements in this Form 10-Q are made pursuant to the safe
harbor provision of the Private Securities Litigation Reform Act of 1995. There
are various factors that could cause results to differ materially from those
anticipated by some statements made in this Form 10-Q. Investors are cautioned
that all forward-looking statements involve risks and uncertainty. Factors that
could cause actual results to differ materially include, but are not limited to
the following: the strength and extent of new and existing competition; the
Company's ability to maintain competitive pricing in its markets; the Company's
ability to maintain adequate levels of vendor support; the ability of the
Company to increase sales; the Company's ability to attract, train and retain
experienced, quality employees; the Company's ability to dispose of excess real
estate and other assets; general economic conditions; housing turnover; interest
rates; weather; and other factors described from time to time in the Company's
Securities and Exchange Commission filings.
7
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Not applicable.
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company held its Annual Meeting of Stockholders on June 5, 1997.
For purposes of voting for the election of Directors and upon such
other business as may have properly come before the meeting, there
were 7,465,958 shares of outstanding Common Stock entitled to vote at
the meeting. Of those outstanding shares, 6,703,654 were represented
either in person or by proxy at the meeting. The stockholders voted on
the following items:
Election of Directors:
----------------------
Name For Authority Withheld
---- --- ------------------
Larry C. Chumley 6,649,294 54,360
Richard D. Denison 6,651,985 51,669
Danny R. Funderburg 6,632,585 71,069
Brent A. Hanby 6,647,571 56,083
Roger A. Holman 6,652,565 51,089
Dwain A. Newman 6,642,865 60,789
David W. Truetzel 6,499,769 203,885
No other matters to be voted upon were brought before the meeting.
Item 5. Other Information. Subsequent to the end of the second quarter, the
Company announced plans to close the Conway, Arkansas home center
store due to low sales volume and continued losses. The store will
close mid-October, 1997. The real estate has been listed for sale. The
Company plans to continue operating the separate contractor related
facility also located in Conway.
Dynamic changes are occurring in the home improvement industry and
most building supply retailers are experiencing pressure on sales and
profitability. The Company has engaged Arthur Andersen LLP to assist
in reviewing various long-term strategies. Arthur Andersen LLP is a
business unit of Andersen Worldwide, the world's largest professional
services provider. The Company's Board of Directors resolved to
continue the engagement to phase III which includes the assistance of
Senn-Delaney, a unit of Arthur Andersen LLP.
8
<PAGE>
As of July 1, 1997, The Company appointed UMB Bank of Kansas City,
Missouri as the stock transfer agent and registrar due to Boatmens
Bank being purchased by another lending institution.
Item 6. Exhibits and Reports on Form 8K.
(a) Exhibits Description of Exhibit Sequentially Numbered
---------------------- ---------------------
Exhibits No. Page
------------ ----
10.10 Waiver letter from Bankamerica Busines s 11
Credit, Inc.
27.10 Financial Data Schedule 12-13
(b) Reports on Form 8-K.
Not applicable.
9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
NATIONAL HOME CENTERS, INC.
Date: September 12, 1997 /s/ Dwain A. Newman
-------------------------------
Dwain A. Newman
Chief Executive Officer and
Chairman
Date: September 12, 1997 /s/ Brent A. Hanby
-------------------------------
Brent A. Hanby
Executive Vice President and
Chief Financial Officer
10
<PAGE>
EXHIBIT 10.1
[LETTERHEAD APPEARS HERE]
June 30, 1997
Brent A. Hanby, EVP & CFO
National Home Centers, Inc.
Highway 265 North
P.O. Box 789
Springdale, Arkansas 72765
Dear Brent,
The REQUESTED WAIVER of the 4/30/97 FIRST QUARTER INTEREST COVERAGE covenant
default has been APPROVED by BankAmerica Business Credit, Inc. This waiver
pertains only to this covenant and the period mentioned. All other terms of the
Loan and Security Agreement remain unchanged.
Yours Sincerely
/s/ FRANCESA M. GASTIL
- --------------------------------
Francesa M. Gastil
Senior Account Executive
BankAmerica Business Credit, Inc.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> JAN-31-1998 JAN-31-1998
<PERIOD-START> MAY-01-1997 FEB-01-1997
<PERIOD-END> JUL-31-1997 JUL-31-1997
<CASH> 132,761 132,761
<SECURITIES> 0 0
<RECEIVABLES> 15,108,395 15,108,395
<ALLOWANCES> 0 0
<INVENTORY> 29,501,975 29,501,975
<CURRENT-ASSETS> 46,134,453 46,134,453
<PP&E> 49,276,614 49,276,614
<DEPRECIATION> 13,342,008 13,342,008
<TOTAL-ASSETS> 84,492,166 84,492,166
<CURRENT-LIABILITIES> 29,094,812 29,094,812
<BONDS> 0 0
0 0
0 0
<COMMON> 74,660 74,660
<OTHER-SE> 24,164,318 24,164,318
<TOTAL-LIABILITY-AND-EQUITY> 84,492,166 84,492,166
<SALES> 43,667,104 79,882,830
<TOTAL-REVENUES> 43,667,104 79,882,830
<CGS> 33,681,775 61,343,712
<TOTAL-COSTS> 33,681,775 61,343,712
<OTHER-EXPENSES> 9,580,056 18,060,440
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 977,799 1,874,136
<INCOME-PRETAX> (572,526) (1,395,458)
<INCOME-TAX> (194,658) (474,456)
<INCOME-CONTINUING> (377,868) (921,002)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (377,868) (921,002)
<EPS-PRIMARY> (0.05) (0.13)
<EPS-DILUTED> 0 0
</TABLE>
