<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 October 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 December 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>
OCTOBER 31, JANUARY 31,
1997 1997
ASSETS (Unaudited) (1)
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets:
Cash $ 124,892 134,086
Accounts Receivable 13,701,427 11,346,279
Income Tax Refunds Receivable 573,000 1,333,892
Inventories 26,073,251 30,809,531
Other 546,046 1,266,852
- ---------------------------------------------------------------------------------------------
Total Current Assets 41,018,616 44,890,640
- ---------------------------------------------------------------------------------------------
Property, Plant and Equipment 48,008,777 49,353,036
Less Accumulated Depreciation 13,596,040 1,2086,745
- ---------------------------------------------------------------------------------------------
Net Property, Plant and Equipment 34,412,737 37,266,291
- ---------------------------------------------------------------------------------------------
Other Assets, Net of Amortization 2,420,927 2,680,855
- ---------------------------------------------------------------------------------------------
$77,852,280 84,837,786
- ---------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------
Current Liabilities:
Current Installments of Long-Term Debt $ 4,693,618 11,513,475
Accounts Payable 15,628,210 14,994,945
Accrued Expenses 3,091,187 3,351,420
- ---------------------------------------------------------------------------------------------
Total Current Liabilities 23,413,015 29,859,840
- ---------------------------------------------------------------------------------------------
Long-Term Debt, Excluding Current Installments 32,924,970 29,320,227
Deferred Income Taxes 0 497,739
Stockholders' Equity 21,514,295 25,159,980
- ---------------------------------------------------------------------------------------------
$77,852,280 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 NINE MONTHS
ENDED
OCTOBER 31, OCTOBER 31,
------------------------------------------------------------------------
(Unaudited) 1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET SALES $ 39,279,691 47,040,920 119,162,521 141,551,278
COST OF SALES 30,892,242 35,721,533 92,235,954 107,238,791
- -----------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 8,387,449 11,319,387 26,926,567 34,312,487
- -----------------------------------------------------------------------------------------------------------------------
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES:
Salaries and Benefits 5,873,505 6,897,656 17,351,786 20,633,804
Rent 501,489 597,570 1,639,136 1,790,373
Depreciation and Amortization 802,054 852,850 2,435,597 2,497,679
Other 2,901,419 2,651,529 6,712,388 7,682,234
- -----------------------------------------------------------------------------------------------------------------------
TOTAL SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 10,078,467 10,999,605 28,138,907 32,604,090
- -----------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) (1,691,018) 319,782 (1,212,340) 1,708,397
Interest Expense 955,711 919,251 2,829,847 2,640,494
- -----------------------------------------------------------------------------------------------------------------------
Loss Before Income Taxes (2,646,729) (599,469) (4,042,187) (932,097)
Income Tax Expense (Benefit) 77,954 (205,460) (396,502) (316,913)
- -----------------------------------------------------------------------------------------------------------------------
NET LOSS $ (2,724,683) (394,009) (3,645,685) (615,184)
- -----------------------------------------------------------------------------------------------------------------------
LOSS PER SHARE $ (0.38) (0.06) (0.51) (0.09)
- -----------------------------------------------------------------------------------------------------------------------
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
- ----------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED
OCTOBER 31,
--------------------------------------
(Unaudited) 1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (3,645,685) (615,184)
Adjustments to Reconcile Net Loss to Net Cash
Provided by (Used in) Operating Activities:
Depreciation and Amortization 2,435,598 2,497,679
Loss (Gain) on Disposal of Property, Plant and Equipment 62,379 (87,266)
Increase in Cash Surrender Value of Life Insurance (12,000) (138,978)
Deferred Income Tax Expense (Benefit) 176,498 (6,116)
Changes in Assets and Liabilities:
Accounts Receivable (2,355,148) (3,292,627)
Inventories 4,736,280 (2,152,334)
Other Current Assets 807,461 1,081,316
Accounts Payable 2,233,265 (535,365)
Accrued Expenses (260,233) 45,760
- ----------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Operating Activities 4,178,415 (3,203,115)
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to Property, Plant and Equipment (225,788) (914,185)
Proceeds from Sale of Property, Plant and Equipment 788,609 142,150
Increase in Other Assets 64,684 442,043
- ----------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Investing Activities 627,505 (1,214,078)
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Long-Term Debt 3,348,580 14,306,852
Repayments of Long-Term Debt (8,163,694) (9,887,682)
- ----------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used In) Financing Activities (4,815,114) 4,419,170
- ----------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH (9,194) 1,977
Cash at Beginning of Period 134,086 130,051
- ----------------------------------------------------------------------------------------------------------
Cash at End of Period $ 124,892 132,028
- ----------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES:
Interest Paid $ 2,834,751 2,436,041
Income Taxes Refunded 1,333,892 1,107,618
Acquistion of Equipment for Notes Payable - 298,712
Acquisition of Other Assets for Notes Payable - 408,786
Issuance of Notes Payable for Payment of Accounts Payable 1,600,000 -
- ----------------------------------------------------------------------------------------------------------
</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
OCTOBER 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 nine months ended October 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 nine months ended October 31, 1997,
do not bear a normal relationship to the statutory federal income tax rate
of 34%, primarily because of the effects of certain adjustments made in the
3rd quarter of fiscal 1997. The Company's losses for the nine months ended
October 31, 1997, result in a net operating loss (NOL) for federal and
state income tax purposes. Under federal income tax provisions, a portion
of this NOL will be carried back to prior years in which the Company paid
taxes, and as a result, a receivable of $573,000 has been recorded as of
October 31, 1997, to reflect estimated income taxes expected to be refunded
from those years. The balance of the NOL represents amounts which can be
carried forward (up to 15 years for federal tax purposes) to years in which
the Company has taxable income and used to reduce the income tax liability
in those years. During the third quarter, management determined that,
based on past and current earnings trends, the realization of the Company's
deferred tax assets (which primarily result from NOL's and other tax credit
carryforwards) is uncertain. As a result, the Company has increased the
valuation allowance relating to deferred tax assets from $275,000 as of
July 31, 1997 to $1,356,000 as of October 31, 1997, with the increase
included in income tax expense for the third quarter of fiscal 1997.
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. In recent years, the Company has experienced increased
competition in its markets
5
<PAGE>
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.
The Company is currently finishing preparation of a five year business plan.
The Company has engaged Arthur Andersen Economic and Financial Consulting Group
of Dallas, Texas and Senn-Delaney, a unit of Arthur Andersen LLP, to assist in
assessing the Company's strengths, weaknesses and competitive position. Based
upon the findings of the engagement, the Company is currently developing a plan
designed to stabilize the Company and return it to profitability and to provide
a solid base for growth. The Company has already identified ways to improve
performance and with the assistance of Senn-Delaney, has started to make changes
in the operations of certain underperforming facilities intended to maximize
efficiency, cash flow and competitive ability.
RESULTS OF OPERATIONS
---------------------
Three Months Ended October 31, 1997 and 1996
- --------------------------------------------
Net sales for the third quarter of fiscal 1997 were down 17% to $39.3 million,
compared to $47.0 million for the third quarter of fiscal 1996. Comparable
store sales in the third 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 third quarter of fiscal 1997 was $2,725,000 or $0.38
per share, compared with net loss for the third quarter of fiscal 1996 of
$394,000, or $0.06 per share.
Gross profit as a percentage of net sales for the third quarter of fiscal 1997
decreased to 21.4% from 24.1% for the same period last year. Increased
competition and promotional pricing led to the decrease in gross margin.
Selling, general and administrative expenses increase to 25.7% of net sales for
the third quarter of fiscal 1997 compared to 23.4% for the third quarter of
fiscal 1996. This increase in expenses as a percentage of sales results
primarily from the closing of the Conway, Arkansas home center store. A
$585,000 loss on this closing, primarily due to inventory shrinkage and from the
auction of equipment, was recorded in the third quarter of 1997.
Net interest expense as a percentage of net sales was 2.4% for the quarter ended
October 31, 1997, compared to 2.0% for the same period last year, primarily due
to increased interest rates and lower sales volume.
Nine Months Ended October 31, 1997 and 1996
- -------------------------------------------
Net sales for the nine months ended October 31, 1997 were down 16% to $119.2
million, compared to $141.6 million for the same period of fiscal 1996.
Comparable store sales for the nine months ended October 31, 1997 were down 14%
over the same period of fiscal 1996. Increased competition has affected sales
volume and pricing.
6
<PAGE>
Gross profit as a percentage of net sales for the first nine months of fiscal
1997 decreased to 22.6% 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 lower sales volume and the closing of the Conway home center
store in the third quarter, selling, general and administrative expenses
increased to 23.6% of net sales for the first nine months of fiscal 1997,
compared to 23.0% of net sales for the same period last year.
Net interest expense as a percentage of net sales was 2.4% for the nine months
ended October 31, 1997, compared to 1.9% for the same period last year,
primarily due to higher interest rates and lower sales volume.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company's working capital at October 31, 1997 increased to $17.6 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 October 31, 1997.
The Company's primary capital needs are to finance inventories and accounts
receivable. During the nine months ended October 31, 1997, operating activities
provided net cash of $4.2 million. Primary sources of cash from operating
activities included approximately $2.2 million from increases in accounts
payable and $4.7 million from decreases in inventories. The primary uses of
cash were approximately $1.2 million from net loss and depreciation and
amortization and approximately $2.4 million to finance increases in accounts
receivable.
Net cash provided by investing activities for the first nine months of fiscal
1997 was approximately $0.6 million, principally due to proceeds from sales of
property, plant and equipment. Net cash used in financing activities during the
first nine months of fiscal 1997 totaled approximately $4.8 million, primarily
from net repayments of long-term borrowings.
At October 31, 1997, the Company owed a bank $20.6 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
October 31, 1997, the Company had approximately $1.9 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 October 31, 1997. The bank has previously waived the
default. The Company expects the bank to issue the waiver again for the third
quarter. If the bank does not waive the default, the loan balance will be
reclassed as a current maturity of long-term debt.
7
<PAGE>
As a part of the Company's strategy, the Company closed the Conway, Arkansas
home center store in October 1997 due to low sales volume and continued losses.
The costs related to the closing of the store were $585,000 and are included in
the operating results for the third quarter. The real estate has been listed
for sale. On December 8, 1997, the Company announced the closing of the
Fayetteville and west Little Rock home center stores. These stores will close
in the 1st quarter of 1998, with the related costs of closing to be expensed in
the fourth quarter of fiscal 1997. Management presently cannot reliably
estimate such costs. The Fayetteville real estate will be listed for sale, and
the Company will attempt to find a sublease tenant for the west Little Rock
store.
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
implementation of the results of the Arthur Andersen engagement; the Company's
ability to maintain adequate levels of vendor support; the Company's ability to
maintain adequate levels of lender 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.
8
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Not applicable.
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Other Information. 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.
Item 6. Exhibits and Reports on Form 8K.
(a) Exhibits Description of Exhibit Sequentially Numbered
Exhibits No. ---------------------- Page
------------ ---------------------
10.10 Waiver letter from Bankamerica
Business Credit, Inc. 11
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: December 12, 1997 /s/ Dwain A. Newman
---------------------------------
Dwain A. Newman
Chief Executive Officer and
Chairman
Date: December 12, 1997 /s/ Brent A. Hanby
---------------------------------
Brent A. Hanby
Executive Vice President and
Chief Financial Officer
10
<PAGE>
[LOGO OF BANKAMERICA APPEARS HERE]
EXHIBIT 10.1
October 24, 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 7/31/97 SECOND 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.
The approval of the noted covenant waiver is subject to a waiver fee of
$10,000.00, which will be charged directly to National Home Centers revolving
loan.
Yours Sincerely
/s/ FRANCESCA M. GASTIL
- ---------------------------------
Francesca M. Gastil
Senior Account Executive
BankAmerica Business Credit, Inc.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> JAN-31-1998 JAN-31-1998
<PERIOD-START> AUG-01-1997 FEB-01-1997
<PERIOD-END> OCT-31-1997 OCT-31-1997
<CASH> 124,892 124,892
<SECURITIES> 0 0
<RECEIVABLES> 13,701,427 13,701,427
<ALLOWANCES> 0 0
<INVENTORY> 26,073,251 26,073,251
<CURRENT-ASSETS> 41,018,616 41,018,616
<PP&E> 48,008,777 48,008,777
<DEPRECIATION> 13,596,040 13,596,040
<TOTAL-ASSETS> 77,852,280 77,852,280
<CURRENT-LIABILITIES> 23,413,015 23,413,015
<BONDS> 0 0
0 0
0 0
<COMMON> 74,660 74,660
<OTHER-SE> 21,439,635 21,439,635
<TOTAL-LIABILITY-AND-EQUITY> 77,852,280 77,852,280
<SALES> 39,279,691 119,162,521
<TOTAL-REVENUES> 39,279,691 119,162,521
<CGS> 30,892,242 92,235,954
<TOTAL-COSTS> 30,892,242 92,235,954
<OTHER-EXPENSES> 10,078,467 28,138,907
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 955,711 2,829,847
<INCOME-PRETAX> (2,646,729) (4,042,187)
<INCOME-TAX> 77,954 (396,502)
<INCOME-CONTINUING> (2,724,683) (3,645,685)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,724,683) (3,645,685)
<EPS-PRIMARY> (0.38) (0.51)
<EPS-DILUTED> 0 0
</TABLE>
