<PAGE>
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
For the fiscal year ended January 31, 1998.
[ ] 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 Identification No.)
incorporation or organization)
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
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 [ ]
On April 6, 1998, there were outstanding 7,142,251 shares of the
registrant's Common Stock, $.01 par value.
The aggregate market value of the 2,446,668 shares of Common Stock held by
non-affiliates of the registrant as of April 6, 1998 was $4,893,336.
DOCUMENTS INCORPORATED BY REFERENCE
National Home Centers, Inc. Annual Report for fiscal year ended January 31,
1998 (certain portions incorporated by reference into Part II)
Proxy Statement for Annual Meeting of Stockholders, June 4, 1998 and
Adjournments (certain portions incorporated by reference into Part III)
<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,
but in the last six months the focus has shifted to professional contractors.
Today, the Company operates two large home center superstores, one appliance
sales warehouse and six contractor sales locations all in Arkansas, and
approximately 55% of its sales are to contractor consumers.
The Company operates its stores in four Arkansas markets: Northwest
Arkansas (3 stores); Little Rock (3 stores); Russellville (2 stores); and Fort
Smith (1 store). NHC also operates fabrication facilities for value-added
conversion products such as countertops, pre-hung door units, and window units.
In October 1997, NHC closed its Conway superstore, and in December 1997, the
Rogers contractor facility was combined into the Bentonville contractor
facility. Subsequent to fiscal 1997 year-end, the Company closed its Rodney
Parham store in Little Rock and its Fayetteville superstore. The Company is
also reducing exposure in the retail portion of its Russellville, Arkansas
facility.
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
The Company is a retailer of home improvement products and building
materials with an established core market primarily in Arkansas, but including
Oklahoma and Missouri. The Company operates large building supply operations
serving both retail consumers and professional contractors. NHC's business
strategy capitalizes on professional contractor sales by providing a broad
product assortment and a full range of services in each of its four Arkansas
markets.
The Company operates in the highly competitive home improvement industry.
NHC's primary competition comes from home centers, discount retail stores,
supermarkets, warehouse stores, certain specialty stores, traditional hardware,
plumbing and electrical suppliers, and lumberyards. The introduction of
national and/or regional home improvement stores to NHC's markets has
significantly increased competition for market share in recent years. In an
attempt to gain market share, these new competitors have offered reduced prices
on products similar to those carried by NHC. This has placed pressure on NHC's
stores and its prospective sales, gross margins, and operating income. Although
NHC's markets are fairly saturated and few national or regional chains are
aggressively expanding, it is possible that competition will continue to
increase in those markets served by NHC. Such additional competition may
adversely affect the Company's future earnings.
In the last year, NHC has prepared a business plan based on a realistic
assessment of its strengths, weaknesses and competitive position. The Company
previously retained Senn-Delaney, a retail-consulting group affiliated with
Arthur Andersen LLP, to assist in the implementation of the
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business plan. The business plan also was designed to reflect the operational,
marketing, administrative, and financial components of NHC's efforts to focus on
sales to contractors. Many of the components of the business plan have been, or
are currently being implemented. NHC's business plans is designed to: (a)
stabilize the Company and return it to profitability; and (b) provide a solid
base for continued growth within its core markets. The Company continues to
scrutinize it's utilization of resources and methods of doing business in order
to maximize efficiency, cash flow, and the Company's competitive ability. The
business plan incorporates the impact of actions already taken or identified for
implementation by NHC.
REDUCTION IN EXPOSURE OF RETAIL ASSETS
The Company initially entered the retail segment of the market in the early
1980's primarily as a hedge against rising interest rates and reduced housing
starts. As a result of the recent drastic increase in competition for the retail
home improvement dollar and non-inflationary economic environment, NHC has
reevaluated its niche in the industry. The Company plans to reduce its exposure
to the retail segment of the home improvement industry. Because regional
contractors have long recognized NHC as a quality operation and because the
Company has developed a strong, loyal following of contractors, NHC plans to
reemphasize and refocus its efforts on becoming a leader in the professional
contractor market. The Company's goal is to increase revenues from professional
contractors to approximately 70% - 80% of the Company's total revenues within
the next year. NHC plans to explore some industry consolidation possibilities
including, but not limited to, buyouts of other contractor-related companies.
Initial positive results have been produced from the Company's business
plan as evidenced by the closing of the Conway, Arkansas home center in October
1997. As of December 1, 1997, the Rogers contractor facility was closed and
combined into the Bentonville contractor facility. Also, the Company announced
plans in December 1997 to close the Rodney Parham and Fayetteville stores, both
of which were liquidated and closed after the fiscal year end. The Company is
also reducing the inventory levels in the Russellville home center and plans to
primarily operate the facility long-term as a contractor location. All related
restructuring costs were expensed as nonrecurring charges in the fourth quarter
ending January 31, 1998.
CAPITALIZATION OF THE COMPANY
NHC currently has a revolving credit agreement that expires in December
1999. The advance rates on this revolver are 85% of eligible receivables and
65% of eligible inventory. The existing lender has expressed their intent to
honor the line of credit through December 1999 but because of the Company's
recent financial difficulties, NHC has struggled to meet its financial covenant
requirements. As a result, the lender raised the interest rate 50 basis points
on February 1, 1998 as additional compensation for year-end covenant waivers.
Additionally, the Company granted deeds of trust on two parcels of undeveloped
land as additional security. Over the next five years, NHC plans to reduce its
outstanding revolver balance while at the same time reducing all other total
long term debt.
Over the past year, as continued losses have been reported and excess
availability under the revolver has been restricted, the Company has become past
due with several vendors. This has resulted in vendors reducing credit limits.
Also, the Company has not been able to take advantage of vendor discounts. NHC
estimates that lost discounts in fiscal 1997 were approximately $500,000. The
Company recognizes that, to successfully implement its business plan, it must
improve relationships
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and increase credit lines with its trade vendors. NHC estimates that $3.5
million is required to become current with all of its trade vendors and the
Company has identified several sources of funds with which to accomplish this.
Cash from the sale of land parcels, a 10% increase in the inventory advance rate
as previously discussed, and continued reduction of retail inventory at its
existing stores will provide the Company with the source of funds necessary to
pay down vendors. Additionally, from the aforementioned sources of cash, NHC
will have the capital available to allow the Company to again take advantage of
vendor discounts over time.
MONETIZE REAL ESTATE VALUES
NHC owns several pieces of undeveloped real estate and buildings that no
longer fit in the Company's strategic plan. The following is a table of the
properties for sale:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Name Debt Asking Price Acres Sale Condition
---- ---- ------------ ----- --------------
<S> <C> <C> <C> <C>
Fort Smith Land -0- $ 1,500,000 7.5 Under contract
Branson Land -0- 500,000 30.0 Listed for Sale
S. Fayetteville Land -0- 1,800,000 26.1 Under contract
Conway Land & Building $2,800,000 2,800,000 7.6 Under contract
Fayetteville Land & Building 2,900,000 6,500,000 15.7 Under contract
Corp. Office Land -0- 275,000 14.7 Under contract
---------- -----------
Total $5,700,000 $13,375,000
- ------------------------------------------------------------------------------------------------------------
</TABLE>
If NHC is successful in its efforts to sell the above properties, the
Company will have made significant strides towards ending its immediate cash
crisis. By doing so, NHC will be able to focus its efforts on implementing a
long-term strategy for competing in the home improvement industry.
In summary, if the Company is successful in implementing all of the above
strategies within the next twelve months, the Company believes the impact will
be as follows:
. Outside of normal operating activities, NHC estimates that it will
generate approximately $7,000,000 of net excess cash by refinancing
existing debt, reducing inventory balances, and monetizing non-producing
assets;
. The Company anticipates being current with all of its trade vendors,
reestablishing credit lines, and again taking advantage of vendor
discounts;
. NHC anticipates improving its capital structure by obtaining more
favorable terms on its debt instruments with fewer financial covenants;
NHC believes it has developed a realistic and attainable business plan that
addresses the needs of its creditors and provides a vehicle for the Company to
return to profitability.
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:
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<TABLE>
<CAPTION>
AREA IN SQUARE FEET
OPENING ------------------- RETAIL/CONTRACTOR FABRICATION
STORE LOCATION DATE ACREAGE RETAIL WAREHOUSE MIX (%) SKUs OPERATIONS
-------------- ---- ------- ------ --------- ------- ---- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
I. NORTHWEST ARKANSAS
Springdale 11/83 21 50,000 190,000 20/80 25,000 door,
window
Bentonville 06/92 6 20,200 18,000 10/90 20,000 --
Rogers Superstore 10/95 20 186,406 20,000 90/10 35,000 --
II. FORT SMITH
Fort Smith 12/77 10 31,074 110,000 15/85 11,500 door,
window
III. LITTLE ROCK
North Little Rock 10/85 13 95,200 150,000 40/60 35,000 door,
window
Conway Contractor 05/93 4 0 30,000 0/100 10,000 door
Maumelle 06/93 3 0 20,000 0/100 500
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 485,532 632,000
</TABLE>
The Springdale, Bentonville, Fort Smith and North Little Rock stores are
leased from the Company's chairman. The Clarksville, Maumelle and a portion of
the Russellville properties are leased from third parties. Lease terms for
these properties range from 10 to 15 years and provide for renewal options. The
Rogers, Conway contractor and a portion of the Russellville property are owned
by the Company.
The Company owns the land and building for the closed Fayetteville and
Conway retail stores. The Company currently has sales contracts pending for
these sites. Mr. Newman has agreed to release the Company from the Rogers
contractor location as of June 30, 1998. The Rodney Parham store is leased from
an unaffiliated third party. The Company is attempting to find a suitable
sublease tenant for the remainder of the lease which expires June 30, 2003.
The Company owns a thirty (30) acre parcel in Branson, Missouri, a seven
(7) 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 June 1998 with estimated net proceeds to the Company of
approximately $1,500,000.
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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 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
10,000 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.
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 10,000 and 35,000 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 1998 1997 1996
-------- ---- ---- ----
<S> <C> <C> <C>
Building Materials.......................... 54 52 53
Hardware/Plumbing/Electrical................ 18 19 18
Home Decor.................................. 10 11 10
Appliances/Cabinets......................... 10 11 13
Lawn and Garden............................. 8 7 6
---- ---- ----
Total....................................... 100% 100% 100%
</TABLE>
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
1997. 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.
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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 1997, while the Company's credit loss was
0.36% 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 30% of NHC's
retail sales were made on third-party and proprietary credit cards in fiscal
1997.
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 0.71% of
sales on advertising in fiscal 1997, primarily on seasonal direct mail
advertising for special promotions and to reinforce customer awareness of its
everyday low pricing. Television advertising will be significantly reduced in
fiscal year 1998.
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.
For the past 20 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 245 customers signed up
for a fall 1998 trip to Switzerland. Builders qualify for the travel incentive
program by purchasing certain volumes of materials and by making timely payments
each month.
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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.
The efficient operation of the Company's business is dependent in part on
its computer software programs and operating systems. These programs and systems
are used in several key areas of the Company's business, including merchandise
purchasing, inventory management, pricing, sales, shipping and financial
reporting, as well as in various administrative functions. The Company has been
evaluating its programs and systems to identify potential year 2000 compliance
problems. These actions are necessary to ensure that the programs and systems
will recognize and process the year 2000 and beyond. It is anticipated that
modification or replacement of most of the Company's programs and systems will
be necessary to make such programs and systems year 2000 compliant. The Company
is communicating with suppliers and others to coordinate year 2000 conversion.
Based on present information, the Company believes that it will be able to
achieve year 2000 compliance by upgrading its key programs and systems to those
that are already year 2000 compliant. However, no assurance can be given that
these efforts will be successful. The Company does not expect expenditures
associated with achieving year 2000 compliance to have a material effect on its
financial results in 1998.
COMPETITION
NHC operates its stores in four Arkansas markets. For many years, NHC
dominated the home improvement industry in Arkansas primarily because these
markets lacked competition from national home improvement chains. Once
considered to be too small, these markets began to attract several nationally
known competitors in their efforts to continue their nationwide expansion. Upon
entering these markets, these new competitors offered lower prices than NHC. As
a result, NHC has been forced to meet prices on most occasions to remain
competitive resulting in a steady decline in gross margins and sales per square
foot. The Company's principal competitors in these markets are Lowe's, Home
Depot, Sutherlands, Payless Cashways, Meeks, Ridout, and Home Quarters.
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, 1998, the Company employed 742 persons, consisting of 643
full-time and 99 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.
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Item 3. Legal Proceedings.
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.
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 6, 1998,
and 5,000,000 shares of Preferred Stock, $1.00 par value, of which no shares
were outstanding as of April 6, 1998.
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, 1998, 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 6, 1998, the 7,142,251 shares of Common Stock then outstanding
were held by approximately 584 persons (excluding persons holding shares in
nominee names). The Transfer Agent and Registrar for the Common Stock is UMB
Bank of Kansas City.
The Company's Common Stock is currently traded on The Nasdaq National
Market under the symbol "NHCI." The following table sets forth the quarterly
high and low sales price for the Common Stock as reported on The Nasdaq National
Market.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
FISCAL 1996
<S> <C> <C>
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................................... 2.69 1.50
Second Quarter.................................. 2.06 1.50
Third Quarter................................... 1.88 0.88
Fourth Quarter.................................. 1.38 0.88
FISCAL 1998
First Quarter (through April 6, 1998)........... 2.50 0.88
</TABLE>
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The Nasdaq Stock Market listing requirements were recently amended. The Company
must meet certain requirements by May 28, 1998 to remain listed on The Nasdaq
National Market. In the event such listing requirements are not met, the
Company may be required to phase-down from the Nasdaq National Market to The
SmallCap Market.
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.
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 2 of the National Home Centers, Inc. 1997
Annual Report (the "1997 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 3 through 5 of the 1997 Annual Report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Not
applicable.
Item 8. Financial Statements and Supplementary Data.
Incorporated by reference from the sections captioned "Consolidated
Balance Sheets, "Consolidated Statements of Operations and Retained Earnings,"
"Consolidated Statements of Cash Flows," "Notes to Consolidated Financial
Statements," and "Report of Independent Public Accountants," pages 6 through 18
of the 1997 Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
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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 4, 1998 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 1997 Annual Report into Item 8 of this Report.
Description
Consolidated Balance Sheets
Consolidated Statements of Operations and Retained Earnings
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
2. Financial Statement Schedules.
The information required to be presented in Schedule II Valuation and
Qualifying Accounts is presented in Note 9 of the Notes to Consolidated
Financial Statements.
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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/
12
<PAGE>
10.9 Lease Agreements dated December 22, 1992 between
Valley Park Limited Partnership and the Company for
the Russellville, Arkansas store./1/
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/
13
<PAGE>
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/
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./12/
10.32 1996 Long-Term Performance Plan./12/
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/
10.35 Waiver letter from BankAmerica dated January 28,
1998.
14
<PAGE>
10.36 Second Amendment to Loan and Security Agreement
with BankAmerica Business Credit, Inc. dated April
30, 1997.
10.37 Third Amendment to Loan and Security Agreement with
BankAmerica Business Credit, Inc. dated February
23, 1998.
10.38 Fourth Amendment to Loan and Security Agreement
with BankAmerica Business Credit, Inc. dated April
1, 1998.
11.1 Computation of Loss Per Share.
13.1 National Home Centers, Inc. 1997 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 did not file any Current Reports on Form 8-K during fiscal 1997.
/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.
15
<PAGE>
/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.
/12/ Incorporated by reference from National Home Centers, Inc. Annual Report on
Form 10-K for the period ending January 31, 1997, filed with Securities and
Exchange Commission on May 1, 1997.
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, 1998 By
------------------------------------
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, 1998 By
------------------------------------
Dwain A. Newman
Chairman of the Board, Chief Executive
Officer and Director
April 30, 1998 By
------------------------------------
Danny R. Funderburg
President, Chief Operating Officer
and Director
April 30, 1998 By
------------------------------------
Roger A. Holman
Vice President, Purchasing - Marketing
and Director
April 30, 1998 By
------------------------------------
Larry C. Chumley
President, Contractor Division and
Director
April 30, 1998 By
------------------------------------
Brent A. Hanby
16
<PAGE>
Executive Vice President,
Chief Financial Officer and
Director
April 30, 1998 By
------------------------------------
Richard D. Denison
Director
April 30, 1998 By
------------------------------------
David W. Truetzel
Director
17
<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/
18
<PAGE>
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/
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/
19
<PAGE>
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/
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/
20
<PAGE>
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./12/
10.32 1996 Long-Term Performance Plan./12/
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/
10.35 Waiver letter from BankAmerica dated January 28,
1998.
10.36 Second Amendment to Loan and Security Agreement
with BankAmerica Business Credit, Inc. dated April
30, 1997.
10.37 Third Amendment to Loan and Security Agreement with
BankAmerica Business Credit, Inc. dated February
23, 1998.
10.38 Fourth Amendment to Loan and Security Agreement
with BankAmerica Business Credit, Inc. dated April
1, 1998.
11.1 Computation of Loss Per Share.
13.1 National Home Centers, Inc. 1997 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.
21
<PAGE>
EXHIBIT 10.35
January 28, 1998
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 10/31/97 THIRD 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,
Francesca M. Gastil
Senior Account Executive
BankAmerica Business Credit, Inc.
<PAGE>
EXHIBIT 10.36
SECOND AMENDMENT
TO
LOAN AND SECURITY AGREEMENT
AND WAIVER OF DEFAULTS
THIS SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT AND WAIVER OF
DEFAULTS (the "Amendment") is dated as of April 30, 1997, and entered into by
and between BANKAMERICA BUSINESS CREDIT, INC. ("Lender"), a Delaware corporation
with offices at 55 South Lake Avenue, Suite 900, Pasadena, California 91101, and
NATIONAL HOME CENTERS, INC. ("Borrower"), an Arkansas corporation, with offices
at P. 0. Box 789, Highway 265 North, Springdale, Arkansas 72765.
WHEREAS, Lender and Borrower have entered into a Loan and Security
Agreement dated as of December 19, 1995 (as amended by (i) that certain First
Amendment to Loan and Security Agreement dated as of May 20, 1996, the
"Agreement");
WHEREAS, two Events of Default have occurred under the Loan Agreement;
WHEREAS, the Borrower desires that the Lender waive the Events of
Default and amend the Loan Agreement in certain respects; and
WHEREAS, the Lender is willing to waive the Events of Default and
amend the Loan Agreement subject to the terms and conditions contained herein;
NOW, THEREFORE, in consideration of the mutual conditions and
agreements set forth in the Agreement and this Amendment, and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties, intending to be legally bound, hereby agree as
follows:
ARTICLE I
Definitions
-----------
Section 1.01. Definitions. Capitalized terms used in this Amendment,
to the extent not otherwise defined herein, shall have the same meanings as in
the Agreement, as amended hereby.
Section 1.02. Article 1 of the Agreement is amended by the addition of
the following definition:
"Interest Rate Conversion Event" means confirmation by Lender based
upon receipt of Borrower's most recent Financial Statements that (a)
Borrower has complied with the financial covenants set forth in
Section 9.19 and 9.20 of the Agreement for the two prior "Periods" on
a cumulative basis beginning with the Period of the "Two Fiscal
Quarters ending July 31, 1997", and (b) Borrower has maintained an
average of $750,000 in unused Availability during each of such two
prior Periods."
<PAGE>
ARTICLE II
Section 2.01. Amendment to Section 3.1(a) of the Agreement. Section 3.1(a)
of the Agreement is hereby amended in its entirety to read as follows:
"3.1.(a) Interest Rates. All Obligations shall bear interest on the unpaid
principal amount thereof from the date made until paid in full in cash at a
rate (the "Applicable Interest Rate") determined by reference to either the
Reference Rate or the Eurodollar Rate and Sections 3.1(a)(i) or (ii), as
applicable, but not to exceed the maximum rate permitted by applicable law.
Subject to the provisions of Section 3.2, any of the Loans may be converted
into, or continued as, Reference Rate Loans or Eurodollar Rate Loans in the
manner provided in Section 3.2. If at any time Loans are outstanding with
respect to which notice has not been delivered to Lender in accordance with
the terms of this Agreement specifying the basis for determining the
interest rate applicable thereto, then those Loans shall be Reference Rate
Loans and shall bear interest at a rate determined by reference to the
Reference Rate until notice to the contrary has been given to the Lender
and such notice has become effective. Except as otherwise provided herein,
the Obligations shall bear interest as follows:
(i) For all Obligations, other than Eurodollar Rate Loan, including all
loans which are Reference Rate Loans, then at a fluctuating per annum rate
equal to the Reference Rate; provided, however, that beginning on February
1, 1997 and continuing until an Interest Rate Conversion Event has
occurred, all Obligations other than Eurodollar Rate Loans, including all
loans which are Reference Rate Loans, shall bear interest at a fluctuating
per annum rate equal to the Reference Rate plus one percent (1%).
Following the Interest Rate Conversion Event, all Obligations other than
Eurodollar Rate Loans, including loans which are Reference Rate Loans,
shall once again bear interest at a fluctuating per annum rate equal to the
Reference Rate; and
(ii) If the Loans are Eurodollar Rate Loans, then at a per annum rate
equal to the Eurodollar Margin plus the Eurodollar Rate determined for the
applicable Interest Period; provided, however, that beginning on February
1, 1997 and continuing until an Interest Rate Conversion Event has
occurred, all Eurodollar Rate Loans shall bear interest at a per annum rate
equal to the Eurodollar Margin plus one percent (1%) plus the Eurodollar
Rate determined for the applicable Interest Period. Following the Interest
Rate Conversion Event, all Eurodollar Rate Loans shall once again bear
interest at a per annum rate equal to the Eurodollar Margin plus the
Eurodollar Rate determined for the applicable Interest Period.
Each change in the Reference Rate shall be reflected in the interest rate
described in (i) above as of the effective date of such change. All interest
charges shall be computed on the basis of a year of three hundred sixty (360)
days and actual elapsed and will be payable in arrears on the first day of each
month hereafter."
Section 2.02. Amendment to Section 9.19 of the Agreement. Section 9.19 of
the Agreement is hereby amended in its entirety to read as follows:
"9.19. Minimum Interest Coverage Ratio. The Borrower and its Subsidiaries
on a consolidated basis will not permit the ratio of (a) Adjusted Net
Earnings from Operations for each fiscal period specified below plus
interest expense for such period and provision for income taxes to (b)
interest expense for such period to be less than the following ratios at
the end of the
<PAGE>
"Periods" specified below.
Periods Ratio
------- -----
One Fiscal Quarter ending 4/30/97 0.60 to 1.0
Two Fiscal Quarters ending 7/31/97 1.22 to 1.0
Three Fiscal Quarters ending 10/31/97 1.35 to 1.0
Four Fiscal Quarters ending 1/31/98 1.0 to 1.0
Four Fiscal Quarters ending 4/30/98
and on a rolling four quarter basis
each Fiscal Quarter ending thereafter 1.0 to 1.0"
Section 2.03. Amendment to Section 9.20 of the Agreement. Section 9.20 of
the Agreement is hereby amended in its entirety to read as follows:
"9.20 Minimum Adjusted Tangible Net Worth. The Borrower and its
Subsidiaries on a consolidated basis will not permit Adjusted Tangible Net
Worth to be less than the following amounts during the Periods specified
below:
Periods Amounts
------- -------
Fiscal Year Ending January 31, 1998 $24,484,000
Fiscal Year Ending January 31, 1999 $25,084,000"
ARTICLE III
Waivers
Section 3.01. Waiver of Events of Default.
(a) The Lender hereby waives the following Events of Default: (i)
Borrower's Minimum Interest Coverage Ratio for the Fiscal Year ending
January 31, 1997 was less than .85 to 1.0, in breach of Section 9.19 of the
Loan Agreement; and (ii) Borrower's Minimum Adjusted Tangible Net Worth for
the Fiscal Year ending January 31, 1997 was less than $27,900,000, in
breach of Section 9.20 of the Loan Agreement.
(b) The foregoing waiver is only applicable to and shall only be
effective to the extent described above. The waiver is limited to the facts
and circumstances referred to herein and shall not operate as (i) a waiver
of or consent to non-compliance with any other section or provision of the
Loan Agreement, (ii) a waiver of any right, power, or remedy of the Lender
under the Loan Agreement, or (iii) a waiver of any other Event of Default
or Event which may exist under the Loan Agreement.
<PAGE>
ARTICLE IV
RATIFICATIONS, REPRESENTATIONS AND WARRANTIES
Section 4.01. Ratifications. The terms and provisions set forth in this
Amendment shall modify and supersede all inconsistent terms and provisions set
forth in the Agreement and, except as expressly modified and superseded by this
Amendment, the terms and provisions of the Agreement, including, without
limitation, all financial covenants contained therein, are ratified and
confirmed and shall continue in full force and effect. Lender and Borrower agree
that the Agreement as amended hereby shall continue to be legal, valid, binding
and enforceable in accordance with its terms.
Section 4.02. Representations and Warranties. Borrower hereby represents
and warrants to Lender that the execution, delivery and performance of this
Amendment and all other loan documents to which Borrower is or is to be a party
hereunder (hereinafter referred to collectively as the "Loan Documents")
executed and/or delivered in connection herewith, have been authorized by all
requisite corporate action on the part of Borrower and will not violate the
Articles of Incorporation or Bylaws of Borrower.
ARTICLE V
CONDITIONS PRECEDENT
Section 5.01. Condition. The effectiveness of this Amendment is subject to
the satisfaction of the following conditions precedent (unless specifically
waived in writing by the Lender):
(a) Lender shall have received all of the following, each dated
(unless otherwise indicated) as of the date of this Amendment, in form and
substance satisfactory to Lender in its sole discretion:
(i) Company General Certificate. A certificate executed by the
Secretary or Assistant Secretary of Borrower certifying (A) that
Borrower's Board of Directors has met and adopted, approved, consented
to and ratified the resolutions attached thereto which authorize the
execution, delivery and performance by Borrower of the Amendment and
the Loan Documents, (B) the names of the officers of Borrower
authorized to sign this Amendment and each of the Loan Documents to
which Borrower is to be a party hereunder, (C) the specimen signatures
of such officers, (D) that neither the Articles of Incorporation nor
Bylaws of Borrower have been amended since the date of the Agreement,
and (E) other matters;
(ii) Deed of Trust. An executed Deed of Trust on Borrower's
real property located in Fayetteville, Arkansas;
(iii) Deed of Trust and Side Letter Agreement. An executed Deed
of Trust on Borrower's real property located in Fort Smith, Arkansas
which Lender agrees not to record unless such property is no longer
subject to the existing escrow agreement in favor of a third party.
(iv) No Material Adverse Change. There shall have occurred no
material
<PAGE>
adverse change in the business, operations, financial condition,
profits or prospects of Borrower, or in the Collateral, and the Lender
shall have received a certificate of Borrower's chief executive
officer to such effect;
(v) Other Documents. Borrower shall have executed and
delivered such other documents and instruments as Lender may require.
(b) All corporate proceedings taken in connection with the
transactions contemplated by this Amendment and all documents, instruments
and other legal matters incident thereto shall be satisfactory to Lender
and its legal counsel, Jenkens & Gilchrist, a Professional Corporation.
ARTICLE VI
MISCELLANEOUS
Section 6.01. Survival of Representations and Warranties. All
representations and warranties made in the Agreement or any other document or
documents relating thereto, including, without limitation, any Loan Document
furnished in connection with this Amendment, shall survive the execution and
delivery of this Amendment and the other Loan Documents, and no investigation by
Lender or any closing shall affect the representations and warranties or the
right of Lender to rely thereon.
Section 6.02. Reference to Agreement. The Agreement, each of the Loan
Documents, and any and all other agreements, documents or instruments now or
hereafter executed and delivered pursuant to the terms hereof or pursuant to the
terms of the Agreement as amended hereby, are hereby amended so that any
reference therein to the Agreement shall mean a reference to the Agreement as
amended hereby.
Section 6.03. Severability. Any provision of this Amendment held by a court
of competent jurisdiction to be invalid or unenforceable shall not impair or
invalidate the remainder of this Amendment and the effect thereof shall be
confined to the provision so held to be invalid or unenforceable.
Section 6.04. APPLICABLE LAW. THIS AMENDMENT AND ALL OTHER LOAN DOCUMENTS
EXECUTED PURSUANT HERETO SHALL BE DEEMED TO HAVE BEEN MADE AND TO BE PERFORMABLE
IN THE STATE OF CALIFORNIA AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF CALIFORNIA.
Section 6.05. Successors and Assigns. This Amendment is binding upon and
shall inure to the benefit of Lender and Borrower and their respective
successors and assigns; provided, however, that Borrower may not assign or
transfer any of its rights or obligations hereunder without the prior written
consent of Lender. Lender may assign any or all of its rights or obligations
hereunder without the prior consent of Borrower.
Section 6.06. Counterparts. This Amendment may be executed in one or more
counterparts, each of which when so executed shall be deemed to be an original,
but all of which when taken together
<PAGE>
shall constitute one and the same instrument.
Section 6.07. Effect of Waiver. No consent or waiver, express or implied,
by Lender to or of any breach of or deviation from any covenant or condition of
the Agreement or duty shall be deemed a consent or waiver to or of any other
breach of or deviation from the same or any other covenant, condition or duty.
No failure on the part of Lender to exercise and no delay in exercising, and no
course of dealing with respect to, any right, power, or privilege under this
Amendment, the Agreement or any other Loan Document shall operate as a waiver
thereof, nor shall any single or partial exercise of any right, power, or
privilege under this Amendment, the Agreement or any other Loan Document
preclude any other or further exercise thereof or the exercise of any other
right, power, or privilege. The rights and remedies provided for in the
Agreement and the other Loan Documents are cumulative and not exclusive of any
rights and remedies provided by law.
Section 6.08. Heading. The headings, captions and arrangements used in this
Amendment are for convenience only and shall not affect the interpretation of
this Amendment.
Section 6.09. Releases. As a material inducement to Lender to enter into
this Amendment, Borrower hereby represents and warrants that there are no claims
or offsets against, or defenses or counterclaims to, the terms and provisions of
and the other obligations created or evidenced by the Agreement or the other
Loan Documents. Borrower hereby releases, acquits, and forever discharges
Lender, and its successors, assigns, and predecessors in interest, their
parents, subsidiaries and affiliated organizations, and the officers, employees,
attorneys, and agents of each of the foregoing (all of whom are herein jointly
and severally referred to as the "Released Parties") from any and all liability,
damages, losses, obligations, costs, expenses, suits, claims, demands, causes of
action for damages or any other relief, whether or not now known or suspected,
of any kind, nature, or character, at law or in equity, which Borrower now has
or may have ever had against any of the Released Parties, including, but not
limited to, those relating to (a) usury or penalties or damages therefor, (b)
allegations that a partnership existed between Borrower and the Released
Parties, (c) allegations of unconscionable acts, deceptive trade practices, lack
of good faith or fair dealing, lack of commercial reasonableness or special
relationships, such as fiduciary, trust or confidential relationships, (d)
allegations of dominion, control, alter ego, instrumentality, fraud,
misrepresentation, duress, coercion, undue influence, interference or
negligence, (e) allegations of tortuous interference with present or prospective
business relationships or of antitrust, or (f) slander, libel or damage to
reputation (hereinafter being collectively referred to as the "Claims"), all of
which Claims are hereby waived.
Section 6.10. Expenses of Lender. Borrower agrees to pay on demand (i) all
costs and expenses reasonably incurred by Lender in connection with the
preparation, negotiation and execution of this Amendment and the other Loan
Documents executed pursuant hereto and any and all subsequent amendments,
modifications, and supplements hereto or thereto, including, without limitation,
the costs and fees of Lender's legal counsel and the allocated cost of staff
counsel and (ii) all costs and expenses reasonably incurred by Lender in
connection with the enforcement or preservation of any rights under the
Agreement, this Amendment and/or other Loan Documents, including, without
limitation, the costs and fees of Lender's legal counsel and the allocated cost
of staff counsel.
Section 6.11. NO ORAL AGREEMENTS. THIS AMENDMENT, TOGETHER WITH THE OTHER
LOAN DOCUMENTS AS WRITTEN, REPRESENT THE FINAL AGREEMENTS BETWEEN LENDER AND
BORROWER AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS BETWEEN
<PAGE>
LENDER AND BORROWER.
IN WITNESS WHEREOF, the parties have executed this Amendment under seal on
the date first above written.
"BORROWER"
ATTEST: NATIONAL HOME CENTERS, INC.
/s/ Belle Reed, Secretary By: /s/ Brent A. Hanby
- ---------------------------------- --------------------------------------
Secretary Name:
(Corporate Seal) ------------------------------------
Title:
-----------------------------------
AGREED AND ACCEPTED as of the date first written above.
"LENDER"
BANKAMERICA BUSINESS CREDIT, INC.
By: /s/ Randy J. Bowman
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
<PAGE>
EXHIBIT 10.37
THIRD AMENDMENT
TO
LOAN AND SECURITY AGREEMENT
THIS THIRD AMENDMENT TO LOAN AND SECURITY AGREEMENT (the "Amendment")
is dated as of February 23, 1998, and entered into by and between BANKAMERICA
BUSINESS CREDIT, INC. ("Lender"), a Delaware corporation with offices at 55
South Lake Avenue, Suite 900, Pasadena, California 91101, and NATIONAL HOME
CENTERS, INC. ("Borrower"), an Arkansas corporation, with offices at P. 0. Box
789, Highway 265 North, Springdale, Arkansas 72765.
WHEREAS, Lender and Borrower have entered into a Loan and Security
Agreement dated as of December 19, 1995 (as amended by that certain First
Amendment to Loan and Security Agreement as of May 20, 1996 and that certain
Second Amendment to Loan and Security Agreement and Waiver of Defaults dated as
of April 30, 1997, the "Agreement");
WHEREAS, the Borrower desires that the Lender amend the Loan Agreement
in certain respects; and
WHEREAS, the Lender is willing to amend the Agreement subject to the
terms and conditions contained herein;
NOW, THEREFORE, in consideration of the mutual conditions and agreements
set forth in the Agreement and this Amendment, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties, intending to be legally bound, hereby agree as follows:
ARTICLE I
Definitions
Section 1.01. Definitions. Capitalized terms used in this Amendment, to the
extent not otherwise defined herein, shall have the same meanings as in the
Agreement, as amended hereby.
Section 1.02. Definition of "Maximum Revolving Credit Line." The
definition of "Maximum Revolving Credit Line" is hereby amended in its entirety
to read as follows:
"Maximum Revolving Credit Line" means Twenty-Five Million and No/100
Dollars ($25,000,000.00).
Section 1.03. Definition of "Availability". The definition of
"Availability" is hereby amended in its entirety to read as follows:
"Availability" means at any time the lesser of:
A. The amount of Twenty-Five Million and No/100
Dollars ($25,000,000) or
B. The sum of
<PAGE>
(1) up to eighty-five percent (85%) of the value of Eligible
Accounts, plus
(2) the lesser of
(a) (i) $14,000,000 through May 31, 1998 and (ii)
$12,500,000 from June 1, 1998 until the Stated Termination
Date; or
(b) the Inventory Advance Rate.
provided, however, that at all times Availability shall be reduced by the sum
of:
(i) the unpaid balance of Revolving Loans at that time;
(ii) the aggregate undrawn face amount of all outstanding Letters or
Credit and the aggregate outstanding amount of all acceptances which the Lender
has, or has caused to be, issued or obtained for the Borrower's account;
(iii) reserves for accrued interest on the Revolving Loans;
(iv) the Environmental Compliance Reserve;
(v) reserves, to be established at Lender's sole discretion, for the
accounts payable to any supplier of consigned and floor-planned Inventory;
(vi) the ACH Settlement Risk Reserve; and
(vii) all other reserves which the Lender in its reasonable discretion
deems necessary or desirable to maintain with respect to the Borrower's account,
including, without limitation, any amounts which the Lender may be obligated to
pay in the future for the account the Borrower."
Section 1.04. Definition of "Inventory Advance Rate". The definition of
"Inventory Advance Rate" is hereby amended in its entirety to read as follows:
"Inventory Advance Rate" means up to sixty-five percent (65%) of
the value of Eligible Inventory until the earlier to occur of (a) the sale
of any of Borrower's Real Property by Borrower, or (b) June 30, 1998, and
thereafter up to fifty-five percent (55%) of the value of Eligible
Inventory; provided, that, if Borrower does not sell any of its Real
Property on or before June 30, 1998 the Inventory Advance Rate shall be
decreased to fifty-five percent (55%) in accordance with the following
schedule:
Dates Inventory Advance Rate
----- ----------------------
July 1, 1998 through July 15, 1998 sixty-three percent (63%)
July 16, 1998 through July 30, 1998 sixty-one percent (61%)
July 31, 1998 through August 14, 1998 fifty-nine percent (59%)
<PAGE>
August 15, 1998 through August 29, 1998 fifty-seven percent (57%)
August 30, 1998 until the Stated
Termination Date fifty-five percent (55%)
ARTICLE II
Section 2.01. Amendment to Section 3.1(a) of the Agreement. Section 3.1(a)
of the Agreement is hereby amended in its entirety to read as follows:
"3.1.(a) Interest Rates. Except as otherwise provided herein, the
Obligations shall bear interest on the unpaid principal amount thereof from
the date made until paid in full in cash at a fluctuating per annum rate
equal to the Reference Rate plus one percent (1%) (the "Applicable Interest
Rate"). Each change in the Reference Rate shall be reflected in the
interest rate described above as of the effective date of such change. All
interest charges shall be computed on the basis of a year of three hundred
sixty (360) days and actual days elapsed and will be payable in arrears on
the first day of each month hereafter."
Section 2.02. Deletions from Section 3 of the Agreement. Section 3.2 and
Section 3.3 are hereby deleted in their entirety and replaced with the word
"RESERVED".
Section 2.03. Amendment to Section 4.3 of the Agreement. Section 4.3 is
hereby amended in its entirety to read as follows:
"4.3 Apportionment, Application and Reversal of Payments. Except as
otherwise expressly provided hereunder, the Lender shall determine in its
discretion the order and manner in which proceeds and other payments that
the Lender receives are applied to the Revolving Loans, interest thereon,
and the other Obligations, and the Borrower hereby irrevocably waives the
right to direct the application of any payment or proceeds. The Lender
shall have the continuing and exclusive right to apply and reverse and
reapply any and all such proceeds and payments to any portion of the
Obligations."
ARTICLE III
RATIFICATIONS, REPRESENTATIONS AND WARRANTIES
Section 3.01. Ratifications. The terms and provisions set forth in this
Amendment shall modify and supersede all inconsistent terms and provisions set
forth in the Agreement and, except as expressly modified and superseded by this
Amendment, the terms and provisions of the Agreement, including, without
limitation, all financial covenants contained therein, are ratified and
confirmed and shall continue in full force and effect. Lender and Borrower agree
that the Agreement as amended hereby shall continue to be legal, valid, binding
and enforceable in accordance with its terms.
Section 3.02. Representations and Warranties. Borrower hereby represents
and warrants to Lender that the execution, delivery and performance of this
Amendment and all other loan documents
<PAGE>
to which Borrower is or is to be a party hereunder (hereinafter referred to
collectively as the "Loan Documents") executed and/or delivered in connection
herewith, have been authorized by all requisite corporate action on the part of
Borrower and will not violate the Articles of Incorporation or Bylaws of
Borrower.
ARTICLE IV
CONDITIONS PRECEDENT
Section 4.01. Conditions. The effectiveness of this Amendment is subject to
the satisfaction of the following conditions precedent (unless specifically
waived in writing by the Lender):
(a) In Addition to this Amendment, Lender shall have received all of
the following, each dated (unless otherwise indicated) as of the date of
this Amendment, in form and substance satisfactory to Lender in its sole
discretion:
(i) Company General Certificate. A certificate executed by the
Secretary or Assistant Secretary of Borrower certifying (A) that
Borrower's Board of Directors has met and adopted, approved, consented
to and ratified the resolutions attached thereto which authorize the
execution, delivery and performance by Borrower of the Amendment and
the Loan Documents, (B) the names of the officers of Borrower
authorized to sign this Amendment and each of the Loan Documents to
which Borrower is to be a party hereunder, (C) the specimen signatures
of such officers, (D) that neither the Articles of Incorporation nor
Bylaws of Borrower have been amended since the date of the Agreement,
and (E) other matters;
(ii) Deed of Trust. An executed Deed of Trust on Borrower's real
property located in Fayetteville, Arkansas;
(iii) No Material Adverse Change. There shall have occurred no
material adverse change in the business, operations, financial
condition, profits or prospects of Borrower, or in the Collateral, and
the Lender shall have received a certificate of Borrower's chief
executive officer to such effect; and
(iv) Other Documents. Borrower shall have executed and delivered
such other documents and instruments as Lender may require.
(b) All corporate proceedings taken in connection with the
transactions contemplated by this Amendment and all documents, instruments
and other legal matters incident thereto shall be satisfactory to Lender
and its legal counsel, Jenkens & Gilchrist, a Professional Corporation.
(c) Borrower shall have paid to Lender the amount of $30,000 as an
accommodation fee.
<PAGE>
ARTICLE V
MISCELLANEOUS
Section 5.01. Survival of Representations and Warranties. All
representations and warranties made in the Agreement or any other document or
documents relating thereto, including, without limitation, any Loan Document
furnished in connection with this Amendment, shall survive the execution and
delivery of this Amendment and the other Loan Documents, and no investigation by
Lender or any closing shall affect the representations and warranties or the
right of Lender to rely thereon.
Section 5.02. Reference to Agreement. The Agreement, each of the Loan
Documents, and any and all other agreements, documents or instruments now or
hereafter executed and delivered pursuant to the terms hereof or pursuant to the
terms of the Agreement as amended hereby, are hereby amended so that any
reference therein to the Agreement shall mean a reference to the Agreement as
amended hereby.
Section 5.03. Severability. Any provision of this Amendment held by a court
of competent jurisdiction to be invalid or unenforceable shall not impair or
invalidate the remainder of this Amendment and the effect thereof shall be
confined to the provision so held to be invalid or unenforceable.
Section 5.04. APPLICABLE LAW. THIS AMENDMENT AND ALL OTHER LOAN DOCUMENTS
EXECUTED PURSUANT HERETO SHALL BE DEEMED TO HAVE BEEN MADE AND TO BE PERFORMABLE
IN THE STATE OF CALIFORNIA AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF CALIFORNIA.
Section 5.05. Successors and Assigns. This Amendment is binding upon and
shall inure to the benefit of Lender and Borrower and their respective
successors and assigns; provided, however, that Borrower may not assign or
transfer any of its rights or obligations hereunder without the prior written
consent of Lender. Lender may assign any or all of its rights or obligations
hereunder without the prior consent of Borrower.
Section 5.06. Counterparts. This Amendment may be executed in one or more
counterparts, each of which when so executed shall be deemed to be an original,
but all of which when taken together shall constitute one and the same
instrument.
Section 5.07. Effect of Waiver. No consent or waiver, express or implied,
by Lender to or of any breach of or deviation from any covenant or condition of
the Agreement or duty shall be deemed a consent or waiver to or of any other
breach of or deviation from the same or any other covenant, condition or duty.
No failure on the part of Lender to exercise and no delay in exercising, and no
course of dealing with respect to, any right, power, or privilege under this
Amendment, the Agreement or any other Loan Document shall operate as a waiver
thereof, nor shall any single or partial exercise of any right, power, or
privilege under this Amendment, the Agreement or any other Loan Document
preclude any other or further exercise thereof or the exercise of any other
right, power, or privilege. The rights and remedies provided for in the
Agreement and the other Loan Documents are cumulative and not exclusive of any
rights and remedies provided by law.
<PAGE>
Section 5.08. Heading. The headings, captions and arrangements used in this
Amendment are for convenience only and shall not affect the interpretation of
this Amendment.
Section 5.09. Releases. As a material inducement to Lender to enter into
this Amendment, Borrower hereby represents and warrants that there are no claims
or offsets against, or defenses or counterclaims to, the terms and provisions of
and the other obligations created or evidenced by the Agreement or the other
Loan Documents. Borrower hereby releases, acquits, and forever discharges
Lender, and its successors, assigns, and predecessors in interest, their
parents, subsidiaries and affiliated organizations, and the officers, employees,
attorneys, and agents of each of the foregoing (all of whom are herein jointly
and severally referred to as the "Released Parties") from any and all liability,
damages, losses, obligations, costs, expenses, suits, claims, demands, causes of
action for damages or any other relief, whether or not now known or suspected,
of any kind, nature, or character, at law or in equity, which Borrower now has
or may have ever had against any of the Released Parties, including, but not
limited to, those relating to (a) usury or penalties or damages therefor, (b)
allegations that a partnership existed between Borrower and the Released
Parties, (c) allegations of unconscionable acts, deceptive trade practices, lack
of good faith or fair dealing, lack of commercial reasonableness or special
relationships, such as fiduciary, trust or confidential relationships, (d)
allegations of dominion, control, alter ego, instrumentality, fraud,
misrepresentation, duress, coercion, undue influence, interference or
negligence, (e) allegations of tortuous interference with present or prospective
business relationships or of antitrust, or (f) slander, libel or damage to
reputation (hereinafter being collectively referred to as the "Claims"), all of
which Claims are hereby waived.
Section 5.10. Expenses of Lender. Borrower agrees to pay on demand (i) all
costs and expenses reasonably incurred by Lender in connection with the
preparation, negotiation and execution of this Amendment and the other Loan
Documents executed pursuant hereto and any and all subsequent amendments,
modifications, and supplements hereto or thereto, including, without limitation,
the costs and fees of Lender's legal counsel and the allocated cost of staff
counsel and (ii) all costs and expenses reasonably incurred by Lender in
connection with the enforcement or preservation of any rights under the
Agreement, this Amendment and/or other Loan Documents, including, without
limitation, the costs and fees of Lender's legal counsel and the allocated cost
of staff counsel.
Section 5.11. NO ORAL AGREEMENTS. THIS AMENDMENT, TOGETHER WITH THE OTHER
LOAN DOCUMENTS AS WRITTEN, REPRESENT THE FINAL AGREEMENTS BETWEEN LENDER AND
BORROWER AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS BETWEEN LENDER AND BORROWER.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment under seal on
the date first above written.
"BORROWER"
ATTEST: NATIONAL HOME CENTERS, INC.
By: /s/ Brent A. Hanby
- ---------------------------------- --------------------------------------
Secretary Name:
(Corporate Seal) ------------------------------------
Title:
-----------------------------------
AGREED AND ACCEPTED as of the date first written above.
"LENDER"
BANKAMERICA BUSINESS CREDIT, INC.
By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
<PAGE>
EXHIBIT 10.38
FOURTH AMENDMENT
TO
LOAN AND SECURITY AGREEMENT
AND WAIVER OF DEFAULTS
THIS FOURTH AMENDMENT TO LOAN AND SECURITY AGREEMENT AND WAIVER OF DEFAULTS
(the "Amendment") is dated as of April 1, 1998, and entered into by and between
BANKAMERICA BUSINESS CREDIT, INC. ("Lender"), a Delaware corporation with
offices at 55 South Lake Avenue, Suite 900, Pasadena, California 91101, and
NATIONAL HOME CENTERS, INC. ("Borrower"), an Arkansas corporation, with offices
at P. 0. Box 789, Highway 265 North, Springdale, Arkansas 72765.
WHEREAS, Lender and Borrower have entered into a Loan and Security
Agreement dated as of December 19, 1995 (as amended by (i) that certain First
Amendment to Loan and Security Agreement dated as of May 20, 1996, (ii) that
certain Second Amendment to Loan and Security Agreement dated as of April 30,
1997, and (iii) that certain Third Amendment to Loan and Security Agreement
dated as of February 23, 1998, the "Agreement");
WHEREAS, three Events of Default have occurred under the Agreement;
WHEREAS, the Borrower desires that the Lender waive the Events of Default
and amend the Agreement in certain respects; and
WHEREAS, the Lender is willing to waive the Events of Default and amend the
Agreement subject to the terms and conditions contained herein;
NOW, THEREFORE, in consideration of the mutual conditions and agreements
set forth in the Agreement and this Amendment, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties, intending to be legally bound, hereby agree as follows:
ARTICLE I
Definitions
Section 1.01. Definitions. Capitalized terms used in this Amendment, to the
extent not otherwise defined herein, shall have the same meanings as in the
Agreement, as amended hereby.
Section 1.02. Definition of " Availability". The definition of
"Availability, is hereby amended in its entirety to read as follows:
"Availability" means at any time the lesser of:
A. The Maximum Revolving Center Line or
B. The sum of
<PAGE>
(1) up to eighty-five percent (85%) of the value of Eligible
Accounts, plus
(2) the lesser of
(a) (i) $14,000,000 through May 31, 1998 and (ii)
$12,500,000 from June 1, 1998 until the Stated Termination
Date; or
(b) the Inventory Advance Rate.
provided, however, that at all times Availability shall be reduced by the sum
of:
(i) the unpaid balance of Revolving Loans at that time;
(ii) the aggregate undrawn face amount of all outstanding Letters or
Credit and the aggregate outstanding amount of all acceptances which the Lender
has, or has caused to be, issued or obtained for the Borrower's account;
(iii) reserves for accrued interest on the Revolving Loans;
(iv) the Environmental Compliance Reserve;
(v) reserves, to be established at Lender's sole discretion, for the
accounts payable to any supplier of consigned and floor-planned Inventory;
(vi) the ACH Settlement Risk Reserve; and
(vii) all other reserves which the Lender in its reasonable discretion
deems necessary or desirable to maintain with respect to the Borrower's account,
including, without limitation, any amounts which the Lender may be obligated to
pay in the future for the account the Borrower."
Section 1.03. Definition of "Maximum Revolving Credit Line". The definition
of "Maximum Revolving Credit Line" is hereby amended in its entirety to read as
follows:
"Maximum Revolving Credit Line" means Twenty-Five Million and No/100
Dollars ($25,000,000.00) through December 31, 1998 and Twenty Million
Dollars ($20,000,000.00) thereafter.
Section 1.04. Article I of the Agreement is amended by the addition of the
following definitions:
"EBITDA" means, with respect to the Borrower and its Subsidiaries, their
earnings (without taking into account any gain or loss from the sale of
assets) before taking into account interest, taxes, depreciation and
amortization.
"Fayetteville Real Property" means Borrower's Real Property located at 675
East Joyce, Fayetteville, Arkansas 72703, which Borrower intends to sell
for at least $6,000,000.
<PAGE>
ARTICLE II
AMENDMENTS
Section 2.01. Amendment to Section 3.1(a) of the Agreement. Section 3.1(a)
of the Agreement is hereby amended in its entirety to read as follows:
"3.1.(a) Interest Rates. Except as otherwise provided herein, effective as
of February 1, 1998, the Obligations shall bear interest on the unpaid
principal amount thereof from the date made until paid in full in cash at a
fluctuating per annum rate (the "Applicable Interest Rate") equal to the
Reference Rate plus one and one-half percent (1.50%) prior to the sale of
the Fayetteville Real Property and one and one quarter percent (1.25%)
thereafter. Each change in the Reference Rate shall be reflected in the
interest rate described above as of the effective date of such change. All
interest charges shall be computed on the basis of a year of three hundred
sixty (360) days and actual days elapsed and will be payable in arrears on
the first day of each month hereafter."
The remaining sections of Section 3. 1 are unchanged.
Section 2.02. Amendment to Section 9. 18 of the Agreement. Section 9.18 of
the Agreement is hereby amended in its entirety to read as follows:
"9.18. Capital Expenditures. Neither the Borrower nor any of its
Subsidiaries shall make or incur any Capital Expenditure if, after giving
effect thereto, the aggregate amount of all Capital Expenditures by the
Borrower and its Subsidiaries (other than Capital Expenditures used
directly for the acquisition of additional stores to the extent permitted
by Section 9.22) during any Fiscal Year would exceed Seven Hundred Fifty
Thousand and No/100 Dollars ($750,000.00)."
Section 2.02. Amendment to Section 9.19 of the Agreement. Section 9.19 of
the Agreement is hereby amended in its entirety to read as follows:
"9.19 EBITDA. The Borrower and its Subsidiaries on a consolidated basis
will not permit EBITDA to be less than the following amounts at the end of
the Periods specified below:
PERIODS AMOUNTS
------- -------
One Fiscal Quarter ending 4/30/98 $ 75,000
Two Fiscal Quarters ending 7/31/98 $1,500,000
Three Fiscal Quarters ending 10/31/98 $2,270,000
Four Fiscal Quarters ending 01/31/99 $2,860,000
One Fiscal Quarter ending 04/30/99 $ 300,000
Two Fiscal Quarters ending 07/3/99 $2,600,000
<PAGE>
PERIODS AMOUNTS
------- -------
Three Fiscal Quarters ending 10/31/99 $4,400,000
Four Fiscal Quarters ending 01/31/00 $4,900,000"
Section 2.04. Amendment to Section 9.20 of the Agreement. Section 9.20 of
the Agreement is hereby amended in its entirety to read as follows:
"9.20 Minimum Adjusted Tangible Net Worth. The Borrower and its
Subsidiaries on a consolidated basis will not permit Adjusted Tangible Net
Worth to be less than the following amounts during the Periods specified
below as determined as of the last day of each month during such Period:
PERIOD AMOUNTS
02/27/98 - 03/31/98 $ 10,700,000
04/01/98 - 06/30/98 $ 10,640,000
07/01/98 - 09/30/98 $ 10,760,000
10/01/98 - 12/31/98 $ 10,970,000
01/01/99 - 03/31/99 $ 9,960,000
04/01/99 - 06/30/99 $ 9,200,000
07/01/99 - 09/30/99 $ 9,800,000
10/01/99 - 12/31/99 $11,200,000"
Section 2.05. Amendment to Section 9.21 of the Agreement. Section 9.21 of
the Agreement is hereby extended in its entirety to read as follows:
9.2 1. Minimum Availability. The Borrower will maintain on a daily basis
unused Availability (after taking into account all outstanding Revolving
Loans and issued but underdrawn Letters of Credit) of at least (i) $350,000
prior to the sale of the Fayetteville Real Property and (ii) $500,000
following the sale of the Fayetteville Real Property.
Section 2.06. Amendment to Article 12. The first sentence of Article 12 is
hereby revised to read as follows:
"The initial term of this Agreement shall terminate on December 20,
1999 (the "Stated Termination Date")."
All other provisions of Article 12 remain unchanged.
<PAGE>
ARTICLE III
WAIVERS
Section 3.01. Waiver of Events of Default.
(a) The Lender hereby waives the following Events of Default: (i)
Borrower's Minimum Interest Coverage Ratio for the Fiscal Year ending
January 31, 1998 was less than 1.00 to 1.0, in breach of Section 9.19 of
the Loan Agreement; (ii) Borrower's Minimum Adjusted Tangible Net Worth for
the Fiscal Year ending January 31, 1999 was less than $24,484,000, in
breach of Section 9.20 of the Loan Agreement, and (iii) Borrower's Debt to
Adjusted Tangible Net Worth Ratio for the Fiscal Quarter ending January 31,
1998 was greater than 3.0 to 1 in breach of Section 9.21 of the Loan
Agreement.
(b) The foregoing waiver is only applicable to and shall only be
effective to the extent described above. The waiver is limited to the facts
and circumstances referred to herein and shall not operate as (i) a waiver
of or consent to non-compliance with any other section or provision of the
Loan Agreement, (ii) a waiver of any right, power, or remedy of the Lender
under the Loan Agreement, or (iii) a waiver of any other Event of Default
or Event which may exist under the Loan Agreement.
ARTICLE IV
RATIFICATIONS, REPRESENTATIONS AND WARRANTIES
Section 4.01. Ratifications. The terms and provisions set forth in this
Amendment shall modify and supersede all inconsistent terms and provisions set
forth in the Agreement and, except as expressly modified and superseded by this
Amendment, the terms and provisions of the Agreement, including, without
limitation, all financial covenants contained therein, are ratified and
confirmed and shall continue in full force and effect. Lender and Borrower agree
that the Agreement as amended hereby shall continue to be legal, valid, binding
and enforceable in accordance with its terms.
Section 4.02. Representations and Warranties. Borrower hereby represents
and warrants to Lender that the execution, delivery and performance of this
Amendment and all other loan documents to which Borrower is or is to be a party
hereunder (hereinafter referred to collectively as the "Loan Documents")
executed and/or delivered in connection herewith, have been authorized by all
requisite corporate action on the part of Borrower and will not violate the
Articles of Incorporation or Bylaws of Borrower.
ARTICLE V
CONDITIONS PRECEDENT
Section 5.01. Condition. The effectiveness of this Amendment is subject to
the satisfaction of the following conditions precedent (unless specifically
waived in writing by the Lender):
<PAGE>
(a) Lender shall have received all of the following, each dated
(unless otherwise indicated) as of the date of this Amendment, in form and
substance satisfactory to Lender in its sole discretion:
(i) Company General Certificate. A certificate executed by the
Secretary or Assistant Secretary of Borrower certifying (A) that
Borrower's Board of Directors has met and adopted, approved, consented
to and ratified the resolutions attached thereto which authorize the
execution, delivery and performance by Borrower of the Amendment and
the Loan Documents, (B) the names of the officers of Borrower
authorized to sign this Amendment and each of the Loan Documents to
which Borrower is to be a party hereunder, (C) the specimen signatures
of such officers, (D) that neither the Articles of Incorporation nor
Bylaws of Borrower have been amended since the date of the Agreement,
and (E) other matters;
(ii) No Material Adverse Change. There shall have occurred no
material adverse change in the business, operations, financial
condition, profits or prospects of Borrower, or in the Collateral, and
the Lender shall have received a certificate of Borrower's chief
executive officer to such effect;
(iii) Other Documents. Borrower shall have executed and
delivered such other documents and instruments as Lender may require.
(b) All corporate proceedings taken in connection with the
transactions contemplated by this Amendment and all documents, instruments
and other legal matters incident thereto shall be satisfactory to Lender
and its legal counsel, Jenkens & Gilchrist, a Professional Corporation.
(c) Borrower shall have paid to Lender the amount of $60,000 as an
accommodation fee.
ARTICLE VI
MISCELLANEOUS
Section 6.01. Survival of Representations and Warranties. All
representations and warranties made in the Agreement or any other document or
documents relating thereto, including, without limitation, any Loan Document
furnished in connection with this Amendment, shall survive the execution and
delivery of this Amendment and the other Loan Documents, and no investigation by
Lender or any closing shall affect the representations and warranties or the
right of Lender to rely thereon.
Section 6.02. Reference to Agreement. The Agreement, each of the Loan
Documents, and any and all other agreements, documents or instruments now or
hereafter executed and delivered pursuant to the terms hereof or pursuant to the
terms of the Agreement as amended hereby, are hereby amended so that any
reference therein to the Agreement shall mean a reference to the Agreement as
amended hereby.
<PAGE>
Section 6.03. Severability. Any provision of this Amendment held by a court
of competent jurisdiction to be invalid or unenforceable shall not impair or
invalidate the remainder of this Amendment and the effect thereof shall be
confined to the provision so held to be invalid or unenforceable.
Section 6.04. APPLICABLE LAW. THIS AMENDMENT AND ALL OTHER LOAN DOCUMENTS
EXECUTED PURSUANT HERETO SHALL BE DEEMED TO HAVE BEEN MADE AND TO BE PERFORMABLE
IN THE STATE OF CALIFORNIA AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF CALIFORNIA.
Section 6.05. Successors and Assigns. This Amendment is binding upon and
shall inure to the benefit of Lender and Borrower and their respective
successors and assigns; provided, however, that Borrower may not assign or
transfer any of its rights or obligations hereunder without the prior written
consent of Lender. Lender may assign any or all of its rights or obligations
hereunder without the prior consent of Borrower.
Section 6.06. Counterparts. This Amendment may be executed in one or more
counterparts, each of which when so executed shall be deemed to be an original,
but all of which when taken together shall constitute one and the same
instrument.
Section 6.07. Effect of Waiver. No consent or waiver, express or implied,
by Lender to or of any breach of or deviation from any covenant or condition of
the Agreement or duty shall be deemed a consent or waiver to or of any other
breach of or deviation from the same or any other covenant, condition or duty.
No failure on the part of Lender to exercise and no delay in exercising, and no
course of dealing with respect to, any right, power, or privilege under this
Amendment, the Agreement or any other Loan Document shall operate as a waiver
thereof, nor shall any single or partial exercise of any right, power, or
privilege under this Amendment, the Agreement or any other Loan Document
preclude any other or further exercise thereof or the exercise of any other
right, power, or privilege. The rights and remedies provided for in the
Agreement and the other Loan Documents are cumulative and not exclusive of any
rights and remedies provided by law.
Section 6.08. Heading. The headings, captions and arrangements used in this
Amendment are for convenience only and shall not affect the interpretation of
this Amendment.
Section 6.09. Releases. As a material inducement to Lender to enter into
this Amendment, Borrower hereby represents and warrants that there are no claims
or offsets against, or defenses or counterclaims to, the terms and provisions of
and the other obligations created or evidenced by the Agreement or the other
Loan Documents. Borrower hereby releases, acquits, and forever discharges
Lender, and its successors, assigns, and predecessors in interest, their
parents, subsidiaries and affiliated organizations, and the officers, employees,
attorneys, and agents of each of the foregoing (all of whom are herein jointly
and severally referred to as the "Released Parties") from any and all liability,
damages, losses, obligations, costs, expenses, suits, claims, demands, causes of
action for damages or any other relief, whether or not now known or suspected,
of any kind, nature, or character, at law or in equity, which Borrower now has
or may have ever had against any of the Released Parties, including, but not
limited to, those relating to (a) usury or penalties or damages therefor, (b)
allegations that a partnership existed between Borrower and the Released
Parties, (c) allegations of unconscionable acts, deceptive trade practices, lack
of good faith or fair dealing, lack of commercial reasonableness or special
relationships, such as fiduciary, trust or confidential relationships, (d)
allegations of dominion,
<PAGE>
control, alter ego, instrumentality, fraud, misrepresentation, duress, coercion,
undue influence, interference or negligence, (e) allegations of tortuous
interference with present or prospective business relationships or of antitrust,
or (f) slander, libel or damage to reputation (hereinafter being collectively
referred to as the "Claims"), all of which Claims are hereby waived.
Section 6.10. Expenses of Lender. Borrower agrees to pay on demand (i) all
costs and expenses reasonably incurred by Lender in connection with the
preparation, negotiation and execution of this Amendment and the other Loan
Documents executed pursuant hereto and any and all subsequent amendments,
modifications, and supplements hereto or thereto, including, without limitation,
the costs and fees of Lender's legal counsel and the allocated cost of staff
counsel and (ii) all costs and expenses reasonably incurred by Lender in
connection with the enforcement or preservation of any rights under the
Agreement, this Amendment and/or other Loan Documents, including, without
limitation, the costs and fees of Lender's legal counsel and the allocated cost
of staff counsel.
Section 6.11. NO ORAL AGREEMENTS. THIS AMENDMENT, TOGETHER WITH THE OTHER
LOAN DOCUMENTS AS WRITTEN, REPRESENT THE FINAL AGREEMENTS BETWEEN LENDER AND
BORROWER AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS BETWEEN LENDER AND BORROWER.
IN WITNESS WHEREOF, the parties have executed this Amendment under seal on
the date first above written.
"BORROWER"
ATTEST: NATIONAL HOME CENTERS, INC.
By:
- ---------------------------------- --------------------------------------
Secretary Name:
(Corporate Seal) ------------------------------------
Title:
-----------------------------------
AGREED AND ACCEPTED as of the date first written above.
"LENDER"
BANKAMERICA BUSINESS CREDIT, INC.
By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
<PAGE>
EXHIBIT 11.1
NATIONAL HOME CENTERS, INC.
AND SUBSIDIARY
Computation of Loss Per Share
Years ended January 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Year Ended January 31
------------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net loss $13,010,122 $3,107,723 $1,597,842
=========== ========== ==========
Weighted average number of common shares 7,142,251 7,142,251 7,142,251
outstanding =========== ========== ==========
Loss per share $ 1.82 $ .44 $ .22
=========== ========== ==========
</TABLE>
<PAGE>
Management's Discussion and Analysis
- ------------------------------------
(in thousands, except selected operating and per share data)
<TABLE>
<CAPTION>
Year Ended January 31,
Statement of Operations Data: 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 150,756 177,001 154,659 151,356 125,640
Cost of sales 117,072 134,104 115,369 110,321 90,579
------------------------------------------------------------------
Gross profit 33,684 42,897 39,290 41,035 35,061
Selling, general and
administrative expenses 43,375 44,023 39,039 36,777 29,548
------------------------------------------------------------------
Operating income (loss) (9,691) (1,126) 251 4,258 5,513
Interest expense, net (3,660) (3,583) (2,787) (1,735) (623)
------------------------------------------------------------------
Earnings (loss) before
income taxes (13,351) (4,709) (2,536) 2,523 4,890
Income tax expense (benefit) (341) (1,601) (938) 990 1,883
------------------------------------------------------------------
Net earnings (loss) $ (13,010) (3,108) (1,598) 1,533 3,007
==================================================================
Earnings (loss) per share $ (1.82) (0.44) (0.22) 0.21 0.46
==================================================================
Weighted average number of
common shares outstanding 7,142 7,142 7,142 7,157 6,574
==================================================================
Selected Financial Data:
Total assets $ 61,790 84,838 86,761 73,877 56,314
Long-term debt 23,323 29,320 30,808 30,425 16,748
Net property, plant and equipment 29,286 37,266 39,699 28,915 16,715
Stockholders' equity 12,150 25,160 28,268 29,866 28,646
Selected Operating Data:
Number of stores at end of period (1) 9 13 13 12 11
Average total sales per square foot -
retail and contractor (2) $ 202 229 238 275 324
Comparable store sales increase
(decrease) (12.3)% 4.9% (3.6)% 8.6% 23.0%
</TABLE>
(1) Number of stores at January 31, 1998 do not include those whose closings
have been announced as of that date. In addition, the number of stores for
previous years have been restated in order to be consistent with the current
year presentation.
(2) Net sales divided by average retail square feet for the period.
2
<PAGE>
Management's Discussion and Analysis
------------------------------------
Results of Operations
Net sales for the three fiscal years ended January 31, 1998, and the respective
total and comparable store percentage increases (decreases) were:
<TABLE>
<CAPTION>
Total Company Comparable Store
Year Ended January 31, Net Sales Increases (Decreases) Increases (Decreases)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1998 $150,756,393 (15)% (12)%
1997 177,000,584 14 % 5 %
1996 154,658,767 2 % (4)%
Year Ended January 31, 1998 Compared to Year Ended January 31, 1997
- ---------------------------------------------------------------------------------------------------
</TABLE>
Net Sales
The Company's net sales decreased 14.8% to $150.8 million for the year ended
January 31, 1998 (fiscal 1997) from $177.0 million for the year ended January
31, 1997 (fiscal 1996). Comparable store sales in fiscal 1997 decreased 12.3%
from fiscal 1996. The overall sales volume decrease was primarily due to
increased competition, the sale of the truss and cabinet manufacturing
operations in fiscal 1996, the closings of the Conway homecenter in October 1997
and the Rogers contractor yard in November 1997, and the pending closings of
Fayetteville, and Rodney Parham locations. The Company had no substantive
increase in the variety of products offered or sales territory. The average
annual sales per store for fiscal 1997 was $15.9 million compared to $17.7
million for fiscal 1996. Competition has become very intense over the past few
years and is expected to continue.
Gross Profit
Gross profit as a percentage of net sales for fiscal 1997 decreased to 22.3%
from 24.2% in fiscal 1996, due to increased competition in the contractor
division and continued competitive pricing pressures in central and northwest
Arkansas. Additionally, in its recent efforts to reduce excess inventory to
increase turns, the Company has offered reduced prices which has contributed to
lower margins.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of net sales
increased to 28.8% in fiscal 1997 versus 24.9% in fiscal 1996. This increase as
a percentage of net sales is primarily the result of the $6.7 million non-
recurring charges related to store closings.
Interest Expense
Net interest expense as a percentage of net sales in fiscal 1997 increased to
2.4% from 2.0% in fiscal 1996, primarily as a result of accounting for the debt
on the Rogers superstore for a full year. See Note 3 of Notes to Consolidated
Financial Statements for additional information on debt and interest.
Income Taxes
Effective income tax rates were (2.5)% and (34.0)% for fiscal years 1997 and
1996, respectively. The effective rate for fiscal 1997 results from the income
tax benefit due to the net operating loss (NOL) in fiscal 1997. However, due to
the uncertainty regarding future realization of the net operating carryforward,
a valuation allowance has been recorded and the full benefit of the NOL has not
been recognized. The Company has filed for a federal tax refund of approximately
$517,000, which is expected to be received in the second quarter of fiscal 1998.
See Note 4 of Notes to Consolidated Financial Statements for additional
information on income taxes.
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 which allowed for
a full year of operation in 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
3
<PAGE>
Management's Discussion and Analysis
- ------------------------------------
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 Little Rock. These stores have adversely effected 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. As the Company's major competitors seek to gain or retain market share
by reducing prices or offering promotional store opening pricing, the Company
has been required to lower prices which has further reduced 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 3 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 received a federal tax refund of
approximately $1,300,000 in the second quarter of fiscal 1997. See Note 4 of
Notes to Consolidated Financial Statements for additional information on income
taxes.
Liquidity and Capital Resources
- -------------------------------
The Company's working capital at January 31, 1998 decreased to $4.0 million from
$15.0 million at January 31, 1997, primarily due to lower inventories resulting
from the store closings discussed previously.
The Company's primary capital needs are to finance inventories and accounts
receivable. During the year ended January 31, 1998, operating activities
provided net cash of $9.1 million. Primary sources of cash from operating
activities included approximately $10.7 million from decreases in inventories,
$1.0 million from decreases in accounts receivable and $0.8 million from
decreases in income tax refunds receivable.
Net cash provided by investing activities for the year ended January 31, 1998
was approximately $0.6 million, principally due to proceeds from the sale of
property, plant and equipment of $0.8 million. Net cash used in financing
activities during fiscal 1997 totaled approximately $9.8 million, primarily from
repayments under the revolving credit facility.
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 each of the three covenants at January 31, 1998;
however, as a result of the primary working capital lender waiving defaults
under the revolving credit agreement, as discussed above, two of the defaults
with respect to the real estate loan agreement are 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 received a waiver, and as a result, has included
the entire outstanding principal balance of $4,607,840 in current installments
of long-term debt at January 31, 1998, 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,
4
<PAGE>
Management's Discussion and Analysis
====================================
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.
Over the past year, as continued losses have been reported and excess
availability under the revolver has been restricted, the Company has become past
due with several vendors. This has resulted in vendors reducing credit limits.
Also, the Company has not been able to take advantage of vendor discounts. The
Company estimates that lost discounts in fiscal 1997 were approximately
$500,000. The Company recognizes that, to successfully implement its business
plan, it must improve relationships and increase credit lines with its trade
vendors and the Company has identified several sources of funds with which to
accomplish this. Cash from the sale of land parcels and continued reduction of
retail inventory at Fayetteville, Rodney Parham and the Russellville stores will
provide the Company with the source of funds necessary to pay down vendors.
Additionally, from the aforementioned sources of cash, the Company will have the
capital available to again take advantage of vendor discounts over time.
At January 31, 1998, the Company owed $16.0 million under its revolving credit
agreement with a bank. This agreement, as revised and amended April 1, 1998,
provides a revolving credit loan commitment not to exceed the lesser of (a) $25
million, or (b) a borrowing base of 85% and 65% of eligible accounts receivable
and eligible inventory, respectively, with inventory availability capped at $14
million and $12.5 million after June 1, 1998. The advance rate on inventory will
revert back to its original 55% upon the earlier of either 1.) the sale of the
North Fayetteville real estate or 2.) June 30, 1998. Based upon eligible
accounts receivable and eligible inventory as of January 31, 1998, the Company
had approximately $1.0 million of additional borrowing capacity under the
revolving credit agreement. The current revolving credit agreement expires
December 20, 1999. 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 respect to these financial
covenants at January 31, 1998; however, the bank has agreed to permanently waive
compliance with respect to such defaults and to amend the covenants for fiscal
1998 in exchange for an increase in the interest rate of 50 basis points.
The Company's current ratio was 1.2 to 1 at January 31, 1998 versus 1.5 to 1 at
January 31, 1997. The Company's total debt to equity ratio increased to 4.1 to 1
at the end of fiscal 1997 versus 2.37 to 1 at the end of the preceding year.
Return on average investment for the three years ended January 31, 1998 ,1997
and 1996 was -59.3%, -17.1%, and -8.7%, respectively.
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 choses 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 Code
Sec. 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.
The Company believes the state of Arkansas is prohibited from collecting any
unclaimed property which had been on the books for more than five years as of
April 1, 1997. The Company believes the statute of limitations has been tolled
by the new legislation. The Company currently has no reserve for the proposed
assessment. The Company is complying with the Act, as amended, on a go forward
basis.
5
<PAGE>
Consolidated Balance Sheets
===========================
January 31, 1998 and 1997
Assets 1998 1997
- --------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 111,548 134,086
Accounts receivable, less allowance for doubtful
accounts of $281,000 in 1998 and $174,250 in
1997 (notes 8 and 9) 9,970,843 11,346,279
Income tax refunds receivable 517,118 1,333,892
Inventories (notes 3 and 7) 19,173,468 30,809,531
Prepaid expenses and other 593,901 592,615
Deferred income taxes (note 4) -- 674,237
----------------------------
Total current assets 30,366,873 44,890,640
============================
Property, plant and equipment (notes 3 and 7):
Land 9,073,150 9,638,196
Buildings and improvements 17,769,630 21,266,132
Machinery and equipment 15,186,112 18,848,886
Construction in progress -- 102,822
----------------------------
42,030,892 49,358,086
Less accumulated depreciation 12,745,131 12,086,745
----------------------------
Net property, plant and equipment 29,285,761 37,266,291
----------------------------
Other assets, at cost less amortization of
$1,068,898 in 1998 and $744,122 in 1997 (notes
7 and 8) 2,137,770 2,680,855
----------------------------
Total assets $ 61,790,404 84,837,786
============================
Liabilities and Stockholders' Equity
- --------------------------------------------------------------------------------
Current liabilities:
Current installments of long-term debt (note 3) $ 9,113,391 11,513,475
Accounts payable 13,200,065 14,994,945
Accrued expenses (note 7) 4,003,643 3,351,420
----------------------------
Total current liabilities 26,817,099 29,859,840
----------------------------
Long-term debt, excluding current installments
(note 3) 23,817,099 29,320,227
----------------------------
Deferred income taxes (note 4) -- 497,739
----------------------------
Commitments and contingencies (note 3,5,6,7 and 8)
Stockholders' equity (notes 3 and 6):
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 (deficit) (7,498,097) 5,517,025
----------------------------
13,413,302 26,423,424
Treasury stock; 323,707 common shares at cost (1,263,444) (1,263,444)
----------------------------
Total stockholders' equity 12,149,858 25,159,980
----------------------------
Total liabilities and stockholders' equity $ 61,790,404 84,837,786
============================
6 The accompanying notes are an integral part of these statements.
<PAGE>
Consolidated Statements of Operations and Retained Earnings (Deficit)
---------------------------------------------------------------------
Years ended January 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------------------
<S> <C> <C> <C>
Net sales $ 150,756,393 177,000,584 154,658,767
Cost of sales 117,072,346 134,103,601 115,368,590
-------------------------------------------------
Gross profit 33,684,047 42,896,983 39,290,177
-------------------------------------------------
Operating expenses:
Salaries and benefits (note 8) 22,498,438 26,825,258 24,494,923
Rent (including $1,542,000 in 1998,
$1,633,200 in 1997 and $1,652,500 in 1996
to related parties) (note 5) 2,074,527 2,330,686 2,417,359
Depreciation and amortization 3,233,046 3,315,560 2,882,620
Nonrecurring charges (note 7) 6,730,000 1,056,000 --
Other 8,839,205 10,495,374 9,244,202
-------------------------------------------------
43,375,216 44,022,878 39,039,104
-------------------------------------------------
Operating income (loss) (9,691,169) (1,125,895) 251,073
-------------------------------------------------
Interest expense, net of amounts capitalized 3,659,573 3,582,776 2,787,331
-------------------------------------------------
Loss before income taxes (13,350,742) (4,708,671) (2,536,258)
Income taxes (note 4) (340,620) (1,600,948) (938,416)
-------------------------------------------------
Net loss (13,010,122) (3,107,723) (1,597,842)
Retained earnings at beginning of year 5,517,025 8,624,748 10,222,590
-------------------------------------------------
Retained earnings (deficit) at end of year $ (7,493,097) 5,517,025 8,624,748
-------------------------------------------------
Loss per share (basic and diluted) (note 1) $ (1.82) (0.44) (0.22)
-------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these statements.
7
<PAGE>
Consolidated Statements of Cash Flows
- -------------------------------------
Years ended January 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(13,010,122) (3,107,723) (1,597,842)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Provision for losses on accounts receivable 404,762 785,743 702,438
Depreciation 2,870,479 3,023,330 2,703,783
Amortization of other assets 362,567 292,280 178,837
Loss (gain) on sale of property, plant and equipment 138,028 (29,108) (408,055)
Increase in cash surrender value of life insurance (23,984) (138,978) (70,210)
Nonrecurring charges (note 7) 6,100,000 - -
Deferred income tax expense (benefit) 176,498 (269,768) 171,910
Changes in assets and liabilities:
Accounts receivable 970,674 (620,521) 319,282
Income tax refunds receivable 816,774 (223,566) (992,599)
Inventories 10,711,063 518,346 (1,896,405)
Prepaid expenses and other (1,286) 544,537 (68,679)
Accounts payable (400,104) (847,470) 8,452,932
Accrued expenses 11,276 392,404 33,169
-------------------------------------------------
Net cash provided by operating activities 9,126,625 319,461 7,528,561
-------------------------------------------------
Cash flows from investing activities:
Additions to property, plant and equipment (399,255) (1,165,481) (13,474,115)
Proceeds from sale of property, plant and equipment 837,225 277,808 604,412
Decrease (increase) in other assets 204,502 (372,172) (302,829)
-------------------------------------------------
Net cash provided by (used in) investing activities 642,472 (1,260,295) (13,172,532)
-------------------------------------------------
Cash flows from financing activities:
Proceeds from long-term debt 4,836,176 15,016,840 29,264,626
Repayments of long-term debt (14,627,816) (14,071,971) (23,667,399)
-------------------------------------------------
Net cash provided by (used in) financing activities (9,791,640) (944,869) 5,597,227
-------------------------------------------------
Net increase (decrease) in cash and cash equivalents (22,543) 4,035 (46,744)
Cash and cash equivalents at beginning of year 134,086 130,051 176,795
-------------------------------------------------
Cash and cash equivalents at end of year $ 111,543 134,086 180,051
-------------------------------------------------
Supplemental disclosures:
Interest paid, net of amounts capitalized $ 3,713,342 3,398,526 2,896,348
Income taxes paid, net of refunds received (1,338,892) (1,107,619) (117,727)
Noncash investing and financing activities:
Settlement of accounts payable for note payable 1,394,776 - -
Sale of fixed assets for note receivable - 275,000 -
Acquisition of equipment by repossession (note 7) - 350,000 -
Acquisition of fixed assets for notes payable - 298,712 209,402
Acquisition of other assets for notes payable - 408,786 -
-------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these statements.
8
<PAGE>
Notes to Consolidated Financial Statements
------------------------------------------
January 31, 1998, 1997 and 1996
(1) Summary of Significant Accounting Policies
National Home Centers, Inc. ("Company"), is a full-line retailer of
home improvement products and building materials, with nine 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 losses.
(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. Amortization of
preopening costs is included in other selling, general and
administrative expenses and amounted to $441,329 and $521,792 in 1997
and 1996, respectively (none in 1998).
(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; however, no interest was
capitalized in 1998 or 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.
(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 8) 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.
(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 No. 93-7, which did
not have a significant impact on earnings, the Company expensed
advertising costs over the related useful periods.
9
<PAGE>
Notes to Consolidated Financial Statements
==========================================
(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. Management believes that 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 taxes 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 excepted 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) Loss Per Share
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings Per Share ("SFAS No. 128"), establishing
------------------
new standards for computing and presenting earnings per share. The
provisions of SFAS No. 128 are effective for financial statements
issued for periods ending after December 15, 1997. The Company has
adopted SFAS No. 128 effective January 31, 1998 and all loss per share
amounts for all periods have been presented and, where appropriate,
restated to conform to the SFAS No. 128 requirements. Basic losses per
common share were computed by dividing the loss by the weighted average
number of shares outstanding during the period (7,142,251 in 1998, 1997
and 1996). Diluted losses per common share were computed in the same
manner as basic losses per share due to the Company incurring losses
from continuing operations and net losses for the years ended January
31, 1998, 1997 and 1996.
(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, 1998 and 1997, 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.
(n) Year 2000 Issue
The efficient operation of the Company's business is dependent in part
on its computer software programs and operating systems. These programs
and systems are used in several key areas of the Company's business,
including merchandise purchasing, inventory management, pricing, sales,
shipping and financial reporting, as well as in various administrative
functions. The Company has been evaluating its programs and systems to
identify potential year 2000 compliance problems. These actions are
necessary to ensure that the programs and systems will recognize and
process the year 2000 and beyond. It is anticipated that modification
or replacement of most of the Company's programs and systems will be
necessary to make such programs and systems year 2000 compliant. The
Company is communicating with suppliers and others to coordinate year
2000 conversion.
Based on present information, the Company believes that it will be able
to achieve year 2000 compliance by upgrading its key programs and
systems to those that are already year 2000 compliant. However, no
assurance can be given that these efforts will be successful. The
Company does not except expenditures associated with achieving year
2000 compliance to have a material effect on its financial results in
1998.
<PAGE>
Notes to Consolidated Financial Statements
------------------------------------------
(2) Going Concern Matters
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements for the years ended January 31, 1998, 1997 and 1996, the Company
incurred losses of $13,010,122, $3,107,723, and $1,597,842, respectively. These
recurring losses, among other factors, may indicate that the Company will be
unable to continue as a going concern.
The financial statements do not include any adjustments relating to the
recoverability of assets and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern. As
described in note 3, the Company was not in compliance with certain covenants of
its revolving credit agreement at January 31, 1998; however, a waiver of these
violations was obtained from the bank. The revolving credit agreement has been
amended, effective April 1, 1998, with availability subject to a revised
formula. In addition, as described in note 3, the Company was also in default
with covenants contained in a real estate loan agreement at January 31, 1998.
The Company's continuation as a going concern is dependent upon its ability to
generate sufficient cash flow to meet its obligations on a timely basis, to
comply with the terms of its revolving credit agreement, to obtain additional
financing or refinancing as may be required, and ultimately to attain
profitability. As described in note 7, the Company implemented restructuring
plans involving the closing of certain stores as of, or subsequent to, January
31, 1998. Through these store closings, management expects to eliminate the
operating losses associated with the stores involved. In addition, management
expects these store closings to provide cash through the liquidation of the
related assets, net of the reduction in related debt. The Company has agreements
to sell real estate associated with stores to be closed, which are expected to
net approximately $3.4 million, after paying off the related mortgage debt. In
addition, the Company has agreements to sell additional parcels of real estate
for approximately $3.6 million.
<TABLE>
<CAPTION>
(3) Long-Term Debt 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Long-term debt consists of the following:
Notes payable to bank under revolving credit agreement $ 16,042,254 21,720,292
Notes payable, secured by real estate:
10.42% note (Rogers property); principal and interest payable
monthly; balance due October 1999 4,607,840 4,901,960
8.75% note (Fayetteville property); principal and interest
payable monthly; balance due August 1999 3,078,722 4,049,044
10.00% note (Conway property); principal and interest payable
monthly; balance due June 2000 2,825,684 2,879,712
Notes payable, secured by equipment:
6.25%-8.36% notes; principal and interest payable monthly
through March 2001 1,608,271 2,950,992
9.85% notes; principal and interest payable monthly through
October 2000 1,143,914 1,497,844
9.93% notes; principal and interest payable monthly through
October 1999 634,632 997,278
8.18% notes; principal and interest payable monthly through
June 1999 406,073 724,339
Other notes payable; weighted average interest rate of 8.26%;
principal and interest payable monthly through various dates 2,089,448 1,112,241
------------------------------
32,436,838 40,833,702
Less current installments 9,113,391 11,513,475
------------------------------
Long-term debt, excluding current installments $ 23,323,447 29,320,227
------------------------------
</TABLE>
11
<PAGE>
Notes to Consolidated Financial Statements
- ------------------------------------------
The Company's revolving credit agreement with a bank, as revised and amended
effective April 1, 1998, provides a revolving credit loan commitment not to
exceed the lesser of (a) $25 million, or (b) a borrowing base of 85% and 65% of
eligible accounts receivable and eligible inventory, respectively, with
inventories capped at $14 million. Borrowings under the agreement are based on
the bank's Reference Rate, which reflects the bank's prime rate (8.50% at
January 31, 1998) plus 1.50%. 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 each of these covenants at January 31, 1998; 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, 1999. However,
there can be no assurance that additional waivers will not be required in the
future or, if required, that the lender will grant them.
Based upon eligible accounts receivable and eligible inventory as of January 31,
1998, the Company had approximately $1.0 million of additional available
borrowing capacity under the revolving credit agreement as of that date. The
current revolving credit agreement expires on December 20, 1999.
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 each of the three covenants at January 31, 1998;
however, as a result of the primary working capital lender waiving defaults
under the revolving credit agreement, as discussed above, two of the defaults
with respect to the real estate loan agreement are 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 received a waiver, and as a result, has included
the entire outstanding principal balance of $4,607,840 in current installments
of long-term debt at January 31, 1998, 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, 1998, are as follows: 1999, $9,113,391; 2000, $19,672,358; 2001,
$3,617,773; 2002, $23,245; and 2003, $10,071. Annual maturities for year 2000
include borrowings under the Company's revolving credit agreement described
above.
(4) Income Taxes
Income tax benefit consists of the following:
1998 1997 1996
------------------------------------------------------
Current:
Federal $ (516,144) (1,329,235) (1,106,946)
State (974) (1,950) (3,380)
------------------------------------------------------
(517,118) (1,331,185) (1,110,326)
------------------------------------------------------
Deferred:
Federal 227,595 (6,866) 327,018
State (51,097) (262,897) (155,108)
------------------------------------------------------
176,498 (269,763) 171,910
------------------------------------------------------
$ (340,620) (1,600,948) (938,416)
------------------------------------------------------
12
<PAGE>
Notes to Consolidated Financial Statements
------------------------------------------
Income tax benefit differs from the amounts computed by applying the U.S.
Federal income tax rate of 34 percent to pretax losses from operations as a
result of the following:
1998 1997 1996
-------------------------------------
Computed "expected" income taxes $(4,539,252) (1,600,948) (862,328)
Increase (decrease) in income taxes
resulting from:
State income taxes, net of
Federal income tax effect (34,367) (174,799) (104,602)
Increase in valuation allowance 4,209,171 203,699 --
Other, net 23,828 (28,900) 28,514
-------------------------------------
$ (340,620) (1,600,948) (938,416)
-------------------------------------
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities at January 31, 1998 and 1997
are presented below:
<TABLE>
<CAPTION>
1998 1997
--------------------------------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, due to allowance for doubtful accounts $ 107,624 66,720
Inventories, due to costs not currently deductible for tax
purposes 501,947 217,491
Accrued expenses not currently deductible 681,185 390,026
Valuation allowance for property, plant and equipment 1,736,089 --
Net operating loss and other carryforwards 2,480,984 434,177
Other 36,523 15,653
--------------------------------
Total gross deferred tax assets 5,544,352 1,124,067
Valuation allowance (4,969,672) (229,402)
--------------------------------
Deferred tax assets 574,680 894,665
Deferred tax liabilities:
Property, plant and equipment, due to differences in depreciation 574,680 718,167
--------------------------------
Net deferred tax asset $ -- 176,498
--------------------------------
Presented in the accompanying consolidated balance sheet as:
Current deferred asset, net -- 674,237
Noncurrent deferred liability, net -- (497,739)
--------------------------------
$ -- 176,498
--------------------------------
</TABLE>
At January 31, 1998, the Company had Federal and state net operating loss (NOL)
and other tax carryforwards, the tax effect of which is $2,272,483, which expire
as follows: 1999, $5,509; 2000, $149,325; 2001, $191,030; 2002, $287,616; 2005
through 2011, $2,909; and 2012, $1,636,094. In addition, the Company has an
alternative minimum tax credit carryforward of $208,501 at January 31, 1998,
which has an indefinite carryforward period. Ultimate realization of deferred
tax assets, which include these tax carryforwards and deductible temporary
differences, is dependent upon many factors, including the Company's ability to
generate adequate future taxable income in specific taxing jurisdictions within
the carryforward periods. Management has considered these factors in reaching
its conclusion as to the valuation allowance for financial reporting purposes.
As a result of the uncertainty regarding future realization, the valuation
allowance has been increased by $4,740,270 during 1997 in order to fully reserve
net deferred tax assets as of January 31, 1998.
13
<PAGE>
Notes to Consolidated Financial Statements
- ------------------------------------------
(5) 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
Property Lease Monthly year ended January 31,
location expiration rental 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Springdale August, 2002 $ 36,000 408,000 432,000 432,000
Fort Smith August, 2002 20,000 228,000 240,000 240,000
North Little Rock August, 2002 52,000 624,000 624,000 624,000
Springdale - cabinet facility May, 2002 10,000 118,000 114,000 114,000
Bentonville May, 2002 9,500 98,000 108,000 108,000
Rogers May, 2002 6,200 66,000 74,400 74,400
Oklahoma City Expired in 1997 -- -- 40,800 60,100
-------------------------------------------------------------
$ 133,700 1,542,000 1,633,200 1,652,500
-------------------------------------------------------------
</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.
During 1996, the Company ceased operations at the cabinet facility (see note 7).
During 1997, the Company agreed to sublease the property to a third party at
$19,000 per month. The Company received $95,000 in 1997 under this sublease
agreement. Also during 1997, the stockholder granted the Company certain
reductions in monthly rental payments totaling $58,400, which have been
reflected in the schedule above. As of January 31, 1998, all rental payments had
been restored to monthly rentals per the agreements, as reflected in the
schedule above.
The Company also leases properties from unrelated parties under noncancellable
operating lease agreements which expire at various dates through 2008. Future
minimum lease payments required under operating leases that have initial or
remaining noncancellable lease terms in excess of one year as of January 31,
1998 are as follows:
Related
party Other Total
------------------------------------------
Year ending January 31,
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
2003 858,800 374,760 1,233,560
Later years -- 1,308,150 1,308,150
------------------------------------------
Total minimum lease payments $ 7,276,400 3,351,200 10,627,600
------------------------------------------
(6) 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, 1998, the Company has issued no shares of its preferred stock.
14
<PAGE>
Notes to Consolidated Financial Statements
------------------------------------------
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, 1998, 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, 1998, no awards had been made under the incentive
compensation plan.
(7) Nonrecurring Charges
During 1997, the Company announced plans to restructure its operations which
included closing several stores. The stores involved are primarily home center
locations which had incurred continuing operating losses in recent years. During
1997, the Company closed two stores (in Conway and Rogers, Arkansas) and
subsequent to January 31, 1998, closed two additional stores (in Little Rock and
Fayetteville, Arkansas). In addition, in March 1998, management announced plans
to close the home center portion of the Russellville, Arkansas store. Closing
these stores will eliminate the continued losses which these stores have
incurred and will provide cash as a result of selling the related assets,
including real estate. As a result of these store closings, the Company recorded
a pre-tax nonrecurring charge of $6,730,000 for the year ended January 31, 1998
(of which $6,100,000 was recorded in the fourth quarter), as follows:
Charges relating to stores to be closed
subsequent to January 31, 1998:
Writedowns of assets to net realizable values:
Inventories $ 925,000
Equipment 1,030,000
Buildings 1,885,500
Leasehold improvements 1,618,500
------------
Total writedowns of assets 5,459,000
------------
Accrued charges:
Severance benefits 127,000
Lease obligations 397,000
Other 117,000
------------
Total accrued charges 641,000
------------
6,100,000
Losses, primarily on inventory and equipment,
for stores closed during 1997 630,000
------------
Total nonrecurring charge -
year ended January 31, 1998 $ 6,730,000
------------
Writedowns of assets to net realizable values represent noncash charges for
asset impairments and disposals of assets directly associated with the closing
of the stores discussed above. The Company owns the real estate located in
Conway and Fayetteville, and has entered into agreements to sell these
properties for approximately $9 million (net of related costs to sell), which is
less than the carrying amount of these assets.
15
<PAGE>
Notes to Consolidated Financial Statements
- ------------------------------------------
The Company leases the other locations under operating lease agreements.
Leasehold improvements associated with stores being closed have been evaluated
based upon the expected future cash flows (noncancellable lease payments net of
projected sublease income), and have been written down to recognize impairment.
Accrued severance charges represent amounts expected to be paid in 1998 prior to
or upon the closing of the remaining stores. Accrued lease obligations include
noncancellable operating lease payments (net of projected sublease income)
subsequent to the date the stores cease operations, the majority of which are
expected to be paid in 1998. Other accrued charges include taxes, insurance and
other continuing costs which are expected to be incurred subsequent to the date
the stores cease operations, and which are expected to be paid in 1998. All of
the accrued charges are directly associated with the closing of the stores
discussed above; no losses from normal operating activities have been accrued
for the period subsequent to January 31, 1998.
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
($900,000) and equipment ($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 was informed that AQMC had
been placed into an involuntary bankruptcy proceeding. As a result, the Company
fully reserved the notes receivable as part of a pre-tax nonrecurring charge of
$1,056,000 for the year ended January 31, 1997. This amount (which was
previously reported as part of other selling, general and administrative
expenses, but which has been reclassified for the current year presentation) is
net of recoverable assets, 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 nonrecurring charge -
year ended January 31, 1997 $ 1,056,000
-----------
AQMC's primary lender had asserted claims regarding the sale of the Cabinet
Craft to AQMC. The lender is also one of the Company's lenders, and is the
lender with respect to the Rogers real estate loan agreement discussed in note
3. The lender claimed to be a secured creditor of AQMC and had asserted a
priority interest in the equipment and inventory of AQMC with respect to which
the Company also claimed an interest. In addition, the lender claimed that it
was owed certain amounts pursuant to the Company's purchase of inventory from
AQMC under terms of the Sales Agreement and for other purchases from AQMC.
Under a settlement agreement with the lender dated June 13, 1997, the Company
settled all claims with the lender with respect to the sale of the Cabinet Craft
assets to AQMC. Under the agreement, the Company agreed to pay the lender
$425,000 in settlement of accounts payable, which had been recorded as of
January 31, 1997. In return, the Company received the rights to the Cabinet
Craft equipment and inventory. The equipment had been recorded at its estimated
fair value of $350,000 at January 31, 1997, while the inventory, valued at
$117,000 at the date of the settlement agreement, had not previously been
recognized. This settlement resulted in a net gain of $161,000 during 1997.
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.
(8) 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
16
<PAGE>
Notes to Consolidated Financial Statements
------------------------------------------
are terminated before cash surrender value exceeds actual premiums advanced. The
Company had advanced premiums of $1,278,938 and $912,498 as of January 31, 1998
and 1997, respectively (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 $48,736, $52,935 and $38,697 for the
years ended January 31, 1998, 1997 and 1996, 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.
(9) 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,
1998, 1997 and 1996:
<TABLE>
<CAPTION>
Balance at Additions Write-offs, Balance at
beginning charged net of end of
Allowance for doubtful: of period to expense recoveries period
---------------------------------------------------
<S> <C> <C> <C> <C>
Trade accounts receivable:
Year ended January 31, 1998 $ 174,250 404,762 298,012 281,000
---------------------------------------------------
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
---------------------------------------------------
Notes receivable:
Year ended January 31, 1998 $ -- -- -- --
---------------------------------------------------
Year ended January 31, 1997 (note 7) -- 1,700,000 1,700,000 --
---------------------------------------------------
Year ended January 31, 1996 -- -- -- --
---------------------------------------------------
</TABLE>
17
<PAGE>
Report of Independent Public Accountants
- ----------------------------------------
To the Board of Directors of
National Home Centers, Inc.:
We have audited the accompanying consolidated balance sheets of National Home
Centers, Inc. and subsidiary as of January 31, 1998 and 1997, and the related
consolidated statements of operations and retained earnings (deficit) and cash
flows for each of the two years in the period ended January 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The consolidated financial statements of National Home Centers, Inc.
and subsidiary, as of January 31, 1996, were audited by other auditors whose
report, dated March 1, 1996, expressed an unqualified opinion on those
statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of National Home
Centers, Inc. and subsidiary as of January 31, 1998 and 1997, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in note 2 to the
financial statements, the Company has suffered recurring losses, has a retained
deficit and is experiencing difficulty in generating sufficient cash flows to
meet its obligations and sustain its operations, which raises substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in note 2. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
Arthur Andersen LLP
Fayetteville, Arkansas
April 1, 1998
18
<PAGE>
EXHIBIT 23.1
ARTHUR ANDERSEN LLP
REPORT 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 Employee Stock Purchase Plan of National
Home Centers, Inc. of our report dated April 1, 1998, 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, 1998.
/s/Arthur Andersen LLP
Fayetteville, Arkansas
April 20, 1998
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