<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________________________________________
FORM 10-K/A
(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>
ITEM 14
The text of Exhibit 13.1 as filed on May 1, 1998 is deleted in its
entirety and replaced with the attached Exhibit 13.1.
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.
May 28, 1998 By /s/ Brent A. Hanby
-----------------------------
Brent A. Hanby
Executive Vice President,
Chief Financial Officer and
Director
<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 $ 111,543 134,086
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 21,268,132
Machinery and equipment 15,188,112 18,343,886
Construction in progress -- 102,822
----------------------------
42,030,892 49,353,036
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 26,317,099 29,859,840
----------------------------
Long-term debt, excluding current installments
(note 3) 23,323,447 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) (7,493,097) 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 362,567 292,230 178,837
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 (269,763) 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) (1,165,431) (13,474,115)
Proceeds from sale of property, plant and equipment 837,225 277,308 604,412
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 $ 111,543 134,086 130,051
-------------------------------------------------
Supplemental disclosures:
Interest paid, net of amounts capitalized $ 3,713,342 3,398,526 2,896,348
Income taxes paid, net of refunds received (1,333,892) (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
