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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1998.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number: 0-21448
NATIONAL HOME CENTERS, INC.
(Exact name of registrant as specified in its charter)
ARKANSAS 71-0403343
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
HIGHWAY 265 NORTH
SPRINGDALE, ARKANSAS 72765
(Address of principal executive offices, including zip code)
(501) 756-1700
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
As of December 11, 1998 National Home Centers, Inc. had 7,142,251 shares of
$0.01 par value Common Stock outstanding.
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PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
NATIONAL HOME CENTERS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
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<CAPTION>
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OCTOBER 31, JANUARY 31,
1998 1998
ASSETS (Unaudited) (1)
<S> <C> <C>
Current Assets:
Cash $ 62,845 111,543
Accounts Receivable 9,236,558 9,970,843
Income Tax Refunds Receivable 0 517,118
Inventories 12,624,603 19,173,468
Other 543,978 593,901
- --------------------------------------------------------------------------------
Total Current Assets 22,467,984 30,366,873
- --------------------------------------------------------------------------------
Property, Plant and Equipment 19,858,182 42,030,892
Less Accumulated Depreciation 10,822,036 12,745,131
- --------------------------------------------------------------------------------
Net Property, Plant and Equipment 9,036,146 29,285,761
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Other Assets, Net of Amortization 2,859,347 2,137,770
- --------------------------------------------------------------------------------
$34,363,477 61,790,404
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current Installments of Long-Term Debt $ 2,872,318 9,113,391
Accounts Payable 5,512,578 13,200,065
Accrued Expenses 2,781,689 4,003,643
- --------------------------------------------------------------------------------
Total Current Liabilities 11,166,585 26,317,099
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Long-Term Debt, Excluding Current Installments 13,034,116 23,323,447
Stockholders' Equity 10,162,776 12,149,858
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$34,363,477 61,790,404
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</TABLE>
(1) January 31, 1998 balances are condensed from the audited consolidated
balance sheet.
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
NATIONAL HOME CENTERS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
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THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
------------------------------------------------------------------------
(Unaudited) 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET SALES $ 23,642,963 39,279,691 84,150,989 119,162,521
COST OF SALES 18,327,187 30,892,242 65,862,613 92,235,954
- ----------------------------------------------------------------------------------------------------------------
GROSS PROFIT 5,315,776 8,387,449 18,288,376 26,926,567
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SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES:
Salaries and Benefits 3,505,732 5,873,505 12,222,625 17,351,786
Rent 469,236 501,489 1,367,522 1,639,136
Depreciation and Amortization 342,866 802,054 1,404,028 2,435,597
Other 1,098,031 2,901,419 3,469,050 6,712,388
- ----------------------------------------------------------------------------------------------------------------
TOTAL SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 5,415,865 10,078,467 18,463,225 28,138,907
- ----------------------------------------------------------------------------------------------------------------
OPERATING LOSS (100,089) (1,691,018) (174,849) (1,212,340)
Interest Expense 363,105 955,711 1,812,233 2,829,847
- ----------------------------------------------------------------------------------------------------------------
Loss Before Income Taxes (463,194) (2,646,729) (1,987,082) (4,042,187)
Income Taxes 0 77,954 0 (396,502)
- ----------------------------------------------------------------------------------------------------------------
NET LOSS $ (463,194) (2,724,683) (1,987,082) (3,645,685)
================================================================================================================
LOSS PER SHARE $ (0.06) (0.38) (0.28) (0.51)
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Weighted Average Number of
Common Shares Outstanding 7,142,251 7,142,251 7,142,251 7,142,251
================================================================================================================
</TABLE>
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NATIONAL HOME CENTERS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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<CAPTION>
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NINE MONTHS ENDED
OCTOBER 31,
--------------------------------
(Unaudited) 1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (1,987,082) (3,645,685)
Adjustments to Reconcile Net Loss to Net Cash
Provided by (Used in) Operating Activities:
Depreciation and Amortization 1,404,028 2,435,598
Loss (Gain) on Disposal of Property, Plant and Equipment (430,714) 62,379
Increase in Cash Surrender Value of Life Insurance (77,960) (12,000)
Deferred Income Tax Benefit 0 176,498
Changes in Assets and Liabilities:
Accounts Receivable 734,285 (2,355,148)
Inventories 6,548,865 4,736,280
Other Current Assets 567,041 807,461
Accounts Payable (7,687,487) 2,233,265
Accrued Expenses (1,221,954) (260,233)
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Net Cash Provided by (Used in) Operating Activities (2,150,978) 4,178,415
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CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to Property, Plant and Equipment (104,195) (225,788)
Proceeds from Sale of Property, Plant and Equipment 19,506,753 788,609
Decrease (Increase) in Other Assets (769,874) 64,684
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Net Cash Provided by Investing Activities 18,632,684 627,505
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Long-Term Debt 14,087,635 3,348,580
Repayments of Long-Term Debt (30,618,039) (8,163,694)
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Net Cash Used in Financing Activities (16,530,404) (4,815,114)
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NET DECREASE IN CASH (48,698) (9,194)
Cash at Beginning of Period 111,543 134,086
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Cash at End of Period $ 62,845 124,892
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SUPPLEMENTAL DISCLOSURES:
Interest Paid $ 1,934,783 2,834,751
Income Taxes Refunded 517,118 1,333,892
Issuance of Notes Payable for Payment of Accounts Payable 0 1,600,000
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</TABLE>
<PAGE>
NATIONAL HOME CENTERS, INC. ("THE COMPANY") AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
OCTOBER 31, 1998
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X of the Securities and Exchange Commission.
Accordingly, the financial statements do not include all of the information
and notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Results of operations for the three months
and nine months ended October 31, 1998, are not necessarily indicative of
the results to be expected for the fiscal year ending January 31, 1999. For
further information, refer to the consolidated financial statements and
related notes thereto included in the Company's Annual Report on Form 10-K
filed with the Commission on April 30, 1998, as amended on May 28, 1998.
2. INCOME TAXES
As a result of the uncertainty associated with the future realization of
deferred tax assets, which include the tax effects of net operating loss
(NOL) and other tax carryforwards, no income tax benefit has been recorded
for the three months and nine months ended October 31, 1998.
<PAGE>
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
GENERAL
National Home Centers, Inc. ("the Company") is a full line retailer of home
improvement products and building materials, with eight locations in Arkansas.
The Company serves retail consumers and professional contractors primarily in
Arkansas and also in Oklahoma, Missouri and Kansas.
Over the past several years, the Company has experienced increased competition
in its markets from other national and/or regional chains which are seeking to
gain or retain market share by reducing prices. This has continued to place
pressure on all of the Company's stores and their respective sales, gross
margins and operating income. During 1997, the Company announced plans to
restructure its operations which included decreasing the retail portion of the
Company's Business. In 1997, the Company closed stores in Conway and Rogers,
Arkansas. During the first quarter of 1998, the Company closed one store in
each of Little Rock and Fayetteville, Arkansas. The Company also closed its
west Rogers, Arkansas store during the second quarter of 1998. In addition,
management is in the process of reducing the home center portion of the
Russellville, Arkansas store. By closing these stores, the Company has
eliminated recurring losses at those locations, and the sale of assets related
to such stores, including real estate, provided the Company with cash.
Significant decreases in inventories, fixed assets, long-term debt, and accounts
payable as of October 31, 1998, compared to January 31, 1998, are the result of
these restructuring steps. The sale of certain real estate and equipment
associated with the closed stores, and certain other real estate, provided the
Company with cash of approximately $19 million. In addition, inventory levels
have been reduced by approximately $6.5 million, primarily as a result of store
closings. The Company used the cash generated by the restructuring essentially
to reduce long-term debt and accounts payable, which have decreased
approximately $16.5 million and $7.7 million, respectively, at October 31, 1998,
compared to January 31, 1998.
RESULTS OF OPERATIONS
THREE MONTHS ENDED OCTOBER 31, 1998 AND 1997
Net sales for the third quarter of fiscal 1998 were down 40% to $23.6 million,
compared to $39.3 million for the third quarter of fiscal 1997. Comparable
store sales in the third quarter of fiscal 1998 were down 15% over the same
period of fiscal 1997. Net loss for the third quarter of fiscal 1998 was
$463,000 or $0.06 per share, compared with net loss for the third quarter of
fiscal 1997 of $2,725,000 or $0.38 per share. The decrease in sales and net
loss was due to the restructuring efforts which involved the closing of the five
stores discussed above. The Company operated eight stores at the end of the
quarter versus thirteen in the same period a year ago. For the quarter, the
Company's revenues consisted of 76% to professional contractors and 24% to
retail customers versus 56% and 44%, respectively, in the third quarter last
year.
Gross profit as a percentage of net sales for the third quarter of fiscal 1998
increased to 22.5% from 21.4% for the same period last year. The increase in
gross profit percentage is a result of more discounts earned in the 3rd quarter
of 1998 and the effects of closing the Conway, Arkansas home center store in the
3rd quarter of 1997.
Selling, general and administrative expenses decreased to 22.9% of net sales for
the third quarter of fiscal 1998 compared to 25.7% of net sales for the same
period last year. This decrease in expenses is primarily a result of the store
closings discussed above.
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Net interest expense as a percentage of net sales was 1.5% for the quarter ended
October 31, 1998, compared to 2.4% for the same period last year. Interest
expense is lower as a result of the decreases in long-term debt discussed above.
NINE MONTHS ENDED OCTOBER 31, 1998 AND 1997
Net sales for the nine months ended October 31, 1998 decreased 29% to $84.2
million, compared to $119.2 million for the same period of fiscal 1997.
Comparable store sales for the nine months ended October 31, 1998 decreased 13%
over the same period of fiscal 1997. Store closings, along with increased
competition, resulted in decreased sales.
Gross profit as a percentage of net sales for the first nine months of fiscal
1998 decreased to 21.7% from 22.6% for the same period last year. Increased
competition and a change in customer mix led to the decrease in gross margin.
As a result of the closing of the supercenters, the customer mix has shifted to
a higher percentage of contractor sales versus retail sales. Generally,
contractor sales tend to have a lower gross profit than retail sales. For the
nine month period, the Company's gross sales consisted of 67% to professional
contractors and 33% to retail customers versus 55% and 45%, respectively, for
the same nine month period last year.
Selling general and administrative expenses decreased to 21.9% of net sales for
the first nine months of fiscal 1998, compared to 23.6% of net sales for the
same period last year. This decrease is primarily from the closing of the
stores and a continual effort to reduce operating expenses.
Net interest expense as a percentage of net sales was 2.2% for the nine months
ended October 31, 1998, compared to 2.4% for the same period last year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital at October 31, 1998 increased to $11.3 million
from $4.0 million at January 31, 1998, primarily due to decreases in current
installments of long-term debt as a result of early retirement of debt.
The Company's primary capital needs are to finance operations. During the nine
months ended October 31, 1998, operating activities used net cash of $2.2
million. Primary sources of cash from operating activities included
approximately $6.5 million from decreases in inventories. The primary uses of
cash were the net loss for the period, adjusted for depreciation and
amortization, of $0.6 million and decreases in accounts payable of $7.7 million.
Net cash provided by investing activities for the first nine months of fiscal
1998 was approximately $18.6 million, principally due to sales of real estate
and equipment of the closed stores. Net cash used in financing activities
during the first nine months of fiscal 1998 totaled approximately $16.5 million,
primarily from net repayments of long-term borrowings.
On July 15, 1998, the Company entered into a loan and security agreement for a
new $20 million revolving credit agreement, which expires in July, 2002. The
agreement provides for interest to be charged at .50% per annum in excess of the
Prime Rate. The agreement limits availability to a borrowing base of 85% of
eligible accounts receivable and 65% of inventory, with each capped at $10
million. The credit facility does not contain any financial covenants. The
Company had additional available borrowing capacity of approximately $1.4
million under the revolving credit agreement as of October 31, 1998.
<PAGE>
As of October 31, 1998, the Company is generally current with all accounts
payable vendors and is utilizing discounts on payments made to vendors which
supply inventory to the Company.
YEAR 2000 COMPLIANCE
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 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.
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 or 1999.
FORWARD-LOOKING STATEMENTS
Forward-looking statements in this Form 10-Q are made pursuant to the safe
harbor provision of the Private Securities Litigation Reform Act of 1995. There
are various factors that could cause results to differ materially from those
anticipated by some statements made in this Form 10-Q. Investors are cautioned
that all forward-looking statements involve risks and uncertainty. The Company
does not undertake to publicly update or revise its forward-looking statements
even if experience or future changes make it clear that any projected results
expressed or implied therein will not be realized. Factors that could cause
actual results to differ materially include, but are not limited to the
following: the strength and extent of new and existing competition; the
Company's ability to maintain competitive pricing in its markets; the Company's
ability to make its management information systems year 2000 compliant; the
Company's ability to maintain adequate levels of vendor support; the Company's
ability to maintain adequate levels of lender support; the ability of the
Company to increase sales; the Company's ability to attract, train and retain
experienced, quality employees; the Company's ability to implement its
restructuring plan, including the disposal of excess real estate and other
assets; general economic conditions; housing turnover; interest rates; weather;
and other factors described from time to time in the Company's Securities and
Exchange Commission filings.
IMPACT OF INFLATION AND CHANGING PRICES
Although the Company cannot accurately determine the precise effect of inflation
on its operations, it does not believe inflation has had a material effect on
sales or results of operations.
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company has not entered into any transactions using derivative financial
instruments or derivative commodity instruments and believes that its exposure
to market risks associated with other financial instruments (such as
investments) are not material.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is not a party to any material pending legal proceedings. The
Company is, at times, a party to routine litigation incidental to its business.
In the opinion of the Company's management, such proceedings should not,
individually or in the aggregate, have a material adverse effect on the
Company's results of operations or financial condition. The Company maintains
insurance in such amounts and with such coverage and deductibles as management
believes are reasonable.
ITEM 2. CHANGES IN SECURITIES.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
As of October 2, 1998, the listing of the Company's common stock moved from the
NASDAQ National Market to the NASDAQ SmallCap Market due to recent criteria
changes for continued listing on the National Market. The criteria included a
minimum bid price of the Company's stock and a minimum market value of shares
held by the public. On June 19, 1998, the Company sent a written request for
exception to the Listing Qualifications Hearings Panel of NASDAQ, requesting
continued listing on the National Market System. NASDAQ denied the request, but
determined the Company was eligible for listing on the NASDAQ SmallCap Market.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K.
(a) Exhibits
Sequentially Numbered
Exhibits No. Description of Exhibit Page
------------ ---------------------- ---------------------
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
Not applicable.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
NATIONAL HOME CENTERS, INC.
Date: December 11, 1998 /s/ Dwain A. Newman
--------------------------------
Dwain A. Newman
Chief Executive Officer and
Chairman
Date: December 11, 1998 /s/ Brent A. Hanby
-------------------------------------
Brent A. Hanby
Executive Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> JAN-31-1999 JAN-31-1999
<PERIOD-START> AUG-01-1998 FEB-01-1998
<PERIOD-END> OCT-31-1998 OCT-31-1998
<CASH> 62,845 62,845
<SECURITIES> 0 0
<RECEIVABLES> 9,236,558 9,236,558
<ALLOWANCES> 0 0
<INVENTORY> 12,624,603 12,624,603
<CURRENT-ASSETS> 0 0
<PP&E> 19,858,182 19,858,182
<DEPRECIATION> 10,822,036 10,822,036
<TOTAL-ASSETS> 34,363,477 34,363,477
<CURRENT-LIABILITIES> 11,166,585 11,166,585
<BONDS> 0 0
0 0
0 0
<COMMON> 74,660 74,660
<OTHER-SE> 10,088,116 10,088,116
<TOTAL-LIABILITY-AND-EQUITY> 34,363,477 34,363,477
<SALES> 23,642,963 84,150,989
<TOTAL-REVENUES> 23,642,963 84,150,989
<CGS> 18,327,187 65,862,613
<TOTAL-COSTS> 18,327,187 65,862,613
<OTHER-EXPENSES> 5,415,865 18,463,225
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 363,105 1,812,233
<INCOME-PRETAX> (463,194) (1,987,082)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (463,194) (1,987,082)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (463,194) (1,987,082)
<EPS-PRIMARY> (0.06) (0.28)
<EPS-DILUTED> (0.06) (0.28)
</TABLE>
