<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, 1999.
[_] 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 Small Cap 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 5, 1999, there were outstanding 7,142,251 shares of the
registrant's Common Stock, $.01 par value.
The aggregate market value of the 2,474,239 shares of Common Stock
held by non-affiliates of the registrant as of April 5, 1999 was $2,628,879.
DOCUMENTS INCORPORATED BY REFERENCE
National Home Centers, Inc. Annual Report for fiscal year ended
January 31, 1999 (certain portions incorporated by reference into Part II)
Proxy Statement for Annual Meeting of Stockholders, June 3, 1999 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 several months the focus has shifted to professional
contractors. Today, the Company operates one appliance sales warehouse and
seven contractor sales locations all in Arkansas, and approximately 70% of its
sales are to contractor consumers.
The Company operates its stores in four Arkansas markets: Northwest
Arkansas (2 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.
During the first quarter of 1998, NHC closed its Rodney Parham store in Little
Rock and sold its Fayetteville superstore. During the second quarter of 1998,
NHC closed and sold its West Rogers store. The Company has also reduced the
home center portion of its Russellville store.
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 other lumberyards, as well as
home centers, discount retail stores, supermarkets, warehouse stores, certain
specialty stores, traditional hardware, and plumbing and electrical suppliers.
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 previous year, NHC, with assistance from Senn-Delaney, a
retail-consulting group affiliated with Arthur Andersen LLP, prepared a business
plan (the "Business Plan") based on a realistic assessment of its strengths,
weaknesses and competitive position. The Business Plan was designed to reflect
the operational, marketing, administrative, and financial components of NHC's
turnaround efforts. Many of the components of the Business Plan have been, or
are currently being implemented, including (i) stabilization of the Company for
the opportunity to return to profitability; and (ii) providing a solid
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base for continued growth within its core markets. In addition, the Company
continues to scrutinize its utilization of resources and methods of doing
business in order to maximize the Company's efficiency, cash flow, and
competitive ability.
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 has reduced 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 the leader in the professional
contractor market. For fiscal 1999, NHC anticipates sales revenues from
professional contractors to approach 80-85% of the Company's total revenues. NHC
plans to explore industry consolidation possibilities including, but not limited
to, acquisition of other contractor-related companies.
The Company has continued to implement its business plan and expand
previous positive results by finalizing the closure of the Rodney Parham and
Fayetteville stores during the first quarter of 1998. Also, the Company closed
and sold its West Rogers store in the second quarter of 1998 and significantly
reduced the home center portion of its Russellville store in the third quarter
of fiscal 1998.
Capitalization of the Company
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% and 65% of eligible accounts receivable and inventory, respectively,
with each capped at $10 million. The facility does not contain any financial
covenants. The Company had additional available borrowing capacity of
approximately $2.5 million under the revolving credit agreement as of January
31, 1999.
Cash from the sale of land parcels, a 10% increase in the inventory
advance rate and continued reduction of retail inventory at its existing stores
has provided the Company with the source of funds necessary to reduce debt.
Monetize Real Estate Values
NHC sold several pieces of real estate and buildings that no longer
fit in the Company's strategic plan. The following is a table of the properties
sold:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Name Debt Selling Price Acres
---- ---- ------------- -----
<S> <C> <C> <C>
Fort Smith Land -0- $ 1,778,000 7.5
West Rogers Land, Building &
Equipment 5,530,000 10,850,000 20.7
S. Fayetteville Land -0- 1,830,000 26.1
Fayetteville Land & Building 2,770,000 6,500,000 15.7
Corp. Office Land -0- 247,000 14.7
---------- -----------
Total $8,300,000 $21,205,000
- --------------------------------------------------------------------------------
</TABLE>
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The Company has made significant strides to pay down debt. By doing
so, NHC will now be able to focus its efforts on implementing a long-term
strategy for continued competition in the home improvement industry. The
following highlight these efforts:
. Outside of normal operating activities, NHC generated approximately
$28,000,000 by refinancing existing debt, reducing inventory
balances, and monetizing non-producing assets. The majority of this
amount was used to reduce accounts payable and other long-term
debt.
. Since July, 1998, the Company has been current with all of its
trade vendors, has reestablished credit lines, and is taking
advantage of vendor discounts.
. NHC has improved its capital structure by obtaining more favorable
terms on its debt instruments with no financial covenants.
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:
<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 49,300 190,000 20/80 15,000 door,
window
Bentonville 06/92 6 20,200 18,000 5/95 5,000 door,
window
II. Fort Smith
Fort Smith 12/77 10 31,100 110,000 12/88 9,000 door,
window
III. Little Rock
North Little Rock 10/85 13 96,200 150,000 40/60 27,000 door,
window
Conway Contractor 05/93 4 0 30,000 0/100 5,000 door,
window
Maumelle 06/93 3 0 20,000 0/100 900
IV. Russellville
Russellville 06/93 14 30,000 80,000 25/75 20,000 door,
window
Clarksville 09/95 1 0 14,000 0/100 6,000 --
------- -------
Total area 226,800 612,000
</TABLE>
The Springdale, Bentonville, Fort Smith and North Little Rock stores
are leased from the Company's chairman and his spouse. 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
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renewal options. The Conway contractor and a portion of the Russellville
property are owned by the Company.
The Company owns the land and building for the closed Conway retail
store and leases approximately one-third of the store to Office Depot, Inc. Mr.
Newman released the Company from the Cabinet Craft lease on April 1, 1998, and
the Rogers contractor lease as of May 1, 1998. The Rodney Parham store is leased
from an unaffiliated third party. The Company subleases approximately one-half
of the store to SteinMart, Inc. The Company is attempting to find a suitable
sublease tenant for the remainder of the building on the lease which expires
June 30, 2003.
On July 15, 1998, the Company sold the real property and improvements
associated with its closed Fayetteville, Arkansas, supercenter to Home Depot,
Inc. for $6.5 million. On July 30, 1998, the Company sold the real property,
improvements and certain fixed assets associated with its closed west Rogers,
Arkansas, supercenter to Lowe's Companies, Inc. for $10.85 million. Proceeds of
the sales were used to reduce indebtedness associated with the properties and
for general working capital.
The Company owns a thirty (30) acre parcel in Branson, Missouri. The
parcel is owned free of debt and has been placed on the market for sale.
Fabrication Facilities
NHC maintains fabrication facilities in Springdale, Bentonville, 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 9,000 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 900-27,000
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 mouldings.
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:
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<TABLE>
<CAPTION>
Fiscal Year Ending January 31,
Products 1999 1998 1997
-------- ---- ---- ----
<S> <C> <C> <C>
Building Materials 61 54 52
Hardware/Plumbing/Electrical 15 18 19
Home Decor 9 10 11
Appliances/Cabinets 10 10 11
Lawn and Garden 5 8 7
---- ---- ----
Total 100% 100% 100%
</TABLE>
Purchasing
Except for pre-hung doors which are fabricated by the Company, NHC
purchases its merchandise from more than 650 manufacturers and suppliers. No
single supplier accounted for more than 10% of NHC's total purchases in fiscal
1998. 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.
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 1998, while the Company's credit loss was 0.54% of
contractor sales. In addition, NHC accepts third-party credit cards such as
MasterCard, Visa, American Express and Discover. During 1998, NHC terminated a
private-label credit program, the National Home Centers Home Project Plus Card,
administered by Household Retail Services, Inc. Approximately 33% of NHC's
retail sales were made on third-party and proprietary credit cards in fiscal
1998.
Marketing
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
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professional contractor business, gives the Company an opportunity to present
product seminars during each trip. There are currently 289 customers signed up
for an October 1999 trip on a Caribbean cruise. Builders qualify for the travel
incentive program by purchasing certain volumes of materials and by making
timely payments each month.
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 0.49% of
sales on advertising in fiscal 1998, primarily on seasonal direct mail
advertising for special promotions and to reinforce customer awareness of its
everyday low pricing. Television advertising was significantly reduced in
fiscal year 1998. Management expects advertising to decline as a percent of
sales in fiscal 1999.
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 Triad/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 previously utilized
the Oracle Relational Database Management System but will terminate the Oracle
System during fiscal 1999. In the second quarter of fiscal 1999, the Company
plans to have implemented CSD software for accounts payable and general ledger.
This system should allow continued 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.
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 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 also communicating with its suppliers and others to coordinate year
2000 conversion. Based on present information, the Company believes that, its
key programs and systems will be year 2000 compliant by May, 1999. However, no
assurance can be
7
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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 1999.
Competition
NHC operates its stores in four Arkansas markets. The Company's
principal competitors in these markets are Lowe's, Home Depot, Sutherlands,
Cameron Ashley, 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, 1999, the Company employed 445 persons, consisting
of 407 full-time and 38 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.
Forward Looking Statements
Forward-looking statements contained herein are made pursuant to the
safe harbor provisions of the Private Securities Litigation Act of 1995. There
are various factors that could cause results to differ materially from those
anticipated by such statements. Investors are cautioned that all forward-looking
statements involve risks and uncertainity. The Company does not undertake to
publicly update or revise its forward-looking statements even if experience or
future changes made 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
excess 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 leader support; the Company's ability to increase sales; the
Company's ability to attract, train and retain experienced, quality employees;
the Company's ability to dispose of excess real estate and other assets; general
economic conditions; housing turnover; interest rates; weather; and other
factors described from time to time in the Company's Securities and Exchange
Commission filings.
Item 3. Legal Proceedings.
-----------------
The Company is not a party to any material pending legal proceedings.
The Company at times does have 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 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 5, 1999,
and 5,000,000 shares of Preferred Stock, $1.00 par value, of which no shares
were outstanding as of April 5, 1999.
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, 1999, the Company's
Chairman beneficially owned approximately 63.0% 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 5, 1999, the 7,142,251 shares of Common Stock then
outstanding were held by approximately 511 persons (excluding persons holding
shares in nominee names). The Transfer Agent and Registrar for the Common Stock
is UMB Bank of Kansas City.
8
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The Company's Common Stock is currently traded on The Nasdaq Small Cap
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 Small
Cap Market.
<TABLE>
<CAPTION>
Fiscal 1997 High Low
- ----------- ---- ---
<S> <C> <C>
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 2.50 1.00
Second Quarter 2.38 1.13
Third Quarter 2.00 1.25
Fourth Quarter 1.94 1.00
Fiscal 1999
- -----------
First Quarter (through April 5, 1999) 1.63 1.00
</TABLE>
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 or 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.
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 or her 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.
Item 6. Selected Financial Data.
-----------------------
Incorporated by reference from the section captioned "Selected
Consolidated Financial Data," page 2 of the National Home Centers, Inc. 1998
Annual Report (the "1998 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 1998 Annual Report.
9
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
----------------------------------------------------------
Incorporated by reference from the section captioned "Management's
Discussion and Analysis," page 4 of the 1998 Annual Report.
Item 8. Financial Statements and Supplementary Data.
-------------------------------------------
Incorporated by reference from the sections captioned "Consolidated
Balance Sheets, "Consolidated Statements of Operations and Retained Earnings
(Accumulated Deficit)," "Consolidated Statements of Cash Flows," "Notes to
Consolidated Financial Statements," and "Report of Independent Public
Accountants," pages 6 through 18 of the 1998 Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure.
--------------------
None.
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 3, 1999 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 1998 Annual
Report into Item 8 of this Report.
Description
-----------
Consolidated Balance Sheets
Consolidated Statements of Operations and Retained Earnings
(Accumulated Deficit)
Consolidated Statements of Cash Flows
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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.
3. Exhibits required by Item 601 of Regulation S-K.
-----------------------------------------------
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
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 July 1, 1993 between Parham Properties,
Inc. and the Company for the Little Rock, Arkansas store./2/
10.7 Lease Agreements dated December 22, 1992 between Valley Park
Limited Partnership and the Company for the Russellville,
Arkansas store./1/
10.8 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/
10.9 Form of the 1993 Employee Stock Purchase Plan of National
Home Centers, Inc./1/
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
10.10 Form of the Company's 1993 Incentive Compensation Plan./1/
10.11 Loan and Security Agreement dated December 29, 1992 between
the Company and MetLife Capital Corporation./2/
10.12 Note & Security Agreement dated 6/15/94 between the Company
and NationsBanc Leasing Corp./3/
10.13 Assignment of Policy dated 5/20/94 between the Company and
the Newman 1994 Family Trust./3/
10.14 Assignment of Policy dated 5/20/94 between the Company and
the Newman 1994 Family Trust./3/
10.15 Split Dollar Insurance Agreement dated 5/20/94 between the
Company and the Newman 1994 Family Trust./3/
10.16 Split Dollar Insurance Agreement dated 5/20/94 between the
Company and the Newman 1994 Family Trust./3/
10.17 Guaranty Agreement effective May 20, 1994./4/
10.18 Supplemental Security Agreement and Term Promissory Note No.
1 dated December 6, 1994 between the Company and MetLife
Capital Corporation./5/
10.19 Promissory Note and Mortgage dated May 5, 1995 to Simmons
First Bank of Arkansas for Conway, Arkansas Store./6/
10.20 Form of the Company's 401(k) Adoption Agreement with First
Tennessee National Bank as Trustee./7/
10.21 1996 Long-Term Performance Plan./8/
10.22 Loan and Security Agreement with NationsCredit Commercial
Funding./9/
10.23 Real Property Purchase Agreement between National Home
Centers, Inc. and Home Depot U.S.A., Inc./9/
10.24 Agreement to Sell and Purchase Real Estate between National
Home Centers, Inc. and Lowe's Home Centers, Inc./9/
11.1 Computation of Loss Per Share.
13.1 National Home Centers, Inc. 1998 Annual Report (only those
portions specifically incorporated herein by reference shall
be deemed filed with the Commission).
21.1 Subsidiaries of the Company./1/
</TABLE>
12
<PAGE>
Exhibit No. Description
----------- -----------
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
1998.
/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. 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.
/3/ 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.
/4/ Incorporated by reference from National Home Centers, Inc. Quarterly
Report on Form 10-Q for the period ended October 31, 1994, filed with the
Se curities and Exchange Commission on December 15, 1994.
/5/ 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.
/6/ 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.
/7/ 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.
/8/ Incorporated by reference from National Home Centers, Inc. Annual Report
on Form 10-K for the period ending January 31, 1997, filed with the
Securities and Exchange Commission on May 1, 1997.
/9/ Incorporated by reference from National Home Centers, Inc. Quarterly
Report on Form 10-Q for the period ending July 31, 1998, filed with the
Securities and Exchange Commission on September 15, 1998.
13
<PAGE>
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, 1999 By: /s/ DWAIN A. NEWMAN
----------------------------------------
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, 1999 By: /s/ DWAIN A. NEWMAN
----------------------------------------
Dwain A. Newman
Chairman of the Board and Chief
Executive Officer
April 30, 1999 By: /s/ DANNY R. FUNDERBURG
----------------------------------------
Danny R. Funderburg
President, Chief Operating Officer and
Director
April 30, 1999 By: /s/ ROGER A. HOLMAN
----------------------------------------
Roger A. Holman
Vice President, Purchasing Marketing and
Director
April 30, 1999 By: /s/ BRENT A. HANBY
----------------------------------------
Brent A. Hanby
Executive Vice President, Chief Financial
Officer and Director
April 30, 1999 By: /s/ RICHARD D. DENISON
----------------------------------------
Richard D. Denison
Director
April 30, 1999 By: /s/ DAVID W. TRUETZEL
----------------------------------------
David W. Truetzel
Director
14
<PAGE>
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
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 July 1, 1993 between Parham
Properties, Inc. and the Company for the Little Rock,
Arkansas store./2/
10.7 Lease Agreements dated December 22, 1992 between Valley Park
Limited Partnership and the Company for the Russellville,
Arkansas store./1/
10.8 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/
10.9 Form of the 1993 Employee Stock Purchase Plan of National
Home Centers, Inc./1/
10.10 Form of the Company's 1993 Incentive Compensation Plan./1/
10.11 Loan and Security Agreement dated December 29, 1992 between
the Company and MetLife Capital Corporation.
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
10.12 Note & Security Agreement dated 6/15/94 between the Company
and NationsBanc Leasing Corp./3/
10.13 Assignment of Policy dated 5/20/94 between the Company and
the Newman 1994 Family Trust./3/
10.14 Assignment of Policy dated 5/20/94 between the Company and
the Newman 1994 Family Trust./3/
10.15 Split Dollar Insurance Agreement dated 5/20/94 between the
Company and the Newman 1994 Family Trust./3/
10.16 Split Dollar Insurance Agreement dated 5/20/94 between the
Company and the Newman 1994 Family Trust./3/
10.17 Guaranty Agreement effective May 20, 1994./4/
10.18 Supplemental Security Agreement and Term Promissory Note No.
1 dated December 6, 1994 between the Company and MetLife
Capital Corporation./5/
10.19 Promissory Note and Mortgage dated May 5, 1995 to Simmons
First Bank of Arkansas for Conway, Arkansas Store./6/
10.20 Form of the Company's 401(k) Adoption Agreement with First
Tennessee National Bank as Trustee./7/
10.21 1996 Long-Term Performance Plan./8/
10.22 Loan and Security Agreement with NationsCredit Commercial
Funding./9/
10.23 Real Property Purchase Agreement between National Home
Centers, Inc. and Home Depot U.S.A., Inc./9/
10.24 Agreement to Sell and Purchase Real Estate between National
Home Centers, Inc. and Lowe's Home Centers, Inc./9/
11.1 Computation of Loss Per Share.
13.1 National Home Centers, Inc. 1998 Annual Report (only those
portions specifically incorporated herein by reference shall
be deemed filed with the Commission).
21.1 Subsidiaries of the Company./1/
27.1 Financial Data Schedule.
</TABLE>
16
<PAGE>
EXHIBIT 11.1
NATIONAL HOME CENTERS, INC.
AND SUBSIDIARY
Computation of Loss Per Share
Years ended January 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Year Ended January 31
-------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net loss 2,959,443 $13,010,122 $3,107,723
========== =========== ==========
Weighted average number of 7,142,251 7,142,251 7,142,251
common shares outstanding ========== =========== ==========
Loss per share $ 0.41 $ 1.82 $ .44
========== =========== ==========
</TABLE>
17
<PAGE>
Exhibit 13.1
LETTER TO SHAREHOLDERS
National Home Centers continues to rebuild the Company which so many customers
have trusted since 1968. The management and employees have been working to
refocus on our main customer, the contractor. We feel better about our prospects
than anytime over the past few years.
For the fiscal year ending January 31, 1999, the Company incurred a net loss of
$2.96 million versus a loss of $13.0 million last year. Net sales decreased to
$104.7 million compared to $150.8 million last year. Comparable store sales
decreased 13%. We ended the year operating eight facilities versus ten in the
same period a year ago. EBITDA (earnings before interest, taxes, depreciation
and amortization) improved to $962,000 in fiscal 1998 from $(6,500,000) last
year, an improvement of over $7.4 million.
Beginning in the summer of 1997 and as discussed in last year's shareholder
letter, we began an extensive overhaul of our business and operations. We
requested a consulting group affiliated with Arthur Andersen LLP to assist us
with this process. We are pleased to report that after several months, we have
completed the following with regard to our four main strategies:
1. Close under-performing facilities -
During the year we closed and sold two large retail facilities and related
assets. We also reduced the size of another retail store from 90,000 to
30,000 square feet.
2. Recapitalize the Company -
The Company renewed the working capital line of credit with a new four year
$20 million revolving line of credit and we are in compliance with all
covenants at fiscal year end. We have renewed our vendor relationships and
have been current with payments since July 1998, allowing us to take
advantage of discounts offered. Working capital went from $4 million at
1/31/98 to $11 million at 1/31/99. We lowered our debt-to-worth ratio from
4.1 to 1 at 1/31/98 to 2.5 to 1 at 1/31/99.
3. Monetize certain assets -
By selling off various real estate, buildings and equipment, we generated
proceeds of over $20 million which we used to pay down debt. We plan to
have all debt on our equipment paid within the next several months. In
addition, we reduced exposure to slower turning inventory and improved our
turns from 4.3 last year to 5.7 in fiscal 1998.
4. Redirect the customer focus to professional contractors
For fiscal 1998, 69% of revenues were created from contractors versus 55%
last year. Our long-term goal is 85% of revenues from contractors.
While much has been accomplished, we still have a few other assets which we plan
to divest later in the year, which could create additional cash flow. Assuming
interest rates remain in the same range as they are now, we have an opportunity
to be profitable in 1999, which is the main goal of our business plan. As the
Company continues to improve its cash flow and income statement, we plan to
continue to explore industry consolidation possibilities, including, but not
limited to, purchases of other contractor-related companies, which was our
primary growth vehicle in the 1970's and 1980's.
We believe we have withstood a challenging four-year period and have adapted to
changes in the home improvement industry to make ourselves a viable player in
this region of the country. Just selling building materials for a low price
won't get the job done. Success in this industry is earned by constantly being
creative, innovative and loyal to our shareholders, employees and customers.
Thanks for your continued interest in our Company.
Sincerely,
/s/ Dwain A. Newman /s/ Danny R. Funderburg
Dwain A. Newman Danny R. Funderburg
Chairman, CEO President, COO
<PAGE>
National Home Centers, Inc.
Selected Consolidated Financial Data
(in thousands, except selected operating and per share data)
<TABLE>
<CAPTION>
For Fiscal Year Ending January 31,
Statement of Operations Data: 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 104,746 150,756 177,001 154,659 151,356
Cost of sales 81,121 117,072 134,104 115,369 110,321
----------------------------------------------------
Gross profit 23,625 33,684 42,897 39,290 41,035
Selling, general and administrative
expenses 24,422 43,375 44,023 39,039 36,777
----------------------------------------------------
Operating income (loss) (797) (9,691) (1,126) 251 4,258
Interest expense, net (2,162) (3,660) (3,583) (2,787) (1,735)
----------------------------------------------------
Earnings (loss) before income taxes (2,959) (13,351) (4,709) (2,536) 2,523
Income tax expense (benefit) 0 (341) (1,601) (938) 990
----------------------------------------------------
Net earnings (loss) $ (2,959) (13,010) (3,108) (1,598) 1,533
----------------------------------------------------
Earnings (loss) per share $ (0.41) (1.82) (0.44) (0.22) 0.21
----------------------------------------------------
Weighted average number of common
shares outstanding 7,142 7,142 7,142 7,142 7,157
----------------------------------------------------
Selected Financial Data:
Total assets $ 32,193 61,790 84,838 86,761 73,877
Long-term debt 12,427 23,323 29,320 30,808 30,425
Net property, plant and equipment 7,899 29,286 37,266 39,699 28,915
Stockholders' equity 9,190 12,150 25,160 28,268 29,866
Selected Operating Data:
Number of stores at end of
period (1) 8 10 13 13 12
Average total sales per square
foot -
Retail and Contractor (2) $ 250 202 229 238 275
Comparable store sales increase
(decrease) (12.5)% (12.3)% 4.9% (3.6)% 8.6%
</TABLE>
(1) The number of stores for previous years has been restated in order to be
consistent with the current year presentation.
(2) Net sales divided by average retail square feet for the period.
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operation
The following discussion should be read in conjunction with the "Selected
Consolidated Financial Data" and the related notes thereto and the Company's
audited financial statements and the related notes thereto appearing elsewhere
in this annual report.
RESULTS OF OPERATIONS
Net sales for the three fiscal years ended January 31, 1999, 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>
1999 $ 104,745,826 (31)% (13)%
1998 150,756,393 (15)% (12)%
1997 177,000,584 14% 5%
</TABLE>
YEAR ENDED JANUARY 31, 1999 COMPARED TO YEAR ENDED JANUARY 31, 1998
NET SALES - The Company's net sales decreased 30.5% to $104.7 million for the
year ended January 31, 1999 (fiscal 1998) from $150.8 million for the year ended
January 31, 1998 (fiscal 1997). Comparable store sales in fiscal 1998 decreased
12.5% from fiscal 1997. The overall sales volume decrease was primarily due to
the increased competition, the closing of the Rodney Parham retail store (Little
Rock) in late fiscal 1997 and the closing of the Fayetteville and west Rogers
retail stores in fiscal 1998. The Company had no substantive increase in the
variety of products offered or its sales territory. The average annual sales per
store for fiscal 1998 was $15.8 million compared to $15.9 million for fiscal
1997. 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 1998
increased to 22.6% from 22.3% in fiscal 1997, even though increased competition
exists in the contractor division and there are continuing competitive pricing
pressures in central and northwest Arkansas. Additionally, in its recent efforts
to reduce retail inventory to increase inventory turnover, the Company had less
closeout merchandise which has contributed to higher margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses as a percentage of net sales decreased to 23.3% in
fiscal 1998 versus 28.8% in fiscal 1997. This decrease as a percentage of net
sales is primarily due to the closing of the two large retail stores which
incurred higher operating expenses and as a result of the $6.7 million
non-recurring charge for the store closings in fiscal 1997.
INTEREST EXPENSE - Net interest expense as a percentage of net sales in fiscal
1998 decreased to 2.1% from 2.4% in fiscal 1997, primarily as a result of paying
off the debt (which led to decreased interest expense) on the Fayetteville and
west Rogers retail stores. See Note 3 of Notes to Consolidated Financial
Statements for additional information on debt and interest.
INCOME TAXES - Effective income tax rates were 0% and (2.5)% for fiscal years
1998 and 1997, respectively. The effective rate for fiscal 1998 results from the
income tax benefit due to the net operating loss (NOL) in fiscal 1998. However,
due to the uncertainty regarding future realization of the net operating loss
carryforward, a valuation allowance has been recorded and the full benefit of
the NOL has not been recognized. See Note 4 of Notes to Consolidated Financial
Statements for additional information on income taxes.
YEAR ENDED JANUARY 31, 1998 COMPARED TO YEAR ENDED JANUARY 31, 1997
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
the increased competition, the sale of the truss and cabinet manufacturing
operations in fiscal 1996, the closing of the Conway homecenter in October 1997,
the Rogers contractor yard in November 1997, and the pending closings of the
Fayetteville and Rodney Parham retail stores. The Company had no
<PAGE>
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 inventory turnover, 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 due to the lower net sales for fiscal 1997 as many of the
expenses are fixed expenses and as a result of the $6.7 million non-recurring
charge for the 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 having
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 loss carryforward, a valuation allowance has been recorded and the
full benefit of the NOL has not been recognized. The Company filed for a federal
tax refund of approximately $517,000, which was received in the second quarter
of fiscal 1998. See Note 4 of Notes to Consolidated Financial Statements for
additional information on income taxes.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to changes in interest rates on a majority of its total
debt. See Note 3 to the consolidated financial statements for discussion of the
Company's total debt. Any increases in interest rates could also affect the
ability of the Company to collect accounts receivable from customers. The
Company depends on the market for favorable long term mortgage rates to help
generate sales and create housing turnover. Should mortgage rates increase
substantially, the Company could have difficulty generating sales. The Company's
exposure to commodity markets for lumber, plywood and other building materials
does fluctuate in pricing but is limited to what is held in inventory as the
Company does not trade commodity futures or options. Quotes to customers for
proposed products to be sold are short-term and increases or decreases in
commodity pricing are generally passed on to the customer. The Company has no
foreign sales and accepts payment only in US dollars; therefore it is not
subject to any currency exchange rate risk.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital at January 31, 1999 increased to $10.9 million
from $4.0 million at January 31, 1998, primarily due to store closings and cash
generated which allowed the Company to pay down debt and to bring its accounts
payable vendors to a current payment status.
The Company's primary capital needs are to finance inventories and accounts
receivable. During the year ended January 31, 1999, operating activities used
net cash of $0.6 million. Primary sources of cash from operating activities
included approximately $5.8 million from decreases in inventories, $2.1 million
from a decrease in accounts receivable and $0.5 million from decreases in income
tax receivable. The primary use of cash was an approximate $8.2 million decrease
in accounts payable and $1.4 million from net loss including depreciation.
Net cash provided by investing activities for the year ended January 31, 1999
was approximately $19.3 million, principally due to proceeds from the sale of
property, plant and equipment for $20.3 million.
Net cash used in financing activities during fiscal 1998 totaled approximately
$18.8 million, primarily for repayments under the revolving credit facility and
other mortgage debt.
At January 31, 1999, the Company owed $10.8 million under its revolving credit
agreement with a bank. This agreement provides a revolving credit loan
commitment not to exceed the lesser of (i) $20 million, or (ii) a borrowing base
of 85% and
<PAGE>
65% of eligible accounts receivable and eligible inventory, respectively, with
receivable and inventory availability each capped at $10 million. Based upon
eligible accounts receivable and eligible inventory as of January 31, 1999, the
Company had approximately $2.5 million of additional borrowing capacity under
the revolving credit agreement. The current revolving credit agreement expires
July 14, 2002. Borrowings under the revolving credit agreement are
collateralized by the Company's accounts receivable and inventory. The Company
was in compliance with all covenants at January 31, 1999.
The Company's current ratio was 2.0 to 1 at January 31, 1999 versus 1.2 to 1 at
January 31, 1998. The Company's total debt to equity ratio decreased to 2.5 to 1
at the end of fiscal 1998 versus 4.1 to 1 at the end of the preceding year.
Return on average investment for the three years ended January 31, 1999, 1998
and 1997 was (28.5)%, (59.3)% and (17.1)%, respectively.
YEAR 2000 ISSUES
The issues dealing with Year 2000 (Y2K) are complex and widespread with various
assessments being made regarding the impact of how most technology-based
platforms will react on January 1, 2000. Information systems and programs may
not process data properly. The Company has determined which of its systems
require upgrading and is in the process of implementing various hardware and
software changes which should allow the Company to be prepared internally for
the date change. Various third parties have been hired to assist with the Y2K
conversion. The Company's main third party software provider has started
installing new Y2K compliant software, which should be completed by the end of
the first quarter of fiscal 1999. All other systems, especially older personal
computers, are either being upgraded or replaced with new systems.
All costs and expenses associated with the Y2K project are being expensed as
incurred. The total cost of the project is estimated at $250,000. The Company
does not expect the cost to have a material impact on the financial statements.
While management is addressing the Y2K issue, there is no guarantee the target
completion dates can be accomplished or would not have an adverse effect on the
Company.
The Company has contacted its key financial institutions and suppliers to access
their Y2K compliance and will continue to monitor such compliance until
year-end. There can be no assurance that such financial institutions, suppliers,
customers or other third parties will be ready and in compliance. A failure by
one or more of these entities could adversely affect the Company's business and
its ability to generate invoices and orders and could also impede collection of
accounts receivable or tracking of inventory. To date, the Company has not
established a formal contingency plan, due to uncertainty of the extent which
the Company may be affected.
FORWARD-LOOKING STATEMENTS
Many issues discussed in this annual report are forward-looking statements made
under Section 27A of the Securities Act of 1933, as amended, and Section 21E of
the Securities Exchange Act of 1934, as amended. These statements involve known
and unknown risks, uncertainties and other factors that may cause results,
levels of activity, growth, performance, earnings per share or achievements to
be materially different from any future results, levels of activity, growth,
performance, earnings per share or achievements expressed or implied by such
forward-looking statements. Investors are cautioned that all forward-looking
statements involve risk and uncertainties. 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 dispose of excess real estate and other assets; general
economic conditions; housing turnover; interest rates; weather; and other
factors described from time to time in the Company's Securities and Exchange
Commission filings. Actual events or results may differ materially from those
described above and those further set forth by the Form 10-K and in the
Definitive Proxy Statement.
<PAGE>
Consolidated Balance Sheets
January 31, 1999 and 1998
Assets 1999 1998
------ ---- ----
Current assets:
Cash and cash equivalents $ 57,984 111,543
Accounts receivable, less allowance for
doubtful accounts of $730,000 in 1999
and $281,000 in 1998 (notes 3 and 9) 7,447,984 9,970,843
Income tax refunds receivable -- 517,118
Inventories (notes 3 and 7) 13,414,136 19,173,468
Prepaid expenses and other 525,518 593,901
------------ ----------
Total current assets 21,445,622 30,366,873
------------ ----------
Property, plant and equipment
notes 3 and 7):
Land 1,433,846 9,073,150
Buildings and improvements 5,864,697 17,769,630
Machinery and equipment 10,308,362 15,188,112
------------ ----------
17,606,905 42,030,892
Less accumulated depreciation 9,707,900 12,745,131
------------ ----------
Net property, plant and equipment 7,899,005 29,285,761
------------ ----------
Other assets, at cost less amortization of
$287,700 in 1999 and $1,068,900 in 1998
(notes 7 and 8) 2,848,046 2,137,770
------------ ----------
Total assets $ 32,192,673 61,790,404
------------ ----------
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Current installments of long-term debt
(note 3) $ 1,259,463 9,113,391
Accounts payable 5,013,027 13,200,065
Accrued expenses (note 7) 4,302,926 4,003,643
------------ ----------
Total current liabilities 10,575,416 26,317,099
------------ ----------
Long-term debt, excluding current
installments (note 3) 12,426,842 23,323,447
------------ ----------
Commitments and contingencies (notes 3,
5, 6, 7 and 8)
Stockholders' equity (note 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
Accumulated deficit (10,452,540) (7,493,097)
------------ ----------
10,453,859 13,413,302
Treasury stock; 323,707 common
shares at cost (1,263,444) (1,263,444)
------------ ----------
Total stockholders' equity 9,190,415 12,149,858
------------ ----------
Total liabilities and stock-
holders' equity $ 32,192,673 61,790,404
------------ ----------
The accompanying notes are an integral part of these statements.
<PAGE>
Consolidated Statements of Operations
and Retained Earnings (Accumulated Deficit)
Years ended January 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net sales $ 104,745,826 150,756,393 177,000,584
Cost of sales 81,121,118 117,072,346 134,103,601
------------- ----------- -----------
Gross profit 23,624,708 33,684,047 42,896,983
------------- ----------- -----------
Operating expenses:
Salaries and benefits (note 8) 15,506,681 22,498,438 26,825,258
Rent (note 5) 1,704,078 2,074,527 2,330,686
Depreciation and amortization 1,759,353 3,233,046 3,315,560
Nonrecurring charges (note 7) -- 6,730,000 1,056,000
Other 5,451,981 8,839,205 10,495,374
------------- ----------- -----------
24,422,093 43,375,216 44,022,878
------------- ----------- -----------
Operating loss (797,385) (9,691,169) (1,125,895)
Interest expense 2,162,058 3,659,573 3,582,776
------------- ----------- -----------
Loss before income taxes (2,959,443) (13,350,742) (4,708,671)
Income taxes (note 4) -- (340,620) (1,600,948)
------------- ----------- -----------
Net loss (2,959,443) (13,010,122) (3,107,723)
Retained earnings (accumulated
deficit):
Beginning of year (7,493,097) 5,517,025 8,624,748
------------- ----------- -----------
End of year $ (10,452,540) (7,493,097) 5,517,025
------------- ----------- -----------
Loss per share (basic and
diluted) (note 1) $ (0.41) (1.82) (0.44)
------------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
Consolidated Statements of Cash Flows
Years ended January 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (2,959,443) (13,010,122) (3,107,723)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Provision for losses on accounts
receivable 389,828 404,762 785,743
Depreciation 1,586,899 2,870,479 3,023,330
Amortization of other assets 172,454 362,567 292,230
Loss (gain) on sale of property,
plant and equipment (311,547) 138,028 (29,108)
Increase in cash surrender value
of life insurance (107,960) (23,984) (138,978)
Nonrecurring charges (note 7) -- 6,100,000 --
Deferred income tax expense
(benefit) -- 176,498 (269,763)
Changes in assets and liabilities:
Accounts receivable 2,133,031 970,674 (620,521)
Income tax refunds receivable 517,118 816,774 (223,566)
Inventories 5,759,332 10,711,063 518,346
Prepaid expenses and other 68,383 (1,286) 544,537
Accounts payable (8,187,038) (400,104) (847,470)
Accrued expenses 299,283 11,276 392,404
------------ ----------- ----------
Net cash provided by (used in)
operating activities (639,660) 9,126,625 319,461
------------ ----------- ----------
Cash flows from investing activities:
Additions to property, plant and
equipment (144,420) (399,255) (1,165,431)
Proceeds from sale of property, plant
and equipment 20,255,824 837,225 277,308
Decrease (increase) in other assets (774,770) 204,502 (372,172)
------------ ----------- ----------
Net cash provided by (used in)
investing activities 19,336,634 642,472 (1,260,295)
------------ ----------- ----------
Cash flows from financing activities:
Proceeds from long-term debt 14,267,636 4,836,176 15,016,840
Repayments of long-term debt (33,018,169) (14,627,816) (14,071,971)
------------ ----------- ----------
Net cash provided by (used in)
financing activities (18,750,533) (9,791,640) 944,869
------------ ----------- ----------
Net increase (decrease) in cash and
cash equivalents (53,559) (22,543) 4,035
Cash and cash equivalents at beginning
of year 111,543 134,086 130,051
------------ ----------- ----------
Cash and cash equivalents at end of year $ 57,984 111,543 134,086
------------ ----------- ----------
Supplemental disclosures:
Interest paid $ 2,301,535 3,713,342 3,398,526
Income taxes refunded 517,118 1,333,892 1,107,619
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
Acquisition of other assets for
notes payable -- -- 408,786
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
Notes to Consolidated Financial Statements
January 31, 1999, 1998 and 1997
(1) Summary of Significant Accounting Policies
------------------------------------------
National Home Centers, Inc. ("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, Oklahoma and Missouri.
(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 in fiscal year 1997
(none in 1999 and 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 fiscal year 1999 or 1998.
(f) Long-Lived Assets
-----------------
In fiscal year 1997, the Company adopted 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, which requires impairment losses to be recorded on long-lived
assets used in operations when indications of impairment are present
and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. Management has
evaluated the Company's long-lived assets for purposes of SFAS No. 121
and has recognized related impairment losses of $100,000 and
$4,534,000 in fiscal years 1999 and 1998, respectively (none in 1997).
The impairment losses recognized in fiscal year 1998 are directly
related to the Company's restructuring activities discussed in note 7,
and are therefore included in |nonrecurring charges in the
accompanying consolidated statement of operations.
(g) 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. Amorti- zation 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.
(Continued)
<PAGE>
(h) Advertising Costs
-----------------
Advertising costs are accounted for in accordance with American
Institute of Certified Public Accountants' Statement of Position
("SOP") No. 93-7, Reporting of Advertising Costs, which 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.
(i) 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.
(j) 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 tax 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 expected 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.
(k) 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 for the years ended January 31, 1999, 1998 and 1997).
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,
1999, 1998 and 1997.
(l) 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.
(m) 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, 1999 and 1998, 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.
(n) 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.
(o) 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 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 for
the year ended January 31, 2000.
(Continued)
<PAGE>
(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, and 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. The Company's
continuation as a going concern is dependent upon its ability to
generate sufficient operating 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.
Prior to 1993, the majority of the Company's sales were from
professional contractor customers. Beginning in 1993, the Company
undertook significant efforts to expand the retail portion of its
business. Over a three-year period, the Company established four
large-format retail building material/home improvement stores, which
increased sales to retail customers to 48% of the Company's total
sales during fiscal year 1997. However, the Company's profitability
during this period decreased dramatically, primarily due to high
operating costs associated with these new stores, and the erosion of
retail sales volumes and margins attributable to competition from
large national retail chains, which entered the Company's markets
during this period.
The Company incurred losses of $2,959,443, $13,010,122 and $3,107,723,
for the years ended January 31, 1999, 1998 and 1997, respectively, the
majority of which are attributable to its retail operations. In fiscal
year 1998, the Company made decisions to restructure its operations,
which ultimately involved the closing or selling of four of its retail
stores and substantially reformatting another. The objectives of the
restructuring were to (1) eliminate those stores with substantial
recurring operating losses, (2) generate cash from the liquidation of
the related assets, and (3) return to a substantially
contractor-oriented business.
As described in note 7, during fiscal year 1999, the Company completed
substantially all of its restructuring efforts by closing certain
retail-oriented stores. In addition, certain real estate and equipment
associated with the closed stores, and certain other real estate, were
sold, and inventory levels significantly reduced. Total cash provided
from these sales of approximately $21 million has been primarily used
to reduce debt and accounts payable. The reduction in debt has
resulted in substantially lower interest expense for fiscal year 1999
compared to fiscal year 1998. In addition, subsequent to the
restructuring, a substantially higher percentage of accounts payable
balances are current. This has resulted in improved vendor relations,
with fewer required prepayments on inventory purchases, and more
early-payment discounts.
The Company's sales to contractor customers increased to approximately
70% of the Company's total sales during fiscal year 1999, compared to
55% for fiscal year 1998, and management expects such sales to further
increase in fiscal year 2000. Management believes that the increased
emphasis on contractor operations will lead to significant
improvements in operating results, due primarily to substantially
lower operating costs and more consistent sales volumes and margins
associated with contractor operations.
In addition, as described in note 3, the Company obtained a new
revolving credit agreement during fiscal year 1999. The new agreement
provides increased borrowing capability compared to the amount which
would have been available under the previous revolving credit
facility. The new agreement contains no financial covenants with which
the Company must comply.
(3) Long-Term Debt
--------------
<TABLE>
<CAPTION>
Long-term debt consists of the following:
1999 1998
<S> <C> <C>
Notes payable under revolving credit agreements $ 10,762,351 16,042,254
Notes payable-principal and interest payable monthly:
Secured by real estate:
10% note, secured by real property in Conway, AR; balance due May 2001 1,884,038 2,825,684
Note, secured by real property in Rogers, AR -- 4,607,840
Note, secured by real property in Fayetteville, AR -- 3,078,722
Secured by equipment:
8.31% notes, final payment due December 2000 433,204 1,608,271
9.42% notes, final payment due August 1999 197,914 634,632
7.46% notes, final payment due June 1999 94,829 406,073
Other notes -- 1,143,914
Other notes payable; weighted average interest rate of 8.46%; due at various dates
313,969 2,089,448
------------ ------------
13,686,305 32,436,838
Less current installments 1,259,463 9,113,391
------------ ------------
Long-term debt, excluding current installments $ 12,426,842 23,323,447
------------ ------------
</TABLE>
(Continued)
<PAGE>
In July 1998, the Company entered into a new revolving credit agreement
with a lender. The agreement provides a revolving credit loan commitment
not to exceed the lesser of (a) $20 million or (b) a borrowing base of 85%
and 65% of eligible accounts receivable and eligible inventory,
respectively, with sublimits on advances of $10 million each. Borrowings
under the agreement are based on prime (7.75% at January 31, 1999) plus
0.50%. The Company also pays a commitment fee of 0.25% based on the average
unused amount of the line. In addition, the Company paid fees in connection
with obtaining the loan of approximately $396,000, which are being
amortized over the term of the loan. The new agreement replaces a similar
revolving credit agreement with another lender.
Borrowings under the revolving credit agreement are collateralized by the
Company's accounts receivable and inventory. Based upon eligible accounts
receivable and eligible inventory as of January 31, 1999, the Company had
approximately $2.5 million of additional available borrowing capacity under
the revolving credit agreement as of that date. The current revolving
credit agreement expires on July 14, 2002.
Borrowings under the real estate loan agreement at January 31, 1999, are
secured by a first real estate mortgage on real estate located in Conway,
Arkansas. In March 1999, the lender agreed to extend the maturity date of
this loan to May 2001 and to reduce the interest rate from 10% to 9%.
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, 1999, are as follows: 2000, $1,259,463; 2001,
$957,636; 2002, $697,382; 2003, $10,771,824; and 2004, none. Annual
maturities for fiscal year 2003 include borrowings under the Company's
revolving credit agreement described above.
(4) Income Taxes
------------
Income tax benefit consists of the following:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ -- (516,144) (1,329,235)
State -- (974) (1,950)
----------- ---------- ------------
-- (517,118) (1,331,185)
----------- ---------- ------------
Deferred:
Federal -- 227,595 (6,866)
State -- (51,097) (262,897)
----------- ---------- ------------
-- 176,498 (269,763)
----------- ---------- ------------
$ -- (340,620) (1,600,948)
----------- ---------- ------------
<CAPTION>
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:
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Computed "expected" income taxes $(1,006,210) (4,539,252) (1,600,948)
Increase (decrease) in income taxes resulting from:
State income taxes, net of Federal income tax effect (124,064) (34,367) (174,799)
Increase in valuation allowance 1,135,001 4,209,171 203,699
Other, net (4,727) 23,828 (28,900)
----------- ---------- ------------
$ -- (340,620) (1,600,948)
----------- ---------- ------------
The tax effects of temporary differences that give rise to significant portions of
deferred tax assets and liabilities at January 31, 1999 and 1998, are presented below:
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Deferred tax assets:
Accounts receivable, due to allowance for doubtful accounts $ 279,517 107,624
Inventories, due to costs not currently deductible for tax purposes 145,370 501,947
Accrued expenses not currently deductible 521,641 681,185
Valuation allowance for property, plant and equipment 758,632 1,736,089
Net operating loss and other carryforwards 4,444,330 2,480,984
Other 57,392 36,523
--------- ---------
Total gross deferred tax assets 6,206,882 5,544,352
Valuation allowance for deferred tax assets (6,104,673) (4,969,672)
---------- ----------
Deferred tax assets 102,209 574,680
Deferred tax liabilities:
Property, plant and equipment, due to differences in depreciation 102,209 574,680
------- -------
Net deferred tax asset $ -- --
----------- -------
</TABLE>
(Continued)
<PAGE>
At January 31, 1999, the Company had Federal and state net operating loss (NOL)
and other tax carryforwards which expire as follows:
Year ending January 31,
2000 $ 5,509
2001 241,909
2002 310,075
2003 449,858
2004 326,709
2006 through 2012 4,408
2013 4,802,631
2019 5,138,025
Indefinite expiration (alternative minimum tax credit) 208,501
----------
Total $11,487,625
----------
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 $1,135,001 during the year ended January 31, 1999, in order to
fully reserve net deferred tax assets.
(5) Leases
------
The Company's principal stockholder, together with his wife
("stockholders"), own certain real property which is leased to the Company
under various operating lease agreements. The following table summarizes
these related party leases:
<TABLE>
<CAPTION>
Rent expense for
year ended January 31,
Property Lease Monthly ----------------------
location expiration rental 1999 1998 1997
-------- ---------- ------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Springdale August,2002 $ 36,000 390,000 408,000 432,000
Fort Smith August,2002 20,000 216,000 228,000 240,000
North Little Rock August,2002 52,000 594,000 624,000 624,000
Bentonville May,2002 9,500 106,500 98,000 108,000
Cabinet facility-
Springdale Terminated -- 20,000 118,000 114,000
Rogers Terminated -- -- 66,000 74,400
Oklahoma City Terminated -- -- -- 40,800
----- --------- --------- ---------
$ 117,500 1,326,500 1,542,000 1,633,200
------- --------- --------- ---------
</TABLE>
The leases for the Springdale, Fort Smith and North Little Rock properties
are assigned as collateral under a loan agreement between the stockholders
and the Arkansas Teacher Retirement System ("ATRS"). Proceeds from this
loan were used by the stockholders to finance the purchase of the
Springdale and Fort Smith properties from the Company, to retire their
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 principal
stockholder.
During fiscal years 1999 and 1998, the stockholders granted the Company
certain reductions in monthly rental payments totaling $103,500 and
$58,400, respectively, which have been reflected in the schedule above.
Monthly rentals per the table above reflect amounts per the lease
agreements as of January 31, 1999. As of that date, the monthly concession
granted the Company amounted to $34,500. The stockholders reserve the right
to increase monthly payments to the amounts per the lease agreements, but
have waived any claims with respect to past rent reductions.
During fiscal year 1997, the Company ceased operations at the cabinet
facility (see note 7). Beginning in fiscal year 1998, the Company subleased
the cabinet facility to a third party for $19,000 per month. The Company
received $38,000 and $95,000 for the years ended January 31, 1999 and 1998,
respectively, under the sublease agreement. During fiscal year 1999, the
stockholders and the Company agreed to terminate the lease agreements for
the cabinet facility as well as the Rogers property, and the stockholders
agreed to release the Company from all obligations with respect to these
leases. In conjunction with the termination of the cabinet facility lease,
the Company sold the related leasehold improvements to the stockholders for
$525,000 (resulting in a pre-tax loss of $18,500).
(Continued)
<PAGE>
The Company also leases properties from unrelated parties under
noncancellable operating lease agreements, which expire at various dates
through 2008, with options to extend the lease terms for additional periods
of up to ten years. The lease agreements with the stockholders contain
options to extend the lease terms for additional periods of up to twenty
years. 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, 1999, are as follows:
Related
party Other Total
----- ----- -----
Year ending January 31,
2000 $1,410,000 462,400 1,872,400
2001 1,410,000 443,200 1,853,200
2002 1,410,000 377,800 1,787,800
2003 794,000 374,800 1,168,800
2004 275,600 275,600
Later years -- 1,032,500 1,032,500
--------- --------- ---------
Total minimum lease payments $5,024,000 2,966,300 7,990,300
--------- --------- ---------
(6) Capital Stock
-------------
The Company's Articles of Incorporation authorize the Board of Directors to
issue shares of preferred stock in series, 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, 1999, the Company has issued no
shares of its preferred stock.
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. The following summarizes stock option activity for
fiscal year 1999:
Exercise
Shares Price
------ -----
Outstanding at January 31, 1998 -- $ --
Granted 280,000 1.75
Canceled (50,000) 1.75
-------- ----
Outstanding at January 31, 1999 230,000 $ 1.75
------- ----
Exercisable at January 31, 1999 46,000 $ 1.75
------- ----
Options granted during fiscal year 1999 were 20% vested upon issuance, with
an increase in vesting of 20% per year beginning one year after the date of
issuance, and have remaining contractual lives of 4.3 years. As permissible
under Statement of Financial Accounting Standards (SFAS) No. 123, the
Company accounts for stock options granted under the provisions of
Accounting Principles Board Opinion No. 25, which recognizes compensation
cost based upon the intrinsic value of the equity award. Accordingly, no
compensation expense was recognized in the consolidated statement of
operations during fiscal year 1999. Had compensation cost for the Company's
stock option plan been determined based on the fair value at the grant date
for awards for fiscal year 1999 consistent with the provisions of SFAS No.
123, the effect on the Company's net loss and loss per share would not be
materially different from the amounts reported.
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, 1999, no awards had been made
under the incentive compensation plan.
(Continued)
<PAGE>
(7) Nonrecurring Charges
--------------------
During fiscal year 1999, the Company completed the restructuring plans
which had been announced in the previous year by closing several stores,
selling real estate and equipment associated with the closed stores, and
selling certain other real estate. These sales resulted in total cash
proceeds of approximately $10.8 million and losses of approximately $2.3
million, which have been charged against the related valuation allowances.
In addition, in July 1998, the Company sold the real estate and equipment
of the Rogers, Arkansas, home center store to Lowe's Home Centers, Inc. for
cash totaling approximately $10.5 million. This transaction resulted in
gains of approximately $1.3 million, which are included in income for the
year ended January 31, 1999.
In conjunction with the Company's restructuring, certain charges and other
transactions have been charged against the valuation allowances and store
closing accruals rather than to current period income or expense. The
following is a reconciliation of activity with respect to these accounts:
<TABLE>
<CAPTION>
Valuation Accrued
allowances expenses Totals
----------- -------- -------
<S> <C> <C> <C>
Balances, January 31, 1998 $ 5,459,000 641,000 6,100,000
Current year activity:
Additions-writedown of land to
estimated realizable value 100,000 -- 100,000
Inventory losses (780,567) -- (780,567)
Losses on sales of fixed assets (2,230,637) -- (2,230,637)
Depreciation (298,791) -- (298,791)
Cash payments-severance benefits and rent -- (366,232) (366,232)
Other noncash credits (charges) (267,726) 49,920 (217,806)
----------- ----------- -----------
Net current year activity (3,477,721) (316,312) (3,794,033)
----------- ----------- -----------
Balances, January 31, 1999 $ 1,981,279 324,688 2,305,967
----------- ----------- -----------
</TABLE>
The valuation allowances represent differences between the carrying amounts
and estimated fair market values of the related assets, all of which are
considered to be held for sale. Assets held for sale at January 31, 1999
and 1998, consist of the following:
<TABLE>
<CAPTION>
1999 1998
---- ----
Carrying Fair Carrying Fair
amount value amount value
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Inventories $ -- -- 3,111,000 2,186,000
Property, plant and equipment 5,131,279 3,150,000 18,733,000 14,199,000
Totals $5,131,279 3,150,000 21,844,000 16,385,000
</TABLE>
During fiscal year 1998, the Company announced plans to restructure its
operations which included closing several stores. The stores involved
consisted primarily of home center locations which had incurred continuing
operating losses in recent years. During fiscal year 1998, 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 restructure the home center portion of the Russellville, Arkansas,
store. 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 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
---------
Total noncash charges 6,100,000
Losses, primarily on inventory and equipment,
for stores closed during fiscal year 1998 630,000
---------
Total nonrecurring charge-year ended January 31, 1998 $ 6,730,000
---------
(Continued)
<PAGE>
Writedowns of assets to net realizable values represent noncash charges for
asset impairments and disposals of assets directly associated with store
closings. Writedowns of inventories, equipment and buildings represent
differences between estimated realizable values and carrying values.
Leasehold improvements associated with stores being closed were evaluated
based upon expected future cash flows (noncancellable lease payments net of
projected sublease income), and were written down to recognize impairment.
Accrued severance benefits represent incremental payroll costs directly
associated with store closings. Accrued lease obligations (which include
noncancellable operating lease payments, net of projected sublease income)
and other accrued charges (taxes, insurance and other continuing costs)
represent costs which were expected to be incurred subsequent to the dates
the stores ceased operations.
During fiscal year 1997, 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. 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, 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 Cabinet
Craft to AQMC. The lender was also the lender with respect to the Rogers
real estate loan, which was paid off in July 1998 (see 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 for the year ended January 31, 1998.
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 are terminated before cash surrender value exceeds
actual premiums advanced. The Company had advanced premiums of $1,645,378
and $1,278,938 as of January 31, 1999 and 1998, 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 $36,920,
$48,736 and $52,935 for the years ended January 31, 1999, 1998 and 1997,
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 position or the results of its operations.
(Continued)
<PAGE>
(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, 1999, 1998 and 1997:
<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, 1999 $ 281,000 389,828 (59,172) 730,000
------- ------- ------- -------
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
------- ------- ------- -------
Notes receivable:
Year ended January 31, 1997 (note 7) $ -- 1,700,000 1,700,000 --
------- --------- --------- -------
</TABLE>
<PAGE>
NATIONAL HOME CENTERS, INC.
AND SUBSIDIARY
Consolidated Financial Statements
January 31, 1999, 1998 and 1997
Together with Report of Independent Public Accountants
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, 1999 and 1998, and the related
consolidated statements of operations and retained earnings (accumulated
deficit) and cash flows for each of the three years in the period ended January
31, 1999. 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.
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, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended January 31, 1999, 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 and has an
accumulated deficit at January 31, 1999, 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
March 16, 1999
<PAGE>
NATIONAL HOME CENTERS, INC.
BOARD OF DIRECTORS
Richard D. Denison
President, First San Francisco Corporation
Danny R. Funderburg
President and Chief Operating Officer
National Home Centers, Inc.
Brent A. Hanby
Executive Vice-President and Chief Financial Officer
National Home Centers, Inc.
Roger A. Holman
Senior Vice-President, Purchasing & Marketing
National Home Centers, Inc.
Dwain A. Newman
Chairman and Chief Executive Officer,
National Home Centers, Inc.
David W. Truetzel
Managing Director, Llama Company
<PAGE>
Transfer Agent
Shareholders of record who wish to change the ownership or
address of stock; report lost, stolen or destroyed
certificates; or who have questions about their accounts
should contact:
UMB Bank
P.O. Box 410064
Kansas City, MO 64141-0064
800-884-4225
Common Stock Information
The common stock of National Home Centers is traded on the
NASDAQ SmallCap Market under the symbol NHCI. The following
table indicates the quarterly high and low sales price of
the Company's Common Stock as reported by NASDAQ for the
fiscal years ended January 31, 1998 and 1999.
Fiscal 1997 High Low
First Quarter 2.69 1.50
Second Quarter 2.06 1.50
Third Quarter 1.88 .088
Fourth Quarter 1.38 .088
Fiscal 1998 High Low
First Quarter 2.50 1.00
Second Quarter 2.38 1.13
Third Quarter 2.00 1.25
Fourth Quarter 1.94 1.00
As of April 5, 1999, there were 551 shareholders of record
and 2,000 persons or entities who held Common Stock in
nominee name. The Company has never declared or paid cash
dividends on its Common Stock and does not expect to pay
cash dividends in the foreseeable future.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS
<FISCAL-YEAR-END> JAN-31-1999 JAN-31-1999
<PERIOD-START> NOV-01-1998 FEB-01-1998
<PERIOD-END> JAN-31-1999 JAN-31-1999
<CASH> 57,984 57,984
<SECURITIES> 0 0
<RECEIVABLES> 7,447,984 7,447,984
<ALLOWANCES> 0 0
<INVENTORY> 13,414,136 13,414,136
<CURRENT-ASSETS> 0 0
<PP&E> 17,606,905 17,606,905
<DEPRECIATION> 9,707,900 9,707,900
<TOTAL-ASSETS> 32,192,673 32,192,673
<CURRENT-LIABILITIES> 10,575,416 10,575,416
<BONDS> 0 0
0 0
0 0
<COMMON> 74,660 74,660
<OTHER-SE> 9,115,755 9,115,755
<TOTAL-LIABILITY-AND-EQUITY> 32,192,673 32,192,673
<SALES> 20,594,837 104,745,826
<TOTAL-REVENUES> 20,594,837 104,745,826
<CGS> 15,258,505 81,121,118
<TOTAL-COSTS> 15,258,505 81,121,118
<OTHER-EXPENSES> 5,958,868 24,422,093
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 349,825 2,162,058
<INCOME-PRETAX> (972,361) (2,959,443)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (972,361) (2,959,443)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (972,361) (2,959,443)
<EPS-PRIMARY> (0.13) (0.41)
<EPS-DILUTED> (0.13) (0.41)
</TABLE>
