<PAGE>
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1999.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-21448
NATIONAL HOME CENTERS, INC.
(Exact name of registrant as specified in its charter)
Arkansas 71-0403343
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Highway 265 North
Springdale, Arkansas 72765
(Address of principal executive offices, including zip code)
(501) 756-1700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--------- ----------
As of September 10, 1999 National Home Centers, Inc. had 7,142,251 shares of
$0.01 par value Common Stock outstanding.
- --------------------------------------------------------------------------------
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
NATIONAL HOME CENTERS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
July 31, January 31,
1999 1999
Assets (Unaudited) (1)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets:
Cash $ 44,785 57,984
Accounts Receivable 11,712,134 7,447,984
Inventories 13,652,755 13,414,136
Other 650,237 525,518
- --------------------------------------------------------------------------------------------------------------
Total Current Assets 26,059,911 21,445,622
- --------------------------------------------------------------------------------------------------------------
Property, Plant and Equipment 17,637,979 17,606,905
Less Accumulated Depreciation 10,146,625 9,707,900
- --------------------------------------------------------------------------------------------------------------
Net Property, Plant and Equipment 7,491,354 7,899,005
- --------------------------------------------------------------------------------------------------------------
Other Assets, Net of Amortization 2,907,274 2,848,046
- --------------------------------------------------------------------------------------------------------------
$ 36,458,539 32,192,673
- --------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
- --------------------------------------------------------------------------------------------------------------
Current Liabilities:
Current Installments of Long-Term Debt $ 927,518 1,259,463
Accounts Payable 7,578,374 5,013,027
Accrued Expenses 3,956,370 4,302,926
- --------------------------------------------------------------------------------------------------------------
Total Current Liabilities 12,462,262 10,575,416
- --------------------------------------------------------------------------------------------------------------
Long-Term Debt, Excluding Current Installments 14,144,684 12,426,842
Stockholders' Equity 9,851,593 9,190,415
- --------------------------------------------------------------------------------------------------------------
$ 36,458,539 32,192,673
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) January 31, 1999 balances are condensed from the audited consolidated
balance sheet.
See accompanying notes to Condensed Consolidated Financial Statements.
2
<PAGE>
NATIONAL HOME CENTERS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
July 31, July 31,
----------------------------------------------------------------------------
(Unaudited) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales $ 28,479,666 31,322,213 53,819,708 60,508,026
Cost of Sales 22,287,760 24,533,781 41,926,830 47,535,426
- ------------------------------------------------------------------------------------------------------------------------------------
Gross Profit 6,191,906 6,788,432 11,892,878 12,972,600
- ------------------------------------------------------------------------------------------------------------------------------------
Selling, General and
Administrative Expenses:
Salaries and Benefits 3,537,548 4,222,869 7,065,532 8,716,893
Rent 289,511 461,108 563,123 898,286
Depreciation and Amortization 334,965 518,021 683,760 1,061,162
Other 1,235,152 794,972 2,249,500 2,371,019
- ------------------------------------------------------------------------------------------------------------------------------------
Total Selling, General and
Administrative Expenses 5,397,176 5,996,970 10,561,915 13,047,360
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Earnings (Loss) 794,730 791,462 1,330,963 (74,760)
Interest Expense 345,256 672,219 669,785 1,449,128
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings (Loss) Before Income Taxes 449,474 119,243 661,178 (1,523,888)
Income Taxes 0 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
Net Earnings (Loss) $ 449,474 119,243 661,178 (1,523,888)
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings (Loss) Per Share
(basic and diluted) $ 0.06 0.02 0.09 (0.21)
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted Average Number of
Common Shares Outstanding 7,142,251 7,142,251 7,142,251 7,142,251
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
3
<PAGE>
NATIONAL HOME CENTERS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Six Months Ended
July 31,
-------------------------------------
(Unaudited) 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Earnings (Loss) $ 661,178 (1,523,888)
Adjustments to Reconcile Net Earnings (Loss) to Net Cash
Provided by (Used in) Operating Activities:
Depreciation and Amortization 683,760 1,061,162
Loss (Gain) on Disposal of Property, Plant and Equipment 92,738 (431,055)
(Increase) Decrease in Cash Surrender Value of Life Insurance 31,702 (77,960)
Changes in Assets and Liabilities:
Accounts Receivable (4,264,150) 383,135
Inventories (238,619) 6,472,150
Other Current Assets (124,719) 587,406
Accounts Payable 2,565,347 (4,210,787)
Accrued Expenses (346,556) (761,178)
- ----------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Operating Activities (939,319) 1,498,985
- ----------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Additions to Property, Plant and Equipment (286,254) (32,841)
Proceeds from Sale of Property, Plant and Equipment 9,800 19,484,453
Increase in Other Assets (183,323) (641,397)
- ----------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Investing Activities (459,777) 18,810,215
- ----------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Proceeds from Long-Term Debt 2,815,242 8,966,337
Repayments of Long-Term Debt (1,429,345) (29,304,997)
- ----------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 1,385,897 (20,338,660)
- ----------------------------------------------------------------------------------------------------------------------
Net Decrease in Cash (13,199) (29,460)
Cash at Beginning of Period 57,984 111,543
- ----------------------------------------------------------------------------------------------------------------------
Cash at End of Period $ 44,785 82,083
- ----------------------------------------------------------------------------------------------------------------------
Supplemental Disclosures:
Interest Paid $ 661,653 1,610,833
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
4
<PAGE>
NATIONAL HOME CENTERS, INC. ("THE COMPANY") AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
July 31, 1999
1. Basis of Presentation
---------------------
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X of the Securities and Exchange Commission.
Accordingly, the financial statements do not include all of the information
and notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Results of operations for the three
months and six months ended July 31, 1999, are not necessarily indicative
of the results to be expected for the fiscal year ending January 31, 2000.
For further information, refer to the consolidated financial statements and
related notes thereto included in the Company's Annual Report on Form 10-K
--------------------------
filed with the Commission on May 3, 1999.
2. Income Taxes
------------
No income tax provision was recorded for the six months or three months
ended July 31, 1999, due to the realization of previously unrecognized NOL
carryforwards. As a result of the uncertainty associated with the future
realization of deferred tax assets, which include the tax effects of net
operating loss (NOL) and other tax carryforwards, no income tax benefit was
recorded for the six months ended July 31, 1998.
ITEM 2
- ------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
--------------------------------------------------
OPERATIONS AND FINANCIAL CONDITION
----------------------------------
General
-------
National Home Centers, Inc., an Arkansas corporation, ("the Company"), is a full
line retailer of home improvement products and building materials, with eight
locations in Arkansas. The Company serves retail consumers and professional
contractors primarily in Arkansas and also in Oklahoma, Missouri and Kansas.
Over the past several years, the Company has experienced increased competition
in its markets from other national and/or regional chains which are seeking to
gain or retain market share by reducing prices. This has continued to place
pressure on all of the Company's stores and their respective sales, gross
margins and operating income. During 1997, the Company announced plans to
restructure its operations which included decreasing the retail portion of the
Company's business. In 1997, the Company closed stores in Conway and Rogers,
Arkansas. During the first quarter of 1998, the Company closed a store in
Little Rock and sold a store in Fayetteville, Arkansas. The Company also sold
its west Rogers, Arkansas store during the second quarter of 1998. In addition,
management has reduced the home center portion of the Russellville, Arkansas
store. By closing these stores, the Company has eliminated recurring losses at
those locations,
5
<PAGE>
and the sale of assets related to such stores, including real estate, provided
the Company with cash to reduce long-term debt and for operations.
Results of Operations
---------------------
Three Months Ended July 31, 1999 and 1998
- -----------------------------------------
Net sales for the second quarter of fiscal 1999 were down 9% to $28.5 million,
compared to $31.3 million for the second quarter of fiscal 1998. Comparable
store sales in the second quarter of fiscal 1999 were up 8% over the same period
of fiscal 1998. Net income for the second quarter of fiscal 1999 was $449,000 or
$0.06 income per share, compared with net income for the second quarter of
fiscal 1998 of $119,000 or $0.02 income per share. EBITDA (earnings before
interest, taxes, depreciation and amortization) was $1,130,000 versus $1,309,000
in the second quarter last year. For the quarter, the Company's revenues
consisted of 83% to professional contractors and 17% to retail customers versus
64% and 36%, respectively, in the second quarter last year.
Gross profit as a percentage of net sales for the second quarter of fiscal 1999
remained constant at 21.7% compared to the same period last year.
Selling, general and administrative expenses decreased to 18.9% of net sales for
the second quarter of fiscal 1999 compared to 19.2% of net sales for the same
period last year. This decrease in expenses is primarily a result of the store
closings discussed above.
Net interest expense as a percentage of net sales was 1.2% for the quarter ended
July 31, 1999, compared to 2.2% for the same period last year. Interest expense
is lower as a result of the decreases in long-term debt discussed above.
Six Months Ended July 31, 1999 and 1998
- ---------------------------------------
Net sales for the six months ended July 31, 1999 were down 11% to $53.8 million,
compared to $60.5 million for the same period of fiscal 1998. Comparable store
sales for the six months ended July 31, 1999 were up 7% over the same period of
fiscal 1998. Net income for the six months ended July 31, 1999 was $661,000 or
$0.09 income per share, compared with net loss for the same period in 1998 of
$1,524,000 or $0.21 loss per share. EBITDA (earnings before interest, taxes,
depreciation and amortization) was $2,015,000 versus $986,000 in the same period
last year. For the six months ended July 31, 1999, the Company's revenues
consisted of 82% to professional contractors and 18% to retail customers versus
63% and 37%, respectively, in the same period last year.
Gross profit as a percentage of net sales for the first six months of fiscal
1999 increased to 22.1% from 21.4% for the same period last year. Gross profits
for the first six months of fiscal 1998 were adversely affected by the closing
of certain retail stores, as discussed above, and the related effects of
closing-out certain lines of merchandise throughout the Company. Gross profits
have stabilized in 1999 as the Company has returned primarily to contractor
sales.
Selling, general and administrative expenses decreased to 19.6% of net sales for
the first six months of fiscal 1999, compared to 21.6% of net sales for the same
period last year. This decrease primarily results from the closing of stores
and a continual effort to reduce operating expenses.
6
<PAGE>
Net interest expense as a percentage of net sales was 1.2% for the six months
ended July 31, 1999, compared to 2.4% for the same period last year. Interest
expense is lower as a result of the decreases in long-term debt discussed above.
Liquidity and Capital Resources
-------------------------------
The Company's working capital at July 31, 1999 increased to $13.6 million from
$10.9 million at January 31, 1999, primarily due to increases in accounts
receivable, resulting from increased sales in the second quarter of 1999
compared to the fourth quarter of 1998.
The Company's primary capital needs are to finance operations. During the six
months ended July 31, 1999, operating activities used net cash of $0.9 million.
Primary sources of cash from operating activities included approximately $2.6
million from increases in accounts payable and $1.3 million from net income,
adjusted for depreciation and amortization. The primary uses of cash were $4.3
million for increases in accounts receivable.
Net cash used in investing activities for the first six months of fiscal 1999
was approximately $0.5 million, principally due to purchases of equipment and
increases in other assets. Net cash provided by financing activities during the
first six months of fiscal 1999 totaled approximately $1.4 million, primarily
from net borrowings of long-term debt.
On July 15, 1998, the Company entered into a loan and security agreement for a
new $20 million revolving credit agreement, which expires in July 2002. The
agreement provides for interest to be charged at .50% per annum in excess of the
Prime Rate. The agreement limits availability to a borrowing base of 85% of
eligible accounts receivable and 65% of inventory, with each capped at $10
million. The credit facility does not contain any financial covenants. The
Company had additional available borrowing capacity of approximately $3.2
million under the revolving credit agreement as of July 31, 1999.
As of July 31, 1999, the Company is generally current with all accounts payable
vendors and is utilizing discounts on payments made to vendors which supply
inventory to the Company.
Year 2000 Compliance
--------------------
The 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 prepare the Company 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 installed new Y2K compliant
software during the first quarter of 1999. The software is still being tested
and updated as necessary. All other systems, especially older personal
computers, are either being upgraded or replaced with new systems.
7
<PAGE>
The costs of new hardware and software are being capitalized according to the
Company's capitalization policies. All other 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 assess
their Y2K compliance and will continue to monitor such compliance until year-
end. There can be no assurance that financial institutions, suppliers, customers
or other third parties, upon which the Company is dependent, will be 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 quarterly 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 actual
events or results, levels of activity, growth, performance, earnings per share
or achievements to be materially different from any future results, levels of
activity, growth, performance, earning 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.
Impact of Inflation and Changing Prices
---------------------------------------
Although the Company cannot accurately determine the precise effect of inflation
on its operations, it does not believe inflation has had a material effect on
sales or results of operations.
8
<PAGE>
ITEM 3
- ------
Quantitative and Qualitative Disclosure about Market Risk
---------------------------------------------------------
The Company is exposed to changes in interest rates on a majority of its 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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is not a party to any material pending legal proceedings. The
Company is, at times, a party to routine litigation incidental to its business.
In the opinion of the Company's management, such proceedings should not,
individually or in the aggregate, have a material adverse effect on the
Company's results of operations or financial condition. The Company maintains
insurance in such amounts and with such coverage and deductibles as management
believes are reasonable.
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company held its Annual Meeting of Stockholders on June 3, 1999. For
purposes of voting for the election of Directors and upon such other business as
may have properly come before the meeting, there were 7,142,251 shares of
outstanding Common Stock entitled to vote at the meeting. Of those outstanding
shares, 6,662,401 were represented either in person or by proxy at the meeting.
The stockholders voted on the following items:
9
<PAGE>
Election of Directors:
- ----------------------
Name For Authority Withheld
---- --- ------------------
Richard D. Denison 6,639,527 22,874
Danny R. Funderburg 6,639,626 22,775
Brent A. Hanby 6,639,677 22,724
Roger A. Holman 6,640,027 22,374
Dwain A. Newman 6,640,627 21,774
David W. Truetzel 6,638,114 24,287
No other matters to be voted upon were brought before the meeting.
Item 5. Other Information.
Not Applicable.
Item 6. Exhibits and Reports on Form 8K.
(a) Exhibits
--------
Sequentially
Exhibits No. Description of Exhibit Numbered Page
------------ ---------------------- -------------
27.1 Financial Data Schedule 12-13
(b) Reports on Form 8-K.
Not applicable.
10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
National Home Centers, Inc.
Date: September 10, 1999 /s/ Dwain A. Newman
-------------------
Dwain A. Newman
Chief Executive Officer and
Chairman
Date: September 10, 1999 /s/ Brent A. Hanby
------------------
Brent A. Hanby
Executive Vice President and
Chief Financial Officer
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> JAN-31-2000 JAN-31-2000
<PERIOD-START> MAY-01-1999 FEB-01-1999
<PERIOD-END> JUL-31-1999 JUL-31-1999
<CASH> 44,785 44,785
<SECURITIES> 0 0
<RECEIVABLES> 11,712,134 11,712,134
<ALLOWANCES> 0 0
<INVENTORY> 13,652,755 13,652,755
<CURRENT-ASSETS> 26,059,911 26,059,911
<PP&E> 17,637,979 17,637,979
<DEPRECIATION> 10,146,625 10,146,625
<TOTAL-ASSETS> 36,458,539 36,458,539
<CURRENT-LIABILITIES> 12,462,262 12,462,262
<BONDS> 0 0
0 0
0 0
<COMMON> 74,660 74,660
<OTHER-SE> 9,776,933 9,776,933
<TOTAL-LIABILITY-AND-EQUITY> 36,458,539 36,458,539
<SALES> 28,479,666 53,819,708
<TOTAL-REVENUES> 28,479,666 53,819,708
<CGS> 22,287,760 41,926,830
<TOTAL-COSTS> 22,287,760 41,926,830
<OTHER-EXPENSES> 5,397,176 10,561,915
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 345,256 669,785
<INCOME-PRETAX> 449,474 661,178
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 449,474 661,178
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 449,474 661,178
<EPS-BASIC> 0.06 0.09
<EPS-DILUTED> 0 0
</TABLE>
