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 April 27, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ______________ to ______________
Commission File No. 0-24826
ERNST HOME CENTER, INC.
(Exact name of registrant as specified in its charter)
Delaware 91-0213470
(State of other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
1511 Sixth Avenue, Seattle, 98101
Washington
(Address of principal (Zip
executive offices) Code)
Registrant's telephone number, including area code: (206)621-6700
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_____
Number of shares of $0.01 par value Common Stock outstanding as
of May 24, 1996 was 12,259,000.
<PAGE>
TABLE OF CONTENTS
Page
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements. 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II. OTHER INFORMATION
Item 1. Legal Proceedings. 12
Item 6. Exhibits and Reports on Form 8-K. 12
Page 2
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
ERNST HOME CENTER, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
ASSETS (Unaudited)
April 27, October 28,
1996 1995
--------- -----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 10,093 $ 5,389
Receivables, net of allowance of $466 and $435 11,541 10,736
Inventories 134,842 138,041
Prepaid expenses and other 5,173 9,446
-------- --------
Total Current Assets 161,649 163,612
Property and Equipment, net 123,547 140,861
Other Assets 4,036 3,781
Notes Receivable 102 482
-------- --------
Total Assets $ 289,334 $ 308,736
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable 72,944 81,535
Accrued payroll and related costs 11,244 12,026
Other accrued liabilities 7,560 8,315
Closed store liabilities 16,127 2,165
Sales taxes payable 3,330 3,679
Notes payable 77,549 35,250
Current maturities of long-term liabilities 2,991 2,689
-------- --------
Total Current Liabilities 191,745 145,659
-------- --------
Long-Term Liabilities:
Long-term debt 7,200 7,540
Obligations under capital leases 75,675 73,364
Other liabilities 7,496 6,555
-------- --------
Total Long-Term Liabilities 90,371 87,459
-------- --------
Commitments And Contingencies
Stockholders' Equity:
Preferred Stock, par value $0.01, 100,000 shares
authorized, no shares issued and outstanding - -
Common Stock, par value $0.01, 16,000,000 shares
authorized, 12,259,000 shares issued and outstanding 123 123
Additional paid-in capital - Common Stock 105,943 105,943
Paid-in capital - Stock Warrants Outstanding 1,929 1,929
Accumulated deficit (100,777) (32,377)
-------- --------
Total Stockholders' Equity 7,218 75,618
-------- --------
Total Liabilities and Stockholders' Equity $ 289,334 $ 308,736
======== ========
See accompanying notes to these Consolidated Financial Statements
</TABLE>
Page 3
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ERNST HOME CENTER, INC.
CONSOLIDATED STATEMENTS
OF OPERATIONS
(dollars in thousands,
except per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS ENDED
ENDED
April 27, April 29, April 27, April 29,
1996 1995 1996 1995
(13 weeks) (13 weeks) (26 weeks) (26 weeks)
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales $ 105,133 $ 126,529 $ 228,707 $ 248,868
Cost of merchandise sold 75,575 86,686 162,976 170,722
---------- ---------- ---------- ----------
Gross profit 29,558 39,843 65,731 78,146
Selling, general and
administrative expenses 43,384 39,640 89,596 75,866
Reserve for store closures - - 34,000 -
Store closing expenses - 176 153 1,121
Store pre-opening expenses 952 1,094 2,601 1,906
---------- ---------- ---------- ----------
Operating loss (14,778) (1,067) (60,619) (747)
Interest expense, net 4,382 2,402 7,781 4,244
---------- ---------- ---------- ----------
Loss before income taxes (19,160) (3,469) (68,400) (4,991)
Income tax benefit - (1,234) - (1,797)
---------- ---------- ---------- ----------
Net loss $ (19,160) $ (2,235) $ (68,400) $ (3,194)
========== ========== ========== ==========
Net loss per common share $ (1.56) $ (0.18) $ (5.58) $ (0.26)
Weighted average number of
common shares outstanding 12,259,000 12,259,000 12,259,000 12,259,000
See accompanying notes to
these Consolidated
Financial Statements
</TABLE>
Page 4
<PAGE>
ERNST HOME CENTER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
April 27, April 29,
1996 1995
(26 weeks) (26 weeks)
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (68,400) $ (3,194)
Adjustments to reconcile net loss
to cash flows from operating activities:
Loss on sale of assets 345 202
Depreciation and amortization 9,948 6,550
Reserve for store closures 34,000 -
Change in assets and liabilities:
Receivables (805) (5,453)
Inventories 196 (30,320)
Prepaid expenses and other 2,401 (1,287)
Accounts payable (8,591) 9,364
Other accrued liabilities (4,230) (2,001)
--------- ---------
Net cash used by operating activities (35,136) (26,139)
--------- ---------
Cash flows from investing activities:
Proceeds from sale of assets 153 13
Capital expenditures (1,111) (20,553)
--------- ---------
Net cash used by investing activities (958) (20,540)
--------- ---------
Cash flows from financing activities:
Net borrowings under line-of-credit agreements 43,049 7,300
Payments on long-term debt and capital
lease obligations (2,372) (8,485)
Other 121 121
--------- ---------
Net cash provided (used) by financing activities 40,798 (1,064)
--------- ---------
Net increase (decrease) in cash and cash equivalents 4,704 (47,743)
Cash and cash equivalents at beginning of period $ 5,389 $ 58,265
--------- ---------
Cash and cash equivalents at end of period $ 10,093 $ 10,522
========== ==========
Supplemental cash flow information:
Cash paid during the period for interest $ 8,415 $ 4,432
Cash paid during the period for income taxes $ - $ -
Supplemental investing and financing information:
Capital lease obligations incurred during the period $ 3,961 $ 12,601
See accompanying notes to these Consolidated Financial Statements
</TABLE>
Page 5
<PAGE>
ERNST HOME CENTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In accordance with Securities and Exchange Commission rules and
regulations, certain information and disclosures normally
included in the financial statements prepared in accordance
with generally accepted accounting principles have been
condensed or omitted in the unaudited Consolidated Financial
Statements of Ernst Home Center, Inc. (the "Company"). The
Company believes that the disclosures made are adequate and the
information presented reflects all adjustments which in the
opinion of management are necessary for a fair statement of the
results of operations and financial position for the periods
presented. All adjustments are of a normal recurring nature
except the charges incurred for the store closures discussed in
Note 2. Due to the seasonal nature of the Company's business,
the results for the periods presented are not necessarily
indicative of the results for the full fiscal year. The
accompanying unaudited Consolidated Financial Statements should
be read in conjunction with other information presented
elsewhere in this Form 10-Q and the Consolidated Financial
Statements and Notes thereto and Management's Discussion and
Analysis included in the Company's annual report on Form 10-K.
1.In November 1995, the Company entered into a new loan agreement
(the "Bank Agreement") with a group of banks that provided for
a revolving loan of $38.0 million, less the amount of
outstanding letters of credit, and refinanced the existing term
loan. This revolving loan has since been replaced with a first
priority secured $80.0 million revolving loan commitment
provided by a new financial institution (the "Revolving Loan
Agreement"). Borrowings under the Bank Agreement were secured
by a security interest in the Company's merchandise
inventories. Borrowings under the revolving loan incurred
interest at the prime lending rate plus one eighth of one
percent per annum or other alternative interest rate options
and were limited to a borrowing base of inventory as defined by
the Bank Agreement. Borrowings under the revolving loan would
have been due March 31, 1997 and the letters of credit
commitment would have expired on June 29, 1997. The term loan,
having a balance of $20.0 million at November 8, 1995, was
refinanced and provided for quarterly scheduled principal
reductions beginning January 31, 1996 and ending July 31, 1999.
Interest on the term loan was at the prime lending rate plus
one quarter of one percent per annum or other alternative
interest rate options. Terms of the Bank Agreement required
compliance with certain restrictive covenants, including
minimum tangible net worth and fixed charge coverage, and
prohibited the payment of dividends and capital distributions.
In January 1996, the Company replaced its existing revolving
loan commitment under the Bank Agreement with the Revolving
Loan Agreement. Borrowings under the Revolving Loan Agreement
are secured by a first priority security interest in the
Company's merchandise inventories and other property.
Borrowings under the Revolving Loan Agreement incur interest at
the prime lending rate plus one percent per annum or at an
alternative interest rate option and are limited to a borrowing
base of eligible inventory as defined by the Revolving Loan
Agreement. The lender at its discretion may, from time to time,
reduce the lending formula with respect to eligible inventory
or may declare an event of default if there is a material
adverse change in the business of the Company. Borrowings under
the Revolving Loan Agreement are due January 2000. Terms of the
Revolving Loan Agreement require the Company to maintain a
minimum tangible net worth. In connection with the Revolving
Loan Agreement, the Company amended the Bank Agreement with
respect to the secured term loan, having a balance of $20.0
million on January 1, 1996, to provide for a second priority
security interest in the Company's merchandise inventories and
other property and for quarterly scheduled principal reductions
beginning July 31, 1996 and ending July 31, 1998 (the "Amended
Bank Agreement"). Interest on the term loan is at the prime
lending rate plus one and one quarter percent per annum. Terms
of the Amended Bank Agreement require compliance with the terms
of the Revolving Loan Agreement and, as a result, the term loan
is classified as a current liability and is presented in the
balance sheet as notes payable.
Page 6
<PAGE>
2.In January 1996, the Company closed nine superstores and
announced that it will close a base store when the lease
expires in the fourth quarter of fiscal 1996 and will not open
two stores that were scheduled to open in the spring of 1996.
The Company recorded a pretax charge of $34.0 million or $2.77
per common share in the quarter ended January 27, 1996 to
establish a reserve in connection with these store closures and
other related actions. The reserve for the store closures is
expected to be utilized over the next two years. The major
components of the charge are as follows (dollars in thousands):
Charge for
Store Closures
-----------
Future occupancy costs $ 13,816
Exit costs 3,446
-----------
17,262
Fixed asset disposal 12,589
Inventory 3,003
Other current asset disposals 1,146
-----------
$ 34,000
===========
The reserve for store closures is included in the items in the
balance sheet as follows (dollars in thousands):
Beginning Ending
Balance Balance
January 27, Period April 27,
1996 Activity 1996
----------- ----------- -----------
Inventories $ (3,003) $ 1,542 $ (1,461)
Prepaid expenses and other (1,146) 1,189 43
Property and Equipment, net (12,589) 502 (12,087)
Closed store liabilities (17,262) 2,958 (14,304)
----------- ----------- -----------
$ (34,000) $ 6,191 $ (27,809)
=========== =========== ===========
3.The Company is party to various legal actions incident to the
normal operation of its business. The Company intends to
vigorously defend these actions and management believes that it
is unlikely that the outcome of the pending legal actions will,
in the aggregate, have a material adverse effect on the
financial condition or the results of the operations of the
Company.
Page 7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion and analysis of financial condition and
results of operations should be read in conjunction with the
similar discussion, analysis and other information included in
the Company's annual report on Form 10-K for the fiscal year
ended October 28, 1995 and with other information presented in
this Form 10-Q. The Company's fiscal year ends on the Saturday
nearest October 31. Fiscal 1996 represents the 53 weeks which
ends November 2, 1996 and fiscal 1995 represents the 52 weeks
ended October 28, 1995.
Overview
Ernst is a major home improvement, hardware and garden retailer
in the Northwestern United States that targets the "do-it-
yourself" customer with a comprehensive offering of leading
national brand and private label products at competitive prices.
The Company opened its first store in downtown Seattle in 1893
and today operates 86 stores located in Washington, Utah, Idaho,
Montana, Oregon, Nevada, Colorado, California and Wyoming.
Ernst's strategy is to position itself as a "user-friendly,"
price competitive, alternative to warehouse style home
improvement retailers. Between 1988 and 1989, the Company
remodeled substantially all of its then existing stores. The
stores were then redesigned to offer customers a bright,
colorful, clean shopping environment and the merchandise offering
was expanded to include over 35,000 stock keeping units ("SKUs").
Following the store remodel, in 1991 the Company introduced the
"superstore" prototype. The Company today has 40 superstores,
including one superstore that opened in the first quarter of
fiscal 1996, and 46 older existing "base" stores.
In January 1996, the Company closed nine superstores and
announced that it will close a base store when the lease expires
in the fourth quarter of fiscal 1996 and will not open two stores
that were scheduled to open in the spring of 1996. A pretax
charge of $34.0 million was recorded in the first quarter of
fiscal 1996 in connection with these store closures and related
actions. The Company has curtailed its previously announced
expansion plans and does not plan to enter into any additional
store lease agreements during fiscal 1996. The change in
expansion plans is caused primarily by lower than anticipated
sales volume and significant losses that were incurred in fiscal
1995. These losses have continued in the first and second
quarters of fiscal 1996. See "Results of Operations" below.
The Company's sales and results of operations experience some
measure of seasonality, which the Company believes is typical in
the home improvement industry. Historically, a greater portion of
the Company's annual sales and operating income are generated in
the second half of its fiscal year (May through October). This
seasonality is primarily attributable to the outdoor projects
season which occurs in the spring and summer months. The
Company's quarterly results may fluctuate for a number of
reasons, including the seasonality of the Company's business and
the weather in the Company's markets. The results of operations
for the six month period ended April 27, 1996 are not necessarily
indicative of the results to be expected for the full fiscal
year.
Results of Operations
Three month period ended April 27, 1996 (13 weeks) compared to
three month period ended April 29, 1995 (13 weeks)
Revenues. Sales decreased $21.4 million or 16.9% to $105.1
million in the three month period ended April 27, 1996 from
$126.5 million in the prior year period. The decrease in sales
was primarily attributable to the disruption in the replenishment
of merchandise which is attributable to restrictions in vendor
trade credit, increased competition and unseasonable weather in
many of the Company's markets. Comparable stores (stores in
operation more than one year including base stores that have been
replaced by superstores) sales decreased 20.4% for the period as
compared to the prior year period. The decline in comparable
store sales is also attributable to the factors discussed above.
The Company believes that its greatest competition comes from the
warehouse style home improvement retailers which operate in the
Company's markets. National and regional warehouse style
competitors have significantly expanded in the Company's markets
in recent years. As of April 27, 1996, 60 warehouse style home
improvement stores operated in the Company's markets. The Company
estimates that 54 of its 86 stores face competition from these
warehouse style home improvement stores. The Company believes
that this increase in competition has reduced its market share
and has negatively impacted its recent financial performance. The
Page 8
<PAGE>
Company also believes that it has experienced an increase in
competition for the limited amount of disposable income that the
consumer has to spend on retail purchases from other non-home
improvement retailers such as general discounters, personal
computer retailers and electronic retailers that have recently
expanded into its markets. In addition, both all store and
comparable store sales were affected by a general slowing in
demand for home improvement products.
Gross Profit. The Company's gross profit decreased $10.3 million
or 25.8% to $29.5 million for the three month period ended April
27, 1996 from $39.8 million for the three month period ended
April 29, 1995. Gross profit as a percentage of sales decreased
to 28.1% for the three month period ended April 27, 1996 from
31.5% in the comparable prior year period. The 3.4 percentage
point decrease in gross margin is primarily a result of a
decrease in initial margins due to a change in the mix of sales
as a result of the disruption in the replenishment of
merchandise, a decrease in vendor discounts, allowances and fees
over the prior year and an increase in the cost of distributing
the Company's merchandise.
Costs and Expenses. Selling, general and administrative expenses
("SG&A") increased $3.7 million or 9.4% to $43.4 million. The
increase in the dollar amount of SG&A is attributable to the
variable store labor, store operating and store occupancy costs
associated with operating the equivalent of three additional
stores during the period relative to the comparable prior year
period and expenses associated with the implementation of the
Company's "Ernst 96" customer service improvement program. This
new program was designed to stress the Company's commitment to
customer service through a television and print advertising
campaign. This campaign is supported with additional sales staff
in each of its stores as well as telephone customer service lines
to respond to customer inquiries. The "Ernst 96" customer service
improvement program increased store labor expenses and
promotional costs as a result of expanding the level of customer
service. SG&A as a percentage of sales increased to 41.3% for the
three month period ended April 27, 1996 compared to 31.3% in the
prior year. This increase in SG&A as a percentage of sales is
primarily attributable to the factors discussed above which were
then spread over a lower store sales base.
Store pre-opening expenses incurred in connection with the
opening and promotion of new stores, including labor to stock
initial inventory, employee training and grand opening
advertising, are amortized over the twelve month period following
the store opening. Store pre-opening expenses decreased $0.1
million to $1.0 million in the current year three month period
compared to $1.1 million in the prior year.
Store closing costs associated with store closings that occur in
the normal operation of the Company's business are expensed in
the period during which the store closing occurs. Store closing
expenses generally include the disposal of certain assets, labor
costs associated with the transfer of inventory and occupancy
costs incurred until the store is subleased or the lease expires.
Operating Income. As a result of the many factors discussed
above, operating loss increased from $1.1 million for the three
month period ended April 29, 1995 to an operating loss of $14.8
million for the three month period ended April 27, 1996.
Interest Expense. Net interest expense increased $2.0 million
from the prior year period to $4.4 million for the three month
period ended April 27, 1996. This increase is primarily
attributable to an increase in obligations under capital leases
resulting from the addition of new superstores and an increase in
borrowings under the Company's credit facilities.
Income Taxes. Due to the uncertainty in the realization of the
future income tax benefits generated by the Company's pretax loss
for the three month period ended April 27, 1996, a valuation
allowance was established against the tax asset that was recorded
as a result of the loss. The establishment of a valuation
allowance for the three month period ended April 27, 1996 is
consistent with the decision to establish a valuation allowance
for certain deferred tax assets of the Company in the fourth
quarter ended October 28, 1995. The Company recorded an income
tax benefit of $1.2 million for the three month period ended
April 29, 1995 for which a valuation allowance was subsequently
established in the fourth quarter ended October 28, 1995.
Net Loss. Net loss increased to $19.2 million for the three month
period ended April 27, 1996 from a net loss of $2.2 million for
the prior year period. The $17.0 million increase is a result of
many of the factors discussed above.
Page 9
<PAGE>
Six month period ended April 27, 1996 (26 weeks) compared to six
month period ended April 25, 1995 (26 weeks)
Revenues. Sales decreased $20.2 million or 8.1% to $228.7 million
in the six month period ended April 27, 1996 from $248.9 million
in the prior year period. The decrease in sales was primarily
attributable to the disruption in the replenishment of
merchandise which is attributable to restrictions in vendor trade
credit, increased competition and, during the three month period
ended April 27, 1996, unseasonable weather in many of the
Company's markets. Comparable stores (stores in operation more
than one year including base stores that have been replaced by
superstores) sales decreased 17.9% for the period as compared to
the prior year period. The decline in comparable store sales is
also attributable to the factors discussed above. The Company
believes that its greatest competition comes from the warehouse
style home improvement retailers which operate in the Company's
markets. National and regional warehouse style competitors have
significantly expanded in the Company's markets in recent years.
As of April 27, 1996, 60 warehouse style home improvement stores
operated in the Company's markets. The Company estimates that 54
of its
86 stores face competition from warehouse style home improvement
stores. The Company believes that this increase in competition
has reduced its market share and has negatively impacted its
recent financial performance. The Company also believes that it
has experienced an increase in competition for the limited amount
of disposable income that the consumer has to spend on retail
purchases from other non-home improvement retailers such as
general discounters, personal computer retailers and electronic
retailers that have recently expanded into its markets. In
addition, all store and comparable store sales were affected by a
general slowing in demand for home improvement products.
Gross Profit. The Company's gross profit decreased $12.4 million
or 15.9% to $65.7 million for the six month period ended April
27, 1996 from $78.1 million for the six month period ended April
29, 1995. Gross profit as a percentage of sales decreased to
28.7% of sales for the six month period ended April 27, 1996 from
31.4% of sales in the comparable prior year period. The decrease
in gross margin is primarily a result of a decrease in initial
margins due to price competition and a change in the mix of sales
as a result of the disruption in the replenishment of
merchandise, a decrease in vendor discounts, allowances and fees
over the prior year and an increase in the cost of distributing
the Company's merchandise.
Costs and Expenses. Selling, general and administrative expenses
("SG&A") increased $13.7 million or 18.1.% to $89.6 million. The
increase in the dollar amount of SG&A is primarily attributable
to the variable store labor, store operating and store occupancy
costs associated with operating the equivalent of ten additional
stores during the period relative to the comparable prior year
period and partially impacted by expenses associated with the
implementation of the "Ernst 96" customer service improvement
programs in the latter part of the six month period. This new
program was designed to stress the Company's commitment to
customer service through a television and print advertising
campaign. This campaign is supported with additional sales staff
in each of its stores as well as telephone customer service lines
to respond to customer inquiries. The "Ernst 96" customer service
improvement program increased store labor expenses and
promotional cost over the prior year period as a result of
expanding the level of customer service. SG&A as a percentage of
sales increased to 39.2% of sales for the six month period ended
April 27, 1996 compared to 30.5% of sales in the prior year
period. This increase in SG&A as a percentage of sales is
primarily attributable to the factors discussed above and other
costs which were then spread over a lower sales base.
During the six month period ended April 27, 1996 the Company
closed nine under-performing stores and announced that it will
close an additional store when the lease expires in the fourth
quarter of fiscal 1996 and will not open two stores that were
scheduled to open in the spring of 1996. The Company recorded a
one time charge of $34.0 million for estimated costs associated
with these store closures and related actions. Store closing
costs associated with store closures that occur in the normal
operation of the Company's business are expensed in the period
during which the store closing occurs. These costs decreased $1.0
million to $0.2 million for the six month period ended April 27,
1996 from the prior year period. Store closing expenses generally
include the disposal of certain assets, labor costs associated
with the transfer of inventory and occupancy costs incurred until
the store is subleased or the lease expires.
Store pre-opening expenses incurred in connection with the
opening and promotion of new stores, including labor to stock
initial inventory, employee training and grand opening
advertising, are amortized over the twelve month period following
Page 10
<PAGE>
the store opening. Store pre-opening expenses increased $0.7
million to $2.6 million in the current year six month period
compared to the prior year period.
Operating Income. As a result of certain factors discussed above,
operating loss increased from $.7 million for the six month
period ended April 29, 1995 to an operating loss of $60.6 million
for the six month period ended April 27, 1996.
Interest Expense. Net interest expense increased $3.5 million
from the comparable prior year period to $7.8 million. This
increase is primarily attributable to an increase in obligations
under capital leases resulting from the addition of new
superstores, an increase in borrowings under the Company's credit
facilities and a decrease in interest income on short-term
investments of surplus cash during the early part of fiscal 1995.
Income Taxes. Due to the uncertainty in the realization of the
future income tax benefits generated by the Company's pretax loss
for the six month period ended April 27, 1996, a valuation
allowance was established against the tax asset that was recorded
as a result of the loss. The establishment of a valuation
allowance for the six month period ended April 27, 1996 is
consistent with the decision to establish a valuation allowance
for certain deferred tax assets of the Company in the fourth
quarter ended October 28, 1995. The Company recorded an income
tax benefit of $1.8 million for the six month period ended April
29, 1995 for which a valuation allowance was subsequently
established in the fourth quarter ended October 28, 1995.
Net Loss. Net loss increased to $68.4 million for the six month
period ended April 27, 1996 from a net loss of $3.2 million for
the prior year period. The $65.2 million increase is a result of
many of the factors discussed above.
Liquidity and Capital Resources
Historically, the Company's principal sources of funds to finance
its working capital requirements and capital expenditures have
been cash flow from operations, bank term loans and a revolving
credit facility. The Company's working capital requirements are
generally at their highest at the end of the first and during the
second fiscal quarters due to higher payments to vendors for
inventory purchased for the Christmas holiday season and for
inventory purchased in anticipation of the spring selling season.
The Company's liquidity has been negatively impacted by its
recent losses and the lack of adequate levels of financing to
meet its working capital requirements in the latter part of
fiscal 1995, the first quarter of fiscal 1996 and, to a lesser
extent, the second quarter of fiscal 1996. As a result, certain
vendors of the Company reduced the amount of credit extended to
the Company for the purchasing of merchandise.
As discussed below, in January 1996, the Company increased the
amount of its credit facilities to $100 million. As a result of
the losses incurred in the second fiscal quarter, the Company
estimates that should the recent sales trends, as impacted by
unseasonable weather patterns, continue through the remaining
spring and summer selling season, the new credit facilities may
not be adequate to meet its working capital requirements without
additional sources of financing. To address these issues, the
Company has retained a financial advisory firm to assist it in
seeking possible additional financing or equity investment in the
Company, in a possible sale of assets or in a possible financial
or operating restructuring. There can be no assurance that any of
these efforts will be successful. If these efforts are not
successful, the Company will consider all other alternatives
available.
In November 1995, the Company entered into a new loan agreement
(the "Bank Agreement") with a group of banks that provided for a
revolving loan of $38.0 million, less the amount of outstanding
letters of credit, and refinanced the existing term loan. In
January 1996, the Company replaced its existing revolving loan
commitment under the Bank Agreement with a secured $80.0 million
revolving loan commitment provided by a new financial institution
(the "Revolving Loan Agreement"). Borrowings under the Revolving
Loan Agreement are secured by a first priority security interest
in the Company's merchandise inventories and other property.
Borrowings under the Revolving Loan Agreement incur interest at
the prime lending rate plus one percent per annum or another
alternative interest rate option and are limited to a borrowing
base of eligible inventory as defined by the Revolving Loan
Agreement. The lender at its discretion may, from time to time,
reduce the lending formula with respect to eligible inventory or
may declare an event of default if there is a material adverse
change in the business of the Company. Borrowings under the
Revolving Loan Agreement are due January 2000. Terms of the
Revolving Loan Agreement require the Company to maintain a
minimum tangible net worth. Borrowings under the revolving loan
commitment were $57.5 million with $4.4 million in open letters
of credit outstanding at April 27, 1996. In connection with the
Revolving Loan Agreement, the Company amended the Bank Agreement
Page 11
<PAGE>
with respect to the secured term loan, having a balance of $20.0
million on April 27, 1996, to provide for a second priority
security interest in the Company's merchandise inventories and
other property and for quarterly scheduled principal reductions
beginning July 31, 1996 and ending July 31, 1998 (the "Amended
Bank Agreement"). Interest on the term loan is at the prime
lending rate plus one and one quarter percent per annum. Terms of
the Amended Bank Agreement require compliance with the terms of
the Revolving Loan Agreement.
During the six month period ended April 27, 1996, the Company
used $35.1 million in net cash in its operating activities,
primarily as a result of the net loss from operations. The
Company used approximately $1.1 million of cash to fund additions
in capital assets primarily for the one new store opened in
November 1995. The Company generated approximately $40.8 million
in net cash from its financing activities, primarily from an
increase in borrowings under the Company's credit facilities. In
fiscal year 1996, the Company plans to limit its total capital
expenditures to less than $10.0 million. As previously discussed,
during the first quarter of fiscal 1996, the Company closed nine
superstores. The Company believes that the closure of these
stores will improve its net liquidity position in the future.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is party to various legal actions incident to the
normal operation of its business. The Company intends to defend
these actions vigorously and believes that it is unlikely that
the outcome of any of the pending legal actions will, in the
aggregate, have a material adverse effect on the results of
operations or financial condition of the Company.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit
EXHIBIT INDEX
Exhibit Sequential
Number Description of Exhibit Page No.
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the 13 weeks ended
April 27, 1996.
Page 12
<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.
ERNST HOME CENTER, INC.
Signature Title Date
- - ---------------------- --------------------------------------- ------------
/s/ Hal Smith President, Chief Executive Officer and 06/07/96
- - ---------------------- Director - Duly Authorized Officer
Hal Smith
/s/ Michael J. Baumann Executive Vice President-Administration, 06/07/96
- - ---------------------- Chief Financial Officer, Secretary and
Michael J. Baumann Treasurer - Principal Financial Officer
/s/ Richard T. Gruber Vice President, Controller and Chief 06/07/96
- - ---------------------- Accounting Officer
Richard T. Gruber
Page 13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet as a April 27, 1996 and the Consolidated Statement
of Operations for the six months ended April 27, 1996 filed as part of Form 10-Q
and is qualified in its entirety by reference to such report on Form 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-02-1996
<PERIOD-START> OCT-29-1995
<PERIOD-END> APR-27-1996
<CASH> 10,093
<SECURITIES> 0
<RECEIVABLES> 12,007
<ALLOWANCES> 466
<INVENTORY> 134,842
<CURRENT-ASSETS> 161,649
<PP&E> 123,547
<DEPRECIATION> 0
<TOTAL-ASSETS> 289,334
<CURRENT-LIABILITIES> 191,745
<BONDS> 0
0
0
<COMMON> 123
<OTHER-SE> 7,095
<TOTAL-LIABILITY-AND-EQUITY> 289,334
<SALES> 228,707
<TOTAL-REVENUES> 228,707
<CGS> 162,976
<TOTAL-COSTS> 162,976
<OTHER-EXPENSES> 126,350
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,781
<INCOME-PRETAX> (68,400)
<INCOME-TAX> 0
<INCOME-CONTINUING> (68,400)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (68,400)
<EPS-PRIMARY> (5.58)
<EPS-DILUTED> (5.58)
</TABLE>
