<PAGE>

                                                                    Exhibit 13.1

LETTER TO SHAREHOLDERS

With four consecutive profitable quarters in fiscal 1999, National Home Centers
is delivering on our promise to move back to our roots and refocus on our main
customer, the contractor. We applaud our driver, warehouse, operations, sales
and management teams for responding to customer needs. For fiscal 1999, 83% of
revenues were derived from contractors versus 69% last year.

For the fiscal year ending January 31, 2000, the Company enjoyed net income of
$1.12 million versus a loss of $2.96 million last year. Net sales increased to
$110.0 million compared to $104.7 million last year. Comparable store sales
increased 16%. We ended the year operating the same eight facilities as we did a
year ago. EBITDA (earnings before interest, taxes, depreciation and
amortization) improved to $3,783,000 in fiscal 1999 from $962,000 last year, an
improvement of over $2.8 million.

Beginning almost three years ago, we began an extensive examination of our
business and operations and knew we needed to change the direction of where we
were going. We completed the following with regard to our main strategies:

* Closed under-performing retail facilities and sold off certain assets
* Recapitalized the Company

We reduced exposure to slower turning inventory and improved our turns to 6.3
last year from 5.7 in fiscal 1998. Our working capital went from $11 million at
1/31/99 to almost $15 million at 1/31/2000.

Our labor market is very tight, with an extreme shortage of workers, which leads
towards higher payroll costs in order to attract and retain quality employee
talent. We are also watching long-term mortgage rates and while they have been
increasing, we believe there will be continued pressure on the government for
fewer increases. If rates hold steady, we have an opportunity to again be
profitable in 2000. 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.

Please visit our website at www.nhci.com which has been significantly expanded.
                            ------------
Some examples of the site can be seen on the inside back cover of this annual
report.

We will continue to stay the course on servicing the builders to help complete
their projects. This focus has allowed us to carry on the tradition of being a
reliable supplier of building materials at a competitive level. Thank you for
the continued interest in your Company.

Sincerely,

/s/ Dwain A. Newman

Dwain A. Newman
Chairman, CEO


/s/ Danny R. Funderburg

Danny R. Funderburg
President, COO


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                         1999 National Home Centers, Inc. Annual Report . Page 1
<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:               2000           1999         1998          1997          1996
----------------------------------------------------------------------------------------------------------
<S>                                      <C>             <C>           <C>           <C>           <C>
 Net sales                               $ 110,041       104,746       150,756       177,001       154,659
 Cost of sales                              85,320        81,121       117,072       134,104       115,369
                                         -----------------------------------------------------------------
 Gross profit                               24,721        23,625        33,684        42,897        39,290
 Selling, general and administrative
  expenses                                  22,168        24,422        43,375        44,023        39,039
                                         -----------------------------------------------------------------
 Operating income (loss)                     2,553          (797)       (9,691)       (1,126)          251
 Interest expense, net                      (1,438)       (2,162)       (3,660)       (3,583)       (2,787)
                                         -----------------------------------------------------------------
 Earnings (loss) before income taxes         1,115        (2,959)      (13,351)       (4,709)       (2,536)
 Income tax benefit                              0             0          (341)       (1,601)         (938)
                                         -----------------------------------------------------------------
 Net earnings (loss)                     $   1,115        (2,959)      (13,010)       (3,108)       (1,598)
                                         -----------------------------------------------------------------
 Earnings (loss) per share               $    0.16         (0.41)        (1.82)        (0.44)        (0.22)
                                         -----------------------------------------------------------------
 Weighted average number of common
  shares outstanding                         7,142         7,142         7,142         7,142         7,142
                                         -----------------------------------------------------------------


Selected Financial Data:
 Total assets                            $  35,896        32,193        61,790        84,838        86,761
 Long-term debt                             15,030        12,427        23,323        29,320        30,808
 Net property, plant and equipment           7,731         7,899        29,286        37,266        39,699
 Stockholders' equity                       10,306         9,190        12,150        25,160        28,268


Selected Operating Data:
Number of stores at end of period                8             8            10            13            13
 Average total sales per square foot -
  Retail and Contractor (1)              $     485           250           202           229           238
 Comparable store sales increase
  (decrease)                                  16.2%        (12.5)%       (12.3)%         4.9%         (3.6)%
</TABLE>

(1)  Net sales divided by average retail square feet for the period.

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1999 National Home Centers, Inc. Annual Report . Page 2
<PAGE>

               MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS

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, 2000, and the respective
total and comparable store percentage increases (decreases) were:

<TABLE>
<CAPTION>
                                                             Total Company                Comparable Store
Fiscal Year Ended January 31,          Net Sales             Increases (Decreases)        Increases (Decreases)
<S>                                     <C>                       <C>                         <C>
2000                                   $ 110,040,562             5%                          16%
1999                                     104,745,826           (31)%                        (13)%
1998                                     150,756,393           (15)%                        (12)%
</TABLE>

YEAR ENDED JANUARY 31, 2000 COMPARED TO YEAR ENDED JANUARY 31, 1999

NET SALES - The Company's net sales increased 5.1% to $110.0 million for the
year ended January 31, 2000 (fiscal 1999) from $104.7 million for the year ended
January 31, 1999 (fiscal 1998). Comparable store sales in fiscal 1999 increased
16.2% from fiscal 1998. The overall sales volume increase was primarily due to
attractive mortgage rates and strong housing demand. The Company had no
substantive increase in the variety of products offered or its sales territory.
The average annual sales per store for fiscal 1999 was $13.8 million compared to
$15.8 million for fiscal 1998. 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 1999
decreased to 22.5% from 22.6% in fiscal 1998, due to increased competition and
continuing competitive pricing pressures in central and northwest Arkansas.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses as a percentage of net sales decreased to 20.2% in
fiscal 1999 versus 23.3% in fiscal 1998. 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 (including salaries) and as a result of
reduced rent expense and depreciation expense.

INTEREST EXPENSE - Net interest expense as a percentage of net sales in fiscal
1999 decreased to 1.3% from 2.1% in fiscal 1998, primarily as a result of
retirement of indebtedness (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 - No income tax expense was recorded in fiscal 1999, as the tax
effects of previously unrecognized NOL carryforwards utilized in 1999 were
included in the net decrease in the valuation allowance for deferred tax assets
for the year. No income tax benefit was recorded in fiscal 1998, as the tax
effects of NOL's generated in 1998 were included in the net increase in the
valuation allowance for deferred tax assets for the year. See Note 4 of Notes to
Consolidated Financial Statements for additional information on income taxes.

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

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                         1999 National Home Centers, Inc. Annual Report . Page 3
<PAGE>

sales volume decrease was primarily due to the increased competition, and 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 - No income tax benefit was recorded in fiscal 1998, as the tax
effects of NOL's generated in 1998 were included in the net increase in the
valuation allowance for deferred tax assets for the year The effective tax rate
of (2.5)% for fiscal year 1997 results primarily from the benefits of NOL's
which were carried back to previous years. 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 continue to
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, 2000 increased to $14.7 million
from $10.9 million at January 31, 1999, primarily due to store closings and
increased cash which allowed the Company to increase current assets while
maintaining the same level of current liabilities. Since July 1998, the Company
has been paying current and discounting with its accounts payable vendors.

The Company's primary capital needs are to finance inventories and accounts
receivable. During the year ended January 31, 2000, operating activities used
net cash of $1.0 million. Primary uses of cash from operating activities
included approximately $1.3 million from increases in inventories, $2.8 million
from an increase in accounts receivable and $1.2 million from a decrease in
accrued expenses. The primary sources of cash was an approximate $1.5 million
increase in accounts payable and $2.2 million from net income including
depreciation.

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1999 National Home Centers, Inc. Annual Report . Page 4
<PAGE>

Net cash used in investing activities for the year ended January 31, 2000 was
approximately $1.3 million, principally due to additions of property, plant and
equipment of $0.9 million.

Net cash provided by financing activities during fiscal 1999 totaled
approximately $2.3 million, primarily from proceeds under the revolving credit
facility.

At January 31, 2000, the Company owed $14.3 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 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, 2000, the Company had approximately $1.3 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, 2000.

The Company's current ratio was 2.4 to 1 at January 31, 2000 versus 2.0 to 1 at
January 31, 1999. The Company's total debt to equity ratio remained the same at
2.5 to 1 at the end of fiscal 1999. Return on average investment for the three
years ended January 31, 2000, 1999 and 1998 was 11.5%, (28.5)% and (59.3)%,
respectively.

YEAR 2000 ISSUES

The Company has not yet experienced any adverse effects related to the ability
of the Company's programs and systems to recognize and process the year 2000 and
beyond. Information systems and programs processed data properly. The Company
upgraded various hardware and software which allowed the Company to be prepared.
The Company's main third party software provider installed new Y2K compliant
software at the end of the third quarter of fiscal 1999.

All costs and expenses associated with the Y2K project were expensed as
incurred. There is no guarantee of continued compliance of the hardware or
software nor can there be assurance that such other financial institutions,
suppliers, customers or other third parties will continue to 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.

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, 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 maintain 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.

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      1999 National Home Centers, Inc. Annual Report . Page 5
<PAGE>

                          NATIONAL HOME CENTERS, INC.
                                 AND SUBSIDIARY

                           Consolidated Balance Sheets
                            January 31, 2000 and 1999

<TABLE>
<CAPTION>
Assets                                                                                             2000                    1999
------                                                                                             ----                    ----
Current assets:
<S>                                                                                            <C>                           <C>
 Cash                                                                                          $     43,847                  57,984
 Accounts receivable, less allowance for doubtful accounts of
  $210,000 in 2000 and $730,000 in 1999                                                           9,994,939               7,447,984
 Inventories                                                                                     14,675,988              13,414,136
 Prepaid expenses and other                                                                         541,606                 525,518
                                                                                                 ----------              ----------
  Total current assets                                                                           25,256,380              21,445,622
                                                                                                 ----------              ----------

Property, plant and equipment:
 Land                                                                                             1,433,846               1,433,846
 Buildings and improvements                                                                       6,025,280               5,864,697
 Machinery and equipment                                                                         10,883,336              10,308,362
                                                                                                 ----------              ----------
                                                                                                 18,342,462              17,606,905
 Less accumulated depreciation                                                                   10,611,433               9,707,900
                                                                                                 ----------              ----------
  Net property, plant and equipment                                                               7,731,029               7,899,005
                                                                                                 ----------              ----------

Other assets, at cost less amortization of $471,200 in 2000 and
 $287,700 in 1999                                                                                 2,908,675               2,848,046
                                                                                                 ----------              ----------
  Total assets                                                                                 $ 35,896,084              32,192,673
                                                                                                 ----------              ----------

Liabilities and Stockholders' Equity
 Current liabilities:
 Current installments of long-term debt                                                        $    988,832               1,259,463
 Accounts payable                                                                                 6,491,277               5,013,027
 Accrued expenses                                                                                 3,079,971               4,302,926
                                                                                                 ----------              ----------
  Total current liabilities                                                                      10,560,080              10,575,416
                                                                                                 ----------              ----------

Long-term debt, excluding current installments                                                   15,030,208              12,426,842
                                                                                                 ----------              ----------

Commitments and contingencies

Stockholders' equity:
 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                                                                             (9,337,159)            (10,452,540)
                                                                                                 ----------              ----------
                                                                                                 11,569,240              10,453,859
 Treasury stock, 323,707 common shares at cost                                                   (1,263,444)             (1,263,444)
                                                                                                 ----------              ----------
  Total stockholders' equity                                                                     10,305,796               9,190,415
                                                                                                 ----------              ----------
  Total liabilities and stockholders' equity                                                   $ 35,896,084              32,192,673
                                                                                                 ----------              ----------
</TABLE>


       The accompanying notes are an integral part of these statements.

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1999 National Home Centers, Inc. Annual Report . Page 6
<PAGE>

                          NATIONAL HOME CENTERS, INC.
                                AND SUBSIDIARY

                     Consolidated Statements of Operations
                  and Retained Earnings (Accumulated Deficit)

                  Years ended January 31, 2000, 1999 and 1998

<TABLE>
<CAPTION>
                                                                             2000                  1999                    1998
                                                                             ----                  ----                    ----
<S>                                                                     <C>                      <C>                    <C>
Net sales                                                               $ 110,040,562            104,745,826            150,756,393
Cost of sales                                                              85,319,586             81,121,118            117,072,346
                                                                           ----------             ----------            -----------
 Gross profit                                                              24,720,976             23,624,708             33,684,047
                                                                           ----------             ----------            -----------


Operating expenses:
 Salaries and benefits                                                     14,619,424             15,506,681             22,498,438
 Rent                                                                       1,143,206              1,704,078              2,074,527
 Depreciation and amortization                                              1,235,639              1,759,353              3,233,046
 Nonrecurring charges                                                              --                     --              6,730,000
 Other                                                                      5,169,877              5,451,981              8,839,205
                                                                           ----------             ----------            -----------

                                                                           22,168,146             24,422,093             43,375,216
                                                                           ----------             ----------            -----------

  Operating income (loss)                                                   2,552,830               (797,385)            (9,691,169)



Interest expense                                                            1,437,449              2,162,058              3,659,573
                                                                           ----------             ----------            -----------
 Earnings (loss) before income taxes                                        1,115,381             (2,959,443)           (13,350,742)

Income taxes                                                                       --                     --               (340,620)
                                                                           ----------             ----------            -----------
 Net earnings (loss)                                                        1,115,381             (2,959,443)           (13,010,122)

Retained earnings (accumulated deficit):
 Beginning of year                                                        (10,452,540)            (7,493,097)             5,517,025
                                                                           ----------             ----------            -----------
 End of year                                                            $  (9,337,159)           (10,452,540)            (7,493,097)
                                                                           ----------             ----------            -----------

Earnings (loss) per share (basic and diluted)                           $        0.16                  (0.41)                 (1.82)
                                                                                 ----                   ----                   ----
</TABLE>

       The accompanying notes are an integral part of these statements.

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                         1999 National Home Centers, Inc. Annual Report . Page 7
<PAGE>

                          NATIONAL HOME CENTERS, INC.
                                AND SUBSIDIARY

                     Consolidated Statements of Cash Flows

                  Years ended January 31, 2000, 1999 and 1998

<TABLE>
<CAPTION>
                                                                                      2000              1999               1998
Cash flows from operating activities:
<S>                                                                               <C>                 <C>               <C>

 Net earnings (loss)                                                              $ 1,115,381         (2,959,443)       (13,010,122)

 Adjustments to reconcile net earnings (loss) to net cash
  provided by (used in) operating activities:
  Provision for losses on accounts receivable                                         223,037            389,828            404,762
  Depreciation                                                                      1,052,166          1,586,899          2,870,479
  Amortization of other assets                                                        183,473            172,454            362,567
  Loss (gain) on sale of property, plant and equipment                                 91,391           (311,547)           138,028
  Decrease (increase) in cash surrender value of life insurance                        95,105           (107,960)           (23,984)
  Nonrecurring charges                                                                   --                 --            6,100,000
  Deferred income tax expense                                                            --                 --              176,498
  Changes in assets and liabilities:
   Accounts receivable                                                             (2,769,992)         2,133,031            970,674
   Income tax refunds receivable                                                         --              517,118            816,774
   Inventories                                                                     (1,261,852)         5,759,332         10,711,063
   Prepaid expenses and other                                                         (16,088)            68,383             (1,286)
   Accounts payable                                                                 1,478,250         (8,187,038)          (400,104)
   Accrued expenses                                                                (1,222,955)           299,283             11,276
                                                                                  -----------        -----------         ----------
Net cash provided by (used in) operating activities                                (1,032,084)          (639,660)         9,126,625
                                                                                  -----------        -----------         ----------
Cash flows from investing activities:
 Additions to property, plant and equipment                                          (937,720)          (144,420)          (399,255)

 Proceeds from sale of property, plant and equipment                                   14,750         20,255,824            837,225
 Decrease (increase) in other assets                                                 (339,207)          (774,770)           204,502
                                                                                  -----------        -----------         ----------
  Net cash provided by (used in) investing activities                              (1,262,177)        19,336,634            642,472
                                                                                  -----------        -----------         ----------

Cash flows from financing activities:
 Proceeds from long-term debt                                                       5,423,743         14,267,636          4,836,176
 Repayments of long-term debt                                                      (3,143,619)       (33,018,169)       (14,627,816)

                                                                                  -----------        -----------         ----------
  Net cash provided by (used in) financing activities                               2,280,124        (18,750,533)        (9,791,640)

                                                                                  -----------        -----------         ----------
Net decrease in cash                                                                  (14,137)           (53,559)           (22,543)


Cash at beginning of year                                                              57,984            111,543            134,086
                                                                                  -----------        -----------         ----------
Cash at end of year                                                               $    43,847             57,984            111,543
                                                                                  -----------        -----------         ----------
Supplemental disclosures:
 Interest paid                                                                    $ 1,417,724          2,301,535          3,713,342
 Income taxes refunded                                                                   --              517,118          1,333,892
 Noncash investing and financing activities:
  Acquisition of fixed assets for notes payable                                        52,611               --                 --
  Settlement of accounts payable for note payable                                        --                 --            1,394,776
</TABLE>

       The accompanying notes are an integral part of these statements.

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1999 National Home Centers, Inc. Annual Report . Page 8
<PAGE>

                           NATIONAL HOME CENTERS, INC.
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                         January 31, 2000, 1999 and 1998

(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.

     (b) Inventories
         -----------
     Inventories, which are comprised primarily of merchandise purchased for
     resale, are stated at the lower of average cost or market.

     (c) 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, 3 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 2000 or 1999.

     (d) Long-Lived Assets
         -----------------
     The Company accounts for long-lived assets under 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 2000). 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.

     (e) Other Assets
         ------------
     Other assets include cash surrender values of life insurance policies,
     covenants not to compete, notes receivable, deferred loan costs, premiums
     advanced on life insurance policies (note 8) and miscellaneous other
     assets. Amortization of covenants not to compete and deferred loan costs is
     provided on the straight-line method, which in the case of deferred loan
     costs is not significantly different from the interest method, over the
     terms of the agreements.

     (f) 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.

     (g) 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.

                                                                     (Continued)

[LOGO OF NHCI]
                         1999 National Home Centers, Inc. Annual Report . Page 9
<PAGE>

                  Notes to Consolidated Financial Statements

     (h) 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.

     (i) Earnings (Loss) Per Share
         -------------------------
     The Company has adopted Statement of Financial Accounting Standards (SFAS)
     No. 128, Earnings Per Share, effective January 31, 1998, and all earnings
              ------------------
     (loss) per share amounts for all periods have been presented, and where
     appropriate, restated to conform to the SFAS No. 128 requirements. Basic
     earnings (loss) per share were computed by dividing the earnings (loss) by
     the weighted average number of common shares outstanding during the period
     (7,142,251 for the years ended January 31, 2000, 1999 and 1998). Diluted
     and basic earnings (loss) per share were computed in the same manner for
     the years ended January 31, 2000, 1999 and 1998.

     (j) 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.

     (k) Fair Value of Financial Instruments
         -----------------------------------
     The carrying value of accounts receivable, accounts payable and accrued
     expenses approximated fair value as of January 31, 2000 and 1999, 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.

     (l) Use of Estimates
         ----------------
     The preparation of consolidated financial statements in conformity with
     accounting principles generally accepted in the United States 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.

(2)  Business Conditions
     -------------------
     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 and $13,010,122, for the years
     ended January 31, 1999 and 1998, respectively, the majority of which were
     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 high recurring operating losses, (2) generate
     cash from the liquidation of the related assets, and (3) return to a
     primarily contractor-oriented business.

     As described in note 7, during fiscal year 1999, the Company completed the
     majority 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 were significantly reduced. Total cash provided from these sales of
     approximately $21 million was used to reduce debt and accounts payable. The
     reduction in debt resulted in substantially lower interest expense for each
     of fiscal years 2000 and 1999 compared to the previous year. In addition,
     subsequent to the restructuring, a substantially higher percentage of
     accounts payable balances became current. This resulted in improved vendor
     relations, with fewer required prepayments on inventory purchases, and more
     early-payment discounts.

                                                                     (Continued)

                                                                  [LOGO OF NHCI]
1999 National Home Centers, Inc. Annual Report . Page 10
<PAGE>

                  Notes to Consolidated Financial Statements

Management believes that the significant improvements in operating results for
the current fiscal year are the direct result of the return of the Company to a
principally contractor-oriented operation and reflect the culmination of the
restructuring efforts described above. Specifically, more consistent sales
volumes and margins, which are reflective of a strong contractor market and
economy in general, and lower operating costs associated with contractor
operations, have been key contributors to the Company's earnings of $1,115,381
for the year ended January 31, 2000. Sales to contractor customers increased to
approximately 83% of the Company's total sales for this period, compared to 70%
and 55% for fiscal years 1999 and 1998, respectively. Management's plans involve
continuing to pursue its strategy of focusing on the contractor segment of the
market, as it believes that this is in the best interest of the Company and its
shareholders.

(3)  Long-Term Debt
     --------------
     Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                                                                            2000              1999
                                                                                                            ----              ----
<S>                                                                                                  <C>                <C>
Notes payable under revolving credit agreements                                                      $14,289,335        10,762,351

Notes payable-principal and interest payable monthly:
 9% note, secured by real property in Conway, AR, balance due May 2001                                 1,284,078         1,884,038
Secured by equipment:
 8.31% notes, final payment due December 2000                                                            217,165           433,204
 9.42% notes, final payment due August 1999                                                                   --           197,914
 7.46% notes, final payment due June 1999                                                                     --            94,829
Other notes payable, weighted average interest rate of 8.37%, due at various dates                       228,462           313,969
                                                                                                     -----------        ----------
                                                                                                      16,019,040        13,686,305
Less current installments                                                                                988,832         1,259,463
                                                                                                     -----------        ----------
 Long-term debt, excluding current installments                                                      $15,030,208        12,426,842
                                                                                                     ===========        ==========
</TABLE>

The Company's revolving credit agreement with a financial institution 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 (8.50% at January 31, 2000)
plus 0.50%. The Company also pays a commitment fee of 0.25% based on the average
unused amount of the line. 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, 2000, the
Company had approximately $1.3 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, 2000, are secured
by a first real estate mortgage on real estate located in Conway, Arkansas.
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, 2000, are as follows: 2001, $988,832; 2002, $715,191; 2003,
$14,315,017; 2004, none; and 2005, none. Annual maturities for fiscal year 2003
include borrowings under the Company's revolving credit agreement described
above.

(4)  Income Taxes
     ------------
     Income taxes consist of the following:

<TABLE>
<CAPTION>
                                                                                     2000                1999                1998
                                                                                     ----                ----                ----
<S>                                                                             <C>                 <C>                 <C>
Current:
 Federal                                                                        $      --                  --            (516,144)
 State                                                                                 --                  --                (974)
                                                                                ---------           ---------           ---------
                                                                                       --                  --            (517,118)
                                                                                ---------           ---------           ---------
Deferred:
 Federal                                                                               --                  --             227,595
 State                                                                                 --                  --             (51,097)
                                                                                ---------           ---------           ---------
                                                                                       --                  --             176,498
                                                                                ---------           ---------           ---------
                                                                                $      --                  --            (340,620)
                                                                                =========           =========           =========
</TABLE>

                                                                     (Continued)

[LOGO OF NHCI]
                        1999 National Home Centers, Inc. Annual Report . Page 11
<PAGE>

                  Notes to Consolidated Financial Statements

Income taxes differ from the amounts computed by applying the U.S. Federal
income tax rate of 34% to pretax earnings (losses) from operations as a result
of the following:

<TABLE>
<CAPTION>
                                                                                     2000                1999                1998
                                                                                     ----                ----                ----
<S>                                                                            <C>                 <C>                 <C>
Computed "expected" income taxes                                               $  379,230          (1,006,210)         (4,539,252)

State income taxes, net of Federal income tax effect                               52,947            (124,064)            (34,367)
Increase (decrease) in valuation allowance                                       (462,363)          1,135,001           4,209,171

Other, net                                                                         30,186              (4,727)             23,828
                                                                               ----------          ----------          ----------
                                                                               $       --                  --            (340,620)
                                                                               ==========          ==========          ==========
</TABLE>

The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and liabilities at January 31, 2000 and 1999, are
presented below:

<TABLE>
<CAPTION>
                                                                                                       2000                  1999
                                                                                                       ----                  ----
<S>                                                                                             <C>                       <C>
Deferred tax assets:
 Accounts receivable, due to allowance for doubtful accounts                                    $    80,409               279,517
 Inventories, due to costs not currently deductible for tax purposes                                124,587               145,370
 Accrued expenses not currently deductible                                                          327,843               521,641
 Valuation allowance for property, plant and equipment                                              702,029               758,632
 Net operating loss and other carryforwards                                                       4,344,657             4,444,330
 Other                                                                                               78,262                57,392
                                                                                                -----------           -----------
  Total gross deferred tax assets                                                                 5,657,787             6,206,882
 Valuation allowance for deferred tax assets                                                     (5,642,311)           (6,104,673)
                                                                                                -----------           -----------
  Deferred tax assets                                                                                15,476               102,209
 Deferred tax liabilities:
  Property, plant and equipment, due to differences in depreciation                                  15,476               102,209
                                                                                                -----------           -----------
   Net deferred tax asset                                                                       $        --                    --
                                                                                                ===========           ===========
</TABLE>

At January 31, 2000, the Company had Federal and state net operating loss (NOL)
and other tax carryforwards which expire as follows:

Year ending January 31,
   2001                                                            $   222,628
   2002                                                                310,075
   2003                                                                449,858
   2004                                                                326,709
   2005 through 2012                                                    32,359
   2013                                                              4,495,103
   2019                                                              5,132,536
   2020                                                                  7,957
Indefinite expiration (alternative minimum tax credit)                 208,501
                                                                    ----------
   Total                                                           $11,185,726
                                                                    ==========

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 Company maintains a valuation
allowance in order to fully reserve net deferred tax assets. During the year
ended January 31, 2000, as a result of the utilization of NOL carryforwards, the
valuation allowance has been decreased by $462,363.

                                                                     (Continued)

                                                                  [LOGO OF NHCI]
1999 National Home Centers, Inc. Annual Report . Page 12
<PAGE>

                  Notes to Consolidated Financial Statements

(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                2000               1999               1998
--------                                      ----------          ------                ----               ----               ----
<S>                                         <C>                  <C>                   <C>              <C>              <C>
Springdale                                  August, 2002         $   36,000            264,000            390,000          408,000
Fort Smith                                  August, 2002             20,000            144,000            216,000          228,000
North Little Rock                           August, 2002             52,000            504,000            594,000          624,000
Bentonville                                 May, 2002                 9,500             84,000            106,500           98,000
Cabinet facility-
 Springdale                                 Terminated                 --                 --               20,000          118,000
Rogers                                      Terminated                 --                 --                 --             66,000
                                                                 ----------          ---------         ----------        ---------
                                                                 $  117,500            996,000          1,326,500        1,542,000
                                                                 ==========          =========         ==========        =========
</TABLE>

The leases for the Springdale 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 2000 and 1999, the stockholders granted the Company certain
reductions in monthly rental payments totaling $414,000 and $103,500,
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,
2000. 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.
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).

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, 2000, are as follows:

                                          Related
                                           party           Other         Total
                                           -----           -----         -----
Year ending January 31,
 2001                                   $1,410,000        459,700      1,869,700
 2002                                    1,410,000        377,800      1,787,800
 2003                                      794,000        374,800      1,168,800
 2004                                           --        275,600        275,600
 2005                                           --        210,000        210,000
 Later years                                    --        822,500        822,500
                                        ----------      ---------      ---------
Total minimum lease payments            $3,614,000      2,520,400      6,134,400
                                        ==========      =========      =========
                                                                     (Continued)

[LOGO OF NHCI]
                        1999 National Home Centers, Inc. Annual Report . Page 13
<PAGE>

                  Notes to Consolidated Financial Statements

(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, 2000, 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, of which 85,000 shares are
     available for granting at January 31, 2000. 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 years
     ended January 31, 1999 and 2000:

                                                                     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
Granted                                                 --                --
Canceled                                           (15,000)             1.75
                                                  --------              ----
Outstanding at January 31, 2000                    215,000          $   1.75
                                                  --------              ----
Exercisable at January 31, 2000                     86,000          $   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 3.3 years. There were no
    options granted during fiscal year 2000. As permissible under Statement of
    Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
                                                   --------------------------
    Compensation, the Company accounts for stock options granted under the
    ------------
    provisions of Accounting Principles Board Opinion No. 25, Accounting for
                                                              --------------
    Stock Issued to Employees, which recognizes compensation cost based upon the
    -------------------------
    intrinsic value of the equity award. Accordingly, no compensation expense
    was recognized in the consolidated statements of operations during fiscal
    years 2000 or 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 years 2000 and 1999 consistent with the provisions of SFAS No.
    123, the effect on the Company's net earnings (loss) and earnings (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, 2000, no awards had been made
     under the incentive compensation plan.

(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:

                                                                     (Continued)

                                                                  [LOGO OF NHCI]
1999 National Home Centers, Inc. Annual Report . Page 14
<PAGE>

                  Notes to Consolidated Financial Statements

<TABLE>
<CAPTION>
                                                     Valuation           Accrued
                                                     allowances          expenses          Totals
                                                     ----------          --------          ------
<S>                                                 <C>                  <C>             <C>
Balances, January 31, 1998                          $ 5,459,000           641,000         6,100,000
Activity, fiscal year 1999:
 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 activity                                       (3,477,721)         (316,312)       (3,794,033)
                                                    -----------          --------        ----------
Balances, January 31, 1999                            1,981,279           324,688         2,305,967
Activity, fiscal year 2000:
 Cash payments-rent                                          --          (166,912)         (166,912)
 Other noncash charges                                       --           (78,604)          (78,604)
                                                    -----------          --------        ----------
  Net activity                                               --          (245,516)         (245,516)
                                                    -----------          --------        ----------
Balances, January 31, 2000                          $ 1,981,279            79,172         2,060,451
                                                    ===========          ========        ==========
</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 include real property with carrying
amounts of $5,131,279 and fair values of $3,150,000 at both January 31, 2000 and
1999.

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
                                                                      ==========

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

[LOGO OF NHCI]
                        1999 National Home Centers, Inc. Annual Report . Page 15
<PAGE>

                                                                     (Continued)

                  Notes to Consolidated Financial Statements

(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.

(8)  Commitments and Contingencies
     -----------------------------
The Company advances premiums under a split-dollar life insurance agreement with
a trust which owns a $20 million insurance policy on the life of the Company's
principal stockholder's wife. During the year ended January 31, 2000, the trust
renegotiated the policies which previously covered both the principal
stockholder and his wife under two $10 million second-to-die policies. The trust
moved to a new insurance company for the same $20 million of coverage for
approximately half of the previous annual premiums. The Company has a security
interest in the policy's cash surrender value and death benefits and, upon
termination of the policy, is entitled to reimbursement of the amounts advanced,
without interest. The period of recovery of premiums advanced by the Company
under the new policy is expected to be approximately the same as under the
previous policies. The Company has a guarantee from the stockholder securing any
deficiency in cash surrender value if the policy is terminated before cash
surrender value exceeds actual premiums advanced. The Company has advanced
premiums of $2,012,277 and $1,645,378 as of January 31, 2000 and 1999,
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 $37,570, $36,920 and $48,736 for the
years ended January 31, 2000, 1999 and 1998, 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.

(9)  Valuation and Qualifying Accounts
     ---------------------------------
The following provides an analysis of the Company's allowances for doubtful
trade accounts receivable for the years ended January 31, 2000, 1999 and 1998:

                            Balance at    Additions    Write-offs,    Balance at
                             beginning     charged       net of         end of
                             of period    to expense   recoveries       period
                             ---------    ----------   ----------       ------

Year ended January 31, 2000   $730,000      223,037       743,037       210,000
                              --------      -------       -------       -------
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
                              --------      -------       -------       -------

                                                                  [LOGO OF NHCI]
1999 National Home Centers, Inc. Annual Report . Page 16
<PAGE>

                          NATIONAL HOME CENTERS, INC.
                                AND SUBSIDIARY

                       Consolidated Financial Statements

                        January 31, 2000, 1999 and 1998

            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, 2000 and 1999, 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, 2000. 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 auditing standards generally accepted
in the United States. 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, 2000 and 1999, and the results of
their operations and their cash flows for each of the three years in the period
ended January 31, 2000, in conformity with accounting principles generally
accepted in the United States.




                                                  Arthur Andersen LLP


Fayetteville, Arkansas
March 23, 2000

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                        1999 National Home Centers, Inc. Annual Report . Page 17
<PAGE>

National Home Centers 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, Gryphon Holdings

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1999 National Home Centers, Inc. Annual Report . Page 18
<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, 2000 and 1999.

Fiscal 1999                     High                Low
First Quarter                   1.63                1.00
Second Quarter                  1.44                1.06
Third Quarter                   1.28                1.00
Fourth Quarter                  1.31                1.00

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 14, 2000, there were 567 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.

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                        1999 National Home Centers, Inc. Annual Report . Page 19
<PAGE>

Corporate Address
Highway 265 North
P.O. Box 789
Springdale, AR 72765
Phone 501/756-1700

Auditors
Arthur Andersen LLP
Fayetteville, Arkansas

Counsel
Wright, Lindsey & Jennings LLP
Little Rock, Arkansas

Corporate Officers

Dwain A. Newman
Chairman and Chief Executive Officer

Danny R. Funderburg
President and Chief Operating Officer

Roger A. Holman
Senior Vice-President, Purchasing & Marketing

Brent A. Hanby
Executive Vice-President and Chief Financial Officer

C. Belle Reed
Secretary and Controller

Robert H. Storment, CPA
Vice-President, Accounting

John Collins
Vice-President, Merchandising & Store Development

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1999 National Home Centers, Inc. Annual Report . Page 20