<PAGE>
 
                                                                    EXHIBIT 13.1


SELECTED CONSOLIDATED FINANCIAL DATA

In thousands, except selected operating and per share data


<TABLE>
<CAPTION>
                                                    Year Ended January 31,
Statement of Operations Data:            1997       1996      1995      1994     1993
---------------------------------------------------------------------------------------
<S>                                    <C>        <C>       <C>       <C>       <C>
     Net sales                         $177,001   154,659   151,356   125,640   88,047
     Cost of sales                      134,104   115,369   110,321    90,579   62,483
                                       --------   -------   -------   -------   ------
     Gross profit                        42,897    39,290    41,035    35,061   25,564
     Selling, general and
       administrative expenses           44,023    39,039    36,777    29,548   20,736
                                       --------   -------   -------   -------   ------
     Operating income                    (1,126)      251     4,258     5,513    4,828
     Interest expense, net               (3,583)   (2,787)   (1,735)     (623)  (1,058)
                                       --------   -------   -------   -------   ------
     Earnings (loss) before 
       income taxes                      (4,709)   (2,536)    2,523     4,890    3,770
     Income tax expense (benefit)        (1,601)     (938)      991     1,883    1,412
                                       --------   -------   -------   -------   ------
     Net earnings (loss)               $ (3,108)   (1,598)    1,532     3,007    2,358
                                       --------   -------   -------   -------   ------
     Earnings (loss) per share           $(0.44)    (0.22)     0.21      0.46     0.44
                                       --------   -------   -------   -------   ------
     Weighted average number of   
       common shares outstanding          7,142     7,142     7,157     6,574    5,318
                                       --------   -------   -------   -------   ------
Selected Financial Data:
     Total assets                      $ 84,838    86,761    73,877    56,314   30,832
     Long-term debt                      29,320    30,808    30,425    16,748    2,657
     Net property, plant 
       and equipment                     37,266    39,699    28,915    16,715    3,429
     Stockholders' equity                25,160    28,268    29,866    28,646    6,968
 
Selected Operating Data:
     Number of stores at end of 
       period                                12        12        11        10        7
     Average total sales per square    
       foot -- retail and       
       contractor (1)                  $    229       238       275       324      365
     Comparable store sales 
       increase (decrease)                  4.9%    (3.6)%      8.6%     23.0%    20.3%
</TABLE>

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

                                       1
<PAGE>
 
                                            MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations

Net sales for the three fiscal years ended January 31, 1997, and the respective
total and comparable store percentage increases (decreases) were:

<TABLE>
<CAPTION>
 
                                         Total Company      Comparable Store
Year Ended January 31,     Net Sales    Sales Increases   Increases (Decreases)
--------------------------------------------------------------------------------
<S>                       <C>           <C>               <C>
1997                      $177,000,584           14%                 5% 
1996                       154,658,767            2%                (4)%
1995                       151,356,300           20%                 9% 
</TABLE>

Year Ended January 31, 1997 Compared To Year Ended January 31, 1996

Net Sales

The Company's net sales increased 14.4% to $177.0 million for the year ended
January 31, 1997 (fiscal 1996) from $154.7 million for the year ended January
31, 1996 (fiscal 1995). Comparable store sales in fiscal 1996 increased 4.9%
over fiscal 1995. The overall sales volume increase was primarily due to the
opening of one new home center superstore in late fiscal 1995 versus this store
being open for all of fiscal 1996. The Company had no substantive increase in
the variety of products offered or sales territory other than the new store. The
average annual sales per store for fiscal 1996 was $17.7 million compared to
$16.6 million for fiscal 1995. Competition has become very intense over the past
few years and is expected to continue. During fiscal 1996, Lowe's opened stores
in Russellville and Conway, Arkansas, and The Home Depot Inc. opened stores in
north Little Rock and west Little Rock. These stores have adversely affected the
Company's sales and profit levels in these markets and may continue to do so in
the future.

Gross Profit

Gross profit as a percentage of net sales for fiscal 1996 decreased to 24.2%
from 25.4% in fiscal 1995, due to increased competition in the contractor
division, and continued competitive pricing pressures in central and northwest
Arkansas. If any of the Company's major competitors seek to gain or retain
market share by reducing prices or the new competitor locations mentioned offer
promotional store opening pricing, the Company may be required to lower prices
which would further reduce gross margins and profits.

Selling, General and Administrative Expenses

Selling, general and administrative expenses as a percentage of net sales
decreased to 24.9% in fiscal 1996 versus 25.2% in fiscal 1995. The Company made
a concentrated effort during fiscal 1996 to reduce expenses as a percent of
sales. The expense ratios as a percent of sales for newer stores were higher
than older stores due to higher expenses such as salaries, advertising and
depreciation.

Interest Expense

Net interest expense as a percentage of net sales in fiscal 1996 increased to
2.0% from 1.8% in fiscal 1995, primarily as a result of higher interest rates on
the variable rate revolving credit facility and additional debt for the new
Rogers superstore. See Note 2 of Notes to Consolidated Financial Statements for
additional information on debt and interest.

Income Taxes

Effective income tax rates were (34.0)% and (37.0)% for fiscal years 1996 and
1995, respectively. The effective rate for fiscal 1996 results from the income
tax benefit due to the net operating loss in fiscal 1996. As a result of the net
operating loss carryback, the Company has filed for a federal tax refund of
approximately $1,300,000, which is expected to be received in the second quarter
of fiscal 1997. See Note 3 of Notes to Consolidated Financial Statements for
additional information on income taxes.

                                       2
<PAGE>
 
MANAGEMENTS DISCUSSION AND ANALYSIS
Year Ended January 31, 1996 Compared To Year Ended January 31, 1995

Net Sales

The Company's net sales increased 2.2% to $154.7 million for the year ended
January 31, 1996 (fiscal 1995) from $151.4 million for the year ended January
31, 1995 (fiscal 1994). Comparable store sales in fiscal 1995 decreased 3.6%
over fiscal 1994. The overall sales volume increase was primarily due to the
opening of one new home center superstore in October 1995. Increased
competition, unfavorable weather conditions and slowing demand caused decreased
sales at the existing stores. The Company had no substantive increase in the
variety of products offered or sales territory other than the new store. Average
total sales per square foot declined in fiscal 1995 versus fiscal 1994 due to
the additional retail square footage added during the year. The average annual
sales per store for fiscal 1995 was $16.6 million compared to $17.4 million for
fiscal 1994.

Gross Profit

Gross profit as a percentage of net sales for fiscal 1995 decreased to 25.4%
from 27.1% in fiscal 1994, due to increased competition in the contractor
division, special promotional pricing at the new retail superstore opened during
the year and continued competitive pricing pressures in central and northwest
Arkansas.

Selling, General and Administrative Expenses

Selling, general and administrative expenses as a percentage of net sales
increased to 25.2% in fiscal 1995 versus 24.3% in fiscal 1994. In fiscal 1995,
certain expenses such as rent and supplies were lower as a percentage of sales
while other expenses such as salaries, advertising, depreciation and telephone
were higher. The expense ratios as a percent of sales for newer stores were
higher than older stores due to higher expenses such as salaries, advertising
and depreciation. During the year, the Company adopted the provisions of
American Institute of Certified Public Accountants' Statement of Position
("SOP") No. 93-7, "Reporting of Advertising Costs". The SOP 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. As a result of adopting SOP 93-7, the Company expensed
approximately $90,000 of advertising expenses in fiscal 1995 related to the new
Rogers superstore that would otherwise have been amortized over twelve months as
preopening costs.

Interest Expense

Net interest expense as a percentage of net sales in fiscal 1995 increased to
1.8% from 1.1% in fiscal 1994. Higher interest rates on the variable rate
revolving credit facility coupled with additional debt for the new Rogers
superstore and the purchase of the Conway superstore led to the increase in
interest expense. See Note 2 of Notes to Consolidated Financial Statements for
additional information on debt and interest.

Income Taxes

Effective income tax rates were (37.0)% and 39.3% for fiscal years 1995 and
1994, respectively. The effective rate for fiscal 1995 results from the income
tax benefit due to the net operating loss in fiscal 1995. As a result of the net
operating loss carryback, the Company received a federal tax refund of
approximately $1,100,000 in the second quarter of fiscal 1996. See Note 3 of
Notes to Consolidated Financial Statements for additional information on income
taxes.

Liquidity and Capital Resources

The Company's working capital at January 31, 1997 decreased to $15.0 million
from $18.5 million at January 31, 1996, primarily due to increases in current
installments of long-term debt. The Rogers real estate loan of $4.9 million has
been reflected as current at January 31, 1997. See Note 2 of Consolidated
Financial Statements for additional information on this loan.

                                                                     (Continued)

                                       3
<PAGE>
 
                                                           RESULTS OF OPERATIONS


The Company also has a $2.9 million note on the Conway, Arkansas real estate
which becomes due in May 1997. The Company is attempting to refinance this note
through the current lender or a new lender. However, at January 31, 1997 the
Company had no definitive agreement in place and has therefore reflected the
note as current.

The Company's primary capital needs are to finance inventories, accounts
receivable and store expansion. During the year ended January 31, 1997,
operating activities provided net cash of $0.3 million. Primary sources of cash
from operating activities included approximately $0.5 million from decreases in
inventories and $0.5 million from decrease in prepaid expenses. The primary uses
of cash were approximately $0.8 million from decreases in accounts payable.

Net cash used in investing activities for the year ended January 31, 1997 was
approximately $1.3 million, principally due to capital expenditures of  $1.2
million.

Net cash provided by financing activities during fiscal 1996 totaled
approximately $0.9 million, primarily from financing under the revolving credit
facility.

The auditor of the State of Arkansas has submitted proposed findings to the
Company resulting from an audit pursuant to the Arkansas Unclaimed Property Act
(the "Act"). The proposed findings, if upheld, would require the Company to pay
$92,724 to the State for unclaimed property which is more than seven (7) years
old and reserve an additional $250,610 for items which are not yet seven (7)
years old. The applicable statutes of limitations set forth in Arkansas law have
run with respect to each of those chooses in action.

On August 20, 1996, an Order was entered by the Honorable Annabelle Clinton
Imber, in the case of Baptist Health, et al v. Gus Wingfield, et al, Pulaski
Chancery No. 95-5627, regarding the Act. According to the decision by Judge
Imber, Ark. Code Ann. 18-28-216 is unconstitutional and it is the Company's
position that the Act cannot be relied upon by the Auditor of the State of
Arkansas to collect from the Company on claims for which the applicable statute
of limitations has run. Recently the General Assembly of Arkansas amended Ark.
Code Ann. 18-28-216 in an attempt to deal with the deficiencies identified by
Judge Imber.  It is the Company's belief that the amendment does not have any
retroactive effect and does not speak to the factual situation relating to the
Company.

On March 10, 1997, the Company formally requested the State to abate and nullify
the proposed findings. The Company awaits a reply from the State. If any
litigation is brought by the State of Arkansas, the Company intends to defend
the claim vigorously. The Company currently has no reserve for the proposed
assessment. The Company does plan to comply with the Act, as amended, in future
periods.

At January 31, 1997, the Company owed $21.7 million under its revolving credit
agreement with a bank. This agreement provides a revolving credit loan
commitment not to exceed the lesser of (a) $35 million, or (b) a borrowing base
of 85% and 55% of eligible accounts receivable and eligible inventory,
respectively, with inventory availability capped at $20 million. Based upon
eligible accounts receivable and eligible inventory as of January 31, 1997, the
Company had approximately $1.5 million of additional borrowing capacity under
the revolving credit agreement. The new revolving credit agreement was signed
with BankAmerica Business Credit, Inc. on December 19, 1995, and expires
December 19, 1998. Borrowings under the revolving credit agreement are
collateralized by the Company's accounts receivable and inventory. The agreement
requires that the Company maintain certain financial ratios, meet specified
minimum levels of tangible net worth and limit its amount of capital
expenditures. The Company was in default with two of these financial covenants
(minimum tangible net worth and interest coverage ratio) at January 31, 1997;
however, the bank has agreed to waive compliance with respect to such defaults
and restate the covenants for fiscal 1997.

                                                                     (Continued)

                                       4
<PAGE>
 
RESULTS OF OPERATIONS

The Company's current ratio was 1.5 to 1 at January 31, 1997 versus 1.7 to 1 at
January 31, 1996. The Company's total debt to equity ratio increased to 2.37 to
1 at the end of fiscal 1996 versus 2.07 to 1 at the end of the preceding year.
Return on average investment for the three years ended January 31, 1997 ,1996
and 1995 was (17.1%), (8.7%), and 8.6%, respectively.

In November 1996, the Company entered into an agreement with American Quality
Manufacturing Corporation ("AQMC") to sell its cabinet manufacturing unit,
Cabinet Craft. The transaction consisted of the sale of inventory and equipment
and a cash advance in exchange for notes receivable totaling $1.7 million. The
Company incurred a net loss of approximately $599,000 from this division during
fiscal year 1995 and approximately $1,185,000 during the fiscal year ended
January 31, 1997.

In December 1996, AQMC ceased operations at its two Arkansas facilities,
including Cabinet Craft. In addition, the Company has been informed that AQMC
has been placed into an involuntary bankruptcy proceeding. As a result the
Company has fully reserved the notes receivable. The loss resulting from this
write-off and the sale of Cabinet Craft was $1,056,000 and is included in the
$1,185,000 above. See Note 6 to the Consolidated Financial Statements for
further detail on this transaction.

Also, in November 1996, the Company sold certain truss assembly and
manufacturing equipment to a third party, for $50,000 cash and a promissory note
of $275,000. The note is due on or before November 1, 1998 and is secured by a
lien in all equipment sold to the buyer.

                                       5
<PAGE>
 
                                                     CONSOLIDATED BALANCE SHEETS
                                                     January 31, 1997 and 1996

<TABLE> 
<CAPTION> 

ASSETS                                                                 1997         1996
--------------------------------------------------------------------------------------------
<S>                                                                <C>           <C>
Current assets:
   Cash and cash equivalents                                       $   134,086      130,051
   Accounts receivable, less allowance for doubtful 
     accounts of $174,250 in 1997 and $147,000 in   
     1996 (notes 2 and 8)                                           11,346,279   11,511,501
   Income tax refunds receivable                                     1,333,892    1,110,326
   Inventories (note 2)                                             30,809,531   31,327,877
   Prepaid expenses and other                                          592,615    1,137,152
   Deferred income taxes (note 3)                                      674,237      416,983
                                                                   -----------   ----------
         Total current assets                                       44,890,640   45,633,890
                                                                   -----------   ----------
 
Property, plant and equipment (notes 2 and 6):
   Land                                                              9,638,196    9,660,910
   Buildings and improvements                                       21,268,132   21,226,619
   Machinery and equipment                                          18,343,886   19,302,323
   Construction in progress                                            102,822       64,326
                                                                   -----------   ----------
                                                                    49,353,036   50,254,178
   Less accumulated depreciation                                    12,086,745   10,555,500
                                                                   -----------   ----------
         Net property, plant and equipment                          37,266,291   39,698,678
                                                                   -----------   ----------
Other assets, at cost less amortization of $744,122 
  in 1997 and $459,619 in 1996 (notes 6 and 7)                       2,680,855    1,428,149
                                                                   -----------   ----------
         Total assets                                              $84,837,786   86,760,717
                                                                   -----------   ----------
Liabilities and Stockholders' Equity
Current liabilities:
   Current installments of long-term debt (note 2)                  11,513,475    8,373,612
   Accounts payable                                                 14,994,945   15,842,415
   Accrued expenses                                                  3,351,420    2,959,016
                                                                   -----------   ----------
         Total current liabilities                                  29,859,840   27,175,043
                                                                   -----------   ----------
 
Long-term debt, excluding current installments 
  (note 2)                                                          29,320,227   30,807,723
 
Deferred income taxes (note 3)                                         497,739      510,248
 
Commitments and contingencies 
  (notes 2, 4, 5, 6 and 7)
 
Stockholders' equity (notes 2 and 5):
   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
   Retained earnings                                                 5,517,025    8,624,748
                                                                   -----------   ----------
                                                                    26,423,424   29,531,147
   Treasury stock; 323,707 common shares at cost                    (1,263,444)  (1,263,444)
                                                                   -----------   ----------
         Total stockholders' equity                                 25,159,980   28,267,703
                                                                   -----------   ----------
               Total liabilities and stockholders' equity          $84,837,786   86,760,717
                                                                   -----------   ----------
</TABLE>

The accompanying notes are an integral part of these statements.

                                       6
<PAGE>
 
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended January 31, 1997, 1996 and 1995


<TABLE>
<CAPTION>
 
                                                    1997          1996           1995
-----------------------------------------------------------------------------------------
<S>                                             <C>            <C>           <C>
Net sales                                       $177,000,584   154,658,767   151,356,300
Cost of sales                                    134,103,601   115,368,590   110,321,167
                                                ------------   -----------   -----------
   Gross profit                                   42,896,983    39,290,177    41,035,133
                                                ------------   -----------   -----------
 
Selling, general and
administrative expenses:
   Salaries and benefits (note 7)                 26,825,258    24,494,923    23,116,393
   Rent (including $1,633,200 in 1997,  
     $1,652,500 in 1996 and $1,652,200    
      in 1995 to related parties) (note 4)         2,330,686     2,417,359     2,598,886
   Depreciation and amortization                   3,315,560     2,882,620     2,229,074
   Other (note 6)                                 11,551,374     9,244,202     8,832,313
                                                ------------   -----------   -----------
                                                  44,022,878    39,039,104    36,776,666
                                                ------------   -----------   -----------
   Operating income (loss)                        (1,125,895)      251,073     4,258,467
 
Interest expense, net of amounts capitalized       3,582,776     2,787,331     1,735,609
                                                ------------   -----------   -----------
   Earnings (loss) before income taxes            (4,708,671)   (2,536,258)    2,522,858
 
Income taxes (note 3)                             (1,600,948)     (938,416)      990,436                  
                                                ------------   -----------   -----------
   Net earnings (loss)                           $(3,107,723)   (1,597,842)    1,532,422  
                                                ------------   -----------   -----------
Earnings (loss) per share                        $     (0.44)        (0.22)         0.21                               
                                                ------------   -----------   -----------
</TABLE>


The accompanying notes are an integral part of these statements.

                                       7
<PAGE>
 
                                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 Year ended January 31, 1997, 1996 and 1995




<TABLE>
<CAPTION>
                                                                                                                   Total
                                                                     Additional                                stockholders'
                                             Preferred     Common     paid-in     Retained       Treasury          equity
                                               stock        stock     capital     earnings         stock       (notes 2 and 5)
-------------------------------------------------------------------------------------------------------------------------------
<S>                                      <C>             <C>        <C>          <C>           <C>              <C>       
Balances at January 31, 1994              $       --       74,660    20,831,739     8,690,168      (950,314)      28,646,253 
Purchase of 40,000 treasury shares                --           --            --            --      (313,130)        (313,130)
Net earnings                                      --           --            --     1,532,422            --        1,532,422 
                                          ----------------------------------------------------------------------------------
Balances at January 31, 1995              $       --       74,660    20,831,739    10,222,590    (1,263,444)      29,865,545 
Net loss                                          --           --            --    (1,597,842)           --       (1,597,842)
                                          ----------------------------------------------------------------------------------
Balances at January 31, 1996              $       --       74,660    20,831,739     8,624,748    (1,263,444)      28,267,703 
Net loss                                          --           --            --    (3,107,723)           --       (3,107,723)
                                          ----------------------------------------------------------------------------------
Balances at January 31, 1997              $       --       74,660    20,831,739     5,517,025    (1,263,444)      25,159,980
                                          ----------------------------------------------------------------------------------  
</TABLE> 

The accompanying notes are an integral part of these statements.

                                       8
<PAGE>
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended January 31, 1997, 1996 and 1995


<TABLE>
<CAPTION>
 
                                                                      1997               1996          1995
---------------------------------------------------------------------------------------------------------------------- 
<S>                                                                <C>                <C>            <C>                         
Cash flows from operating activities:
   Net earnings (loss)                                             $(3,107,723)       (1,597,842)    1,532,422
   Adjustments to reconcile net earnings     
    (loss) to net cash provided by (used in) 
    operating activities:                     
        Provision for losses on accounts receivable                    785,743           702,438       694,024  
        Depreciation                                                 3,023,330         2,703,783     2,085,355  
        Amortization of other assets                                   292,230           178,837       143,719  
        Loss (gain) on sale of property, plant and equipment           (29,108)         (408,055)        1,237  
        Increase in cash surrender value of life insurance            (138,978)          (70,210)      (64,766) 
        Deferred income tax expense (benefit)                         (269,763)          171,910       226,029   
        Changes in assets and liabilities:                   
            Accounts receivable                                       (620,521)          319,282    (2,565,943)
            Income tax refunds receivable                             (223,566)         (992,599)      (27,390)
            Inventories                                                518,346        (1,896,405)   (3,705,088)
            Prepaid expenses and other                                 544,537           (68,679)       92,728 
            Accounts payable                                          (847,470)        8,452,932     1,213,288 
            Accrued expenses                                           392,404            33,169       135,422 
                                                                    ----------       -----------   ----------- 
Net cash provided by (used in) operating activities                    319,461         7,528,561      (238,963) 
                                                                    ----------       -----------   ----------- 
Cash flows from investing activities:
   Additions to property, plant and equipment                       (1,165,431)      (13,474,115)  (13,889,900)           
   Proceeds from sale of property, plant and equipment                 277,308           604,412        66,342            
   Increase in other assets                                           (372,172)         (302,829)      (94,801)
                                                                    ----------       -----------   ----------- 
        Net cash used in investing activities                       (1,260,295)      (13,172,532)  (13,918,359)
                                                                    ----------       -----------   ----------- 
Cash flows from financing activities:
   Proceeds from long-term debt                                     15,016,840        29,264,626    28,440,375
   Repayments of long-term debt                                    (14,071,971)      (23,667,399)  (14,158,322)
   Purchase of treasury stock                                               --                --      (313,130)
                                                                    ----------       -----------   ----------- 
        Net cash provided by financing activities                      944,869         5,597,227    13,968,923 
                                                                    ----------       -----------   ----------- 
Net increase (decrease) in cash and cash equivalents                     4,035           (46,744)     (188,399)
Cash and cash equivalents at beginning of year                         130,051           176,795       365,194 
                                                                    ----------       -----------   ----------- 
Cash and cash equivalents at end of year                           $   134,086           130,051       176,795 
                                                                    ----------       -----------   ----------- 
                                                                                                               
Supplemental disclosures:                                                                                      
   Interest paid, net of amounts capitalized                       $ 3,398,526         2,896,348     1,625,897 
   Income taxes paid, net of refunds received                       (1,107,619)         (117,727)      791,796 
   Noncash investing and financing activities:                                                                 
        Sale of fixed assets for note receivable                       275,000                --            -- 
        Acquisition of equipment by repossession (note 6)              350,000                --            -- 
        Acquisition of fixed assets for notes payable                  298,712           209,402       463,560 
        Acquisition of other assets for notes payable                  408,786                --            --  
                                                                    ----------       -----------   ----------- 
</TABLE>

The accompanying notes are an integral part of these statements.

                                       9
<PAGE>
 
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                      January 31, 1997, 1996 and 1995


(1) Summary of Significant Accounting Policies 

National Home Centers, Inc. ("Company"), is a full-line retailer of home
improvement products and building materials, with twelve locations in Arkansas.
The Company serves retail consumers and professional contractors primarily in
Arkansas, Oklahoma, Missouri and Kansas.

(a) Basis of Presentation

The consolidated financial statements include the financial statements of
National Home Centers, Inc. and its wholly-owned subsidiary, Crystal Valley
Properties, Inc., whose operations are insignificant. All intercompany balances
and transactions have been eliminated in consolidation. Certain previously
reported amounts have been reclassified to conform to the current year
presentation, with no effect on previously reported net earnings (loss).

(b) Cash Equivalents

Cash equivalents include cash and short-term, highly liquid investments with
maturities of three months or less when acquired.

(c) Inventories

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

(d) Store Preopening Costs

Store preopening costs, which consist primarily of payroll and other general and
administrative costs, are deferred until stores are open and then amortized over
a period of twelve months. Unamortized preopening costs are included in prepaid
expenses and other current assets and amount to $441,329 at January 31, 1996
(none at January 31, 1997). Amortization of preopening costs is included in
other selling, general and administrative expenses and amounted to $441,329,
$521,792 and $664,583 in 1997, 1996 and 1995, respectively.

(e) Property, Plant and Equipment

Property, plant and equipment are stated at cost. Equipment under capital leases
is stated at the lower of the present value of minimum lease payments at the
beginning of the lease term or fair value at the inception of the lease.
Depreciation is calculated on the straight-line method over the estimated useful
lives of the assets, as follows: buildings, 40 years; improvements, 10 years;
and machinery and equipment, 5 to 10 years. Equipment under capital leases is
amortized using the straight-line method over the shorter of the lease term or
estimated useful lives of the assets. Leasehold improvements are amortized using
the straight-line method over the shorter of the lease term, including renewal
options, or the estimated useful lives of the assets.

The Company capitalizes interest as part of the cost of assets which it
constructs for its own use. Interest of $311,329 and $243,504 was capitalized in
1996 and 1995, respectively (none in 1997).

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," was issued in March 1995. The Company adopted this statement in
1997. The adoption of SFAS No. 121 did not have a material effect on the
Company's financial position and results of operations.

(f) 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 7) 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.

                                       10
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(g) Advertising Costs

In 1996, the Company adopted the provisions of American Institute of Certified
Public Accountants' Statement of Position ("SOP") No. 93-7, "Reporting of
Advertising Costs". The SOP 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. Prior to the adoption of
SOP 93-7, which did not have a significant impact on earnings, the Company
expensed advertising costs over the related useful periods.

(h) 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. The amount at year end is adequate to cover unpaid expenses relating
to these claims.

(i) 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.

(j) Earnings (Loss) Per Share

Earnings (loss) per share are based upon the weighted average number of shares
of common stock outstanding during each year (7,142,251 in 1997 and 1996, and
7,157,018 in 1995).

(k) 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.

(l) Fair Value of Financial Instruments

The carrying value of cash equivalents, accounts receivable, income tax refunds
receivable, accounts payable and accrued expenses approximated fair value as of
January 31, 1997 and 1996, 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.

(m) Use of Estimates

The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported assets and liabilities and disclosure
of contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.

                                                                     (Continued)

                                       11
<PAGE>
 
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(2) Long-Term Debt

Long-term debt consists of the following:
 
<TABLE> 
<CAPTION> 
                                                                         1997         1996
----------------------------------------------------------------------------------------------
<S>                                                                   <C>          <C> 
Notes payable to bank under revolving credit agreement                $21,720,292  22,176,905
 
Notes payable, secured by real estate:
   9.42% note (Rogers property); principal and interest payable
   monthly; balance due October 1999                                    4,901,960          --
 
   8.75% note (Fayetteville property); principal and interest payable
   monthly; balance due August 1999                                     4,049,044   5,333,676
 
   10.26% note (Conway property); principal and interest payable
   monthly; balance due May 1997                                        2,879,712   2,928,982
 
Notes payable, secured by equipment:
   6.25%-8.36% notes; principal and interest payable
   monthly through March 2001                                           2,950,992   4,128,026
 
   9.85% notes; principal and interest payable
   monthly through October 2000                                         1,497,844   1,818,704
 
   8.12% notes; principal and interest payable
   monthly through June 1999                                              724,339   1,328,431
 
Other notes payable; weighted average interest rate of 8.05%;
   principal and interest payable monthly through various dates         2,109,519   1,466,611
                                                                      -----------  ----------
                                                                       40,833,702  39,181,335
Less current installments                                              11,513,475   8,373,612                         
                                                                      -----------  ----------
   Long-term debt, excluding current installments                     $29,320,227  30,807,723 
                                                                      -----------  ----------
</TABLE>

                                       12
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The Company's revolving credit agreement with a bank provides a revolving credit
loan commitment not to exceed the lesser of (a) $35 million, or (b) a borrowing
base of 85% and 55% of eligible accounts receivable and eligible inventory,
respectively, with inventories capped at $20 million. The agreement provides the
Company with the option of borrowing rates based on either (a) the London
Interbank Offered Rate ("LIBOR") plus 2.50%, or (b) the bank's Reference Rate,
which reflects the bank's prime rate (8.25% at January 31, 1997). As of January
31, 1997, $14 million of the Company's outstanding borrowings under the
agreement were based on LIBOR plus 2.50%, or a weighted average interest rate of
8.125%. Interest on the balance of outstanding borrowings was based on the
bank's Reference Rate. The spread over LIBOR is subject to adjustment annually
based upon the Company's profitability. In addition, the Company pays a
commitment fee of 0.25% based on the unused portion of the line.

Borrowings under the revolving credit agreement are collateralized by the
Company's accounts receivable and inventory. In addition, the agreement requires
that the Company comply with the following financial covenants: (i) minimum
interest coverage ratio, (ii) minimum adjusted tangible net worth, and (iii)
debt-to-adjusted tangible net worth ratio. The Company was in default with
respect to items (i) and (ii) at January 31, 1997, however, the bank has agreed
to permanently waive compliance with respect to such defaults and to amend the
covenants. Management of the Company believes it will be in compliance with the
amended debt covenants up to and including January 31, 1998. However, there can
be no assurance that the lender will not require additional waivers in the
future or, if required, that the lender will grant them.

Based upon eligible accounts receivable and eligible inventory as of January 31,
1997, the Company had approximately $1.5 million of additional available
borrowing capacity under the revolving credit agreement as of that date. The
current revolving credit agreement expires on December 19, 1998.

The Rogers real estate loan agreement calls for monthly principal payments of
$24,510, plus accrued interest, through September 1999, with a final payment of
unpaid principal and interest due October 1999. The loan agreement requires the
Company to comply with certain financial covenants, which are basically
identical to those contained in the revolving credit agreement described above.
The Company was in default with two of these covenants at January 31, 1997;
however, as a result of the primary working capital lender waiving defaults
under the revolving credit agreement, as discussed above, one of the defaults
with respect to the real estate loan agreement is waived under terms of the
agreement. With respect to the remaining default, the agreement provides that
such defaults constitute "events of acceleration" whereby the note becomes due
on demand. The Company has requested that the lender waive this default;
however, the Company has not yet received a waiver, and as a result, has
included the entire outstanding principal balance of $4,901,960 in current
installments of long-term debt at January 31, 1997, even though no notice of
demand by the lender has been received. The Company is current with respect to
all payments called for under the loan agreement, and no other events of default
have occurred with respect to the terms of the agreement. If the lender were to
demand payment, management believes alternative sources of financing would be
available.

Borrowings under the other real estate loan agreements are secured by first real
estate mortgages on the Company's retail facilities in Fayetteville and Conway,
Arkansas, respectively. 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, 1997, are as follows: 1998, $11,513,475; 1999, $24,814,582; 2000,
$3,581,979; 2001, $914,762; and 2002, $8,904. Annual maturities for year 1999
include borrowings under the Company's revolving credit agreement described
above.

                                       13
<PAGE>
 
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(3) Income Taxes   

Income tax expense (benefit) consists of the following:
 
<TABLE> 
<CAPTION> 
                                                               1997          1996       1995
-----------------------------------------------------------------------------------------------
<S>                                                       <C>            <C>          <C> 
Current:
  Federal                                                  $(1,329,235)  (1,106,946)  634,759
  State                                                         (1,950)      (3,380)  129,648
                                                           -----------   ----------   -------
                                                            (1,331,185)  (1,110,326)  764,407
                                                           -----------   ----------   -------
Deferred:
  Federal                                                       (6,866)     327,018   187,659
  State                                                       (262,897)    (155,108)   38,370
                                                           -----------   ----------   -------
                                                              (269,763)     171,910   226,029
                                                           -----------   ----------   -------
                                                           $(1,600,948)    (938,416)  990,436
                                                           -----------   ----------   -------
</TABLE>

Income tax expense (benefit) differs from the amounts computed by applying the
U.S. Federal income tax rate of 34 percent to pretax earnings (loss) from
operations as a result of the following:

<TABLE>
<CAPTION>
                                                            1997        1996       1995
-----------------------------------------------------------------------------------------
<S>                                                     <C>           <C>        <C>
Computed "expected" income taxes                        $(1,600,948)  (862,328)  857,772
Increase (decrease) in income taxes resulting from:
   State income taxes, net of Federal income 
     tax effect                                            (174,799)  (104,602)  110,892
   Increase in valuation allowance                          203,699         --        --
   Other, net                                               (28,900)    28,514    21,772
                                                        -----------   --------   -------
                                                        $(1,600,948)  (938,416)  990,436
                                                        -----------   --------   -------
</TABLE>

The tax effect of temporary differences that give rise to significant portions
of deferred tax assets and liabilities at January 31, 1997 and 1996 are
presented below:

<TABLE> 
<CAPTION> 
                                                                    1997       1996
--------------------------------------------------------------------------------------
<S>                                                             <C>          <C>
Deferred tax assets:
    Accounts receivable, due to allowance for 
      doubtful accounts                                         $   66,720     61,668
    Inventories, due to costs not currently deductible 
      for tax purposes                                             217,491    257,986
    Accrued expenses not currently deductible                      390,026    266,314
    Net operating loss and other carryforwards                     434,177    136,979
    Other                                                           15,653     14,280
                                                                ----------   --------
        Total gross deferred tax assets                          1,124,067    737,227
    Valuation allowance                                           (229,402)        --
                                                                ----------   --------
        Net deferred tax assets                                    894,665    737,227
                                                                ----------   --------
 
Deferred tax liabilities:
    Property, plant and equipment, due to 
      differences in depreciation                                  718,167    661,507
    Store preopening costs currently deductible                         --    168,985
                                                                ----------   --------
        Total gross deferred tax liabilities                       718,167    830,492
                                                                ----------   --------
            Net deferred tax asset (liability)                  $  176,498    (93,265)
                                                                ----------   --------
 
Presented in the accompanying consolidated balance sheet as:
    Current deferred asset, net                                    674,237    416,983
    Noncurrent deferred liability, net                            (497,739)  (510,248)
                                                                ----------   --------
                                                                  $176,498    (93,265)
                                                                ----------   --------
</TABLE>

                                       14
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


At January 31, 1997, the Company had approximately $7.2 million in net operating
loss (NOL) carryforwards for state (primarily Arkansas) income tax purposes, of
which $3.1 million and $4.1 million expire in 2001 and 2002, respectively.
Ultimate realization of these NOL carryforwards is dependent upon the Company's
ability to generate adequate future taxable income in specific taxing
jurisdictions within the carryforward periods. A valuation allowance has been
established for that portion of deferred tax assets relating to NOL carryforward
amounts which management believes may ultimately not be realized due to the
short expiration dates of the carryforwards. Remaining deferred tax assets are
attributable to an alternative minimum tax credit carryforward of $91,000, which
has an indefinite carryforward period, and deductible temporary differences,
which are offset by existing taxable temporary differences reversing within the
carryforward period. As a result, management believes it is more likely than not
the Company will realize the benefits of those deductible temporary differences.

(4) Leases

The Company's principal stockholder ("stockholder") owns certain real property
which he leases 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      
                                                       Monthly     -------------------------------------       
Property location                 Lease expiration     rental         1997          1996         1995 
--------------------------------------------------------------------------------------------------------
<S>                               <C>                <C>            <C>            <C>          <C>   
Springdale                        August, 2002       $   36,000       432,000      432,000      432,000
Fort Smith                        August, 2002           20,000       240,000      240,000      240,000
North Little Rock                 August, 2002           52,000       624,000      624,000      624,000
Springdale -- cabinet facility    May, 2002               9,500       114,000      114,000      110,000
Bentonville                       May, 2002               9,000       108,000      108,000      104,000
Rogers                            May, 2002               6,200        74,400       74,400       74,400
Oklahoma City                     (expired in 1997)          --        40,800       60,100       67,800
                                                       --------     ---------    ---------    ---------
                                                       $132,700     1,633,200    1,652,500    1,652,200
                                                       --------     ---------    ---------    ---------
</TABLE>

The leases for the Springdale, Fort Smith and North Little Rock properties are
assigned as collateral under a loan agreement between the stockholder and the
Arkansas Teacher Retirement System ("ATRS"). Proceeds from this loan were used
by the stockholder to finance the purchase of the Springdale and Fort Smith
properties from the Company, to retire his 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 stockholder.

The lease agreements for the Bentonville property and the cabinet manufacturing
facility provide escalation provisions which increase the monthly rentals over
the lease terms. Monthly rentals for the other related party leases remain the
same over the lease terms.

The Company also leases properties from unrelated parties under noncancelable
operating lease agreements which expire at various dates through 2008. Future
minimum lease payments required under operating leases that have initial or
remaining noncancelable lease terms in excess of one year as of January 31, 1997
are as follows:

<TABLE>
<CAPTION>
 
Year ending January 31          Related party    Other      Total
-----------------------------------------------------------------------
<S>                             <C>            <C>        <C>
1998                               $1,600,400    458,160   2,058,560
1999                                1,604,400    459,660   2,064,060
2000                                1,604,400    426,660   2,031,060
2001                                1,604,400    407,210   2,011,610
2002                                1,604,400    374,760   1,979,160
Later years                           858,800  1,682,920   2,541,720
                                   ----------  ---------  ----------
Total minimum lease payments       $8,876,800  3,809,370  12,686,170
                                   ----------  ---------  ----------
</TABLE>

                                       15
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(5) Capital Stock

The Company's Articles of Incorporation authorize the Board of Directors to
issue shares of preferred stock in series, and 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, 1997, the Company has issued no shares of its preferred stock.

The Company has an employee stock purchase plan, a long-term performance plan
and an incentive compensation plan. Under the employee stock purchase plan,
employees are eligible, through payroll deductions up to a maximum of $2,400
annually, to purchase shares of the Company's common stock at the current market
price of the stock. The Company contributes an amount equal to ten percent (in
cash or stock) of the amounts contributed by employees.

Under the long-term performance plan, certain directors and key employees are
eligible for awards granted under the plan in the form of, or combination
thereof, stock options, stock appreciation rights, or restricted shares of the
Company's common stock. The Company has authorized 300,000 shares to be awarded
under the plan. The amount, terms and conditions of any award under the plan are
subject to certain limitations set forth therein. As of January 31, 1997, no
options for shares of the Company's common stock had been issued under the long-
term performance plan.

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, 1997, no awards had been made under the incentive
compensation plan.

(6) Disposals of Assets

During November 1996, the Company entered into an agreement with American
Quality Manufacturing Corporation ("AQMC") to sell its cabinet manufacturing
unit, Cabinet Craft. The transaction consisted of the sale of inventory for
$900,000, the sale of equipment for $700,000, and a cash advance of $100,000, in
exchange for notes receivable totaling $1.7 million. The notes are due in
monthly installments of principal and interest (7%) through November 2001, and
are collateralized by security interests in the related equipment and inventory.

In December 1996, AQMC ceased operations at its two Arkansas facilities,
including Cabinet Craft. In addition, the Company has been informed that AQMC
has been placed into an involuntary bankruptcy proceeding.  As a result, the
Company has fully reserved the notes receivable as part of a pre-tax charge of
$1,056,000 for fiscal year ended January 31, 1997. This amount is net of
recoverable assets and is included in other selling, general and administrative
expenses, as follows:

         Notes receivable charged-off                          $1,700,000
         Fair market value of equipment recoverable              (350,000)
         Deferred gain from sale of inventory and equipment      (294,000)
                                                               ----------
                Total                                          $1,056,000
                                                               ----------

Litigation has been threatened and claims have been made by AQMC's primary
lender regarding the sale of assets by the Company to AQMC. AQMC's primary
lender is also one of the Company's lenders, and is the lender which the Company
is currently in default with regarding the real estate loan discussed in note 2.
The lender claims to be a secured creditor of AQMC and has asserted an interest
in certain assets of AQMC with respect to which the Company also has an
interest. Specifically, the lender (i) claims to have a priority interest in
Cabinet Craft's equipment and inventory, (ii) claims to be owed $367,500
pursuant to the Company's purchase of inventory from AQMC under terms of the
Sales Agreement, (iii) claims to be owed in excess of $83,000 by the Company for
other purchases from AQMC, and (iv) asserts a priority interest to all post-sale
accounts receivable owed to AQMC.

                                       16
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


As a result of AQMC's bankruptcy proceeding, neither the lender nor the Company
have the present ability to begin litigation against one another on these
claims. However, it is anticipated that if a settlement is not reached between
the Company and the lender, the lender will file a motion asking the bankruptcy
trustee to abandon these claims and allow litigation to begin between the lender
and the Company. The Company has offered a proposed settlement to the lender
concerning these claims, which includes paying a reduced amount in settlement of
the accounts payable, and repossessing the inventory; however, the lender has
not provided a written response to this offer.

It is the Company's opinion that it will prevail on its claim to Cabinet Craft's
equipment and, as a result, has recorded this equipment at its fair market value
of $350,000 in other assets in the accompanying balance sheet at January 31,
1997; however, no recognition has been given to any reduction in accounts
payable or any amounts of inventory which might ultimately be recovered.

Also during November 1996, the Company completed the sale of its truss
manufacturing unit. The transaction consisted of the sale of equipment for cash
and notes receivable totaling $325,000, resulting in a gain before income taxes
of $202,000.

(7) Commitments and Contingencies

The Company advances premiums under a split-dollar life insurance agreement with
a trust which owns two $10 million joint life insurance policies on the lives of
the Company's principal stockholder and his wife. The Company has a security
interest in the policies' cash surrender values and death benefits and, upon
termination of the policies, is entitled to reimbursement of the amounts
advanced, without interest. The Company has a guarantee from the stockholder
securing any deficiency in cash surrender value if the policies are terminated
before cash surrender value exceeds actual premiums advanced. The Company had
advanced premiums of $912,498 and $546,057 as of January 31, 1997 and 1996,
respectively, which are 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 $52,935, $38,697 and $40,000 in 1997,
1996 and 1995, 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
statements.

(8) Valuation and Qualifying Accounts

The following provides an analysis of the Company's allowances for doubtful
trade accounts receivable and notes receivable for the years ended January 31,
1997, 1996 and 1995:

<TABLE>
<CAPTION>
                                 Balance at        Additions       Write-offs,    Balance at 
                                 beginning          charged          net of         end of   
                                 of period         to expense      recoveries       period    
----------------------------------------------------------------------------------------------
<S>                               <C>             <C>              <C>           <C>      
Allowance for doubtful trade                                                              
  accounts receivable:                                                                    
Year ended January 31, 1997       $147,000          785,743          758,493       174,250
Year ended January 31, 1996        150,000          702,438          705,438       147,000
Year ended January 31, 1995        207,500          694,024          751,524       150,000
                                                                                          
Allowance for doubtful                                                                    
  notes receivables:                                                                      
Year ended January 31, 1997             --        1,700,000        1,700,000            --
Year ended January 31, 1996             --               --               --            --
Year ended January 31, 1995             --               --               --            -- 
</TABLE>

The Company charged off notes receivable totaling $1,700,000 in fiscal year
ended January 31, 1997, in conjunction with the sale of its cabinet
manufacturing division (see note 6).

                                       17