-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CqXfGe/mZi5oZ/ae4onSUa0v8tzsNsT8Aual6F+5kNimrTh8FkLiz9MxYeqXSI/6 iHASNOQm3t0ULfd87om/3Q== 0000950152-99-002706.txt : 19990331 0000950152-99-002706.hdr.sgml : 19990331 ACCESSION NUMBER: 0000950152-99-002706 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19990102 FILED AS OF DATE: 19990330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIY HOME WAREHOUSE INC CENTRAL INDEX KEY: 0000899595 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-LUMBER & OTHER BUILDING MATERIALS DEALERS [5211] IRS NUMBER: 382560752 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-21768 FILM NUMBER: 99577629 BUSINESS ADDRESS: STREET 1: 5811 CANAL RD STE 180 CITY: VALLEY VIEW STATE: OH ZIP: 44125 BUSINESS PHONE: 2163285100 MAIL ADDRESS: STREET 1: 5811 CANAL ROAD STREET 2: SUITE 180 CITY: VALLEY VIEW STATE: OH ZIP: 44125 10-K405 1 DIY HOME WAREHOUSE, INC. 10-K405 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 2, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO Commission File No. 0-21768 D.I.Y. HOME WAREHOUSE, INC. (Exact name of registrant as specified in its charter) STATE OF OHIO 38-2560752 (State of Incorporation) (I.R.S. Employer I.D. No.) 5811 CANAL ROAD VALLEY VIEW, OHIO 44125 (216) 328-5100 (Address of principal executive offices and telephone number) Securities Registered Pursuant to Section 12(b) of the Act: NONE Securities Registered Pursuant to Section 12(g) of the Act: COMMON STOCK, NO PAR VALUE Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes X No --- --- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- As of February 26, 1999, the aggregate market value of the Registrant's voting stock held by non-affiliates of the Registrant was $1,613,205 determined in accordance with the highest price at which the stock was sold on such date as reported by the OTC Bulletin Board. As of February 26, 1999, there were 7,276,059 shares of the Registrant's common stock issued and outstanding. 1 2 DOCUMENTS INCORPORATED BY REFERENCE The registrant's Proxy Statement for its Annual Meeting of Shareholders to be held on Wednesday, April 28, 1999, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days of the close of the registrant's fiscal year, is incorporated by reference in answer to Part III of this Annual Report on Form 10-K to the extent noted herein. In addition, pages 2 through 12 of DIY Home Warehouse, Inc.'s 1998 Annual Report to Shareholders is incorporated by reference in answer to Items 6, 7 and 8 of Part II and Item 14(a)(1) of Part IV of this report. PART I ITEM 1. BUSINESS GENERAL D.I.Y. Home Warehouse, Inc. ("DIY" or the "Company") operates fourteen retail warehouse-format home improvement centers that sell products primarily to do-it-yourself home repair and remodeling customers. The Company's "DIY Home Warehouse" stores are located in Northeast Ohio and range in size from 66,000 to 109,000 square feet of enclosed selling space with an additional 12,000 to 20,000 square feet of outside selling space. Six of these retail centers are located in the Cleveland metropolitan area, two are in the Youngstown metropolitan area, four stores are in the Akron area, and one store each is located in Mansfield and Ashtabula. DIY also offers a high level of customer service, making shopping at its stores easy and convenient and, through its displays and trained staff, enabling do-it-yourself shoppers to conceptualize, design and complete their own home repair, maintenance and improvement projects. The Company also offers kitchen, bath and other product installation for its customers. MERCHANDISING DIY offers a wide selection of home improvement products at everyday low prices. Each store carries approximately 32,000 SKUs, including variations in color and size. Brand name products are carried throughout each store. In addition, the Company carries several private label products, including paints and doors. The Company seeks to carry a broad and deep product selection in its core product areas. Core product areas are characterized by a high need for specialized customer service. The Company's four core product areas consist of (a) Kitchen, Plumbing and Bath, (b) Paint, Home Decorating and Floorcoverings, (c) Lawn and Garden, and (d) Lumber, Building Materials and Doors and Windows. In its non-core product areas, DIY seeks to carry as deep a selection as its competitors, but does not seek to carry a broad selection of products within the same category. Non-core product areas are characterized by products which do not require a high level of specialized service, but which are better stocked and sold in traditional warehouse-format for customer convenience. The Company's non-core product areas are Electrical, Lighting and Fans, and Hardware and Tools. The following table depicts the percentage of total net sales data for the periods indicated, by product area. 2 3
FISCAL YEAR ENDED -------------------------------------------------------------------------------- PRODUCT AREA JANUARY 2, 1999 JANUARY 3, 1998 DECEMBER 28, 1996 - ------------ --------------- --------------- ----------------- A. Kitchen, Plumbing and Bath 20.2% 21.2% 21.5% B. Paint, Home Decorating and Floorcoverings 17.0 17.0 16.3 C. Lawn and Garden 18.0 15.0 14.6 D. Lumber, Building Materials and Doors and Windows 28.0 29.2 29.6 E. Electrical, Lighting and Fans 9.0 9.6 10.3 F. Hardware and Tools 7.8 8.0 7.7 ----- ----- ----- 100.0% 100.0% 100.0% ===== ===== =====
Kitchen, Plumbing and Bath. The Company carries a wide selection of kitchen cabinets, sinks, toilets, bathtubs, faucets, showerheads, bathroom vanities and cabinets, tub and shower surrounds and enclosures, and other items used for kitchen and bathroom remodeling projects. DIY offers four complete lines of kitchen cabinets for custom order and two lines which are stocked for customer carryout. All products are offered over a broad range of price and quality levels. Each store has vignette displays, showing depictions of completed projects. Salespeople are available to assist customers in planning and designing remodeling projects as well as assisting in product selection. Salespeople use computers in planning projects, which provide a three dimensional graphic depiction of the finished project, and generate a materials list and cost estimate. Paint, Home Decorating and Floorcoverings. The Company offers a wide assortment of interior and exterior paints, stains, varnishes and other surface applications, as well as sundry related supplies such as paint brushes, sand paper, paint thinner, glues and other similar items. Blinds and window treatments, closet and storage materials, wall coverings, floorcoverings (rugs, tiles and similar items), and other home decorating items are also featured in this product area. In addition to budget priced DIY "house label" products, DIY offers products from manufacturers such as Dutch Boy, Enterprise, Behr, Levolor and Cuprinol. Salespeople are available to computer custom match and mix paint colors, and otherwise assist customers in planning and selecting products for their home decorating projects. Lawn and Garden. The Company carries a wide selection of seasonal items relating to landscaping and yard beautification and maintenance, such as annual flowers and other nursery stock, fertilizers, lawn mowers and garden tractors, barbecues and grills, soils and mulches, lawn and garden maintenance tools, and similar items. DIY seeks to provide a large selection of lawn and garden goods, at high quality and low prices. This department provides both significant sales primarily in the second and third quarters of the year and substantial traffic of potential customers for other departments. Lumber, Building Materials and Doors and Windows. The Company carries a broad selection of exterior and interior doors, storm windows and doors, steel entry doors, pre-hung doors, window units, skylights, security doors and bars, moldings, glass blocks and similar items. These items are displayed "as installed". Such "as installed" presentations offer the customer the opportunity to physically operate the door or window and to explore its features and benefits. The Company's stores feature, on average, approximately 160 "as installed" presentations. This product area also offers treated and dimensional lumber, plywood, pine boards, particle board and other wood product items. Salespeople will also custom cut most stock pieces. Electrical, Lighting and Fans and Hardware and Tools. The Company offers a selection of heaters and fans, lights, lighting fixtures, switch plates, light bulbs, outlets, switches, electrical wire and conduit, fuses and circuit breakers, related electrical products, hand and power tools and accessories, fasteners, chains, and other related tools and items. The Company features a large attractive lighting display area with working samples. The Company's Hardware and Tools product area provides all necessary equipment to complete a do-it-yourself customer project. 3 4 CUSTOMER SERVICE DIY seeks to provide superior service for every customer by hiring experienced personnel, including people with experience in the building trades such as plumbers and electricians, and by providing these employees with in-store and vendor-supported product training. Specially trained personnel are available in every product area (or "department"), particularly in the core departments, to help customers conceptualize and plan virtually any home improvement project. Customer questions, problems, returns and exchanges are handled at a convenient service desk near the main entrance to the store. Virtually all items offered by the Company carry the manufacturers' full product warranties. The Company has a "no-hassle" return policy for all of its products. If the customer is not satisfied, the Company will have the product repaired, exchange the product or refund the product purchase price. The Company does not operate a repair department. The Company offers kitchen, bath and other product installation, catering to customers who do not have the time or skills for home repair, maintenance, or improvement projects. The Company offers DIY credit card programs to three purchaser classes: consumer, professional and non-profit institutional, with modified terms and benefits for each card and class. These programs are all owned and operated by a third party. Customers can also pay by cash, check, Visa, MasterCard and Discover. DIY home centers are open seven days a week, from 7:30 a.m. to 9:00 p.m. on weekdays and Saturdays and from 9:00 a.m. to 6:00 p.m. on Sundays. PURCHASING AND DISTRIBUTION The Company purchases over 85% of its merchandise directly from manufacturers. The balance, which are generally high turnover but long lead time items, are purchased through and stocked by distributors. Product re-orders are initiated at the store department level, after review of available stock and applying local knowledge as to sales patterns for particular items. Merchandise selection is centrally handled by buyers at the headquarters level to attain the most attractive volume discounts and programs available. DIY has a staff of four merchandisers, one of whom serves as the Company's Vice President-General Merchandising Manager. Each merchandiser has responsibility for specified product categories. During fiscal 1998, the Company's top 10 vendors accounted for approximately 25% of its purchases, with no single supplier accounting for more than 7% of Company purchases. The number of active vendors is approximately 600. The Company is not dependent on any one vendor for any significant product. The Company does not license or contract the operating of departments within its stores to outside providers. The majority of the merchandise purchased by the Company is shipped by the vendors directly to its stores. The Company thereby largely avoids the costs associated with maintaining a distribution center or warehouse, and does not incur costs of moving inventory from storage sites to the stores. However, a warehouse is used for situations involving import and/or seasonal product categories, for cross docking and/or temporary storage where a cost-benefit advantage exists. All merchandise is displayed on the sales floor in the lower levels of warehouse type racks, with stock stored in the upper racks. In this way, on-site storeroom space requirements are minimized, and utilization of available store space for sales is maximized. 4 5 The Company stocks inventory at levels appropriate to support its warehouse home center format and its wide product selection consisting of approximately 32,000 SKUs. The Company generally experiences its highest working capital requirements with respect to inventory during March and April when inventory quantities are increased in anticipation of higher spring and summer sales. MANAGEMENT INFORMATION SYSTEMS The Company's information system strategy is to provide excellent customer service and reliable, timely information to manage DIY. The infrastructure for the Company's Local Area Network (LAN) and Wide Area Networks (WAN) consists of the IBM AS/400 processor for its mission critical applications, Microsoft NT and Novell for its networked servers and personal computers. Margin, sales and inventory information is delivered through the DIY Network and processed at headquarters daily. The Company's strategic IT architecture is flexible enough to accommodate a mix of systems while retaining the ability to centralize or delegate management and control of these systems. MARKETING The Company's marketing program is designed to create an awareness of DIY's comprehensive selection of brand name merchandise, superior customer service and everyday low prices. The Company's primary advertising vehicle is local newspaper advertising, which currently consists of circulars, tablets or flyers included with the Sunday newspaper in its markets. In addition, the circulars are supported by limited full or partial page advertisements in the newspapers and local newspaper advertising. The Company also engages in electronic advertising--both television and radio--in order to enhance consumer recognition of the DIY Home Warehouse name and product assortment or to promote a sense of urgency regarding the purchase of a particular product or group of products. COMPETITION The home improvement, hardware and garden businesses are all highly competitive. The Company competes against traditional hardware, plumbing, electrical and home supply retailers, as well as warehouse-format and discount retail stores and many of the Company's competitors have substantially greater resources than the Company. Builders Square and Lowe's Company have had stores in the Company's markets since 1985 and 1994, respectively. However, Builders Square announced in the first quarter of 1999 that it will exit the marketplace in Northeastern Ohio. Lowe's continued to expand with additional locations in 1996, 1997 and 1998. Beginning in the fourth quarter of 1997 and in 1998, Home Depot began operations in several of the Company's markets. Home Depot and Lowe's have announced further expansion plans in 1999. In addition, there has been increasing consolidation within the home improvement industry, which may provide certain entities increased competitive advantages. Specifically, increased competition including, but not limited to, additional competitors' store locations, price reductions, and advertising and marketing campaigns could have a material adverse effect on the Company's business, recoverability of asset values, financial condition and operating results. EMPLOYEES Each DIY home center employs approximately 50 to 100 employees, supervised by a store manager, three assistant managers and 8 to 10 department heads. As of January 2, 1999, the Company employed approximately 1,009 persons, approximately 723 of whom were full-time employees. DIY is not a party to any collective bargaining agreements. The Company considers its relations with its employees to be excellent. 5 6 ITEM 2. PROPERTIES Each DIY home center is individually designed based on the particular characteristics of the property, with the overall goal of achieving a relatively uniform "look" among all the stores, including the same product areas. All stores are conveniently located near major roads and each provides parking for customers. The following table sets forth the location, opening date and approximate size of each of the Company's home centers.
Leased Area in Square Feet ------ ------------------- Store Location Opening Date or Owned Interior Selling Garden Greenhouse - -------------- ------------ -------- ---------------- ------ ---------- Cleveland, Ohio.............. March 1985............. Leased............ 109,000 12,000 -- North Randall, Ohio.......... October 1985........... Leased............ 83,000 17,000 -- Eastlake, Ohio............... August 1990............ Leased............ 66,000 17,000 -- Elyria, Ohio................. February 1992.......... Leased............ 72,000 16,200 -- Brook Park, Ohio............. March 1993............. Leased............ 93,000 18,000 -- Boardman, Ohio............... September 1993......... Leased............ 81,900 18,000 -- Warren, Ohio................. January 1994........... Owned,Land Lease.. 79,000 18,000 -- Mansfield, Ohio.............. March 1994............. Owned............. 80,000 18,000 -- Akron, Ohio (Northeast)...... September 1994......... Owned............. 89,800 18,000 -- Medina, Ohio................. March 1995............. Owned............. 83,200 20,000 3,200 Mentor, Ohio................. April 1995............. Leased............ 86,100 15,000 -- Akron, Ohio (Northwest)...... May 1995............... Leased............ 96,800 16,500 -- Akron, Ohio (Southeast)...... June 1995.............. Owned............. 85,400 15,000 3,200 Ashtabula, Ohio.............. November 1995.......... Owned, Land Lease. 84,200 15,750 3,200 Held for Resale - --------------- North Canton, Ohio........... May 1994............... Owned............. 86,000 18,000 --
The Company's headquarters consist of approximately 12,100 square feet of leased space in Valley View, Ohio, near Cleveland. The Company also leases 57,500 square feet of warehouse space near the Company's headquarters. The Company leases or subleases eight of its retail properties. In addition, two of the Company's retail stores are subject to land leases. The various lease terms expire between 1 and 10 years, and certain store leases have renewal options ranging from 10 to 45 years. The leases generally provide for additional rental payments based upon a percentage of gross or net store sales above various levels. The Company subleases portions of premises not being used by the Company to various third parties. The Company closed one of its owned stores in the fourth quarter of 1998. The Company is actively marketing this location and estimates the net proceeds of the sale will approximate the property's net book value. The Company owns most of the equipment and trade fixtures throughout its stores and headquarters and has made leasehold improvements at most locations. Management believes all of the Company's facilities are in excellent condition. ITEM 3. LEGAL PROCEEDINGS Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's security holders during the fourth quarter of the fiscal year covered by this Annual Report on Form 10-K. 6 7 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS From 1985 to May 18, 1993, the Company's stock was privately held. From May 25, 1993, to December 2, 1998, the Company's Common Stock was traded on the National Market of Nasdaq. From December 3, 1998 to present the Company Stock has been traded on the OTC Bulletin Board under its symbol "DIYH." As of February 26, 1999, the closing price for the Company's Common Stock on the OTC Bulletin Board was $0.69 and there were approximately 211 holders of record of Common Stock. Based on information provided to the Company by certain holders of record, the Company estimates there are in excess of 1,500 beneficial shareholders. The Company has not paid any cash dividends on its Common Stock in the past three fiscal years. Management intends to follow a policy of retaining earnings in the foreseeable future in order to finance the development and operations of its business. The declaration and payment of dividends will be within the discretion of the Company's Board of Directors and would depend, among other factors, on the Company's earnings, financial condition, capital requirements, level of indebtedness and contractual restrictions with respect to payment of dividends. The following table sets forth a quarterly summary, for the years ended January 2, 1999, and December 28, 1996 of the high and low closing sales prices as reported by Nasdaq NNM or, after December 2, 1998, the OTC Bulletin Board.
1998 1997 1996 ------------------------------------------------- FISCAL QUARTER HIGH LOW HIGH LOW HIGH LOW - -------------- ---- --- ---- --- ---- --- 1st $3.25 $2.69 $4.63 $3.50 $5.00 $3.38 2nd 3.13 2.00 4.63 3.25 6.00 4.13 3rd 2.06 1.06 4.06 2.38 5.75 4.25 4th 1.25 0.25 4.56 2.50 5.63 4.00
ITEM 6. SELECTED FINANCIAL DATA The information for the fiscal years 1994-1998 under the heading "Selected Financial Data and Operating Highlights" contained in the Company's Annual Report to Shareholders for the fiscal year ended January 2, 1999, on page 12 of Exhibit 13.1 hereto, is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The information under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in the Company's Annual Report to Shareholders for the fiscal year ended January 2, 1999, on pages 2-4 of Exhibit 13.1 hereto, is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information under the headings "Statement of Income, Statement of Shareholders' Equity, Balance Sheet, Statement of Cash Flows, Notes to Financial Statements and Report of Independent Accountants" contained in the Company's Annual Report to Shareholders for the fiscal year ended January 2, 1999, on pages 5-11 of Exhibit 13.1 hereto, is incorporated herein by reference. 7 8 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEMS 10, 11, 12, 13. The information required by ITEMS 10, 11, 12 AND 13 will be included in the Company's Proxy Statement for its 1999 Annual Meeting of Shareholders to be held on April 28, 1999, and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Annual Report on Form 10-K: (1) Financial Statements: The following financial statements of D.I.Y. Home Warehouse, Inc. are filed herewith by incorporation by reference from pages 5 through 11 of the Registrant's Annual Report to Shareholders for the fiscal year ended January 2, 1999, as provided in Item 8 hereof: Statement of Income for the Years Ended January 2, 1999, January 3, 1998 and December 28, 1996; Statement of Shareholders' Equity for the Years Ended January 2, 1999, January 3, 1998 and December 28, 1996; Balance Sheet as of January 2, 1999 and January 3, 1998; Statement of Cash Flows for the Years Ended January 2, 1999, January 3, 1998 and December 28, 1996. Notes to Financial Statements; Report of Independent Accountants. (2) Financial Statement Schedules: Financial Statement Schedules have been omitted because they are not required, are not applicable, or the required information is included in the financial statements or the notes thereto. (3) A list of the exhibits required by Item 601 of Regulation S-K to be filed as a part of this Form 10-K is shown on the "Exhibit Index" filed herewith. (b) Reports on Form 8-K The Company filed one report on Form 8-K regarding events that occurred during the months included in the fourth quarter of the Company's 1998 fiscal year. 8 9 SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 22, 1999 D.I.Y. HOME WAREHOUSE, INC. By: /s/ FRED A. ERB ------------------------------- Fred A. Erb, Chairman of the Board of Directors Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ FRED A. ERB /s/ GREGORY K. JONES - -------------------------- --------------------------- Fred A. Erb Gregory K. Jones Chairman of the Board of Directors Director Dated: March 22, 1999 Dated: March 22, 1999 /s/ CLIFFORD L. REYNOLDS /s/ JOHN A. SHIELDS - -------------------------- --------------------------- Clifford L. Reynolds John A. Shields Director and President Director (principal executive officer) Dated: March 22, 1999 Dated: March 22, 1999 /s/ R. SCOTT EYNON /s/ MARK A. TIMMERMAN - -------------------------- --------------------------- R. Scott Eynon Mark A. Timmerman Vice President-Operations and Director Director Dated: March 22, 1999 Dated: March 22, 1999 /s/ JOHN M. ERB /s/ ERIC I. GLASSMAN - -------------------------- --------------------------- John M. Erb Eric I. Glassman Secretary and Director Vice President-Chief Financial Officer Dated: March 22, 1999 Dated: March 22, 1999 /s/ DENNIS C. HOFF --------------------------- Dennis C. Hoff Vice President-General Merchandising Manager Dated: March 22, 1999
9 10 EXHIBIT INDEX Exhibit Number Description of Exhibit - ------ ---------------------- 3 Articles of Incorporation and By-Laws: -------------------------------------- 3.1 Articles of Incorporation of D.I.Y. Home Warehouse, Inc. as amended (A) 3.2 Amended and Restated Code of Regulations of D.I.Y. Home Warehouse, Inc. (A) 10 Material Contracts: ------------------- 10.1 Sublease between D.I.Y. Ohio Real Estate Associates Limited Partnership and D.I.Y. Home Warehouse, Inc., dated August 1, 1992 (A) 10.2 Indenture of Lease between Smith - D.I.Y. Center Limited Partnership and D.I.Y. Home Warehouse, Inc., dated December 27, 1985 (A) 10.3 Amendment to Lease between D.I.Y. Center Associates (successor in interest to Smith - D.I.Y. Center Limited Partnership) and D.I.Y. Home Warehouse, Inc., dated July 2, 1991 (A) 10.4 Amendment to Lease between D.I.Y. Center Associates, L.P. and D.I.Y. Home Warehouse, Inc. dated March 21, 1995 (C) 10.5 Lease between Fred A. Erb and D.I.Y. Home Warehouse, Inc., dated March 1, 1993 (A) 10.6 Lease Agreement between West Park Limited, Inc. and D.I.Y. Home Warehouse, Inc. dated August 2, 1991 (A) 10.7 Addendum #1 to Lease Agreement between West Park Limited, Inc. and D.I.Y. Home Warehouse, Inc., dated September 2, 1991 (A) 10.8 Addendum #2 to Lease Agreement between West Park Limited, Inc. and D.I.Y. Home Warehouse, Inc., dated September 16, 1991 (A) 10.9 Sublease between The Wholesale Club, Inc. and D.I.Y. Home Warehouse, Inc., dated May 14, 1992 (A) 10.10 Sublease between The Wholesale Club, Inc. and D.I.Y. Home Warehouse, Inc., dated November 25, 1992 (A) 10.11 Lease between Myron S. Viny, dba Central Valley Properties, and D.I.Y. Home Warehouse, Inc., dated February 26, 1993, but effective beginning May 1, 1993 (A) 10.12 Modification and Supplement to lease between the Estate of Myron S. Viny (formerly DBA Central Valley Properties) and D.I.Y. Home Warehouse, Inc. dated November 27, 1995 (G) 10 11 Exhibit Number Description of Exhibit - ------ ---------------------- 10.13 D.I.Y. Home Warehouse, Inc. 1993 Long Term Incentive Plan as Amended February 23, 1994 and Approved by Stockholders May 25, 1994# (A) 10.14 Form of Non-Qualified Stock Option Agreement under the D.I.Y. Home Warehouse, Inc. 1993 Long Term Incentive Plan as Amended# (G) 10.15 Indemnification Agreement between D.I.Y. Home Warehouse, Inc. and Clifford L. Reynolds (A) 10.16 Indemnification Agreement between D.I.Y. Home Warehouse, Inc. and R. Scott Eynon (A) 10.17 Indemnification Agreement between D.I.Y. Home Warehouse, Inc. and Dennis C. Hoff (A) 10.18 Indemnification Agreement between D.I.Y. Home Warehouse, Inc. and John M. Erb (A) 10.19 Indemnification Agreement between D.I.Y. Home Warehouse, Inc. and Fred A. Erb (A) 10.20 Tax Indemnification Agreement among D.I.Y. Home Warehouse, Inc. and Fred A. Erb, Clifford L. Reynolds, R. Scott Eynon, Dennis C. Hoff and John M. Erb (A) 10.21 D.I.Y. Home Warehouse, Inc.'s 401K Plan# (A) 10.22 $1,250,000 Promissory Note from D.I.Y. Home Warehouse, Inc. to Edgemere, Inc. f/k/a Erb Lumber Co., dated July 1, 1991 (A) 10.23 Security Agreement between D.I.Y. Home Warehouse and Erb Lumber Co., dated November 14, 1985 (A) 10.24 Agreement of Lease (Boardman Facility) between DIY Ohio Real Estate Associates Limited Partnership and D.I.Y. Home Warehouse, Inc. dated as of October 1, 1993 (B) 10.25 Second Amendment to Agreement Lease (Boardman facility) between D.I.Y. Home Warehouse, Inc. and D.I.Y. Ohio Real Estate Associated Limited Partnership (the Landlord) and assignment of the lease to V&V 224, Limited by the Landlord dated October 22, 1998 (L) 10.26 Lease between Elmhurst Properties, Inc. and D.I.Y. Home Warehouse, Inc., dated May 26, 1993 (B) 10.27 Real Estate Purchase Agreement (Mansfield) between DIY Ohio Real Estate Associates Limited Partnership and D.I.Y. Home Warehouse, Inc. dated as of March 1, 1994 (B) 10.28 Assignment and Assumption of Lease and Sublease between Kmart Corporation and D.I.Y. Home Warehouse, Inc. dated December 22, 1994 (C) 10.29 Shopping Center Lease between KCHGC, Inc. and D.I.Y. Home Warehouse, Inc. dated January 12, 1995 (C) 11 12 Exhibit Number Description of Exhibit - ------ ---------------------- 10.30 Revolving Credit Agreement and Security Agreement dated December 7, 1994 between D.I.Y. Home Warehouse, Inc. and National City Bank, Columbus, and Old Kent Bank and Trust Company (C) 10.31 Loan and Co-lender Agreement and Open-End Mortgage, Assignment of Rents and Security Agreement dated December 23, 1994 between D.I.Y. Home Warehouse, Inc. and National City Bank, Columbus, and Old Kent Bank and Trust Company (C) 10.32 First Amendment to Loan and Co-Lender Agreement dated December 22, 1995 between D.I.Y. Home Warehouse, National City Bank, Columbus, and Old Kent Bank (G) 10.33 Second Amendment to Loan and Co-Lender Agreement dated December 23, 1996 between D.I.Y. Home Warehouse, Inc., National City Bank of Columbus and Old Kent Bank (I) 10.34 Third Amendment to Loan and Co-Lender Agreement dated October 24, 1997 between D.I.Y. Home Warehouse, Inc., National City Bank of Columbus and Old Kent Bank (J) 10.35 Fourth Amendment to Loan and Co-Lender Agreement dated April 4, 1998 between D.I.Y. Home Warehouse, Inc., National City Bank of Columbus and Old Kent Bank (K) 10.36 Fifth Amendment to Loan and Co-Lender Agreement dated October 28, 1998 between D.I.Y. Home Warehouse, Inc., National City Bank of Columbus and Old Kent Bank (L) 10.37 Line of Credit Agreement for Real Estate Loans, Open-end Mortgage, Assignment of Rents and Security Agreement, and Mortgage Notes between D.I.Y. Home Warehouse, Inc. and National City Bank, Columbus and Old Kent Bank dated April 28, 1995 (D) 10.38 First Amendment to Line of Credit Agreement; Open-end Mortgage, Assignment of Rents and Security Agreement (Leasehold) for Trumbull County; Open-end Mortgage, Assignment of Rents and Security Agreement for Summit County; Mortgage Note to National City Bank, Columbus dated September 15, 1995; Mortgage Note to Old Kent Bank dated September 15, 1995 (F) 10.39 Second Amendment to Line of Credit Agreement dated December 22, 1995 between D.I.Y. Home Warehouse, National City Bank, Columbus, and Old Kent Bank (G) 10.40 Third Amendment to Line of Credit Agreement Dated December 23, 1996 between D.I.Y. Home Warehouse, Inc., National City Bank of Columbus and Old Kent Bank (I) 10.41 Fourth Amendment to Line of Credit Agreement dated October 24, 1997 between D.I.Y. Home Warehouse, Inc., National City Bank of Columbus and Old Kent Bank (J) 10.42 Fifth Amendment to Line of Credit Agreement dated April 4, 1998 between D.I.Y. Home Warehouse, Inc., National City Bank of Columbus and Old Kent Bank (K) 10.43 Sixth Amendment to Line of Credit Agreement dated October 28, 1998 between D.I.Y. Home Warehouse, Inc., National City Bank of Columbus and Old Kent Bank (L) 10.44 Partial Release of Mortgage to Open-End Mortgage Assignment of Rents and Security Agreement for Richland County, Stark County, Summit County, Trumball County and Medina County by Old Kent Bank dated October 28, 1998 (L) 12 13 Exhibit Number Description of Exhibit - ------ ---------------------- 10.45 Amendment No. 1 to Open-End Mortgage, Assignment of Rents and Security Agreement for Richland County, Stark County, Summit County, Trumball County and Medina County between D.I.Y. Home Warehouse, Inc., National City Bank and Old Kent Bank dated October 28, 1998 (L) 10.46 First Amendment to Mortgage Note between D.I.Y. Home Warehouse, Inc. and National City Bank dated October 28, 1998 (L) 10.47 First Amendment to Security Agreement dated December 22, 1995 between D.I.Y. Home Warehouse, National City Bank, Columbus, and Old Kent Bank (G) 10.48 Second Amendment to Security Agreement dated October 28, 1998 between D.I.Y. Home Warehouse, Inc., National City Bank and Old Kent Bank (L) 10.49 First Amendment to Subordination Agreement dated December 22, 1995 between D.I.Y. Home Warehouse, National City Bank, Columbus, and Old Kent Bank, and Edgemere Enterprises, Inc. (G) 10.50 Second Amendment to Subordination Agreement dated October 28, 1998 between D.I.Y. Home Warehouse, Inc., National City Bank and Old Kent Bank (L) 10.51 Modification to Revolving Credit Agreement, Line of Credit Agreement, and Loan and Co-lender Agreement between D.I.Y. Home Warehouse, Inc., National City Bank, Columbus, and Old Kent Bank dated February 20, 1996 (G) 10.52 1994 D.I.Y. Home Warehouse, Inc. Employee Bonus Plan dated May 25, 1994# (C) 10.53 1995 D.I.Y. Home Warehouse, Inc. Employee Bonus Plan dated May 24, 1995# (G) 10.54 D.I.Y. Home Warehouse, Inc. 1996 Retainer Stock Plan for Non-Employee Directors (G) 10.55 Amended and Restated Employment Agreement between Clifford L. Reynolds and D.I.Y. Home Warehouse, Inc.# (E) 10.56 Amended and Restated Employment Agreement between R. Scott Eynon and D.I.Y. Home Warehouse, Inc.# (E) 10.57 Amended and Restated Employment Agreement between Dennis C. Hoff and D.I.Y. Home Warehouse, Inc.# (E) 10.58 Amended and Restated Employment Agreement between Clifford L. Reynolds and D.I.Y. Home Warehouse, Inc. (K) 10.59 Amended and Restated Employment Agreement between R. Scott Eynon and D.I.Y. Home Warehouse, Inc. (K) 10.60 Amended and Restated Employment Agreement between Dennis C. Hoff and D.I.Y. Home Warehouse, Inc. (K) 10.61 Employment Agreement between Eric I. Glassman and D.I.Y. Home Warehouse, Inc. (K) 13 14 Exhibit Number Description of Exhibit - ------ ---------------------- 10.62 Transaction Bonus Agreement between Clifford L. Reynolds and D.I.Y. Home Warehouse, Inc. (K) 10.63 Transaction Bonus Agreement between R. Scott Eynon and D.I.Y. Home Warehouse, Inc. (K) 10.64 Transaction Bonus Agreement between Dennis C. Hoff and D.I.Y. Home Warehouse, Inc. (K) 10.65 Transaction Bonus Agreement between Eric I. Glassman and D.I.Y. Home Warehouse, Inc. (K) 10.66 General Business Lease Agreement with IBM Credit Corporation dated May 30, 1996 (H) 10.67 Amended and Restated Employment Agreement between Clifford L. Reynolds and D.I.Y. Home Warehouse, Inc. dated November 21, 1996# (I) 10.68 Credit and Security Agreement dated October 27, 1998 among D.I.Y. Home Warehouse, Inc. and the Lenders which are signatures hereto and National City Commercial Finance, Inc, as agent and National City Bank as Letter of Credit Bank (L) 10.69 Amendment No. 3 to Amended and Restated Employment Agreement between Clifford L. Reynolds and D.I.Y. Home Warehouse, Inc. 10.70 Amendment No. 2 to Amended and Restated Employment Agreement between R. Scott Eynon and D.I.Y. Home Warehouse, Inc. 10.71 Amendment No. 1 to Amended and Restated Employment Agreement between Eric I. Glassman and D.I.Y. Home Warehouse, Inc. 13 Annual Report: -------------- 13.1 Annual Report to Shareholders of D.I.Y. Home Warehouse, Inc. for the fiscal year ended January 2, 1999, certain portions of which are incorporated by reference herein. 23 Consents: --------- 23.1 Consent of Independent Accountants 27 Financial Data Schedule ----------------------- 27.1 Financial Data Schedule for the year ended January 2, 1999 - ------------- 14 15 # Management contract or compensatory plan or arrangement required to be identified by Form 10-K Item 14. (A) Incorporated by reference to Exhibits to the Registrant's Registration Statement No. 33-60012 on Form S-1 filed May 18, 1993. (B) Incorporated by reference to Exhibits to the Registrant's Report on Form 10-K for the fiscal year ended January 1, 1994. (C) Incorporated by reference to Exhibits to the Registrant's Report on Form 10-K for the fiscal year ended December 31, 1994. (D) Incorporated by reference to Exhibits to the Registrant's Report on Form 10-Q for the quarter ended April 1, 1995. (E) Incorporated by reference to Exhibits to the Registrant's Report on Form 10-Q for the quarter ended July 1, 1995. (F) Incorporated by reference to Exhibits to the Registrant's Report on Form 10-Q for the quarter ended September 30, 1995. (G) Incorporated by reference to Exhibits to the Registrant's Report on Form 10-K for the fiscal year ended December 30, 1995. (H) Incorporated by reference to Exhibits to the Registrant's Report on Form 10-Q for the quarter ended June 29, 1996. (I) Incorporated by reference to Exhibits to the Registrant's Report on Form 10-K for the fiscal year ended December 28, 1996. (J) Incorporated by reference to Exhibits to the Registrant's Report on Form 10-Q for the quarter ended September 27, 1997. (K) Incorporated by reference to Exhibits to the Registrant's Report on Form 10-Q for the quarter ended July 4, 1998. (L) Incorporated by reference to Exhibits to the Registrant's Report on Form 10-Q for the quarter ended October 3, 1998. 15 EX-10.69 2 EXHIBIT 10.69 1 Exhibit 10.69 AMENDMENT NO. 3 TO AMENDED AND RESTATED EMPLOYMENT AGREEMENT This Amendment No. 3 to Amended and Restated Employment Agreement is executed as of March 11, 1999, by Clifford L. Reynolds (the "Executive") and D.I.Y. Home Warehouse, Inc., an Ohio corporation (the "Company"). RECITALS -------- A. Executive and the Company are parties to a certain Amended and Restated Employment Agreement, dated as of January 1, 1995, as amended by Amendment No. 1 to Amended and Restated Employment Agreement dated as of November 21, 1996 and by Amendment No. 2 to Amended and Restated Employment Agreement dated as of May 28, 1998 (collectively, the "Agreement"). B. The parties desire to amend the Agreement as set forth below. NOW, THEREFORE, in consideration of the promises and mutual covenants contained herein and for other good and valuable consideration, the parties agree as follows: 1. Section 1 of the Agreement is hereby amended to read, in its entirety, as follows: 1. EMPLOYMENT. For a period of seven (7) years from and after January 1, 1995 (the "Effective Date") , unless sooner terminated as provided below or extended upon mutual agreement of the parties, the Company will employ Executive as the President of the Company, to perform such services for and on behalf of the Company as the Company's Board of Directors may from time to time direct consistent with Executive's title and position, and Executive hereby accepts such employment, upon the terms and conditions set forth in this Agreement. Executive's principal place of business will be located within a fifty (50) mile radius of downtown Cleveland, Ohio. 2. As amended hereby, the Agreement shall continue in full force and effect and is hereby ratified and confirmed. 3. This Amendment No. 3 may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 2 IN WITNESS WHEREOF, the undersigned have executed this Amendment No. 3 as of the date set forth above. EXECUTIVE /s/ Clifford L. Reynolds -------------------------- Clifford L. Reynolds COMPANY D.I.Y. Home Warehouse, Inc., an Ohio corporation By: /s/ Fred A. Erb ------------------------- Fred A. Erb Its: Chairman EX-10.70 3 EXHIBIT 10.70 1 Exhibit 10.70 AMENDMENT NO.2 TO AMENDED AND RESTATED EMPLOYMENT AGREEMENT This Amendment No. 2 to Amended and Restated Employment Agreement is executed as of March 11, 1999, by R. Scott Eynon (the "Executive") and D. I.Y. Home Warehouse, Inc., an Ohio corporation (the "Company"). RECITALS -------- A. Executive and the Company are parties to a certain Amended and Restated Employment Agreement, dated as of January 1, 1995, as amended by Amendment No. 1 to Amended and Restated Employment Agreement dated as of May 28, 1998 (collectively, the "Agreement"). B. The parties desire to amend the Agreement as set forth below. NOW, THEREFORE, in consideration of the promises and mutual covenants contained herein and for other good and valuable consideration, the parties agree as follows: 1. Section 1 of the Agreement is hereby amended to read, in its entirety, as follows: 1. EMPLOYMENT. For a period of seven (7) years from and after January 1, 1995 (the "Effective Date") , unless sooner terminated as provided below or extended upon mutual agreement of the parties, the Company will employ Executive as the Vice President - Operations of the Company, to perform such services for and on behalf of the Company as the Company's Board of Directors may from time to time direct consistent with Executive's title and position, and Executive hereby accepts such employment, upon the terms and conditions set forth in this Agreement. Executive's principal place of business will be located within a fifty (50) mile radius of downtown Cleveland, Ohio. 2. As amended hereby, the Agreement shall continue in full force and effect and is hereby ratified and confirmed. 3. This Amendment No. 2 may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 2 IN WITNESS WHEREOF, the undersigned have executed this Amendment No. 2 as of the date set forth above. EXECUTIVE /s/ R. Scott Eynon ------------------------- R. Scott Eynon COMPANY D.I.Y. Home Warehouse, Inc., an Ohio corporation By: /s/ Fred A. Erb ----------------------- Fred A. Erb Its: Chairman EX-10.71 4 EXHIBIT 10.71 1 Exhibit 10.71 AMENDMENT NO. 1 TO AMENDED AND RESTATED EMPLOYMENT AGREEMENT This Amendment No. 1 to Amended and Restated Employment Agreement is executed as of March 11, 1999, by Eric I. Glassman (the "Executive") and D. I.Y. Home Warehouse, Inc., an Ohio corporation (the "Company"). RECITALS -------- A. Executive and the Company are parties to a certain Employment Agreement, dated as of July 1, 1998 (the "Agreement"). B. The parties desire to amend the Agreement as set forth below. NOW, THEREFORE, in consideration of the promises and mutual covenants contained herein and for other good and valuable consideration, the parties agree as follows: 1. Section 1 of the Agreement is hereby amended to read, in its entirety, as follows: 1. EMPLOYMENT. From and after the date of this Agreement (the "Effective Date") until December 31, 2001, unless sooner terminated as provided below or extended upon mutual agreement of the parties, the Company will employ Executive as the Vice President and Chief Financial Officer of the Company, to perform such services for and on behalf of the Company as the Company's Board of Directors may from time to time direct consistent with Executive's title and position, and Executive hereby accepts such employment, upon the terms and conditions set forth in this Agreement. Executive's principal place of business will be located .within a fifty (50) mile radius of downtown Cleveland, Ohio. 2. As amended hereby, the Agreement shall continue in full force and effect and is hereby ratified and confirmed. 3. This Amendment No. 1 may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 2 IN WITNESS WHEREOF, the undersigned have executed this Amendment No. 1 as of the date set forth above. EXECUTIVE /s/ Eric I. Glassman ---------------------------- Eric I. Glassman COMPANY D.I.Y. Home Warehouse, Inc., an Ohio corporation By: /s/ Fred A. Erb ------------------------- Fred A. Erb Its: Chairman EX-13.1 5 EXHIBIT 13.1 1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS D.I.Y. Home Warehouse, Inc. - --------------------------------------------- RESULTS OF OPERATIONS The following table sets forth, for the years indicated, certain information derived from the Company's Statement of Income expressed in dollars (000's) and as a percentage of net sales.
1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------- Net sales $ 172,600 100.0% $ 210,200 100.0 $ 212,068 100.0% Cost of sales 127,215 73.7 152,625 72.6 156,612 73.8 - ---------------------------------------------------------------------------------------------------------------------------- Gross profit 45,385 26.3 57,575 27.4 55,456 26.2 Store operating, general and administrative expenses 45,336 26.3 49,586 23.6 46,954 22.2 Store closing and development costs 2,143 1.2 1,436 0.7 -- -- - ---------------------------------------------------------------------------------------------------------------------------- Operating income (loss) (2,094) (1.2) 6,553 3.1 8,502 4.0 Other expenses, net 1,761 1.0 1,701 0.8 2,147 1.0 - ---------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes (benefit) .. (3,855) (2.2) 4,852 2.3 6,355 3.0 Income taxes (benefit) (1,556) (0.9) 1,980 0.9 2,570 1.2 - ---------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 2,299) (1.3) $ 2,872 1.4 $ 3,785 1.8% ============================================================================================================================
References to the years 1998, 1997 and 1996 relate to the fiscal years ended January 2, 1999, January 3, 1998 and December 28, 1996, respectively. Fiscal year 1997 consisted of 53 weeks; Fiscal years 1998 and 1996 consisted of 52 weeks. Fiscal 1998 Compared to Fiscal 1997 Fiscal 1998 consisted of 52 weeks compared to 53 weeks in fiscal 1997. Net sales decreased by $37.6 million, or 17.9%, from $210.2 million in fiscal 1997 to $172.6 million in fiscal 1998. Comparable store sales were impacted by additional national warehouse competition in a majority of the Company's markets. Gross profit decreased by $12.2 million, or 21.2%, from $57.6 million in fiscal 1997 to $45.4 million in fiscal 1998. Gross profit percentage, as a percentage of net sales, was 26.3% in fiscal 1998 compared to 27.4% in fiscal 1997. The decrease in gross margin percentage was impacted by the liquidation sales related to closing two stores during the fourth quarter of fiscal 1998. (See discussion below on store closings.) Also, a decrease in vendor rebates and discounts resulting from decreased inventory purchases in fiscal 1998 compared to fiscal 1997 impacted the 1998 gross margin. During fiscal 1998, the Company continued to focus on enhancing the balance sheet by reducing inventory levels. As a result, inventory purchases in fiscal 1998 were approximately $37.0 million lower than purchases during fiscal 1997. Store operating, general and administrative expenses decreased $4.3 million, or 8.6%, to $45.3 million in fiscal 1998 from $49.6 million in fiscal 1997. The decrease is due to the Company's ongoing efforts to reduce operating costs. As a percentage of net sales, store operating, general and administrative expenses increased to 26.3% in fiscal 1998 compared to 23.6% in fiscal 1997 due to lower sales on which to leverage these expenses. During the first quarter of 1998, the Company incurred approximately $306,000 in store development costs as part of completing new merchandising, marketing and other strategic initiatives implemented in fiscal year 1997. During the fourth quarter of fiscal 1998, the Company closed two of its stores. The Company incurred $1.8 million to close the two stores in the fourth quarter of fiscal 1998. Included in the costs are approximately $700,000 related to the write down of long lived assets of these two stores to their net realizable value. The remainder represents the operating costs incurred to close these stores. Other expenses, net of $1.7 million, remained relatively the same in fiscal 1998 compared to fiscal 1997. However, interest expense decreased by approximately $291,000 from $2.2 million in fiscal 1997 to $1.9 million in fiscal 1998 due primarily to the benefit of reduced debt levels on average amounts outstanding under the Revolving Credit Agreement and Mortgage Loans which were approximately $18.2 million during fiscal 1998 compared to $22.5 million during fiscal 1997. (See discussion on New Credit Facility under Cash Flows from Financing Activities.) The interest expense decrease was offset by the gain of $214,000 on the sale of property in fiscal 1997. The income tax benefit of $1.6 million for fiscal year 1998 consisted of approximately $622,000 of current federal income taxes, and $978,000 of deferred tax benefits. The Company has available net operating loss carryforwards of approximately $591,000 and $2,240,000 for federal and state income taxes, respectively, which expire principally in year 2018 (federal) and in year 2013 (state). In addition, the Company has available Alternate Minimum Tax credit carryforwards of approximately $202,000 which may be used indefinitely to reduce federal income taxes. The effective tax benefit was 40.4% in fiscal 1998 compared to an effective tax expense rate of 40.8% in fiscal 1997. Fiscal 1997 Compared to Fiscal 1996 Fiscal 1997 consisted of 53 weeks compared to 52 weeks in fiscal 1996. Net sales decreased by $1.9 million, or 1%, from $212.1 million in fiscal 1996 to $210.2 million in fiscal 1997. Comparable store sales decreased by 2% in fiscal 1997. Sales throughout fiscal 1997 were impacted by additional competition and sales during the first half of 1997 were negatively impacted by adverse weather conditions. Gross profit increased by $2.1 million, or 3.8%, to $57.6 million in fiscal 1997 from $55.5 million in fiscal 1996. As a percentage of net sales, gross profit was 27.4% and 26.2% in fiscal 1997 and 1996, respectively. The increase in gross margin percentage of 1.2% was a result of the Company's 2 2 year-long commitment to implementing programs to improve margin through re-negotiated vendor programs, vendor changes, conversion to direct purchase versus distributor purchase for certain product lines, freight and logistic programs, increased retail prices and enhanced information systems which provided tools to better manage this aspect of the business. Store operating, general and administrative expenses for fiscal 1997 were $49.6 million compared to $47.0 million in fiscal 1996. As a percentage of net sales, these expenses increased to 23.6% in fiscal 1997, from 22.2% in fiscal 1996. Operating expenses for fiscal 1997 increased over fiscal 1996 as a result of general increases in certain expenses including rent, real estate tax and personal property tax assessments and insurance, among others. Operating expenses in fiscal 1997 also include expenses for a full year from the new information system implemented in the second half of fiscal 1996. The Company incurred store developments costs of $1.4 million in fiscal year 1997. During 1997, management assessed the business strategies and opportunities of the Company to differentiate itself in the warehouse-format home improvement retail market. This comprehensive process resulted in the development of new merchandising, marketing and other strategic initiatives to strengthen the Company's market position. These programs were implemented on a Company-wide basis during the second through fourth quarters of fiscal 1997. In addition, comprehensive renovations of certain store locations were undertaken in 1997. Other expenses, net decreased by approximately $400,000 from $2.1 million in fiscal 1996 to $1.7 million in fiscal 1997 due primarily to benefits of reduced debt levels as average amounts outstanding under the Revolving Credit Agreement were approximately $7.2 million during fiscal 1997 compared to $11.7 million during fiscal 1996. The effective income tax rate was 40.8% in fiscal 1997 compared to 40.4% in fiscal 1996. LIQUIDITY AND CAPITAL RESOURCES The Statement of Cash Flows reflects cash inflows and outflows from the Company's operating, investing, and financing activities. The Company's primary capital needs are to finance merchandise inventories and store development activities. Cash Flows from Operating Activities During the year ended January 2, 1999, operating activities provided net cash of approximately $7.6 million. The primary source of cash from operating activities was $4.5 million from depreciation and amortization and $8.9 million from reducing inventories, offset by $2.2 million to reduce accounts payable and the Company's net loss of $2.3 million. During the year ended January 3, 1998, operating activities provided net cash of $4.4 million. The primary source of cash from operating activities was $6.2 from net income plus depreciation and amortization. The primary use of cash was $1.7 million to fund the increase in merchandise inventories and $1.7 million to reduce accounts payable. Cash Flows from Investing Activities Net cash used in investing activities was $1.4 million and $2.7 million in fiscal 1998 and 1997, respectively. Capital expenditures incurred in fiscal 1998 and 1997 of $1.4 million and $3.6 million relate primarily to store development costs associated with the comprehensive renovations of certain store locations. Fiscal year 1997 capital expenditures were offset by $851,000 from the sale of several parcels of property. The Company did not open any new stores in fiscal 1998 and 1997. Further expansion is not anticipated in 1999. Cash Flows from Financing Activities Net cash used in financing activities increased by $4.6 million from $1.6 million for the year ended January 3, 1998 to $6.2 million for the year ended January 2, 1999. The increase in fiscal 1998 is primarily due to a reduction in net borrowings under the revolving credit and mortgage loans of approximately $4.3 million as a result of lower inventory purchases. Net cash used in financing activities of $1.6 million in fiscal 1997 was primarily a result of net principal payments on the Company's mortgage loans, note payable and capital lease obligations. On October 27, 1998, the Company terminated its existing Revolving Credit Agreement with its two banks and entered into a new Credit and Security Agreement (Credit Agreement) with a bank. The new Credit Agreement provides for borrowings up to $20,000,000 pursuant to a formula based upon the Company's inventories with interest at the Company's option of either LIBOR or the prime rate for specified maturities adjusted by varying points in accordance with the Security Agreement. The new Credit Agreement extends through October 27, 2001. A commitment fee of .375 percent per annum is charged on the unused credit facility. Borrowings under the new Credit Agreement are collateralized substantially by all of the Company's assets, except for real estate which secures the existing Mortgage Loans. Concurrent with signing the new Credit Facility, the Company negotiated amendments to its existing Mortgage Loans which allowed the Company to convert its variable and half of its fixed Mortgage Loans aggregating $8,471,032 to borrowings under the new Credit Agreement. The Company had $10.1 million and $6.4 million outstanding on the Company's credit facilities at January 2, 1999 and January 3, 1998, respectively. The Company also had $5.7 million and $15.2 million outstanding at January 2, 1999 and January 3, 1998, respectively under mortgage loans and capital leases. The terms of the new Credit Agreement and Amended Mortgage Loans require the Company to meet certain financial covenants, and limit the level of additional indebtedness. Management believes cash on hand, cash from operations and cash available through the Company's financing agreements will be sufficient to meet the short and long-term working capital requirements. FORWARD-LOOKING STATEMENT This Annual Report may contain statements that are forward-looking, as that term is defined by the Private Securities Litigation Reform Act of 1995 or by the Securities and Exchange Commission in its rules, regulations and releases. The Company intends that such forward-looking statements be subject to the safe harbors created thereby. All forward-looking statements are based on current expectations regarding important risk factors. Accordingly, actual results may differ materially from those expressed in the forward-looking statements and the making of such statements should not be regarded as a representation by the Company or any other person that the results expressed therein will be achieved. Important risk factors include, but are not limited to, the following: general economic conditions; consumer spending and debt levels; housing turnover; weather; impact on sales and margins from both existing and new competition; changes in operating expenses; changes in product mix; interest rates; changes in and the application of accounting policies and practices; adverse results in significant litigation matters; adverse state and federal regulations and legislation; the occurrence of extraordinary events including events and acts of nature or accidents; and the risks described from time to time in the Company's Securities and Exchange Commission filings. 3 3 Dependence on Key Personnel The Company's operations depend on the continuing efforts of its executive officers and its senior management. Should the Company be unable to retain any of its executive officers or senior management, the Company's prospects could be adversely affected. Competition The home improvement, hardware and garden businesses are all highly competitive. The Company competes against traditional hardware, plumbing, electrical and home supply retailers, as well as warehouse-format and discount retail stores and many of the Company's competitors have substantially greater resources than the Company. Builders Square and Lowe's Company have had stores in the Company's markets since 1985 and 1994, respectively. However, Builders Square announced in the first quarter of 1999 that they will be exiting the marketplace in Northeastern Ohio. Lowe's continued to expand with additional locations in 1996, 1997 and 1998. In the fourth quarter of 1997 and continuing in 1998, Home Depot began operations in several of the Company's markets and Home Depot and Lowe's have announced further expansion plans in 1999. In addition, there has been increasing consolidation within the home improvement industry, which may provide certain entities increased competitive advantages. Specifically, increased competition including, but not limited to, additional competitors' store locations, price reductions, and advertising and marketing campaigns could have a material adverse effect on the Company's business. Seasonality The Company's business is seasonal in nature. On a per store basis, the Company generally experiences its lowest sales during the first and fourth quarters of each fiscal year. The Company believes the seasonality is caused by the effect of winter weather on consumers' willingness to undertake outdoor home improvement projects and the lack of significant sales of lawn and garden products during the first and fourth fiscal quarters. In addition, a longer or harsher period of winter weather than is usual in the Company's markets, or an excessively rainy or unseasonably cold spring season, could have a material adverse effect on the Company's sales. On a per store basis, the Company generally experiences its highest sales during the second and third quarters. However, gross profit margins are lower during the second quarter than in the third quarter due to higher sales of lawn and garden and lumber and building materials which generally carry lower gross profit margins than the Company's average gross profit margin. The Company's gross profit margins on kitchen, plumbing, bath, electrical and hardware are generally higher than the Company's average gross profit margin, and sales of such products are not as seasonal as sales of lawn and garden and building material products. The Company's quarterly results of operations may also fluctuate materially depending on the timing of new store openings, closings and store development activities. Inflation General inflation has not had a significant impact on the Company during the past three years. The Company's commodity products, primarily lumber and certain building materials, experience unusual deflation or inflation due to a combination of price volatility, increased demand and supply levels. Resulting price increases or decreases are generally passed on to customers through retail price changes and, accordingly, do not significantly impact the Company. Year 2000 Issue BACKGROUND. Some computers, software, and other equipment include programming code in which calendar year data is abbreviated to only two digits. As a result of this design decision, some of these systems could fail to operate or fail to produce correct results if "00" is interpreted to mean 1900, rather than 2000. These problems are widely expected to increase in frequency and severity as the year 2000 approaches, and are commonly referred to as the "Millennium Bug" or "Year 2000 Problem." ASSESSMENT. The Company has reviewed its internal computer programs and systems to ensure that the programs and systems will be Year 2000 compliant. The Company presently believes that its computer systems will be Year 2000 compliant in a timely manner. The Company has incurred approximately $150,000 and will expect to incur approximately an additional $150,000 to complete these efforts. INTERNAL INFRASTRUCTURE. The Company believes that it has identified substantially all of the major computers, software applications, and related equipment used in connection with its internal operations that must be modified, upgraded, or replaced to minimize the possibility of a material disruption to its business. The Company has commenced the process of modifying, upgrading, and replacing those systems that have been identified as affected, and expects to complete this process by the second quarter of fiscal 1999. SYSTEMS OTHER THAN INFORMATION TECHNOLOGY SYSTEMS. In addition to computers and related systems, the operation of office and facilities equipment, such as fax machines, photocopiers, telephone switches, security systems, and other common devices may be affected by the Year 2000 Problem. The Company is currently assessing the potential effect of, and costs of remediating, the Year 2000 Problem on its office and facilities equipment. The Company does not expect to incur any material costs to complete these efforts. Such costs are included in the estimate discussed above under "Assessments." SUPPLIERS. The Company has initiated communications with third party suppliers of the major computers, software, and other equipment used, operated, or maintained by the Company to identify and, to the extent possible, to resolve issues involving the Year 2000 Problem. However, the Company has limited or no control over the actions of these third party suppliers. Thus, while the Company expects that it will be able to resolve any significant Year 2000 Problems with these systems, there can be no assurance that these suppliers will resolve any or all Year 2000 Problems with these systems before the occurrence of a material disruption to the business of the Company or any of its customers. Any failure of these third parties to resolve Year 2000 problems with their systems in a timely manner could have a material adverse effect on the Company's business, financial condition, and results of operation. Based on the progress the Company has made in addressing its Year 2000 issues and the Company's plan and timeline to complete its compliance program, the Company does not foresee significant risks associated with its Year 2000 compliance at this time. As the Company's plan is to address its significant Year 2000 issues prior to being affected by them, it has not developed a comprehensive contingency plan. The Company expects to complete its Year 2000 compliance testing by the end of the Company's 1999 second quarter. At that time, the Company will assess the need for a contingency plan as deemed necessary. 4 4 STATEMENT OF INCOME D.I.Y. Home Warehouse, Inc. - -------------------
for the years ended January 2, 1999, January 3, 1998 and December 28, 1996 1998 1997 1996 - -------------------------------------------------------------------------------------------------------------------------- Net sales $ 172,600,414 $ 210,199,898 $ 212,068,262 Cost of sales 127,215,341 152,624,851 156,611,900 - -------------------------------------------------------------------------------------------------------------------------- GROSS PROFIT 45,385,073 57,575,047 55,456,362 - -------------------------------------------------------------------------------------------------------------------------- Operating expenses: Store operating, general and administrative 45,336,514 49,585,529 46,954,847 Store closing and development costs 2,143,394 1,436,416 -- - -------------------------------------------------------------------------------------------------------------------------- TOTAL OPERATING EXPENSES 47,479,908 51,021,945 46,954,847 - -------------------------------------------------------------------------------------------------------------------------- OPERATING INCOME (LOSS) (2,094,835) 6,553,102 8,501,515 Other income (expense): Interest expense, net (1,860,892) (2,151,662) (2,452,575) Other income, net 100,146 450,186 305,816 - -------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes (benefit) (3,855,581) 4,851,626 6,354,756 Income taxes (benefit) (1,556,130) 1,979,556 2,569,570 - -------------------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $ (2,299,451) $ 2,872,070 $ 3,785,186 ========================================================================================================================== EARNINGS (LOSS) PER COMMON SHARE, BASIC AND DILUTED $ (0.30) $ 0.38 $ 0.50 ========================================================================================================================== Weighted average common shares outstanding 7,594,540 7,633,825 7,626,702 ==========================================================================================================================
STATEMENT OF SHAREHOLDERS' EQUITY - ---------------------------------
for the years ended January 2, 1999, January 3, 1998 and December 28, 1996 Total Common Stock Retained Treasury Shareholders' Shares Amount Earnings Stock Equity - ------------------------------------------------------------------------------------------------------------------------------------ BALANCES, DECEMBER 30, 1995 7,625,000 $ 22,912,521 $ 10,526,839 -- $ 33,439,360 Shares issued under the Retainer Stock Plan for Non-Employee Directors 5,685 29,484 29,484 Net income 3,785,186 3,785,186 - ------------------------------------------------------------------------------------------------------------------------------------ BALANCES, DECEMBER 28, 1996 7,630,685 22,942,005 14,312,025 -- 37,254,030 Shares issued under the Retainer Stock Plan for Non-Employee Directors 3,174 13,457 13,457 Net income 2,872,070 2,872,070 - ------------------------------------------------------------------------------------------------------------------------------------ BALANCES, JANUARY 3, 1998 7,633,859 22,955,462 17,184,095 -- 40,139,557 Net loss (2,299,451) (2,299,451) Purchase of common stock for treasury (357,800) $ (201,441) (201,441) - ------------------------------------------------------------------------------------------------------------------------------------ BALANCES, JANUARY 2, 1999 7,276,059 $ 22,955,462 $ 14,884,644 $ (201,441) $ 37,638,665 ====================================================================================================================================
See Notes to Financial Statements. 5 5 BALANCE SHEET D.I.Y. Home Warehouse, Inc. - -------------
as of January 2, 1999 and January 3, 1998 1998 1997 - --------------------------------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 128,149 $ 141,401 Refundable federal income taxes 706,545 365,963 Merchandise inventories 31,261,721 40,156,756 Deferred income taxes 1,542,590 278,565 Prepaid expenses and other assets 780,086 846,350 - --------------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 34,419,091 41,789,035 - --------------------------------------------------------------------------------------------------------------------------- PROPERTY AND EQUIPMENT, AT COST: Land 4,275,402 4,275,402 Buildings 19,563,279 19,551,311 Furniture, fixtures and equipment 18,665,163 18,333,731 Leasehold improvements 11,246,915 10,166,236 - --------------------------------------------------------------------------------------------------------------------------- 53,750,759 52,326,680 Less accumulated depreciation and amortization 17,878,455 13,381,396 - --------------------------------------------------------------------------------------------------------------------------- Property and equipment, net 35,872,304 38,945,284 Other assets 385,910 474,888 - --------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 70,677,305 $ 81,209,207 =========================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Note payable, affiliate $ 300,000 $ 600,000 Current maturities of long-term debt 1,288,330 946,183 Accounts payable 8,462,635 10,615,039 Accrued expenses 4,078,679 3,917,720 Accrued sales and income taxes 1,151,434 1,530,710 Customer deposits 297,273 328,485 - --------------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 15,578,351 17,938,137 Revolving credit 10,134,153 6,375,000 Long-term debt 4,438,867 14,208,586 Deferred income taxes 2,887,269 2,547,927 - --------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 33,038,640 41,069,650 - --------------------------------------------------------------------------------------------------------------------------- Commitments -- -- SHAREHOLDERS' EQUITY: Preferred stock, authorized 1,000,000 shares, none issued -- -- Common stock, no par value, authorized 10,000,000 shares, issued 7,633,859 shares at January 2, 1999 and January 3, 1998 outstanding 7,276,059 and 7,633,859 shares at January 2, 1999 and January 3, 1998 respectively 22,955,462 22,955,462 Retained earnings 14,884,644 17,184,095 - --------------------------------------------------------------------------------------------------------------------------- 37,840,106 40,139,557 Less common stock in treasury, at cost: 357,800 shares (201,441) -- - --------------------------------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 37,638,665 40,139,557 - --------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 70,677,305 $ 81,209,207 ===========================================================================================================================
See Notes to Financial Statements. 6 6 STATEMENT OF CASH FLOWS D.I.Y. Home Warehouse, Inc.
for the years ended January 2, 1999, January 3, 1998 and December 28, 1996 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (2,299,451) $ 2,872,070 $ 3,785,186 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 4,504,100 3,372,876 3,201,110 Deferred income tax expense (924,683) 1,037,230 818,428 Common shares issued under Retainer Stock Plan -- 13,457 29,484 Net (gain) loss on disposal of property 3,649 (214,675) -- Changes in operating assets and liabilities: Refundable federal income taxes (340,582) (117,275) (248,688) Merchandise inventories 8,895,035 (1,694,631) 1,466,668 Prepaid expenses and other assets 66,264 55,575 (141,350) Other assets 88,978 102,554 107,738 Accounts payable (2,152,404) (1,663,416) (789,444) Accrued income taxes (235,644) (177,980) (148,105) Accrued expenses and other liabilities (13,885) 765,396 311,892 - ----------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 7,591,377 4,351,181 8,392,919 - ----------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of property and equipment (1,434,769) (3,599,180) (1,745,975) Proceeds from sale of property -- 850,911 -- - ----------------------------------------------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (1,434,769) (2,748,269) (1,745,975) - ----------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments, notes payable (300,000) (300,000) -- Principal payments under capital lease obligations (160,739) (157,624) (56,970) Principal payments of long-term debt (9,266,833) (1,540,247) (597,511) Proceeds from revolving credit 12,384,153 9,000,000 4,000,000 Principal payments, revolving credit (8,625,000) (8,625,000) (11,300,000) Purchase of treasury stock (201,441) -- -- - ----------------------------------------------------------------------------------------------------------------------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (6,169,860) (1,622,871) (7,954,481) - ----------------------------------------------------------------------------------------------------------------------- Net decrease in cash and cash equivalents (13,252) (19,959) (1,307,537) Cash and cash equivalents, beginning of year 141,401 161,360 1,468,897 - ----------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 128,149 $ 141,401 $ 161,360 ======================================================================================================================= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest $ 1,907,064 $ 2,146,071 $ 2,571,345 ======================================================================================================================= Cash paid for income taxes $ 456,288 $ 1,446,974 $ 2,146,248 ======================================================================================================================= SUPPLEMENTAL INVESTING AND FINANCING INFORMATION: Capital lease obligations incurred $ -- $ 23,310 $ 815,988 =======================================================================================================================
See Notes to Financial Statements. 7 7 NOTES TO FINANCIAL STATEMENTS D.I.Y. Home Warehouse, Inc. 1. Organization and Summary of Significant Accounting Policies D.I.Y. Home Warehouse, Inc. (DIY or the Company) operates retail warehouse-format home improvement centers that sell products primarily to do-it-yourself home repair and remodeling customers. The Company's "DIY Home Warehouse" stores are located in Northeast Ohio and range in size from 66,000 to 109,000 square feet of enclosed selling space and 12,000 to 20,000 square feet of outside selling space. The significant accounting policies followed in the preparation of the accompanying financial statements are summarized below. Fiscal Year The Company's fiscal year is comprised of 52 or 53 weeks, ending on the Saturday nearest December 31. Unless otherwise stated, references to the years 1998, 1997 and 1996 relate to the fiscal years ended January 2, 1999, January 3, 1998 and December 28, 1996, respectively. Fiscal year 1997 consisted of 53 weeks. Fiscal years 1998 and 1996 consisted of 52 weeks. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Financial Instruments The Company has provided fair value estimates and information about valuation methodologies of financial instruments in this note and Note 2 to the financial statements. The Company's financial instruments consist of investments in cash and cash equivalents and obligations under notes payable and long-term debt. Cash and Cash Equivalents Cash equivalents consist of short-term, highly liquid investments, with a maturity of three months or less, carried at cost plus accrued interest, which are readily convertible into cash. The carrying value for cash and cash equivalents approximates fair value. Concentration of Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash equivalents. The Company places its cash equivalents with high quality financial institutions. Merchandise Inventories Merchandise inventories are stated at the lower of cost or market, cost being determined on a first-in, first-out ("FIFO") method. Advertising Costs Advertising and promotion costs are charged to operations in the year incurred. Advertising expense was $2,624,787, $2,181,935 and $2,064,058 in 1998, 1997 and 1996, respectively. Store Closing and Development Costs Store Closing Costs - ------------------- In the fourth quarter of 1998, the Company announced the closing of two of its stores. The Company incurred $1,837,703 in the fourth quarter to close these stores. Also included in these costs are the write down of long-lived assets of these two stores to their net realizable value. Store Development Costs - ----------------------- The Company incurred $305,691 and $1,436,416 related to store development costs for the fiscal years ended January 2, 1999 and January 3, 1998. During 1997, management assessed the business strategies and opportunities of the Company to differentiate itself in the warehouse-format home improvement retail market. This comprehensive process related in the development of new merchandising, marketing and other strategic initiatives to strengthen the Company's market position. Select marketing and merchandising programs were implemented on a Company-wide basis during 1997 and the first quarter of 1998. Certain of the costs incurred in 1997 and 1998 relate to the development and creative design of these strategic concepts while other costs pertain to implementation including marketing, advertising, promotions and payroll costs. Property, Equipment and Depreciation Property and equipment are stated at cost and are depreciated for financial reporting purposes using the straight-line method over estimated useful lives of thirty-nine years for buildings and five to ten years for furniture, fixtures and equipment. Leasehold improvements are amortized by the straight-line method over the initial term of the lease. At retirement or sale, the cost of the assets and related accumulated depreciation are removed from the appropriate accounts, and any resulting gain or loss is included in current income. Routine maintenance, repairs and renewals are expensed as incurred. Renewals and betterments which substantially increase the life of property and equipment are capitalized. As discussed under store development and closing costs, the Company announced the closing of two of its stores during the fourth quarter of 1998. The Company closed the retail operations of these stores at the end of January 1999. The Company is actively marketing the one location owned by the Company. Included in property and equipment, net on the balance sheet are net assets of approximately $3.8 million held for resale. The Company estimates the net proceeds of the sale will approximate the property's net book value. Earnings Per Share Earnings per share have been computed according to Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." The denominators for calculating the Company's basic and diluted earnings per share are identical as all common stock equivalents are anti-dilutive as of January 2, 1999, January 3, 1998 and December 28, 1996. Income Taxes Income taxes are provided based upon income for financial reporting purposes. Deferred income taxes reflect the net tax effects of temporary differences 8 8 between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Tax credits are applied to reduce the provision for income taxes in the year in which the credits arise. Reclassifications Certain prior year balances have been reclassified to conform to current year presentation. 2. DEBT The Note payable, affiliate of $300,000 represents a note payable to Edgemere Enterprise, Inc., an entity owned by the Company's majority shareholder, which is due on demand. The note bears interest at three-quarters of one percent above the base lending rate of Comerica Bank and is subordinated to the Company's revolving credit facility and other debt with its banks. In April 1998 and 1997, the Company made principal payments of $300,000 each on the Note payable, affiliate in accordance with the terms of the subordination agreement with the Company's banks. Interest expense on the Note payable, affiliate was $31,526, $64,295 and $82,544 in 1998, 1997 and 1996, respectively. On October 27, 1998, the Company terminated its existing Revolving Credit Agreement with its two banks and entered into a new Credit and Security Agreement (Credit Agreement) with a bank. The new Credit Agreement provides for borrowings up to $20,000,000 pursuant to a formula based upon the Company's inventories with interest at the Company's option of either LIBOR or the prime rate for specified maturities adjusted by varying points in accordance with the Security Agreement. The new Credit Agreement extends through October 27, 2001. A commitment fee of .375 percent per annum is charged on the unused credit facility. Borrowings under the new Credit Agreement are collateralized substantially by all of the Company's assets, except for real estate. Concurrent with signing the new Credit Facility, the Company negotiated amendments to its existing Mortgage Loans which allowed the Company to convert its variable and half of its fixed Mortgage Loans aggregating $8,471,032 to borrowings under the new Credit Agreement. The Company had $10,134,153 and $6,375,000 outstanding on the Company's credit facilities at January 2, 1999 and January 3, 1998, respectively at weighted average annual interest rates of 7.2 percent at January 3, 1999 and 7.3 percent at January 3, 1998. Long-term debt consists of the following:
1998 1997 ----------------------------- Mortgage loans due in monthly installments of $98,206 including principal and interest at 10.3 percent per annum, due January 1, 2005, collateralized by certain real property. On December 23, 1999, the interest rate adjusts to 2.5 percent plus the then current 5 year Treasury Securities yield $ 3,821,737 $ 8,182,770 Mortgage loans due in monthly installments of $34,796 including principal and interest at 9.28 percent per annum, due May 1, 2005 collateralized by certain real property. On April 28, 2000, the interest rate adjusts to 2.5 percent plus the then current 5 year Treasury Securities yield 1,441,494 3,086,303 Mortgage loans, converted to new credit facility on October 27, 1998 -- 3,260,992 Capital lease obligations (Note 4) 463,966 624,704 - ----------------------------------------------------------------------------------------------------------------- Long-term debt 5,727,197 15,154,769 Less current maturities of long-term debt 1,288,330 946,183 - ----------------------------------------------------------------------------------------------------------------- Long-term debt, net of current maturities $ 4,438,867 $14,208,586 =================================================================================================================
Principal amounts of long-term debt payable, including capital lease obligations in fiscal years 1999 through 2003 are $1,288,330, $1,423,782, $1,461,492, $1,474,663, and $78,930, respectively. During fiscal years 1998, 1997 and 1996, interest expense was $1,865,949, $2,170,060 and $2,491,845, respectively. The carrying amount of the Company's notes payable and borrowings under the revolving credit facility approximate fair value. The fair value of the Company's long-term debt was estimated using a discounted cash flow analysis based on the Company's current incremental borrowing rate for similar types of borrowing arrangements. The carrying value of this debt, $5,727,197, was estimated to have a fair value of $6,100,000 at January 2, 1999. The terms of the new credit facility and amended mortgage loans require the Company to meet certain financial covenants and limit the level of additional indebtedness. 3. INCOME TAXES Income taxes include the following:
1998 1997 1996 ---------------------------------------------- Federal $ 622,968) $ 935,053 $ 1,307,458 Deferred (933,162) 761,469 859,083 State and local -- 283,034 403,029 - ------------------------------------------------------------------- $(1,556,130) $ 1,979,556 $ 2,569,570 ===================================================================
A reconciliation of the statutory federal income tax rate to the Company's effective income tax rate follows:
1998 1997 1996 ---------------------------- Statutory federal income tax rate (34.0)% 34.0% 34.0% State and local income taxes, net of federal benefit (6.3) 6.2 6.2 Tax credits and other (0.1) 0.6 0.2 - --------------------------------------------------------------------------------------- Effective income tax rate (40.4)% 40.8% 40.4% =======================================================================================
Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of assets and liabilities. The deferred tax assets (liabilities) shown on the balance sheet are as follows:
1998 1997 ----------------------------- Depreciation $(2,837,837) $(2,537,061) LIFO (169,113) (225,485) Accrued liabilities 876,045 297,896 State income tax 129,546 195,288 Net operating loss carry forwards 656,680 -- - -------------------------------------------------------------------- Net deferred tax (liability) $(1,344,679) $(2,269,362) ====================================================================
The Company has available net operating loss carryforwards of approximately $591,000 and $2,240,000 for federal and state income taxes, respectively, which expire principally in year 2018 (federal) and in year 2013 (state). In addition, the Company has available Alternate Minimum Tax credit carryforwards of approximately $202,000 which may be used indefinitely to reduce federal income taxes. 4. LEASES AND COMMITMENTS The Company leases eight retail stores, its corporate offices and warehouse under operating leases. In addition, two of the Company's retail stores are subject to land leases. The Company's operating leases have remaining terms from 1 to 10 years and have renewal options varying from 10 to 45 years. Six leases require 9 9 additional lease payments based upon a percentage of sales above certain sales levels. There were no percentage lease payment requirements for fiscal year 1998. Percentage lease payments were $24,090 and $42,463 in 1997 and 1996, respectively. In 1996, the Company entered into a capital lease for a new computer management information computer system. The lease is for 5 years and the lease can be renewed or the assets purchased at the end of the initial lease term. Future minimum rental payments required under operating and capital leases that have non-cancelable lease terms in excess of one year and sublease rentals due the Company under non-cancelable subleases are as follows:
Capital Operating Leases Leases --------------------------------- Lease Sublease Net Payments Rental Payments --------------------------------- Year ending: 1999 $3,943,403 $166,380 $3,777,023 $207,900 2000 3,737,826 153,195 3,584,631 207,900 2001 3,593,138 159,800 3,433,338 87,172 2002 2,589,374 119,000 2,470,374 2003 1,828,729 -- 1,828,729 Later years 5,249,330 -- 5,249,330 - ----------------------------------------------------------------- Total minimum lease payments $20,941,800 $598,375 $20,343,425 $502,972 ======================================================= Less amounts representing interest 39,006 - ----------------------------------------------------------------- Present value of net minimum lease payments $463,966 =================================================================
Total net rental expense for all operating leases for the years ended January 2, 1999, January 3, 1998 and December 28, 1996 was approximately $3,990,000, $3,943,000 and $3,738,000, respectively. Rental expense is net of sublease rental income of $187,500, $185,510 and $252,000 for the years ended January 2, 1999, January 3, 1998 and December 28, 1996, respectively. The Company leased four of its retail stores from the Company's majority shareholder or entities affiliated with him during fiscal years 1998, 1997 and 1996. The majority shareholder sold one of the retail stores to a third party during the fourth quarter of 1998. Rents associated with these leases were $1,784,555, $1,873,992 and $1,837,403 for the years ended January 2, 1999, January 3, 1998 and December 28, 1996, respectively. 5. STOCKHOLDERS' EQUITY Treasury Stock On November 11, 1998, the Company received an unsolicited offer from a brokerage firm on behalf of an existing shareholder to sell 357,800 shares of the Company's stock (the "Shares") at $9/16 ($0.563). At that time, due to the timing of the proposed transaction, the Company did not participate in the proposed sale and the shares were acquired by the Company's Chairman and Controlling Stockholder. On November 23, 1998, the Company accepted the Controlling Stockholder's offer to sell the Shares to the Company at the price per share which the Controlling Stockholder paid. The Company's decision to purchase the Shares was based on the Company's conclusion that the purchase would enhance shareholder value. The Company's lender approved the purchase of the Shares. The Company also announced that it has no present intention to acquire additional shares of its stock. Stock Options The Company has a Long Term Incentive Plan (the "Plan") which reserves 1,350,000 shares of the Company's authorized common stock for issuance. The Plan provides for the granting of incentive stock options to purchase shares of common stock at a price not less than 100% of the fair market value of the stock on the dates options are granted. Options granted under the Plan vest over three to five years at the rate of 33% to 20% each year and expire no more than ten years from the date of grant. On May 21, 1997, the Company's Board of Directors authorized an amendment to outstanding stock option awards to reprice such stock options at an exercise price equal to the fair market value of the stock as of that date. As a result, 796,000 options were repriced at the fair market value on May 21, 1997. The vesting period of such options was re-established to vest over 3 years at a rate of one-third per year. A summary of the Company's stock option activity and related information for fiscal years 1998, 1997 and 1996 is as follows:
Average Option Stock Option Price Per Share ----------------------------- Outstanding at December 30, 1995 673,000 $ 10.18 Granted 159,000 4.62 Canceled (31,000) 8.39 - ------------------------------------------------------------------ Outstanding at December 28, 1996 801,000 9.15 Granted 237,500 3.75 Canceled (40,500) 7.76 Canceled in connection with stock option repricing (796,000) 8.88 Granted in connection with stock option repricing 796,000 3.56 - ------------------------------------------------------------------ Outstanding at January 3, 1998 998,000 $ 3.68 Granted -- -- Canceled (113,000) 4.10 - ------------------------------------------------------------------ Outstanding at January 2, 1999 885,000 3.63 ==================================================================================
1998 1997 1996 -------------------------------------- Options exercisable at end of year 298,641 11,400 286,300 Weighted-average option price per share of options exercisable $ 3.75 $ 11.66 $ 10.65 Exercisable price per share for options at end of year: Exercisable $3.56 to $4.69 to $6.44 to $ 16.13 $ 16.13 $ 16.13 Outstanding $3.56 to $3.56 to $3.63 to $ 16.13 $ 16.13 $ 16.13 Weighted-average remaining contractual life (years): Exercisable 3.25 1.50 2.50 Outstanding 3.25 4.25 3.00 Options available for future grant 465,000 352,000 549,000
The Company applies APB Opinion Number 25 and related interpretations in accounting for its stock option plan. Accordingly, since all options are granted at a fixed price not less than the fair market value of the Company's common stock on the date of grant, no compensation expense has been recognized relative to its stock option plan. Had compensation expense for the Company's stock-based plan been determined based on the fair value at the 1998, 1997 and 1996 grant dates for awards under the plan consistent with the method of FASB Statement Number 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
1998 1997 1996 ------------------------------------------- Net income (loss) As Reported $(2,299,451) $2,872,070 $3,785,186 Pro Forma $(2,565,906) $2,664,621 $3,683,661 Earnings (loss) per common share As Reported $(0.30) $0.38 $0.50 Pro Forma $(0.34) $0.35 $0.48
The fair value of each option granted during fiscal years 1997 and 1996 was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions. There were no options granted in fiscal year 1998. 10 10
1997 1996 ------------------------------------------------- Shares Subject Shares Not Subject to Repricing to Repricing ------------------------------------------------- Risk free interest rates 6.46% 6.2 - 6.5% 5.4 - 5.7% Expected life (years) 4 5 5 Volatility 37% 38% 36% Dividend yield 0% 0% 0%
Option valuation models, like the Black-Scholes model, require the input of highly subjective assumptions including the expected stock price volatility. Since changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options or the resultant compensation expense for stock option awards. 6. EMPLOYEE BENEFIT PLAN The Company has a contributory 401(k) savings and investment plan for all employees who have obtained certain age and length of service requirements. Eligible employees may contribute up to 15 percent of their compensation to the plan, subject to any limitations imposed by federal income tax regulations. The Company partially matches participants' contributions. Effective February 1, 1997 the matching cash contribution was increased to 66 percent of a participant's contribution from 33.3 percent up to 6 percent of their compensation. Each employee controls the investment of funds credited to their respective account. Company contributions to this plan were $410,000, $476,051 and $211,789 for fiscal years 1998, 1997 and 1996, respectively. 7. QUARTERLY FINANCIAL DATA (UNAUDITED)
1998 1st 2nd 3rd 4th Total ------------------------------------------------------------------------------------------ Net sales $37,412,172 $56,334,029 $42,900,050 $35,954,163 $172,600,414 Gross profit 10,684,252 14,458,674 11,267,626 8,974,521 45,385,073 Net income (loss) (797,045) 885,394 (337,491) (2,050,309) (2,299,451) Earnings (loss) per common share $(0.10) $0.12 $(0.04) $(0.27) $(0.30) Weighted average common shares outstanding 7,633,859 7,633,859 7,633,859 7,476,584 7,594,540
The sum of the 1998 quarterly earnings (loss) per common shares does not equal fiscal 1998 earnings (loss) per common share due to the effects of rounding.
1997 1st 2nd 3rd 4th Total ------------------------------------------------------------------------------------------ Net sales $39,652,011 $66,857,265 $56,461,962 $47,228,660 $210,199,898 Gross profit 11,661,430 17,383,294 15,088,857 13,441,466 57,575,047 Net income (loss) (89,616) 1,969,304 882,708 109,674 2,872,070 Earnings (loss) per common share $(0.01) $0.26 $0.12 $0.01 $0.38 Weighted average common shares outstanding 7,633,719 7,633,859 7,633,859 7,633,859 7,633,825
REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors D.I.Y. Home Warehouse, Inc. In our opinion, the accompanying balance sheets and the related statements of income, shareholders' equity and of cash flows present fairly, in all material respects, the financial position of D.I.Y. Home Warehouse, Inc. at January 2, 1999 and January 3, 1998, and the results of its operations and its cash flows for each of the three years in the period ended January 2, 1999, in conformity with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP Cleveland, Ohio February 12, 1999 11 11 SELECTED FINANCIAL DATA AND OPERATING HIGHLIGHTS D.I.Y. Home Warehouse, Inc.
Fiscal Year ------------------------------------------------------------ (Amounts in thousands, except per share data) 1998 1997(1) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------- OPERATING RESULTS Net sales $172,600 $210,200 $212,068 $178,008 $136,369 Cost of sales 127,215 152,625 156,612 128,672 98,202 - ------------------------------------------------------------------------------------------------------------------------- Gross profit 45,385 57,575 55,456 49,336 38,167 Store operating, general and administrative expenses 45,336 49,586 46,954 40,935 30,333 Store preopening costs -- -- -- 1,778 1,200 Store closing and development costs 2,143 1,436 -- -- -- Other expense (income), net 1,761 1,701 2,147 1,431 (101) - ------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes (benefit) (3,855) 4,852 6,355 5,192 6,735 Income taxes (benefit) 1,556 1,980 2,570 2,082 2,654 - ------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ (2,299) $ 2,872 $ 3,785 $ 3,110 $ 4,081 ========================================================================================================================= Earnings (loss) per common share, basic and diluted $ (0.30) $ 0.38 $ 0.50 $ 0.41 $ 0.54 ========================================================================================================================= Weighted average common shares outstanding 7,595 7,634 7,627 7,625 7,625 =========================================================================================================================
(1) Fiscal year 1997 consisted of 53 weeks; all other years reported consisted of 52 weeks.
1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------ SELECTED OPERATING DATA Number of stores open at end of period 14 16 16 16 11 Interior selling square footage at end of period 1,189,000 1,369,000 1,353,000 1,353,000 918,000 Comparable store sales increase (decrease) (17.9)% (2)% 7% (5)% 8% Number of employees 1,009 1,254 1,334 1,325 939 (Amounts in thousands) 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------ BALANCE SHEET DATA (AT PERIOD END) Working capital $ 18,841 $ 23,851 $ 20,889 $ 23,297 $ 20,769 Total assets 70,677 81,209 79,764 83,500 58,519 Notes payable and current maturities of long-term debt 1,588 1,546 1,698 1,452 1,820 Long-term debt 14,573 20,584 22,031 29,415 14,767 Shareholders' equity 37,639 40,140 37,254 33,439 30,330
12 EX-23.1 6 EXHIBIT 23.1 1 Exhibit 23.1 EXHIBIT 23.1 TO ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 2, 1999 BY D.I.Y. HOME WAREHOUSE, INC. CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statement of D.I.Y. Home Warehouse, Inc. on Form S-8 (File No. 33-87020) of our report, dated February 12, 1999, on our audits of the Financial Statements of D.I.Y. Home Warehouse, Inc. as of January 2, 1999 and January 3, 1998 and for each of the three years in the period ended January 2, 1999, which report is included in Exhibit 13.1 of this Form 10-K. /s/ PricewaterhouseCoopers, LLP Cleveland, Ohio March 20, 1999 EX-27 7 EXHIBIT 27
5 1,000 YEAR JAN-02-1999 JAN-04-1998 JAN-02-1999 128 0 78 0 31,262 34,419 53,751 17,879 70,677 15,578 14,573 0 0 22,955 14,684 70,677 172,600 172,600 127,215 47,479 (100) 0 1,861 (3,855) (1,556) (2,299) 0 0 0 (2,299) (0.30) (0.30)
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