1
EXH 13.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------
RESULTS OF OPERATIONS
The following table sets forth, for the years indicated, certain information
derived from the Company's Statement of Operations expressed in dollars (000's)
and as a percentage of net sales. The financial information and the discussion
and analysis which follows should be read in conjunction with the accompanying
consolidated financial statements, including the notes thereto, for each of the
three years in the period ended January 1, 2000.
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1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
Net sales $ 128,478 100.0% $ 172,600 100.0% $ 210,200 100.0%
Cost of sales 94,830 73.8 127,215 73.7 152,625 72.6
- ------------------------------------------------------------------------------------------------------------------------------
Gross profit 33,648 26.2 45,385 26.3 57,575 27.4
Store operating, general and administrative expenses 33,373 26.0 45,336 26.3 49,586 23.6
Store closing and development costs 2,082 1.6 2,143 1.2 1,436 0.7
- ------------------------------------------------------------------------------------------------------------------------------
Operating (loss) income (1,807) (1.4) (2,094) (1.2) 6,553 3.1
Other expense, net 918 0.7 1,761 1.0 1,701 0.8
- ------------------------------------------------------------------------------------------------------------------------------
(Loss) income before income tax (benefit) expense (2,725) (2.1) (3,855) (2.2) 4,852 2.3
Income tax (benefit) expense (1,093) (0.9) (1,556) (0.9) 1,980 0.9
- ------------------------------------------------------------------------------------------------------------------------------
Net (loss) income $ (1,632) (1.3)% $ (2,299) (1.3)% $ 2,872 1.4%
==============================================================================================================================
References to the years 1999, 1998 and 1997 relate to the fiscal years ended
January 1, 2000, January 2, 1999 and January 3, 1998, respectively. Fiscal 1999
and 1998 consisted of 52 weeks while fiscal 1997 consisted of 53 weeks.
Fiscal 1999 Compared to Fiscal 1998
Net sales decreased by $44.1 million or 25.6% to $128.5 million during 1999
from $172.6 million during 1998. Continuing store sales, which exclude the
results of the two stores closed during the fourth quarter of 1998 and the three
stores closed during the second quarter of 1999 for both periods, decreased
$18.3 million or $13.4% to $118.1 million in 1999 to $136.4 million in 1998. The
decrease in net sales between the two periods was the result of additional
competition from national warehouse retailers in the Company's markets.
The Company anticipates that net sales for fiscal year 2000 will be below the
net sales recorded during 1999.
Gross profit decreased by $11.7 million or 25.9% to $33.6 million in 1999 from
$45.4 million in 1998. Negatively impacting gross profit during 1999 was $1.8
million of inventory markdown costs included in cost of sales related to the
liquidation of the merchandise inventory at the three stores closed during the
second quarter of 1999. In comparison, 1998's gross profit was negatively
impacted by $.8 million of inventory markdown costs included in cost of sales
related to the liquidation of the merchandise inventory at the two stores closed
during the fourth quarter of fiscal 1998. Continuing store gross profit as a
percentage of net sales, which excludes the results of the five closed stores
for both periods, increased to 27.8% in 1999 from 27.0% in 1998. The increase in
the continuing store gross profit percentage between the two periods reflects
the positive impact of the Company's merchandising mix adjustment.
The Company anticipates that gross profit as a percentage of net sales for
fiscal year 2000 will be comparable with the gross profit as a percentage of net
sales experienced during 1999.
Store operating, general and administrative expenses decreased $12.0 million
or 26.4% to $33.4 million in 1999 from $45.3 million in 1998. Continuing stores
operating, general and administrative expenses as a percentage of net sales,
which exclude the results of the five closed stores for both periods, decreased
to 26.1% in 1999 from 26.4% in 1998. The decrease in the continuing stores
operating, general and administrative expenses as a percentage of net sales
between the two periods reflects the Company's continued management of
controllable expenses despite lower sales volume against which to leverage such
costs. This management of controllable expenses included lower personnel costs
resulting from reduced store and corporate staffing levels, decreased
advertising expenditures, a reduction in the utilization of outside services and
an overall reduction in general operating expenses.
The Company anticipates that store operating, general and administrative
expenses for fiscal year 2000 will be below the store operating, general and
administrative expenses recognized during 1999.
During the first quarter of 1999, the Company recognized $.3 million of store
closing costs from the Bedford, Ohio and Canton, Ohio stores that were closed
during the fourth quarter of 1998. These expenses were recorded in the store
closing and development costs line item of the Company's operating statement.
During the second quarter of 1999, the Company announced the closure of three
stores located in Boardman, Ohio; Mansfield, Ohio; and Akron, Ohio. Concurrent
with the announcement, the Company sold the land and buildings of its Mansfield
and Canton stores for $8.6 million, resulting in a pre-tax gain of $1.9 million.
The gain on the sale of the property was offset by the expenses to close the
three stores which included a $2.6 million write-off of leasehold improvements
and property and equipment, a $.5 million lease termination fee and other store
closing costs of $.2 million. The gain on the sale of property as well as the
offsetting expenses were recorded in the store closing and development costs
line item of the Company's operating statement.
During the fourth quarter of 1999, the Company removed kitchen displays from
its stores in connection with the repositioning of its merchandising mix,
resulting in a $.4 million charge. These expenses were recorded in the store
closing and development costs line item of the Company's operating statement.
Other expense, net decreased $.8 million or 47.9% to $.9 million during 1999
from $1.8 million during 1998. The decrease in other expense, net primarily
reflects the $1.0 million reduction in mortgage interest expense between the two
periods. During 1999, the Company utilized the proceeds from the sale of
property as well as its revolving credit facility to extinguish the remainder of
its outstanding mortgage loans. The reduction in mortgage interest expense
between 1999 and 1998 was partially offset by a $.2 million increase in
revolving credit facility interest expense.
The Company anticipates that other expense, net for fiscal year 2000 will be
below the other expense, net recorded during 1999.
The $1.1 million in income tax benefit recorded during 1999 was comprised of
$.8 million of current federal income tax and $.3 million of deferred tax
benefits. The Company has available net operating loss carryforwards of
approximately $1.6 million and $5.6 million for federal and state income taxes,
respectively. The federal income tax net operating loss carryforwards will
expire principally in the year 2019. Similarly, of the $5.6 million in state
income tax net operating loss carryforwards, approximately $2.0 million will
expire principally in the year 2013 with the remainder expiring principally in
the year 2014. In addition, the Company has available Alternate Minimum Tax
credit carryforwards of approximately $.2 million which may be used indefinitely
to reduce
2
2
federal income taxes. The effective tax benefit rate was 40.1% in 1999 compared
to an effective tax benefit rate of 40.4% in 1998.
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 1997 to $172.6
million in 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 1997
to $45.4 million in 1998. Gross profit percentage, as a percentage of net sales,
was 26.3% in 1998 compared to 27.4% in 1997. The decrease in gross margin
percentage was impacted by the liquidation sales related to closing two stores
during the fourth quarter of 1998. (See discussion below on store closings.)
Also, a decrease in vendor rebates and discounts resulting from decreased
inventory purchases in 1998 compared to 1997 impacted the 1998 gross margin.
During 1998, the Company continued to focus on enhancing the balance sheet by
reducing inventory levels. As a result, inventory purchases in 1998 were
approximately $37.0 million lower than purchases during 1997.
Store operating, general and administrative expenses decreased $4.3 million,
or 8.6%, to $45.3 million in 1998 from $49.6 million in 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 1998 compared to 23.6% in 1997 due to lower sales on which to leverage
these expenses.
During the first quarter of 1998, the Company incurred approximately $.3
million in store development costs as part of completing new merchandising,
marketing and other strategic initiatives implemented in year 1997.
During the fourth quarter of 1998, the Company closed two of its stores. The
Company incurred $1.8 million to close the two stores in the fourth quarter of
1998. Included in the costs are approximately $.7 million 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 expense, net of $1.7 million, remained relatively the same in 1998
compared to 1997. However, interest expense decreased by approximately $.3
million from $2.2 million in 1997 to $1.9 million in 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 1998 compared to $22.5 million during 1997. The interest expense
decrease was offset by the gain of $.2 million on the sale of property in 1997.
The income tax benefit of $1.6 million for 1998 consisted of approximately $.6
million of current federal income taxes, and $1.0 million of deferred tax
benefits. The Company has available net operating loss carryforwards of
approximately $.6 million and $2.2 million 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 $.2 million which may be used indefinitely to
reduce federal income taxes.
The effective tax benefit was 40.4% in 1998 compared to an effective tax
expense rate of 40.8% in 1997.
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. The Company believes its
existing resources, including cash and cash equivalents, internally generated
funds and bank credit facilities will be sufficient to meet working capital
requirements for the next 12 months.
Cash Flows from Operating Activities
During the year ended January 1, 2000, operating activities provided net cash
of $3.0 million. The primary sources of cash from operating activities included
a $7.2 million reduction in merchandise inventories, $3.3 million from
depreciation and amortization and a $2.6 million loss on the write-off of
leasehold improvements and property and equipment related to the three stores
closed during 1999. Partially offsetting these positive cash flow items were the
$3.9 million decrease in accounts payable, the $3.3 million decrease in accrued
expenses and other liabilities, the $1.9 million gain on the sale of certain
closed stores' property and the Company's $1.6 million net loss for 1999.
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 $3.7 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 provided by investing activities increased by $9.2 million to $7.8
million during 1999 from net cash used in investing activities of $1.4 million
during 1998. The increase in cash provided by investing activities between the
two periods was due primarily to the $8.1 million in net proceeds from the sale
of land and buildings of the Company's former Mansfield and Canton stores. Net
cash provided by investing activities during 1999 was also positively impacted
by the absence of $1.1 million in additional capital expenditures experienced
during 1998.
Net cash used in investing activities was $1.4 million and $2.7 million in
1998 and 1997, respectively. Capital expenditures incurred in 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.
Capital expenditures during 1997 were offset by $.8 million from the sale of
several parcels of property.
Cash Flows from Financing Activities
Net cash used in financing activities increased by $4.4 million to $10.6
million during 1999 from $6.2 million during 1998. The increase in net cash used
in financing activities between the two periods primarily reflects the $8.6
million increase in net payments against the Company's revolving credit
facility, partially offset by a $4.0 million decrease in mortgage loan payments.
As noted previously, the Company sold the land and buildings of its former
Mansfield and Canton stores for $8.6 million during 1999. These proceeds,
combined with an overall reduction in the utilization of the revolving credit
facility due to lower inventory purchase levels, enabled the Company to reduce
the outstanding balance of its revolving credit facility and extinguish the
remaining outstanding balances on its mortgage loans.
Net cash used in financing activities increased by $4.6 million from $1.6
million during 1997 to $6.2 million during 1998. The increase in net cash used
in financing activities between the two periods was due primarily to the
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 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 entered into a Credit and Security Agreement
(Credit Agreement) with a bank. The Credit Agreement provides for borrowings up
to $20.0 million 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 Credit Agreement extends through October 27, 2001. A commitment fee of .375%
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, other than real estate.
The terms of the Credit Agreement require the Company to meet certain
financial covenants, and limit the level of additional indebtedness. The Company
was in compliance with all restrictive covenants of the Credit Agreement at
January 1, 2000.
The Company had $5.3 million and $10.1 million outstanding under its 3
revolving credit facilities at January 1, 2000 and January 2, 1999,
respectively.
3
3
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.
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 filed for Chapter 7 bankruptcy protection and exited the Northeastern
Ohio marketplace during 1999. Lowe's has continued to expand, opening additional
locations in 1996, 1997 and 1998. In the fourth quarter of 1997 and continuing
through 1999, Home Depot began operations in several of the Company's markets.
Both Home Depot and Lowe's have announced further expansion plans in 2000. 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 furniture,
plumbing, 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 were widely expected to increase in frequency and severity into
and beyond 2000, and are commonly referred to as the "Millennium Bug" or "Year
2000 Problem."
ASSESSMENT. The Company completed its review of its internal computer programs
and systems prior to January 1, 2000 to ensure that the programs and systems
would be Year 2000 compliant. Upon entering the 2000 calendar year, the Company
did not encounter any significant Year 2000 problems and has been able to
operate its business in the normal course without interruption. Additionally,
the Company does not anticipate encountering any significant Year 2000 issues
with its internal computer programs and systems as it continues to operate
during the 2000 calendar year and beyond. The Company incurred approximately $.4
million to complete its Year 2000 efforts and does not anticipate incurring any
additional expenditures related to Year 2000 issues.
INTERNAL INFRASTRUCTURE. The Company believes that it identified and
subsequently modified, upgraded or replaced substantially all of the major
computers, software applications, and related equipment used in connection with
its internal operations prior to January 1, 2000 to ensure that there would be
no material disruption to its business. Upon entering the 2000 calendar year,
the Company did not encounter any significant Year 2000 problems with its
internal infrastructure and has been able to operate its business in the normal
course without interruption. Additionally, the Company does not anticipate
encountering any significant Year 2000 issues with its internal infrastructure
as it continues to operate during the 2000 calendar year and beyond. As such,
the Company does not anticipate incurring any additional expenditures related to
Year 2000 issues.
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. Upon entering the 2000
calendar year, the Company did not experience any significant Year 2000 problems
with its office and facilities equipment and has been able to operate its
business in the normal course without interruption. Additionally, the Company
does not anticipate encountering any significant Year 2000 problems with its
office and facilities equipment as it continues to operate during the 2000
calendar year and beyond. The Company did not incur any material costs to
address Year 2000 issues in its office and facilities equipment and does not
anticipate incurring any additional expenditures related to Year 2000 issues.
SUPPLIERS. The Company communicated with third party suppliers of the major
computers, software, and other equipment used, operated, or maintained by the
Company prior to January 1, 2000 and identified and, where necessary, resolved
issues involving the Year 2000 Problem. Upon entering the 2000 calendar year,
the Company did not experience any significant Year 2000 problems with these
third party suppliers and has been able to operate its business in the normal
course without interruption. Additionally, the Company does not anticipate
encountering any significant Year 2000 issues with these third party suppliers
as it continues to operate during the 2000 calendar year and beyond.
Based on the procedures completed by the Company prior to January 1, 2000 and
the absence of any significant Year 2000 problems since entering the 2000
calendar year, the Company does not foresee any significant risks associated
with its Year 2000 compliance at this time. As such, the Company will continue
to operate without developing a comprehensive contingency plan as it is deemed
to be unnecessary.
4
4
STATEMENT OF OPERATIONS D.I.Y. Home Warehouse, Inc.
- -----------------------
-----------------------------------------------------
for the years ended January 1, 2000, January 2, 1999 and January 3, 1998 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
Net sales $ 128,477,523 $ 172,600,414 $ 210,199,898
Cost of sales 94,829,103 127,215,341 152,624,851
- -------------------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 33,648,420 45,385,073 57,575,047
- -------------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Store operating, general and administrative 33,372,877 45,336,514 49,585,529
Store closing and development costs 2,082,542 2,143,394 1,436,416
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 35,455,419 47,479,908 51,021,945
- -------------------------------------------------------------------------------------------------------------------------------
OPERATING (LOSS) INCOME (1,806,999) (2,094,835) 6,553,102
Other (expense) income:
Interest expense, net (1,029,603) (1,860,892) (2,151,662)
Other income, net 111,315 100,146 450,186
- -------------------------------------------------------------------------------------------------------------------------------
(Loss) income before income tax (benefit) expense (2,725,287) (3,855,581) 4,851,626
Income tax (benefit) expense (1,093,702) (1,556,130) 1,979,556
- -------------------------------------------------------------------------------------------------------------------------------
NET (LOSS) INCOME $ (1,631,585) $ (2,299,451) $ 2,872,070
===============================================================================================================================
NET (LOSS) EARNINGS PER COMMON SHARE, BASIC AND DILUTED $ (0.22) $ (0.30) $ 0.38
===============================================================================================================================
Weighted average common shares outstanding, basic and diluted 7,276,059 7,594,540 7,633,825
===============================================================================================================================
STATEMENT OF STOCKHOLDERS' EQUITY
- ---------------------------------
for the fiscal years ended January 1, 2000, January 2, 1999 and January 3, 1998
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Total
Common Stock Retained Treasury Stockholders'
--------------------------- Earnings Stock Equity
Shares Amount
-------------------------------------------------------------------------------
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
Net loss (1,631,585) (1,631,585)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCES, JANUARY 1, 2000 7,276,059 $ 22,955,462 $ 13,253,059 $ (201,441) $ 36,007,080
===================================================================================================================================
See Accompanying Notes to Financial Statements.
5
5
D.I.Y. Home Warehouse, Inc.
BALANCE SHEET
--------------------------------------
as of January 1, 2000 and January 2, 1999 1999 1998
- ---------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 309,349 $ 128,149
Refundable federal income taxes 606,170 706,545
Merchandise inventories 24,084,280 31,261,721
Deferred income taxes 1,636,875 1,542,590
Prepaid expenses and other assets 936,087 780,086
- ---------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 27,572,761 34,419,091
- ---------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, AT COST:
Land 2,409,742 4,275,402
Buildings 14,578,286 19,563,279
Furniture, fixtures and equipment 12,611,952 17,825,865
Capital lease assets 839,298 839,298
Leasehold improvements 8,739,049 11,246,915
- ---------------------------------------------------------------------------------------------------------------
39,178,327 53,750,759
Less accumulated depreciation and amortization 15,142,429 17,878,455
- ---------------------------------------------------------------------------------------------------------------
Property and equipment, net 24,035,898 35,872,304
Other assets 196,437 385,910
- ---------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 51,805,096 $ 70,677,305
===============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable, affiliate $ -- $ 300,000
Current maturities of long-term debt 188,900 1,288,330
Accounts payable 4,572,801 8,462,635
Accrued payroll and related expenses 1,264,433 1,935,110
Accrued expenses 871,332 2,143,569
Accrued sales and income taxes 554,043 1,151,434
Customer deposits 73,623 297,273
- ---------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 7,525,132 15,578,351
Revolving credit 5,310,031 10,134,153
Long-term debt 100,055 4,438,867
Deferred income taxes 2,862,798 2,887,269
- ---------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 15,798,016 33,038,640
- ---------------------------------------------------------------------------------------------------------------
Commitments -- --
STOCKHOLDERS' EQUITY:
Preferred stock, authorized 1,000,000 shares, none issued -- --
Common stock, no par value, 10,000,000 authorized shares,
7,633,859 shares issued at January 1, 2000 and January 2, 1999 22,955,462 22,955,462
- ---------------------------------------------------------------------------------------------------------------
Retained earnings 13,253,059 14,884,644
Treasury stock, 357,800 shares at cost (201,441) (201,441)
- ---------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 36,007,080 37,638,665
- ---------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 51,805,096 $ 70,677,305
===============================================================================================================
See Accompanying Notes to Financial Statements.
6
6
STATEMENT OF CASH FLOWS D.I.Y. Home Warehouse, Inc.
- -----------------------
for the fiscal years ended January 1, 2000, January 2, 1999 -------------------------------------------------
and January 3, 1998 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (1,631,585) $ (2,299,451) $ 2,872,070
Adjustments to reconcile net (loss )income to net cash
provided by operating activities:
Depreciation and amortization 3,282,134 3,655,549 3,372,876
Deferred income tax expense (118,756) (924,683) 1,037,230
Common shares issued under Retainer Stock Plan -- -- 13,457
Net gain on sale of property from closed stores (1,859,734) -- --
Loss on write-off of leasehold improvements and property
and equipment from closed stores 2,619,701 848,551 --
Net loss (gain) on disposal of property 10,042 3,649 (214,675)
Changes in operating assets and liabilities:
Refundable federal income taxes 100,375 (340,582) (117,275)
Merchandise inventories 7,177,441 8,895,035 (1,694,631)
Prepaid expenses and other current assets (156,001) 66,264 55,575
Other assets 189,473 88,978 102,554
Accounts payable (3,889,834) (2,152,404) (1,663,416)
Accrued sales and income taxes (597,391) (235,644) (177,980)
Accrued expenses and other liabilities (2,166,564) (13,885) 765,396
- -----------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,959,301 7,591,377 4,351,181
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (312,478) (1,434,769) (3,599,180)
Proceeds from sale of property 8,096,741 -- 850,911
- -----------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 7,784,263 (1,434,769) (2,748,269)
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments, notes payable (300,000) (300,000) (300,000)
Principal payments under capital lease obligations (175,011) (160,739) (157,624)
Principal payments of long-term debt (5,263,231) (9,266,833) (1,540,247)
Proceeds from revolving credit 6,728,464 12,384,153 9,000,000
Principal payments, revolving credit (11,552,586) (8,625,000) (8,625,000)
Purchase of treasury stock -- (201,441) --
- -----------------------------------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (10,562,364) (6,169,860) (1,622,871)
- -----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 181,200 (13,252) (19,959)
Cash and cash equivalents, beginning of year 128,149 141,401 161,360
- -----------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 309,349 $ 128,149 $ 141,401
=======================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 1,143,153 $ 1,907,064 $ 2,146,071
=======================================================================================================================
Cash Paid For Income Taxes $ 180,000 $ 456,288 $ 1,446,974
=======================================================================================================================
SUPPLEMENTAL INVESTING AND FINANCING INFORMATION:
Capital lease obligations incurred $ -- $ -- $ 23,310
=======================================================================================================================
See Accompanying 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
1999, 1998 and 1997 relate to the fiscal years ended January 1, 2000, January 2,
1999 and January 3, 1998, respectively. Fiscal 1999 and 1998 consisted of 52
weeks while fiscal 1997 consisted of 53 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 - Debt to the
accompanying 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 $1,387,964, $2,624,787 and $2,181,935 in 1999,
1998 and 1997, respectively.
Store Closing Costs
During the first quarter of 1999, the Company incurred $259,656 of additional
closing costs associated with the closure of its Bedford, Ohio and Canton, Ohio
stores announced during the fourth quarter of 1998. These expenses have been
included in the store closing and development costs line item of the
accompanying statement of operations.
During the second quarter of 1999, the Company announced the closing of its
Boardman, Ohio; Mansfield, Ohio and Akron, Ohio stores and incurred $1,472,887
in closing costs, net of a gain on the sale of property from closed stores of
$1,859,734 (see Property, Equipment and Depreciation below). Included in these
net costs are the $2,619,701 write down of long-lived assets of these three
stores to their net realizable value, a $463,327 lease termination fee and
miscellaneous other closing costs of $249,593. These expenses have been included
in the store closing and development costs line item of the accompanying
statement of operations. In addition to these operating expenses, the Company
incurred $1,773,000 of inventory markdown costs related to the liquidation of
the merchandise inventories of the three closed stores. These inventory markdown
costs have been included in the cost of sales line item of the accompanying
statement of operations.
During the fourth quarter of 1998, the Company announced the closing of two of
its Bedford and Canton stores and recorded $1,837,703 of expense to close these
stores. Included in these costs are the write down of long-lived assets of these
two stores to their net realizable value. These expenditures have been included
in the store closing and development costs line item of the accompanying
statement of operations. In addition to these operating expenses, the Company
incurred $780,000 of inventory markdown costs related to the liquidation of the
merchandise inventories of the two closed stores. These inventory markdown costs
have been included in the cost of sales line item of the accompanying statement
of operations.
Store Development Costs
In connection with the repositioning of its merchandising mix, the Company
incurred $349,999 in store development expenses during the fourth quarter of
1999 to eliminate kitchen displays in its stores. These costs have been included
in the store closing and development costs line item of the accompanying
statement of operations.
The Company incurred $305,691 and $1,436,416 in store development costs during
1998 and 1997. During 1997, management assessed the business strategies and
opportunities available to the Company for it 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. 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. These expenditures have been included in the store closing and
development costs line item of the accompanying statement of operations.
Property, Equipment and Depreciation
Property and equipment are recorded at historical cost and are depreciated
over the estimated useful lives of the assets using the straight-line method for
financial reporting purposes. The ranges of the estimated useful lives are:
buildings, 39 years; furniture, fixtures and equipment, 5-10 years; and
leasehold improvements, over the shorter of the useful life of the asset or 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. Fully depreciated
assets are written off against accumulated depreciation. Routine maintenance,
repairs and renewals are expensed as incurred. Renewals and improvements which
substantially increase the life of property and equipment are capitalized.
In the second quarter of 1999, the Company sold the land and buildings of its
closed Mansfield and Canton stores for net proceeds of $8,096,741. These sales
resulted in a pre-tax gain of $1,859,734 which has been included in the store
closing and development costs line item of the accompanying statement of
operations.
Depreciation expense for 1999, 1998 and 1997 amounted to $3,282,134,
$3,655,549 and $3,372,876, respectively. Amortization of capital lease assets
has been included in depreciation expense. Accumulated amortization related to
capital leases amounted to $595,817, $429,364 and $261,504 in 1999, 1998 and
1997 respectively.
8
8
Earnings Per Share
Earnings per share have been computed according to Financial Accounting
Standards Board ("FASB") Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" as follows:
Fiscal Year Ended
----------------------------------------------------
January 1, 2000 January 2, 1999 January 3, 1998
----------------------------------------------------
Net (loss) income applicable to
common shares $(1,631,585) $(2,299,451) $ 2,872,070
=================================================================================================
Weighted average common shares
outstanding for the period 7,276,059 7,594,540 7,633,825
Diluted effect of exercise of stock options -- -- --
- -------------------------------------------------------------------------------------------------
Weighted average common shares, assuming
issuance of the above securities 7,276,059 7,594,540 7,633,825
=================================================================================================
Net (loss) earnings per common share:
Basic $ (0.22) $ (0.30) $ 0.38
Diluted $ (0.22) $ (0.30) $ 0.38
Options to purchase 928,000 shares of common stock at a weighted average
exercise price of $3.14 per share were outstanding at January 1, 2000 but were
not included in the computation of diluted earnings per share for 1999 because
the options would have an anti-dilutive effect on the net loss for the year.
Options to purchase 885,000 shares of common stock at a weighted average
exercise price of $3.63 per share were outstanding at January 2, 1999 but were
not included in the computation of diluted earnings per share for 1998 because
the options would have an anti-dilutive effect on the net loss for the year.
Options to purchase 998,000 shares of common stock at a weighed average
exercise price of $3.68 per share were outstanding at January 3, 1998 but were
not included in the computation of diluted earnings per share for 1997 because
the options' exercise prices were greater than the average market price for the
common shares for the year.
Reclassifications
Certain items in the 1998 and 1997 financial statements and notes thereto have
been reclassified to conform to the 1999 presentation.
2. DEBT
The Company has a Credit and Security Agreement (the "Credit Agreement") with
a bank. The 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 as specified in the Credit Agreement. The Credit Agreement
extends through October 27, 2001. A commitment fee of .375% per annum is charged
on the unused credit facility. Borrowings under the Credit Agreement are
collateralized substantially by all of the Company's assets, except for real
estate. The terms of the Credit Agreement require the Company to meet certain
financial covenants and limit the level of additional indebtedness. The Company
was in compliance with all restrictive covenants of the Credit Agreement at
January 1, 2000.
The Company had $5,310,031 and $10,134,153 outstanding under the Credit
Agreement at January 1, 2000 and January 2, 1999, respectively, at weighted
average annual interest rates of 7.4% during 1999 and 7.2% during 1998.
Long-term debt consists of the following: ---------------------
1999 1998
---------------------
Mortgage loans due in monthly installments of $98,206 including
principal and interest at 10.3% per annum, due January 1,
2005, collateralized by certain real property. $ -- $3,821,737
Mortgage loans due in monthly installments of $34,796 including
principal and interest at 9.28% per annum, due May 1,
2005, collateralized by certain real property. -- 1,441,494
Capital lease obligations (Note 4) 288,955 463,966
- --------------------------------------------------------------------------------------------------
Long-term debt 288,955 5,727,197
Less current maturities of long-term debt 188,900 1,288,330
- --------------------------------------------------------------------------------------------------
Long-term debt, net of current maturities $100,055 $4,438,867
==================================================================================================
Principal amounts of long-term debt payable, including capital lease
obligations in fiscal years 2000 and 2001 are $189,900 and $100,055,
respectively.
The carrying amount of the Company's borrowings under the Credit Agreement
approximate fair value. The fair value of the Company's long-term debt
outstanding at January 2, 1999 was estimated using a discounted cash flow
analysis based on the Company's then-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 Note payable, affiliate balance of $300,000 outstanding as of January 2,
1999 represented a demand note payable to Edgemere Enterprise, Inc., an entity
owned by the Company's majority shareholder. The note bore interest at .75%
above the base lending rate of Comerica Bank and was subordinated to the
Company's revolving credit facility and other debt with its banks. During 1999,
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
$7,650, $31,526, and $64,295 during 1999, 1998 and 1997, respectively.
During 1999, 1998 and 1997, interest expense was $1,032,114, $1,865,949 and
$2,170,060, respectively.
3. INCOME TAXES
The Company accounts for income taxes in accordance with the FASB Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). Under SFAS No. 109, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities and are measured using the tax rates and laws that are currently in
effect.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Income tax (benefit) expense include the following:
-----------------------------------------------
1999 1998 1997
-----------------------------------------------
Federal $ (800,464) $ (622,968) $ 935,053
Deferred (293,238) (933,162) 761,469
State and local -- -- 283,034
- -------------------------------------------------------------------
$(1,093,702) $(1,556,130) $ 1,979,556
===================================================================
A reconciliation of the statutory federal income tax rate to the Company's
effective income tax rate follows:
------------------------------
1999 1998 1997
------------------------------
Statutory federal income tax rate (34.0) % (34.0)% 34.0%
State and local income taxes, net of federal benefit (5.9) (6.3) 6.2
Tax credits and other (0.2) (0.1) 0.6
- ----------------------------------------------------------------------------------------
Effective income tax (benefit) expense rate (40.1)% (40.4)% 40.8%
========================================================================================
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:
--------------------------------
1999 1998
--------------------------------
Depreciation $(2,954,566) $(2,837,837)
LIFO (110,511) (169,113)
Accrued liabilities 470,244 876,045
State income tax 59,410 129,546
Net operating loss carry forwards 1,309,500 656,680
- -------------------------------------------------------------------------
Net deferred tax liability $(1,225,923) $(1,344,679)
=========================================================================
The Company has available net operating loss carryforwards of approximately
$1,553,000 and $5,585,000 for federal and state income taxes, respectively. The
federal income tax net operating loss carryforwards will expire principally in
the year 2019. Similarly, of the $5,585,000 in state income tax net operating
loss carryforwards, approximately $2,011,000 will expire principally in the year
2013 with the remainder expiring principally in the year 2014. In addition,
9
9
the Company has available Alternate Minimum Tax credit carryforwards of
approximately $171,000 which may be used indefinitely to reduce federal income
taxes.
4. LEASES AND COMMITMENTS
The Company leases six 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 8 years and have renewal options varying from 2 to 45 years. Five of the
Company's leases require additional lease payments based upon a percentage of
sales above certain sales levels. There were no percentage lease payment
requirements during 1999 or 1998. Percentage lease payments totaled $24,090
during 1997.
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 Lease
Payments Rental Payments Payments
Year ending: -------------------------------------------------------
2000 $ 3,023,684 $ 190,695 $ 2,832,989 $207,900
2001 2,830,022 209,800 2,620,222 100,925
2002 1,860,579 131,500 1,729,079 --
2003 1,065,147 -- 1,065,147 --
2004 1,000,068 -- 1,000,068 --
Thereafter 1,480,235 -- 1,480,235 --
- -----------------------------------------------------------------------------
Total minimum
lease payments $11,259,735 $ 531,995 $10,727,740 $308,825
==================================================================
Less amounts
representing interest 19,870
- -----------------------------------------------------------------------------
Present value of net
minimum lease
payments $288,955
=============================================================================
Total net rental expense for all operating leases for 1999, 1998 and 1997 was
approximately $4,130,985, $3,990,000 and $3,943,000, respectively. Total net
rental expense is net of sublease rental income of $219,880, $187,500 and
$185,510 for 1999, 1998, and 1997, respectively. Also included in total net
rental expense for 1999 was $463,327 of lease termination fees associated with
the closure of the Boardman store.
The Company leased three of its retail stores from the Company's majority
shareholder or affiliated entities during 1999 and four of its retail stores
during 1998 and 1997. 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 $1,357,820, $1,784,555 and $1,873,992 during 1999, 1998 and 1997,
respectively.
5. 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 reestablished 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 1999, 1998 and 1997 is as follows:
-----------------------------------
Average Option
Stock Option Price Per Share
-----------------------------------
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
Canceled (113,000) $ 4.10
- ---------------------------------------------------------------------------
Outstanding at January 2, 1999 885,000 $ 3.63
Granted 155,000 $ 0.79
Canceled (112,000) $ 3.73
- ---------------------------------------------------------------------------
Outstanding at January 2, 1999 928,000 $ 3.14
================================================================================================
--------- --------- ---------
1999 1998 1997
--------- --------- ---------
Options exercisable at end of year 602,681 298,641 11,400
Weighted-average option price per share
of options exercisable $ 3.23 $ 3.75 $ 11.66
Options available for future grant 422,000 465,000 352,000
Options Outstanding Options Exercisable
- ----------------------------------------------------------------------------------------------------------
Range of Outstanding at Weighted Avg. Weighted Avg. Exercisable at Weighted Avg.
Exercise Prices January 1, 2000 Contractual Life Exercise Price January 1, 2000 Exercise Price
- ----------------------------------------------------------------------------------------------------------
$0.44 35,000 4.17 $0.44 -- --
$.075 30,000 4.67 $0.75 -- --
$1.00 80,000 4.50 $1.00 80,000 $1.00
$3.56 779,000 2.33 $3.56 519,281 $3.56
$4.69 3,000 1.67 $4.69 2,400 $4.69
$9.00 1,000 -- $9.00 1,000 $9.00
------- -------
928,000 602,681 $3.23
======= =======
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" 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 1999, 1998 and 1997 grant dates for
awards under the plan consistent with the method of FASB Statement of Financial
Accounting Standard No. 123, "Accounting for Stock-Based Compensation", the
Company's net (loss) income and (loss) earnings per share would have been
reduced to the pro forma amounts indicated below:
------------------------------------------
1999 1998 1997
------------------------------------------
Net (loss) income As Reported $(1,631,585) $ (2,299,451) $2,872,070
Pro Forma $(1,861,827) $ (2,565,906) $2,664,621
Net (loss) earnings
per common share,
basic and diluted As Reported $ (0.22) $ (0.30) $0.38
Pro Forma $ (0.26) $ (0.34) $0.35
The fair value of each option granted during 1999 and 1997 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.
-------------------------------------------------
1999 1997
-------------------------------------------------
Shares Subject Shares Not Subject
to Repricing to Repricing
-------------------------------------------------
Risk free interest rates 5.1% - 6.0% 6.5% 6.2 - 6.5%
Expected life (years) 5 4 5
Volatility 82% 37% 38%
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.
10
10
6. TREASURY STOCK TRANSACTIONS
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.
7. 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% of their compensation to the plan,
subject to any limitations imposed by federal income tax regulations. In
addition, the Company matches 66% of the participants' contributions up to 6% of
their compensation. Each employee controls the investment of funds credited to
their respective account. Company contributions to this plan were $387,676,
$410,000 and $476,051 during 1999, 1998 and 1997, respectively.
8. QUARTERLY FINANCIAL DATA (UNAUDITED)
-----------------------------------------------------------------------------------------
1999 1st 2nd 3rd 4th(a) Total(b)
-----------------------------------------------------------------------------------------
Net sales $ 29,162,507 $ 46,086,969 $ 29,309,501 $ 23,918,546 $ 128,477,523
Gross profit 8,410,291 10,273,571 8,086,499 6,878,059 33,648,420
Net (loss) income (733,005) (758,759) 328,455 (468,276) (1,631,585)
Net (loss) earnings
per common share,
basic and diluted $ (0.10) $ (0.10) $ 0.05 $ (0.06) $ (0.22)
Weighted average
common shares
outstanding, basic
and diluted 7,276,059 7,276,059 7,276,059 7,276,059 7,276,059
(a) During the fourth quarter of 1999, the Company reduced its general
liability reserve by $325,863 to better reflect its recent actual claims
experience. Additionally, the Company recorded $349,999 in store
development costs during the fourth quarter of 1999 to eliminate kitchen
displays in its stores.
(b) The sum of the 1999 quarterly earnings (loss) per common shares amounts do
not equal the fiscal 1999 loss per common share due to the effects of
rounding.
-----------------------------------------------------------------------------------------
1998 1st 2nd 3rd 4th(a) Total(b)
-----------------------------------------------------------------------------------------
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 (loss) income (797,045) 885,394 (337,491) (2,050,309) (2,299,451)
Net (loss) earnings
per common share,
basic and diluted $ (0.10) $ 0.12 $ (0.04) $ (0.27) $ (0.30)
Weighted average
common shares
outstanding, basic
and diluted 7,633,859 7,633,859 7,633,859 7,476,584 7,594,540
(a) Fourth quarter adjustments were not material to the quarterly results of
operations.
(b) The sum of the 1998 quarterly earnings (loss) per common shares amounts do
not equal the fiscal 1998 loss per common share due to the effects of
rounding.
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- ---------------------------------
To the Stockholders and Board of Directors
D.I.Y. Home Warehouse, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of D.I.Y. Home Warehouse, Inc. at
January 1, 2000 and January 2, 1999, and the results of its operations and its
cash flows for each of the three years in the period ended January 1, 2000, in
conformity with accounting principles generally accepted in the United States.
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
auditing standards generally accepted in the United States, 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 16, 2000
11
11
SELECTED FINANCIAL DATA AND OPERATING HIGHLIGHTS D.I.Y. Home Warehouse, Inc.
- ------------------------------------------------
Fiscal Year
----------------------------------------------------------------
(Amounts in thousands, except per share data) 1999 1998 1997(1) 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
OPERATING RESULTS
Net sales $ 128,478 $ 172,600 $ 210,200 $ 212,068 $ 178,008
Cost of sales 94,830 127,215 152,625 156,612 128,672
- ----------------------------------------------------------------------------------------------------------------------------------
Gross profit 33,648 45,385 57,575 55,456 49,336
Store operating, general and administrative expenses 33,373 45,336 49,586 46,954 40,935
Store preopening costs -- -- -- -- 1,778
Store development and closing costs 2,082 2,143 1,436 -- --
Other expense, net 918 1,761 1,701 2,147 1,431
- ----------------------------------------------------------------------------------------------------------------------------------
(Loss) income before income tax (benefit) expense (2,725) (3,855) 4,852 6,355 5,192
Income tax (benefit) expense (1,093) (1,556) 1,980 2,570 2,082
- ----------------------------------------------------------------------------------------------------------------------------------
Net (loss) income $ (1,632) $ (2,299) $ 2,872 $ 3,785 $ 3,110
==================================================================================================================================
Net (loss) earnings per common share, basic and diluted $ (0.22) $ (0.30) $ 0.38 $ 0.50 $ 0.41
==================================================================================================================================
Weighted average common shares outstanding, basic and diluted 7,276 7,595 7,634 7,627 7,625
==================================================================================================================================
(1) Fiscal year 1997 consisted of 53 weeks; all other years reported consisted
of 52 weeks.
---------------------------------------------------------------------
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
SELECTED OPERATING DATA
Number of stores open at end of period 11 14 16 16 16
Interior selling square footage at end of period 930,700 1,189,000 1,369,000 1,353,000 1,353,000
Comparable store sales increase (decrease) (13.2)% (17.9)% (2)% 7% (5)%
Number of employees 702 1,009 1,254 1,334 1,325
---------------------------------------------------------------------
(Amounts in thousands) 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA (at period end)
Working capital $ 20,048 $ 18,841 $ 23,851 $ 20,889 $ 23,297
Total assets 51,805 70,677 81,209 79,764 83,500
Notes payable and current maturities of long-term debt 189 1,588 1,546 1,698 1,452
Long-term debt, less current maturities 5,410 14,573 20,584 22,031 29,415
Stockholders' equity 36,007 37,639 40,140 37,254 33,439
12