1
Exhibit 13.1
2000
ANNUAL REPORT
[D.I.Y. LOGO]
2
[D.I.Y. LOGO]
1
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Dear Stockholders
2
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Management's Discussion
and Analysis of Financial
Condition and Results of
Operations
7
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Statement of Operations
7
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Statement of
Stockholders' Equity
8
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Balance Sheet
9
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Statement of Cash Flows
10
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Notes to Financial
Statements
15
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Report of Independent
Accountants
16
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Selected Financial Data and
Operating Highlights
17
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Corporate Information
D.I.Y. HOME WAREHOUSE, INC. IS A REGIONAL RETAILER OF HOME IMPROVEMENT PRODUCTS
AND BUILDING MATERIALS IN THE NORTHEASTERN OHIO MARKETPLACE. FOCUSING PRIMARILY
UPON THE DO-IT-YOURSELF CONSUMER, DIY IS DISTINGUISHED BY ITS MERCHANDISING AND
ITS EMPHASIS UPON A HIGH LEVEL OF CUSTOMER SERVICE.
FINANCIAL HIGHLIGHTS
D.I.Y. Home Warehouse, Inc.
for the years ended December 30, 2000,
January 1, 2000 and January 2, 1999 2000 1999 1998
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STATEMENT OF INCOME DATA
Net sales $ 75,646,326 $ 128,477,523 $ 172,600,414
Loss before income tax benefit $ (9,406,006) $ (2,725,287) $ (3,855,581)
Net loss $ (8,391,735) $ (1,631,585) $ (2,299,451)
Net loss per common share, basic and diluted $ (1.15) $ (0.22) $ (0.30)
FINANCIAL POSITION
Total assets $ 38,807,272 $ 51,805,096 $ 70,677,305
Long term debt, less current maturities $ -- $ 5,410,086 $ 14,573,020
Stockholders' equity $ 27,615,345 $ 36,007,080 $ 37,638,665
STATISTICS
Number of stores at year end 9 11 14
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DEAR STOCKHOLDERS:
D.I.Y. Home Warehouse, Inc. survived another year of intense competition
and uncertainty during 2000. Our national competitors - Home Depot and Lowe's -
continued to roll out large new stores across our northeast Ohio marketplace.
Pressures from the competition caused us to close two of our 11 stores and to
concentrate our energies and resources on merchandise categories in which we
believe DIY holds a competitive advantage.
FINANCIAL PERFORMANCE
The Company's net loss widened to $8,392,000, or $(1.15) per share, for
the year ended December 30, 2000. This compares with a net loss of $1,632,000,
or $(0.22) per share, for the previous year. Included in the results for 2000
were pre-tax costs of $3,486,000 associated with store closings and inventory
markdowns. In 1999, similar costs amounted to $3,506,000 on a pre-tax basis.
Increased losses in 2000 were the direct result of a 41.1 percent decrease
in sales. Net sales for the year ended December 30, 2000, were $75,646,000,
compared with $128,478,000 in 1999. Excluding the effect of store closings,
competitive pressures resulted in a comparable store sales decrease of 33.6
percent in 2000.
Gross profit rose to 26.5 percent of sales in 2000, versus 26.2 percent in
1999. Excluding store closings and inventory liquidation markdowns from both
periods, our gross profit in 2000 was 28.3 percent, compared with 27.9 percent
in 1999, reflecting a shift in sales to higher margin merchandise. At the same
time, however, lower sales volumes deprived us the opportunity to more fully
leverage expenses. While store operating, general and administrative expenses
were reduced by more than 20 percent during the year, the cost of our operating
structure could not be downsized far enough or fast enough to keep pace with the
decline in sales.
DIY's cash flow from operations and investing activities slowed to
$287,000 in 2000, largely as a result of the net loss from operations. The
Company's balance sheet, however, remained relatively strong. At year end, we
had Working Capital of $6,642,000, Stockholders' Equity of $27,615,000 and no
long-term debt. Total debt outstanding of $5,168,000 consisted almost entirely
of a revolving credit balance. Interest paid in 2000 decreased by 34.8 percent
to $745,000 from $1,143,000 in 1999.
FOCUS ON ASSET MANAGEMENT AND SALES GROWTH
During these difficult times, the Company has intensified its focus on
managing assets and stabilizing sales trends. Our remaining stores will continue
to implement strategies to maximize results from our strongest and most
successful departments, including garden center/seasonal, paints,
ready-to-assemble furniture and value-oriented flooring. The Company is also
working aggressively to sell or redeploy closed store facilities.
GOING FORWARD
This is a difficult period in time for D.I.Y. Home Warehouse, Inc. We see
no simple or quick remedy to competitive pressure caused by enormous levels of
new retail square footage built to serve our marketplace. Given the extremely
difficult circumstances, management is resolved to be prudent and proactive in
operating the Company to maximize value to stockholders, and to offer customers
the best possible combination of merchandise, convenience and service. We
continue to appreciate the support of our customers, associates, stockholders
and vendors as we strive for success in the future.
Sincerely,
/s/ FRED A. ERB /s/ CLIFFORD L. REYNOLDS
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Fred A.Erb Clifford L. Reynolds
Chairman of the Board President and Chief Executive Officer
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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 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
financial statements, including the notes thereto, for each of the three years
in the period ended December 30, 2000.
2000 1999 1998
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Net sales $ 75,646 100.0% $ 128,478 100.0% $ 172,600 100.0%
Cost of sales 55,608 73.5 94,830 73.8 127,215 73.7
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Gross profit 20,038 26.5 33,648 26.2 45,385 26.3
Store operating, general and administrative expenses 26,506 35.0 33,373 26.0 45,336 26.3
Store closing and development costs 2,245 3.0 2,082 1.6 2,143 1.2
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Operating loss (8,713) (11.5) (1,807) (1.4) (2,094) (1.2)
Other expense, net 693 0.9 918 0.7 1,761 1.0
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Loss before income tax benefit (9,406) (12.4) (2,725) (2.1) (3,855) (2.2)
Income tax benefit (1,014) (1.3) (1,093) (0.8) (1,556) (0.9)
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Net loss $ (8,392) (11.1)% $ (1,632) (1.3)% $ (2,299) (1.3)%
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References to the years 2000, 1999 and 1998 relate to the fiscal years ended
December 30, 2000, January 1, 2000 and January 2, 1999, respectively. Fiscal
years 2000, 1999 and 1998 consisted of 52 weeks.
FISCAL 2000 COMPARED TO FISCAL 1999
Net sales decreased by $52.8 million or 41.1% to $75.6 million during 2000
from $128.5 million during 1999. Continuing store sales, which excludes the
results of the three stores closed during the second quarter of 1999 and the two
stores closed during the third quarter of 2000 for both periods, decreased $35.0
million or 33.6% to $69.1 million during 2000 from $104.1 million during 1999.
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 2001 will be below the
net sales recorded during 2000.
Gross profit decreased by $13.6 million or 40.4% to $20.0 million during 2000
from $33.6 million during 1999. Negatively impacting gross profit during 2000
was $1.2 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 third quarter of 2000. In comparison, 1999's gross profit was negatively
impacted by $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. Continuing store gross profit as a
percentage of net sales, which excludes the results of the five closed stores
for both periods, increased to 28.3% during 2000 from 27.9% during 1999. The
increase in the continuing store gross profit percentage between the two periods
reflects the positive impact of the Company's adjustment of its merchandising
mix.
The Company anticipates that gross profit as a percentage of net sales for
fiscal year 2001 will be comparable with the gross profit as a percentage of net
sales experienced during 2000.
Store operating, general and administrative expenses decreased $6.9 million
or 20.6% to $26.5 million during 2000 from $33.4 million during 1999. Although
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, increased to 34.9% during 2000 from 25.7% during 1999, these same
continuing stores expenses decreased $2.7 million or 10.1% between the two
periods. The increase in the continuing stores operating, general and
administrative expenses as a percentage of net sales between the two periods
reflects the Company's lower continuing store sales volumes against which to
leverage such costs while the decrease in these expense between the same two
periods highlights the Company's continued management of controllable expenses.
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 2001 will be below the store operating, general and
administrative expenses recognized during 2000.
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During the third quarter of 2000, the Company announced the closure of its
North Randall, Ohio and Tallmadge Avenue (Akron, Ohio) locations. In connection
with the store closures, the Company recorded a charge of $1.7 million for costs
expected to be incurred in closing both locations, including $.9 million in net
rent obligations, $.3 million for estimated real estate taxes and $.2 million
for expected utility costs for the North Randall store. Additionally, the
Company also recorded a $.7 million write-off of the net leasehold improvements
and property and equipment of these stores during the third quarter of 2000.
During the fourth quarter of 2000, the Company received proceeds of $.2 million
from the sale of certain of these assets written off during the third quarter,
reducing the 2000 net write-off of net leasehold improvements and property and
equipment to $.5 million. These store closure charges, aggregating $2.2 million,
were recorded in the store closing and development costs line item in the
accompanying statement of operations.
The Company is currently in negotiations to sublease the North Randall store.
Any sublease rental income generated by the North Randall store will be recorded
as a reduction to the net rent obligation accrued for as of December 30, 2000.
Other expenses, net decreased $.2 million or 24.5% to $.7 million during 2000
from $.9 million during 1999. The decrease in other expenses, net primarily
reflects the $.2 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 Company anticipates that other expenses, net for fiscal year 2001 will be
below the other expenses, net recorded during 2000.
The $1.0 million in income tax benefit recorded during 2000 was comprised of
$1.2 million of federal deferred tax benefits, partially offset by $.2 million
of current state and local income tax. The Company has available net operating
loss carryforwards of $5.7 million and $9.1 million for federal and state income
taxes, respectively. The federal income tax net operating loss carryforwards
will expire principally in the year 2020. Similarly, of the $9.1 million in
state income tax net operating loss carryforwards, approximately $3.4 million
will expire principally in the year 2014 with the remainder expiring in the year
2015. In addition, the Company has available Alternate Minimum Tax credit
carryforwards of $.1 million which may be used indefinitely to reduce federal
income taxes. The effective tax rate was 10.8% during 2000 compared to an
effective tax rate of 40.1% during 1999. This change in the effective tax rate
was principally due to the establishment of a valuation allowance of $2.6
million during 2000 against the net deferred tax assets in accordance with the
provisions of the FASB Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes". The establishment of the valuation allowance was
based on the Company's assessment that it was more likely than not that such
assets would not be realized through future taxable earnings or implementation
of tax planning strategies. This valuation allowance was recorded in the income
tax benefit line item in the accompanying statement of operations.
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 excludes 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.
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 adjustment of its merchandising mix.
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.
During the first quarter of 1999, the Company recognized $.3 million of store
closing costs associated with the closure of the Bedford, Ohio and Canton, Ohio
stores during the fourth quarter of 1998. These expenses were recorded in the
store closing and development costs line item in the accompanying statement of
operations.
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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 in the accompanying statement of operations.
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 in the accompanying statement of
operations.
Other expenses, net decreased $.8 million or 47.9% to $.9 million during 1999
from $1.8 million during 1998. The decrease in other expenses, 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 $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 $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 $.2
million which may be used indefinitely to reduce 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.
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, bank credit facilities, pending real estate transactions and the ability
to further liquidate inventories and real property will be sufficient to meet
working capital requirements for the next 12 months.
CASH FLOWS FROM OPERATING ACTIVITIES
During the year ended December 30, 2000, operating activities provided net
cash of $.2 million. The primary sources of cash from operating activities
included a $7.3 million reduction in merchandise inventories, $2.6 million from
depreciation and amortization, a $1.5 million increase in accrued expenses and
other liabilities, a $.6 million reduction in refundable federal income taxes
and a $.5 million loss on the write-off of leasehold improvements and property
and equipment related to the two stores closed during 2000. Partially offsetting
these positive cash flow items were the Company's $8.4 million net loss for
2000, the $2.8 million decrease in accounts payable and the $1.2 million
reduction in net deferred tax liabilities.
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.
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash provided by investing activities decreased by $7.7 million to $.1
million during 2000 from net cash provided by investing activities of $7.8
million during 1999. The decrease in cash provided by investing activities
between the two periods was due primarily to the absence, during 2000, of the
$8.1 million in proceeds received during 1999 from the sale of land and
buildings of the Company's former Mansfield and Canton stores. This decrease was
partially offset by the $.2 million reduction in the acquisition of property and
equipment between the two periods as well as the $.2 million of proceeds
received during 2000 for the sale of property and equipment from the two stores
closed during the current year.
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
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million during 1998. The increase in cash provided by investing activities
between the two periods was due primarily to the $8.1 million in 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 which were primarily related to the
comprehensive renovations of certain store locations.
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash used in financing activities decreased by $10.1 million to $.4
million during 2000 from $10.6 million during 1999. The decrease in net cash
used in financing activities between the two periods was due primarily to the
absence, during 2000, of $5.3 million in mortgage loan payments and $.3 million
of notes payable payments as well as the $4.6 million reduction in net payments
against the Company's revolving credit facility.
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.
During the third quarter of 2000, the Company permanently reduced its
aggregate revolving credit commitment from $20,000,000 to $13,000,000 under the
terms of its October 27, 1998 Credit and Security Agreement (the "Credit
Agreement") with a bank. The Credit Agreement provided for borrowings 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. Additionally, during this
same period, the Company violated certain of the restrictive covenants under the
Credit Agreement arising from the Company's year-to-date third quarter 2000
financial results.
On November 14, 2000, the Company entered into an agreement with the bank
waiving the restrictive covenant violations and amending the Credit Agreement
(the "Amended Credit Agreement"). The Amended Credit Agreement reduced the
aggregate revolving credit commitment from $13,000,000 to $10,000,000 and
replaced the original financial covenants. Borrowings under the Amended Credit
Agreement continue to be collateralized substantially by all of the Company's
assets, except for real estate. A commitment fee of .375% per annum is charged
on the unused credit facility. The Amended Credit Agreement extends through
October 27, 2001, at which time management believes that the Company will have
the ability to extend the Amended Credit Agreement, will have sufficient
positive cash flows or will have the ability to meet working capital
requirements through further liquidation of inventories or real property.
Sufficient positive cash flows to meet working capital requirements are expected
to be met, in part, by proceeds from various real estate transactions that are
currently being negotiated by management. These real estate transactions include
either the sale or sublease of certain Company store locations.
The Company had $5.1 million and $5.3 million outstanding under the Amended
Credit Agreement and Credit Agreement at December 30, 2000 and January 1, 2000,
respectively, at weighted average annual interest rates of 8.9% during 2000 and
7.4% during 1999. The Company was in compliance will all restrictive covenants
of the Amended Credit Agreement at December 30, 2000.
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
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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. Lowe's Company entered the Company's market in the
third quarter of 1994 and has continued to expand, opening additional locations
in the Company's markets during 1996, 1997, 1998 and 2000. In the fourth quarter
of 1997, Home Depot opened its first store in the Company's market and continued
to expand its operations into additional Company markets during 1998, 1999 and
2000. Additionally, both Home Depot and Lowe's have announced further expansion
plans into the Company's markets during 2001. 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
cabinetry, ready-to-assemble furniture, electrical and hardware products 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 store closings and 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.
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STATEMENT OF OPERATIONS D.I.Y. Home Warehouse, Inc.
for the fiscal years ended December 30, 2000,
January 1, 2000 and January 2, 1999 2000 1999 1998
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Net sales $ 75,646,326 $ 128,477,523 $ 172,600,414
Cost of sales 55,608,348 94,829,103 127,215,341
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GROSS PROFIT 20,037,978 33,648,420 45,385,073
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Operating expenses:
Store operating, general and administrative 26,505,649 33,372,877 45,336,514
Store closing and development costs 2,245,097 2,082,542 2,143,394
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TOTAL OPERATING EXPENSES 28,750,746 35,455,419 47,479,908
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OPERATING LOSS (8,712,768) (1,806,999) (2,094,835)
Other (expense) income:
Interest expense, net (737,775) (1,029,603) (1,860,892)
Other income, net 44,537 111,315 100,146
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Loss before income tax benefit (9,406,006) (2,725,287) (3,855,581)
Income tax benefit (1,014,271) (1,093,702) (1,556,130)
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NET LOSS $ (8,391,735) $ (1,631,585) $ (2,299,451)
==========================================================================================================================
NET LOSS PER COMMON SHARE, BASIC AND DILUTED $ (1.15) $ (0.22) $ (0.30)
==========================================================================================================================
Weighted average common shares outstanding, basic and diluted 7,276,059 7,276,059 7,594,540
==========================================================================================================================
See accompanying notes to financial statements.
STATEMENT OF STOCKHOLDERS' EQUITY
for the fiscal years ended December 30, 2000, January 1, 2000 and January 2, 1999
Total
Common Stock Retained Treasury Stockholders'
Shares Amount Earnings Stock Equity
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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)
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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
Net loss (8,391,735) (8,391,735)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 30, 2000 7,276,059 $ 22,955,462 $ 4,861,324 $(201,441) $27,615,345
==================================================================================================================================
See accompanying notes to financial statements.
7
10
BALANCE SHEET D.I.Y. Home Warehouse, Inc.
as of December 30, 2000 and January 1, 2000 2000 1999
- ----------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 164,993 $ 309,349
Refundable federal income taxes -- 606,170
Merchandise inventories 16,752,775 24,084,280
Deferred income taxes -- 1,636,875
Prepaid expenses and other assets 915,801 936,087
- ----------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 17,833,569 27,572,761
- ----------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, AT COST:
Land 2,409,742 2,409,742
Buildings 14,579,471 14,578,286
Furniture, fixtures and equipment 10,387,935 12,611,952
Capital lease assets 839,298 839,298
Leasehold improvements 7,859,110 8,739,049
- ----------------------------------------------------------------------------------------------------------
36,075,556 39,178,327
Less accumulated depreciation and amortization 15,197,333 15,142,429
- ----------------------------------------------------------------------------------------------------------
Property and equipment, net 20,878,223 24,035,898
Other assets 95,480 196,437
- ----------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 38,807,272 $ 51,805,096
==========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 99,276 $ 188,900
Revolving credit 5,068,811 --
Accounts payable 1,774,633 4,572,801
Accrued payroll and related expenses 1,295,968 1,264,433
Accrued store closing costs 1,477,976 --
Accrued expenses 874,827 871,332
Accrued sales and income taxes 583,196 554,043
Customer deposits 17,240 73,623
- ----------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 11,191,927 7,525,132
Revolving credit -- 5,310,031
Long-term debt -- 100,055
Deferred income taxes -- 2,862,798
- ----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 11,191,927 15,798,016
- ----------------------------------------------------------------------------------------------------------
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 December 30, 2000 and January 1, 2000 22,955,462 22,955,462
Retained earnings 4,861,324 13,253,059
Treasury stock, 357,800 shares at cost (201,441) (201,441)
- ----------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 27,615,345 36,007,080
- ----------------------------------------------------------------------------------------------------------
Commitments -- --
- ----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 38,807,272 $ 51,805,096
==========================================================================================================
See accompanying notes to financial statements.
8
11
STATEMENT OF CASH FLOWS D.I.Y. Home Warehouse, Inc.
for the fiscal years ended December 30, 2000,
January 1, 2000 and January 2, 1999 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(8,391,735) $(1,631,585) $(2,299,451)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 2,561,253 3,282,134 3,655,549
Deferred income tax expense (1,225,923) (118,756) (924,683)
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 510,695 2,619,701 848,551
Net loss on disposal of property 16,934 10,042 3,649
Changes in operating assets and liabilities:
Refundable federal income taxes 606,170 100,375 (340,582)
Merchandise inventories 7,331,505 7,177,441 8,895,035
Prepaid expenses and other current assets 20,286 (156,001) 66,264
Other assets 100,957 189,473 88,978
Accounts payable (2,798,168) (3,889,834) (2,152,404)
Accrued sales and income taxes 29,153 (597,391) (235,644)
Accrued expenses and other liabilities 1,456,623 (2,166,564) (13,885)
- ----------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 217,750 2,959,301 7,591,377
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (105,403) (312,478) (1,434,769)
Proceeds from sale of property from closed stores 174,196 8,096,741 --
- ----------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 68,793 7,784,263 (1,434,769)
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments, notes payable -- (300,000) (300,000)
Principal payments under capital lease obligations (189,679) (175,011) (160,739)
Principal payments of long-term debt -- (5,263,231) (9,266,833)
Purchase of treasury stock -- -- (201,441)
Proceeds from revolving credit 5,115,807 6,728,464 12,384,153
Principal payments, revolving credit (5,357,027) (11,552,586) (8,625,000)
- ----------------------------------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (430,899) (10,562,364) (6,169,860)
- ----------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (144,356) 181,200 (13,252)
Cash and cash equivalents, beginning of year 309,349 128,149 141,401
- ----------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 164,993 $ 309,349 $ 128,149
======================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 744,676 $1,143,153 $ 1,907,064
======================================================================================================================
Cash paid for income taxes $ 149,029 $ 180,000 $ 456,288
======================================================================================================================
See accompanying notes to financial statements.
9
12
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
2000, 1999 and 1998 relate to the fiscal years ended December 30, 2000, January
1, 2000 and January 2, 1999, respectively. Fiscal years 2000, 1999 and 1998
consisted of 52 weeks.
ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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.
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. Lowe's Company entered the Company's market in the
third quarter of 1994 and has continued to expand, opening additional locations
in the Company's markets during 1996, 1997, 1998 and 2000. In the fourth quarter
of 1997, Home Depot opened its first store in the Company's market and continued
to expand its operations into additional Company markets during 1998, 1999 and
2000. Additionally, both Home Depot and Lowe's have announced further expansion
plans into the Company's markets during 2001. 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.
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 revolving
credit agreements 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 $1,021,144, $1,387,964 and $2,624,787 in 2000,
1999 and 1998, respectively.
STORE CLOSING COSTS
During the third quarter of 2000, the Company announced the closure of its
North Randall, Ohio and Tallmadge Avenue (Akron, Ohio) locations. In connection
with the store closures, the Company recorded a charge of $1,734,402 for costs
expected to be incurred in closing both locations, including $854,575 in net
rent obligations, $261,918 for estimated real estate taxes and $187,238 for
expected utility costs for the North Randall store. Additionally, the Company
also recorded a $684,891 write-off of the net leasehold improvements and
property and equipment of these stores during the third quarter of 2000. During
the fourth quarter of 2000, the Company received proceeds of $174,196 from the
sale of certain of these assets written off during the third quarter, reducing
the 2000 net write-off of net leasehold improvements and property and equipment
to $510,695. These store closure charges, aggregating $2,245,097, were recorded
in the store closing and development costs line item in the accompanying
statement of operations. The remaining balance of expected costs to be incurred
in closing these locations amounted to $1,477,976 as of December 30, 2000 and
has been recorded in the accrued store closing costs line item of the
accompanying balance sheet.
10
13
In addition to these operating expenses, the Company incurred $1,240,876 of
inventory markdown costs during the third quarter of 2000 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.
The Company is currently in negotiations to sublease the North Randall store.
Any sublease rental income generated by the North Randall store will be recorded
as a reduction to the net rent obligation accrued for as of December 30, 2000.
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 were 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 its
Bedford, Ohio and Canton, Ohio stores and recorded $1,837,703 of expense to
close these stores. Included in these costs were 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. 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.
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 in store development costs during 1998. 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 in 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 line item of the accompanying statement of operations.
Depreciation expense for 2000, 1999 and 1998 amounted to $2,561,253,
$3,282,134 and $3,655,549, respectively. Amortization of capital lease assets
has been included in depreciation expense. Accumulated amortization related to
capital leases amounted to $763,676, $595,817 and $429,364 in 2000, 1999 and
1998, respectively.
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."
Fiscal Year Ended
--------------------------------------------------------------
December 30, 2000 January 1, 2000 January 2, 1999
- ------------------------------------------------------------------------------------------------------------
Net loss applicable to common shares $ (8,391,735) $(1,631,585) $(2,299,451)
============================================================================================================
Weighted average common shares
outstanding for the period 7,276,059 7,276,059 7,594,540
Diluted effect of exercise of stock options -- -- --
- ------------------------------------------------------------------------------------------------------------
Weighted average common shares, assuming
issuance of the above securities 7,276,059 7,276,059 7,594,540
============================================================================================================
Net loss per common share:
Basic $ (1.15) $ (0.22) $ (0.30)
Diluted $ (1.15) $ (0.22) $ (0.30)
Options to purchase 815,500 shares of common stock at a weighted average
exercise price of $3.00 per share were outstanding at December 30, 2000 but were
not included in the computation of diluted earnings per share for 2000 because
the options would have had an anti-dilutive effect on the net loss for the year.
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 had an anti-dilutive effect on the net loss for the year.
11
14
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 had an anti-dilutive effect on the net loss for the year.
Reclassifications
Certain items in the 1999 financial statements and notes thereto have been
reclassified to conform to the 2000 presentation.
2. DEBT
During the third quarter of 2000, the Company permanently reduced its
aggregate revolving credit commitment from $20,000,000 to $13,000,000 under the
terms of its October 27, 1998 Credit and Security Agreement (the "Credit
Agreement") with a bank. The Credit Agreement provided for borrowings 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. Additionally, during this
same period, the Company violated certain of the restrictive covenants under the
Credit Agreement arising from the Company's year-to-date third quarter 2000
financial results.
On November 14, 2000, the Company entered into an agreement with the bank
waiving the restrictive covenant violations and amending the Credit Agreement
(the "Amended Credit Agreement"). The Amended Credit Agreement reduced the
aggregate revolving credit commitment from $13,000,000 to $10,000,000 and
replaced the original financial covenants. Borrowings under the Amended Credit
Agreement continue to be collateralized substantially by all of the Company's
assets, except for real estate. A commitment fee of .375% per annum is charged
on the unused credit facility. The Amended Credit Agreement extends through
October 27, 2001, at which time management believes that the Company will have
the ability to extend the Amended Credit Agreement, will have sufficient
positive cash flows or will have the ability to meet working capital
requirements through further liquidation of inventories or real property.
Sufficient positive cash flows to meet working capital requirements are expected
to be met, in part, by proceeds from various real estate transactions that are
currently being negotiated by management. These real estate transactions include
either the sale or sublease of certain Company store locations.
The Company had $5,068,811 and $5,310,031 outstanding under the Amended
Credit Agreement and Credit Agreement at December 30, 2000 and January 1, 2000,
respectively, at weighted average annual interest rates of 8.9% during 2000 and
7.4% during 1999. The Company was in compliance with all restrictive covenants
of the Amended Credit Agreement at December 30, 2000.
Long-term debt consists of the following:
2000 1999
Capital lease obligations (Note 4) $99,276 $288,955
Less current maturities of long-term debt 99,276 188,900
- ----------------------------------------------------------------------
Long-term debt, net of current maturities $ -- $100,055
======================================================================
The carrying amount of the Company's borrowings under the Credit Agreement
and the Amended Credit Agreement approximate fair value.
During 1999, the Company made principal payments of $300,000 on the Note
payable, affiliate in accordance with the terms of the subordination agreement
with the Company's banks. The Note payable, affiliate 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. Interest expense on the Note payable, affiliate
was $7,650 during 1999.
During 2000, 1999 and 1998, interest expense was $741,161, $1,032,114 and
$1,865,949, 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:
2000 1999 1998
Federal $ -- $ (800,464) $ (622,968)
Deferred (1,185,253) (293,238) (933,162)
State and local 170,982 -- --
- -----------------------------------------------------------------------
$(1,014,271) $(1,093,702) $(1,556,130)
- -----------------------------------------------------------------------
A reconciliation of the statutory federal income tax rate to the Company's
effective income tax rate follows:
2000 1999 1998
Statutory federal income tax rate (34.0)% (34.0)% (34.0)%
State and local income taxes, net of federal benefit (4.5) (5.9) (6.3)
Valuation allowance 27.2 -- --
Permanent items, tax credits and other 0.5 (0.2) (0.1)
- -----------------------------------------------------------------------------------------------
Effective income tax rate (10.8)% (40.1)% (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:
2000 1999
Depreciation $(1,120,572) $(2,954,566)
LIFO (51,219) (110,511)
Accrued liabilities 1,125,602 470,244
Tax credits -- 59,410
Net operating loss carry forwards 2,602,699 1,309,500
- ---------------------------------------------------------------------------
Net deferred tax asset (liability) 2,556,510 (1,225,923)
Less: Valuation allowance 2,556,510 --
- ---------------------------------------------------------------------------
Net deferred tax liability $ -- $(1,225,923)
===========================================================================
12
15
During 2000, the Company established a valuation allowance of $2,556,510
against its net deferred tax assets in accordance with the provisions of SFAS
No. 109. The establishment of the valuation allowance was based on the Company's
assessment that it was more likely than not that such assets would not be
realized through future taxable earnings or implementation of tax planning
strategies. This valuation allowance was recorded in the income tax benefit line
item in the accompanying statement of operations.
The Company has available net operating loss carryforwards of approximately
$5,706,000 and $9,147,000 for federal and state income taxes, respectively. The
federal income tax net operating loss carryforward will expire principally in
the year 2020. Similarly, of the $9,147,000 in state income tax net operating
loss carryforwards, approximately $3,438,000 will expire principally in the year
2014, with the remainder expiring in the year 2015. In addition, the Company has
available Alternate Minimum Tax credit carryforwards of approximately $62,000
which may be used indefinitely to reduce federal income taxes.
4. LEASES AND COMMITMENTS
The Company leases six retail stores, including the North Randall location
that was closed during the third quarter of 2000, and its corporate offices
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 7 years and have renewal options varying from 2 to 30 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 2000, 1999 or 1998.
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:
2001 $ 2,955,474 $150,800 $2,804,674 $101,731
2002 1,926,030 96,500 1,829,530 --
2003 1,077,011 -- 1,077,011 --
2004 1,015,977 -- 1,015,977 --
2005 938,843 -- 938,843 --
Thereafter 420,017 -- 420,017 --
- ------------------------------------------------------------------------------------------------
Total minimum
lease payments $8,333,352 $247,300 $8,086,052 $101,731
===============================================================================
Less amounts
representing interest 2,455
- ------------------------------------------------------------------------------------------------
Present value of net
minimum lease
payments $ 99,276
================================================================================================
Total net rental expense for all operating leases for 2000, 1999 and 1998 was
$2,933,370, $4,130,985 and $3,990,000, respectively. Total net rental expense is
net of sublease rental income of $213,380, $219,880 and $187,500 for 2000, 1999
and 1998, respectively. Also included in total net rental expense for 1999 was
$463,327 of lease cancellation costs associated with the closure of the Boardman
store.
The Company leased three of its retail stores from the Company's majority
shareholder or entities affiliated with him during 2000 and 1999 and four of its
retail stores during 1998. 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 $1,372,468, $1,357,820 and $1,784,555 during 2000, 1999 and
1998, 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. A summary of the Company's stock option activity
and related information for 2000, 1999 and 1998 is as follows:
Average Option
Stock Option Price Per Share
------------ ---------------
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 1, 2000 928,000 $3.14
Granted 20,000 $0.56
Canceled (132,500) $3.60
- ------------------------------------------------
Outstanding at December 30, 2000 815,500 $3.00
================================================
2000 1999 1998
------- ------- -------
Options exercisable at end of year 730,392 602,681 298,641
Weighted-average option price per share
of options exercisable $ 3.28 $ 3.23 $ 3.75
Options available for future grant 534,500 422,000 465,000
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------------------- --------------------------------------
Range of Outstanding at Weighted Avg. Weighted Avg. Exercisable at Weighted Avg.
Exercise Prices December 30, 2000 Contractual Life Exercise Price December 30, 2000 Exercise Price
- --------------- ----------------- ---------------- -------------- ----------------- --------------
$ 0.44 35,000 3.17 $0.44 -- --
$ 0.56 20,000 4.17 $0.56 -- --
$ .075 30,000 3.67 $0.75 -- --
$ 1.00 80,000 3.50 $1.00 80,000 $1.00
$ 3.56 647,500 1.33 $3.56 647,500 $3.56
$ 4.69 3,000 0.67 $4.69 2,892 $4.69
======= -------
815,500 1.78 $3.00 730,392 $3.28
------- =======
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 2000, 1999 and 1998 grant dates for
awards under the plan consistent with the method of FASB Statement of Financial
Accounting Standard No. 123, "Accounting for Stock-Based
13
16
Compensation", the Company's net loss and loss per share would have been reduced
to the pro forma amounts indicated below:
2000 1999 1998
Net loss: As Reported $ (8,391,735) $ (1,631,585) $(2,299,451)
Pro Forma $ (8,523,968) $ (1,861,827) $(2,565,906)
Net loss per common share: As Reported $ (1.15) $ (0.22) $ (0.30)
Pro Forma $ (1.17) $ (0.26) $ (0.34)
The fair value of each option granted during 2000 and 1999 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 during
1998.
2000 1999
Risk free interest rates 6.8% 5.1 - 6.0%
Expected life (years) 5 5
Volatility 82.0% 82.0%
Dividend yield 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. 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.
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 $282,624,
$387,676 and $410,000 during 2000, 1999 and 1998, respectively.
8. QUARTERLY FINANCIAL DATA (UNAUDITED)
2000 1st 2nd 3rd 4th(a) Total(b)
Net sales $ 17,129,388 $ 26,234,256 $ 18,693,289 $13,589,390 $ 75,646,326
Gross profit 5,076,394 7,163,102 3,745,823 4,052,657 20,037,978
Net (loss) income (1,123,876) (245,935) (7,743,587) 721,669 (8,391,735)
Net (loss) income
per share:
Basic and diluted $ (0.15) $ (0.03) $ (1.06) $ 0.10 $ (1.15)
(a) During the fourth quarter of 2000, the Company recorded an income tax
benefit of $2,621,319 which included a true-up of deferred tax assets and
liabilities of approximately $1,500,000 related to the filing of the
Company's 1999 tax return in September 2000 and the closing of the two
stores in the third quarter of 2000.
(b) The sum of the 2000 quarterly net income (loss) per share amounts do not
equal the fiscal 2000 net loss per share due to the effects of rounding.
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) income
per share:
Basic and diluted $ (0.10) $ (0.10) $ 0.05 $ (0.06) $ (0.22)
(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.
9. SUBSEQUENT EVENT
Subsequent to December 30, 2000, the Company entered into an agreement to
lease its Tallmadge Avenue location to a third party (the "lessee"). Under the
terms of the lease agreement, the Company will begin leasing the facility on
April 1, 2001 for 30 months at a lease rate of approximately $28,000 per month.
In addition to the monthly lease rate, the lessee will also be responsible for
certain utility and maintenance costs associated with the property. The lease
agreement also provides the lessee with a 12 month option to purchase the
location at a yet-to-be determined negotiated price.
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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
December 30, 2000 and January 1, 2000, and the results of its operations and its
cash flows for each of the three years in the period ended December 30, 2000 in
conformity with accounting principles generally accepted in the United States of
America. 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 of
America, 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 our opinion.
As discussed in Note 2 to the financial statements, the Company's Amended
Credit Agreement expires in 2001.
/s/ PRICEWATERHOUSECOOPERS LLP
- --------------------------------
Cleveland, Ohio
March 23, 2001
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SELECTED FINANCIAL DATA AND OPERATING HIGHLIGHTS D.I.Y. Home Warehouse, Inc.
Fiscal Year
(Amounts in thousands, except per share data) 2000 1999 1998 1997(1) 1996
- ---------------------------------------------------------------------------------------------------------------------------------
OPERATING RESULTS
Net sales $ 75,646 $ 128,478 $ 172,600 $210,200 $212,068
Cost of sales 55,608 94,830 127,215 152,625 156,612
- ---------------------------------------------------------------------------------------------------------------------------------
Gross profit 20,038 33,648 45,385 57,575 55,456
Store operating, general and administrative expenses 26,506 33,373 45,336 49,586 46,954
Store development and closing costs 2,245 2,082 2,143 1,436 --
Other expense, net 693 918 1,761 1,701 2,147
- ---------------------------------------------------------------------------------------------------------------------------------
(Loss) income before income tax (benefit) expense (9,406) (2,725) (3,855) 4,852 6,355
Income tax (benefit) expense (1,014) (1,093) (1,556) 1,980 2,570
- ---------------------------------------------------------------------------------------------------------------------------------
Net (loss) income $ (8,392) $ (1,632) $ (2,299) $ 2,872 $ 3,785
=================================================================================================================================
Net (loss) earnings per common share, basic and diluted $ (1.15) $ (0.22) $ (0.30) $ 0.38 $ 0.50
=================================================================================================================================
Weighted average common shares outstanding, basic and diluted 7,276 7,276 7,595 7,634 7,627
=================================================================================================================================
(1) Fiscal year 1997 consisted of 53 weeks; all other years reported consisted
of 52 weeks.
2000 1999 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
SELECTED OPERATING DATA
Number of stores open at end of period 9 11 14 16 16
Interior selling square footage at end of period 757,900 930,700 1,189,000 1,369,000 1,353,000
Comparable store sales (decrease) increase (33.6)% (13.2)% (17.9)% (2)% 7%
Number of employees 486 702 1,009 1,254 1,334
(Amounts in thousands) 2000 1999 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA (at period end)
Working capital $ 6,642 $ 20,048 $ 18,841 $ 23,851 $ 20,889
Total assets 38,807 51,805 70,677 81,209 79,764
Notes payable and current maturities of long-term debt 5,168 189 1,588 1,546 1,698
Long-term debt -- 5,410 14,573 20,584 22,031
Stockholders' equity 27,615 36,007 37,639 40,140 37,254
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CORPORATE INFORMATION
DIRECTORS
Fred A. Erb (1), (2), (4)
Chairman of the Board
D.I.Y. Home Warehouse, Inc.
Clifford L. Reynolds (1), (3), (5)
President and
Chief Executive Officer
D.I.Y. Home Warehouse, Inc.
John M. Erb (1), (4)
Vice President
Erb Lumber Company, Inc.
R. Scott Eynon
Vice President/Operations
D.I.Y. Home Warehouse, Inc.
Committees of the Board as of December 30, 2000
- --------------------------------------------------------------------------------
(1) Executive Committee
(2) Audit Committee
(3) Audit Committee - May 24, 2000 through December 30, 2000
(4) Compensation Committee
(5) Compensation Committee - May 24, 2000 through December 30, 2000
OFFICERS
Fred A. Erb
Chairman of the Board
Clifford L. Reynolds
President and Chief Executive Officer
John M. Erb
Secretary
R. Scott Eynon
Vice President/Operations
Todd R. Ayers
Controller
COMMON STOCK INFORMATION
From 1985 to May 18, 1993, the Company's stock was privately held. From May
1993 to December 2, 1998, the Company's Common Stock was traded on Nasdaq NM.
Subsequent to December 2, 1998, the Company's Common Stock has been traded on
the OTC Bulletin Board under its symbol "DIYH."
As of March 6, 2001, the closing price for the Common Stock on the OTC
Bulletin Board was $0.41 and there were approximately 181 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 1,000 beneficial
shareholders. The Company did not pay any dividends during 2000 and 1999.
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 at the discretion of the Company's
Board of Directors and will depend on the Company's, among other factors,
earnings, financial condition, capital requirements, level of indebtedness, and
contractual restrictions with respect to payment of dividends.
The following table sets forth, for the fiscal years ended December 30, 2000,
January 1, 2000 and January 2, 1999, the high and low closing sales prices as
reported by Nasdaq NM or, after December 2, 1998, the OTC Bulletin Board. The
prices reflect inter-dealer quantities without retail and do not necessarily
represent mark-up, mark-down or commissions, and do not necessarily represent
actual transactions.
2000
Quarter HIGH LOW
- ------------------------------------------------
First Quarter $ 0.66 $0.44
Second Quarter 0.69 0.44
Third Quarter 0.75 0.52
Fourth Quarter 0.75 0.47
1999
Quarter High Low
- ------------------------------------------------
First Quarter $ 0.75 $0.19
Second Quarter 0.84 0.56
Third Quarter 0.97 0.63
Fourth Quarter 0.75 0.53
1998
Quarter High Low
- ------------------------------------------------
First Quarter $ 3.25 $2.69
Second Quarter 3.13 2.00
Third Quarter 2.06 1.06
Fourth Quarter 1.25 0.25
CORPORATE HEADQUARTERS
D.I.Y. Home Warehouse, Inc.
5811 Canal Road
Valley View, Ohio 44125
Phone: (216) 328-5100
FAX: (216) 328-5134
COMMON STOCK
D.I.Y. Home Warehouse, Inc.
common stock is traded on the OTC
Bulletin Board under the symbol "DIYH"
TRANSFER AGENT AND REGISTRAR
National City Bank
Corporate Trust Operations
P.O. Box 94915
Cleveland, Ohio 44101-4915
INDEPENDENT AUDITORS
PricewaterhouseCoopers LLP
BP Tower
200 Public Square, 27th Floor
Cleveland, Ohio 44114-2301
ANNUAL MEETING
The Annual Meeting of Stockholders will be held on Tuesday, May 22, 2001 at
10:00 a.m., local time, at the offices of Jaffe, Raitt, Heuer & Weiss,
Professional Corporation, One Woodward Avenue, Suite 2400, Detroit, Michigan,
48226, (313) 961-8380
FORM 10-K
A copy of the Company's Annual Report on Form 10-K for the fiscal year ended
December 30, 2000, as filed with the Securities and Exchange Commission, is
available from the Company without charge upon written request to:
Investor Relations
D.I.Y. Home Warehouse, Inc.
5811 Canal Road
Valley View, Ohio 44125
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[D.I.Y. LOGO]
DIY Home Warehouse, Inc.
5811 Canal Road
Valley View, Ohio 44125
216-328-5100