<PAGE> 1
FORM 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 3, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO
Commission File No. 0-21768
D.I.Y. HOME WAREHOUSE, INC.
(Exact name of registrant as specified in its charter)
STATE OF OHIO 38-2560752
(State of Incorporation) (I.R.S. Employer I.D. No.)
5811 CANAL ROAD
VALLEY VIEW, OHIO 44125
(216) 328-5100
(Address of principal executive offices and telephone number)
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes X No
--- ---
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
As of February 27, 1998, the aggregate market value of the Registrant's
voting stock held by non-affiliates of the Registrant was $8,530,988 determined
in accordance with the highest price at which the stock was sold on such date as
reported by the Nasdaq National Market.
As of February 27, 1998, there were 7,633,859 shares of the
Registrant's common stock issued and outstanding.
<PAGE> 2
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's Proxy Statement for its Annual Meeting of Shareholders
to be held on Wednesday, April 29, 1998, which will be filed with the Securities
and Exchange Commission pursuant to Regulation 14A within 120 days of the close
of the registrant's fiscal year, is incorporated by reference in answer to Part
III of this Annual Report on Form 10-K to the extent noted herein. In addition,
pages 3 through 12 of DIY Home Warehouse, Inc.'s 1997 Annual Report to
Shareholders is incorporated by reference in answer to Items 6, 7 and 8 of Part
II and Item 14(a)(1) of Part IV of this report.
PART I
ITEM 1. BUSINESS
GENERAL
D.I.Y. Home Warehouse, Inc. ("DIY" or the "Company") operates sixteen
retail warehouse-format home improvement centers that sell products primarily to
do-it-yourself home repair and remodeling customers. The Company's "DIY Home
Warehouse" stores are located in Northeast Ohio and range in size from 66,000 to
109,000 square feet of enclosed selling space with an additional 12,000 to
20,000 square feet of outside selling space. Seven of these retail centers are
located in the Cleveland metropolitan area, two are in the Youngstown
metropolitan area, four stores are in the Akron area, and one store each is
located in Mansfield, Canton and Ashtabula. DIY also offers a high level of
customer service, making shopping at its stores easy and convenient and, through
its displays and trained staff, enabling do-it-yourself shoppers to
conceptualize, design and complete their own home repair, maintenance and
improvement projects. The Company also offers kitchen, bath and other product
installation for its customers.
MERCHANDISING
DIY offers a wide selection of home improvement products at everyday
low prices. Each store carries approximately 33,000 SKUs, including variations
in color and size. Brand name products are carried throughout each store. In
addition, the Company carries several private label products, including paints
and doors.
The Company seeks to carry a broad and deep product selection in its
core product areas. Core product areas are characterized by a high need for
specialized customer service. The Company's four core product areas consist of
(a) Kitchen, Plumbing and Bath, (b) Paint, Home Decorating and Floorcoverings,
(c) Lawn and Garden, and (d) Lumber, Building Materials and Doors and Windows.
In its non-core product areas, DIY seeks to carry as deep a selection as its
competitors, but does not seek to carry a broad selection of products within the
same category. Non-core product areas are characterized by products which do not
require a high level of specialized service, but which are better stocked and
sold in traditional warehouse-format for customer convenience. The Company's
non-core product areas are Electrical, Lighting and Fans, and Hardware and
Tools.
The following table depicts the percentage of total net sales data for
the periods indicated, by product area.
2
<PAGE> 3
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------------------------------------------
PRODUCT AREA JANUARY 3, 1998 DECEMBER 28, 1996 DECEMBER 30, 1995
- ------------ --------------- ----------------- -----------------
<S> <C> <C> <C>
A. Kitchen, Plumbing and Bath 21.2% 21.5% 22.7%
B. Paint, Home Decorating and
Floorcoverings 17.0 16.3 15.8
C. Lawn and Garden 15.0 14.6 15.1
D. Lumber, Building Materials and
Doors and Windows 29.2 29.6 28.5
E. Electrical, Lighting and Fans 9.6 10.3 10.8
F. Hardware and Tools 8.0 7.7 7.1
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
Kitchen, Plumbing and Bath. The Company carries a wide selection of
kitchen cabinets, sinks, toilets, bathtubs, faucets, showerheads, bathroom
vanities and cabinets, tub and shower surrounds and enclosures, and other items
used for kitchen and bathroom remodeling projects. DIY offers four complete
lines of kitchen cabinets for custom order and two lines which are stocked for
customer carryout. All products are offered over a broad range of price and
quality levels. Each store has up to 40 vignette displays, showing full room
depictions of completed projects. Salespeople are readily available to assist
customers in planning and designing remodeling projects as well as assisting in
product selection. Salespeople use computers in planning projects, which provide
a three dimensional graphic depiction of the finished project, and generate a
materials list and cost estimate.
Paint, Home Decorating and Floorcoverings. The Company offers a wide
assortment of interior and exterior paints, stains, varnishes and other surface
applications, as well as sundry related supplies such as paint brushes, sand
paper, paint thinner, glues and other similar items. Blinds and window
treatments, closet and storage materials, wall coverings, floorcoverings (rugs,
tiles and similar items), and other home decorating items are also featured in
this product area. In addition to budget priced DIY "house label" products, DIY
offers products from manufacturers such as Dutch Boy, Pittsburgh Paint,
Enterprise, Behr, Levolor and Armstrong. Salespeople are readily available to
computer custom match and mix paint colors, and otherwise assist customers in
planning and selecting products for their home decorating projects.
Lawn and Garden. The Company carries a wide selection of seasonal items
relating to landscaping and yard beautification and maintenance, such as annual
flowers and other nursery stock, fertilizers, lawn mowers and garden tractors,
barbecues and grills, soils and mulches, lawn and garden maintenance tools, and
similar items. DIY seeks to provide a large selection of lawn and garden goods,
at high quality and low prices. This department provides both significant sales
primarily in the second and third quarters of the year and substantial traffic
of potential customers for other departments. Three of DIY's stores have indoor
garden centers which provide year-round climate controlled accommodations for
tropical house plants, live goods and accessories.
Lumber, Building Materials and Doors and Windows. The Company carries a
broad selection of exterior and interior doors, storm windows and doors, steel
entry doors, pre-hung doors, window units, skylights, security doors and bars,
moldings, glass blocks and similar items. These items are displayed "as
installed," similar to the full room vignette presentations utilized by the
Kitchen, Plumbing and Bath Department. Such "as installed" presentations offer
the customer the opportunity to physically operate the door or window and to
explore its features and benefits. The Company's stores feature, on average,
approximately 160 "as installed" presentations. This product area also offers
treated and dimensional lumber, plywood, pine boards, particle board and other
wood product items. Salespeople will also custom cut most stock pieces.
Electrical, Lighting and Fans and Hardware and Tools. The Company
offers a selection of heaters and fans, lights, lighting fixtures, switch
plates, light bulbs, outlets, switches, electrical wire and conduit, fuses and
circuit breakers, related electrical products, hand and power tools and
accessories, fasteners, chains, and other related tools and items. The Company
features a large attractive lighting display area with over 700 working samples.
The Company's Hardware and Tools product area provides all necessary equipment
to complete a customer's project.
3
<PAGE> 4
CUSTOMER SERVICE
DIY seeks to provide superior service for every customer by hiring
experienced personnel, including people with experience in the building trades
such as plumbers and electricians, and by providing these employees with
in-store and vendor-supported product training. Specially trained personnel are
available in every product area (or "department"), particularly in the core
departments, to help customers conceptualize and plan virtually any home
improvement project.
Customer questions, problems, returns and exchanges are handled at a
convenient service desk near the main entrance to the store. Virtually all items
offered by the Company carry the manufacturers' full product warranties. The
Company has a "no-hassle" return policy for all of its products. If the customer
is not satisfied, the Company will have the product repaired, exchange the
product or refund the product purchase price. The Company does not operate a
repair department.
The Company offers kitchen, bath and other product installation,
catering to customers who do not have the time or skills for home repair,
maintenance, or improvement projects.
The Company offers DIY credit card programs to three purchaser classes:
consumer, professional and non-profit institutional, with modified terms and
benefits for each card and class. These programs are all owned and operated by a
third party. Customers can also pay by cash, check, Visa, MasterCard and
Discover. DIY home centers are open seven days a week, from 7:00 a.m. to 10:00
p.m. on weekdays and Saturdays and from 8:00 a.m. to 6:00 p.m. on Sundays.
PURCHASING AND DISTRIBUTION
The Company purchases over 85% of its merchandise directly from
manufacturers. The balance, which are generally high turnover but long lead time
items, are purchased through and stocked by distributors. Product re-orders are
initiated at the store department level, after review of available stock and
applying local knowledge as to sales patterns for particular items. Merchandise
selection is centrally handled by buyers at the headquarters level to attain the
most attractive volume discounts and programs available. DIY has a staff of
seven merchandisers, one of whom serves as the Company's Vice President-General
Merchandising Manager. Each merchandiser has responsibility for specified
product categories.
During fiscal 1997, the Company's top 10 vendors accounted for
approximately 25% of its purchases, with no single supplier accounting for more
than 7% of Company purchases. The number of active vendors is approximately 600.
The Company is not dependent on any one vendor for any significant product. The
Company does not license or contract the operating of departments within its
stores to outside providers.
The majority of the merchandise purchased by the Company is shipped by
the vendors directly to its stores. The Company thereby largely avoids the costs
associated with maintaining a distribution center or warehouse, and does not
incur costs of moving inventory from storage sites to the stores. In some
limited situations involving import and/or seasonal product categories, a third
party warehouse location is used for cross docking and/or temporary storage
where a cost-benefit advantage exists. All merchandise is displayed on the sales
floor in the lower levels of warehouse type racks, with stock stored in the
upper racks. In this way, on-site storeroom space requirements are minimized,
and utilization of available store space for sales is maximized.
4
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The Company stocks inventory at levels appropriate to support its
warehouse home center format and its wide product selection consisting of
approximately 33,000 SKUs. The Company generally experiences its highest working
capital requirements with respect to inventory during March and April when
inventory quantities are increased in anticipation of higher spring and summer
sales.
MANAGEMENT INFORMATION SYSTEMS
The Company's information system strategy is to provide excellent
customer service and reliable, timely information to manage DIY. The
infrastructure for the Company's Local Area Network (LAN) and Wide Area Networks
(WAN) consists of the IBM AS/400 processor for its mission critical
applications, Microsoft NT and Novell for its networked servers and personal
computers. Margin, sales and inventory information is delivered through the DIY
Network and processed at headquarters daily. The Company's strategic IT
architecture is flexible enough to accommodate a mix of systems while retaining
the ability to centralize or delegate management and control of these systems.
MARKETING
The Company's marketing program is designed to create an awareness of
DIY's comprehensive selection of brand name merchandise, superior customer
service and everyday low prices. The Company's primary advertising vehicle is
local newspaper advertising, which currently consists of circulars, tablets or
flyers included with the Sunday newspaper in its markets. In addition, the
circulars are supported by limited full or partial page advertisements in the
newspapers and local newspaper advertising. The Company also engages in
electronic advertising--both television and radio--in order to enhance consumer
recognition of the DIY Home Warehouse name and product assortment or to promote
a sense of urgency regarding the purchase of a particular product or group of
products.
COMPETITION
The home improvement, hardware and garden businesses are all highly
competitive. The Company competes against traditional hardware, plumbing,
electrical and home supply retailers, as well as warehouse-format and discount
retail stores and many of the Company's competitors have substantially greater
resources than the Company. Builders Square and Lowe's Company have had stores
in the Company's markets since 1985 and 1994, respectively. Lowe's continued to
expand with additional locations in 1996 and 1997. In the fourth quarter of
1997, Home Depot began operations in several of the Company's markets and Home
Depot and Lowe's have announced further expansion plans. In addition, there has
been increasing consolidation within the home improvement industry, which may
provide certain entities increased competitive advantages. Specifically,
increased competition including, but not limited to, additional competitors'
store locations, price reductions, and advertising and marketing campaigns could
have a material adverse effect on the Company's business, recoverability of
asset values, financial condition and operating results.
EMPLOYEES
Each DIY home center employs approximately 80 to 165 employees,
supervised by a store manager, three to five assistant managers and 10 to 12
department heads. As of January 3, 1998, the Company employed approximately
1,254 persons, approximately 927 of whom were full-time employees. DIY is not a
party to any collective bargaining agreements. The Company considers its
relations with its employees to be excellent.
5
<PAGE> 6
ITEM 2. PROPERTIES
Each DIY home center is individually designed based on the particular
characteristics of the property, with the overall goal of achieving a relatively
uniform "look" among all the stores, including the same product areas. All
stores are conveniently located near major roads and each provides parking for
customers. The following table sets forth the location, opening date and
approximate size of each of the Company's home centers.
<TABLE>
<CAPTION>
Area in Square Feet
Leased -------------------
Store Location Opening Date or Owned Interior Selling Garden Greenhouse
- -------------- ------------ -------- ---------------- ------ ----------
<S> <C> <C> <C> <C>
Cleveland, Ohio.......... March 1985.................. Leased........... 109,000 12,000 --
North Randall, Ohio...... October 1985................ Leased........... 83,000 17,000 --
Eastlake, Ohio........... August 1990................. Leased........... 66,000 17,000 --
Elyria, Ohio............. February 1992............... Leased........... 72,000 16,200 --
Bedford, Ohio............ August 1992................. Leased........... 94,000 18,000 --
Brook Park, Ohio......... March 1993.................. Leased........... 93,000 18,000 --
Boardman, Ohio........... September 1993.............. Leased........... 81,900 18,000 --
Warren, Ohio............. January 1994................ Owned,Land Lease. 79,000 18,000 --
Mansfield, Ohio.......... March 1994.................. Owned............ 80,000 18,000 --
North Canton, Ohio....... May 1994.................... Owned............ 86,000 18,000 --
Akron, Ohio (Northeast).. September 1994.............. Owned............ 89,800 18,000 --
Medina, Ohio............. March 1995.................. Owned............ 83,200 20,000 3,200
Mentor, Ohio............. April 1995.................. Leased........... 86,100 15,000 --
Akron, Ohio (Northwest).. May 1995.................... Leased........... 96,800 16,500 --
Akron, Ohio (Southeast).. June 1995................... Owned............ 85,400 15,000 3,200
Ashtabula, Ohio.......... November 1995............... Owned, Land Lease 84,200 15,750 3,200
</TABLE>
The Company's headquarters consist of approximately 12,100 square feet
of leased space in Valley View, Ohio, near Cleveland.
The Company leases or subleases nine of its properties. In addition,
two of the Company's retail stores are subject to land leases. The various lease
terms expire between 1 and 11 years, and certain store leases have renewal
options ranging from 10 to 45 years. The leases generally provide for additional
rental payments based upon a percentage of gross or net store sales above
various levels. The Company subleases portions of premises not being used by the
Company to various third parties.
The Company owns most of the equipment and trade fixtures throughout
its stores and headquarters and has made leasehold improvements at most
locations. Management believes all of the Company's facilities are in excellent
condition.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year covered by this Annual Report on
Form 10-K.
6
<PAGE> 7
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS
From 1985 to May 18, 1993, the Company's stock was privately held. From
May 25, 1993, to the present, the Company's Common Stock has been traded on the
National Market of Nasdaq (Nasdaq NM) under the symbol of "DIYH."
Prior to listing on Nasdaq NM, there was no established public trading
for the Common Stock. During the fiscal year ended January 3, 1998, the reported
average daily volume of shares traded was 15,223 shares.
As of February 27, 1998, the closing price for the Company's Common
Stock on Nasdaq NM was $2.75 and there were approximately 225 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 1,800 beneficial
shareholders. The Company has not paid any cash dividends on its Common Stock in
the past three fiscal years. Management intends to follow a policy of retaining
earnings in the foreseeable future in order to finance the development and
operations of its business. The declaration and payment of dividends will be
within the discretion of the Company's Board of Directors and would depend,
among other factors, on the Company's earnings, financial condition, capital
requirements, level of indebtedness and contractual restrictions with respect to
payment of dividends.
The following table sets forth a quarterly summary, for the years ended
January 3, 1998, December 28, 1996 and December 30, 1995 of the high and low
closing sales prices as reported by Nasdaq NNM.
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------------------
FISCAL QUARTER HIGH LOW HIGH LOW HIGH LOW
- -------------- ---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
1st $4.63 $3.50 $5.00 $3.38 $8.50 $5.75
2nd 4.63 3.25 6.00 4.13 8.00 6.00
3rd 4.06 2.38 5.75 4.25 8.25 6.25
4th 4.56 2.50 5.63 4.00 6.75 3.50
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA
The information for the fiscal years 1993-1997 under the heading
"Selected Financial Data and Operating Highlights" contained in the Company's
Annual Report to Shareholders for the fiscal year ended January 3, 1998, on page
12 of Exhibit 13.1 hereto, is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The information under the heading "Management's Discussion and Analysis
of Financial Condition and Results of Operations" contained in the Company's
Annual Report to Shareholders for the fiscal year ended January 3, 1998, on
pages 3-5 of Exhibit 13.1 hereto, is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information under the headings "Statement of Income, Statement of
Shareholders' Equity, Balance Sheet, Statement of Cash Flows, Notes to Financial
Statements and Report of Independent Accountants" contained in the Company's
Annual Report to Shareholders for the fiscal year ended January 3, 1998, on
pages 6-11 of Exhibit 13.1 hereto, is incorporated herein by reference.
7
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEMS 10, 11, 12, 13.
The information required by ITEMS 10, 11, 12 AND 13 will be included in
the Company's Proxy Statement for its 1998 Annual Meeting of Shareholders to be
held on April 29, 1998, and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report on Form
10-K:
(1) Financial Statements:
The following financial statements of D.I.Y. Home
Warehouse, Inc. are filed herewith by incorporation
by reference from pages 6 through 11 of the
Registrant's Annual Report to Shareholders for the
fiscal year ended January 3, 1998, as provided in
Item 8 hereof:
Statement of Income for the Years Ended January 3,
1998, December 28, 1996, and December 30, 1995;
Statement of Shareholders' Equity for the Years Ended
January 3, 1998, December 28, 1996, and December 30,
1995;
Balance Sheet as of January 3, 1998 and December 28,
1996;
Statement of Cash Flows for the Years Ended January
3, 1998, December 28, 1996 and December 30, 1995.
Notes to Financial Statements;
Report of Independent Accountants.
(2) Financial Statement Schedules:
Financial Statement Schedules have been omitted
because they are not required, are not applicable, or
the required information is included in the financial
statements or the notes thereto.
(3) A list of the exhibits required by Item 601 of
Regulation S-K to be filed as a part of this Form
10-K is shown on the "Exhibit Index" filed herewith.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K regarding events
occurring during the months included in the fourth quarter of the
Company's 1997 fiscal year.
8
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SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 20, 1998 D.I.Y. HOME WAREHOUSE, INC.
By: /s/ FRED A. ERB
-----------------
Fred A. Erb,
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Annual Report on Form 10-K has been signed by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
/s/ FRED A. ERB /s/ GREGORY K. JONES
- ----------------- ---------------------
Fred A. Erb Gregory K. Jones
Chairman of the Board of Directors Director
Dated: March 20, 1998 Dated: March 20, 1998
/s/ CLIFFORD L. REYNOLDS /s/ JOHN A. SHIELDS
- -------------------------- ---------------------
Clifford L. Reynolds John A. Shields
Director and President Director
(principal executive officer) Dated: March 20, 1998
Dated: March 20, 1998
/s/ R. SCOTT EYNON /s/ MARK A. TIMMERMAN
- -------------------- -----------------------
R. Scott Eynon Mark A. Timmerman
Vice President-Operations and Director Director
Dated: March 20, 1998 Dated: March 20, 1998
/s/ DENNIS C. HOFF /s/ MARILYN A. EISELE
- -------------------- -----------------------
Dennis C. Hoff Marilyn A. Eisele
Vice President-General Merchandising Vice President -
Manager and Director Administration and Finance,
Dated: March 20, 1998 and Chief Financial Officer
Dated: March 20, 1998
/s/ JOHN M. ERB /s/ ERIC I. GLASSMAN
- ----------------- ----------------------
John M. Erb Eric I. Glassman
Secretary and Director Controller & Treasurer
Dated: March 20, 1998 Dated: March 20, 1998
9
<PAGE> 10
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------- ----------------------
3 Articles of Incorporation and By-Laws:
3.1 Articles of Incorporation of D.I.Y. Home Warehouse, Inc.
as amended (A)
3.2 Amended and Restated Code of Regulations of D.I.Y. Home
Warehouse, Inc. (A)
10 Material Contracts:
-------------------
10.1 Sublease between D.I.Y. Ohio Real Estate Associates
Limited Partnership and D.I.Y. Home Warehouse, Inc.,
dated August 1, 1992 (A)
10.2 Indenture of Lease between Smith - D.I.Y. Center Limited
Partnership and D.I.Y. Home Warehouse, Inc., dated
December 27, 1985 (A)
10.3 Amendment to Lease between D.I.Y. Center Associates (successor in
interest to Smith - D.I.Y. Center Limited Partnership) and D.I.Y. Home
Warehouse, Inc., dated July 2, 1991 (A)
10.4 Amendment to Lease between D.I.Y. Center Associates, L.P. and
D.I.Y. Home Warehouse, Inc. dated March 21, 1995 (C)
10.5 Lease between Fred A. Erb and D.I.Y. Home Warehouse, Inc.,
dated March 1, 1993 (A)
10.6 Lease Agreement between West Park Limited, Inc. and D.I.Y.
Home Warehouse, Inc. dated August 2, 1991 (A)
10.7 Addendum #1 to Lease Agreement between West Park Limited,
Inc. and D.I.Y. Home Warehouse, Inc., dated September 2,
1991 (A)
10.8 Addendum #2 to Lease Agreement between West Park Limited,
Inc. and D.I.Y. Home Warehouse, Inc., dated September 16,
1991 (A)
10.9 Sublease between The Wholesale Club, Inc. and D.I.Y. Home
Warehouse, Inc., dated May 14, 1992 (A)
10.10 Sublease between The Wholesale Club, Inc. and D.I.Y. Home
Warehouse, Inc., dated November 25, 1992 (A)
10.11 Lease between Myron S. Viny, dba Central Valley Properties, and D.I.Y.
Home Warehouse, Inc., dated February 26, 1993, but effective beginning
May 1, 1993 (A)
10
<PAGE> 11
Exhibit
Number Description of Exhibit
- ------- ----------------------
10.12 Modification and Supplement to lease between the Estate of Myron S.
Viny (formerly DBA Central Valley Properties) and D.I.Y. Home
Warehouse, Inc. dated November 27, 1995 (G)
10.13 D.I.Y. Home Warehouse, Inc. 1993 Long Term Incentive Plan as
Amended February 23, 1994 and Approved by Stockholders
May 25, 1994# (A)
10.14 Form of Non-Qualified Stock Option Agreement under the D.I.Y. Home
Warehouse, Inc. 1993 Long Term Incentive Plan as Amended# (G)
10.15 Indemnification Agreement between D.I.Y. Home Warehouse,
Inc. and Clifford L. Reynolds (A)
10.16 Indemnification Agreement between D.I.Y. Home Warehouse,
Inc. and R. Scott Eynon (A)
10.17 Indemnification Agreement between D.I.Y. Home Warehouse,
Inc. and Dennis C. Hoff (A)
10.18 Indemnification Agreement between D.I.Y. Home Warehouse,
Inc. and John M. Erb (A)
10.19 Indemnification Agreement between D.I.Y. Home Warehouse,
Inc. and Fred A. Erb (A)
10.20 Tax Indemnification Agreement among D.I.Y. Home Warehouse,
Inc. and Fred A. Erb, Clifford L. Reynolds, R. Scott Eynon,
Dennis C. Hoff and John M. Erb (A)
10.21 D.I.Y. Home Warehouse, Inc.'s 401K Plan# (A)
10.22 $1,250,000 Promissory Note from D.I.Y. Home Warehouse,
Inc. to Edgemere, Inc. f/k/a Erb Lumber Co., dated July 1, 1991 (A)
10.23 Security Agreement between D.I.Y. Home Warehouse and
Erb Lumber Co., dated November 14, 1985 (A)
10.24 Agreement of Lease (Boardman Facility) between DIY Ohio Real
Estate Associates Limited Partnership and D.I.Y. Home Ware-
house, Inc. dated as of October 1, 1993 (B)
10.25 Lease between Elmhurst Properties, Inc. and D.I.Y. Home
Warehouse, Inc., dated May 26, 1993 (B)
10.26 Real Estate Purchase Agreement (Mansfield) between DIY Ohio Real
Estate Associates Limited Partnership and D.I.Y. Home Warehouse,
Inc. dated as of March 1, 1994 (B)
10.27 Assignment and Assumption of Lease and Sublease between Kmart
Corporation and D.I.Y. Home Warehouse, Inc. dated December 22, 1994 (C)
11
<PAGE> 12
Exhibit
Number Description of Exhibit
- ------- ----------------------
10.28 Shopping Center Lease between KCHGC, Inc. and D.I.Y. Home
Warehouse, Inc. dated January 12, 1995 (C)
10.29 Revolving Credit Agreement and Security Agreement dated December 7,
1994 between D.I.Y. Home Warehouse, Inc. and National City Bank,
Columbus, and Old Kent Bank and Trust Company (C)
10.30 Loan and Co-lender Agreement and Open-End Mortgage, Assignment of
Rents and Security Agreement dated December 23, 1994 between D.I.Y.
Home Warehouse, Inc. and National City Bank, Columbus, and Old Kent
Bank and Trust Company (C)
10.31 Line of Credit Agreement for Real Estate Loans, Open-end Mortgage,
Assignment of Rents and Security Agreement, and Mortgage Notes
between D.I.Y. Home Warehouse, Inc. and National City Bank,
Columbus and Old Kent Bank dated April 28, 1995 (D)
10.32 First Amendment to Line of Credit Agreement; Open-end Mortgage,
Assignment of Rents and Security Agreement (Leasehold) for Trumbull
County; Open-end Mortgage, Assignment of Rents and Security Agreement
for Summit County; Mortgage Note to National City Bank, Columbus dated
September 15, 1995; Mortgage Note to Old Kent Bank dated September 15,
1995 (F)
10.33 First Amendment to Revolving Credit Agreement dated December 22,
1995 between D.I.Y. Home Warehouse, National City Bank, Columbus,
and Old Kent Bank (G)
10.34 Amended and Restated Revolving Note dated December 22, 1995 in the
amount of $10,000,000 to National City Bank, Columbus (G)
10.35 Amended and Restated Revolving Note dated December 22, 1995 in the
amount of $10,000,000 to Old Kent Bank (G)
10.36 Amended and Restated Revolving Note dated December 22, 1995 in the
amount of $1,500,000 to National City Bank, Columbus (G)
10.37 Amended and Restated Revolving Note dated December 22, 1995 in the
amount of $1,500,000 to Old Kent Bank (G)
10.38 First Amendment to Security Agreement dated December 22,
1995 between D.I.Y. Home Warehouse, National City Bank, Columbus,
and Old Kent Bank (G)
10.39 First Amendment to Subordination Agreement dated December 22,
1995 between D.I.Y. Home Warehouse, National City Bank, Columbus,
and Old Kent Bank, and Edgemere Enterprises, Inc. (G)
10.40 Second Amendment to Line of Credit Agreement dated December 22,
1995 between D.I.Y. Home Warehouse, National City Bank, Columbus,
and Old Kent Bank (G)
12
<PAGE> 13
Exhibit
Number Description
- ------- -----------
10.41 First Amendment to Loan and Co-Lender Agreement dated December 22,
1995 between D.I.Y. Home Warehouse, National City Bank, Columbus,
and Old Kent Bank (G)
10.42 Modification to Revolving Credit Agreement, Line of Credit Agreement,
and Loan and Co-lender Agreement between D.I.Y. Home Warehouse, Inc.,
National City Bank, Columbus, and Old Kent Bank dated February 20, 1996
(G)
10.43 1994 D.I.Y. Home Warehouse, Inc. Employee Bonus Plan dated
May 25, 1994# (C)
10.44 1995 D.I.Y. Home Warehouse, Inc. Employee Bonus Plan dated
May 24, 1995# (G)
10.45 Amended and Restated Employment Agreement between Clifford L.
Reynolds and D.I.Y. Home Warehouse, Inc.# (E)
10.46 Amended and Restated Employment Agreement between R. Scott Eynon and
D.I.Y. Home Warehouse, Inc.# (E)
10.47 Amended and Restated Employment Agreement between Dennis C.
Hoff and D.I.Y. Home Warehouse, Inc.# (E)
10.48 Employment Agreement between Marilyn A. Eisele and D.I.Y. Home
Warehouse, Inc.# (E)
10.49 D.I.Y. Home Warehouse, Inc. 1996 Retainer Stock Plan for Non-
Employee Directors (G)
10.50 General Business Lease Agreement with IBM Credit Corporation dated May
30, 1996 (H)
10.51 Amended and Restated Employment Agreement between Clifford
L. Reynolds and D.I.Y. Home Warehouse, Inc. dated November 21,
1996# (I)
10.52 Second Amendment to Revolving Credit Agreement dated
December 23, 1996 between D.I.Y. Home Warehouse, Inc.,
National City Bank of Columbus and Old Kent Bank (I)
10.53 Third Amendment to Line of Credit Agreement Dated December 23,
1996 between D.I.Y. Home Warehouse, Inc., National City Bank
of Columbus and Old Kent Bank (I)
10.54 Second Amendment to Loan and Co-Lender Agreement dated
December 23, 1996 between D.I.Y. Home Warehouse, Inc., National
City Bank of Columbus and Old Kent Bank (I)
10.55 Third Amendment to Revolving Credit Agreement dated
October 24, 1997 between D.I.Y. Home Warehouse, Inc.,
National City Bank of Columbus and Old Kent Bank (J)
13
<PAGE> 14
Exhibit
Number Description
- ------- -----------
10.56 Third Amendment to Loan and Co-Lender Agreement dated
October 24, 1997 between D.I.Y. Home Warehouse, Inc.,
National City Bank of Columbus and Old Kent Bank (J)
10.57 Fourth Amendment to Line of Credit Agreement dated
October 24, 1997 between D.I.Y. Home Warehouse, Inc.,
National City Bank of Columbus and Old Kent Bank (J)
10.58 Renewal of Sublease between The Wholesale Club, Inc., and
D.I.Y. Home Warehouse, Inc., dated July 30, 1997.
11 Earnings Per Share:
-------------------
11.1 Computation of Earnings Per Common Share
13 Annual Report:
--------------
13.1 Annual Report to Shareholders of D.I.Y. Home Warehouse, Inc.
for the fiscal year ended January 3, 1998, certain portions
of which are incorporated by reference herein.
23 Consents:
---------
23.1 Consent of Independent Accountants
27 Financial Data Schedule
-----------------------
27.1 Financial Data Schedule for the year ended January 3, 1998
- ----------
# Management contract or compensatory plan or arrangement required to be
identified by Form 10-K Item 14.
(A) Incorporated by reference to Exhibits to the Registrant's Registration
Statement No. 33-60012 on Form S-1 filed May 18, 1993.
(B) Incorporated by reference to Exhibits to the Registrant's Report on
Form 10-K for the fiscal year ended January 1, 1994.
(C) Incorporated by reference to Exhibits to the Registrant's Report on
Form 10-K for the fiscal year ended December 31, 1994.
(D) Incorporated by reference to Exhibits to the Registrant's Report on
Form 10-Q for the quarter ended April 1, 1995.
(E) Incorporated by reference to Exhibits to the Registrant's Report on
Form 10-Q for the quarter ended July 1, 1995.
(F) Incorporated by reference to Exhibits to the Registrant's Report on
Form 10-Q for the quarter ended September 30, 1995.
14
<PAGE> 15
(G) Incorporated by reference to Exhibits to the Registrant's Report on
Form 10-K for the fiscal year ended December 30, 1995.
Incorporated by reference to Exhibits to the Registrant's Report on
Form 10-Q for the quarter ended March 30, 1996.
(H) Incorporated by reference to Exhibits to the Registrant's Report on
Form 10-Q for the quarter ended June 29, 1996.
(I) Incorporated by reference to Exhibits to the Registrant's Report on
Form 10-K for the fiscal year ended December 28, 1996.
(J) Incorporated by reference to Exhibits to the Registrant's Report on
Form 10-Q for the quarter ended September 27, 1997.
15
<PAGE> 1
Exhibit 10.58
[DIY HOME WAREHOUSE LETTERHEAD]
30 July 1997
The Wholesale Club, Inc.
c/o Walmart Stores, Inc.
701 South Walton Blvd
Bentonville, AR 72716
attn: Property Management
RE DIY HOME WAREHOUSE SUBLEASE RENEWAL
WALMART FORMER SAM'S #6305
BROOKPARK, OHIO
Dear Sir/Madam,
This letter constitutes our notice of renewal of the above-captioned sublease
for the renewal term coming up. Please at your earliest convenience acknowledge
where provided below and fax or mail back to me.
Sincerely,
Acknowledged by Sublessor
/s/ Reynold Hendrickson
Reynold Hendrickson
for DIY Home Warehouse
----------------------------
Wholesale Club/Walmart
<PAGE> 1
EXHIBIT 11.1
D.I.Y. HOME WAREHOUSE, INC.
FORM 10-K
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
Three Months Ended Fiscal Year Ended
January 3, December 28, January 3, December 28,
1998 1996 1998 1996
---------- ---------- ---------- ----------
(Unaudited)
-----------
<S> <C> <C> <C> <C>
Income applicable to common shares $ 109,674 $ 676,831 $2,872,070 $3,785,186
========== ========== ========== ==========
Weighted average common shares
outstanding for the period 7,633,859 7,630,685 7,633,825 7,626,702
Dilutive effect of exercise of stock
options
- - - -
---------- ---------- ---------- ----------
Weighted average common shares,
assuming issuance of the above
securities 7,633,859 7,630,685 7,633,825 7,626,702
========== ========== ========== ==========
Earnings per common share:
Basic $ 0.01 $ 0.09 $ 0.38 $ 0.50
Diluted $ 0.01 $ 0.09 $ 0.38 $ 0.50
</TABLE>
<PAGE> 1
Exhibit 13.1
3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS D.I.Y. Home Warehouse, Inc.
RESULTS OF OPERATIONS
The following table sets forth, for the years indicated, certain information
derived from the Company's Statement of Income expressed in dollars (000's) and
as a percentage of net sales.
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $210,200 100.0% $212,068 100.0% $178,008 100.0%
Cost of sales 152,625 72.6 156,612 73.8 128,672 72.3
Gross profit 57,575 27.4 55,456 26.2 49,336 27.7
Store operating, general and administrative expenses 49,586 23.6 46,954 22.2 40,935 23.0
Store preopening costs -- -- -- -- 1,778 1.0
Store development costs 1,436 0.7 -- -- -- --
Operating income 6,553 3.1 8,502 4.0 6,623 3.7
Other expenses, net 1,701 0.8 2,147 1.0 1,431 0.8
Income before income taxes 4,852 2.3 6,355 3.0 5,192 2.9
Income taxes 1,980 0.9 2,570 1.2 2,082 1.2
Net income $ 2,872 1.4% $ 3,785 1.8% $3,110 1.7%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
References to the years 1997, 1996 and 1995 relate to the fiscal years ended
January 3, 1998, December 28, 1996, and December 30, 1995, respectively. Fiscal
year 1997 consisted of 53 weeks; all other years reported consisted of 52 weeks.
FISCAL 1997 COMPARED TO FISCAL 1996
Fiscal 1997 consisted of 53 weeks compared to 52 weeks in fiscal 1996. Net
sales decreased by $1.9 million, or 1%, from $212.1 million in fiscal 1996 to
$210.2 million in fiscal 1997. Comparable store sales decreased by 2% in fiscal
1997. Sales throughout fiscal 1997 were impacted by additional competition and
sales during the first half of 1997 were negatively impacted by adverse weather
conditions.
Gross profit increased by $2.1 million, or 3.8%, to $57.6 million in fiscal
1997 from $55.5 million in fiscal 1996. As a percentage of net sales, gross
profit was 27.4% and 26.2% in fiscal 1997 and 1996, respectively. The increase
in gross margin percentage of 1.2% is a result of the Company's year-long
commitment to implementing programs to improve margin through re-negotiated
vendor programs, vendor changes, conversion to direct purchase versus
distributor purchase for certain product lines, freight and logistic programs,
increasing retail prices and enhanced information systems which provide tools to
better manage this aspect of the business.
Store operating, general and administrative expenses for fiscal 1997 were
$49.6 million compared to $47.0 million in fiscal 1996. As a percentage of net
sales, these expenses increased to 23.6% in fiscal 1997, from 22.2% in fiscal
1996. Operating expenses for fiscal 1997 increased over fiscal 1996 as a result
of general increases in certain expenses including rent, real estate tax and
personal property tax assessments and insurance, among others. Operating
expenses in fiscal 1997 also include expenses for a full year from the new
information system implemented in the second half of fiscal 1996.
The Company incurred store developments costs of $1.4 million in fiscal year
1997. During 1997, management assessed the business strategies and opportunities
of the Company to differentiate itself in the warehouse-format home improvement
retail market. This comprehensive process resulted in the development of new
merchandising, marketing and other strategic initiatives to strengthen the
Company's market position. These programs were implemented on a Company-wide
basis during the second through fourth quarters of fiscal 1997. In addition,
comprehensive renovations of certain store locations were undertaken in 1997. As
part of the program, the Company added a merchandise close-out bargain annex and
merchandise within some of the stores. The Company will incur limited additional
costs in 1998 to complete the implementation of these concepts in selected
remaining store locations.
Other expense, net decreased by approximately $400,000 from $2.1 million in
fiscal 1996 to $1.7 million in fiscal 1997 due primarily to benefits of reduced
debt levels as average amounts outstanding under the Revolving Credit Agreement
were approximately $7.2 million during fiscal 1997 compared to $11.7 million
during fiscal 1996.
The effective income tax rate was 40.8% in fiscal 1997 compared to 40.4% in
fiscal 1996.
FISCAL 1996 COMPARED TO FISCAL 1995
Net sales increased by $34.1 million, or 19%, to $212.1 million in fiscal
1996 from $178.0 million in fiscal 1995. Comparable store sales for fiscal 1996
increased 7%. Sales during the first half of 1996 were negatively impacted by
adverse weather conditions and the liquidation of a competitor
<PAGE> 2
4
which had competing stores in the Company's market. Sales during the second half
of the year were strong as the Company realized comparable store sales increases
of 14% and 13% during the third and fourth quarters of the year, respectively.
The Company continued to focus on its core strategy of improving customer
service and loyalty which translated into increased sales. Programs completed in
1996 included remodeling and re-merchandising of the Company's older stores and
expansion of the DIY Installation Program, development of the DIY Pro Club, and
extensive product knowledge and management training programs.
Gross profit increased by $6.1 million, or 12.4%, to $55.5 million in fiscal
1996 from $49.3 million in fiscal 1995. As a percentage of net sales, gross
profit was 26.2% and 27.7% in fiscal 1996 and 1995, respectively. The decrease
is due primarily to vendor discounts received in 1995 on the initial inventory
for five new stores opened during 1995. There were no new store openings in
fiscal 1996.
Store operating, general and administrative expenses for fiscal 1996 were
$47.0 million compared to $40.9 million in fiscal 1995. As a percentage of net
sales, these expenses decreased to 22.2% in fiscal 1996, from 23.0% in fiscal
1995. This decrease reflected the benefit of sales leveraging and continuing
progress in expense reduction efforts. There were no store preopening costs in
fiscal 1996 as there were no new stores opened in 1996. Store preopening costs
were $1.8 million in fiscal 1995 relative to five stores opened during the year.
Other expense, net increased to $2.1 million in fiscal 1996 compared to $1.4
million in fiscal 1995 due primarily to an increase in interest expense on
mortgage debt outstanding for the entire fiscal 1996 as compared to being
outstanding for a portion of fiscal 1995. In addition, approximately $190,000 of
construction period interest expense was capitalized in fiscal 1995 associated
with the five new stores opened in 1995. There was no capitalized interest in
fiscal 1996 as there were no new stores in the year. Interest expense on the
revolving credit facility remained relatively constant in fiscal 1996 compared
to fiscal 1995 although borrowings were at a higher level during the first half
of 1996. The Company's ability to manage cash and make repayments on the credit
facility in the second half of 1996 resulted in the average outstanding
borrowings for 1996 to be the same as fiscal 1995 and the average interest rate
was 7% during both years.
The effective income tax rate was 40.4% in fiscal 1996 compared to 40.1% in
fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Statement of Cash Flows reflects cash inflows and outflows from the
Company's operating, investing, and financing activities. The Company's primary
capital needs are to finance merchandise inventories and store development
activities, and historically to finance expansion.
CASH FLOWS FROM OPERATING ACTIVITIES
During the year ended January 3, 1998, operating activities 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. A major portion of the increase in merchandise
inventories is attributable to the initial development of the FrugalBees program
which is a close-out and bargain annex and merchandise within our existing
stores.
During the year ended December 28, 1996, operating activities provided net
cash of $8.4 million. The primary source of cash from operating activities was
$7.0 million from net income plus depreciation and amortization, and $1.5
million from a decrease in merchandise inventories. Average merchandise
inventories per store were $2.4 million in fiscal 1996 compared to $2.5 million
in fiscal 1995 reflecting a successful program by management to continue to
control inventory levels while maintaining good in-stock positions and
increasing sales and inventory turnover.
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash used in investing activities was $2.7 million and $1.7 million in
fiscal 1997 and 1996, respectively. Capital expenditures incurred in fiscal 1997
relate primarily to store development costs of $3.6 million associated with the
comprehensive renovations of certain store locations which were offset by
$851,000 from the sale of several parcels of property. Net cash used in
investing activities in fiscal 1996 were primarily due to remodeling initiatives
in the Company's older stores.
The Company did not open any new stores in fiscal 1997 and 1996. Further
expansion is not anticipated in 1998, however expansion is being explored for
1999 and beyond.
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash used in financing activities of $1.6 million during fiscal 1997
was primarily a result of principal payments on the Company's mortgage loans,
note payable, affiliate and capital lease obligation.
Net cash used in financing activities during 1996 totaled $8.0 million, a
result of net repayments of the Company's revolving credit facility of $7.3
million and principal payments of debt and capital lease obligation of
approximately $700,000. During 1996, the Company entered into a capital lease
obligation of approximately $800,000 for computer hardware and software.
The Company has agreements with two banks at January 3, 1998 which provide
for borrowings under a revolving credit facility of up to $23.0 million. The
agreements extend through January 1, 2001 with annual renewal options thereafter
on the first $20.0 million. The commitment for the remaining $3.0 million
extends through December 1, 1998, with annual renewal options thereafter. The
Company had $6.4 million and $6.0 million outstanding under these agreements at
January 3, 1998 and December 28, 1996, respectively. The Company also had $15.2
million and $16.8 million outstanding at January 3, 1998 and December 28, 1996,
respectively, under mortgage loans and a capital lease obligation.
The terms of the revolving credit facility and mortgage loans require the
Company to maintain certain levels of net worth, liquidity, and cash flow, and
limit the level of additional indebtedness and capital expenditures. Management
believes cash on hand, cash from operations and cash available through the
Company's financing agreements will be sufficient to meet short-term and
long-term working capital requirements.
<PAGE> 3
5
FORWARD-LOOKING STATEMENTS
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. Lowe's continued to
expand with additional locations in 1996 and 1997. In the fourth quarter of
1997, Home Depot began operations in several of the Company's markets and Home
Depot and Lowe's have announced further expansion plans. In addition, there has
been increasing consolidation within the home improvement industry, which may
provide certain entities increased competitive advantages. Specifically,
increased competition including, but not limited to, additional competitors'
store locations, price reductions, and advertising and marketing campaigns could
have a material adverse effect on the Company's business, recoverability of
asset values, financial condition and operating results.
SEASONALITY
The Company's business is seasonal in nature. On a per store basis, the
Company generally experiences its lowest sales during the first and fourth
quarters of each fiscal year. The Company believes the seasonality is caused by
the effect of winter weather on consumers' willingness to undertake outdoor home
improvement projects and the lack of significant sales of lawn and garden
products during the first and fourth fiscal quarters. In addition, a longer or
harsher period of winter weather than is usual in the Company's markets, or an
excessively rainy or unseasonably cold spring season, could have a material
adverse effect on the Company's sales. On a per store basis, the Company
generally experiences its highest sales during the second and third quarters.
However, gross profit margins are lower during the second quarter than in the
third quarter due to higher sales of lawn and garden and lumber and building
materials which generally carry lower gross profit margins than the Company's
average gross profit margin. The Company's gross profit margins on kitchen,
plumbing, bath, electrical and hardware are generally higher than the Company's
average gross profit margin, and sales of such products are not as seasonal as
sales of lawn and garden and building material products.
The Company's quarterly results of operations may also fluctuate materially
depending on the timing of new store openings and store development activities
and related preopening and store development expenses. The Company believes new
stores opened later in a fiscal year may have an adverse impact on the Company's
profitability in that year, because it is the Company's experience that stores
opened early in the year achieve higher levels of profitability sooner than
stores opened later in the year.
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
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four digits to define the applicable year. Any of the
Company's computer programs that have date-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions or
engage in similar normal business activities. The Company has assessed the Year
2000 Issue with regard to its internal financial and operational systems as well
as its external financial vendors and determined that the costs to complete the
related compliance will not materially affect future financial results. The
Company anticipates its Year 2000 Issues to be completed and tested by the end
of fiscal year 1998.
<PAGE> 4
6
<TABLE>
<CAPTION>
STATEMENT OF INCOME D.I.Y. Home Warehouse, Inc.
for the years ended January 3, 1998, December 28, 1996 and December 30, 1995 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $210,199,898 $212,068,262 $178,008,474
Cost of sales 152,624,851 156,611,900 128,672,389
GROSS PROFIT 57,575,047 55,456,362 49,336,085
Operating expenses:
Store operating, general and administrative 49,585,529 46,954,847 40,934,818
Store preopening costs -- -- 1,778,418
Store development costs 1,436,416 -- --
TOTAL OPERATING EXPENSES 51,021,945 46,954,847 42,713,236
OPERATING INCOME 6,553,102 8,501,515 6,622,849
Other income (expense):
Interest expense, net (2,151,662) (2,452,575) (1,911,003)
Other income, net 450,186 305,816 479,730
Income before income taxes 4,851,626 6,354,756 5,191,576
Income taxes 1,979,556 2,569,570 2,081,733
NET INCOME $ 2,872,070 $ 3,785,186 $ 3,109,843
- ------------------------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE, BASIC AND DILUTED $ 0.38 $ 0.50 $ 0.41
- ------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 7,633,825 7,626,702 7,625,000
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
for the years ended January 3, 1998, December 28, 1996 and December 30, 1995
Total
Common Stock Retained Shareholders'
Shares Amount Earnings Equity
<S> <C> <C> <C> <C>
BALANCES, DECEMBER 31, 1994 7,625,000 $22,912,521 $7,416,996 $ 30,329,517
Net income 3,109,843 3,109,843
BALANCES, DECEMBER 30, 1995 7,625,000 22,912,521 10,526,839 33,439,360
Shares issued under the Retainer Stock Plan for
Non-Employee Directors 5,685 29,484 29,484
Net income 3,785,186 3,785,186
BALANCES, DECEMBER 28, 1996 7,630,685 22,942,005 14,312,025 37,254,030
Shares issued under the Retainer Stock Plan for
Non-Employee Directors 3,174 13,457 13,457
Net income 2,872,070 2,872,070
BALANCES, JANUARY 3, 1998 7,633,859 $22,955,462 $ 17,184,095 $ 40,139,557
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
<PAGE> 5
7
<TABLE>
<CAPTION>
BALANCE SHEET D.I.Y. Home Warehouse, Inc.
as of January 3, 1998 and December 28, 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 141,401 $ 161,360
Accounts receivable, trade 100,389 51,812
Refundable federal income taxes 365,963 248,688
Merchandise inventories 40,156,756 38,462,125
Deferred income taxes 278,565 280,791
Prepaid expenses and other assets 745,961 850,113
TOTAL CURRENT ASSETS 41,789,035 40,054,889
PROPERTY AND EQUIPMENT, AT COST:
Land 4,275,402 4,476,301
Buildings 19,551,311 19,823,392
Furniture, fixtures and equipment 18,333,731 17,284,376
Leasehold improvements 10,166,236 7,934,600
52,326,680 49,518,669
Less accumulated depreciation and amortization 13,381,396 10,186,763
PROPERTY AND EQUIPMENT, NET 38,945,284 39,331,906
Other assets 474,888 577,442
TOTAL ASSETS $81,209,207 $79,964,237
- ------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable, affiliate $ 600,000 $ 900,000
Current maturities of long-term debt 946,183 798,377
Accounts payable 10,615,039 12,278,455
Accrued expenses 3,917,720 3,140,735
Accrued sales and property taxes 1,270,776 1,056,267
Accrued income taxes 259,934 437,914
Customer deposits 328,485 554,583
TOTAL CURRENT LIABILITIES 17,938,137 19,166,331
Revolving credit 6,375,000 6,000,000
Long-term debt 14,208,586 16,030,953
Deferred income taxes 2,547,927 1,512,923
Commitments -- --
SHAREHOLDERS' EQUITY:
Preferred stock, authorized 1,000,000 shares, none issued -- --
Common stock, no par value, authorized 10,000,000 shares,
7,633,859 and 7,630,685 shares outstanding at January 3, 1998
and December 28, 1996, respectively 22,955,462 22,942,005
Retained earnings 17,184,095 14,312,025
TOTAL SHAREHOLDERS' EQUITY 40,139,557 37,254,030
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $81,209,207 $ 79,964,237
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
<PAGE> 6
8
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS D.I.Y. Home Warehouse, Inc.
for the years ended January 3, 1998, December 28, 1996 and December 30, 1995 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $2,872,070 $3,785,186 $ 3,109,843
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,372,876 3,201,110 2,353,851
Amortization of deferred gain on sale of property -- -- (36,905)
Deferred income tax expense 1,037,230 818,428 346,412
Common shares issued under Retainer Stock Plan 13,457 29,484 --
Net gain on disposal of property (214,675) -- --
Changes in operating assets and liabilities:
Accounts receivable, trade (48,577) 45,772 78,176
Refundable federal income taxes (117,275) (248,688) --
Merchandise inventories (1,694,631) 1,466,668 (8,289,333)
Prepaid expenses and other assets 104,152 (187,122) (78,102)
Other assets 102,554 107,738 12,027
Accounts payable (1,663,416) (789,444) 5,316,280
Accrued income taxes (177,980) (148,105) 82,103
Accrued expenses and other liabilities 765,396 311,892 1,590,117
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,351,181 8,392,919 4,484,469
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (3,599,180) (1,745,975) (18,233,696)
Proceeds from sale of property 850,911 -- --
NET CASH USED IN INVESTING ACTIVITIES (2,748,269) (1,745,975) (18,233,696)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments, notes payable (300,000) -- (687,176)
Proceeds from long-term debt -- -- 7,975,000
Principal payments under capital lease obligations (157,624) (56,970) --
Principal payments of long-term debt (1,540,247) (597,511) (307,177)
Proceeds from revolving credit 9,000,000 4,000,000 10,800,000
Principal payments, revolving credit (8,625,000) (11,300,000) (3,500,000)
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (1,622,871) (7,954,481) 14,280,647
Net (decrease) increase in cash and cash equivalents (19,959) (1,307,537) 531,420
Cash and cash equivalents, beginning of year 161,360 1,468,897 937,477
CASH AND CASH EQUIVALENTS, END OF YEAR $ 141,401 $ 161,360 $ 1,468,897
- -----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest, net of capitalized interest $2,146,071 $2,571,345 $ 1,680,658
- -----------------------------------------------------------------------------------------------------------------------
Cash paid for income taxes $1,446,974 $2,146,248 $ 1,653,259
- -----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL INVESTING AND FINANCING INFORMATION:
Capital lease obligations incurred $ 23,310 $ 815,988 $ --
- -----------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
</TABLE>
<PAGE> 7
NOTES TO FINANCIAL STATEMENTS D.I.Y. Home Warehouse, Inc.
9
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
D.I.Y. Home Warehouse, Inc. (DIY or the Company) operates sixteen 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
1997, 1996 and 1995 relate to the fiscal years ended January 3, 1998, December
28, 1996 and December 30, 1995, respectively. Fiscal year 1997 consisted of 53
weeks. Fiscal years 1996 and 1995 consisted of 52 weeks.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
FINANCIAL INSTRUMENTS
The Company has provided fair value estimates and information about valuation
methodologies of financial instruments in this note and Note 2 to the financial
statements. The Company's financial instruments consist of investments in cash
and cash equivalents and obligations under notes payable and long-term debt.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of short-term, highly liquid investments, with a
maturity of three months or less, carried at cost plus accrued interest, which
are readily convertible into cash. The carrying value for cash and cash
equivalents approximates fair value.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations
of credit risk consist principally of cash equivalents. The Company places its
cash equivalents with high quality financial institutions.
MERCHANDISE INVENTORIES
Merchandise inventories are stated at the lower of cost or market, cost being
determined on a first-in, first-out ("FIFO") method.
PROPERTY, EQUIPMENT AND DEPRECIATION
Property and equipment are stated at cost and are depreciated for financial
reporting purposes using the straight-line method over estimated useful lives of
thirty-nine years for buildings and five to ten years for furniture, fixtures
and equipment. Leasehold improvements are amortized by the straight-line method
over the initial term of the lease. At retirement or sale, the cost of the
assets and related accumulated depreciation are removed from the appropriate
accounts, and any resulting gain or loss is included in current income. Routine
maintenance, repairs and renewals are expensed as incurred. Renewals and
betterments which substantially increase the life of property and equipment are
capitalized.
ADVERTISING COSTS
Advertising and promotion costs are charged to operations in the year
incurred. Advertising expense was $2,181,935, $2,064,058 and $2,753,145 in 1997,
1996 and 1995, respectively.
STORE PREOPENING COSTS
Non-capital expenditures associated with new store preopening costs are
expensed as incurred.
STORE DEVELOPMENT COSTS
The Company incurred $1,436,416 related to store development costs for the
fiscal year ended January 3, 1998. During 1997, management assessed the business
strategies and opportunities of the Company to differentiate itself in the
warehouse-format home improvement retail market. This comprehensive process
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 the
second, third and fourth quarters of 1997. Certain of the costs incurred in 1997
relate to the development and creative design of these strategic concepts while
other costs pertain to implementation including marketing, advertising,
promotions and payroll costs.
EARNINGS PER SHARE
Earnings per share have been computed according to Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share." SFAS 128 replaced the
previously reported "primary earnings per share" with "basic earnings per share"
and replaced "fully diluted earnings per share" with "diluted earnings per
share." This statement had no effect on the resulting earnings per share for the
Company, as the Company's basic and diluted earnings per share are identical.
INCOME TAXES
Income taxes are provided based upon income for financial reporting purposes.
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. Tax credits are applied
to reduce the provision for income taxes in the year in which the credits arise.
2. DEBT
The Note payable, affiliate of $600,000 represents a note payable to Edgemere
Enterprise, Inc., an entity owned by the Company's majority shareholder, which
is due on demand. The note bears interest at three-quarters of one percent above
the base lending rate of Comerica Bank and is subordinated to the Company's
revolving credit facility and other debt with its banks. In April 1997, the
Company made a principal payment of $300,000 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 $64,295, $82,544 and
$87,203 in 1997, 1996 and 1995, respectively.
The Company has agreements with two banks at January 3, 1998, which provide
for borrowings under a revolving credit facility of up to $23,000,000 with
interest at the Company's option of either the prime rate, LIBOR for specified
maturities, or the banks' certificate of deposit rate for specified maturities
each adjusted by varying basis points in accordance with the debt agreements.
The agreements extend through January 1, 2001, with annual renewal options
thereafter on the first $20,000,000. The commitment for the remaining $3,000,000
extends through December 1, 1998, with annual renewal options thereafter. A
commitment fee of .25 percent per annum is charged on the unused credit
facility. Borrowings under these agreements are collateralized by the Company's
merchandise inventories and receivables. The Company had $6,375,000 and
$6,000,000 outstanding under these agreements at January 3, 1998 and December
28, 1996, respectively, at a weighted average annual inter est rate of 7.3
percent at January 3, 1998 and 7.1 percent at December 28, 1996.
<PAGE> 8
10
<TABLE>
<CAPTION>
Long-term debt consists of the following:
1997 1996
<S> <C> <C>
Mortgage loans due in monthly installments of $98,206
including principal and interest at 10.3 percent per annum
through January 1, 2005 and $4,833,044 due January 1, 2005.
Collateralized by certain real property. On December 23,
1999, the interest rate adjusts to 2.5 percent plus the then
current 5 year Treasury Securities yield. $8,182,770 $8,491,497
Mortgage loans due in monthly installments of $34,796
including principal and interest at 9.28 percent per annum
through May 1, 2005 and $1,751,090 due May 1, 2005
collateralized by certain real property. On April 28, 2000,
the interest rate adjusts to 2.5 percent plus the then
current 5 year Treasury Securities yield. 3,086,303 3,207,204
Mortgage loans due in monthly installments of $44,480
including principal and interest through October 1, 2005 and
$113,209 due October 1, 2005. Interest is at the Company's
option of either the prime rate plus .125 percent, LIBOR for
specified maturities plus 1.625 percent, the banks'
certificate of deposit rate for specified maturities plus
1.75 percent, or the 5 year Treasury Securities yield plus
2.5 percent (7.6 percent as of January 3, 1998).
Collateralized by certain real property. 3,260,992 4,371,611
Capital lease obligations (Note 4) 624,704 759,018
Long-term debt 15,154,769 16,829,330
Less current maturities of long-term debt 946,183 798,377
Long-term debt, net of current maturities $14,208,586 $ 16,030,953
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Principal amounts of long-term debt payable, including capital lease
obligations in fiscal years 1998 through 2002 are $946,183, $1,034,930,
$1,134,798, $1,129,442 and $1,127,779, respectively.
During fiscal years 1997, 1996 and 1995, interest expense incurred and
capitalized was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Interest expense incurred $2,170,060 $ 2,491,845 $ 2,153,005
Interest capitalized -- -- 190,800
Interest expense, net $2,170,060 $ 2,491,845 $ 1,962,205
</TABLE>
The carrying amount of the Company's notes payable and borrowings under the
revolving credit facility approximate fair value. The fair value of the
Company's long-term debt was estimated using a discounted cash flow analysis
based on the Company's current incremental borrowing rate for similar types of
borrowing arrangements. The carrying value of this debt, $15,154,769, was
estimated to have a fair value of $16,404,131 at January 3, 1998.
The terms of the revolving credit facility and mortgage loans require the
Company to maintain certain levels of net worth, liquidity, cash flow and fixed
charge coverage, and limit the level of additional indebtedness and capital
expenditures.
3. INCOME TAXES
Income taxes include the following:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Federal $ 935,053 $ 1,307,458 $ 1,328,683
Deferred 761,469 859,083 346,412
State and local 283,034 403,029 406,638
$1,979,556 $2,569,570 $2,081,733
- -----------------------------------------------------------------------
</TABLE>
A reconciliation of the statutory federal income tax rate to the Company's
effective income tax rate follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Statutory federal income tax rate 34.0% 34.0% 34.0%
State and local income taxes, net of
federal benefit 6.2 6.2 6.3
Tax credits and other 0.6 0.2 (0.2)
Effective income tax rate 40.8% 40.4% 40.1%
- -------------------------------------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Depreciation $(2,537,061) $(1,411,338)
LIFO (225,485) (281,729)
Accrued liabilities 297,896 305,624
State income tax 195,288 155,311
Net deferred tax (liability) $(2,269,362) $(1,232,132)
- -------------------------------------------------------------------------------
</TABLE>
4. LEASES AND COMMITMENTS
The Company leases nine retail stores 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 11
years and have renewal options varying from 10 to 45 years. Six leases require
additional lease payments based upon a percentage of sales above certain sales
levels. Percentage lease payments were $24,090 and $42,463 in 1997 and 1996,
respectively. There were no percentage lease payment requirements for fiscal
year 1995.
In 1996, the Company entered into a capital lease for a new computer
information system. The lease is for 5 years and the lease can be renewed or the
assets purchased at the end of the initial lease term.
Future minimum rental payments required under operating and capital leases
that have non-cancelable lease terms in excess of one year and sublease rentals
due the Company under non-cancelable subleases are as follows:
<TABLE>
<CAPTION>
Capital
Operating Leases Leases
Lease Sublease Net
Payments Rental Payments
<S> <C> <C> <C> <C>
Year ending:
1998 $4,087,098 $187,500 $3,899,598 $207,900
1999 3,762,554 118,380 3,644,174 207,900
2000 3,650,118 105,195 3,544,923 207,900
2001 3,598,331 100,800 3,497,531 86,078
2002 2,543,407 84,000 2,459,407 --
Later years 6,954,719 -- 6,954,719 --
Total minimum
lease payments $24,596,227 $595,875 $24,000,352 $709,778
- ---------------------------------------------------------
Less amounts
representing interest 85,074
Present value of net
minimum lease
payments $624,704
- -------------------------------------------------------------------------
</TABLE>
Total net rental expense for all operating leases for the years ended
January 3, 1998, December 28, 1996 and December 30, 1995 was approximately
$3,943,000, $3,738,000 and $3,397,000, respectively. Rental expense is net of
sublease rental income of $185,510, $252,000 and $223,000 for the years ended
January 3, 1998, December 28, 1996 and December 30, 1995, respectively.
The Company leases four of its retail stores from the Company's majority
shareholder or entities affiliated with him. Rents associated with these leases
were $1,873,992, $1,837,403 and $1,794,940 for the years ended January 3, 1998,
December 28, 1996 and December 30, 1995, 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 re-established to vest
over 3 years at a rate of one-third per year. A summary of the Company's stock
option activity and related information for fiscal years 1997, 1996 and 1995 is
as follows:
<PAGE> 9
11
<TABLE>
<CAPTION>
Average Option
Stock Option Price Per Share
<S> <C> <C>
Outstanding at January 1, 1995 503,000 $11.42
Granted 205,000 6.99
Canceled (35,000) 9.24
Outstanding at December 30, 1995 673,000 10.18
Granted 159,000 4.62
Canceled (31,000) 8.39
Outstanding at December 28, 1996 801,000 9.15
Granted 237,500 3.75
Canceled (40,500) 7.76
Canceled in connection with stock option repricing (796,000) 8.88
Granted in connection with stock option repricing 796,000 3.56
Outstanding at January 3, 1998 998,000 $3.68
- --------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Options exercisable at end of year 11,400 286,300 163,500
Weighted-average option price per share
of options exercisable $11.66 $ 10.65 $10.96
Exercisable price per share for options at end of year:
Exercisable $4.69 to $ 6.44 to $6.44 to
$16.13 $ 16.13 $16.13
Outstanding $3.56 to $ 3.63 to $6.44 to
$16.13 $ 16.13 $16.13
Weighted-average remaining contractual life (years):
Exercisable 3.25 2.50 1.50
Outstanding 4.25 3.00 3.75
Options available for future grant 352,000 549,000 177,000
</TABLE>
The Company applies APB Opinion Number 25 and related interpretations in
accounting for its stock option plan. Accordingly, since all options are granted
at a fixed price not less than the fair market value of the Company's common
stock on the date of grant, no compensation expense has been recognized relative
to its stock option plan. Had compensation expense for the Company's stock-based
plan been determined based on the fair value at the 1997, 1996 and 1995 grant
dates for awards under the plan consistent with the method of FASB Statement
Number 123, the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Net income As Reported $ 2,872,070 $3,785,186 $ 3,109,843
Pro Forma $ 2,664,621 $3,683,661 $ 3,051,592
Earnings per common share As Reported $0.38 $0.50 $0.41
Pro Forma $0.35 $0.48 $0.40
</TABLE>
The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
SHARES SUBJECT SHARES NOT SUBJECT
TO REPRICING TO REPRICING
<S> <C> <C> <C> <C>
Risk free interest rates 6.46% 6.2 - 6.5% 5.4 - 5.7% 5.9 - 7.8%
Expected life (years) 4 5 5 5
Volatility 37% 38% 36% 36%
Dividend yield 0% 0% 0% 0%
</TABLE>
Option valuation models, like the Black-Scholes model, require the input of
highly subjective assumptions including the expected stock price volatility.
Since changes in the subjective input assumptions can materially affect the fair
value estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its stock options or the
resultant compensation expense for stock option awards.
6. EMPLOYEE BENEFIT PLAN
The Company has a contributory 401(k) savings and investment plan for all
employees who have obtained certain age and length of service requirements.
Eligible employees may contribute up to 15 percent of their compensation to the
plan, subject to any limitations imposed by federal income tax regulations. The
Company partially matches participants' contributions. Effective February 1,
1997 the matching cash contribution was increased to 66 percent of a
participant's contribution from 33.3 percent up to 6 percent of their
compensation. Each employee controls the investment of funds credited to their
respective account. Company contributions to this plan were $476,051, $211,789
and $177,126 for fiscal years 1997, 1996 and 1995, respectively.
7. Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
1997 1st 2nd 3rd 4th Total
<S> <C> <C> <C> <C> <C>
Net sales $ 39,652,011 $66,857,265 $56,461,962 $47,228,660 $210,199,898
Gross profit 11,661,430 17,383,294 15,088,857 13,441,466 57,575,047
Net income (loss) (89,616) 1,969,304 882,708 109,674 2,872,070
Earnings (loss) per
common share $ (0.01) $ 0.26 $ 0.12 $ 0.01 $ 0.38
Weighted average
common shares
outstanding 7,633,719 7,633,859 7,633,859 7633,859 7,633,825
</TABLE>
<TABLE>
<CAPTION>
1996 1st 2nd 3rd 4th Total
<S> <C> <C> <C> <C> <C>
Net sales $ 39,143,905 $68,168,668 $56,806,258 $47,949,431 $212,068,262
Gross profit 10,765,103 16,886,574 14,903,928 12,900,757 55,456,362
Net income (loss) (108,791) 2,029 676,831561 3,785,186
Earnings (loss) per
common share $ (0.01) $ 0.27 $ 0.16 $ 0.09 $ 0.50
Weighted average
common shares
outstanding 7,625,000 7,625,000 7,626,125 7,630,685 7,626,702
</TABLE>
The sum of 1996 quarterly earnings (loss) per common share does not equal fiscal
1996 earnings per common share due to the effects of rounding.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors Coopers & Lybrand L.L.P.
D.I.Y. Home Warehouse, Inc. a professional service firm
We have audited the accompanying balance sheet of D.I.Y. Home Warehouse, Inc.
as of January 3, 1998 and December 28, 1996, and the related statements of
income, shareholders' equity, and cash flows for each of the three years in the
period ended January 3, 1998. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of D.I.Y. Home Warehouse, Inc. as
of January 3, 1998 and December 28, 1996, and the results of its operations and
its cash flows for each of the three years in the period ended January 3, 1998
in conformity with generally accepted accounting principles.
/s/ Coopers Lybrand L.L.P.
Cleveland, Ohio
February 19, 1998
<PAGE> 10
12
SELECTED FINANCIAL DATA AND OPERATING HIGHLIGHTS D.I.Y. Home Warehouse, Inc.
<TABLE>
<CAPTION>
Fiscal Year
(Amounts in thousands, except per share data) 1997(1) 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Results
Net sales $210,200 $212,068 $178,008 $136,369 $88,022
Cost of sales 152,625 156,612 128,672 98,202 62,602
Gross profit 57,575 55,456 49,336 38,167 25,420
Store operating, general and administrative expenses 49,586 46,954 40,935 30,333 18,451
Store preopening costs -- -- 1,778 1,200 1,309
Store development costs 1,436 -- -- -- --
Other expense (income), net 1,701 2,147 1,431 (101) (315)
Income before income taxes 4,852 6,355 5,192 6,735 5,975
Income taxes (2) 1,980 2,570 2,082 2,654 1,844
Net income (2) $ 2,872 $ 3,785 $ 3,110 $ 4,081 $ 4,131
- ----------------------------------------------------------------------------------------------------------------------------
Earnings per common share (2) $ 0.38 $ 0.50 $ 0.41 $ 0.54 $ 0.62
- ----------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 7,634 7,627 7,625 7,625 6,705
- ----------------------------------------------------------------------------------------------------------------------------
Pro forma results: (3)
Pro forma income before income taxes $ 5,975
Pro forma income taxes 2,450
Pro forma net income $ 3,525
- ------------------------------------------------- -------
Pro forma earnings per common share $ 0.53
- -------------------------------------------------- -------
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------
Selected Operating Data
Number of stores open at end of period 16 16 16 11 7
Interior selling square footage at end of period 1,369,000 1,353,000 1,353,000 918,000 583,000
Comparable store sales increase (decrease) (2)% 7% (5)% 8% (3)%
Number of employees 1,254 1,334 1,325 939 669
(Amounts in thousands) 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data (at period end)
Working capital $ 23,851 $20,889 $23,297 $20,769 $16,285
Total assets 81,209 79,764 83,500 58,519 36,963
Notes payable and current maturities of long-term debt 1,546 1,698 1,452 1,820 900
Long-term debt 20,584 22,031 29,415 14,767 --
Shareholders' equity 40,140 37,254 33,439 30,330 26,249
<FN>
- --------------------------
(1) Fiscal year 1997 consisted of 53 weeks; all other years reported consisted
of 52 weeks.
(2) For the period January 2, 1993 through May 18, 1993, the Company was
treated for federal income tax purposes as an S corporation and,
accordingly, income tax was taxed directly to the shareholders. See (3) for
Pro forma results.
(3) Pro forma results assume the Company had been taxed as a C Corporation for
the entire period. Pro forma results are not applicable in 1997, 1996, 1995
and 1994.
</TABLE>
<PAGE> 1
EXHIBIT 23.1 TO ANNUAL REPORT ON FORM 10-K
------------------------------------------
FOR THE FISCAL YEAR ENDED JANUARY 3, 1998
-----------------------------------------
BY D.I.Y. HOME WAREHOUSE, INC.
------------------------------
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement of
D.I.Y. Home Warehouse, Inc. on Form S-8 (File No. 33-87020) of our report, dated
February 19, 1998, on our audits of the Financial Statements of D.I.Y. Home
Warehouse, Inc. as of January 3, 1998 and December 28, 1996 and for each of the
three years in the period ended January 3, 1998, which report is included in
Exhibit 13.1 of this Form 10-K.
/s/ Coopers & Lybrand
Cleveland, Ohio
March 20, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-03-1998
<PERIOD-START> DEC-29-1996
<PERIOD-END> JAN-03-1998
<CASH> 141
<SECURITIES> 0
<RECEIVABLES> 100
<ALLOWANCES> 0
<INVENTORY> 40,157
<CURRENT-ASSETS> 41,789
<PP&E> 52,327
<DEPRECIATION> 13,382
<TOTAL-ASSETS> 81,209
<CURRENT-LIABILITIES> 17,938
<BONDS> 20,584
0
0
<COMMON> 22,955
<OTHER-SE> 17,184
<TOTAL-LIABILITY-AND-EQUITY> 81,209
<SALES> 210,200
<TOTAL-REVENUES> 210,200
<CGS> 152,625
<TOTAL-COSTS> 51,022
<OTHER-EXPENSES> (450)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,152
<INCOME-PRETAX> 4,851
<INCOME-TAX> 1,979
<INCOME-CONTINUING> 2,872
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,872
<EPS-PRIMARY> .38
<EPS-DILUTED> .38
</TABLE>
