1
FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 1997
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 Number 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)
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 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_____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at September 27, 1997
- --------------------------- -----------------------------------
Common Stock, no par value 7,633,859
2
D.I.Y. HOME WAREHOUSE, INC.
INDEX
PAGE NO.
--------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheet - September 27,
1997 and December 28, 1996............................. 3
Condensed Statement of Income -
Three and Nine Months Ended September 27,
1997 and September 28, 1996............................ 4
Condensed Statement of
Shareholders' Equity - Nine Months
Ended September 27, 1997............................... 5
Condensed Statement of Cash Flows -
Nine Months Ended September 27, 1997
and September 28, 1996................................. 6
Notes to Condensed Financial
Statements............................................. 7-8
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations.............................. 9-12
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K....................... 13-14
2
3
PART I - FINANCIAL INFORMATION
D.I.Y. HOME WAREHOUSE, INC.
CONDENSED BALANCE SHEET
September 27, 1997 December 28, 1996
------------------ -----------------
Assets (Unaudited)
Current assets:
Cash and cash equivalents $ 729,954 $ 161,360
Accounts receivable, trade 117,783 51,812
Refundable federal income taxes 248,688
Merchandise inventories 46,068,608 38,462,125
Deferred income taxes 140,105 280,791
Prepaid expenses and other assets 653,611 850,113
------------ ------------
Total current assets 47,710,061 40,054,889
------------ ------------
Property and equipment, at cost 50,470,326 49,518,669
Less accumulated depreciation and amortization (12,651,175) (10,186,763)
------------ ------------
Property and equipment, net 37,819,151 39,331,906
Other assets 497,554 577,442
------------ ------------
Total assets $ 86,026,766 $ 79,964,237
============ ============
Liabilities and Shareholders' Equity
Current liabilities:
Note payable, affiliate $ 600,000 $ 900,000
Current maturities of long-term debt 860,224 798,377
Accounts payable 16,323,201 12,278,455
Accrued expenses and other 5,535,444 5,189,499
------------ ------------
Total current liabilities 23,318,869 19,166,331
------------ ------------
Revolving credit 6,500,000 6,000,000
Long-term debt 14,529,889 16,030,953
Deferred income taxes 1,648,177 1,512,923
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 as of September 27, 1997
and December 28, 1996, respectively 22,955,462 22,942,005
Retained earnings 17,074,369 14,312,025
------------ ------------
Total shareholders' equity 40,029,831 37,254,030
------------ ------------
Total liabilities and shareholders' equity $ 86,026,766 $ 79,964,237
============ ============
See accompanying notes to condensed financial statements.
3
4
D.I.Y. HOME WAREHOUSE, INC.
CONDENSED STATEMENT OF INCOME
(Unaudited)
For the three months ended For the nine months ended
September 27, September 28, September 27, September 28,
1997 1996 1997 1996
------------- ------------- ------------- -------------
Net sales $ 56,461,962 $ 56,806,258 $ 162,971,238 $ 164,118,831
Cost of sales 41,373,105 41,902,330 118,837,657 121,563,227
------------- ------------- ------------- -------------
Gross profit 15,088,857 14,903,928 44,133,581 42,555,604
Store operating, general
and administrative expenses 12,437,544 12,406,072 37,269,744 35,599,517
Store development costs 706,671 -- 923,275 --
------------- ------------- ------------- -------------
Total operating expenses 13,144,215 12,406,072 38,193,019 35,599,517
------------- ------------- ------------- -------------
Operating income 1,944,642 2,497,856 5,940,562 6,956,087
Other expense, net (448,526) (518,589) (1,274,824) (1,718,170)
------------- ------------- ------------- -------------
Income before income taxes 1,496,116 1,979,267 4,665,738 5,237,917
Income taxes 613,408 791,706 1,903,394 2,129,564
------------- ------------- ------------- -------------
Net income $ 882,708 $ 1,187,561 $ 2,762,344 $ 3,108,353
============= ============= ============= =============
Earnings per share $ 0.12 $ 0.16 $ 0.36 $ 0.41
============= ============= ============= =============
Weighted average
common shares outstanding 7,633,859 7,626,125 7,633,812 7,625,375
============= ============= ============= =============
See accompanying notes to condensed financial statements.
4
5
D.I.Y. HOME WAREHOUSE, INC.
CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 27, 1997
(Unaudited)
Total
Retained Shareholders'
Shares Amount Earnings Equity
----------- ----------- ----------- ------------
Balances at 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 2,762,344 2,762,344
----------- ----------- ----------- -----------
Balances, September 27, 1997 7,633,859 $22,955,462 $17,074,369 $40,029,831
=========== =========== =========== ===========
See accompanying notes to condensed financial statements.
5
6
D.I.Y. HOME WAREHOUSE, INC.
CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
For the nine months ended
September 27, 1997 September 28, 1996
------------------ ------------------
Cash flows from operating activities:
Net income $ 2,762,344 $ 3,108,353
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,508,142 2,445,041
Deferred income tax expense 275,940
Shares issued under Retainer Stock Plan 13,457 29,484
Gain on sale of property (262,668)
Changes in operating assets and liabilities:
Accounts receivable, trade (65,971) 69,115
Refundable federal income taxes 248,688
Merchandise inventories (7,606,483) (1,578,776)
Prepaid expenses and other assets 276,390 (48,435)
Accounts payable 4,044,746 1,962,299
Accrued expenses and other current liabilities 345,945 463,518
----------- -----------
Net cash provided by operating activities 2,540,530 6,450,599
----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment (1,560,320) (1,271,656)
Proceeds from sale of property 850,911
----------- -----------
Net cash (used in) investing activities (709,409) (1,271,656)
----------- -----------
Cash flows from financing activities:
Principal payments under capital lease
obligations (107,012) (77,069)
Principal payments of note payable, affiliate (300,000)
Proceeds from revolving credit 9,000,000 4,000,000
Principal payments of revolving credit (8,500,000) (8,800,000)
Principal payments of long-term debt (1,355,515) (441,223)
----------- -----------
Net cash (used in) financing activities (1,262,527) (5,318,292)
----------- -----------
Net increase (decrease) in cash and cash 568,594 (139,349)
equivalents
Cash and cash equivalents, beginning of period 161,360 1,468,897
----------- -----------
Cash and cash equivalents, end of period $ 729,954 $ 1,329,548
=========== ===========
See accompanying notes to condensed financial statements.
6
7
D.I.Y. HOME WAREHOUSE, INC.
Notes to Condensed Financial Statements
(Unaudited)
1. Basis of Presentation:
In the opinion of management, the accompanying unaudited condensed
financial statements contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial position as of
September 27, 1997 and the results of operations and cash flows for the three
and nine months ended September 27, 1997 and September 28, 1996. The condensed
financial statements should be read in conjunction with the financial statements
and notes contained in the Company's Annual Report filed on Form 10-K. The
results of operations for any interim period should not necessarily be
considered indicative of the results of operations for the full year.
2. Earnings Per Share:
Earnings per share are computed using the weighted average number of
shares of common stock outstanding for the periods. Earnings per share have not
been adjusted for the effect of stock options as the dilutive effect would be
less than three percent for each period.
3. Sale of Property:
During the first half of fiscal 1997, the Company sold property,
resulting in net proceeds of approximately $851,000 and net gains of $263,000.
The net proceeds were used to reduce the principal outstanding on the mortgage
loans.
4. Note Payable, Affiliate:
In April 1997, the Company made a principal payment of $300,000 on the
Note payable, affiliate to Edgemere Enterprise, Inc., an entity owned by the
Company's majority shareholder, in accordance with the terms of the
subordination agreement with the Company's banks.
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 five
years at the rate of 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 with a weighted-average exercise price per share of
$8.92 were repriced at the fair market value on May 21, 1997 of $3.56. The
vesting period of such options was re-established to vest over 3 years at a rate
of one-third per year.
7
8
5. Stock Options (Continued)
A summary of stock options is as follows:
PERIOD ENDED
------------------------------------------------------------------------
SEPTEMBER 27, 1997 DECEMBER 28, 1996 DECEMBER 30, 1995
------------------ ----------------- -----------------
Options outstanding, beginning of period 801,000 673,000 503,000
Granted 237,500 159,000 205,000
Cancelled (36,500) (31,000) (35,000)
Cancelled in connection with stock
option repricing (796,000)
Granted in connection with stock
option repricing 796,000 - -
--------- ------- -------
Options outstanding, end of period 1,002,000 801,000 673,000
========= ======= =======
Options exercisable, September 27, 1997 10,800 286,300 163,500
--------- ------- -------
All options issued were granted at 100 percent of the fair market value of
the Company's common stock on the date of grant. Options outstanding as of
September 27, 1997 had a weighted-average exercise price of $3.68 and will
expire at various dates between January 1, 1999 and February 21, 2002. At
September 27, 1997, there were 348,000 shares of common stock reserved for
future grant.
6. Store Development Costs
The Company incurred $707,000 and $923,000 related to store development
costs for the three and nine months ended September 27, 1997, respectively.
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 and third quarters of
1997. In addition, a comprehensive renovation of one store location was
completed in the third quarter. Certain of the costs incurred to date relate to
the development and creative design of these strategic concepts while other
costs pertain to implementation including marketing, advertising, promotions and
payroll costs. The Company will incur additional costs in the fourth quarter of
1997 and into 1998 to implement various of these concepts in selected store
locations.
8
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OPERATIONS - Three Months Ended September 27, 1997
Compared to Three Months Ended September 28, 1996
Net sales for the quarter ended September 27, 1997 were $56,462,000
compared to $56,806,000 for the comparable quarter of fiscal 1996. Comparable
sales decreased 1.0% for the third quarter of fiscal 1997. Comparable store
sales were below expectations due to conservative consumer spending patterns.
Gross profit increased by $185,000, or 1.2%, to $15,089,000 in the
third quarter of fiscal 1997 from $14,904,000 in the third quarter of fiscal
1996. As a percentage of net sales, gross profit increased to 26.7% in the
quarter ended September 27, 1997 compared to 26.2% in the comparable quarter of
fiscal 1996. This increase is due primarily to comprehensive programs and
initiatives underway aimed at improving margins, such as freight and logistics
programs and enhanced information systems which provide tools to better manage
this aspect of the business.
Store operating, general and administrative expenses were $12,437,000
for the quarter ended September 27, 1997 compared to $12,406,000 for the quarter
ended September 28, 1996. As a percentage of net sales, operating expenses were
22.0% in the third quarter of fiscal 1997 compared to 21.8% in the comparable
quarter of fiscal 1996.
The Company incurred $707,000 related to store development programs for
the quarter ended September 27, 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. Select marketing and
merchandising programs were implemented on a Company-wide basis during the
second and third quarters of 1997. In addition, a comprehensive renovation of
one store location was completed in the third quarter. Certain of the costs
incurred to date relate to the development and creative design of these
strategic concepts while other costs pertain to implementation including
marketing, advertising, promotions and payroll costs. The Company will incur
additional costs in the fourth quarter of 1997 and into 1998 to implement
various of these concepts in selected store locations.
Other expense, net, decreased from $519,000 in the quarter ended
September 28, 1996 to $449,000 in the quarter ended September 27, 1997 due
primarily to a decrease in interest expense of $85,000 associated with the
benefits of reduced debt levels as average amounts outstanding under the
revolving credit facility were approximately $4,832,000 and $9,462,000 in the
third quarters of fiscal 1997 and 1996, respectively.
9
10
OPERATIONS - Nine Months Ended September 27, 1997
Compared to Nine Months Ended September 28, 1996
Net sales for the nine months ended September 27, 1997 were
$162,971,000 compared to $164,119,000 for the nine months ended September 28,
1996. Comparable store sales for the nine months ended September 27, 1997
decreased by less than 1.0% reflecting reduced sales due to conservative
consumer spending patterns.
Gross profit increased by $1,578,000, or 3.7%, to $44,134,000 for the
nine months ended September 27, 1997 from $42,556,000 for the nine months ended
September 28, 1996. As a percentage of net sales, gross profit increased to
27.1% in the first nine months of fiscal 1997 compared to 25.9% in the first
nine months of fiscal 1996. The increase in gross margin percentage of 1.2% is a
result of the Company's continued emphasis on implementing programs to improve
margins, such as freight and logistics programs and enhanced information systems
which provide tools to better manage this aspect of the business.
Store operating, general and administrative expenses were $37,270,000
for the first nine months of fiscal 1997 compared to $35,600,000 for the first
nine months of fiscal 1996. As a percentage of sales, operating expenses
increased to 22.9% in the first nine months of fiscal 1997 compared to 21.7% in
the first nine months of fiscal 1996. Operating expenses for the nine months
ended September 28, 1996 were favorably impacted by the reversal of bonus
provisions as a result of a decision in the first quarter of fiscal 1996 to
eliminate the discretionary store and management bonus provision which had been
expensed in prior periods. Further, operating expenses in the nine months of
fiscal 1997 increased over the same period in 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. Lastly, operating expenses
in the first nine months of 1997 include expenses of new information systems
implemented in the second half of 1996 which will provide long-term benefits to
the Company. These expenses commenced in the third quarter of 1996.
The Company incurred store development costs of $923,000 for the first
nine months of fiscal 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. Select marketing and
merchandising programs were implemented on a Company-wide basis during the
second and third quarters of 1997. In addition, a comprehensive renovation of
one store location was completed in the third quarter. Certain of the costs
incurred to date relate to the development and creative design of these
strategic concepts while other costs pertain to implementation including
marketing, advertising, promotions and payroll costs. The Company will incur
additional costs in the fourth quarter of 1997 and into 1998 to implement
various of these concepts in selected store locations.
10
11
Other expenses, net, decreased by $443,000, from $1,718,000 for the
nine months ended September 28, 1996 to $1,275,000 for the nine months ended
September 27, 1997. The decrease is due primarily to gains of $263,000 from the
sale of property in the first half of fiscal 1997 and a decrease in interest
expense of $275,000 due to the benefits of reduced debt levels as average
amounts outstanding under the Revolving Credit Agreement were approximately
$7,748,000 and $13,110,000 in the first nine months of fiscal 1997 and 1996,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 27, 1997, operating activities
provided net cash of $2,541,000. The primary source of cash from operations was
$5,271,000 from net income plus depreciation and amortization. The primary use
of cash for the nine months ended September 27, 1997 was $7,607,000 to fund
increased merchandise inventory levels at existing stores offset by an increase
of $4,045,000 in accounts payable. During the nine months ended September 28,
1996, operating activities provided net cash of $6,450,000. The primary source
of cash from operations was $5,553,000 from net income plus depreciation and
amortization. The primary use of cash for the nine months ended September 28,
1996 was $1,579,000 to fund increased merchandise inventory levels at existing
stores offset by an increase of $1,962,000 in accounts payable. The increase in
merchandise inventory levels for the nine months ended September 27, 1997
compared to the nine months ended September 28, 1996 is primarily due to a
greater emphasis by management to maintain higher in-stock inventory levels to
provide better customer service and inventory increases for certain new or
expanded merchandising categories associated with the Company's strategic
initiatives.
Net cash used in investing activities was $709,000 for the nine months
ended September 27, 1997, due primarily from the net proceeds of $851,000 from
the sales of several parcels of property offset by cash used of $1,560,000 for
remodeling initiatives and the acquisition of property and equipment. Net cash
used in investing activities for the nine months ended September 28, 1996 was
$1,272,000 due to remodeling initiatives in the Company's older stores.
Net cash used in financing activities for the nine months ended
September 27, 1997 was $1,263,000 as a result of principal payments on the
mortgage notes, capital lease obligations and note payable, affiliate of
$1,763,000 offset by an increase in the Company's revolving credit facility of
$500,000. The Company used the net proceeds of approximately $863,000 from the
sale of property in fiscal 1997 to reduce the outstanding principal on the
variable mortgage loan.
Net cash used in financing activities for the nine months ended
September 28, 1996 totaled $5,318,000, as a result of net repayments to the
Company's revolving credit facility of $4,800,000 and principal payments of debt
and capital lease obligations of approximately $518,000.
11
12
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. The Company has an
agreement with two banks which provide for borrowings under a revolving credit
facility of up to $23,000,000 of which $6,500,000 was outstanding as of
September 27, 1997.
OTHER
This Quarterly Report on Form 10-Q 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.
12
13
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
A list of the exhibits required by Item 601 of Regulation S-K to
be filed as a part of this Form 10-Q is shown on the "Exhibit
Index" filed herewith.
(b) Reports on Form 8-K:
None
Signature
Pursuant to the requirements 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.
D.I.Y. HOME WAREHOUSE, INC.
(Registrant)
DATED: November 11, 1997
By: Marilyn A. Eisele
--------------------------------------
Vice President - Administration
and Finance, Chief Financial Officer
13
14
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------ ----------------------
10 Material Contracts
------------------
10.1 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
10.2 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
10.3 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
11 Earnings Per Share:
------------------
11.1 Computation of Earnings Per Share
27 Financial Data Schedule:
-----------------------
27.1 Financial Data Schedule for the quarter ended
September 27, 1997
14