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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 July 4, 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 Number 0-21768
D.I.Y. Home Warehouse, Inc.
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(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 July 4, 1998
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Common Stock, no par value 7,633,859
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DIY HOME WAREHOUSE, INC.
INDEX PAGE NO.
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheet -
July 4, 1998 and
January 3, 1998......................................................................... 3
Condensed Statement of Income -
Three and Six Months Ended July 4, 1998
and June 28, 1997....................................................................... 4
Condensed Statement of Shareholders'
Equity - Six Months Ended
July 4, 1998............................................................................ 5
Condensed Statement of Cash Flows -
Six Months Ended July 4, 1998
and June 28, 1997....................................................................... 6
Notes to Condensed Financial Statements................................................. 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations.............................................................................. 8 - 11
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................................................ 12 - 13
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PART I - FINANCIAL INFORMATION
DIY HOME WAREHOUSE, INC.
CONDENSED BALANCE SHEET
July 4, 1998 January 3, 1998
------------ ---------------
Assets (Unaudited)
Current assets:
Cash and cash equivalents $ 480,777 $ 141,401
Accounts receivable, trade 116,811 100,389
Refundable federal income taxes -- 365,963
Merchandise inventories 39,543,213 40,156,756
Deferred income taxes 278,565 278,565
Prepaid expenses and other assets 605,625 745,961
------------ -----------
Total current assets 41,024,991 41,789,035
------------ -----------
Property and equipment, at cost 53,620,967 52,326,680
------------ -----------
Less accumulated depreciation and amortization 15,328,509 13,381,396
Property and equipment, net 38,292,458 38,945,284
Other assets 421,627 474,888
------------ -----------
Total assets $ 79,739,076 $81,209,207
============ ===========
Liabilities and Shareholders' Equity
Current liabilities:
Note payable, affiliate $ 300,000 $ 600,000
Current maturities of long-term debt 989,321 946,183
Accounts payable 14,677,287 10,615,039
Accrued expenses and other 5,672,229 5,776,915
Total current liabilities 21,638,837 17,938,137
Revolving credit 1,775,000 6,375,000
Long-term debt 13,635,333 14,208,586
Deferred income taxes 2,462,002 2,547,927
Shareholders' equity:
Preferred stock, authorized 1,000,000 shares,
none issued -- --
Common stock, no par value, authorized
10,000,000 shares, 7,633,859 shares
outstanding as of July 4, 1998
and January 3, 1998 22,955,462 22,955,462
Retained earnings 17,272,442 17,184,095
------------ -----------
Total shareholders' equity 40,227,904 40,139,557
------------ -----------
Total liabilities and shareholders' equity $ 79,739,076 $81,209,207
============ ===========
See accompanying notes to condensed financial statements.
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DIY HOME WAREHOUSE, INC.
CONDENSED STATEMENT OF INCOME
(Unaudited)
For the three months ended For the six months ended
July 4, June 28, July 4, June 28,
1998 1997 1998 1997
------------ ------------ -------------- ------------
Net sales $ 56,334,029 $ 66,857,265 $ 93,746,202 $106,509,276
Cost of sales 41,875,355 49,473,971 68,603,276 77,464,552
------------ ------------ -------------- ------------
Gross profit 14,458,674 17,383,294 25,142,926 29,044,724
Store operating, general
and administrative expenses 12,418,294 13,425,796 23,689,726 24,911,579
Store development costs 99,747 137,225 305,517 137,225
------------ ------------ -------------- ------------
Operating income 1,940,633 3,820,273 1,147,683 3,995,920
Other expense, net 439,964 498,699 997,943 826,298
------------ ------------ -------------- ------------
Income before income taxes 1,500,669 3,321,574 149,740 3,169,622
Income taxes 615,275 1,352,270 61,393 1,289,986
------------ ------------ -------------- ------------
Net income $ 885,394 $ 1,969,304 $ 88,347 $ 1,879,636
============== ============= ================= =============
Earnings per common
share, basic and diluted $ 0.12 $ 0.26 $ 0.01 $ 0.25
============== ============= ================= =============
Weighted average
common shares outstanding 7,633,859 7,633,859 7,633,859 7,633,859
============== ============= ================= =============
See accompanying notes to condensed financial statements.
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DIY HOME WAREHOUSE, INC.
CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JULY 4, 1998
(Unaudited)
Common Stock Total
----------------------------------- Retained Shareholders'
Shares Amount Earnings Equity
-------------- ------------- -------------- ---------------
Balances, January 3, 1998 7,633,859 $22,955,462 $17,184,095 $40,139,557
Net income 88,347 88,347
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Balances, July 4, 1998 7,633,859 $22,955,462 $17,272,442 $40,227,904
============= =========== =========== ===========
See accompanying notes to condensed financial statements.
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DIY HOME WAREHOUSE, INC.
CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
For the six months ended
July 4, 1998 June 28, 1997
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Cash flows from operating activities:
Net income $ 88,347 $ 1,879,636
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,955,051 1,664,351
Shares issued under retainer stock plan - 13,457
Loss (gain) on sale of property 2,752 (262,668)
Deferred income taxes (85,925) -
Changes in operating assets and liabilities:
Accounts receivable, trade (16,422) (23,708)
Refundable federal income taxes 365,963 248,688
Merchandise inventories 613,543 (8,170,821)
Prepaid expenses and other assets 193,597 197,397
Accounts payable 4,062,248 6,035,083
Accrued expenses and other current liabilities (104,686) 1,513,139
Net cash provided by operating activities 7,074,468 3,094,554
Cash flows from investing activities:
Acquisition of property and equipment (1,304,977) (760,740)
Proceeds from sale of property - 850,911
---------------- --------------
Net cash (used in) provided by investing
activities (1,304,977) 90,171
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Cash flows from financing activities:
Principal payments under capital lease
obligations (83,116) (69,284)
Principal payments of note payable, affiliate (300,000) (300,000)
Proceeds from revolving credit 3,625,000 6,000,000
Principal payments of revolving credit (8,225,000) (8,500,000)
Principal payments of long-term debt (446,999) (323,137)
---------------- --------------
Net cash (used in) financing activities (5,430,115) (3,192,421)
---------------- --------------
Net increase (decrease) in cash and cash
equivalents 339,376 (7,696)
Cash and cash equivalents, beginning of period 141,401 161,360
---------------- --------------
Cash and cash equivalents, end of period $ 480,777 $ 153,664
=============== ===============
See accompanying notes to condensed financial statements.
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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
July 4, 1998 and the results of operations for the three and six months ended
July 4, 1998 and June 28, 1997 and cash flows for the six months ended July 4,
1998. 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. Basic and fully diluted
earnings per common share are identical.
COMPUTATION OF EARNINGS PER COMMON SHARE
(BASIC AND DILUTED)
(Unaudited)
Three Months Ended Six Months Ended
July 4, 1998 June 28, 1997 July 4, 1998 June 28, 1997
------------ ------------- ------------ -------------
(Unaudited) (Unaudited)
Net income applicable to common $ 885,394 $1,969,304 $ 88,347 $1,879,636
shares ================ ================= ================= =================
Weighted average common shares
outstanding for the period 7,633,859 7,633,859 7,633,859 7,633,789
Dilutive effect of exercise of stock
options
- - - -
---------------- ----------------- ----------------- ----------------
Weighted average common shares,
assuming issuance of the above
securities 7,633,859 7,633,859 7,633,859 7,633,789
================ ================= ================= =================
Earnings per common share:
Basic $0.12 $0.26 $0.01 $0.25
Diluted $0.12 $0.26 $0.01 $0.25
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OPERATIONS - Three Months Ended July 4, 1998
Compared to Three Months Ended June 28, 1997
Net sales for the quarter ended July 4, 1998 decreased by $10,523,000,
or 15.7%, to $56,334,000 for the quarter ended July 4, 1998 from $66,857,000 for
the comparable quarter in fiscal 1997. Comparable store sales were impacted by
additional national warehouse competition in a majority of the Company's
markets.
Gross profit decreased by $2,924,000, or 16.8%, from $17,383,000 in the
second quarter of fiscal 1997 to $14,459,000 in the second quarter of fiscal
1998. Gross profit, as a percentage of net sales, was 25.7% in the second
quarter of fiscal 1998 compared to 26.0% in the second quarter of fiscal 1997.
This decrease in gross profit percentage is due to a decrease in vendor rebates
and discounts resulting from decreased inventory purchases in the second quarter
of fiscal 1998 compared to the comparable quarter of fiscal 1997. During the
second quarter of fiscal 1998, the Company continued to focused on enhancing the
balance sheet by reducing inventory levels. As a result, inventory purchases in
the second quarter of fiscal 1998 were approximately $8,500,000 lower than
purchases during the second quarter fiscal of 1997.
Store operating, general and administrative expenses decreased
$1,008,000, or 7.5%, to $12,418,000 in the quarter ended July 4, 1998 from
$13,426,000 in the quarter ended June 28, 1997. This decrease is due to the
Company's ongoing efforts to reduce operating costs. As a percentage of net
sales, store operating, general and administrative expenses increased to 22.0%
in the second quarter of fiscal 1998 compared to 20.0% in the comparable quarter
of fiscal 1998 due to lower sales on which to leverage these expenses.
Other expense, net, was $440,000 for the quarter ended July 4, 1998
compared to $499,000 for the quarter ended June 28,1997. The net decrease of
$59,000 is due to a decrease in interest expense of $108,000 primarily
associated with the benefits of reduced debt level as average amounts
outstanding under the revolving credit facility were approximately $5,095,000
and $8,941,000 in the second quarter of 1998 and 1997, respectively. The
interest expense decrease of $108,000 was offset by the gain of $45,000 on sale
of property in the second quarter of fiscal 1997.
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OPERATIONS - Six Months Ended July 4, 1998
Compared to Six Months Ended June 28, 1997
Net sales decreased $12,763,000, or 12.0% from $106,509,000 for the six
month ended June 28, 1997 to $93,746,000 for the six months ended July 4, 1998
due to additional national warehouse competition in a majority of the Company's
markets.
Gross profit decreased by $3,902,000, or 13.4%, to $25,143,000 for the
six months ended July 4, 1997 from $29,045,000 for the six months ended June 28,
1997. As a percentage of net sales, gross profit decreased to 26.8% in the first
half of fiscal 1998 compared to 27.3% in the first half of fiscal 1997. The
Company focused on enhancing the balance sheet by reducing inventory levels This
decrease in gross profit percentage is due to a decrease in vendor rebates and
discounts resulting from decreased inventory purchases of approximately
$18,500,000 in the first half of 1998 compared to the comparable quarter of
fiscal 1997.
Store operating, general and administrative expenses decreased
$1,222,000, or 4.9% to $23,690,000 in the first half of fiscal 1998 from
$24,912,000 for the first half of fiscal 1997. The decrease is due to the
Company's on-going effort to reduce operating expenses. As a percentage of
sales, operating expenses were 25.3% for the first half of 1998 compared to
23.4% for the first half of 1997 due to lower sales on which to leverage
expenses.
The Company incurred $306,000 related to store development costs for
the six months ended July 4, 1998 compared to $137,000 for the same period of
fiscal 1997. During the first half of fiscal 1997, management assessed the
business strategies and opportunities of the Company to differentiate itself in
the warehouse-format home improvement retail market. This process resulted in
development of new merchandising, marketing and other strategic initiatives to
strengthen the Company's market position.
Other expense, net, increased by $172,000, to $998,000 for the six
months ended July 4, 1998 from $826,000 for the comparable period of fiscal
1997. This increase is primarily due to a $263,000 gain on sale of parcels of
property in the first half of fiscal 1997 and a decrease in interest expense
from the Mortgage Loans and Revolving Credit Agreement of $58,000 and $50,000,
respectively in the first half of fiscal 1998. Mortgage interest expense
decreased primarily due to the principal reduction on the variable mortgage loan
in the third quarter of 1997 from the proceeds on the sale of property. The
Revolving Credit Agreement interest expense decreased due to the benefits of
reduced debt levels as average amounts outstanding were approximately $7,495,000
and $9,206,000 in the first half of fiscal 1998 and 1997, respectively.
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LIQUIDITY AND CAPITAL RESOURCES
During the six months ended July 4, 1998 and June 28, 1997, operating
activities provided net cash of approximately $7,074,000 and $3,095,000,
respectively. The primary source of cash from operating activities for the six
months ended July 4, 1998 was $1,955,000 from deprecation and amortization and
$614,000 from reducing inventories, combined with an increase of $4,062,000 in
accounts payable. The primary source of cash from operating activities for the
six months ended June 28, 1997 was $3,544,000 from net income plus depreciation
and amortization and an increase of $6,035,000 in accounts payable. The primary
use of cash for same period in 1997 included $8,171,000 to fund seasonal
increases in inventories. The Company continued to focus on enhancing its
balance sheet during fiscal 1998 which included inventory reductions of
approximately $7,205,000 compared to the same period of fiscal 1997.
Net cash used in investing activities was $1,305,000 for the six months
ended July 4, 1998 due to store development capital expenditures associated with
the comprehensive renovation of certain store locations. Net cash provided by
investing activities was $90,000 for the six months ended June 28, 1997, due
primarily to the proceeds of $851,000 from the sales of several parcels of
property offset by cash used of $761,000 for the acquisition of property and
equipment.
Net cash used in financing activities increased by $2,238,000 to
$5,430,000 for the six months ended July 4, 1998 from $3,192,000 for the
comparable period in fiscal 1997. The increase is due to a reduction in the net
borrowings under the revolving credit facility as a result of lower inventory
purchases.
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.
FORWARD-LOOKING STATEMENTS
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
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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.
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. Home
Depot continued to expand in the first half of 1998 and has announced further
expansion plans in the second half 1998 and first quarter of 1999. Lowe's has
announced further expansion plans in 1998. 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.
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.
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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: August 3, 1998
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By: Eric I. Glassman
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Vice President and Chief Financial
Officer
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EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------ ----------------------
10 Material Contracts
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10.1 Fourth Amendment to Revolving Credit Agreement dated
April 4, 1998 between D.I.Y. Home Warehouse, Inc.,
National City Bank of Columbus and Old Kent Bank
10.2 Fourth Amendment to Loan and Co-Lender Agreement dated
April 4, 1998 between D.I.Y. Home Warehouse, Inc.,
National City Bank of Columbus and Old Kent Bank
10.3 Fifth Amendment to Line of Credit Agreement dated
April 4, 1998 between D.I.Y. Home Warehouse, Inc.,
National City Bank of Columbus and Old Kent Bank
10.4 Amended and Restated Employment Agreement between
Clifford L. Reynolds and D.I.Y. Home Warehouse, Inc.
10.5 Amended and Restated Employment Agreement between
R. Scott Eynon and D.I.Y. Home Warehouse, Inc.
10.6 Amended and Restated Employment Agreement between
Dennis C. Hoff and D.I.Y. Home Warehouse, Inc.
10.7 Employment Agreement between Eric I. Glassman and
D.I.Y. Home Warehouse, Inc.
10.8 Transaction Bonus Agreement between Clifford L. Reynolds
and D.I.Y. Home Warehouse, Inc.
10.9 Transaction Bonus Agreement between R. Scott Eynon
and D.I.Y. Home Warehouse, Inc.
10.10 Transaction Bonus Agreement between Dennis C. Hoff
and D.I.Y. Home Warehouse, Inc.
10.11 Transaction Bonus Agreement between Eric I. Glassman
and D.I.Y. Home Warehouse, Inc.
27 Financial Data Schedule:
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27.1 Financial Data Schedule for the quarter ended
July 4, 1998
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