<PAGE> 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 28, 1996
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 28, 1996
- -------------------------- ---------------------------------
Common Stock, no par value 7,630,685
<PAGE> 2
DIY HOME WAREHOUSE, INC.
INDEX PAGE NO.
----- --------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheet -
September 28, 1996 and
December 30, 1995.............................................. 3
Condensed Statement of Income -
Three and Nine Months Ended September
28, 1996 and September 30, 1995................................ 4
Condensed Statement of Shareholders'
Equity - Nine Months Ended September 28,
1996........................................................... 5
Condensed Statement of Cash Flows -
Nine Months Ended September 28, 1996
and September 30, 1995......................................... 6
Notes to Condensed Financial Statements........................ 7-8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations.................................................... 9-11
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.............................. 12
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
DIY HOME WAREHOUSE, INC.
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
September 28, 1996 December 30, 1995
------------------ -----------------
Assets (Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,329,548 $ 1,468,897
Accounts receivable, trade 28,469 97,584
Merchandise inventories 41,507,569 39,928,793
Deferred income taxes 685,312 685,312
Prepaid expenses and other assets 794,468 662,991
------------ ------------
Total current assets 44,345,366 42,843,577
------------ ------------
Property and equipment, at cost 49,688,789 46,956,706
Less accumulated depreciation and amortization (9,430,694) (6,985,653)
------------ ------------
Property and equipment, net 40,258,095 39,971,053
Other assets 602,138 685,180
------------ ------------
Total assets $ 85,205,599 $ 83,499,810
============ ============
Liabilities and Shareholders' Equity
Current liabilities:
Note payable, affiliate $ 900,000 $ 900,000
Current maturities of long-term debt 835,492 552,670
Accounts payable 15,030,198 13,067,899
Accrued expenses and other 5,489,230 5,025,712
------------ ------------
Total current liabilities 22,254,920 19,546,281
------------ ------------
Revolving credit 8,500,000 13,300,000
Long-term debt 16,774,466 16,115,153
Deferred income taxes 1,099,016 1,099,016
Shareholders' equity:
Preferred stock, authorized 1,000,000 shares,
none issued -- --
Common stock, no par value authorized
10,000,000 shares, 7,630,685 and 7,625,000
shares outstanding as of September 28, 1996
and December 30, 1995, respectively 22,942,005 22,912,521
Retained earnings 13,635,192 10,526,839
------------ ------------
Total shareholders' equity 36,577,197 33,439,360
------------ ------------
Total liabilities and shareholders' equity $ 85,205,599 $ 83,499,810
============ ============
</TABLE>
See accompanying notes to condensed financial statements.
3
<PAGE> 4
DIY HOME WAREHOUSE, INC.
CONDENSED STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
-------------------------- -------------------------
September 28, September 30, September 28, September 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $ 56,806,258 $ 47,308,171 $ 164,118,831 $ 135,977,087
Cost of Sales 41,902,330 35,080,294 121,563,227 98,269,144
------------- ------------- ------------- -------------
Gross profit 14,903,928 12,227,877 42,555,604 37,707,943
Store operating, general and
administrative expenses 12,406,072 10,978,461 35,599,517 30,071,939
Store preopening costs -- 206,429 -- 1,491,989
------------- ------------- ------------- -------------
Operating income 2,497,856 1,042,987 6,956,087 6,144,015
Other expense, net (518,589) (284,594) (1,718,170) (1,010,359)
------------- ------------- ------------- -------------
Income before income taxes 1,979,267 758,393 5,237,917 5,133,656
Income taxes 791,706 309,733 2,129,564 2,046,743
------------- ------------- ------------- -------------
Net income $ 1,187,561 $ 448,660 $ 3,108,353 $ 3,086,913
============= ============= ============= =============
Earnings per share $0.16 $0.06 $0.41 $0.40
===== ===== ===== =====
Weighted average
common shares
outstanding 7,626,125 7,625,000 7,625,375 7,625,000
============= ============= ============= =============
</TABLE>
See accompanying notes to condensed financial statements.
4
<PAGE> 5
DIY HOME WAREHOUSE, INC.
CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 28, 1996
(Unaudited)
<TABLE>
<CAPTION>
Common Stock
------------
Retained Shareholders'
Shares Amount Earnings Equity
------ ------ -------- ------------
<S> <C> <C> <C> <C>
Balances at December 30,
1995, as previously reported 7,625,000 $22,912,521 $10,252,424 $33,164,945
Adjustment for the
cumulative effect of the
change in accounting for
merchandise inventories 274,415 274,415
--------- ---------- ----------- -----------
Balances at December 30,
1995, as adjusted 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 3,108,353 3,108,353
----------- ----------- ----------- -----------
Balances, September 28,
1996 7,630,685 $22,942,005 $13,635,192 $36,577,197
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
5
<PAGE> 6
DIY HOME WAREHOUSE, INC.
CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the nine months ended
September 28, 1996 September 30, 1995
----------------- ------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,108,353 $ 3,086,913
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,445,041 1,641,364
Deferred income tax expense and other 29,484 56,000
Changes in operating assets and liabilities:
Accounts receivable, trade 69,115 82,449
Merchandise inventories (1,578,776) (10,476,525)
Prepaid expenses and other assets (48,435) (45,846)
Accounts payable 1,962,299 10,196,420
Accrued expenses and other current liabilities 463,518 1,284,974
------------ ------------
Net cash provided by operating activities 6,450,599 5,825,749
------------ ------------
Cash flows from investing activities:
Acquisition of property and equipment (1,271,656) (15,829,963)
------------ ------------
Net cash used in investing activities (1,271,656) (15,829,963)
------------ ------------
Cash flows from financing activities:
Principal payments under capital lease
obligations (77,069) --
Principal payments, note payable -- (687,176)
Proceeds from revolving credit 4,000,000 7,300,000
Principal payments of revolving credit (8,800,000) --
Proceeds from long-term debt -- 3,375,000
Principal payments of long-term debt (441,223) (199,267)
------------ ------------
Net cash (used in) provided by financing
activities (5,318,292) 9,788,557
------------ ------------
Net decrease in cash and cash equivalents (139,349) (215,657)
Cash and cash equivalents, beginning of period 1,468,897 937,477
------------ ------------
Cash and cash equivalents, end of period $ 1,329,548 $ 721,820
============ ============
</TABLE>
Supplemental schedule of non-cash investing and financing activities: Capital
lease obligations of $1,460,427 were incurred when the Company entered into
leases for vehicles and computer hardware and software in 1996.
See accompanying notes to condensed financial statements.
6
<PAGE> 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 28, 1996 and the results of operations and cash flows for the
three and nine months ended September 28, 1996 and September 30, 1995. 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. Summary of Significant Accounting Policies:
During the first quarter of 1996, the Company changed its method
of accounting for merchandise inventories from the last-in, first-out (LIFO)
method to the first-in, first-out (FIFO) method. As required by generally
accepted accounting principles, the Company has retroactively adjusted prior
years' financial statements for this change. The new method of accounting for
inventory was adopted in recognition of industry practice and to provide for a
better matching of costs and revenues. The Internal Revenue Service granted
permission to the Company to change to the FIFO method of inventory valuation
for income tax purposes. The effect of the change in accounting method increased
net income as previously reported $69,000 for the three and nine months ended
September 30, 1995, and $0.01 per share for the three months ended September 30,
1995. The effect of the change in accounting method did not impact earnings per
share as previously reported for the nine months ended September 30, 1995.
3. 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.
4. Stock Options:
The Company has a Long Term Incentive Plan (the Plan) which
reserves shares of the Company's authorized common stock for issuance. On May
22, 1996, the Company's shareholders authorized an increase of the number of
shares authorized for issuance under the Plan from 850,000 shares to 1,350,000
shares. 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. A summary of
activity under the Plan for the nine months ended September 28, 1996 is as
follows:
7
<PAGE> 8
<TABLE>
<CAPTION>
Average
Shares Subject Option Price
to Options Per Share
---------- ---------
<S> <C> <C>
Outstanding December 30, 1995 673,000 $ 10.18
Granted 158,000 $ 4.50
Canceled (25,000) $ 8.63
------
Outstanding September 28, 1996 806,000 $ 9.14
=======
</TABLE>
At September 28, 1996, 288,100 options were exercisable and 544,000 shares were
available for future grant. The Company does not expect to adopt the recognition
provisions of recently issued SFAS No. 123, Accounting for Stock-Based
Compensation. Disclosures required by the new accounting standard will be
included in future financial statements pursuant to the effective date criteria.
6. Income Taxes:
A reconciliation of the Statutory federal income tax rate to the
Company's effective income tax rate follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
------------------ -----------------
September 28, September 30, September 28, September 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Statutory federal income tax
rate 34.0% 34.0% 34.0% 34.0%
State and local income taxes,
net of federal benefit 6.9 6.3 6.9 6.1
Tax credits and other (0.9) 0.5 (0.2) (0.2)
------ ----- ------ -----
Effective income tax rate 40.0% 40.8% 40.7% 39.9%
===== ===== ===== =====
</TABLE>
8
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OPERATIONS - Three Months Ended September 28,
1996 Compared to Three Months Ended September 30, 1995
Net sales increased by $9.5 million, or 20%, to $56.8 million in the
third quarter of fiscal 1996, from $47.3 million in the third quarter of fiscal
1995. This increase in net sales was attributable primarily to a comparable
store sales increase of 14%.
Gross profit increased by $2.7 million, or 22%, to $14.9 million in the
third quarter of fiscal 1996 from $12.2 million in the third quarter of fiscal
1995. As a percentage of net sales, gross profit increased to 26.2% in the
quarter ended September 28, 1996 compared to 25.8% in the comparable quarter of
fiscal 1995, due primarily to continued Company focus on enhancing its gross
profit margin.
Store operating, general and administrative expenses were $12.4 million
for the quarter ended September 28, 1996 compared to $11.0 million for the
quarter ended September 30, 1995. As a percentage of net sales, operating
expenses decreased to 21.8% in the third quarter of fiscal 1996 compared to
23.2% in the third quarter of fiscal 1995, reflecting the benefit of sales
leveraging and continuing expense reduction programs.
There were no store preopening costs in the third quarter of fiscal
1996, as there were no new stores under development during this period. Store
preopening costs were approximately $206,000 in the third quarter of fiscal 1995
relative to one store under development during this period.
Other expense, net, increased from $285,000 in the quarter ended
September 30, 1995 to $519,000 in the quarter ended September 28, 1996 due
primarily to a $208,000 gain on the sale of a land parcel recorded in the third
quarter of 1995.
9
<PAGE> 10
OPERATIONS - Nine Months Ended September 28,
1996 Compared to Nine Months Ended September 30, 1995
Net sales for the nine months ended September 28, 1996 were $164.1
million, a 21% increase over net sales of $136.0 million for the nine months
ended September 30, 1995. Comparable store sales increased 5% for the first nine
months of fiscal 1996. In addition, the increase in net sales was partially
attributable to the full period sales in 1996 for the five DIY locations which
were opened in 1995.
Gross profit for the nine months ended September 28, 1996 was $42.6
million compared to gross profit of $37.7 for the nine months ended September
30, 1995. Gross profit, as a percentage of net sales, decreased from 27.7% in
the first nine months of fiscal 1995 to 25.9% in the comparable 1996 nine month
period. This decline in gross margin percentage is due primarily to vendor
discounts received in 1995 on the initial inventory orders for four new stores
opened during the first nine months of 1995. No such discounts were realized in
the first nine months of fiscal 1996 as there were no new store openings.
Store operating expenses were 21.7% of net sales in the first nine
months of fiscal 1996 as compared to 22.1% of net sales in the first nine months
of fiscal 1995, reflecting the benefit of sales leveraging and continuing
expense reduction programs.
There were no store preopening costs for the nine months ended
September 28, 1996 as there were no new stores under development during this
period. Store preopening costs were $1.5 million for the nine months ended
September 30, 1995 relative to four stores opened during this period.
Other expense, net, increased from $1.0 million in the nine months
ended September 30, 1995 to $1.7 million in the nine months ended September 28,
1996 due to interest expense incurred on higher levels of debt outstanding in
the first nine months of 1996 compared to the comparable 1995 period.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 28, 1996, operating activities
provided net cash of $6.5 million. The primary source of cash from operations
was $5.5 million from net income plus depreciation and amortization. The primary
use of cash was $1.6 million to fund increased merchandise inventory levels at
existing stores offset by an increase of $2.0 million and $464,000 in accounts
payable and accrued expenses and other current liabilities, respectively. During
the nine months ended September 30, 1995, operating activities provided net cash
of $5.8 million. The primary source of cash from operations was $4.7 million
from net income plus depreciation and amortization. The primary use of cash was
$10.5 million to finance increases in merchandise inventories resulting from new
store openings in the first nine months of 1995 offset by a $10.2 million
increase in accounts payable and a $1.3 million increase in accrued expenses and
other current liabilities.
10
<PAGE> 11
Net cash used in investing activities was approximately $1.3 million
and $15.8 million during the nine months ended September 28, 1996 and September
30, 1995, respectively, due to remodeling initiatives in the Company's older
stores in the first nine months of 1996 and the acquisition of property and
equipment related to new store expansion in the first nine months of fiscal
1995.
Net cash used in financing activities during the nine months ended
September 28, 1996 totaled $5.3 million, as a result of net repayments to the
Company's revolving credit facility of $4.8 million and principal payments of
debt and capital lease obligations of approximately $500,000. Net cash provided
by financing activities in the nine months ended September 30, 1995 totaled $9.8
million, due primarily to $7.3 million and $3.4 million from revolving credit
borrowings and mortgage loans, respectively, offset by principal payments of
debt and a note payable of approximately $900,000.
During the first quarter of fiscal 1996, the Company changed its method
of accounting for inventories from the last-in, first-out (LIFO) method to the
first-in, first-out (FIFO) method. As required by generally accepted accounting
principles, the Company has retroactively adjusted prior years' financial
statements for this change. The effect of the change in accounting method
increased net income, as previously reported, $69,000 for the three and nine
months ended September 30, 1995, and $0.01 per share for the three months ended
September 30, 1995. The effect of the change in accounting method did not impact
earnings per share as previously reported for the nine months ended September
30, 1995.
The Company entered into capital lease obligations of $815,988 for
computer hardware and software and $644,439 for trucks in the second and first
quarters of 1996, respectively. At September 28, 1996, the Company had $14.5
million available under its revolving credit facility.
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.
11
<PAGE> 12
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 7, 1996
By: /s/ Marilyn A. Eisele
----------------------
Vice President - Administration
and Finance, Chief Financial Officer
12
<PAGE> 13
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------ ----------------------
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 28, 1996
13
<PAGE> 1
EXHIBIT 11.1
DIY HOME WAREHOUSE, INC.
FORM 10-Q
COMPUTATION OF EARNINGS PER COMMON SHARE
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 28, September 30, September 28, September 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income applicable to
common shares $1,187,561 $ 448,660 $3,108,353 $3,086,913
========== ========== ========== ==========
Weighted average common
shares outstanding for the
period 7,626,125 7,625,000 7,625,375 7,625,000
Dilutive effect of exercise of
stock options -- -- -- --
---------- ---------- ---------- ----------
Weighted average common
shares, assuming issuance of
the above securities 7,626,125 7,625,000 7,625,375 7,625,000
========== ========== ========== ==========
Earnings per common share:
Primary $0.16 $0.06 $0.41 $0.40
Fully diluted $ -- $ -- $ -- $ --
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-START> DEC-31-1995
<PERIOD-END> SEP-28-1996
<CASH> 1,330
<SECURITIES> 0
<RECEIVABLES> 28
<ALLOWANCES> 0
<INVENTORY> 41,508
<CURRENT-ASSETS> 44,345
<PP&E> 49,689
<DEPRECIATION> 9,431
<TOTAL-ASSETS> 85,205
<CURRENT-LIABILITIES> 22,255
<BONDS> 25,274
0
0
<COMMON> 22,942
<OTHER-SE> 13,635
<TOTAL-LIABILITY-AND-EQUITY> 85,205
<SALES> 164,118
<TOTAL-REVENUES> 164,118
<CGS> 121,563
<TOTAL-COSTS> 121,563
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,911
<INCOME-PRETAX> 5,238
<INCOME-TAX> 2,130
<INCOME-CONTINUING> 3,108
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,108
<EPS-PRIMARY> 0.41
<EPS-DILUTED> 0.41
</TABLE>
