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 June 29, 1996

[ ] 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 June 29, 1996
- --------------------------- ------------------------------
Common Stock, no par value 7,625,000

Total pages: 12
Index to exhibits: 13

D.I.Y. HOME WAREHOUSE, INC.

INDEX

PAGE NO.
--------

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Balance Sheet -
June 29, 1996 and December 30,
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Condensed Statement of Income -
Three and Six Months Ended June 29,
1996 and July 1, 1995 . . . . . . . . . . . . . . . . . . . . 4

Condensed Statement of
Shareholders' Equity - Six
Months Ended June 29, 1996. . . . . . . . . . . .. . . . . . . 5

Condensed Statement of Cash Flows -
Six Months Ended June 29,
1996 and July 1, 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

PART I - FINANCIAL INFORMATION

D.I.Y. HOME WAREHOUSE, INC.
CONDENSED BALANCE SHEET

June 29, 1996 December 30,1995
------------- ----------------
Assets (Unaudited)

Current assets:
Cash and cash equivalents $ 1,102,397 $ 1,468,897
Accounts receivable, trade 74,678 97,584
Merchandise inventories 44,771,896 39,928,793
Deferred income taxes 685,312 685,312
Prepaid expenses and other assets 690,421 662,991
----------- -----------
Total current assets 47,324,704 42,843,577
----------- -----------
Property and equipment, at cost 49,323,728 46,956,706
Less accumulated depreciation and
amortization 8,573,253 6,985,653
----------- -----------
Property and equipment, net 40,750,475 39,971,053
-----------
Other assets 628,677 685,180
----------- -----------
Total assets $88,703,856 $83,499,810
=========== ===========

Liabilities and Shareholders' Equity
Current liabilities:
Note payable, affiliate $ 900,000 $ 900,000
Current maturities of long-term debt 816,326 552,670
Accounts payable 15,953,526 13,067,899
Accrued expenses and other 6,090,442 5,025,712
----------- -----------
Total current liabilities 23,760,294 19,546,281
----------- -----------
Revolving credit 11,500,000 13,300,000
Long-term debt 16,984,392 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, 7,625,000 shares
outstanding 22,912,521 22,912,521
Retained earnings 12,447,633 10,526,839
----------- -----------
Total shareholders' equity 35,360,154 33,439,360
----------- -----------
Total liabilities and
shareholders' equity $88,703,856 $83,499,810
----------- -----------

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 SIX MONTHS ENDED
JUNE 29, JULY 1, JUNE 29, JULY 1,
1996 1995 1996 1995
------------ ------------ ------------ ------------

Net sales $ 68,168,668 $ 58,411,111 $107,312,573 $ 88,668,916

Cost of sales 51,282,094 42,118,502 79,660,896 63,188,850
------------ ------------ ------------ ------------

Gross profit 16,886,574 16,292,609 27,651,677 25,480,066

Store operating, general
and administrative
expenses 12,822,932 11,645,598 23,193,444 19,093,478

Store preopening costs -- 638,802 -- 1,285,560
------------ ------------ ------------ ------------

Operating income 4,063,642 4,008,209 4,458,233 5,101,028

Other expense, net 623,668 455,708 1,199,581 725,765
------------ ------------ ------------ ------------

Income before income taxes 3,439,974 3,552,501 3,258,652 4,375,263

Income taxes 1,410,389 1,417,499 1,337,858 1,737,010
------------ ------------ ------------ ------------

Net income $ 2,029,585 $ 2,135,002 $ 1,920,794 $ 2,638,253
============ ============ ============ ============

Earnings per share $ 0.27 $ 0.28 $ 0.25 $ 0.35
============ ============ ============ ============

Weighted average
common shares outstanding 7,625,000 7,625,000 7,625,000 7,625,000
============ ============ ============ ============

See accompanying notes to condensed financial statements.

4
5

D.I.Y. HOME WAREHOUSE, INC.
CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 29, 1996
(Unaudited)

Common Stock Total
------------------ Retained Shareholders'
Shares Amount Earnings Equity
------ ------ -------- ------

Balances at December
30, 1995, as previous-
ly 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

Net income 1,920,794 1,920,794

----------- ----------- ----------- -----------

Balances, June 29, 1996 7,625,000 $22,912,521 $12,447,633 $35,360,154
=========== =========== =========== ===========

See accompanying notes to condensed financial statements.

5
6

D.I.Y. HOME WAREHOUSE, INC.
CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)

For the six months ended
June 29, July 1,
1996 1995
------------- ---------

Cash flows from operating activities:
Net income $ 1,920,794 $ 2,638,253
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,587,600 952,024
Changes in operating assets and
liabilities:
Accounts receivable, trade 22,906 (174,205)
Merchandise inventories (4,843,103) (12,418,841)
Prepaid expenses and other assets 29,073 (160,087)
Accounts payable 2,885,627 15,280,086
Accrued expenses and other current
liabilities 1,064,730 1,525,924
------------ ------------
Net cash provided by
operating activities 2,667,627 7,643,154
------------ ------------
Cash flows from investing activities:
Acquisition of property and equipment (906,595) (12,404,066)
------------ ------------
Net cash used in investing
activities (906,595) (12,404,066)
------------ ------------
Cash flows from financing activities:
Principal payments under capital
lease obligations (35,905) --
Principal payments, note payable -- (687,176)
Proceeds from revolving credit 4,000,000 2,500,000
Principal payments of revolving credit (5,800,000) --
Proceeds from long-term debt -- 3,375,000
Principal payments of long-term debt (291,627) (113,021)
------------ ------------
Net cash (used in) provided by
financing activities (2,127,532) 5,074,803
------------ ------------
Net (decrease) increase in cash and cash
equivalents (366,500) 313,891
Cash and cash equivalents, beginning of
period 1,468,897 937,477
------------ ------------
Cash and cash equivalents, end of period $ 1,102,397 $ 1,251,368
============ ============

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.

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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
June 29, 1996 and the results of operations and cash flows for the three and six
months ended June 29, 1996 and July 1, 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 had no effect on net
income or earnings per share as previously reported for the three or six months
ended July 1, 1995.

The Company will restate each of its 1995 quarters as well as its 1995
and 1994 annual results to provide retroactive application of the effect of the
accounting change. Had the Company not changed its method of inventory costing,
the impact on net income and earnings per share for the three and six months
ended June 29, 1996 would not have been material.

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.

7
8

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 six months ended June 29, 1996 is as follows:

Average Option
Shares Subject Price
to Options Per Share
---------- ---------

Outstanding December 30, 1995 673,000 $ 10.18

Granted 158,000 $ 4.62
Canceled (10,000) $ 7.14
-------- --------
Outstanding June 29, 1996 821,000 $ 9.15
======== ========

At June 29, 1996, 174,800 options were exercisable and 529,000 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 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:

Three months ended Six Months ended
June 29, July 1, June 29, July 1,
1996 1995 1996 1995
------ ------ ------ ------

Statutory federal income tax rate 34.0% 34.0% 34.0% 34.0
State and local income taxes,
net of federal benefit 7.0 6.0 7.0 6.0
Tax credits and other -- (0.1) -- (0.3)
------ ------ ------ ------
Effective income tax rate 41.0% 39.9% 41.0% 39.7
====== ====== ====== ======

8
9

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION

OPERATIONS - Three Months Ended June 29,
1996 Compared to Three Months Ended July 1, 1995

Net sales increased by $9.8 million, or 17%, to $68.2 million in the
second quarter of fiscal 1996, from $58.4 million in the second quarter of
fiscal 1995. This increase in net sales was attributable primarily to the full
period sales in 1996 for the five DIY locations which were opened in 1995. DIY
posted comparable store sale increases in each month of the quarter resulting in
a quarterly increase of 4%. However, sales were below expectations due to
adverse weather conditions in April, May and the first two weeks of June which
significantly delayed the spring lawn and garden shopping season. Further, the
Company's sales were adversely affected in April and May by the liquidation of a
competitor, Handy Andy, which had ten competing stores in the Company's markets.

Gross profit increased by $594,000, or 4%, to $16.9 million in the
second quarter of fiscal 1996 from $16.3 million in the second quarter of fiscal
1995. As a percentage of net sales, gross profit decreased to 24.8% in the
quarter ended June 29, 1996 compared to 27.9% in the comparable quarter of
fiscal 1995, due primarily to vendor discounts received in 1995 on the initial
inventory for new stores. No such discounts were realized in the second quarter
of fiscal 1996 as there were no new store openings in the period.

Store operating, general and administrative expenses were $12.8 million
for the quarter ended June 29, 1996 compared to $11.6 million for the quarter
ended July 1, 1995. As a percentage of net sales, operating expenses decreased
to 18.8% in the second quarter of fiscal 1996 compared to 19.9% in the second
quarter of fiscal 1995 due to emphasis on cost-leveraging and improvements in
operating strategies.

There were no store preopening costs in the second quarter of fiscal
1996, as there were no new stores under development during this period. Store
preopening costs were $638,802 in the second quarter of fiscal 1995 relative to
three stores opened during this period.

Other expense, net, increased from $455,708 in the quarter ended July
1, 1995 to $623,668 in the quarter ended June 29, 1996 due to interest expense
incurred on higher levels of debt outstanding in the second quarter of 1996.

9
10

OPERATIONS - Six Months Ended June 29,
1996 Compared to Six Months Ended July 1, 1996

Net sales for the six months ended June 29, 1996 were $107.3 million, a
21% increase over net sales of $88.7 million for the six months ended July 1,
1995. Comparable store sales increased 1% reflecting reduced sales in the first
quarter due to severe winter weather and adverse weather during April, May and
the first two weeks of June which significantly delayed the spring lawn and
garden shopping season. Further, the Company's sales were adversely affected in
April and May by the liquidation of a competitor, Handy Andy, which had ten
competing stores in the Company's markets.

Gross profit for the six months ended June 29, 1996 was $27.7 million
compared to gross profit of $25.5 for the six months ended July 1, 1995. Gross
profit, as a percentage of net sales, decreased from 28.7% in the first six
months of fiscal 1995 to 25.8% in the comparable 1996 six month period. The
decline in gross margin is due primarily to vendor discounts received in 1995 on
the initial inventory orders for four new stores opened during the first half of
1995. No such discounts were realized in the first six months of fiscal 1996 as
there were no new store openings.

Store operating expenses were 21.6% of net sales in the first half of
fiscal 1996 consistent with 21.5% of net sales in the first half of fiscal 1995,
as the sales softness in the spring of 1996 impacted the Company's ability to
leverage expenses.

There were no store preopening costs for the six months ended June 29,
1996 as there were no new stores under development during this period. Store
preopening costs were $1,285,560 for the six months ended July 1, 1995 relative
to four stores opened during this period.

Other expense, net, increased from $725,765 in the first six months of
1995 to $1,199,581 in the first six months of 1996 due to interest expense
incurred on higher levels of debt outstanding.

LIQUIDITY AND CAPITAL RESOURCES

During the six months ended June 29, 1996, operating activities
provided net cash of $2.7 million. The primary source of cash from operations
was $3.5 million from net income plus depreciation and amortization. The primary
use of cash was $4.8 million to fund increased merchandise inventory levels at
existing stores for seasonal requirements, partially offset by an increase of
$2.9 million and $1.1 million in accounts payable and accrued expenses and
other, respectively. During the six months ended July 1, 1995, operating
activities provided net cash of $7.6 million. The primary source of cash from
operations was $3.6 million from net income plus depreciation and amortization.
The primary use of cash was $12.4 million to finance increases in merchandise
inventories resulting from new store openings in the first half of 1995 and
seasonal increases, offset by a $15.3 million increase in accounts payable and a
$1.5 million increase in accrued expenses and other current liabilities.

10
11

Net cash used in investing activities was approximately $900,000 and
$12.4 million during the six months ended June 29, 1996 and July 1, 1995,
respectively, due to remodeling initiatives in the Company's older stores in the
first six months of 1996 and the acquisition of property and equipment related
to new store expansion in the first six months of fiscal 1995.

Net cash used in financing activities during the six months ended June
29, 1996 totaled $2.1 million, as a result of repayments to the Company's
revolving credit facility of $1.8 million and principal payments of debt and
capital lease obligations of $300,000. Net cash provided by financing activities
in the six months ended July 1, 1995 totaled $5.1 million, due primarily to $2.5
million and $3.4 million from revolving credit borrowings and mortgage loans,
respectively.

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 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.

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.

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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 9, 1996
By: /s/ Marilyn A. Eisele
-------------------------------------
Vice President - Administration
and Finance, Chief Financial Officer

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13

EXHIBIT INDEX

Exhibit
Number Description of Exhibit
- ------ ----------------------

10 Material Contracts:
-------------------

10.1 General Business Lease Agreement with IBM
Credit Corporation dated May 30, 1996

11 Earnings Per Share:
-------------------

11.1 Computation of Earnings Per Share

27 Financial Data Schedule:
------------------------

27.1 Financial Data Schedule for the quarter ended
June 29, 1996