UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,WASHINGTON, D.C. 20549
---------------FORM
10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]10-K/A(Amendment No. 1)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended
January 28, 1996February 2, 2013OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
¨ 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 0-21182 ORCHARD SUPPLY HARDWARE STORES CORPORATION (ExactCOMMISSION FILE NO.: 001-11679
Orchard Supply Hardware Stores Corporation
(Exact name of registrant as specified in its charter)
Delaware 95-4214109 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 6450 Via Del Oro San Jose, California 95119 (Address of principal executive offices) Registrant's
Delaware 95-4214109 (State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
6450 Via Del Oro
San Jose, California95119 (Address of principal executive offices) (Zip Code) Registrant’s telephone number, including area code: (408) 281-3500
Securities registered pursuant to Section 12(b) of the Act:
None
Title of each class
Name of each exchange on which registered
Class A Common Stock, par value $0.01 per share NASDAQ Capital Market Securities registered pursuant to Section 12(g) of the Act:
CommonSeries A Preferred Stock, par value
$.01$0.00001 per share(TitleIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
class)the Securities Act. Yes ¨ No xIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No x
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 ----- -----Yes x No ¨Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
registrant'sregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[ ]¨Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company x Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
The holders of Class A Common Stock are entitled to voting rights. The aggregate market value of
the Common Stock of the registrantvoting stock held by non-affiliates of the registrant,on March 29, 1996, based oncomputed by reference to the closing sales price of the Company’s Class A Common Stock as quoted on theNasdaq NationalNASDAQ Capital Market onsuch date,July 27, 2012, the last business day of the registrant’s second fiscal quarter ended July 28, 2012, was$167,791,271.$22,200,000. Thenumberholders of the Class B Common Stock are entitled to one-tenth of a vote for each share of Class B Common Stock held. No shares of theregistrant'sregistrant’s Class C Common Stock,outstanding at March 29, 1996 was 7,528,198 shares.which are entitled to voting rights, are held by non-affiliates. (For purposes of this calculation, all of the registrant’s executive officers, directors and 10% owners known to the registrant may be deemed affiliates of the registrant and the aggregate value does not include the value of the Class B Common Stock, which is not publicly traded.)As of May 3, 2013, the registrant had 4,830,147 shares of Class A Common Stock, par value $0.01 per share, 8,644.06788 shares of Class B Common Stock, par value $0.01 per share, and 1,194,000 shares of Class C Common Stock, par value $0.01 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Annual Meeting of Stockholders to be held May 23, 1996 are incorporated by reference into Part III hereof.None.
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARIES
INDEX
TO ANNUAL REPORT ON FORM 10-K For the fiscal year ended January 28, 1996PART I Item 1. Business. As used in this Annual Report on Form 10-K ("Form 10-K"), the term "Orchard Holding" refers to Orchard Supply Hardware Stores Corporation, a Delaware corporation, the term "Orchard Supply" refers to its wholly-owned subsidiary, Orchard Supply Hardware Corporation, a Delaware corporation, and unless the context indicates otherwise, the terms "Company" and "Orchard" refer to Orchard Holding and Orchard Supply. Unless otherwise indicated, as used in this Form 10-K all references to a fiscal year shall mean the fiscal year of the Company which commences in such year (for example, the fiscal year commencing January 30, 1995 and ending January 28, 1996 is referred to herein as fiscal 1995). General As of March 1996, Orchard operated 60 hardware superstores in California which average approximately 40,000 square feet of interior and exterior selling space and carry over 45,000 stock keeping units ("SKUs"). Orchard primarily targets the "fix-it" homeowner focused on repair and maintenance projects and is positioned in a unique niche between small, high-priced independent hardware retailers and large warehouse home center chains. Orchard strives to offer the service and convenience of a "mom and pop" hardware store while providing a greater depth and breadth of "fix-it" products in its core product categories than the large warehouse home center chains. Historically, the Company's market has been Northern and Central California, where the Company currently operates 50 stores. The Company successfully entered the Southern California market in fiscal 1994 with the opening of six stores in metropolitan Los Angeles and one store near Santa Barbara. The Company has subsequently added three stores in metropolitan Los Angeles. The Company currently expects to open five to seven new stores in fiscal 1996 and five to ten new stores annually for the next several years thereafter, substantially all of which will be located in Southern California. Through these store openings, the Company plans to strengthen its position in metropolitan Los Angeles and extend its Southern California presence first into Orange, San Bernardino and Ventura Counties and then into Riverside and San Diego Counties. See "--Risk Factors--Managing Expansion." Recent Developments On March 18, 1996, the Company sold 500,000 shares (the "Offering") of its Common Stock, $.01 par value per share ("Common Stock"), for an aggregate net proceeds of approximately $11.5 million. The Company's largest stockholder, an affiliate of Freeman Spogli & Co. Incorporated ("FS&Co.") sold 2,375,000 shares of Common Stock in the Offering. FS&Co., through its affiliates, remains the Company's largest stockholder, controlling the power to vote 18.2% of the outstanding shares of Common Stock, assuming full conversion of the Company's 6% Cumulative Convertible Preferred Stock, $.01 par value per share ("Convertible Preferred Stock"). The Company's Common Stock has been accepted for trading on the New York Stock Exchange. The Company anticipatesSpecial Note Regarding Forward-Looking Statements
We believe that
trading will commence in April 1996 under the symbol "ORH." Risk Factors The following risk factors should be carefully considered, in addition to other information contained in this Form 10-K. Competition The retail hardware business is highly competitive, andsome of theCompany's competitors have substantially greater resources thaninformation in this document constitutes forward-looking statements. You can identify these statements by forward-looking words such as “outlook”, “believes”, “expects”, “appears”, “may”, “will”, “should”, “intend”, “target”, “projects”, “estimates”, “plans”, “forecast”, “is likely to”, “anticipates”, or theCompany. The Company competes with warehouse home center chains, traditional home improvement centers and local independent retailers. Management believes that its primary competitors are the warehouse home center chains, HomeBase and The Home Depot, Inc. ("Home Depot"). 5The Company estimates that over 70% of Orchard's stores currently compete directly with warehouse home center stores. The Company anticipates that Home Depot will open four additional stores in its markets in 1996. As it executes its growth strategy, Orchard will be opening stores in proximity to existing warehouse home centers. Orchard competes largely on the basis of service, selection and convenience, rather than price, and has been successful thus far in competing with warehouse home centers. However, due to the competitive nature of the market and the substantially greater resources possessed by the Company's home center competition, the Company faces the risk of increased competition in its market niche. See "--Competition." Managing Expansion The Company currently plans to open five to seven new stores in fiscal 1996 and five to ten stores annually for the next several years thereafter, substantially all of which will be located in Southern California. The Company's ability to execute its expansion plans will depend to a great extent on its ability to obtain suitable store sites on acceptable terms and open stores on a timely basis. The Company may encounter substantial delays, increased expensesnegative thereof orloss of potential sites due to the complexities associated with the regulatory and permitting processes involved in opening retail stores. The Company's expansion will further depend on its ability to implement its operating controls and systems, to complete tenant improvements in a timely manner, to hire and train competent store managers and staff and to integrate these employees and new stores into its overall operations. The Company's prospects may be adversely affected ifcomparable terminology. We believe it isunableimportant toexecute its store opening program. There can be no assurance that planned store openings will be accomplished in a timely or profitable manner. As the Company continues its store opening program, it will incur pre- opening costs as well as higher labor, occupancy and other operating costs as a percentage of sales in its new stores, thereby adversely affecting overall margins until the new stores achieve sales maturity. Orchard's stores typically have an operating loss in the year in which they commence operations, due primarilycommunicate our expectations tothe stores' pre-opening expenses. In the subsequent year, a new store generally breaks even before allocation of overhead expenses not directly related to the store. Consequently, the opening of new stores has a negative impact on the Company's profitability for that year. In addition, if the Company accelerates its expansion plans, earnings in the near term will be adversely affected. The Company's expansion into the Southern California market involves increased occupancy, labor, advertising and other costs, reflecting the cost structure of the Southern California market as compared to the Company's operations in Northern and Central California, and there can be no assurance that the Company will be able to reduce these costs over time. In addition, metropolitan Los Angeles is approximately 350 miles from the Company's Tracy, California warehouse and distribution facility, which has resulted in gross margins that are 0.9% lower in Southern California primarily due to increased transportation costs. This will continue until the Company opens a Southern California warehouse and distribution facility, which is currently planned for fiscal 1998 when the Company currently anticipates it will have developed the necessary store base in this market. Transportation savings are expected to be initially offset by higher warehouse expenses at this facility. Successful implementation of the new warehouse and distribution facility is a key factor in the Company's expansion strategy. If the opening is delayed, or if the Company is unable to operate its existing warehouse and distribution facility on a cost efficient basis until fiscal 1998, the Company's expansion program and results of operations could be adversely affected. The metropolitan Los Angeles area is large and complex and there can be no assurance that the Company's Southern California stores will achieve desired levels of profitability. See "--Growth Strategy," "--Distribution," "--Competition" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." 6Seasonality and Sensitivity to Weather The Company's results of operations exhibit some degree of seasonality. Generally, the Company's sales and operating income are highest in the second quarter and lowest in the fourth quarter. This is primarily attributable to seasonality in sales of garden, nursery and related products which peak at the beginning of the spring/summer gardening season. The Company has experienced losses in the fourth quarter in the past and may experience losses in this quarter in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company's business can be negatively impacted by adverse weather conditions, particularly the sales of garden and nursery products which comprised approximately 27% of the Company's total sales for fiscal 1995. For example, the Company's results in the first half of fiscal 1995 were adversely impacted by unusually wet weather in Northern and Central California, and nursery and garden sales were also negatively affected during the prolonged drought in California in the early 1990s. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Quarterly Fluctuations; Comparable Store Sales The Company is subject to quarterly fluctuations in results of operations due to various factors, including general economic conditions, consumer confidence, weather conditions, levels of promotional marketing efforts, the maturation of new stores and competitive activity. In addition, results of operations can be adversely affected by the number and timing of new store openings and related pre-opening costs. Future results of operations may fluctuate as a result of these and other factors. Sales in an existing store may also be adversely affected by the opening of a new Orchard store within the same market; however, these new stores are intended to increase overall market penetration and customer convenience. Several of these factors also impact comparable sales comparisons. The Company experienced a strong comparable store sales increase in fiscal 1995, especially in the second half of the year. The Company does not expect to sustain its rate of comparable store sales growth in fiscal 1996, particularly in the second half of the year. The Company has recorded comparable store sales decreases in certain quarters and fiscal years, and there can be no assurance that comparable store sales for any particular quarter or fiscal year will not decrease in the future. A decrease in comparable store sales in any future period could have an adverse effect on earnings for that period. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Because of these fluctuations in quarterly results, the results achieved in any quarter should not be viewed as necessarily indicative of the results that will be achieved for a full fiscal year or any future quarter. Geographic Concentration As its operations are entirely within California, the Company is subject to regional risks, such as the economy, weather conditions, natural disasters and regulation. Areas of California have recently begun to emerge from a prolonged recession. If the economic recovery falters, California suffers another drought, or other adverse regional events occur,our stockholders. However, there may bean adverse impact onevents in theCompany's salesfuture that we are not able to accurately predict or over which we have no control. The risk factors andprofitabilitycautionary language discussed in this document outline examples of risks, uncertainties andits abilityevents that may cause actual results toimplement its expansion program atdiffer materially from theplanned rate. Leverage and Certain Restrictions Imposed by Lenders The Company is leveraged. After giving effect toexpectations described in theOffering and the application of the estimated net proceeds therefrom, as of January 28, 1996, the Company's ratio of long-term debt to stockholders' equity would have been approximately 1.3 to 1 and the Company's long-term debt as a percentage of total 7capitalization would have been 56.2%. The Company's operating results have been and will continue to be impacted by significant fixed charges related to its indebtedness and dividends with respect to its preferred stock. The Company's debt instruments contain financial and operating covenantsforward-looking statements, including among otherthings, requirementsthings:our business strategy and financial performance;
our exploration of all financial and strategic alternatives to maintain our business as a going concern, including, but not limited to, one or more transactions that may include a comprehensive financial reorganization of our company or a transaction such as a sale or merger of the Company;
refinancing or modifications to our capital structure; and
our restructuring reforms.
You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this document.
All forward-looking statements included herein are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Except to the extent required by applicable laws and regulations, we undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this document or to reflect the occurrence of unanticipated events.
You should be aware that the
Company maintain certain financial ratios and satisfy certain financial tests and limitations onoccurrence of theCompany's ability to make capital expenditures, to incur other indebtedness and to pay dividends. Ifevents described in theCompany fails to comply with the various covenants, the lenders will be able to either accelerate the maturity“Risk Factors” portion ofor cause the Company to repurchase the applicable indebtedness. The degree to which the Company is leveragedthis Amendment and theterms governing Orchard's indebtedness, including restrictive covenantsOriginal Filing, the documents incorporated herein andevents of default, could have important consequences to stockholders including the following: (i) a significant portion of the Company's cash flow from operations must be dedicated to service its indebtedness; (ii) the Company may be more leveraged thanour otherproviders of similar productsSecurities andservices, which may place the Company at a competitive disadvantage; and (iii) the Company's leverage could make it more vulnerable to changes in general economic conditions. Unexpected declines in the Company's future business, increases in interest rates, or the inability to borrow additional funds for its operations if and when required could impair the Company's ability to meet its debt service obligations and, therefore,Exchange Commission (the “SEC”) filings could have a material adverse effect on our business, prospects, financial condition or operating results.Orchard Supply Hardware Stores Corporation (“Orchard” or the
Company's business and future prospects. No assurance can be given that additional debt or equity funds would be available if needed or, if available, on terms which are favorable to the Company. See "Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." Control of the Company Presently, six of the eight members of the Company's Board of Directors are affiliated with FS&Co. or management. FS&Co. currently controls through affiliates the power to vote 4.3% (18.2% if the Convertible Preferred Stock“Company”) isfully converted) of the outstanding shares of Common Stock of the Company. Although FS&Co.'s voting power was reduced in the Offering, FS&Co. may effectively control or strongly influence the Company's management policy and financing decisions and may have the power to strongly influence the election of the Board of Directors; however, all major corporate transactions including certain mergers and acquisitions, sales of substantially all assets of the Company or going private transactions require approval of a majority of the Company's outstanding stock entitled to vote thereon (other than transactions subject to Section 203 of the Delaware General Corporation Law). Industry The home improvement industry caters primarily to homeowners interested in performing repairs, maintenance and minor remodeling projects on their homes. Retail sales of home improvement products have grown from approximately $125 billion in 1994 to approximately $130 billion in 1995. The industry is highly fragmented and competitive and is comprised primarily of local independent retailers with five or fewer stores, traditional home improvement centers and warehouse home center chains. Local independent retailers compete on the basis of service and convenience, but typically offer small stores, limited product offerings and relatively high prices. While home centers (which include warehouse home center chains with average store sizes in excess of 100,000 square feet and smaller traditional home improvement centers) target the customer involved in major remodeling and project-oriented home improvements, Orchard targets shoppers for "fix-it" products with its 40,000 square foot (on average) hardware superstores. This difference in business focus is evidenced by the fact that approximately one-third of the sales of a major warehouse competitor are building materials, lumber and floor and wall coverings; less than 5% of Orchard's sales are attributable to these products. 8The Orchard Concept Orchard's business strategy is to position itself as the primary destination for customers' "fix-it" needs by providing a broad merchandise selection, outstanding service, convenient, well organized stores and value pricing. Broad Selection and Availability Orchard offers a wide selection of brand name and private label merchandise, including many products not carried by its competitors in its core merchandise categories of hardware, plumbing, electrical and garden and nursery. Management believes that in these core categories the Company offers more SKUs than its warehouse competitors. Orchard further distinguishes itself by maintaining a high in-stock selection (98% on average) to ensure availability of merchandisefiling this Amendment No. 1 (the “Amendment”) to itscustomers. The following table sets forth the Company's percentage of sales by product category for the last three fiscal years:
Fiscal Fiscal Fiscal Production Category 1993 1994 1995 - -------------------- ------ ------ ------Hardware............................... 22.8% 23.0% 23.5% Plumbing............................... 14.8 14.2 13.5 Electrical............................. 10.9 10.8 10.8 Garden and Nursery..................... 26.9 27.1 26.6 Other.................................. 24.6 24.9 25.6 ----- ----- ----- Total Sales............................ 100.0% 100.0% 100.0% ===== ===== =====Hardware. Orchard carries a wide line of hardware products, including fasteners, power tools, hand tools and accessories. The Company stocks over 6,900 SKUs of nuts, bolts, screws and other fasteners, many of which are not carried by its competitors. Orchard offers these fasteners for sale in a variety of quantities, repackaging bulk shipments from its vendors at the Tracy, California distribution center for sale in smaller, more profitable unit counts. The Company also carries over 210 brand name power tools, including Black & Decker, Skil, Makita, Freud, Porter Cable, Milwaukee, Bosch, Delta, DeWalt, Wissota, Campbell Hausfeld, Homelite, Panasonic, Versapak, Chamberlin, ShopVac, McCulloch, Echo and Coleman Power Mate. Orchard offers over 1,200 different power tool accessories, such as drill bits and saw blades, which generate high gross margins and increase shopping frequency due to their consumable nature. Orchard further stocks an extensive selection of handtools, including 40 and 120 SKUs of pipe wrenches and hammers, respectively, and also offers replacement products for these tools, including handles. Plumbing. Orchard distinguishes itself from its competitors by carrying a broad selection of repair and maintenance plumbing parts. The Company stocks over 1,580 different PVC, ABS, galvanized, copper, brass, flare, compression, polystyrene and cast iron fittings, as well as over 1,485 faucet, toilet and sink repair parts including hard-to-find parts for discontinued faucets and toilets. Orchard also offers a variety of faucets, toilets and sinks. In addition, Orchard's selection of 475 sprinkler and drip irrigation SKUs appeals to both homeowners and commercial landscapers. Electrical. Orchard stocks nearly 370 different light bulbs and 155 types of extension cords. With over 315 different lamp parts, repair and maintenance is emphasized. Orchard is also well equipped in basic electrical components and stocks a broad selection of electric boxes, wire and circuit breakers commonly used in residential and commercial construction. 9Garden and Nursery. Garden and nursery products are a strong focus of Orchard's business, reflecting Orchard's heritage as a farmers' cooperative. Orchard offers both the price and convenience of a mass merchant and the selection, quality and expertise of an independent nursery. It carries a broad selection of landscape container and bedding plants, most of which are contract grown to the Company's specification. Orchard's nurseries carry more than 30 varieties of ground cover, over twice as many as are offered by its major competitors. Orchard has one of the largest displays of Ames and Corona garden tools in the United States. Orchard also offers a wide selection of tank sprayers, liquid and dry fertilizers, weed killers, insecticides, hoses and hose-end products. In addition, the Company supplies a variety of organic bag goods, including bark, mulch, soil conditioners, potting soils, planting mixes and peat moss. Other. In addition to the "fix-it" items above, the Company carries an extensive selection of housewares, paint, paint supplies and automotive supplies, as well as certain destination items such as bottled water. The Company also offers a selection of impulse items which captures incremental sales from its frequent customer base and further differentiates Orchard from its competition. High Levels of Customer Service The Company is committed to furnishing outstanding levels of customer service through knowledgeable, well trained personnel. Orchard seeks to hire personnel with prior repair and "fix-it" experience and provides its employees with extensive training. The Company requires all of its employees to pass written tests in their respective departments as a condition of employment and requires ongoing testing in other departments in order to be eligible for advancement. For example, the Company provides compensation incentives to its garden and nursery employees to become certified California Nurserymen. This certification, awarded by the California Association of Nurserymen, is basedAnnual Report oncompleting 3,120 hours of relevant work experience and passing a test which displays proficiency in plant identification, landscape design and insect and weed control. As of January 28, 1996, the Company employed 48 certified California Nurserymen. In addition, Orchard provides its customers with the following value- added services which the Company believes create high customer loyalty: Pick-Up Stations. All Orchard stores operate a convenient pick-up station for heavy, large or hard-to-handle items. A customer may purchase oversized items by simply taking a pull-tag located at the product display rack within the store, checking out at the register and driving to the pick-up station, where an Orchard employee loads the product into the customer's vehicle. OSH Credit Card. Orchard offers a proprietary credit card to its retail and commercial customers to build customer loyalty. The Company had 50,627 active accounts at January 28, 1996. The Company's credit card sales comprised approximately 12.3% of total sales in fiscal 1995. Approximately 78.5% of those credit card sales were attributable to commercial customers. The Company also offers its commercial customers added services such as the ability to selectively restrict their employee purchases and detailed descriptions of all purchases on a monthly basis. Commercial Services. Orchard offers added convenience and fast pick-up for commercial customers who can place orders over the phone which will be prepared for immediate pick-up at no additional charge. Management believes that the majority of its commercial customers are industrial concerns, real estate property managers and municipalities with maintenance and repair needs, as opposed to contractors and other construction related businesses. The Company is currently targeting growth in its commercial business by expanding the services offered to commercial customers and enhancing its marketing activities. The Company recently added a Director of Commercial Sales to lead this effort. 10Custom Cutting. Orchard will custom cut to a customer's specifications products such as pipe, electrical wire, shade cloth, rope, chain, tubing, screening and glass. "How-To" Fairs. The Company conducts three annual "how-to" fairs designed to provide customers with do-it-yourself information through vendor booths and specialized classes. In addition, these fairs feature celebrities, such as Norm Abrams from the television programs "This Old House" and "The New Yankee Workshop," Dean Johnson and Robin Hartle from "Hometime," and Orchard's spokesman Richard Karn from "Home Improvement." Two fairs are held in Northern California and the Company's first Southern California fair is scheduled for May 1996. Management estimates that the Company's largest "how-to" fair attracted approximately 150,000 people. Eager Beaver Engine Shop. Orchard offers customers repair and maintenance service for power driven equipment such as lawn mowers, chain saws and edgers through its factory authorized service facility located at its Tracy warehouse and distribution facility. Customers can drop off the equipment to be repaired at their local Orchard store and pick it up typically within seven days. Convenient, Well Organized Stores To encourage ease of shopping, Orchard's stores are designed in a conventional supermarket format with low profile shelving, as opposed to warehouse racking, and wide aisles for easy mobility. Customers can view the entire store upon entering, helping them to easily and quickly find the items they need. Related departments are located adjacent to one another, and most merchandise is displayed according to centrally developed plan-o-grams designed to optimize space utilization. Product labels and descriptive signs assist customers in easy identification of merchandise, and efficient check-out stations minimize customer waiting time. The Company's stores follow a standard merchandise layout and maintain a consistent appearance. In addition, all stores are easily accessible, are conveniently located and have ample parking. These features provide customers with an attractive shopping environment and the ability to locate items and check out of the store quickly. Value Orientation The Company provides the customer with value through a combination of broad merchandise selection, outstanding service, convenient, well organized stores and fair everyday prices. The Company offers competitive pricing on high visibility, high volume products. The Company also stocks a wide selection of products not typically carried by its competitors on which the Company generally achieves higher margins. The Company also seeks to increase its margins by concentrating on non-commodity products and through the selective use of private label merchandise and in-house repackaging of bulk shipments into smaller, more profitable unit counts. Growth Strategy Orchard's strategy for growth is to continue to build its market presence in existing markets and to enter attractive new markets. The Company's primary strategy is to add new stores in its existing metropolitan Los Angeles market and to extend its Southern California presence into Orange, Riverside, San Bernardino, San Diego and Ventura Counties. The Company will also augment its Northern and Central California base with strategic new store additions. The Company plans to open five to seven new stores in fiscal 1996 and five to ten new stores annually for the next several years thereafter, substantially all of which will be in Southern California. By extending its presence in Southern California, the Company believes it will be able to leverage its advertising and marketing expenses in this market and attain a critical mass of stores to support a new Southern California warehouse and distribution facility, which is planned for fiscal 1998. 11The Company successfully entered the Southern California market in fiscal 1994 with the acquisition of six former hardware store sites in metropolitan Los Angeles and one near Santa Barbara which were converted to the Orchard format. The Company has since opened three additional stores in metropolitan Los Angeles and plans to open five to seven more Southern California stores in fiscal 1996. Leases have been signed for three new stores in metropolitan Los Angeles and Orange County and the Company is currently negotiating leases for additional locations in Southern California. The Company's expansion into Southern California has been very successful, with four of the stores in this market already ranking among the Company's top 20 stores in sales. Management believes that the Southern California market, one of the largest do-it-yourself ("DIY") markets in the United States, presents an attractive opportunity for the broad-selection, high-service Orchard concept. Until 1994, the Company's growth capacity had been significantly constrained by debt service requirements. Recently, through equity offerings and debt refinancings, the Company has been able to build its liquidity and capital resources which has allowed it to accelerate its expansion program and should enhance its ability to react quickly to site acquisition opportunities. The Company believes its experience in Southern California has demonstrated that Orchard's concept is transferrable from its Northern and Central California markets to other regions. The Company believes that the Southern California market has considerably more expansion potential than Northern and Central California and can support aggressive growth over at least the next five years. The Company believes it has the potential to expand to 60-80 stores in Southern California and to add approximately 10 stores (for a total of 60) to its base in Northern and Central California. See "--Risk Factors--Managing Expansion" and "--Leverage and Certain Restrictions Imposed by Lenders." Advertising and Marketing Achieving and maintaining high levels of consumer awareness is an important element of the Company's business strategy. In its Northern and Central California markets, where the Company has been in business since 1931 and now operates more stores than any of its competitors, the Company's surveys indicate a name recognition of 99% among DIY customers within the trade areas around the Company's stores. In Southern California the Company's aggressive marketing campaigns have produced growing consumer awareness of the Company's presence. Recent surveys by the Company indicate a name recognition of 82% among DIY customers within trade areas around the Company's stores. Consistent with its emphasis on building a concentrated market presence, Orchard utilizes advertising and marketing campaigns across three major media categories: newspaper, circulars and broadcasting. Major campaigns are currently centered around Easter, Memorial Day, July 4th, Labor Day and Christmas. The Company offsets a significant portion of the costs of its advertising, particularly television advertising, with allowances obtained from vendors that participate in the Company's cooperative advertising program. These vendors provide allowances to the Company in return for featuring their products in the Company's advertising media. In addition to the seasonal advertising campaigns, Orchard regularly places newspaper ads and circulars in its markets and conducts an institutional image-building television and radio campaign. Another major part of the Company's advertising program is its annual "how-to" fairs. Two annual fairs are held in Northern California and the Company's first Southern California fair is scheduled for May 1996. Vendors participating at the Company's "how-to" fairs perform product demonstrations, offer advice and distribute discount coupons which are redeemable only at Orchard stores. Management estimates that the largest "how-to" fair attracted approximately 150,000 people and more than 400 vendors. 12In Northern and Central California, the Company is able to maximize the efficiency of its advertising program in its markets by spreading these costs over a large number of stores contained in a concentrated geographical area. The Los Angeles media market, which covers most of Southern California, is more expensive than Northern and Central California, and Orchard currently lacks the store concentration it enjoys in its historical markets. Accordingly, the Company's marketing costs as a percentage of sales have increased as a result of its expansion into metropolitan Los Angeles. As more stores are added in this market, the Company expects these costs to decline as a percentage of sales, although no assurance can be given that this will occur. See "--Risk Factors--Managing Expansion." Purchasing Orchard's computerized point-of-sale systems automatically generate store merchandise orders and track inventory by SKU. The majority of Orchard's merchandise is purchased directly from the manufacturer and is shipped to the Company's central warehouse located in Tracy, California. Orchard stores have no significant storage space and rely on the warehouse for a majority of their merchandise. The merchandising department controls inventory flow through a purchase order management ("POM") system which tracks SKU levels and generates reorder quantities for replenishment. This warehouse facility purchases over 25,000 SKUs, accounting for approximately 73% of the total dollar sales. The remaining 27% of the total dollar sales of the stores is obtained through direct shipments from distributors and manufacturers to the stores. Orchard buys goods from approximately 1,000 different vendors. The Company's top 10 suppliers account for less than 17% of its total purchases, with no single supplier accounting for more than 5% of the total. As its store base has grown due to the expansion program, the Company has been able to realize greater volume discounts in some of its purchasing. Distribution Orchard's distribution is currently handled through a 350,000 square foot warehouse and distribution facility situated on approximately 28.5 acres of land in Tracy, California. The Company is currently utilizing temporary on-site storage units to supplement its storage capacity at this facility. The Company anticipates that the Tracy facility will be able to support, with additional shifts, if necessary, the Company's anticipated growth through early fiscal 1998 when a second warehouse and distribution facility is planned for the Southern California area. The central location of the warehouse and distribution facility allows the Company to process and deliver orders within 24 hours to all of its Northern and Central California stores and 48 hours for its Southern California stores, thereby ensuring high in-stock levels. By eliminating the need for in-store storage space, Orchard maximizes the selling space available in its stores and reduces overall inventory requirements, without sacrificing the high in-stock position (98% on average) in the retail stores. Metropolitan Los Angeles is approximately 350 miles from the Tracy facility, which has resulted in transportation costs for Southern California that are greater than in the Company's current Northern and Central California markets. The Company has outsourced the delivery of merchandise to stores south of Santa Maria, California to an independent common carrier. The Company processes orders and delivers goods to its Southern California stores within 48 hours. The Company expects to open a second warehouse and distribution facility to service the Southern California stores after approximately 25 stores are open in that area, which the Company currently anticipates will occur in fiscal 1998. The Company is currently in the process of enhancing its management information systems in anticipation of a second warehouse and distribution facility. While the additional facility will reduce transportation costs for the Southern California stores, it will initially have higher operating costs as a percentage of sales than the existing facility. This ratio is expected to decline as more stores are opened in the Southern California market area. As of January 28, 1996, Orchard operated a fleet of 33 tractors and 137 trailers, which are driven and maintained by a non-union work force and which service the Northern and Central California stores. 13Credit Card Operations Orchard offers a private label revolving charge plan to both its commercial and retail customers. This credit card operation is maintained by Orchard employees and provides customized services such as customer defined card usage restrictions, purchase order identification and descriptive billing which are geared to the commercial customer. To promote its credit card and increase charge business, Orchard began implementing a new credit card program in fiscal 1995 known as Club OSH. Club OSH provides the cardholder with a 10% discount the first time the card is used, an ongoing 2% discount if the customer's statement balance is paid in full by the monthly due date and a senior citizen discount of 3% when merchandise is purchased on Wednesday using the Club OSH card. All charge accounts from the Southern California and San Joaquin Valley stores were converted to Club OSH in fiscal 1995 and all remaining accounts will be converted by March 1996. At January 28, 1996, the Company had 50,627 active accounts. For fiscal 1995, approximately 78.5% of the credit card sales were from commercial customers. For fiscal 1995, bad debt losses approximated 1.0% of total Company credit card sales. Operations Orchard manages its operations on a centralized basis. Its headquarters staff is responsible for all pricing, purchasing, advertising and promotional programs, new site selection and administrative functions such as accounting, payroll and management information systems. The Company's stores are operated by store managers who report to one of six district managers. Orchard's store managers are responsible for day-to-day store operations, subject to operating procedures established at headquarters. Orchard stores are open seven days a week. Depending on the size and sales volume of the store, the total number of personnel varies from 57 to 130, 25 to 49 of whom are full-time employees. A typical store is staffed with a store manager, one first assistant manager, three assistant managers and 12 department managers. Because of the Company's strong focus on customer service, all employees participate in an initial training program and subsequent ongoing training. Management Information Systems Management has sought to design and develop the Company's information systems to sustain growth through increased productivity and address a wide range of functions that include sales analysis, merchandise ordering and processing, merchandise management and presentation, management of human resources and financial management. The Company's management is provided with information on performance that includes the daily individual store and department information necessary for financial and merchandising decisions and periodic results reporting for strategic planning and analysis. The Company has projects underway to increase the capabilities of its credit function and to implement the system enhancements that will be necessary to support its plan to add a second warehouse and distribution facility in early fiscal 1998. Sales analysis reporting includes daily and periodic store sales results detailed by department, classification and SKU movement. Merchandise ordering is supported by the POM system which employs forecasting to calculate suggested order quantities for warehouse inventory replenishment. Purchase orders are reviewed or created on-line and are electronically transmitted to suppliers that participate in the hardware industry's "Eagle" Electronic Data Interchange ("EDI") system. Price change control is an integral part of the POM system. 14The Store Order system is coupled with the POM system and processes daily transmitted store orders and produces warehouse pick tickets, shipping manifests, "pool" (cross dock) distribution reports and productivity reports. On-line capability of the system provides the warehouse with real-time inventory data such as purchase order receiving, processing manifest exceptions and updating inventory levels. This system is linked to the Retail Stock Ledger financial system for store accounting. The Point-of-Sale system is a fully integrated store sales, credit, inventory and data collection system. The system provides automatic price look- up and Orchard and bank card credit authorization at point-of-sale; sales audit reporting; advertised item reporting; item sales performance and history; daily computer review; and forecast and order generation of all warehouse replenished items as well as suggested order quantities for items ordered directly from vendors. The system provides improved customer service, reduces store operating expense and provides disciplined inventory management. The Company currently has bar code scanning capabilities and a UNIX based point-of-sale system in all of its stores. Financial management is addressed by the retail stock ledger, accounts payable, general ledger, fixed assets, bank card transmission, accounts receivable and credit systems. These systems are traditional retail financial control and operational systems with the exception of having on-line capability wherever feasible in order to enhance productivity. Management believes its systems are a key component to the Company's ability to evaluate and respond to its markets and customers. Competition The Company competes with warehouse home center chains, traditional home improvement centers and local independent retailers, including neighborhood hardware stores and garden and nursery centers. Management believes that the Company's "fix-it" orientation, broad merchandise selection, convenient locations, value-added services and high name recognition in Northern and Central California distinguish it from its competitors, including larger warehouse home center chains and independent hardware stores. See "--Risk Factors--Competition." Management believes that two warehouse home center chains, Home Depot and HomeBase, are its primary competitors. Home Depot and HomeBase currently operate 32 and 11 stores, respectively, in the Company's markets. As of January 28, 1996, the Company estimates that over 70% of Orchard's stores faced competition from warehouse operators. Home Depot opened three stores in 1995 in the Company's markets and HomeBase closed three stores in Orchard's markets in 1994 and closed one additional store in early 1995. The Company believes that Home Depot will open four stores in fiscal 1996 in the Company's markets. As the Company continues its expansion, new stores are frequently opened in proximity with existing Home Depot or HomeBase stores. In addition to offering a broader selection on its core merchandise categories than its warehouse competitors, the Company and the warehouse chains do not compete in a number of merchandise areas. For example, the Company does not carry significant amounts of lumber and building materials and the warehouse home centers do not carry product lines in housewares, work clothes and patio furniture. Although Orchard competes largely on the basis of service, selection and convenience, rather than on price, and has been successful thus far in competing with warehouse home centers, given the highly competitive nature of the market and the substantially greater resources of some of its competitors, the Company faces the risk of increased competition in its market niche. See "--Risk Factors--Competition." 15Employees As of January 28, 1996, Orchard had 4,980 total employees of whom 2,564 were full time. Management believes that its relationship with its employees is good. The Company has never experienced a material interruption of business caused by labor disputes. All of Orchard's employees are non-union. Item 2. Properties Of the Company's 60 stores, 11 are owned and 49 are leased under long- term ground or building arrangements with various renewal options. All of these 49 leases are scheduled to expire after 2000 (including options to renew). See Note 3 to Consolidated Financial Statements. The Company owns its 350,000 square foot warehouse and distribution facility which is located on 28.5 acres in Tracy, California. See "--Distribution." The Company also owns its former warehouse in San Jose which consists of several buildings totalling 282,000 square feet located on 17.4 acres. The Company has listed this facility for sale at an asking price of $5.9 million. The Company has leased approximately 70% of the space in this property with the intention of making it more attractive to a developer. The Company has also listed for sale 11 acres it owns adjacent to its warehouse and distribution facility in Tracy, California for $1.0 million. The Company's corporate offices are located in a 75,761 square foot building in south San Jose. The current lease term expires in November of 2000, with an option for the Company to extend for five additional years. Item 3. Legal Proceedings There are no material legal proceedings pending or, to the knowledge of management of the Company, threatened against the Company. Item 4. Submissions of Matters to a Vote of Security Holders. Not applicable. 16PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters. The Company's Common Stock is currently traded on the Nasdaq National Market under the symbol OSHC. The Company has applied to have its Common Stock listed on the New York Stock Exchange and anticipates that trading will commence in April 1996. The following table sets forth,Form 10-K for the fiscalperiods indicated, the high and low sales prices for the Common Stock as reported by Nasdaq.
High Low ---- ---Fiscal 1994 First Quarter........................ $15 1/2 $11 3/4 Second Quarter ...................... $15 1/2 $12 Third Quarter........................ $13 1/4 $ 9 Fourth Quarter....................... $10 $ 6 1/4 Fiscal 1995 First Quarter ....................... $ 9 $ 7 Second Quarter....................... $14 1/4 $ 8 9/16 Third Quarter........................ $16 3/4 $13 1/4 Fourth Quarter....................... $26 1/2 $14As of March 29, 1996, there were 303 holders of record of the Company's Common Stock. The Company has not declared or paid cash dividends to its holders of Common Stock. The Company currently anticipatesyear ended February 2, 2013 (the “Original Filing”) thatall earnings will be retained for the development and expansion of its business and, therefore, does not anticipate paying dividends on its Common Stock in the foreseeable future. The agreements governing the Company's indebtedness contain provisions which prohibit the Company from paying dividends on its Common Stock. See Note 5 to Consolidated Financial Statements. Dividends on the Convertible Preferred Stock accrue at 6% per annum from the date of original issuance, February 25, 1994, and are payable quarterly, when, as and if declared by the Board of Directors. No dividends can be declared or paid on the Company's Common Stock unless all accrued and unpaid dividends on the Preferred Stock have been paid in full. As of January 28, 1996, the Companywascurrent in the payment of the preferred dividends. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 17Item 6. Selected Financial Data. The selected consolidated financial data presented below, except store data, has been derived from the historical consolidated financial statements of the Company. The selected consolidated financial data for the fiscal years presented have been derived from financial statements which were audited by Arthur Andersen LLP, independent public accountants. The information presented below should be read in conjunction with the Consolidated Financial Statements and Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Form 10-K.
Year Ended ----------------------------------------------------------------------- January 26, January 31, January 30, January 29, January 28, 1992 1993 1994 1995 1996 (52 weeks) (53 weeks) (52 weeks) (52 weeks) (52 weeks) ----------- ----------- ----------- ----------- -----------(In thousands, except per share and store data) Income Statement Data: Sales............................................ $308,562 $346,158 $365,077 $441,646 $532,439 Cost of goods sold............................... 199,052 224,599 234,326 281,379 339,764 -------- -------- -------- -------- -------- Gross margin................................... 109,510 121,559 130,751 160,267 192,675 Operating expenses............................... 91,296 99,944 106,802 137,858 161,040 Pre-opening expenses............................. 1,192 924 2,221 7,525 2,400 -------- -------- -------- -------- -------- Operating income............................... 17,022 20,691 21,728 14,884 29,235 Write-down in carrying amount of asset held for disposal........................................ -- 2,007 -- -- -- Interest expense................................. 14,773 16,725 11,563 12,587 13,337 -------- -------- -------- -------- -------- Income before provision for income taxes....... 2,249 1,959 10,165 2,297 15,898 Provision for income taxes....................... 971 866 -- -- 4,289 -------- -------- -------- -------- -------- Income before extraordinary items (1).......... 1,278 1,093 10,165 2,297 11,609 Extraordinary items (1).......................... 971 (200) (9,318) -- -- -------- -------- -------- -------- -------- Net income..................................... 2,249 893 847 2,297 11,609 Preferred stock dividends (2).................... 3,446 4,208 814 1,115 1,200 -------- -------- -------- -------- -------- Net income (loss) available to common stock.... $ (1,197) $ (3,315) $ 33 $ 1,182 $ 10,409 ======== ======== ======== ======== ======== Per Share Data: Primary: Net income (loss) per common and equivalent share before extraordinary items................ $ (1.74) $ (2.52) $ 1.57 $ 0.17 $ 1.48 Net income (loss) per common and equivalent share........................................... (.96) (2.68) 0.01 0.17 1.48 Fully diluted: Net income (loss) per common and equivalent share before extraordinary items................ (1.74) (2.52) 1.57 0.17 1.38 Net income (loss) per common and equivalent share........................................... (.96) (2.68) 0.01 0.17 1.38 Unaudited Pro Forma (Fully-Taxed) Data (3): Net income available to common stock............. $ 9,380 Fully diluted net income per common and equivalent share................................ 1.12 Other Data: Comparable store sales growth.................... (1.3)% 5.3% 2.0% (1.1)% 8.0% Number of stores (at end of period).............. 37 39 43 56 60 Balance Sheet Data (end of period): Working capital.................................. $ 44,649 $ 52,274 $ 94,996 $ 71,049 $ 76,155 Total assets..................................... 198,463 197,996 309,735 292,659 305,536 Long-term debt and capital leases................ 125,892 130,374 156,273 135,232 132,242 Stockholders' equity............................. 13,628 14,848 61,827 82,578 93,257- ---------------- (1) Extraordinary items include losses on the extinguishment of debt of $0.6 million and $9.3 million in the years ended January 31, 1993 and January 30, 1994, respectively, and benefits from the realization of net operating loss carryforwards of $1.0 million and $0.4 million in the years ended January 26, 1992 and January 31, 1993, respectively. (2) See Note 6 to Consolidated Financial Statements. (3) Pro forma net income available to common stock reflects an income tax provision at a 41.0% effective rate. The Company's actual effective tax rate for fiscal 1995 was 27%. See Note 8 to Consolidated Financial Statements. Management believes the presentation of such pro forma data is meaningful to the reader because it more fully represents the future tax status of the Company. 18Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements, Notes to Consolidated Financial Statements and Selected Consolidated Financial Data included elsewhere in this Form 10-K. This Form 10-K contains forward-looking statements which involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Business--Risk Factors." General The Company opened 14 stores in fiscal 1994 and five stores in fiscal 1995. The Company plans to open five to seven stores in fiscal 1996. As a result of the Company's accelerated expansion and entry into Southern California, the Company incurred substantial store pre-opening expenses amounting to $7.5 million for fiscal 1994 and $2.4 million for fiscal 1995. These pre-opening expenses consist principally of store merchandising and stocking expenses, personnel recruitment and training costs and grand-opening advertising and promotional expenses. In fiscal 1996, the Company expects pre-opening expenses to be approximately $0.4 million to $0.5 million per store. As the Company has implemented its new store opening program, operating expenses as a percent of sales for the new stores are higher on average, adversely affecting overall operating margins until these new stores achieve sales maturity. The Company's average store achieves maturity after approximately four years. In addition, the Company has generally experienced higher marketing, distribution and occupancy costs in its new stores in the Southern California market. The Company believes, however, that these higher expenses should be offset by higher sales at these stores (when these stores achieve maturity), bringing margins for Southern California stores in line with those for Northern and Central California stores. See "Business--Risk Factors-- Managing Expansion." The Company experienced a strong comparable store sales increase in fiscal 1995, especially in the second half of the year. The Company does not expect to sustain its rate of comparable store sales growth in fiscal 1996, particularly in the second half of the year. See "Business--Risk Factors--Quarterly Fluctuations; Comparable Store Sales." The following table sets forth selected results of operations as percentages of sales for the periods indicated:
Year Ended(1) ----------------------------------------------------------- January 31, January 30, January 29, January 28, 1993 1994 1995 1996 ----------- ---------- ----------- -----------Sales......................................... 100.0% 100.0% 100.0% 100.0% Gross Margin.................................. 35.1 35.8 36.3 36.2 Operating expenses............................ 28.9 29.3 31.2 30.2 Pre-opening expenses.......................... 0.3 0.6 1.7 0.5 ----- ----- ----- ----- Operating income.............................. 6.0 6.0 3.4 5.5 Write-down of asset held for disposal......... 0.6 -- -- -- Interest expense.............................. 4.8 3.2 2.9 2.5 ----- ----- ----- ----- Income before provision for income taxes and extraordinary items.......................... 0.6 2.8 0.5 3.0 Income tax provision.......................... 0.3 -- -- 0.8 ----- ----- ----- ----- Income before extraordinary items............. 0.3 2.8 0.5 2.2 Extraordinary items........................... (0.1) (2.6) -- -- ----- ----- ----- ----- Net income.................................... 0.3% 0.2% 0.5% 2.2% ===== ===== ===== =====- --------- (1) Amounts may not total due to rounding. 19Results of Operations 52 Weeks ended January 28, 1996 (fiscal 1995) compared to 52 Weeks ended January 29, 1995 (fiscal 1994). Sales for fiscal 1995 increased by 20.6% to $532.4 million from $441.6 million in fiscal 1994. The increase is attributable to an 8.0% gain in comparable store sales and the sales contributed by the 19 stores opened since the beginning of 1994 before they were included in the comparable store base. The comparable store sales increase reflects the diminishing effect of eight competing warehouse home centers that opened primarily in late 1993, the recent closing of four competing warehouse home centers, and sales gains achieved by 14 Orchard stores opened in the prior fiscal year which are now part of the comparable store base. Improving economic conditions in California also were a contributing factor. Gross margin increased $32.4 million from $160.3 million for fiscal 1994 to $192.7 million for fiscal 1995. As a percentage of sales, gross margin decreased from 36.3% for fiscal 1994 to 36.2% for fiscal 1995. A decline in purchase markup was offset partially by reduced inventory shrinkage and leveraging of warehouse operating costs. Operating expenses increased by $23.2 million from $137.9 million for fiscal 1994 to $161.0 million for fiscal 1995. As a percentage of sales, these expenses decreased from 31.2% for fiscal 1994 to 30.2% for fiscal 1995. Decreased payroll costs as a percentage of sales were offset partially by an increase in occupancy costs as a percentage of sales in the Southern California stores. Pre-opening expenses decreased to $2.4 million for fiscal 1995 from $7.5 million for fiscal 1994. The decrease in pre-opening expenses is due to five new store openings in 1995 versus 14 stores in the prior year, in addition to lower average pre-opening costs per store. Operating income before pre-opening expenses for fiscal 1995 increased by $9.2 million or 41.1% from fiscal 1994. Operating income increased by $14.4 million from $14.9 million in fiscal 1994 to $29.2 million in fiscal 1995. As a percent of sales, operating income increased from 3.4% to 5.5%. Sales increases, the leveraging of expenses and reduced pre-opening expenses were the main contributors to the increase in operating income. Interest expense increased by $0.7 million from $12.6 million in fiscal 1994 to $13.3 million for fiscal 1995. In fiscal 1994 the Company capitalized an additional $0.8 million of construction period interest on new store construction projects and realized $0.4 million more in interest income than in fiscal 1995. The increase in interest expense was partially offset by a $0.5 million expense reduction due to a decrease in long-term debt. The Company recorded an income tax provision for fiscal 1995 at an effective tax rate of 27.0%, reflecting the reversal of a previously established valuation allowance. Future effective income tax rates should approximate the combined federal and state statutory rate and are estimated to be approximately 41.0% in fiscal 1996. See Note 8 to Consolidated Financial Statements. 52 Weeks ended January 29, 1995 (fiscal 1994) compared to 52 Weeks ended January 30, 1994 (fiscal 1993). Sales for fiscal 1994 increased by 21.0% to $441.6 million from $365.1 million for fiscal 1993. Increased sales as a result of 14 new stores opened in fiscal 1994 were partially offset by a 1.1% decrease in comparable store sales. Comparable store sales were impacted by the eight competing warehouse home centers that opened in Orchard markets, principally in the second half of fiscal 1993, and unfavorable weather conditions in Northern California during a five week period in April and May, 1994. Gross margin increased $29.5 million from $130.8 million in fiscal 1993 to $160.3 million in fiscal 1994. As a percentage of sales, gross margin increased from 35.8% for fiscal 1993 to 36.3% for fiscal 1994. The increase in gross margin percentage resulted primarily from an increase in the purchase markup due to a reduction in the cost 20of merchandise achieved through improved buying. Lower inventory shrinkage and reduced permanent markdowns also contributed to the favorable gross margin performance. Operating expenses for fiscal 1994 were 31.2% of sales compared with 29.3% of sales for fiscal 1993, an increase of 1.9% of sales. The increase is partially attributable to higher advertising, rent and payroll costs as a percent of sales for the 14 new stores opened in fiscal 1994 which have not yet achieved sales maturity. The negative impact of the comparable store sales decline on the sales base as described above also contributed to higher selling, general and administrative expenses as a percent of sales. Pre-opening expenses increased to $7.5 million for fiscal 1994 from $2.2 million for fiscal 1993. The increase in pre-opening expenses is due to 14 new store openings in fiscal 1994 versus four new store openings in the prior year. Operating income before pre-opening expense for fiscal 1994 decreased by $1.5 million from fiscal 1993. Operating income decreased by $6.8 million from $21.7 million for fiscal 1993 to $14.9 million for fiscal 1994. As a percentage of sales, operating income decreased to 3.4% for fiscal 1994 from 6.0% for fiscal 1993. Higher pre- opening costs and increased corporate expenses associated with the Company's expansion program were the main contributors to the decrease in operating income. Interest expense increased from $11.6 million for fiscal 1993 to $12.6 million for fiscal 1994. The increase was due primarily to additional interest resulting from the issuance by the Company in January 1994 of $100 million aggregate principal amount of 9 3/8% Senior Notes due 2002 ("9 3/8% Notes") which was partially offset by reduced interest due to the retirement of $19.3 million of 14.5% Senior Subordinated Discount Notes ("14.5% Subordinated Notes") and $30.0 million of 9% Senior Notes due 1997 ("9% Senior Notes") on February 25, 1994. The Company did not record a tax provision as a result of the reversal of a previously established valuation allowance. See Note 8 to Consolidated Financial Statements. The results of operations for fiscal 1993 included extraordinary charges of $9.3 million resulting from the early extinguishment of $44.7 million in aggregate principal amount of the 14.5% Subordinated Notes in April 1993 and the remaining $19.3 million of 14.5% Subordinated Notes and $30 million of the 9% Senior Notes in February 1994. 52 Weeks ended January 30, 1994 (fiscal 1993) compared to 53 Weeks ended January 31, 1993 (fiscal 1992). Sales for the 52 weeks ended January 30, 1994 increased to $365.1 million from $346.2 million for the 53 weeks ended January 31, 1993. The increase of 5.5% would have been 7.1% if calculated on a comparable 52 week period. This sales increase was due in part to the opening of four new stores during fiscal 1993. Fiscal 1993 comparable store sales increased by 2.0% for an equivalent 52 week period. Sales of fiscal 1993 were negatively impacted by continued sluggishness of the California economy as well as the opening during the year of seven new warehouse home center stores by the Company's competitors which impacted nine Orchard stores. Gross margin increased from $121.6 million in fiscal 1992 to $130.8 million in fiscal 1993. As a percentage of sales, gross margin increased from 35.1% for fiscal 1992 to 35.8% for fiscal 1993. The increase in gross margin percentage resulted primarily from an increase in the purchase markup of 0.7%, due mainly to a reduction in the cost of merchandise made possible by the Company's new warehouse which opened in February 1992. Other favorable factors including improved inventory shrinkage of 0.2% and reduced permanent markdowns of 0.1% were offset by higher promotional markdowns of 0.3%. Operating expenses for fiscal 1993 were 29.3% of sales compared with 28.9% of sales for fiscal 1992, an increase of 0.4%. This increase was attributable mainly to the impact on payroll and occupancy costs as a percent of sales of the four new stores opened during the past year. 21Pre-opening expenses are expensed as incurred. For fiscal 1993, pre- opening expenses included $1.7 million related to the fiscal 1993 store openings and $0.5 million for the stores to be opened in fiscal 1994. Operating income for fiscal 1993 increased by $1.0 million to $21.7 million from $20.7 million in fiscal 1992, despite the impact of an additional $1.3 million of pre-opening costs in fiscal 1993 and a benefit of approximately $0.6 million resulting from the additional week in fiscal 1992. Interest expense decreased from $16.7 million for fiscal 1992 to $11.6 million for fiscal 1993, or a decrease of $5.1 million. This decrease is due primarily to the redemption of $44.7 million in aggregate principal amount of the 14.5% Subordinated Notes on April 30, 1993. The Company did not record a tax provision for fiscal 1993 as a result of the benefit of net operating loss carryforwards against which a valuation allowance has previously been provided. In prior years, the benefit of the net operating loss carryforwards was treated as an extraordinary item in accordance with APB Opinion No. 11. The Company's effective income tax rate for fiscal 1992 was 44.2%. See Note 8 to the Consolidated Financial Statements. The results of operations for fiscal 1993 include extraordinary charges of $9.3 million resulting from the early extinguishment of $44.7 million in aggregate principal amount of the 14.5% Subordinated Notes in April 1993 and the remaining $19.3 million of 14.5% Subordinated Notes and $30 million of the Old Senior Notes in February 1994. Fiscal 1992 had a write-off of $1.1 million for the early extinguishment of debt and an extraordinary credit of $0.9 million representing the income tax benefit from the realization of net operating loss carryforwards. Fiscal 1992 also included a pre-tax nonoperating write-down in the carrying amount of the Company's old warehouse in San Jose, California to reflect management's estimate of net realizable value. Quarterly Results of Operations The following table presents certain unaudited quarterly consolidated financial information for each of the Company's last eight fiscal quarters. In the opinion of the Company's management, this quarterly information has been prepared on the same basis as the Consolidated Financial Statements appearing elsewhere in this Form 10-K and includes all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the unaudited quarterly results set forth herein. The Company's quarterly results have in the past been subject to fluctuations, and thus, the operating results for any quarter are not necessarily indicative of results for any future period.
Fiscal 1994 Fiscal 1995 -------------------------------------- -------------------------------------- First Second Third Fourth First Second Third Fourth Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter -------- -------- -------- -------- -------- -------- -------- --------(Dollars in millions) Sales.......................... $ 96.6 $125.6 $111.8 $107.7 $125.4 $145.5 $131.5 $130.1 Gross margin................... 34.6 45.0 41.0 39.6 45.6 52.3 47.5 47.2 Operating expenses............. 28.8 35.9 36.7 36.4 37.5 41.6 40.3 41.7 Pre-opening expenses........... 3.8 2.6 0.6 0.6 1.0 -- 1.2 0.2 Operating income............... 2.0 6.4 3.8 2.7 7.2 10.7 6.0 5.4 Net income (loss).............. (0.9) 3.3 0.6 (0.7) 2.9 5.6 1.8 1.3 Comparable store sales growth.. (1.5)% (3.0)% 0.4% 0.2% 1.8% 6.5% 10.1% 13.0% Stores open at end of period... 47 54 55 56 58 58 59 60The Company's results of operations exhibit some measure of seasonality. Generally, the Company's sales and operating income are highest in the second quarter and lowest in the fourth quarter. This is due primarily to 22seasonality in sales of garden, nursery and related products, which peak at the beginning of the spring/summer gardening season. The Company has experienced losses in the fourth quarter in the past and may experience losses in this quarter in the future. See "Business--Risk Factors--Seasonality and Sensitivity to Weather." The Company's quarterly results and comparable store sales comparisons are subject to various factors including consumer confidence, promotional marketing efforts, maturation of new stores, weather conditions and competitive store changes. See "Business--Risk Factors--Quarterly Fluctuations; Comparable Store Sales." Liquidity and Capital Resources The Company's liquidity needs arise primarily from the funding of the Company's capital expenditures, working capital requirements, ongoing expansion program and service on indebtedness. The Company's wholly-owned subsidiary, Orchard Supply, had long-term debt and capital lease obligations as of January 28, 1996 of $134.3 million, including (i) $100.0 million of 9 3/8% senior notes due February 15, 2002, (ii) $20.0 million of store mortgage notes and (iii) $12.8 million of warehouse mortgage notes. In addition, the Company has up to $40.0 million of revolving credit availability under Orchard Supply's senior revolving credit facility (the "Financing Agreement") (with a $10.0 million sublimit for letters of credit) of which no borrowings and $8.5 million of letters of credit were outstanding at January 28, 1996. Orchard Supply's debt instruments contain financial and operating covenants including, among other things, requirements that Orchard Supply maintain certain financial ratios and satisfy certain financial tests and limitations on Orchard Supply's ability to make capital expenditures, to incur other indebtedness, and to pay dividends. At January 28, 1996, the Company and Orchard Supply were in compliance with all covenants contained in such debt instruments. The Company's business strategy requires that it maintain broad product lines and large inventories, however, the effect of this strategy on working capital is somewhat minimized through the receipt of trade credit. The Company's working capital is also affected by accounts receivable arising from its proprietary credit card which had an average monthly balance for fiscal 1995 of $12.5 million. The Company will fund its working capital needs through a combination of funds from operations and borrowings under the Financing Agreement. The Financing Agreement permits borrowings based on percentages of the Company's eligible inventory and accounts receivable and remains effective through May 1999. In connection with Orchard's expansion plans, the Company anticipates capital additions of approximately $0.9 million for furniture, fixtures and equipment for each new store opened, a portion of which may be acquired under operating leases. The Company expects that pre-opening expenses will range from approximately $0.4 million to $0.5 million. The initial inventory requirement for new stores, net of trade credit, is estimated at $1.0 million per store. In the event that the Company is responsible for the renovation or remodeling of the existing space to be leased, the Company anticipates incurring additional capital expenditures of approximately $1.0 million to $1.8 million per store. If the Company elects to purchase the real estate, the capital expenditure would range from approximately $2.5 million for owned store improvements constructed on leased land to $4.0 million to $7.0 million if the entire property were to be owned by the Company. The Company's capital expenditure plan for fiscal 1996 and 1997 provides for annual capital expenditures of $19.8 million and $17.0 million, respectively. This capital expenditure plan includes the expenditures of approximately $4.0 million to $5.0 million annually for the maintenance of existing facilities. The remainder of the annual budgeted amounts will be used primarily for the opening of new stores, including fixtures and leasehold improvements with respect to the new stores, and computer equipment. The Company has historically obtained some of its equipment through operating leases, and expects to be able to procure such arrangements in the future. The inability of the Company to procure such arrangements for its capital expenditure program may have a negative impact on the ability of the Company to make capital expenditures. The Company believes that funds from operations, together with the proceeds of the Offering, borrowing availability under the Financing Agreement and financing through operating leases, will be adequate to fund the 23Company's operating requirements and capital expenditure program and meet its debt and dividend obligations for at least the next 18 months. See "Business--Risk Factors--Managing Expansion" and "--Leverage and Certain Restrictions Imposed by Lenders." Effect of Inflation The effect of inflation on the Company's results of operations has not been material in the periods discussed. Impact of Recent Accounting Pronouncements In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of." This pronouncement requires that long-lived assets and certain identifiable intangible assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss is to be recognized when the sum of undiscounted cash flows is less than the carrying amount of the asset. Measurement of the loss for assets that the entity expects to hold and use are to be based on the fair value of the asset. Although management does not expect this pronouncement to have a material impact on the Company's financial condition or results of operations at adoption, its provisions, when adopted, will be applicable to any future assessments of its long-lived assets. SFAS No. 121 will be adopted in fiscal 1996. Item 8. Financial Statements and Supplementary Data See the Index included at "Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K." Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure None. 24PART III Item 10. Directors and Executive Officers of the Registrant The information required by this item will be contained in the Company's Proxy Statement for its Annual Stockholders Meeting to be held May 23, 1996 to befiled with the Securities and Exchange Commissionwithin 120 days after January 28, 1996on May 3, 2013 for the purpose of amending, supplementing or including the following items:Item 1A - Risk Factors
Item 10 - Directors, Executive Officers and
is incorporated herein by reference.Corporate GovernanceItem
11.11 - Executive CompensationThe information required by this item will be contained in the Company's Proxy Statement for its Annual Stockholders Meeting to be held May 23, 1996 to be filed with the Securities and Exchange Commission within 120 days after January 28, 1996 and is incorporated herein by reference.Item
12.12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13 - Certain Relationships and Related Transactions, and Director Independence
Item 14 - Principal Accountant Fees and Services
Item 15 - Exhibits, Financial Statement Schedules
Except as described above, no other amendments are being made to the Original Filing. The
information required byOriginal Filing continues to speak as of the date of the Original Filing, and thisitem will beAmendment does not reflect events occurring after the date of the Original Filing except as expressly set forth herein, or modify or update the disclosure contained in theCompany's Proxy Statement for its Annual Stockholders MeetingOriginal Filing in any way other than as required to reflect the additions discussed above and reflected below.
Item 1A. Risk Factors. In addition to the other information set forth in this Amendment, the factors discussed in “Part I — Item 1A — Risk Factors” in our Original Filing could materially affect our business, financial condition, or operating results. The risks described in our Original Filing, this Amendment and any other SEC reports are not the only risks facing us. There are additional risks and uncertainties not currently known to us or that we currently deem to be
heldimmaterial that may also materially adversely affect our business, financial condition, or operating results. We include the following risk factors in addition and as updates to the risk factors previously provided:Restructuring Risks
We may not be successful in our restructuring initiatives and even if successful, we may be required to effectuate a reorganization process.
In connection with our inability to maintain our leverage covenants under our Senior Secured Term Loan for our fiscal quarters ended October 27, 2012 and February 2, 2013, we obtained waivers from our Senior Secured Term Loan lenders, whereby the Senior Secured Term Loan lenders waived, among other things, any and all defaults or events of default which would otherwise occur under the Senior Secured Term Loan as a result of any failure by us to comply with the maximum adjusted leverage ratio covenant contained in the Senior Secured Term Loan for the respective fiscal quarters. The waiver provided for the fiscal quarter ended February 2, 2013, also provided for a waiver for our fiscal quarter ending May
23, 19964, 2013, and conditioned the waiver in its entirety on our continued compliance with certain terms and conditions, including achievement of a mutually acceptable agreement with the term loan lenders by May 1, 2013 relating to refinancing or modifications to our capital structure in a way that serves the best interests of all of our stakeholders. On April 26, 2013, such date was extended to June 30, 2013. Total debt of $208.2 million has been classified as current liabilities as of February 2, 2013.While we continue to address the terms of our restructuring with our Senior Secured Term Loan lenders, we cannot provide any assurances that we will reach agreement on the definitive terms of any restructuring. In addition, any restructuring may be effectuated under the supervision of a bankruptcy court. We cannot provide any assurances that any restructuring can be completed out-of-court, under the supervision of a bankruptcy court or at all. If we reorganize under the supervision of a bankruptcy court, it is expected that our equity holders would experience a complete loss of their investment.
In addition, while we anticipate continued compliance with the terms and conditions of the waiver while we address the terms of our restructuring, failure to comply with the terms and conditions of the waiver could cause the effectiveness of the waiver to terminate. In the event the waiver terminates, there would be a default under the Senior Secured Term Loan and, as a result, the lenders under the Senior Secured Term Loan could declare the outstanding indebtedness to be due and payable, in acceleration of the current maturity dates of December 21, 2013 and December 21, 2015. As a result of the cross-default provisions in our debt agreements, a default under the Senior Secured Term Loan could result in a default under, and the acceleration of, payments in the Senior Secured Credit Facility. If payments under our credit facilities were to be accelerated, we anticipate that we would seek protection under the Bankruptcy Code.
Risks Relating to Our Class A Common Stock and Preferred Stock and the Securities Market
We are not in compliance with NASDAQ’s continued listing requirements. Accordingly, we may not be able to maintain our listing on the NASDAQ Capital Market.
On May 8, 2013 we received written notice from the NASDAQ Stock Market indicating that we are no longer in compliance with the minimum stockholders’ equity requirement for continued listing on the NASDAQ Capital Market. NASDAQ Capital Market Listing Rule 5550(b)(1) requires registrants to maintain a minimum of $2,500,000 in stockholders equity unless the registrant has met one of the alternative standards of market value of listed securities or net income from continuing operations. In the Company’s Form 10-K for the period ended February 2, 2013, the Company reported a stockholders’ deficit of $30.6 million as a result of a net loss of $33.6 million in the fourth quarter of 2012. In the notice, NASDAQ requested we provide our plan to regain compliance with the continued listing requirements before June 24, 2013. If NASDAQ accepts the plan, it can grant us an additional 180 days from the date of the notice to evidence compliance with Listing Rule 5550(b)(1). If NASDAQ does not accept the plan, we will have the opportunity to appeal any delisting decision to a NASDAQ Listings Qualifications Panel.
If we fail to meet the continued listing standards of the NASDAQ Capital Market, our Common Stock could be delisted from the NASDAQ Capital Market. If our Common Stock is delisted by NASDAQ, then the market liquidity of our Common Stock would likely be negatively affected, which would make it more difficult for holders to sell our Common Stock in the open market. Investors would find it more difficult to dispose of or obtain accurate quotations as to the market value of our Common Stock, and the per share price of our Common Stock may be adversely affected. Delisting from NASDAQ would also result in negative publicity and may result in a loss of confidence by investors, customers, suppliers or employees.
No assurances can be provided that we will be able to regain or maintain compliance with the requirements for continued listing under the NASDAQ Listing Rules and maintain our NASDAQ Capital Market listing. In the event we were to effectuate a restructuring under the supervision of a bankruptcy court, we anticipate that our Common Stock would thereafter be delisted from the NASDAQ Stock Market.
Item 10. Directors, Executive Officers and Corporate Governance. Board of Directors. The names, ages, positions, business experience and principal occupations and employment of each member of the Board of Directors is set forth below:
Name
Age
Principal Occupation, Employment and Directorships
William C. Crowley, Chairman
Director since November
2005; Class A Director
55 Mr. Crowley was the President and Chief Operating Officer of ESL Investments, Inc. from January 1999 to May 2012. From March 2005 to January 2011, Mr. Crowley served as an Executive Vice President of Sears Holdings Corporation, and from September 2005 to January 2011, as its Chief Administrative Officer. From March 2005 to September 2006, he also served as Chief Financial Officer of Sears Holdings and from January 2007 to October 2007 as interim Chief Financial Officer. From May 2003 to March 2005, Mr. Crowley was as an officer of Kmart Holding Corporation and, since December 2006, he has served as Chairman of the board of directors of Sears Canada Inc., and from March 2005 he has been a director of Sears Canada Inc. He is currently a director of AutoNation, Inc., an automotive retailer. From August 2008 to December 2012, he served as a director of AutoZone, Inc., a retailer and distributor of automotive replacement parts and accessories. And, from March 2005 to May 2010, Mr. Crowley served as a director of Sears Holdings. Mark R. Baker
Director since March 2011;
Class B/C Director
55 Mr. Baker has been our President and Chief Executive Officer and a member of our Board since March 2011. From September 2008 to September 2010, Mr. Baker served as President and Chief Operating Officer of The Scotts Miracle-Gro Co., a leading manufacturer and marketer of branded consumer lawn and garden products. From September 2002 to September 2008, Mr. Baker served as Chief Executive Officer and President of Gander Mountain Company, an outdoor retailer specializing in hunting, fishing and camping gear. From May 1996 to August 2001, Mr. Baker held various positions with The Home Depot, Inc., lastly serving as Chief Merchandising Officer and Executive Vice President of Merchandising. Kevin R. Czinger
Director since December 2011;
Class A Director
54 Mr. Czinger is co-founder and CEO of CKC Energy, a distributed power generation company. He was the Senior Strategic Advisor of CODA Automotive, Inc., an electric car and battery company from January 2011 to January 2012. From January 2008 to December 2010, Mr. Czinger served as Co-Founder, President and Chief Executive Officer of CODA Automotive, where he oversaw the management and strategic direction of the company. From October 2005 to April 2007, he was a Co-Founder and Managing Principal of San Shan Partners Limited, a private equity fund based in China. Previously, he served as a partner and Senior Managing Director at Fortress Private Equity, an alternative asset management firm and an Entrepreneur-in-Residence at Benchmark Capital. Susan L. Healy
Director since December 2011;
Class A Director
47 From June 2010 to February 2011, Ms. Healy was the Chief Financial Officer at Virent Energy Systems, Inc. and from April 2006 to August 2009, she was Senior Vice President and Chief Financial Officer at Lands’ End, Inc. From December 2004 to April 2006, Ms. Healy served as the Chief Financial Officer of East Coast Power LLC and as co-Chief Financial Officer of
Cogentrix Energy, Inc. From January 2004 to April 2006, she served as a Vice President of J. Aron and Company, a subsidiary of The Goldman Sachs Group Inc., and from September 2000 to January 2004, Ms. Healy worked as a Vice President, Corporate Treasury at Goldman Sachs. From April 1998 to September 2000, she worked as a Vice President, Investment Banking and from August 1994 to April 1998 as an Associate at Goldman Sachs. Steven L. Mahurin
Director since May 2011;
Class B/C Director
53 Mr. Mahurin has been our Executive Vice President, Merchandising since May 2011 and a member of our Board since December 2011. From March 2008 to April 2011, Mr. Mahurin was Executive Vice of Merchandising for Office Depot, Inc. From March 2004 to March 2008, Mr. Mahurin was Senior Vice President, Chief Merchandising Officer for True Value Company, a $2 billion hardware cooperative. Karen M. Rose
Director since December 2011;
Class A Director
64 Since January 2009, Ms. Rose has been the Chair of the board of directors of Maidenform Brands, Inc. and from January 2005 a director of Maidenform. She also serves as Chair of Maidenform’s audit committee and is a member of its compensation and nominating and governance committees. From December 1997 until her retirement in October 2003, Ms. Rose was Group Vice President and Chief Financial Officer of The Clorox Company. Prior to that, Ms. Rose held various management positions including Director of Finance, Household Products Company and Vice President and Treasurer since joining Clorox in 1978. Ms. Rose currently serves on the board of directors of Wilton Brands, Inc., where she chairs the audit committee and is a member of its nominating and governance committee. From January 2004 to June 2006, Ms. Rose served on the board of directors of Fairmont, Inc. And from June 2006 to March 2010 she served on the board of directors of Bare Escentuals, Inc. Executive Officers. A description of the Company’s Executive Officers is contained under the heading “Part I – Item 1 – Business, Executive Officers” in the Original Filing.
There are no family relationships among our directors and executive officers.
Section 16(a) Beneficial Ownership Reporting Compliance. Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our executive officers and directors and persons who beneficially own more than 10% of our Common Stock to file initial reports of beneficial ownership and reports of changes in beneficial ownership with the SEC. Such persons are required by SEC regulations to furnish us with copies of all Section 16(a) forms filed by such person.
Based solely on our review of such forms furnished to us and written representations from certain reporting persons, we believe that all filing requirements applicable to our executive officers, directors and greater-than-10% stockholders were complied with for Fiscal 2012.
Code of Ethics. The Company has adopted a Code of Ethics that applies to all of its employees, including the Chief Executive Officer, Chief Financial Officer and other executive officers. A copy of the Code of Ethics can be obtained on the Company’s website by going to http://ir.osh.com and following the “Corporate Governance” link. The Company intends to post on its website any amendments to or waivers of the Company’s Code of Ethics. The information contained on the Company’s website is not part of this document.
Audit Committee. The Audit Committee currently consists of Ms. Healy, Mr. Czinger and Ms. Rose. Ms. Healy is the Chair. The Audit Committee acts under a written charter adopted and approved by the Board of Directors in December 2011. The Board of Directors has determined that Ms. Healy, Mr. Czinger and Ms. Rose meet the independence requirements set forth in Rule 10A-3 under the Securities Exchange Act of 1934, as amended, and the applicable rules of NASDAQ and that Ms. Healy, Mr. Czinger and Ms. Rose each qualify as an audit committee “financial expert” under the rules of the SEC.
The Audit Committee operates under a written charter approved by the Board of Directors, a copy of which can be obtained on our website by going to http://ir.osh.com and following the “Corporate Governance” link. As more fully defined in the committee’s charter, the functions of the Audit Committee include reviewing and discussing with management and the independent registered public accounting firm, the Company’s annual audited financial statements and quarterly financial statements, retaining our independent registered public accounting firm, reviewing their independence, reviewing and approving the planned scope of our annual audit, reviewing and approving any fee arrangements with our independent registered public accounting firm, overseeing their audit work, reviewing and pre-approving any non-audit services that may be performed by them, reviewing the adequacy of accounting and financial controls, reviewing our critical accounting policies and reviewing and approving any related party transactions.
Item 11. Executive Compensation. Compensation Committee. The current members of the Compensation Committee are Kevin R. Czinger (Chair) and Karen M. Rose. The Compensation Committee currently has one vacancy. Each of the members of the Compensation Committee is independent for purposes of the applicable NASDAQ rules. The Compensation Committee operates under a written charter approved by the Board of Directors, a copy of which can be obtained on our website by going to http://ir.osh.com and following the “Corporate Governance” link.
As more fully described in the committee’s charter, the primary function of the Compensation Committee is to assist the Board of Directors in managing compensation and development for the directors and executive officers. The Compensation Committee’s primary duties and responsibilities are to (i) establish and review the overall compensation philosophy; (ii) set compensation for executive officers and directors; and (iii) monitor incentive and equity-based compensation plans. The Compensation Committee’s charter does not provide for any delegation of these duties. In addition, the Compensation Committee has the authority under its charter to hire outside consultants and conduct such compensation reviews, investigations and/or surveys as the Compensation Committee may reasonably deem will provide such information as could reasonably and properly be required by the Compensation Committee in the exercise of its duties and responsibilities. In Fiscal 2012, the Company engaged the services of a consultant related to executive compensation matters. The Committee met four times during Fiscal 2012.
Summary Compensation Table. The following table summarizes the compensation paid by the Company to our Chief Executive Officer and two most highly compensated executive officers.
Name and Principal Position
Year Salary
(1)($)Bonus
Paid in
Fiscal
Year
(2)($)Stock
Awards
(3)($)Option
Awards
(3)($)Non-Equity
Incentive Plan
Compensation
(4)($)All Other
Compensation
(5)($)Total ($) Mark R. Baker
2012 635,577 0 0 1,428,073 0 215 2,063,865 President, Chief Executive
Officerand Director
2011 438,461 322,767 0 0 1,528 762,756 Chris D. Newman(6)
2012 418,115 0 0 500,146 0 182 918,443 Executive Vice President,
ChiefFinancial Officer and Treasurer
2011 98,269 100,000 0 0 0 33,696 231,965 Steven L. Mahurin
2012 420,385 0 0 532,040 0 184 952,609 Executive Vice President,
Merchandising and Director
2011 253,846 0 0 0 0 284,790 538,636
(1) Unless otherwise noted, Fiscal 2012 salaries reflect amounts paid between January 29, 2012 and February 2, 2013 and Fiscal 2011 salaries reflect amounts paid between January 30, 2011 and January 28, 2012.
(2) Represents amounts paid as sign on bonuses for each of Messrs. Baker and Newman and a minimum guaranteed bonus of $125,000, all pursuant to the terms of their respective offer letters.
(3) Represents the aggregate grant date fair market value of stock options and restricted stock units calculated in accordance with the fair value method.
(4) None of our named executive officers earned compensation under our non-equity incentive compensation plan in 2011 or 2012 because we did not meet the minimum EBITDA threshold for any bonuses to be paid under the terms of the plan.
(5) See the “All Other Compensation” table below for additional information.
(6) Mr. Newman joined the Company in November 2011 on an interim basis, during which time he received compensation in the amount of $67,500 for services provided between November 7, 2011 and December 19, 2011, at which time he joined the Company as a full-time employee and received a sign-on bonus of $100,000. All Other Compensation Table
The following table describes each component of the “All Other Compensation” column in the Summary Compensation Table.
Name
Life Insurance
Premiums
(1)($)Relocation Tax
Payments
($)Total
($)Mark R. Baker
215 0 215 Chris D. Newman
182 0 182 Steven L. Mahurin
184 0 184
(1) Reflects premiums paid on group term life insurance benefits and short-term disability benefits. Outstanding Equity Awards at Fiscal Year End 2012
The following table summarizes information with respect to the equity awards held by our named executive officers as of the end of the Fiscal 2012.
Option Awards(1) Stock Awards(2) Name
Number of
Securities
Underlying
Unexercised
Options (#)
ExercisableNumber of
Securities
Underlying
Unexercised
Options (#)
UnexercisableOption
Exercise
Price ($)Option
Expiration
DateNumber of
Shares or
Units of Stock
Not Yet
Vested #Market Value
Of Shares or
Units of Stock
That Have
Not Vested
($)(6)Mark R. Baker(3)
123,578 20.00 05/21/22 88,551 625,170 Chris D. Newman(4)
43,280 20.00 05/21/22 31,000 218,860 Steven L. Mahurin(5)
46,040 20.00 05/21/22 33,000 232,980
(1) Reflects options to purchase Class A Common Stock granted under our 2011 Equity Incentive Plan.
(2) The shares vest as to 8.33% on the first day of the first fiscal quarter following the period in which Adjusted EBITDA for the Company in any previous trailing four fiscal quarters during the performance period is at least a specified target.
(3) The options vest as to 40% on March 28, 2013, 20% on March 28, 2014, 20% on March 28, 2015 and 20% on March 28, 2016.
(4) The options vest as to 40% on November 7, 2013, 20% on November 7, 2014, 20% on November 7, 2015 and 20% on November 7, 2016.
(5) The options vest as to 40% on May 2, 2013, 20% on May 2, 2014, 20% on May 2, 2015 and 20% on May 2, 2016.
(6) Based on a price per share of $7.06, the closing price of our Common Stock on the NASDAQ Capital Market on the final day of trading in Fiscal 2012. Option Exercises and Stock Vested During Fiscal Year 2012
None of our named executive officers exercised any of their stock options during Fiscal 2012.
Potential Payments upon Termination or Change-in-Control
Each of the named executive officers has entered into a severance agreement with us on substantially the same terms (except for the length of the applicable severance protection period). Pursuant to the terms of the severance agreements, if the named executive officer is terminated by us without Cause or resigns for Good Reason, he will be placed on a severance-related leave of absence and will be entitled to receive the following severance payments and benefits: (i) 12 months of base salary continuation, subject to certain offsets, (ii) continued participation in all of our benefit plans and programs (except for our long-term disability plan, flexible spending accounts, company-paid life insurance and 401(k) plan) as an active employee for 12 months, and (iii) outplacement services for up to 12 months. All such severance payments and benefits are subject to the named executive officer’s execution of a release of claims. The severance agreements also provide that each named executive officer is subject to a perpetual confidentiality covenant and a post-termination non-solicitation of employees covenant for a period equal to the period of his or her respective salary continuation period opportunity, regardless of whether severance pay and benefits are payable under the severance agreement. For purposes of Mr. Baker’s severance agreement, “Cause” generally means his insubordination, dishonesty, fraud, incompetence, moral turpitude, refusal to perform his duties or responsibilities for any reason other than illness or incapacity or
unsatisfactory performance of his duties, as determined by our Board of Directors in its sole discretion. For purposes of the severance agreements with our named executive officers, “Cause” generally means (i) a material breach by the executive officer (other than due to disability) of his or her duties and responsibilities which breach is demonstrably willful and deliberate on his or her part, is committed in bad faith or without reasonable belief that such breach is in our best interest and is not remedied in a reasonable period of time after receipt of written notice from us specifying such breach, (ii) the commission by the executive officer of a felony involving moral turpitude or (iii) dishonesty or willful misconduct in connection with the named executive officer’s employment.
For purposes of the severance agreements, including Mr. Baker’s, “Good Reason” generally means (i) a reduction in more than 10% in the sum of the executive officer’s annual base salary and target bonus, (ii) the executive officer’s mandatory relocation to an office more than 50 miles from the primary location at which he or she is required to perform his or her duties or (iii) any other action or inaction that constitutes a material breach of the terms of the agreement, including failure of a successor company to assume or fulfill the obligations of the agreement. Mr. Baker also has Good Reason to quit if he is removed from our Board of Directors. In each case, the executive officer must provide us with written notice of the events giving rise to a claim of Good Reason within 30 days of its initial existence and we will have 60 days to remedy such event.
The severance agreements do not include single trigger change-of-control provisions which provide for payment or acceleration of equity awards based upon a change of control event in itself.
Using each named executive officer’s current base salary, the maximum total payments by the Company to each named executive officer under the termination circumstances described above, as of February 2, 2013, the last day of Fiscal 2012, would be as follows:
Current Officers
Cash Severance
($)(1)Outplacement
Services($)(2)COBRA
Premium($)Unvested In-the-Money
Options at February 2,
2013(#)/($)Total Estimated
Benefit ($)Mark R. Baker
625,000 24,000 23,096 — 672,096 Chris D. Newman
410,000 24,000 23,096 — 457,096 Steven L. Mahurin
410,000 24,000 23,096 — 457,096
(1) Reflects 12 months continued salary for Messrs. Baker, Newman and Mahurin.
(2) Upon the first day of termination from the Company, the named executive officers will be eligible for outplacement services, at the expense of the Company. Director Compensation. Under the Company’s Director Compensation Policy, each of our outside directors receives a mix of cash and equity-based compensation. In addition, all Board members are entitled to reimbursement by the Company for reasonable travel to and from meetings of the Board, and reasonable food and lodging expenses incurred in connection therewith. The Compensation Committee reviews the Director Compensation Policy from time-to-time to ensure that compensation levels are fair and appropriate. Under the Director Compensation Policy, outside directors are compensated in the following manner:
Cash
Compensation($)(1)Equity
CompensationAnnual Retainer:
Board Member
50,000 50,000 (2) Chairman of the Board (additional)
25,000 — Audit Committee Chair (additional)
15,000 — Compensation Committee Chair (additional)
10,000 — Nominating and Corporate Governance Committee Chair (additional)
6,250 — Special Committee (additional)
7,500 (3) —
(1) Assumes service for a full year; outside directors who serve for less than the full year are entitled to receive a pro-rated portion of the applicable payment. Each “year”, for purposes of the Director Compensation Policy, begins on the date of our annual meeting of stockholders and ends on the date of our next annual meeting of stockholders. For the year beginning on the date of our 2012 annual meeting of stockholders, each director can elect, in lieu of their Board member cash compensation, to take an equally valued stock grant.
(2) The annual restricted stock award is determined by dividing the award value of $50,000 by the fair market value on the date of the annual meeting of stockholders. The shares will then vest over a period of one year, in four equal installments, at a rate of 25% of the shares vesting quarterly, subject to the outside director’s continued Board service on each such date.
(3) Members are compensated in the amount of $7,500 per quarter, paid in advance per quarter, plus $1,000 per meeting attended. The following table sets forth certain information with respect to compensation awarded to, paid to or earned by each of our non-employee directors during Fiscal 2012.
Name(1)
Fees Earned or Paid
in Cash (2)($)Stock Awards ($) William C. Crowley
12,500.00 (3 ) Kevin R. Czinger
56,250.00 (3 ) Susan L. Healy
62,500.00 (3 ) Karen M. Rose
37,500.00 (3 ) Bryant W. Scott(4)
54,375.00 (3 ) Matthew D. Cwiertnia(5)
50,000.00 — Ravi Y. Sarin(5)
50,000.00 —
(1) See the 2012 Summary Compensation Table for disclosure related to Mr. Baker, our President and CEO, and Mr. Mahurin, our Executive Vice President, Merchandising. Messrs. Baker and Mahurin do not receive any additional compensation for their services as members of our Board of Directors.
(2) Fees are based on membership on the Board and participation in Board or Committee Chairmanship positions.
(3) The annual stock award is determined by dividing the award value of $50,000 by the fair market value on the date of the annual meeting of stockholders. The shares will then vest over a period of one year, in four equal installments, at a rate of 25% of the shares vesting quarterly, subject to the outside director’s continued Board service on each such date. Accordingly, from the date of the 2011 annual meeting of stockholders until the date of the 2012 annual meeting of stockholders, the annual grant of Class A Common Stock given to each of these outside directors was 3,009 shares based on the fair market value of $16.62 per share on the date of the 2011 annual meeting of stockholders. In addition, Mr. Crowley elected to receive all of his Board member cash compensation in an equal valued stock grant and Ms. Rose elected to receive one-half of her Board member cash compensation in equal valued stock grants.
(4) Mr. Scott resigned as a member of the Board of Directors on May 2, 2013.
(5) Fees payable for Board services provided by these directors pursuant to our Director Compensation Policy are paid to ACOF Operating Manager, L.P. These directors, elected by the holders of the Class B Common Stock and Class C Common Stock, voting as a separate class, receive $50,000 in lieu of the stock award given to the other outside directors. Messrs. Cwiertnia and Sarin resigned as members of the Board of Directors on May 2, 2013. Equity Compensation Plan Information. The Company’s 2011 Equity Compensation Plan provides for the granting of up to one million shares of Class A Common Stock in the form of nonqualified and incentive stock options, SARs, restricted stock, restricted stock units, deferred stock units, performance shares and other stock awards to employees, non-employee directors and consultants.
Plan Category
Number of
Shares
to be Issued
Upon Exercise
of
Outstanding
Options,
Warrants
and RightsWeighted-
Average
Exercise Price
of Outstanding
Options,
Warrants
and Rights ($)Number of
Shares
Remaining
Available for
Future Issuance
Under Equity
Compensation
Plans
(Excluding Shares
Reflected in
Columns)Equity compensation plans approved by stockholders
646,583 $ 20.00 329,270 Equity compensation plans not approved by stockholders
— — — Total
646,583 — 329,270
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. Security Ownership of Principal Shareholders and Management. The following table sets forth, as of May 30, 2013, certain information with respect to the beneficial ownership of the Company’s capital stock by (i) each director and director-nominee of the Company, (ii) each named executive officer and (iii) all directors and executive officers of the Company as a group. The address for those individuals for which an address is not otherwise provided is c/o Corporate Secretary, Orchard Supply Hardware Stores Corporation, 6450 Via Del Oro, San Jose, California 95119.
Name of Beneficial Owner(1)
Title of Class of
Capital Stock(1)Shares
Beneficially
Owned(2)Percent
of Class of
Stock(3)Mark R. Baker(4)
Class A Common Stock 49,432 * Chris D. Newman
— — — Steven L. Mahurin(5)
Class A Common Stock 18,416 * William C. Crowley(6)
Class A Common Stock 14,177 * Kevin R. Czinger(7)
Class A Common Stock 4,156 * Susan L. Healy(8)
Class A Common Stock 4,156 * Karen M. Rose(9)
Class A Common Stock 5,661 * All Current Directors and Executive Officers as a Group (9 persons)(10)
Class A Common Stock 105,942 *
* Less than 1%
(1) Unless otherwise indicated, we believe that all persons named in the table have sole investment and voting power over the shares of Common Stock owned.
(2) Under the rules of the Securities and Exchange Commission, a person is deemed to be the beneficial owner of shares that can be acquired by such person within 60 days upon exercise of stock options or stock awards vesting, or vesting of restricted stock units.
(3) Calculated on the basis of 4,830,147 shares of Class A Common Stock, 8,644.06788 shares of Class B Common Stock and 1,194,000 shares of Class C Common Stock outstanding as of May 30, 2013, provided that any additional shares of Common Stock that a stockholder has a right to acquire within 60 days after May 30, 2013 are deemed to be held and outstanding for the purpose of calculating that stockholder’s percentage of beneficial ownership but not the percentages of beneficial ownership of other stockholders.
(4) Represents 49,432 shares of Class A Common Stock issuable upon the exercise of vested options held by Mr. Baker.
(5) Represents 18,416 shares of Class A Common Stock issuable upon the exercise of vested options held by Mr. Mahurin.
(6) Represents 8,399 shares of Class A Common Stock held by Mr. Crowley, 1,504 shares of Class A Common Stock vesting within 60 days and 4,274 securities held directly by Tynan, LLC (“Tynan”), which Mr. Crowley is the manager and a member of, and may be deemed to beneficially own securities owned by Tynan.
(7) Represents 3,404 shares of Class A Common Stock held by Mr. Czinger and 752 shares of Class A Common Stock vesting within 60 days.
(8) Represents 3,404 shares of Class A Common Stock held by Ms. Healy and 752 shares of Class A Common Stock vesting within 60 days.
(9) Represents 4,533 shares of Class A Common Stock held by Ms. Rose and 1,128 shares of Class A Common Stock vesting within 60 days.
(10) Represents 77,792 shares of Class A Common Stock issuable upon the exercise of vested options and 4,136 shares of Class A Common Stock vesting within 60 days. The following table sets forth certain information about persons the Company knows, based on inspections of Schedule 13G or 13D and Forms 3, 4 and 5 filed with the Securities and Exchange Commission,
within 120 days after January 28, 1996to be beneficial owners of five percent or more of Class A Common or Class C Common Stock as of May 30, 2013.
Name of Beneficial Owner(1)
Title of Class of
Capital Stock(6)Shares
Beneficially
OwnedPercent
of Class of
Stock(5)Cumulated
Voting
Power(5)ESL Investments, Inc. and related persons, as a group
1170 Kane Concourse, Suite 200
Bay Harbor, FL 33154(1)
Class A Common Stock 925,752 19.2 % 15.3 % ACOF I LLC(2)
2000 Avenue of the Stars, 12th Floor
Los Angeles, CA 90067
Class C Common Stock 1,194,000 100 % 19.8 % Samana Capital, L.P.(3)
35 Ocean Reef Drive, Suite 142
Key Largo, FL 33037
Class A Common Stock 274,721 5.7 % 4.6 % Fairholme Capital Management, L.L.C. and related persons, as a group(4)
4400 Biscayne Blvd., 9th Floor
Miami, FL 33137
Class A Common Stock 604,143 12.6 % 10.0 %
(1) Consists of an aggregate of 925,752 shares held as follows: 482,230 shares of Class A Common Stock held by ESL Partners, L.P. (“Partners”); 215 shares held by ESL Institutional Partners, L.P. (“Institutional”); 17 shares held by CRK Partners, LLC (“CRK LLC”); and 443,290 shares held by Edward S. Lampert. Mr. Lampert is the sole stockholder, chief executive officer and director of ESL. ESL Investments, Inc. is the general partner of RBS, the sole member of CRK and the manager of RBSIM. RBS is the general partner of Partners and the managing member of ESL Investors, LLC. RBSIM is the general partner of Institutional. Mr. Lampert entered into a letter agreement with Partners (a “Lock-Up Agreement”) that restricts the purchases and sales by Mr. Lampert of the shares. Pursuant to the Lock-Up Agreement, Mr. Lampert generally is required to sell Shares and purchase additional Shares on a pro rata basis with the sales and purchases of shares made by Partners, and generally must make such sales and purchases on substantially the same terms and conditions as Partners (subject to certain legal, tax, accounting or regulatory considerations). Mr. Lampert is also restricted from certain sales of Shares or purchases of additional shares except in accordance with the Lock-Up Agreements. Each of Partners, Investors, Institutional, CRK LLC, and Mr. Lampert disclaim beneficial ownership of shares not directly held by it/him.
(2) ACOF I LLC (“ACOF”) is owned by Ares Corporate Opportunities Fund, L.P. (“ACOF Opportunities”). The general partner of ACOF Opportunities is ACOF Management, L.P. (“ACOF Management”). The general partner of ACOF Management is ACOF Operating Manager, L.P. (“ACOF Operating”). The general partner of ACOF Operating is Ares Management, Inc. (“Ares Inc.”). Ares Inc. is owned by Ares Management LLC (“Ares Management”), which, in turn, is owned by Ares Management Holdings LLC (“Ares Management Holdings”). Ares Management Holdings is controlled by Ares Holdings LLC (“Ares Holdings”), which, in turn, is controlled by Ares Partners Management Company LLC (“APMC”) (APMC, ACOF, ACOF Opportunities, ACOF Management, ACOF Operating, Ares Inc., Ares Management, Ares Management Holdings, and Ares Holdings are collectively referred to in this footnote as the “Ares Entities”). APMC is managed by an executive committee comprised of Michael Arougheti, David Kaplan, Gregory Margolies, Antony Ressler and Bennett Rosenthal. Because the executive committee acts by consensus/majority approval, none of the members of the executive committee has sole voting or dispositive power with respect to any shares of Common Stock. Each of the members of the executive committee, the Ares Entities (other than ACOF and ACOF Opportunities with respect to the shares held directly by ACOF) and the directors, officers, partners, stockholders, members and managers of the Ares Entities expressly disclaims beneficial ownership of any shares of Common Stock and nothing herein shall be deemed an admission that any such person or entity is the beneficial owner of such shares.
(3) Samana Capital, L.P. (“SC”) is the owner of the Class A Common Stock. Morton Holdings, Inc. (“MH”) is the general partner of SC. On February 6, 2013, SC entered into an investment management agreement with ZBI Equities, L.L.C. (“ZBIE”) (the “IMA”) pursuant to which SC has granted ZBIE investment and voting control over the Class A Common Stock. ZBIE is wholly-owned by Ziff Brothers Investments, L.L.C. (“ZBI”). As a result, each of ZBI and ZBIE may be deemed to beneficially own the Class A Common Stock. In addition, each of MH and Philip B. Korsant may be deemed to beneficially own the Class A Common Stock reported as a result of certain rights retained by SC under the IMA.
(4) Consists of shares of Class A Common Stock owned, in the aggregate, by Bruce R. Berkowitz (“Mr. Berkowitz”) and various investment vehicles managed by Fairholme Capital Management, L.L.C. (“FCM”) of which 592,993 are owned by The Fairholme Fund and 8,070 are owned by The Fairholme Allocation Fund, each a series of Fairholme Funds, Inc. Because Mr. Berkowitz, in his capacity as the Managing Member of FCM or as President of Fairholme Funds, Inc., has voting or dispositive power over all shares beneficially owned by FCM, he is deemed to have beneficial ownership of all such shares. Each of Mr. Berkowitz, The Fairholme Fund, and FCM disclaim beneficial ownership of shares of Class A Common Stock for any purpose, except to the extent of any pecuniary interest therein.
(5) Calculated on the basis of 4,830,147 shares of Class A Common Stock, par value $0.01 per share, 8,644.06788 shares of Class B Common Stock and 1,194,000 shares of Class C Common Stock outstanding as of May 30, 2013, provided that any additional shares of Common Stock that a stockholder has a right to acquire within 60 days after May 30, 2013 are deemed to be held and outstanding for the purpose of calculating that stockholder’s percentage of beneficial ownership but not the percentages of beneficial ownership of other stockholders.
(6) The outstanding Class B Common Stock represent less than 0.2% of the total outstanding common stock of the Company and is not included in the table above. Each stockholder of Class B Common Stock is entitled to vote one-tenth of a vote for each share of Class B Common Stock held by him or her on all matters submitted to a vote of the Company’s stockholders, except the election of directors. The Class C Common Stock and Class B Common Stock are entitled to elect, voting as a separate class, two directors to our Board of Directors.
ITEM 13. Certain Relationships and Related Transactions, and Director Independence. The Company has adopted a written statement of policy regarding transactions with related persons, which we refer to as our “Policy Statement on Related Party Transactions.” Our policy requires that a “related person” (as defined in paragraph (a) of Item 404 of Regulation S-K) must promptly disclose to our General Counsel any “related person transaction” (defined as any transaction that is
incorporated hereinreportable byreference.us under Item13. Certain Relationships and Related Transactions The information required by this item404(a) of Regulation S-K in which we are or will becontaineda participant and the amount involved exceeds $120,000 and in which any related person has or will have a direct or indirect material interest) in which such related person has or will have a direct or indirect material interest and all material facts with respect thereto. The General Counsel will promptly communicate such information to our Audit Committee or another independent body of our Board of Directors. No related person transaction will be entered into without the approval or ratification of our Audit Committee or another independent body of our Board of Directors. It is our policy that directors who may have an interest in a related person transaction will recuse themselves from any such vote. Our policy does not specify the standards to be applied by our Audit Committee or other independent body of our Board of Directors in determining whether or not to approve or ratify a related person transaction, and we accordingly anticipate that these determinations will be made in accordance with principles of law generally applicable to directors of a Delaware corporation. Any request for us to enter into a transaction with an executive officer, director or employee, or any of such persons’ immediate family members or affiliates, must first be presented to our Audit Committee for review, consideration and approval. In approving or rejecting the proposed agreement, our Audit Committee will review each such transaction for potential conflicts of interest or improprieties in a manner consistent with our Policy Statement on Related Party Transactions.Indemnity Agreements. The Company has entered into indemnity agreements with its executive officers and directors which provide, among other things, that the Company will indemnify such executive officer or director, under the circumstances and to the extent provided for therein, for expenses, damages, judgments, fines and settlements he or she may be required to pay in actions or proceedings which he or she is or may be made a party by reason of his or her position as a director, officer or other agent of the Company, and otherwise to the fullest extent permitted under Delaware law and our Bylaws.
Sears Holdings Agreements. On December 30, 2011, we completed our spin-off (the “Spin-Off”) from Sears Holdings Corporation (“Sears Holdings”). In connection with the Spin-Off, the Company entered into a series of agreements with Sears Holdings. ESL Investments, Inc. and its related entities (“ESL”) owns 55.3% of the outstanding Common Stock of Sears Holdings, based on the Proxy Statement filed by Sears Holdings on March 28, 2013. The Company paid Sears Holdings approximately $167,000 in Fiscal 2012 for providing certain support services pursuant to a transition services agreement. In Fiscal 2012, the Company paid Sears Holdings an aggregate of approximately $2.2 million for sales of certain Sears Holdings-branded products pursuant to three brands license agreements.
Stockholders’ Agreement. In connection with the Spin-Off, the Company, ESL, Edward S. Lampert, William C. Crowley and ACOF entered into the Second Amended and Restated Stockholders Agreement (the “Stockholders’ Agreement”). The Stockholders’ Agreement was effective immediately following the Spin-Off and provides certain rights and obligations to the parties thereto, including certain voting rights, including board elections, protective provisions and consent rights, rights of first refusal and tag-along rights with respect to transfers by parties to the agreement, preemptive rights with respect to securities offerings by the Company, registration rights and certain restrictions on stock acquisitions by parties during the six-month period, subject to extension, following the Spin-Off.
Other than the foregoing, there were no relationships or related party transactions in or since the end of Fiscal 2012, or any proposed relationships or related party transactions, requiring disclosure herein.
Director Independence. The Board of Directors has determined that Kevin R. Czinger, Karen M. Rose and Susan L. Healy have no relationship which, in the
Company's Proxy Statement for its Annual Stockholders Meeting to be held May 23, 1996 to be filedopinion of the Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and each is an “independent director” as defined by the applicable NASDAQ rules and the rules and regulations of the Securities and Exchange Commissionwithin 120 days after(the “SEC”). In determining the independence of our directors, the Board of Directors has adopted the independence standards that mirror the criteria specified by applicable law and regulations of the SEC and the NASDAQ.Because William C. Crowley served as Executive Vice President and Chief Administrative Officer of Sears Holdings until January 2011, Mr. Crowley will not be an “independent director” until January 2014.
Item 14. Principal Accounting Fees and Services. The following is a summary of the aggregate fees billed to us for the fiscal years ended January 28,
19962012 andis incorporated hereinFebruary 2, 2013 byreference. 25our independent registered public accounting firm, Deloitte & Touche LLP:
February 2,
2013January 28,
2012Audit fees (1)(2)
$ 1,357,465 $ 1,317,825 Audit related fees (3)
52,200 102,250 Tax fees
60,000 0 All other fees
0
Total
$ 1,469,665 $ 1,420,075
(1) Audit fees consist of fees billed for professional services rendered for the audit of the Company’s consolidated annual financial statements and the review of the interim consolidated financial statements for the quarterly reports, and other services that are normally provided by our independent registered public accountants in connection with statutory and regulatory filings or engagements.
(2) Approximately $296,118 of the Audit Fees billed by Deloitte related to Fiscal 2011 was paid by Sears Holdings as the costs were incurred in connection with the Spin-Off and were therefore reimbursable by Sears Holdings.
(3) Audit-Related Fees consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of the Company’s consolidated financial statements and are not reported under “Audit Fees.” The Audit Committee has considered whether the provisions of services described in the table above are compatible with maintaining auditor independence. Unless a type of service has received general pre-approval, it will require separate pre-approval by the Audit Committee. The independent registered public accounting firm and management are required to periodically report to the Audit Committee regarding the extent of services provided by the independent registered public accounting firm in accordance with this pre-approval process. During Fiscal 2012 and Fiscal 2011, all fees paid to our independent auditors were pre-approved in accordance with this policy without exception.
Item
14.15. Exhibits, Financial StatementSchedules, and Reports on Form 8-K The financial statements referred to below are attached as pages F-1 to F-18 and the financial statement schedules referred to below are attached as pages S-1 to S-5, and all are incorporated herein by this reference.Schedules.
Page (a)(1) IndexExhibit
NumberDescription
Form
File No.
Exhibit
Filing Date
Filed Herewith
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended. X 31.2 Certification of Chief Financial Statements: Number ------ ReportOfficer pursuant to Rule 13a-14(a) and Rule 15d-14(a) ofIndependent Public Accountants.................................... F-1 Consolidated Balance Sheetsthe Securities Exchange Act of 1934, asof January 29, 1995 and January 28, 1996..... F-2 Consolidated Statements of Operations - For the Fiscal years ended January 30, 1994, January 29, 1995 and January 28, 1996..................... F-4 Consolidated Statements of Stockholders' Equity - For the Fiscal years ended January 30, 1994, January 29, 1995 and January 28, 1996............... F-5 Consolidated Statements of Cash Flows - For the Fiscal years ended January 30, 1994, January 29, 1995 and January 28, 1996..................... F-6 Notes to Consolidated Financial Statements.................................. F-7 (a)(2) Index to Financial Statement Schedules: Report of Independent Public Accountants.................................... S-1 Schedule I - Condensed Financial Information of Orchard Supply Hardware Corporation........................................................ S-2 Schedule II - Valuation and Qualifying Accounts............................. S-5amended.X All other schedules are omitted since the required information is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements and notes hereto. (a)(3) Exhibits The exhibits listed on the accompanying Index to Exhibits are filed as part of this Form 10-K. In addition, following is a list of each executive compensation plan and arrangement required to be filed as an exhibit. Executive Compensation Plans and Arrangements --------------------------------------------- *(A) Orchard Holding Corporation Amended 1989 Employee Stock Subscription Plan dated May 23, 1989, as amended on August 7, 1989. *(B) Form of Stock Subscription Agreement by and between Orchard Holding Corporation and certain members of management who purchased shares of common stock of Orchard Holding Corporation for cash, with form of pledge agreement attached thereto as Exhibit A. *(C) Form of Stock Subscription Agreement by and between Orchard Holding Corporation and certain members of management who purchased shares of common stock of Orchard Holdin Corporation for cash and promissory notes, with form of note and pledge agreement attached thereto as Exhibits A and B, respectively. 26*(D) Orchard Holding Corporation Amended 1989 Nonqualified Stock Option Plan dated May 24, 1989, as amended on August 7, 1989. *(E) Form of Nonqualified Stock Option Agreement by and between Orchard Holding Corporation and certain members of management. *(F) Orchard Holding Corporation 1989 Nonqualified Performance Stock Option Plan dated May 24, 1989. *(G) Form of Nonqualified Performance Stock Option Agreement by and between Orchard Holding Corporation and certain members of management. *(H) Employment Agreement between Maynard Jenkins and Wickes Companies, Inc. dated January 1, 1989 (assumed by Orchard Supply Hardware Corporation). *(I) Orchard Holding Corporation Second Amended and Restated 1989 Employee Stock Subscription Plan dated May 23, 1989, as amended and restated on June 11, 1991. *(J) First Amendment to Employment Agreement dated January 1, 1989 between Orchard Suppl Hardware Corporation and Maynard Jenkins. *(K) Form of Nonqualified Stock Option Agreement between Orchard Holding Corporation and Maynard Jenkins. ***(L) Orchard Supply Hardware Stores Corporation 1993 Non-Employee Directors Stock Option Plan dated July 26, 1993. **(M) Form of Nonqualified Stock Option Agreement by and between Orchard Supply Hardware Stores Corporation and certain non-employee directors (other than directors affiliated with Freeman Spogli & Co.). **(N) Orchard Supply Hardware Stores Corporation 1993 Stock Option Plan dated November 19, 1993 **(O) Form of Incentive Stock Option Agreement by and between Orchard Supply Hardware Stores Corporation and certain officers and key employees. ****(P) Second Amendment to Employment Agreement dated January 1, 1989 between Orchard Supply Hardware Corporation and Maynard Jenkins. +(Q) Third Amendment to Employment Agreement dated as of April 15, 1996 between Orchard Supply Hardware Corporation and Maynard Jenkins. - --------------- * Filed as an exhibit to Registration Statement on Form S-4 (Registration No. 33-55190) on November 30, 1992. ** Filed with Registration Statement on Form S-1 (Registration No. 33-51437) on December 14, 1993. *** Filed with Amendment No. 1 to Registration Statement on Form S-1 (Registration No. 33-51437) on December 29, 1993. **** Filed with Annual Report on Form 10-K (File No. 0-21182) on April 12, 1995. + Filed herewith. (b) Reports on Form 8-K Current Report on Form 8-K dated February 23, 1996 containing the financial statements referenced in subsection (a) of this Item 14. (c) Exhibits The Exhibits listed on the accompanying Index to Exhibits are filed as part of this Form 10-K. 27Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrantregistrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.Date: April 10, 1996 Orchard Supply Hardware Stores Corporation By: /s/ Stephen M. Hilberg ---------------------- Stephen M. Hilberg Vice President-Finance and
Date: June 3, 2013 /s/ Chris D. Newman
Chris D. Newman Executive Vice President,
Chief Financial
Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----------------------------------------- ----/s/ Maynard Jenkins President, Chief ExecutiveOfficer andApril 10, 1996 ----------------------- Director (Principal Executive Officer) Maynard Jenkins /s/ Stephen M. Hilberg Vice President-Finance, Chief Financial April 10, 1996 ----------------------- Officer and Director (Principal Financial Stephen M. Hilberg Officer) /s/ Michael Seda Controller (Principal Accounting Officer) April 10, 1996 - ------------------------ Michael Seda /s/ Matt L. Figel Director April 10, 1996 - ------------------------ Matt L. Figel /s/ Morton Godlas Director April 10, 1996 - ------------------------ Morton Godlas /s/ William A. Hall Director April 10, 1996 - ------------------------ William A. Hall /s/ J. Frederick Simmons Director April 10, 1996 - ------------------------ J. Frederick Simmons /s/ Ronald P. Spogli Director April 10, 1996 - ------------------------ Ronald P. Spogli /s/ William M. Wardlaw Director April 10, 1996 - ------------------------ William M. WardlawTreasurer28EXHIBIT INDEX
Exhibit No. Description - ----------- -----------#3.1 Certificate of Incorporation of the Orchard Supply Hardware Stores Corporation (formerly Orchard Holding Corporation) as amended through December 13, 1993. *3.2 Bylaws of the Orchard Supply Hardware Stores Corporation (formerly Orchard Holding Corporation), as amended to date. *4.1 Stockholder Agreement dated as of July 26, 1989 pursuant to the Purchase Agreement (included as Exhibit 4.2 hereto), by and among FS Equity Partners II, L.P. and the purchasers who are signatories thereto. *4.2 Common Stock Registration Rights Agreement dated as of July 26, 1989 among Orchard Holding Corporation and the purchasers who are signatories thereto. *4.3 Form of Warrant to Purchase Shares of Common Stock of Orchard Holding Corporation issued pursuant to the Note Purchase Agreement dated as of October 15, 1992 among Orchard Supply Hardware Corporation, Orchard Holding Corporation and the purchasers named therein. **4.4 Stockholder Agreement dated May 30, 1989 by and among FS Equity Partners II, L.P. and the investors named therein. ***4.5 Form of Amendment to the Warrant to Purchase Shares of Common Stock of Orchard Supply Hardware Corporation (formerly Orchard Holding Corporation). ####4.6 Indenture dated as of January 15, 1994 among Orchard Supply Hardware Corporation, Orchard Supply Hardware Stores Corporation, as Guarantor, and U.S. Trust Company of California, N.A., as Trustee, with respect to the 9% Senior Notes due 2002, with form of note attached thereto as Exhibit A. ###4.7 Certificate of Designation of Rights and Preferences of the 6% Cumulative Convertible Preferred Stock of Orchard Supply Hardware Stores Corporation. **10.1 Stock Purchase Agreement dated as of May 30, 1989 by and among Orchard Holding Corporation and the investors who are signatories thereto. *10.2 Purchase Agreement dated as of July 26, 1989 by and among Orchard Holding Corporation, Orchard Supply Hardware Corporation and the purchasers who are signatories thereto. *10.3 Letter Agreement between Orchard Supply Hardware Corporation and Metropolitan Life Insurance Company dated as of November 8, 1989. ***10.4 Loan Agreement dated as of March 19, 1990 between Orchard Supply Hardware Corporation and Metropolitan Life Insurance Company. ***10.5 First Amendment to Loan Agreement dated as of September 12, 1990 between Orchard Supply Hardware Corporation and Metropolitan Life Insurance Company. ####10.6 Second Amendment to Loan Agreement dated as of December 1, 1993 between Orchard Supply Hardware Corporation and Metropolitan Life Insurance Company. ####10.7 Third Amendment to Loan Agreement dated as of January 27, 1994 between Orchard Supply Hardware Corporation and Metropolitan Life Insurance Company. ####10.8 Fourth Amendment to Loan Agreement dated as of January 29, 1994 between Orchard Supply Hardware Corporation and Metropolitan Life Insurance Company. *10.9 Note Agreement dated as of May 15, 1992 among Orchard Supply Hardware Corporation, Orchard Holding Corporation and the purchasers named therein, with respect to the 10.64% Senior Secured Notes due 2002, with form of Note and Deed of Trust, Assignment of Rents and Security Agreement attached as exhibits thereto. ***10.10 First Amendment to Note Agreement dated as of February 8, 1993 among Orchard Supply Hardware Corporation, Orchard Supply Hardware Stores Corporation (formerly Orchard Holding Corporation) and Teachers Insurance and Annuity Association of America, with respect to the 10.64% Senior Secured Notes due 2002. ####10.11 Second Amendment to Note Agreement dated as of November 24, 1993 by and among Orchard Supply Hardware Corporation, Orchard Supply Hardware Stores Corporation (formerly Orchard Holding Corporation) and Teachers Insurance and Annuity Association of America, with respect to the 10.64% Senior Secured Notes due 2002. ####10.12 Third Amendment to Note Agreement dated as of November 30, 1993 by and among Orchard Supply Hardware Corporation, Orchard Supply Hardware Stores Corporation (formerly Orchard Holding Corporation) and Teachers Insurance and Annuity Association of America, with respect to the 10.64% Senior Secured Notes due 2002.29
Exhibit No. Description - ----------- -----------####10.13 Fourth Amendment to Note Agreement dated as of January 19, 1994 by and among Orchard Supply Hardware Corporation, Orchard Supply Hardware Stores Corporation (formerly Orchard Holding Corporation) and Teachers Insurance and Annuity Association of America, with respect to the 10.64% Senior Secured Notes due 2002. ####10.14 Fifth Amendment to Note Agreement dated as of January 29, 1994 by and among Orchard Supply Hardware Corporation, Orchard Supply Hardware Stores Corporation (formerly Orchard Holding Corporation) and Teachers Insurance and Annuity Association of America, with respect to the 10.64% Senior Secured Notes due 2002. +++10.15 Sixth Amendment to Note Agreement dated as of April 27, 1994 by and among Orchard Supply Hardware Corporation, Orchard Supply Hardware Stores Corporation (formerly Orchard Holding Corporation) and Teachers Insurance and Annuity Association of America, with respect to the 10.64% Senior Secured Notes due 2002. +++10.16 Seventh Amendment to Note Agreement dated as of May 31, 1994 by and among Orchard Supply Hardware Corporation, Orchard Supply Hardware Stores Corporation (formerly Orchard Holding Corporation) and Teachers Insurance and Annuity Association of America, with respect to the 10.64% Senior Secured Notes due 2002. +++10.17 Eighth Amendment to Note Agreement dated as of August 7, 1995 by and among Orchard Supply Hardware Corporation, Orchard Supply Hardware Stores Corporation (formerly Orchard Holding Corporation) and Teachers Insurance and Annuity Association of America, with respect to the 10.64% Senior Secured Notes due 2002. *10.15 Note Purchase Agreement dated as of October 15, 1992 among Orchard Supply Hardware Corporation, Orchard Holding Corporation and the purchasers named therein, including certain schedules and exhibits. *10.16 Financing Agreement dated as of October 29, 1992 between Orchard Supply Hardware Corporation and The CIT Group/Business Credit, Inc. ***10.17 Amendment to Financing Agreement dated as of February 23, 1993 between Orchard Supply Hardware Corporation and The CIT Group/Business Credit, Inc. ####10.18 Amendment to Financing Agreement dated as of July 30, 1993 by and between Orchard Supply Hardware Corporation and The CIT Group/Business Credit, Inc. ####10.19 Amendment to Financing Agreement dated as of November 12, 1993 by and between Orchard Supply Hardware Corporation and The CIT Group/Business Credit, Inc. ####10.20 Amendment to Financing Agreement dated as of November 24, 1993 by and between Orchard Supply Hardware Corporation and The CIT Group/Business Credit, Inc. ####10.21 Amendment to Financing Agreement dated as of January 14, 1994 by and between Orchard Supply Hardware Corporation and The CIT Group/Business Credit, Inc. ####10.22 Amendment to Financing Agreement dated as of January 29, 1994 by and between Orchard Supply Hardware Corporation and The CIT Group/Business Credit, Inc. *10.23 Orchard Holding Corporation Amended 1989 Employee Stock Subscription Plan dated May 23, 1989, as amended on August 7, 1989. *10.24 Form of Stock Subscription Agreement by and between Orchard Holding Corporation and certain members of management who purchased shares of common stock of Orchard Holding Corporation for cash, with form of pledge agreement attached thereto as Exhibit A. *10.25 Form of Stock Subscription Agreement by and between Orchard Holding Corporation and certain members of management who purchased shares of common stock of Orchard Holding Corporation for cash and promissory notes, with form of note and pledge agreement attached thereto as Exhibits A and B, respectively. *10.26 Orchard Holding Corporation Amended 1989 Nonqualified Stock Option Plan dated May 24, 1989, as amended on August 7, 1989. *10.27 Form of Nonqualified Stock Option Agreement by and between Orchard Holding Corporation and certain members of management. *10.28 Orchard Holding Corporation 1989 Nonqualified Performance Stock Option Plan dated May 24, 1989. *10.29 Form of Nonqualified Performance Stock Option Agreement by and between Orchard Holding Corporation and certain members of management. *10.30 Supplemental Letter Agreement dated April 11, 1989 between FS Equity Partners II, L.P. and Bankers Trust Company.30
Exhibit No. Description - ----------- -----------*10.31 Employment Agreement between Maynard Jenkins and Wickes Companies, Inc. dated January 1, 1989 (assumed by Orchard Supply Hardware Corporation). *10.32 Orchard Holding Corporation Second Amended and Restated 1989 Employee Stock Subscription Plan dated May 23, 1989, as amended and restated on June 11, 1991. *10.33 Form of Indemnity Agreement by and among Orchard Holding Corporation, Orchard Supply Hardware Corporation and each director. *10.34 First Amendment to Employment Agreement dated January 1, 1989 between Orchard Supply Hardware Corporation and Maynard Jenkins. *10.35 Form of Nonqualified Stock Option Agreement between Orchard Holding Corporation and Maynard Jenkins. ****10.36 Form of Waiver regarding the Note Agreement dated as of May 15, 1992 among Orchard Supply Hardware Corporation, Orchard Holding Corporation and the purchasers named therein, with respect to the 10.64% Senior Secured Notes due 2002. ****10.37 Form of Waiver regarding the Financing Agreement dated as of October 29, 1992 between Orchard Supply Hardware Corporation and The CIT Group/Business Credit, Inc. ****10.38 Form of Waiver regarding the Loan Agreement dated as of March 19, 1990 between Orchard Supply Hardware Corporation and Metropolitan Life Insurance Company. ##10.39 Orchard Supply Hardware Stores Corporation 1993 Non-Employee Directors Stock Option Plan dated July 26, 1993. #10.40 Form of Nonqualified Stock Option Agreement by and between Orchard Supply Hardware Stores Corporation and certain non-employee directors (other than directors affiliated with Freeman Spogli & Co.). ####10.41 Orchard Supply Hardware Stores Corporation 1993 Stock Option Plan dated November 19, 1993 as amended on March 29, 1994. #10.42 Form of Incentive Stock Option Agreement by and between Orchard Supply Hardware Stores Corporation and certain officers and key employees. ####10.43 Registration Rights Agreement dated as of December 29, 1993 by and between Orchard Supply Hardware Stores Corporation and FS Equity Partners III, L.P. ###10.44 Securities Purchase Agreement entered into as of December 29, 1993 by and between Orchard Supply Hardware Stores Corporation and FS Equity Partners III, L.P. +10.45 Second Amendment to Employment Agreement dated as of April 15, 1996 between Orchard Supply Hardware Corporation and Maynard Jenkins. +++10.49 Third Amendment to Employment Agreement dated as of April 15, 1996 between Orchard Supply Hardware Corporation and Maynard Jenkins. ++10.50 Financing Agreement dated as of August 8, 1995 by and between Orchard Supply Hardware Corporation and Bank of America National Trust and Savings Association. ++10.51 Guaranty dated as of August 8, 1995 made by Orchard Supply Hardware Stores Corporation, as Guarantor, in favor of Bank of America National Trust and Savings Association as Agent. ***18.1 Preferability Letter dated March 5, 1993 from Arthur Andersen LLP regarding change in accounting principle. +++23.1 Consent of Arthur Andersen LLP for Orchard Supply Hardware Stores Corporation. +++27 Financial Data Schedule for the fiscal year ended January 28, 1996.- --------------- * Filed as an exhibit to Registration Statement on Form S-4 (Registration No. 33-55190) on November 30,1992. ** Filed with Registration Statement of Form S-1 (Registration No. 33-57752) on February 2, 1993. *** Filed with Amendment No. 1 to Registration Statement on Form S-1 (Registration No. 33-57752) on March 9, 1993. **** Filed with Amendment No. 2 to Registration Statement of Form S-1 (Registration No. 33-57752) on March 23, 1993. # Filed with Registration Statement on Form S-1 (Registration No. 33-51437) on December 14, 1993. ## Filed with Amendment No. 1 to Registration Statement on Form S-1 (Registration No. 33-51437) on December 29, 1993. ### Filed with Amendment No. 2 to Registration Statement on Form S-1 (Registration No. 33-51437) on January 18, 1994. #### Filed with Annual Report on Form 10-K (File No. 0-21182) on April 13, 1994. + Filed with Annual Report on Form 10-K (File No. 0-21182) on April 12, 1995. ++ Filed with Quarterly Report on Form 10-Q (File No. 0-21182) on September 12, 1995. +++ Filed herewith. 31INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ----Report of Independent Public Accountants............................................... F-2 Consolidated Balance Sheets as of January 29, 1995 and January 28, 1996................ F-3 Consolidated Statements of Income for the years ended January 30, 1994, January 29, 1995 and January 28, 1996............................................... F-5 Consolidated Statements of Stockholders' Equity for the years ended January 30, 1994, January 29, 1995 and January 28, 1996............................................... F-6 Consolidated Statements of Cash Flows for the years ended January 30, 1994, January 29, 1995 and January 28, 1996............................................... F-7 Notes to Consolidated Financial Statements............................................. F-8F-1REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of Orchard Supply Hardware Stores Corporation: We have audited the accompanying consolidated balance sheets of Orchard Supply Hardware Stores Corporation (a Delaware corporation) and subsidiary as of January 28, 1996 and January 29, 1995, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended January 28, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Orchard Supply Hardware Stores Corporation and subsidiary as of January 28, 1996 and January 29, 1995 and the results of its operations and its cash flows for each of the three years in the period ended January 28, 1996 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP San Jose, California February 23, 1996 F-2ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (In thousands)
January 29, January 28, 1995 1996 ----------- -----------ASSETS CURRENT ASSETS: Cash and cash equivalents................................................................................ $ 9,240 $ 7,930 Investments.............................................................................................. 3,000 -- Accounts receivable, less allowance of $1,201 and $1,543 at January 29, 1995 and January 28, 1996, respectively..................................................................... 14,417 16,597 Inventory................................................................................................ 103,438 116,761 Prepaid expenses and other............................................................................... 8,221 8,391 Assets held for disposal................................................................................. 6,145 6,513 -------- -------- Total current assets................................................................................... 144,461 156,192 PROPERTY AND EQUIPMENT, net............................................................................... 129,840 132,645 LEASEHOLD RIGHTS, net of accumulated amortization of $3,775 and $4,885 at January 29, 1995 and January 28, 1996, respectively................................................... 9,751 8,636 DEFERRED FINANCING COSTS, net of accumulated amortization of $1,249 and $1,873 at January 29, 1995 and January 28, 1996, respectively............................................ 3,236 2,848 GOODWILL, net of accumulated amortization of $886 and $1,042 at January 29, 1995 and January 28, 1996, respectively....................................................................... 5,371 5,215 -------- -------- Total assets........................................................................................... $292,659 $305,536 ======== ========The accompanying notes are an integral part of these consolidated statements. F-3ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
January 29, January 28, 1995 1996 ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES:Outstanding checks, not cleared by the bank........................... $ 7,168 $ -- Accounts payable...................................................... 36,476 42,032 Accrued payroll and related items..................................... 8,715 11,612 Accrued advertising................................................... 3,448 3,622 Accrued sales taxes................................................... 7,158 8,325 Accrued interest payable.............................................. 4,478 4,535 Other accrued expenses................................................ 3,476 7,203 Notes payable......................................................... 773 684 Current portion of capital leases and long-term debt.................. 1,720 2,024 -------- -------- Total current liabilities........................................... 73,412 80,037 OTHER LIABILITIES...................................................... 1,437 -- CAPITAL LEASES AND LONG-TERM DEBT, net of current portion.............. 135,232 132,242 -------- -------- Total liabilities................................................... 210,081 212,279 -------- -------- COMMITMENTS AND CONTINGENCIES (see Note 3)............................. STOCKHOLDERS' EQUITY: Preferred Stock, $.01 par value Authorized--2,000,000 shares; issued--800,000 shares; outstanding--800,000 shares; liquidation preference of $20,000....... 8 8 Common Stock, $.01 par value Authorized--16,000,000 shares; issued--7,018,885 shares; outstanding--6,983,400 and 7,015,165 shares at January 29, 1995 and January 28, 1996, respectively....................................... 70 70 Additional paid-in capital............................................. 90,700 90,612 Less--Notes receivable from sale of common stock....................... (151) (93) Retained earnings (accumulated deficit)................................ (8,049) 2,660 -------- -------- Total stockholders' equity............................................ 82,578 93,257 -------- -------- Total liabilities and stockholders' equity............................ $292,659 $305,536 ======== ========The accompanying notes are an integral part of these consolidated statements. F-4ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (In thousands, except share data)
Year Ended -------------------------------------- January 30, January 29, January 28, 1994 1995 1996 ----------- ----------- -----------SALES........................................... $365,077 $441,646 $532,439 COST OF GOODS SOLD.............................. 234,326 281,379 339,764 -------- -------- -------- Gross margin................................... 130,751 160,267 192,675 SELLING AND OTHER EXPENSES...................... 91,302 120,323 140,997 GENERAL AND ADMINISTRATIVE EXPENSES............. 15,500 17,535 20,043 PRE-OPENING EXPENSES............................ 2,221 7,525 2,400 -------- -------- -------- Operating income............................... 21,728 14,884 29,235 INTEREST EXPENSE, net........................... 11,563 12,587 13,337 -------- -------- -------- Income before provision for income taxes and extraordinary items.......................... 10,165 2,297 15,898 PROVISION FOR INCOME TAXES...................... -- -- 4,289 -------- -------- -------- Income before extraordinary items.............. 10,165 2,297 11,609 EXTRAORDINARY ITEMS: Loss on extinguishment of debt................. (9,318) -- -- -------- -------- -------- Net income..................................... 847 2,297 11,609 PREFERRED STOCK DIVIDENDS EARNED................ 814 1,115 1,200 -------- -------- -------- Net income available to common stock........... $ 33 $ 1,182 $ 10,409 ======== ======== ======== INCOME PER COMMON AND EQUIVALENT SHARE: Income before extraordinary items.............. $ 1.57 $ 0.17 $ 1.48 Extraordinary items............................ (1.57) -- -- -------- -------- -------- Net income per common and equivalent share..... $ 0.01 $ 0.17 $ 1.48 ======== ======== ======== WEIGHTED AVERAGE NUMBER OF COMMON AND EQUIVALENT SHARES............................. 5,951 6,984 7,039 ======== ======== ======== FULLY DILUTED INCOME PER COMMON AND EQUIVALENT SHARE: Income before extraordinary items............ $ 1.57 $ 0.17 $ 1.38 Extraordinary Items.......................... (1.57) -- -- -------- -------- -------- Net income per common and equivalent share..... $ 0.01 $ 0.17 $ 1.38 ======== ======== ======== FULLY DILUTED WEIGHTED AVERAGE NUMBER OF COMMON AND EQUIVALENT SHARES.................. 5,951 6,984 8,401 ======== ======== ========The accompanying notes are an integral part of these consolidated statements. F-5ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands, except share data)
Notes Retained Preferred Stock Common Stock Receivable Earnings ------------------- ----------------- Paid-In for Capital (Accumulated Total Shares Amount Shares Amount Capital Stock Deficit) Equity ----------- ------ --------- ------ ------- ----------- ------------ --------BALANCE, JANUARY 31, 1993........... 1,602,486 $ 16 1,207,598 $12 $26,392 $(379) $(11,193) $14,848 Payment of notes receivable from sale of common stock.............. -- -- -- -- -- 208 -- 208 Repurchase of common stock......... -- -- (200) -- (3) -- -- (3) Repurchase of Series A redeemable preferred stock........ (333) -- -- -- (3) -- -- (3) Issuance of common stock, net of transaction costs................. -- -- 3,800,000 38 48,333 -- -- 48,371 Issuance of common stock resulting from exercise of options.......................... -- -- 7,225 -- 60 -- -- 60 Reclassification of Series A preferred stock................... (1,602,153) (16) 1,915,630 19 (3) -- -- -- Payment of cash dividend on Series A preferred stock.......... -- -- -- -- (2,500) -- -- (2,500) Payment of fractional shares....... -- -- -- -- (1) -- -- (1) Net income......................... -- -- -- -- -- -- 847 847 ---------- ------ --------- ------ ------- ----------- ------------ -------- BALANCE, JANUARY 30, 1994........... -- -- 6,930,253 69 72,275 (171) (10,346) 61,827 Payment of notes receivable from sale of common stock.............. -- -- -- -- -- 20 -- 20 Issuance of convertible preferred stock, net of transaction costs... 800,000 8 -- -- 19,099 -- 19,107 Issuance of common stock resulting from exercise of options and warrants............. -- -- 53,147 1 441 -- -- 442 Dividend on convertible preferred stock............................. -- -- -- -- (1,115) -- -- (1,115) Net income......................... -- -- -- -- -- -- 2,297 2,297 ---------- ------ --------- ------ ------- ----------- ------------ -------- BALANCE, JANUARY 29, 1995........... 800,000 8 6,983,400 70 90,700 (151) (8,049) 82,578 Payment of notes receivable from sale of common stock.............. -- -- -- -- -- 58 -- 58 Issuance of common stock resulting from exercise of options and warrants............. -- -- 31,765 -- 212 -- -- 212 Dividend on convertible preferred stock............................. -- -- -- -- (300) -- (900) (1,200) Net income......................... -- -- -- -- -- -- 11,609 11,609 ---------- ------ --------- ------ ------- ----------- ------------ -------- BALANCE, JANUARY 28, 1996........... 800,000 $ 8 7,015,165 $70 $90,612 $ (93) $ 2,660 $93,257 ========== ====== ========= ====== ======= =========== ============ ========The accompanying notes are an integral part of these consolidated statements. F-6ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Year Ended --------------------------------------- January 30, January 29, January 28, 1994 1995 1996 ----------- ----------- -----------CASH FLOWS FROM OPERATING ACTIVITIES: Net income......................................................... $ 847 $ 2,297 $ 11,609 Non-cash adjustments to net income - Depreciation and amortization.................................... 6,845 8,682 10,715 Prepayment premium on senior and subordinated senior debentures.. 6,335 -- -- Write-off of deferred financing costs............................ 2,745 -- -- Accretion of debt discounts...................................... 313 -- -- Loss on asset disposals.......................................... 65 55 15 Changes in assets and liabilities - Increase in accounts receivable.................................. (477) (1,172) (2,180) Increase in inventories.......................................... (8,636) (20,944) (13,323) Increase in prepaid expenses and other........................... (2,430) (2,631) (355) Increase in accounts payable and other current liabilities....... 7,517 15,977 5,465 -------- -------- -------- Net cash provided by operating activities...................... 13,124 2,264 11,946 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment................................ (29,491) (30,577) (12,500) (Purchase) Redemption of investments............................... -- (3,000) 3,000 Purchase of leasehold rights....................................... (6,511) -- -- -------- -------- -------- Net cash used in investing activities.......................... (36,002) (33,577) (9,500) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from public stock offering............................ 48,370 -- -- Net Proceeds from issuance of preferred stock...................... -- 19,107 -- Proceeds from issuance of long-term debt........................... 103,079 1,752 -- Principal payments on capital leases and long-term debt............ (50,757) (52,335) (2,686) Deferred financing costs paid...................................... (2,736) (433) (51) Preferred stock dividends.......................................... (2,500) (1,115) (1,200) Repayment of notes payable, net.................................... (1,727) (2,473) (89) Repurchase of capital stock........................................ (6) -- -- Proceeds from issuance of capital stock............................ 60 442 212 Payment of notes receivable from sale of capital stock............. 208 20 58 -------- -------- -------- Net cash provided by (used in) financing activities.............. 93,991 (35,035) (3,756) -------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................................................ 71,113 (66,348) (1,310) CASH AND CASH EQUIVALENTS, beginning of period....................... 4,475 75,588 9,240 -------- -------- -------- CASH AND CASH EQUIVALENTS, end of period............................. $ 75,588 $ 9,240 $ 7,930 ======== ======== ========The accompanying notes are an integral part of these consolidated statements. F-7ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 28, 1996 1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES: Consolidation and Nature of Operations The consolidated financial statements include the accounts of Orchard Supply Hardware Stores Corporation ("Company") and its wholly-owned subsidiary, Orchard Supply Hardware Corporation ("Orchard Supply") which operates 60 hardware super stores located in California. As of January 28, 1996, 50 of the stores were located in Northern and Central California, Orchard Supply's historical market, and 10 stores were located in Southern California, a geographical market entered during the year ended January 30, 1994. The majority of the Company's merchandise is handled through a single warehouse and distribution facility in Northern California. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from the estimates. Cash and Cash Equivalents All highly liquid instruments with an original maturity of three months or less are included in cash and cash equivalents. "Outstanding checks, not cleared by bank" which are included in current liabilities, consists of checks outstanding against zero balance accounts. Investments Effective January 31, 1994 the Company adopted Statement of Financial Accounting Standards (SFAS) No. 115 "Accounting for Certain Investments in Debt and Equity Securities." SFAS No. 115 addresses the accounting and reporting of investments in equity securities that have readily determinable fair values and all debt securities and requires that all such investments be classified as held-to-maturity securities, trading securities or available-for-sale securities. The Company's securities, classified as available for sale, are carried at fair market value. The impact of SFAS No. 115 was not material to the Company. Inventory Inventory is stated at the lower of cost or market using the retail first- in, first-out ("FIFO") method. Assets Held for Disposal Assets held for disposal represent the Company's former warehouse building and a parcel of land adjacent to the new warehouse site which had previously been included in property and equipment, and are currently being held for sale. The Company carries these assets at amounts not to exceed net realizable value. Property and Equipment Property and equipment are stated at cost and are depreciated primarily on the straight-line basis over the estimated useful lives of the assets. Leasehold improvements are amortized over the lesser of the lease term or the estimated useful life of the improvements. The range of estimated useful lives is as follows: F-8ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Buildings.......................... 25-40 years Leasehold improvements............. 14-25 years or life of lease Land improvements.................. 15 years or life of lease Machinery and equipment............ 3-10 yearsDuring the years ended January 30, 1994, January 29, 1995 and January 28, 1996, the Company capitalized interest costs of $448,000, $870,000 and $57,000 related to the construction of new stores. Leasehold Rights Leasehold rights represent the difference between the fair market value of the Company's lease rentals and the stated rental rates at the time of acquisition. Leasehold rights are amortized over the lives of the lease terms ranging from five to 35 years. Pre-Opening Expenses Costs related to the preparation and opening of new stores are expensed as incurred. These expenses consist principally of store merchandising and stocking expenses, personnel recruitment and training costs and grand-opening advertising and promotional expenses. Deferred Financing Costs Deferred financing costs are amortized over the lives of the respective debt instruments. Goodwill Goodwill is amortized over a 40 year period. Earnings Per Share Net income per common and equivalent share is computed by dividing net income available to common stock (net income less preferred stock dividend requirements) by the weighted average number of common and equivalent shares. Common and equivalent shares include common stock issuable upon exercise of stock options and warrants less shares assumed repurchased with the proceeds from notes receivable from sale of common stock (using the treasury stock method, unless antidilutive). Options outstanding pursuant to the Performance Stock Option Plan (now terminated) and the options granted to the President of the Company are excluded from the calculation due to their contingent nature. Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 83, common stock issued by the Company during the 12-month period prior to the initial public offering and stock options and warrants granted during the same period for which a measurement date has been established have been included in the calculation of common and common equivalent shares using the treasury stock method and the public offering price as if they were outstanding for all applicable periods. Net Income per common and equivalent share on a fully diluted basis reflects the assumed conversion of preferred stock to common stock, if dilutive. F-9ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 2. PROPERTY AND EQUIPMENT: Property and equipment are summarized below (in thousands):
January 29, January 28, 1995 1996 ----------- ----------- Property and EquipmentLand..................................... $ 26,980 $ 26,980 Land improvements........................ 1,652 2,074 Buildings................................ 37,394 37,782 Machinery and equipment.................. 37,703 43,540 Leasehold improvements................... 49,249 53,910 Construction in progress................. 4,382 3,807 Assets under capital leases................ 1,849 1,834 -------- -------- 159,209 169,927 Accumulated depreciation and amortization.. (29,369) (37,282) -------- -------- Net property and equipment............... $129,840 $132,645 ======== ========Accumulated amortization on assets under capital lease was approximately $1.0 million and $1.1 million for the years ended January 29, 1995 and January 28, 1996, respectively. 3. OPERATING LEASE COMMITMENTS: Orchard Supply has entered into certain long-term operating leases primarily for buildings and equipment. Future annual minimum lease commitments under noncancelable operating leases as of January 28, 1996 are as follows (in thousands):
Future Minimum Year Ending January, Rentals --------------------------------- --------------1997............................. $ 21,199 1998............................. 20,007 1999............................. 19,480 2000............................. 17,573 2001............................. 15,707 Thereafter....................... 217,524 -------- Total minimum lease payments... $311,490 ========Store leases contain certain provisions for contingent rents based upon defined percentages of the dollar value of sales at individual stores. Total net rent expense is as follows (in thousands):
Total Contingent Year Ended Rentals Rentals - ------------------ ------- ----------January 28, 1996.................. $20,656 $689 January 29, 1995.................. 17,067 573 January 30, 1994.................. 12,532 486F-10ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 4. BENEFIT PLANS: Orchard Supply maintains a profit-sharing benefit plan and a 401(k) plan covering substantially all employees. Orchard Supply matches 50% of employee contributions to the 401(k) plan up to a maximum employee contribution of 3% of the employee's compensation. Orchard Supply may also make additional profit sharing contributions to employee accounts at the discretion of the Board of Directors. The Company's expenses for the 401(k) and profit-sharing plans were as follows (in thousands):
401(k) Profit Year Ended Contributions Sharing ---------- ------------- -------January 28, 1996................ $762 $1,219 January 29, 1995................ 624 671 January 30, 1994................ 468 9905. LONG-TERM DEBT AND CREDIT ARRANGEMENTS: Long-term debt consists of the following (in thousands):
January 29, January 1995 28, 1996 ----------- --------9 3/8% senior notes................ $100,000 $100,000 Store and warehouse mortgages...... 35,412 32,829 Obligations under capital leases... 1,540 1,437 -------- -------- Total debt......................... 136,952 134,266 Less--Current maturities........... 1,720 2,024 -------- -------- $135,232 $132,242 ======== ========The Company and Orchard Supply have complied with the restrictive loan covenants contained in the above obligations which provide, among other things, that (1) minimum working capital and net worth levels be maintained, (2) minimum fixed charge ratios be met, (3) capital expenditures be restricted and (4) additional long-term debt be limited. 9 3/8% Senior Notes On January 20, 1994, the Company, as guarantor, and Orchard Supply, as issuer, issued $100 million of unsecured 9 3/8% senior notes. The notes mature on February15
2002 and may be redeemed at Orchard Supply's option at various redemption dates as specified in the indenture. The terms of the notes limit the ability of Orchard Supply and the Company to pay dividends, incur indebtedness, issue stock, transfer funds to affiliates and dispose of assets. Store and Warehouse Mortgages The store mortgage notes bear interest at a rate equal to the average yield imputed from one-year United States Treasury securities, determined annually, plus 2.75% (10.1% and 9.1% at January 29, 1995 and January 28, 1996, respectively). Principal payments began in May 1993 and a final balloon payment is due in 2002. Payments are based on a twenty-year amortization schedule. In May 1992, a life insurance company loaned Orchard Supply approximately $13.7 million through a first mortgage loan on the new warehouse facility located in Tracy, California. The mortgage note bears interest of 10.64% payable monthly on the outstanding loan balance. The first principal payment of $0.9 million was paid on May 31, 1995. Further principal payments are due each anniversary date through 2002, increasing by $0.2 million each year. F-11ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The net book value of the assets mortgaged pursuant to the above mortgage loans approximated $50.4 million at January 28, 1996. Revolving Credit Facility As of August 8, 1995, a new revolving credit facility was put into place by Orchard Supply, which is guaranteed by the Company and is secured by inventory and accounts receivable. Borrowings are limited to an amount equal to 75% of eligible accounts receivable, as defined, plus up to 50% of eligible inventory, as defined. The maximum available borrowings under the revolving credit facility are $40.0 million. In addition, there is a $10.0 million sublimit for letters of credit under the revolving credit facility. Letters of credit outstanding as of January 29, 1995 and January 28, 1996 totaled $5.2 million and $8.5 million, respectively. The revolving credit facility remains effective through May 31, 1999 and bears interest payable monthly at either the bank reference rate, as defined, or LIBOR plus 1.375% per annum, as elected by the Company. The following summarizes activity applicable to the revolving credit facilities (dollar amounts in thousands):
January 29, January 28, 1995 1996 ----------- -----------Balance outstanding at end of year.................... $ -- $ -- Weighted average balance outstanding during the year.. 120 889 Maximum amount outstanding during the year............ 4,625 11,290 Weighted average interest rate........................ 8.77% 9.79% Interest rate at end of period........................ 9.50% 8.50%Capital Leases Orchard Supply leases two stores and certain equipment under capital lease agreements. The leases bear interest at an implicit rate of approximately 10%. Financing Costs In connection with the early extinguishments of debt during the year ended January 30, 1994, the Company recorded extraordinary charges of $9.3 million. The charges during the year ended January 30, 1994 consist of prepayment premiums of $6.3 million, the write-off of deferred financing charges of $2.7 million and the accelerated accretion of debt discounts of $0.3 million. F-12ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Principal and Interest Payments The following summarizes the required future payments pursuant to the various long-term debt instruments, including capital leases, discussed above (in thousands):
Future Minimum Principal Rental Payments Payments On Pursuant to Year Ending January, Long-Term Debt Capital Leases -------------------- -------------- ---------------1997................................ $ 1,910 $ 253 1998................................ 2,216 252 1999................................ 2,534 252 2000................................ 2,861 253 2001................................ 3,198 253 Thereafter.......................... 120,110 866 -------- ------ 132,829 2,129 Less--Amount representing interest.. 692 ------ Present value of future commitments. 1,437 Less--Current portion............... 1,910 114 -------- ------ Long-term portion................... $130,919 $1,323 ======== ======Total cash paid by the Company for interest was as follows (in thousands):
Year ended ----------January 28, 1996......... $13,050 January 29, 1995......... 9,531 January 30, 1994......... 10,9056. PREFERRED STOCK: In connection with the Company's initial public offering of common stock, the Company declared dividends on the Series A preferred stock of $13.3 million equal to all earned but undeclared dividends. Of this amount, $2.5 million was paid in cash and funded by borrowings under Orchard Supply's revolving credit facility. The remainder was paid through the issuance of 1,915,630 additional shares of preferred stock. The Company also converted all outstanding shares of preferred stock, including those issued pursuant to the dividends discussed above, into 3,128,028 shares of common stock at the market price pursuant to a statutory reclassification. On February 25, 1994, the Company issued to an affiliate 325,000 shares of Series 1 and 475,000 shares of Series 2 6% Cumulative Convertible Preferred Stock, $.01 par value per share, at a price of $24.25 per share. The preferred stock has an aggregate liquidation preference of $20.0 million, is convertible at the option of the holder into common stock at an initial conversion rate of 1.6 shares of common stock for each share of preferred stock subject to adjustment upon certain circumstances and may be redeemed by the Company at any time after December 15, 1996 at an initial redemption price of $26.50 per share, and thereafter at prices decreasing ratably to $25.00 per share on December 15, 2002. F-13ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 7. COMMON STOCK: On April 6, 1993, the Company completed its initial public offering. The Company sold 3.8 million shares of common stock at a price of $14 per share. Common Stock Warrants In connection with the issuance of notes since redeemed, the Company issued warrants to purchase 79,669 shares of common stock at $8.33 per share. All of the warrants have been exercised as of January 28, 1996. Stock Options Under the 1989 Nonqualified Stock Option Plan, options may be granted to qualified personnel of the Company to purchase shares of common stock at a price no less than the fair market value of such shares at the time the option is granted. Consequently, no compensation expense has been recognized in relation to this plan. Under the provisions of the plan, options shall vest no later than five years from the date of grant. In July of 1993, the 1993 Non-Employee Directors Stock Option Plan of the Company was added which resulted in the grant of 10,000 shares to non- employee directors. The provisions of the 1993 plan are the same as the 1989 plan. In November of 1993, the Company added the 1993 Stock Option Plan, reserving 350,000 shares for issuance to the officers, certain employees and directors of the Company. The provisions of the 1993 plan are the same as the 1989 plan with the following exceptions: the options vest 25% upon grant and 25% over the next three anniversary dates and the options cannot be granted to those possessing greater than 10% of the total combined voting power of all classes of common stock. At January 28, 1996, options covering 217,113 shares of common stock were outstanding, of which 111,888 shares were vested under the plans. The Board of Directors may accelerate the vesting at its discretion. Options expire ten years after the date of grant. The Company has reserved 394,314 shares of common stock for issuance under the plans. Following is a detail of activity for the stock option plans:
Options Options Price Available Outstanding Per Share --------- ----------- ------------January 31, 1993.. 7,561 52,439 $ 8.33 Authorized..... 360,000 -- -- Granted........ (105,000) 105,000 12.83-17.10 Cancelled...... 2,784 (2,784) 8.33-17.10 Exercised...... -- (7,225) 8.33 -------- ------- January 30, 1994.. 265,345 147,430 8.33-17.10 Cancelled...... 13,105 (13,105) 8.33-17.10 Exercised...... -- (699) 8.33 -------- ------- January 29, 1995.. 278,450 133,626 8.33-17.10 Granted........ (111,200) 111,200 7.75 Cancelled...... 9,951 (9,951) 7.75-17.10 Exercised...... -- (17,762) 7.75-17.10 -------- ------- January 28, 1996.. 177,201 217,113 7.75-17.10 ======== =======F-14ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In April 1992, the Company granted nonqualified stock options outside of the 1989 Nonqualified Stock Option Plan to its President covering 12,045 shares of common stock at an exercise price of $8.33 per share. The options are only exercisable upon the occurrence of certain mergers, consolidations, business combinations, asset sales, tender offers and liquidations involving the Company. Because of the contingent nature of the shares, no measurement date, as defined, has been established. No compensation expense has been recorded attributable to these options. 8. INCOME TAXES: In accordance with SFAS 109, all deferred tax assets and liabilities are quantified. Deferred tax assets include operating loss and tax credit carryforwards. A valuation allowance against the tax assets is required to adjust the assets to realizable amounts. Changes in the valuation allowance are generally a component of the income tax provision. The major components of deferred tax assets and liabilities are as follows (in thousands):
January 30, January 29, January 28, 1994 1995 1996 ----------- ----------- -----------Deferred tax assets-- Net operating losses........... $ 3,814 $ 4,913 $1,476 AMT payments made.............. 1,951 1,951 4,028 Other.......................... 2,383 1,531 3,217 ------- ------- ------ Total assets.................. 8,148 8,395 8,721 Valuation allowance............ (4,083) (2,907) -- ------- ------- ------ Net assets.................... 4,065 5,488 8,721 ------- ------- ------ Deferred tax liabilities-- Depreciation................... 2,114 2,732 4,743 Software costs................. -- 805 1,294 ------- ------- ------ Total liabilities............. 2,114 3,537 6,037 ------- ------- ------ Total net deferred tax asset.. $ 1,951 $ 1,951 $2,684 ======= ======= ======The significant components of income tax expense follow (in thousands):
January 30, January 29, January 28, 1994 1995 1996 ----------- ----------- -----------Current tax expense-- Federal......................................... $ 275 $ 191 $ 5,946 State........................................... 2 2 1,983 Deferred tax expenses-- Federal......................................... 240 610 (796) State........................................... 68 373 63 Adjustments to beginning valuation allowance..... (595) (1,176) (2,907) ----- ------- ------- $ -- $ -- $ 4,289 ===== ======= =======F-15ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following is a reconciliation of the effective tax rate to the statutory federal rate:
January 30, January 29, January 28, 1994 1995 1996 ----------- ----------- -----------Statutory federal income tax rate................ 34.0% 34.0% 34.0% State income taxes net of federal benefit........ 6.1 6.1 6.1 Adjustments to valuation allowance............... (70.3) (51.2) (18.2) Goodwill amortization and other permanent differences.................................... 30.2 11.1 5.1 ----- ----- ----- 0% 0% 27.0% ===== ===== =====As of January 28, 1996, for tax purposes, the Company has net operating loss carryforwards of approximately $4.0 million and $1.1 million available to offset federal and California taxable income, respectively. These net operating loss carryforwards expire at various dates through the fiscal year ending January 2010 and state loss carryforwards expire at various dates through the fiscal year ending January 2000. As a result of the initial public offering and other ownership changes, the Internal Revenue Code, as amended, may limit the Company's ability to utilize its federal income tax net operating loss carryforwards. Any annual limitation amount determined by this computation that is not used in the current year increases the succeeding year's annual limitation amount. The Company's ability to utilize net operating loss carryforwards as computed for California income tax purposes may be similarly limited. The limitation on the use of net operating loss carryforwards may have the effect of accelerating a portion of the Company's income tax liability to an earlier year, and may also result in an overall increase in income taxes payable by the Company. Whether the Company's liability for taxes will be accelerated or increased will depend on numerous factors, including whether and the extent to which future annual taxable income of the Company exceeds the annual limitation, whether the Company is paying tax based on its regular taxable income or its alternative minimum taxable income and whether and the extent to which California permits corporations to deduct net operating loss carryforwards for California income tax purposes. The Company has made income tax payments of approximately $1.2 million, $-0- and $2.8 million in the years ended January 30, 1994, January 29, 1995 and January 28, 1996, respectively, primarily toward tax liabilities computed for alternative minimum tax purposes. Such payments are recorded as prepayments which will be applied against future liabilities computed for regular tax purposes. 9. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS: Working Capital Accounts The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short maturity of these instruments. Long-term Debt Based on the borrowing rates currently available to the Company for loans with similar terms and average maturities, the fair value of long-term debt is approximately $135.6 million versus the carrying amount of approximately $134.3 million at January 28, 1996. F-16ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 10. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
Income (Loss) Per Common and Equivalent Share Net Income on a Fully Sales Gross Margin (Loss) Diluted Basis -------- ------------ ---------- -------------- (In thousands, except per share data)Year ended January 29, 1995 First quarter............. $ 96,555 $ 34,606 $ (917) $(0.16) Second quarter............ 125,566 44,970 3,305 0.40 Third quarter............. 111,790 41,043 598 0.04 Fourth quarter............ 107,735 39,648 (689) (0.14) -------- -------- ------- ------ Year...................... $441,646 $160,267 $ 2,297 $ 0.17 ======== ======== ======= ====== Year ended January 28, 1996 First quarter............. $125,352 $ 45,644 $ 2,922 $ 0.35 Second quarter............ 145,465 52,323 5,601 0.67 Third quarter............. 131,497 47,516 1,820 0.22 Fourth quarter............ 130,125 47,192 1,266 0.14 -------- -------- ------- ------ Year...................... $532,439 $192,675 $11,609 $ 1.38 ======== ======== ======= ======F-17ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 11. SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARY: All operations of the Company are conducted through its wholly-owned subsidiary, Orchard Supply. The following summarizes the financial position and results of operations for the subsidiary (in thousands):
January 29, January 28, 1995 1996 ----------- -----------Current assets.................. $144,453 $156,193 Non-current assets.............. 148,198 149,344 -------- -------- $292,651 $305,537 ======== ======== Current liabilities............. $ 73,412 $ 80,037 Non-current liabilities......... 136,669 132,242 -------- -------- 210,081 212,279 -------- -------- Redeemable preferred stock...... -- -- Other equity.................... 82,570 93,258 -------- -------- 82,570 93,258 -------- -------- $292,651 $305,537 ======== ========
Year Ended ------------------------------------- January 30, January 29, January 28, 1994 1995 1996 ----------- ----------- -----------Sales............................... $365,077 $441,646 $532,439 Gross margin........................ 130,751 160,267 192,675 Income before provisions for taxes and extraordinary items........... 10,170 2,339 15,938 Net income.......................... 852 2,339 11,649The various debt instruments of Orchard Supply restrict the payment of dividends to the parent as Orchard Supply is the primary obligor for all debt outstanding. F-18REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES To the Stockholders of Orchard Supply Hardware Stores Corporation: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of Orchard Supply Hardware Stores Corporation included in this Form 10-K and have issued our report thereon dated February 23, 1996. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The accompanying schedules are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP San Jose, California February 23, 1996 S-1ORCHARD SUPPLY HARDWARE STORES CORPORATION SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF SUBSIDIARY CONDENSED BALANCE SHEETS (In thousands)
January 29, January 28, 1995 1996 ----------- -----------ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 9,235 $ 7,930 Investments............................................... 3,000 -- Accounts receivable....................................... 14,414 16,598 Inventory................................................. 103,438 116,761 Prepaid expenses and other................................ 8,221 8,391 Assets held for disposal.................................. 6,145 6,513 -------- -------- Total current assets..................................... 144,453 156,193 PROPERTY AND EQUIPMENT, net................................ 129,840 132,645 OTHER ASSETS, net.......................................... 18,358 16,699 -------- -------- Total assets............................................. $292,651 $305,537 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued liabilities.................. 70,919 77,329 Notes payable............................................. 773 684 Current portion of capital leases and long-term debt...... 1,720 2,024 -------- -------- Total current liabilities................................ 73,412 80,037 OTHER LIABILITIES.......................................... 1,437 -- CAPITAL LEASES AND LONG-TERM DEBT, net of current portion.. 135,232 132,242 -------- -------- Total liabilities........................................ 210,081 212,279 -------- -------- STOCKHOLDERS' EQUITY: Additional paid-in capital................................ 80,231 82,509 Retained earnings......................................... 2,339 10,749 -------- -------- Total stockholders' equity............................... 82,570 93,258 -------- -------- Total liabilities and stockholders' equity............... $292,651 $305,537 ======== ========The accompanying notes are an integral part of these consolidated statements. S-2ORCHARD SUPPLY HARDWARE STORES CORPORATION SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF SUBSIDIARY CONDENSED STATEMENTS OF INCOME FOR THE FISCAL YEARS ENDED (In thousands)
Year Ended --------------------------------------- January 30, January 29, January 28, 1994 1995 1996 ----------- ----------- -----------SALES.......................................... $365,077 $441,646 $532,439 COST OF GOODS SOLD............................. 234,326 281,379 339,764 -------- -------- -------- Gross margin.................................. 130,751 160,267 192,675 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES... 108,998 145,332 163,392 -------- -------- -------- Operating income.............................. 21,753 14,935 29,283 INTEREST EXPENSE, net.......................... 11,583 12,596 13,345 -------- -------- -------- Income before provision for income taxes and extraordinary items.......................... 10,170 2,339 15,938 PROVISION FOR INCOME TAXES..................... -- -- 4,289 -------- -------- -------- Income before extraordinary items............. 10,170 2,339 11,649 EXTRAORDINARY ITEMS............................ (9,318) -- -- Net income.................................... $ 852 $ 2,339 $ 11,649 ======== ======== ========The accompanying notes are an integral part of these consolidated statements. S-3ORCHARD SUPPLY HARDWARE STORES CORPORATION SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF SUBSIDIARY CONDENSED STATEMENTS OF CASH FLOWS FOR THE FISCAL YEARS ENDED (In thousands)
Year Ended --------------------------------------- January 30, January 29, January 28, 1994 1995 1996 ----------- ----------- -----------CASH FLOWS FROM OPERATING ACTIVITIES: Net income......................................................... $ 852 $ 2,239 $ 11,649 Non-cash adjustments to net income - Depreciation and amortization.................................... 6,845 8,682 10,715 Prepayment premium on senior and subordinated senior debentures.. 6,335 -- -- Write-off of deferred financing costs............................ 2,745 -- -- Accretion of debt discounts...................................... 313 -- -- Loss on asset disposals.......................................... 65 55 15 Changes in assets and liabilities - Increase in accounts receivable.................................. (477) (1,171) (2,184) Increase in inventories.......................................... (8,636) (20,944) (13,323) (Increase) decrease in prepaid expenses and other................ (2,429) (2,631) (355) Increase in accounts payable and other current liabilities....... 7,506 15,986 5,465 --------- --------- --------- Net cash provided by operating activities...................... 13,119 2,316 11,982 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment......................... (29,491) (30,577) (12,500) (Purchase) Redemption of investments............................... -- (3,000) 3,000 Purchase of leasehold rights....................................... (6,511) -- -- --------- --------- --------- Net cash used in investing activities.......................... (36,002) (33,577) (9,500) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt........................... 103,079 1,752 -- Principal payments on capital leases and long-term debt............ (50,757) (52,335) (2,686) Deferred financing costs paid...................................... (2,736) (433) (51) Repayment of notes payable, net.................................... (1,727) (2,473) (89) Contributions from (distributions to) parent company............... 46,132 18,402 (961) --------- --------- --------- Net cash provided by (used in) financing activities.............. 93,991 (35,087) (3,787) --------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................................................ 71,108 (66,348) (1,305) CASH AND CASH EQUIVALENTS, beginning of period....................... 4,475 75,583 9,235 --------- --------- --------- CASH AND CASH EQUIVALENTS, end of period............................. $ 75,583 $ 9,235 $ 7,930 ========= ========= =========The accompanying notes are an integral part of these consolidated statements. S-4ORCHARD SUPPLY HARDWARE STORES CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE FISCAL YEAR ENDED (In thousands)
BALANCE AT CHARGED TO CHARGED TO BALANCE BEGINNING OF COSTS / OTHER AT END OF DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD - ------------------------------ ------------ ---------- ---------- ---------- ---------JANUARY 30, 1994 Accounts receivable reserves.. $1,267 $1,215 $214 $(1,520) $1,176 JANUARY 29, 1995 Accounts receivable reserves.. $1,176 $1,172 $210 $(1,357) $1,201 JANUARY 28, 1996 Accounts receivable reserves.. $1,201 $1,488 $176 $(1,322) $1,543S-5