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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,Washington, D.C. 20549
---------------
FORM 10-K
(MARK ONE)
/X/(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
[FEE REQUIRED]
For the fiscal year ended January 29, 199528, 1996
OR
/ /[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[NO FEE REQUIRED]
For the transition period from to
Commission file number 0-21182
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 telephone number, including area code: (408) 281-3500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
par value $.01 per share
(Title of class)
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
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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'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. / /[ ]
The aggregate market value of the Common Stock of the registrant held by
non-affiliates of the registrant on March 31, 1995,29, 1996, based on the closing price
of the Common Stock on the Nasdaq National Market on such date, was
$40,721,645.$167,791,271.
The number of shares of the registrant's Common Stock outstanding at March
31, 199529, 1996 was 6,983,4007,528,198 shares.
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 19, 199523, 1996 are incorporated by reference into Part III hereof.
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ORCHARD SUPPLY HARDWARE STORES CORPORATION
INDEX TO ANNUAL REPORT ON FORM 10-K
For the fiscal year ended January 29, 199528, 1996
Page
----
PART I
Item 1. Business ...........................................Business.......................................... 5
Item 2. Properties ......................................... 12Properties........................................ 16
Item 33. Legal Proceedings .................................. 13Proceedings................................. 16
Item 4. Submission of Matters to a Vote of
Security Holders ............................... 13Holders................................ 16
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters ................ 13Matters................. 17
Item 6. Selected Financial Data ............................ 14Data........................... 18
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations ..................................... 15Operations...................................... 19
Item 8. Financial Statements and Supplementary Data ........ 20Data....... 24
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure ......... 20Disclosure.......... 24
PART III
Item 10. Directors and Executive Officers of
the Registrant .. 21Registrant.................................. 25
Item 11. Executive Compensation .............................. 21Compensation............................ 25
Item 12. Security Ownership of Certain Beneficial
Owners and Management ........................... 21Management........................... 25
Item 13. Certain Relationships and Related Transactions ...... 21Transactions.... 25
PART IV
Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K .............. 228-K.............. 26
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PART I
ITEMItem 1. BUSINESS.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 and its predecessor company.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
31, 199430, 1995 and ending January 29, 199528, 1996 is referred to herein as fiscal 1994)1995).
GENERALGeneral
As of March 1995,1996, Orchard operates 57operated 60 hardware superstores in California
which average approximately 40,000 square feet of interior and exterior selling
space.
All of the Company's stores are located in California.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 andwhile providing a
greater depth and breadth of "fix-it" products in its core product categories
than the large warehouse home center chains.
ConsistentHistorically, 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
Company's expansion strategy to increase market
share in existing markets and to open stores in attractive new markets, the
Company completed the acquisitionopening of six former Builders Emporium store sites
(Pasadena, Burbank, Van Nuys and Hollywoodstores in metropolitan Los Angeles and Pismo Beachone 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 Reddingfive to ten new stores annually for the next several years
thereafter, substantially all of which will be located in Central and Northern California, respectively) on
November 16, 1993 and completedSouthern California.
Through these store openings, the acquisition of the three other sites (South
Pasadena and West Los AngelesCompany plans to strengthen its position in
metropolitan Los Angeles and Goletaextend 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 Santa Barbara area) on December 22, 1993 (the "Expansion"). All nine Expansion
stores were converted into the Orchard format and opened by May 1994. In
addition, the Company opened five stores in Northern CaliforniaOffering. FS&Co., through the end
of fiscal 1994 to complete its fiscal 1994 program of 14 store openings.
In order to improveaffiliates, remains the
Company's capital structure andlargest stockholder, controlling the power to enhance its
financial flexibility, on February 25, 1994, Orchard Holding sold 800,000vote 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 (the
"Preferred("Convertible
Preferred Stock"), with an aggregate liquidation preference of $20.0 million
(the "Preferred Stock Offering") to an affiliate of Freeman Spogli & Co.
Incorporated ("FS&Co."). The aggregate net proceeds of $19.3 million were
contributed as common equityCompany's Common Stock has been accepted for trading on
the New York Stock Exchange. The Company anticipates that trading will commence
in April 1996 under the symbol "ORH."
Risk Factors
The following risk factors should be carefully considered, in addition to
Orchard Supply to fund the redemption of Orchard
Supply's outstanding 14.5% Senior Subordinated Discount Notes (the "14.5%
Subordinated Notes") at their stated redemption price of 107.25%other information contained in this Form 10-K.
Competition
The retail hardware business is highly competitive, and some of the
principal amount thereof.Company's competitors have substantially greater resources than the Company.
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").
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The 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 expenses or loss 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 if it is unable to execute 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
primarily to the 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."
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Seasonality 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, there may be an adverse impact
on the Company's sales and profitability and its ability to implement its
expansion program at the planned rate.
Leverage and Certain Restrictions Imposed by Lenders
The Company is leveraged. After giving effect to the Offering 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
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capitalization 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 covenants including, among
other things, requirements that the Company maintain certain financial ratios
and satisfy certain financial tests and limitations on the Company's ability to
make capital expenditures, to incur other indebtedness and to pay dividends. If
the Company fails to comply with the various covenants, the lenders will be able
to either accelerate the maturity of or cause the Company to repurchase the
applicable indebtedness.
The degree to which the Company is leveraged and the terms governing
Orchard's indebtedness, including restrictive covenants and events 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 than other
providers of similar products and services, 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, could
have a material adverse effect on 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 Offering,
FS&Co., through its affiliates, owns approximately 48.2%is
fully converted) of the outstanding shares of Common Stock $.01 par value per share (the "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 (assuming full conversionor going private transactions require approval of a majority of the
Preferred Stock)Company's outstanding stock entitled to vote thereon (other than transactions
subject to Section 203 of the Delaware General Corporation Law).
INDUSTRYIndustry
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 $116.9approximately $125
billion in 19931994 to approximately $125.8$130 billion in 1994.1995. The industry is highly
fragmented and competitive and is comprised primarily of local independent
retailers (those
with five or fewer stores),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 90,000100,000
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 as opposed to thecoverings; less
than 5% of Orchard's sales beingare attributable to these products.
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BUSINESS STRATEGYThe Orchard Concept
Orchard's business strategy is to provideposition itself as the primary
destination for customers' "fix-it" needs by providing a broad merchandise
selection, outstanding service, convenient, well organized stores and fair
everyday pricing, thereby encouraging its customers to perceive Orchard as the
primary destination for their "fix-it" needs.value
pricing.
Broad Selection.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
areasmerchandise categories of hardware, plumbing, electrical and garden and nursery.
Orchard's stores carry approximately 45,000 stock keeping units
("SKUs") and maintainManagement 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 positionselection (98% on average) to ensure the
availability of
its merchandise to its customers. This breadth of selection
contrasts with the Company's warehouse competitors, which typically carry only
25,000 to 33,000 SKUs.
The following table sets forth the Company's percentage of sales by product
category for the last three fiscal years:
FISCAL FISCAL FISCAL
PRODUCT CATEGORY 1992Fiscal Fiscal Fiscal
Production Category 1993 1994 ---------------------------------------------1995
- -------------------- ------ ------ ------
Hardware .................................... 22.2%Hardware............................... 22.8% 23.0% Plumbing .................................... 15.323.5%
Plumbing............................... 14.8 14.2 Electrical .................................. 11.413.5
Electrical............................. 10.9 10.8 10.8
Garden and Nursery .......................... 26.7Nursery..................... 26.9 27.1 Other ....................................... 24.426.6
Other.................................. 24.6 24.9 25.6
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Total Sales .................................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
3,0006,900 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 150210 brand name power tools, including Black &
Decker, Skil, Makita, Freud, Porter Cable, Milwaukee, Bosch, Delta, DeWalt,
Dremel, 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 3040 and 150120
SKUs of pipe wrenches and hammers, respectively, and also offers replacement
products for many of 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 1,3001,580 different PVC, ABS, galvanized, copper, brass, flare,
compression, polystyrene and cast iron fittings, as well as over 1,2501,485 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 nearly 400475 sprinkler and drip irrigation
SKUs appeals to both homeowners and commercial landscapers.
Electrical. Orchard stocks nearly 300370 different light bulbs and 150155
types of extension cords. With over 350315 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.
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Garden 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 6
5
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 displaydisplays 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 work gear and seasonal
items,automotive
supplies, as well as certain destination items such as bottled water. The
Company also offers a unique merchandise 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.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 based on
completing 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 29,
1995,28, 1996, the Company employed 5048 certified
California Nurserymen.
In addition, Orchard provides its customers with the following value-addedvalue-
added services which the Company believes create high customer loyalty.loyalty:
Pick-Up Stations. All Orchard stores operate a convenient pick-up
stationsstation 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 an average
of 37,52050,627
active accounts at January 28, 1996. The Company's credit card sales
comprised approximately 12.3% of total sales in fiscal 1994, which comprised approximately 12.4% of
the Company's sales in that year.1995. Approximately
83.6%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.
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Custom 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 twothree annual "how-to" fairs in its
existing market areas in Northern and Central California. These fairs are designed
to provide customers with do-it-yourself ("DIY") information through vendor booths and
specialized classes. Management estimates that its Santa Clara
County "how-to" fair in February 1995, which featuredIn 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""Hometime," and Orchard's
spokesman Richard Karn from "Home Improvement",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.
ZIP Service. Orchard offers added convenience and fast pick-up through
its "ZIP" service for commercial customers, which enables them to place orders
over the phone and have them pre-assembled for immediate pick-up at no
additional charge.
Custom Cutting. Orchard will custom cut to a customer's specifications
products such as pipe, electrical wire, shade cloth, rope, chain, tubing and
screening.
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
Californiawarehouse and distribution center.facility. Customers can drop off the equipment to be
repaired at their local Orchard store and pick it up typically within seven
days.
7
6
Convenient, Well Organized Stores.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. This allows customers toracking, and wide aisles for easy mobility. Customers can view the
entire store upon entering, in orderhelping them to easily and quickly find the productsitems
they need. Every store is organized so that relatedRelated departments are located adjacent to one another, and most
SKUs aremerchandise 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 lines at the cash register.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 facilities and
wide aisles.parking.
These features provide customers with an attractive shopping environment and the
ability to get inlocate items and check out of the store quickly.
Value Pricing.Orientation
The Company provides the customer with value through a combination of
broad merchandise selection, outstanding service, convenient, well organized
stores and fair everyday pricing. Fair everyday pricing entailsprices. The Company offers competitive pricing on high
visibility, high volume products. The Company also stocks a wide selection of
products and higher margins
on other products which in many cases are not typically carried by competitors. In
addition,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.
ThisGrowth Strategy
Orchard's strategy of providing value, together with the Company's broadfor growth is to continue to build its market presence
achieved by operating morein existing markets and to enter attractive new markets. The Company's
primary strategy is to add new stores than any ofin its competitors
withinexisting metropolitan Los Angeles
market and to extend its markets, has resulted in strong name identification inSouthern California presence into Orange, Riverside,
San Bernardino, San Diego and Ventura Counties. The Company will also augment
its Northern and Central California marketsbase with strategic new store additions.
The Company plans to open five to seven new stores in fiscal 1996 and togetherfive 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.
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The Company successfully entered the Southern California market in
fiscal 1994 with the Company's marketing
campaign, its growing name identificationacquisition of six former hardware store sites in
itsmetropolitan 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 market. The
average customer purchasestores in fiscal 1996. Leases have been signed for three new stores
in metropolitan Los Angeles and Orange County and the Company is approximately $18.
EXPANSION STRATEGYcurrently
negotiating leases for additional locations in Southern California. The
Company's expansion strategy is to increase market share in
existing markets and to openinto Southern California has been very successful, with four
of the stores in attractive new markets. Building on its
base,this market already ranking among the Company opened 14Company's top 20 stores
in fiscal 1994, including the nine Expansion
stores, six of which are located in metropolitan Los Angeles. The remaining five
new stores opened in fiscal 1994 are located in Northern and Central California.sales. Management believes that the metropolitan Los AngelesSouthern California market, which is one of the
largest DIYdo-it-yourself ("DIY") markets in the United States, presents an
attractive opportunity for the broad selection, highbroad-selection, high-service Orchard concept.
Until 1994, the Company's growth capacity had been significantly
constrained by debt service Orchard format, particularly in light of
the recent liquidation of the Builders Emporium chain which operated
approximately 40 DIY stores in metropolitan Los Angeles. In fiscal year 1995,requirements. Recently, through equity offerings
and debt refinancings, the Company planshas been able to openbuild 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 new stores, the majority of which are expected to
be in metropolitan Los Angeles.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 70 stores60) to its base in Northern and Central CaliforniaCalifornia.
See "--Risk Factors--Managing Expansion" and 45 stores
in metropolitan Los Angeles"--Leverage and Orange County. The Company also plans to
relocate one store in Northern California.
The $19.7 million purchase price for the nine Expansion store sites was
financed through $18.7 million in additional borrowings under Orchard Supply's
revolving credit facility (the "Financing Agreement")Certain
Restrictions Imposed by Lenders."
Advertising and the assumptionMarketing
Achieving and maintaining high levels of $1.0
million in outstanding mortgage debt. A portionconsumer awareness is an
important element of the proceeds of the sale of
$100.0 million principal amount of 93/8% Senior Notes due 2002 (the "Notes") on
January 20, 1994 was used to refinance the additional borrowings under the
Financing Agreement and to finance the $35.0 million additional investment
required to open the Expansion stores.
The six Expansion store sites in metropolitan Los Angeles have
permitted the Company an immediate presence in that market. However, because the
Los Angeles media market is more expensive than theCompany's business strategy. In its Northern and
Central California markets, where the Company has been in business since 1931
and Orchard initially lacks the store concentration it enjoys
innow operates more stores than any of its existing markets,competitors, the Company's advertising andsurveys
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 expensescampaigns have increased as a percent of sales. The Company executed its standard print
advertising campaign in metropolitan Los Angeles, with only limited use of
electronic media.
8
7
The Company services all the acquired Expansion stores in metropolitan
Los Angeles, Goleta, Pismo Beach and Santa Maria from its warehouse and
distribution center located in Tracy, California using an independent common
carrier. Due to the distanceproduced growing consumer awareness of the Los Angeles metropolitan market from the
Tracy warehouse, transportation expenses as a percent of sales for these
Expansion stores were higher than its other stores. The Company expects to open
an additional warehouse to service the metropolitan Los Angeles stores after
approximately 25 stores are open in that area.
In order to achieve the desired economies in distribution and
advertising and to establish critical market presence, management believes it is
necessary to open more stores in metropolitan Los Angeles in addition to the six
Expansion stores. The Company expects that the majority of new stores opened
over the next several years will be in metropolitan Los Angeles. Three of the
five planned openings in 1995 will be in this market. Entering into a new market
area, particularly one as large and complex as Los Angeles, presents significant
risks to the Company.
1995 STORE OPENING SCHEDULE*
ANTICIPATED INTERIOR AND
FISCAL 1995 EXTERIOR SELLING
STORE LOCATIONS OPENING SQ. FOOTAGE
------------------------------------------- -------------- ----------------
Mountain View ............................. First Quarter 41,193
La Crescenta+ ............................. First Quarter 40,660
Whittier+ ................................. Fourth Quarter 41,178
Torrance+ ................................. Fourth Quarter 40,600
Woodland .................................. Fourth Quarter 40,600
Livermore (relocation) .................... Fourth Quarter 40,811
----------
* This schedule represents management's current estimate with respect
to anticipated store openings; however, there is no assurance thatCompany's
presence. Recent surveys by the Company will be able to achieve its expansion plan, or that the new
stores will be profitable.
+ Metropolitan Los Angeles Expansion store location.
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 thatindicate a name recognition of 82%
among DIY customers within trade areas around 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.
Management believes that two warehouse home center chains, Home Depot
and HomeBase, are its primary competitors. Since 1984 when the first warehouse
home center was opened in Orchard's markets, Home Depot and HomeBase have opened
and currently operate 27 and 13 stores, respectively, in the Company's markets.
As of January 29, 1995, the Company estimates that 45 Orchard stores faced
competition from warehouse operators. Despite this warehouse competition, the
Company's operating income before pre-opening expenses has increased from $17.3
million in fiscal 1989 to $22.4 million in fiscal 1994. The Company believes
Home Depot will open one store in fiscal 1995 in the Company's markets. HomeBase
closed three stores in Orchard's markets in fiscal 1994 and closed one
additional store in early fiscal 1995. If the anticipated Home Depot store
openings occur and the Company's fiscal 1995 expansion plan takes place on
schedule, then following fiscal 1995, Home Depot and HomeBase will operate 40
stores in the Company's markets and 48 Orchard stores will face competition from
warehouse competitors in these markets.
9
8
ADVERTISING AND MARKETING
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. TheseMajor campaigns are
currently centered around Easter, Memorial Day, July 4th, Labor Day and
Christmas. The Company usesoffsets a significant portion of the costs of its
advertising, and
marketing allowance, which it obtainsparticularly television advertising, with allowances obtained from
vendors that participate in the Company's cooperative advertising program,program.
These vendors provide allowances to offset the costs of these
campaigns, particularly television advertising expenses. Cooperative advertising
is the rebate received by the Company from a merchandise vendor in return for featuring that vendor's producttheir
products in the Company's advertising media. The Company
also maximizes 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.
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 which
are held annually in two ofNorthern California and the Company's major markets. Eachfirst Southern California fair
attracts approximately
150,000 potential customers and over 360 vendors, which purchase booths where
theyis 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.
12
In 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 initiallycurrently
lacks the store concentration it enjoys in its existinghistorical markets. Accordingly,
the Company has experienced an
increase inCompany's marketing costs as a percentage of sales have increased as a
result of its fiscal
1994 openings inexpansion into metropolitan Los Angeles. TheAs more stores are added
in this market, the Company executed its standard
print advertising campaign in the Los Angeles market, but with only limited useexpects these costs to decline as a percentage of
electronic media. As an emerging entrant into a large and complex advertising
market, theresales, although no assurance can be no assurancesgiven that the Companythis will be able to achieve the
same level of name recognition as in its Northern and Central California
markets.
PURCHASINGoccur. 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 stocks
approximatelypurchases over
25,000 SKUs, accounting for approximately 70%73% of the total dollar sales. Of theThe
remaining 30%27% of the total dollar sales of the stores 3% is
obtained through pool consolidation orders, which are received at the warehouse
and immediately shipped to the individual stores, and 27% 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 rate increased in
fiscal 1994,program, the Company benefited fromhas been able to realize greater volume
discounts created by
growing sales volume generated by new stores.
DISTRIBUTIONin some of its purchasing.
Distribution
Orchard's warehouse facility, which commenced operations in February
1992, was designed to improve the in-stock position in the Company's stores by
increasing the amount of warehouse delivered merchandise versus vendor delivered
merchandise, improving inventory management and leveraging the Company's fixed
cost structure as it expands its store base. Thedistribution is currently handled through a 350,000 square
foot warehouse and distribution facility is situated on approximately 28.5 acres of
land in Tracy, California
and replaced the Company's warehouse located in San Jose, California, which was
reachingCalifornia. The Company is currently utilizing temporary on-site
storage units to supplement its full capacity.storage capacity at this facility. The centrally located warehouse is within a one day
round trip (approximately a 300 mile radius) of each Northern and Central
California store. Management estimatesCompany
anticipates that the warehouseTracy facility will be able to support, with additional
shifts, at least 68 stores.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 building was designed
to be expanded by approximately 100,000 square feet at an estimated costcentral location of $2.5
million. Thethe warehouse and distribution
facility allows the Company to continue with its
10
9
store expansion plans and maintain its ability 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 (98% on average).levels. By removingeliminating the
need for in-store storage space, Orchard maximizes the selling space available
in its stores and reduces overall inventory requirements, thereby increasing Orchard'swithout sacrificing
the high in-stock position.position (98% on average) in the retail stores.
Metropolitan Los Angeles is approximately 350 miles from the Company's
distribution center,Tracy
facility, which has resulted in significantly higher transportation costs for Southern California
that are greater than in itsthe Company's current Northern and Central California
markets. ManagementThe Company has outsourced the delivery of merchandise to the Pismo Beach store and stores south
by use of Santa Maria, California to an independent common carrier. As a result, transportation
expenses as a percent of sales have been approximately 1.3% higher for the
metropolitan Los Angeles stores. The Company
has been ableprocesses orders and delivers goods to process orders
from its metropolitan Los AngelesSouthern California stores within 2448
hours. OrchardThe Company expects to open an additionala second warehouse and distribution facility
to service the metropolitan Los AngelesSouthern California stores after approximately 25 stores are open
in that area.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 warehousefacility will reduce transportation costs for the Southern
California stores, it will initially have a higher operating cost than the existing warehouse in Tracy, California. These costs as a percentage
of sales arethan the existing facility. This ratio is expected to be reduceddecline as more
stores are opened in the metropolitan Los Angeles and Orange County markets.Southern California market area.
As of January 29, 1995,28, 1996, Orchard operated a fleet of 3233 tractors and
132137 trailers, which are driven and maintained by a non-union work force. The Companyforce and
which service the Northern and Central California stores.
13
Credit 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 required to expand its fleetconverted by March 1996.
At January 28, 1996, the Company had 50,627 active accounts. For fiscal
1995, approximately 78.5% of tractors and trailers when it opens a
new distribution center in metropolitan Los Angeles.
OPERATIONSthe 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, five for the Northern
and Central California regions and one for metropolitan Los Angeles.managers. Orchard's store
managers who average in excess of ten years of service with the Company, are responsible for day-to-day store operations, subject to operating
procedures established at headquarters.
The Company added an average of approximately 70 clerical and 17
management workers to staff each Expansion store. All management employees
underwent a 12 week training program and all other employees underwent an eight
week training program prior to the Expansion store openings.
Orchard stores are open seven days a week. Depending on the size and
sales volume of the facility,store, the total number of personnel per store 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. MANAGEMENT INFORMATION SYSTEMS
Orchard'sBecause 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 have been designed and developed 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
concise relevant
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
item 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.
1114
10
The Store Order system is tightly 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-uplook-
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 new 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 excellent and a key component to the Company's
ability to evaluate and respond to its markets and customers.
EMPLOYEESCompetition
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
29,28, 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."
15
Employees
As of January 28, 1996, Orchard had 4,5904,980 total employees of whom 2,4632,564
were full-time employees.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.
ITEMItem 2. PROPERTIES.Properties
Of the Company's 5760 stores, 11 are owned and 4649 are leased under long-termlong-
term ground or building arrangements with various renewal options. All but
one of these
4649 leases are scheduled to expire after 2000 (including options to renew). See
Note 3 to Consolidated Financial Statements.
Orchard completed the acquisition of six former Builders Emporium
stores on November 16, 1993 and the acquisition of three former Builders
Emporium stores on December 22, 1993. Six of these stores are located in
metropolitan Los Angeles (Pasadena, South Pasadena, Burbank, Van Nuys, Hollywood
and West Los Angeles) and three of these stores are in new single-store markets
previously targeted for entry (Redding, Goleta and Pismo Beach). Orchard
purchased three of these stores (Van Nuys, Hollywood and Pismo Beach) and is
leasing the remainder. All but one of the Expansion store leases will expire
after 2000 (including options to renew).
The Company owns its 350,000 square foot warehouse and distribution
facility which is located on 28.5 acres (including acreage reserved for warehouse expansion) in Tracy, California. See
"--Distribution." The Company also owns its former warehouse in San Jose warehouse 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 entered into long-term leases for portionshas leased approximately 70% of the buildingspace in 1994
and is actively seeking to enter into long-term leases for the remainder. The
intent of securing tenants for this property
iswith the intention of making it more attractive to facilitate its future
purchase by a developer. The Company has
also listed for sale 11 acres it owns adjacent to its warehouse and distribution
centerfacility 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 Company recently exercised its right of first
refusal on the remaining 23,581 square feet of this building in order to
accommodate further expansion. The current lease term expires in November of 2000,
unless extended bywith an option for the Company.
12
11
ITEMCompany to extend for five additional years.
Item 3. LEGAL PROCEEDINGS.Legal Proceedings
There are no material legal proceedings pending or, to the knowledge
of management of the Company, threatened against the Company.
ITEMItem 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS.Submissions of Matters to a Vote of Security Holders.
Not applicable.
16
PART II
ITEMItem 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Orchard Holding'sMarket for the Registrant's Common Equity and Related Stockholder
Matters.
The Company's Common Stock began trading in the over-the-counter
market on March 31, 1993 upon completion of its initial public offering and is quotedcurrently traded on the National Association of Securities Dealers Automated Quotations
System ("Nasdaq")Nasdaq National
Market under the symbol OSHC. The quarterlyCompany 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, for the fiscal periods
indicated, the high and low closing salesales prices for the Common Stock as reported on the Nasdaq National
Market during fiscal 1993 and fiscal 1994 as follows:by
Nasdaq.
1993 HIGH LOW
------- -------High Low
---- ---
Fiscal 1994
First quarter (from March 31, 1993) .................. $14-1/Quarter........................ $15 1/2 $11 3/4
$12-1/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 ....................................... $13-3/Quarter....................... $14 1/4 $11-1/2$ 8 9/16
Third quarter ........................................Quarter........................ $16 $12-3/3/4 $13 1/4
Fourth quarter ....................................... $17-1/Quarter....................... $26 1/2 $12
1994
First quarter ........................................ $13-1/4 $13-1/4
Second quarter ....................................... $13 $12
Third quarter ........................................ $ 9-7/8 $ 9-1/2
Fourth quarter ....................................... $ 7-3/4 $ 7$14
As of March 31, 1995, the number of stockholders29, 1996, there were 303 holders of record of the Company's
Common Stock was 329.
Orchard HoldingStock.
The Company has not declared or paid cash dividends to its holders of
Common Stock. Orchard HoldingThe Company currently anticipates that all earnings in the near
future 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.
Declaration of dividends on the Common Stock will depend,
among other things, upon levels of indebtedness, future earnings, the operating
and financial condition of the Company, its capital requirements and general
business conditions. The agreements governing Orchard Supply'sthe Company's indebtedness contain provisions which
prohibit Orchard Holdingthe Company from paying dividends on its Common Stock. See "Item 7. Management'sNote 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 Company was current in the payment of the preferred
dividends. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Liquidity and Capital Resources.Operations."
1317
12
ITEMItem 6. SELECTED FINANCIAL DATA.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
ended
January 27, 1991, January 26, 1992, January 31, 1993, January 30, 1994 and
January 29, 1995presented have been derived from financial statements which were audited by
Arthur Andersen LLP, independent public accountants. The selected financial information and other data presented
below should be read in conjunction with the "Consolidated Financial Statements,"
"Notes to 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 27, JANUARYYear Ended
-----------------------------------------------------------------------
January 26, JANUARYJanuary 31, JANUARYJanuary 30, JANUARYJanuary 29, 1991January 28,
1992 1993 1994 1995 1996
(52 WEEKS)weeks) (53 weeks) (52 WEEKS) (53 WEEKS)weeks) (52 WEEKS)weeks) (52 WEEKS)weeks)
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AND STORE DATA)
INCOME STATEMENT DATA:
Sales ................................................ $299,924(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 ................................... 191,815sold............................... 199,052 224,599 234,326 281,379 339,764
-------- -------- -------- -------- --------
Gross margin ....................................... 108,109margin................................... 109,510 121,559 130,751 160,267 192,675
Operating expenses ................................... 88,444expenses............................... 91,296 99,944 106,802 137,858 161,040
Pre-opening expenses ................................. 579expenses............................. 1,192 924 2,221 7,525 2,400
-------- -------- -------- -------- --------
Operating income ................................... 19,086income............................... 17,022 20,691 21,728 14,884 29,235
Write-down in carrying amount of asset held for
disposal .................................. --disposal........................................ -- 2,007 -- -- --
Interest expense(1) .................................. 15,160expense................................. 14,773 16,725 11,563 12,587 13,337
-------- -------- -------- -------- --------
Income before provision for income taxes ........... 3,926taxes....... 2,249 1,959 10,165 2,297 15,898
Provision for income taxes ........................... 1,667taxes....................... 971 866 -- -- 4,289
-------- -------- -------- -------- --------
Income before extraordinary items(2) ............... 2,259items (1).......... 1,278 1,093 10,165 2,297 11,609
Extraordinary items(2) ............................... 1,667items (1).......................... 971 (200) (9,318) -- --
-------- -------- -------- -------- --------
Net income ......................................... 3,926income..................................... 2,249 893 847 2,297 11,609
Preferred stock dividends(3)(4) ...................... 3,046dividends (2).................... 3,446 4,208 814 1,115 1,200
-------- -------- -------- -------- --------
Net income (loss) available to common stock ........ $ 880stock.... $ (1,197) $ (3,315) $ 33 $ 1,182 =======$ 10,409
======== ======== ======== ======== ========
Per Share Data:
Primary:
Net income (loss) per common and equivalent
share(5)..share before extraordinary items................ $ 0.71(1.74) $ (0.96)(2.52) $ (2.68) $ 0.011.57 $ 0.17 Weighted average number of$ 1.48
Net income (loss) per common and equivalent
shares(5) .......................................... 1,242 1,242 1,238 5,951 6,984
OTHER DATA: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 ........................ 1.9%growth.................... (1.3)% 5.3% 2.0% (1.1)% 8.0%
Number of stores (at end of period) .................. 34.............. 37 39 43 56 BALANCE SHEET DATA:60
Balance Sheet Data (end of period):
Working capital ...................................... $ 34,090capital.................................. $ 44,649 $ 52,274 $ 94,996 $ 71,049 $ 76,155
Total assets ......................................... 175,549assets..................................... 198,463 197,996 309,735 292,659 305,536
Long-term debt and capital leases .................... 111,648leases................ 125,892 130,374 156,273 135,232 132,242
Stockholders' equity ................................. 11,432equity............................. 13,628 14,848 61,827 82,578 93,257
- ---------------------------
(1) Data includes non-cash amortization of deferred financing costs and original
issue discount related to debt incurred in various refinancings.
(2) 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 $1.7 million, $1.0 million and $0.4 million in the years ended January
29, 1991, January 26, 1992 and January 31, 1993, respectively,
as accountedrespectively.
(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 under APB No. 11 (Seefiscal 1995 was 27%. See Note 8 to Consolidated Financial
Statements. Management believes the financial statements).
(3) Preferred stock dividends forpresentation of such pro forma data is
meaningful to the years ended January 27, 1991, January 26,
1992, January 31, 1993 and January 30, 1994 reflect dividends earned onreader because it more fully represents the Series A Preferred Stock, $.01 par value per share (the "Series A Preferred
Stock"), prior to its reclassification into Common Stock (the
"Reclassification") in April 1993. Prior to April 1993, no preferred stock
dividends had been declared. In April 1993, all previously earned dividends
were declared and paid. The payment consisted of a cash payment of $2.5
million and the settlementfuture tax
status of the remaining dividends through the issuanceCompany.
18
Item 7. Management's Discussion and Analysis of additional sharesFinancial Condition and
Results of Series A Preferred Stock. The shares of Series A
Preferred Stock were then converted into shares of Common Stock pursuant to
the Reclassification.
(4) Preferred stock dividends for the year ended January 29, 1995 reflect
dividends earned as a result of the Preferred Stock Offering issued on
February 25, 1994.
(5) See Note 2 to Consolidated Financial Statements for information regarding
the calculation of per share data.
14
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.Operations.
The following discussion and analysis should be read in conjunction with
the "ConsolidatedConsolidated Financial Statements," "Notes Notes to Consolidated Financial
Statements"Statements and "SelectedSelected Consolidated Financial Data"Data included elsewhere in this
Form 10-K. GENERALThis 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 completed the acquisition of six former Builders Emporium
store sites (Pasadena, Burbank, Van Nuysopened 14 stores in fiscal 1994 and Hollywood in metropolitan Los
Angeles, and Pismo Beach and Redding in Central and Northern California,
respectively) on November 16, 1993 and completed the acquisition of three other
sites (South Pasadena and West Los Angeles in metropolitan Los Angeles and
Goleta in the Santa Barbara area) on December 22, 1993. All of the Expansion
stores were opened for business by May 1994. In addition, the Company opened five stores in Northern California through the end of fiscal 1994 to complete
its fiscal 1994 program of 14 store openings.1995.
The Company hasplans 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 in connection
with opening stores amounting to $7.5
million for fiscal 1994.1994 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 implementshas implemented its new store opening program, operating
expenses as a percent of sales for the new stores will initially beare 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 expects that it willhas generally experienceexperienced
higher marketing, distribution and occupancy costs in its new stores in the
metropolitan Los AngelesSouthern California market. The Company believes, however, that these higher
expenses willshould be offset by higher sales at these stores than are
typical of mature Orchard(when these stores
achieve maturity), bringing margins for Southern California stores in line with
those for Northern and Central California. These
factors reduced operating marginsCalifornia stores. See "Business--Risk Factors--
Managing Expansion."
The Company experienced a strong comparable store sales increase in fiscal
1994 and will reduce future
operating margins so long as the Company continues to open a large number of
stores relative to its existing store base.
The Company's results of operations exhibit some measure of
seasonality. During the three fiscal years ended January 29, 1995, approximately
28.0% of the Company's annual sales and approximately 37.0% to 40.0% of its
annual operating income before pre-opening expenses were generatedespecially in the second fiscal quarter. This is due primarily to increased sales of garden, nursery and
related products during the first and second quarters, which is the beginninghalf of the spring/summer gardening season. Weather conditions haveyear. The Company does not expect to
sustain its rate of comparable store sales growth in fiscal 1996, particularly
in the most impact on
sales of these outdoor related products during this period. Conversely, during
the three years ended January 29, 1995, approximately 24.0%second half of the Company's
annual sales and approximately 13.0% to 19.0% of its annual operating income
before pre-opening expenses were generated in the fourth fiscal quarter, due
primarily to decreased sales of garden, nursery and related products during this
quarter.
As a consequence of the Company's high leverage, the percentage
variance of the Company's net income from period to period has been and may
continue to be magnified. Therefore, relatively small increases in expenses such
as interest expense have resulted and will continue to result in substantial
percentage decreases in net income.
15
14year. See "Business--Risk Factors--Quarterly
Fluctuations; Comparable Store Sales."
The following table sets forth selected results of operationoperations as
percentages of sales for the periods indicated:
YEAR ENDED(1)Year Ended(1)
-----------------------------------------------------------
JANUARY 26, JANUARYJanuary 31, JANUARYJanuary 30, JANUARYJanuary 29, 1992January 28,
1993 1994 1995 1996
----------- --------------------- ----------- -----------
Sales ..............................Sales......................................... 100.0% 100.0% 100.0% 100.0%
Gross Margin ....................... 35.5Margin.................................. 35.1 35.8 36.3 Selling general and
administrative expenses .......... 29.636.2
Operating expenses............................ 28.9 29.3 31.2 30.2
Pre-opening expenses ............... 0.4expenses.......................... 0.3 0.6 1.7 0.5
----- ----- ----- -----
Operating income ................... 5.5income.............................. 6.0 6.0 3.4 5.5
Write-down of asset held for disposal ......................... --disposal......... 0.6 -- -- --
Interest expense ................... 4.8expense.............................. 4.8 3.2 2.9 2.5
----- ----- ----- -----
Income before provision for income taxes and
extraordinary items .............. 0.7items.......................... 0.6 2.8 0.5 3.0
Income tax provision ............... 0.3provision.......................... 0.3 -- -- 0.8
----- ----- ----- -----
Income before extraordinary items ............................ 0.4items............. 0.3 2.8 0.5 2.2
Extraordinary items ................ 0.3items........................... (0.1) (2.6) -- --
----- ----- ----- -----
Net income ......................... 0.7%income.................................... 0.3% 0.2% 0.5% 2.2%
===== ===== ===== =====
- --------------------
(1) Amounts may not total due to rounding.
RESULTS OF OPERATIONS19
Results 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 the 52 weeks ended January 29, 1995fiscal 1994 increased by 21.0% to $441.6 million from $365.1
million for the 52 weeks ended January 30, 1994.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 unseasonably
rainyunfavorable weather conditions in Northern California during
a five week period in April and May, 1994.
Gross margin increased by $29.5 million from $130.8 million in fiscal 1993 to
$160.3 million in fiscal 1994. As a percentpercentage 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
20
of merchandise achieved through improved buying. Lower inventory shrinkage and
reduced permanent markdowns also contributed to the favorable gross margin
performance.
Selling, general and administrativeOperating 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.
16
15Pre-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 primarily due to a $5.3 million
increase in pre-opening expensesfrom 6.0% for fiscal 1993. Higher pre-
opening costs and increased corporate expenses associated with the Company's
increased expansion program.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 iswas due primarily to additional interest
resulting from the issuance by the Company in January 1994 of $100.0 mil-lion$100 million
aggregate principal amount of 93/9 3/8% Senior Notes due 2002 (the "Notes"("9 3/8% Notes"),
which was partially offset by reduced interest due to the retirement of $19.3
million of the 14.5% Senior Subordinated Discount Notes (the "14.5%("14.5% Subordinated Notes")
and $30.0 million of 9% Senior Notes due 1997 (the "Old("9% Senior Notes") on February
25, 1994.
The Company did not record a tax provision or tax benefit as a result of net operating loss carry forwards against whichthe reversal of a
previously established valuation allowance has
previously been provided.allowance. See Note 8 to Consolidated
Financial Statements.
The results of operations for fiscal 1993 includeincluded 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 the 14.5% Subordinated Notes and $30.0$30 million of the Old9%
Senior Notes each of which were called for redemption in fiscal 1993 and
redeemed in fiscalFebruary 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%.
Selling, general and administrativeOperating 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.
21
Pre-opening expenses are expensed as incurred. For fiscal 1993, pre-openingpre-
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.
17
16
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 $30.0$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.
53 Weeks ended January 31, 1993 (fiscal 1992) compared to 52 Weeks
ended January 26, 1992 (fiscal 1991).
Sales increased from $308.6 million in fiscal 1991 to $346.2 million in
fiscal 1992, an increaseQuarterly Results of $37.6 million or 12.2%. Approximately $5.4 millionOperations
The following table presents certain unaudited quarterly consolidated
financial information for each of the increase in sales or 1.8% is attributable toCompany's last eight fiscal quarters. In
the additional week in
fiscal 1992. The increase also reflects an increase of comparable store sales
(those stores open for more than one year) of 5.3% from fiscal 1991 to fiscal
1992 (as adjusted to remove the effectopinion of the additional weekCompany's management, this quarterly information has been
prepared on the same basis as the Consolidated Financial Statements appearing
elsewhere in fiscal 1992).
Management believes that improved consumer confidence favorably impacted
comparable store sales in December 1992this Form 10-K and January 1993.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 60
The Company's results of operations exhibit some measure of seasonality.
Generally, the Company's sales also benefitted from an increaseand operating income are highest in the second
quarter and lowest in the fourth quarter. This is due primarily to
22
seasonality in sales of garden, nursery and nurseryrelated products, due to
an easingwhich peak at the
beginning of the water restrictions imposed duringspring/summer gardening season. The Company has experienced
losses in the six year droughtfourth quarter in Northernthe past and Central California.may experience losses in this
quarter in the future. See "Business--Risk Factors--Seasonality and Sensitivity
to Weather."
The remainderCompany's quarterly results and comparable store sales comparisons are
subject to various factors including consumer confidence, promotional marketing
efforts, maturation of the sales increase was
attributable to the full year effect of the three new stores, opened during
fiscal 1991weather conditions and sales from two new stores opened during fiscal 1992. The
increase in sales was accomplished despite the opening of three new warehouse
home center stores by the Company's competitors which impacted five of the
Company's stores.
Gross margin increased $12.1 million from $109.5 million fiscal 1991 to
$121.6 million in fiscal 1992. Gross margin as a percentage of sales decreased
from 35.5% in fiscal 1991 to 35.1% in fiscal 1992. The decrease in gross margin
as a percentage of sales reflects an increase in warehouse costs of 0.4% of
salescompetitive store
changes. See "Business--Risk Factors--Quarterly Fluctuations; Comparable Store
Sales."
Liquidity and an increase in inventory shrinkage of 0.3% of sales, which was offset
by a reduction in permanent markdowns of 0.2% of sales due primarily to reduced
Christmas and winter clearance markdowns and a 0.1% of sales improvement in
purchase markons. Since a portion of warehouse costs is fixed, an increase in
sales should reduce warehouse costs as a percentage of sales. Management
believes that the increase in inventory shrinkage was caused in part by the
recession experienced in the Company's markets. Orchard has acted to reduce
inventory shrinkage by increasing its security staff, installing electronic
theft devices and rearranging merchandise displays in stores with the highest
inventory shrinkage.
Selling, general and administrative expenses as a percentage of sales
decreased from 29.6% in fiscal 1991 to 28.9% in fiscal 1992, a decrease of 0.7%.
Tight payroll controls contributed to reducing store and administrative base
payrolls by 0.6% of sales. In addition, fringe benefits were reduced by 0.3% of
sales due primarily to improved workers' compensation and medical claims
experience.
Operating income increased $3.7 million from $17.0 million in fiscal
1991 to $20.7 million in fiscal 1992. Operating income as a percentage of sales
increased from 5.5% in fiscal 1991 to 6.0% in fiscal 1992. The higher operating
income percentage in fiscal 1992 compared to fiscal 1991 principally reflects
the decrease in selling, general and administrative percentage of sales and
pre-opening expenses percentage of sales which was partially offset by the
decrease in the Company's gross margin percentage. The 53rd week in fiscal 1992
is estimated to have contributed an additional $0.6 million to the Company's
operating income.
18
17
Interest expense in fiscal 1992 was $16.7 million as compared to
interest expense of $14.8 million in fiscal 1991. The increase of $1.9 million
is primarily a result of interest incurred in connection with the financing of
the Company's new warehouse facility and the higher interest on borrowings used
to refinance Orchard Supply's senior credit facility. The Company capitalized
the interest associated with the new warehouse until February 1992, when it
began expensing such interest.
The Company's effective income tax rates in fiscal 1991 and fiscal 1992
were 43.2% and 44.2%, respectively. See Note 8 to Consolidated Financial
Statements.
Net income decreased from $2.2 million in fiscal 1991 to $0.9 million
in fiscal 1992. Net income for fiscal 1992 was adversely affected by a $2.0
million 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 its
net realizable value. In addition, the Company's net income in fiscal 1992 was
affected by extraordinary items consisting of a tax benefit relating to net
operating loss carryforwards of $0.4 million offset by an extraordinary charge
of $0.6 million relating to the early extinguishment of debt in connection with
the refinancing of Orchard Supply's senior credit facility. Net income in fiscal
1991 was favorably impacted by an extraordinary tax benefit relating to net
operating loss carryforwards of $1.0 million.
LIQUIDITY AND CAPITAL RESOURCESCapital Resources
The Company's liquidity needs arise primarily from the funding of the
Company's capital expenditures, working capital requirements, ongoing expansion
program and debt service on indebtedness.
The Company's wholly-owned subsidiary, Orchard Supply's fundedSupply, had long-term debt
and capital lease obligations includeas 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 $20.0$40.0 million of revolving
credit availability under Orchard Supply's senior revolving credit facility (the
"Financing Agreement") (with an $8.0a $10.0 million sublimit for
guarantees of letters of credit) of
which no borrowings and $5.2$8.5 million of
guarantees of letters of credit were outstanding as ofat
January 29, 1995, (ii)
$20.7 million outstanding under a store mortgage facility, (iii) $13.7 million
aggregate principal amount of warehouse mortgage notes, (iv) $1.0 million store
mortgage assumed in connection with the acquisition of a former Builders
Emporium store site and (v) $100.0 million aggregate principal amount of the
Notes.28, 1996. Orchard Supply's debt instruments contain financial and
operating covenants including, among other things, requirements that the CompanyOrchard
Supply maintain certain financial ratios and satisfy certain financial tests and
limitations on the Company'sOrchard Supply's ability to make capital expenditures, to incur
other indebtedness, and to pay dividends. As ofAt January 29, 1995,28, 1996, the Company and
Orchard Supply were in compliance with all covenants contained in such debt
instruments.
On February 25, 1994, the Company used the proceeds of the Preferred
Stock Offering to redeem the remaining 14.5% Subordinated Notes at their stated
redemption price of 107.25% of their principal amount, resulting in a call
premium of $1.4 million which was paid with available cash from operations. The
net proceeds from the issuance of $100.0 million of the Notes were applied as
follows: (i) $30.9 million to retire the Old Senior Notes at their stated
redemption price of 103.0% of the principal amount thereof, (ii) $20.0 million
to repay additional borrowings under the Financing Agreement used to finance the
Expansion, (iii) $35.0 million to fund additional investments required to open
the nine Expansion stores and (iv) the remainder for general corporate purposes.
Aggregate scheduled principal repayments on the Company's long-term debt
instruments, including capital leases, for fiscal 1995, 1996 and 1997 are $1.9
million, $2.2 million and $2.5 million, respectively.
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 19941995 of
$11.1$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 is to be used for
working capital and general corporate purposes. The Financing Agreement remains effective
through October 29, 1995.
19
18May 1999.
In connection with Orchard's expansion plans, the Company anticipates
capital expendituresadditions of approximately $900,000$0.9 million for furniture, fixtures and
equipment for each new store opened, a portion of which may be leasedacquired under
operating leases. Pre-opening expenses for the nine Expansion stores ($5.1
million in the aggregate) averaged $645,000 for the six metropolitan Los Angeles
stores and $410,000 for the remaining stores. The Company expects that for its
subsequent metropolitan Los Angeles stores, pre-opening expenses will range from
approximately $600,000$0.4 million to $700,000 (compared to $450,000 in its Northern and
Central California markets).$0.5 million. The initial inventory requirement
for new stores, net of trade credit, is estimated at $900,000$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 $800,000$1.0 million to $1,500,000$1.8 million per store. If
the Company elects to purchase the real estate, the capital expenditure would
range from approximately $2,500,000$2.5 million for owned store improvements constructed
on leased land to $4,000,000$4.0 million to $6,000,000$7.0 million if the entire property were to be
owned by the Company.
During
fiscal 1994 the Company opened three owned stores, nine leased stores and two
stores that were constructed on ground leases.
The Company's three-year capital expenditure plan for fiscal 1995, 1996 and 1997 provides
for annual capital expenditures of $10.8 million, $16.2$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 companyCompany to make capital
expenditures.
The Company believes that funds from operations, together with borrowingsthe proceeds of
the Offering, borrowing availability under the Financing Agreement and financing
through operating leases, will be adequate to fund the
23
Company's operating requirements and capital expenditure program and meet its
debt and dividend obligations for at least the next several years. Any material shortfalls18 months.
See "Business--Risk Factors--Managing Expansion" and "--Leverage and
Certain Restrictions Imposed by Lenders."
Effect of operating cash flow could require the
Company to reduce its expansion plans.
EFFECT OF INFLATIONInflation
The effect of inflation on the Company's results of operations has not been
material in the periods discussed.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
The Company adoptedImpact of Recent Accounting Pronouncements
In March 1995, the provisions of Statement of Financial Accounting Standard No. 109 "Accounting for Income Taxes" in its fiscal year beginning
February 1, 1993. The effect of the adoption was not material. See Note 8 to
Consolidated Financial Statements.
Effective January 31, 1994 the Company adoptedStandards Board issued Statement of
Financial Accounting Standards (SFAS) No. 115121 "Accounting for Certain Investmentsthe 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
Debtcircumstances 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 Equity Securities" ("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.
115"). SFAS No. 115 addresses the accounting121 will be adopted in fiscal 1996.
Item 8. Financial Statements 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 impact of SFAS No. 115 was not material to
the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATASupplementary Data
See the Index included at "Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K."
ITEMItem 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSUREChanges In and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
2024
19
PART III
ITEMItem 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTDirectors 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 19,
199523, 1996 to
be filed with the Securities and Exchange Commission within 120 days after
January 29, 199528, 1996 and is incorporated herein by reference.
ITEMItem 11. EXECUTIVE COMPENSATIONExecutive Compensation
The information required by this item will be contained in the Company's
Proxy Statement for its Annual Stockholders Meeting to be held May 19,
199523, 1996 to
be filed with the Securities and Exchange Commission within 120 days after
January 29, 199528, 1996 and is incorporated herein by reference.
ITEMItem 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTSecurity Ownership of Certain Beneficial Owners and Management
The information required by this item will be contained in the Company's
Proxy Statement for its Annual Stockholders Meeting to be held May 19,
199523, 1996 to
be filed with the Securities and Exchange Commission within 120 days after
January 29, 199528, 1996 and is incorporated herein by reference.
ITEMItem 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSCertain Relationships and Related Transactions
The information required by this item will be contained in the Company's
Proxy Statement for its Annual Stockholders Meeting to be held May 19,
199523, 1996 to
be filed with the Securities and Exchange Commission within 120 days after
January 29, 199528, 1996 and is incorporated herein by reference.
2125
20
PART IV
ITEMItem 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORMExhibits, Financial Statement Schedules, 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.
PAGE
(A)(1) INDEX TO FINANCIAL STATEMENTS: NUMBER
------
Page
(a)(1) Index to Financial Statements: Number
------
Report of Independent Public Accountants ..................................Accountants.................................... F-1
Consolidated Balance Sheets as of January 30, 199429, 1995 and January 29, 1995 ...28, 1996..... F-2
Consolidated Statements of Operations --- For the Fiscal years ended
January 31, 1993, January 30, 1994, and January 29, 1995 ...................and January 28, 1996..................... F-4
Consolidated Statements of Stockholders' Equity --- For the Fiscal years
ended January 31, 1993, January 30, 1994, and January 29, 1995 .............and January 28, 1996............... F-5
Consolidated Statements of Cash Flows --- For the Fiscal years ended
January 31, 1993, January 30, 1994, and January 29, 1995 ...................and January 28, 1996..................... F-6
Notes to Consolidated Financial Statements ................................Statements.................................. F-7
(A)(a)(2) INDEX TO FINANCIAL STATEMENT SCHEDULES:Index to Financial Statement Schedules:
Report of Independent Public Accountants ..................................Accountants.................................... S-1
Schedule I --- Condensed Financial Information of Orchard Supply
Hardware Corporation ......................................................Corporation........................................................ S-2
Schedule II --- Valuation and Qualifying Accounts ..........................Accounts............................. S-5
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.
22
21
(A)(a)(3) EXHIBITSExhibits
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 HoldingHoldin 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 SupplySuppl 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, 1993.1993
**(O) Form of Incentive Stock Option Agreement by and between Orchard Supply
Hardware Stores Corporation and certain officers and key employees.
+(P)****(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 Performance Bonus Plan dated
February 1, 1994.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, 22
(B) REPORTS ON FORM 8-K
None.
(C) EXHIBITS1996 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.
2427
23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: April 12, 199510, 1996
Orchard Supply Hardware Stores Corporation
By: /s/ Stephen M. Hilberg
----------------------------------------------------------
Stephen M. Hilberg
Vice President-Finance and
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 DATESignature Title Date
--------- ---------------------------------------------- ----
/s/ Maynard Jenkins President, Chief Executive Officer and April 12, 1995
- ----------------------------------10, 1996
----------------------- Director (Principal Executive Officer)
Maynard Jenkins
/s/ Stephen M. Hilberg Vice President-Finance, Chief Financial April 12, 1995
- ----------------------------------10, 1996
----------------------- Officer and Director (Principal Financial
Officer)
Stephen M. Hilberg Officer)
/s/ Michael Seda Controller (Principal Accounting Officer) April 12, 199510, 1996
- ----------------------------------------------------------
Michael Seda
/s/ Bradford M. FreemanMatt L. Figel Director April 12, 199510, 1996
- ----------------------------------
Bradford M. Freeman------------------------
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 12, 199510, 1996
- ----------------------------------------------------------
J. Frederick Simmons
/s/ Ronald P. Spogli Director April 12, 199510, 1996
- ----------------------------------------------------------
Ronald P. Spogli
/s/ William M. Wardlaw Director April 12, 199510, 1996
- ----------------------------------
William M. Wardlaw
/s/ Morton Godlas Director April 12, 1995
- ----------------------------------
Morton Godlas
/s/------------------------
William E. Walsh Director April 12, 1995
- ----------------------------------
William E. WalshM. Wardlaw
2528
24EXHIBIT INDEX
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
-------Exhibit No. Description
- ----------- -----------
+3.1#3.1 Certificate of Incorporation of the Orchard Supply Hardware Stores Corporation (formerly
Orchard Holding Corporation) as amended to date.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####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 93/8%9% Senior Notes due 2002, with form of note attached thereto
as Exhibit A.
+++4.7###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####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####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####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####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.
2629
25
EXHIBIT
NUMBER DESCRIPTION
-------Exhibit No. Description
- ----------- -----------
++++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.
++++10.13####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####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####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####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####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####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####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.
27
26
EXHIBIT
NUMBER DESCRIPTION
------- -----------
*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
HardwareCorporation,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####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####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###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+10.45 Second Amendment to Employment Agreement dated January 1,
1989as of April 15,
1996 between Orchard Supply Hardware Corporation and Maynard
Jenkins.
+10.46 Sixth+++10.49 Third Amendment to NoteEmployment Agreement dated as of April 27, 1994
by and among15, 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, (formerly Orchard Holding
Corporation) and Teachers Insurance and Annuity Associationas
Guarantor, in favor of Bank of America with respect to the 10.64% Senior Secured Notes
due 2002.
+10.47 Seventh Amendment to Note Agreement datedNational Trust and Savings Association 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.
++10.48 Orchard Supply Hardware Corporation Performance Bonus Plan
dated February 1, 1994.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.
++27.1+27 Financial Data Schedule for the fiscal year ended January 29,
1995.28, 1996.
- ---------------------------------
* Filed as an exhibit to Registration Statement on Form S-4 (Registration
No. 33-55190) on November 30, 1992.30,1992.
** 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 June 14,
1994.September
12, 1995.
+++ Filed herewith.
2831
27INDEX 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-8
F-1
REPORT 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 29, 199528, 1996 and January 30, 199429, 1995, and the related consolidated statements
of operations,income, stockholders' equity and cash flows for each of the three years in
the period ended January 29, 1995.28, 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 29, 199528, 1996 and January 30, 199429, 1995
and the results of its operations and its cash flows for each of the three years
in the period ended January 29, 199528, 1996 in conformity with generally accepted
accounting principles.
As discussed in Note 8 to the consolidated financial statements, the
Company adopted the provisions of Statement of Financial Accounting Standards
No. 109 "Accounting for Income Taxes" effective February 1, 1993.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
San Jose, California
March 3, 1995
F-1February 23, 1996
F-2
28
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)(In thousands)
JANUARY 30, JANUARYJanuary 29, 1994January 28,
1995 1996
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ..................................................... $ 75,588equivalents................................................................................ $ 9,240 Investments ...................................................................$ 7,930
Investments.............................................................................................. 3,000 -- 3,000
Accounts receivable, less allowance of $1,176$1,201 and $1,201$1,543 at January 30, 1994
and January 29, 1995
respectively ......................................... 13,245and January 28, 1996, respectively..................................................................... 14,417 Inventory ..................................................................... 82,49416,597
Inventory................................................................................................ 103,438 116,761
Prepaid expenses and other .................................................... 6,575other............................................................................... 8,221 8,391
Assets held for disposal ...................................................... 6,133disposal................................................................................. 6,145 6,513
-------- --------
Total current assets .................................................... 184,035assets................................................................................... 144,461 156,192
PROPERTY AND EQUIPMENT, net ............................................................ 105,874net............................................................................... 129,840 132,645
LEASEHOLD RIGHTS, net of accumulated amortization of $2,766$3,775 and $3,775$4,885
at
January 30, 1994 and January 29, 1995 respectively .................................. 10,871and January 28, 1996, respectively................................................... 9,751 8,636
DEFERRED FINANCING COSTS, net of accumulated amortization of $5,155$1,249 and
$5,781$1,873 at January 30, 1994 and January 29, 1995 respectively ........................ 3,428and January 28, 1996, respectively............................................ 3,236 2,848
GOODWILL, net of accumulated amortization of $730$886 and $886$1,042 at January 30, 1994
and January 29, 1995
respectively ................................................... 5,527and January 28, 1996, respectively....................................................................... 5,371 5,215
-------- --------
Total assets ............................................................ $309,735assets........................................................................................... $292,659 $305,536
======== ========
The accompanying notes are an integral part of these consolidated statements.
F-2F-3
29
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)(In thousands, except share data)
JANUARY 30, JANUARYJanuary 29, 1994January 28,
1995 1996
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Outstanding checks, not cleared by the bank .................................. $ 3,774bank........................... $ 7,168 $ --
Accounts payable ............................................................. 30,491payable...................................................... 36,476 42,032
Accrued payroll and related items ............................................ 7,294items..................................... 8,715 11,612
Accrued advertising .......................................................... 2,114advertising................................................... 3,448 3,622
Accrued sales taxes .......................................................... 4,933taxes................................................... 7,158 8,325
Accrued interest payable.............................................. 4,478 4,535
Other accrued expenses ....................................................... 8,212 7,954expenses................................................ 3,476 7,203
Notes payable ................................................................ 1,494payable......................................................... 773 684
Current portion of capital leases and long-term debt ......................... 30,727debt.................. 1,720 2,024
-------- --------
Total current liabilities .............................................. 89,039liabilities........................................... 73,412 80,037
OTHER LIABILITIES ..................................................................... 2,596LIABILITIES...................................................... 1,437 --
CAPITAL LEASES AND LONG-TERM DEBT, net of current portion ............................. 156,273portion.............. 135,232 132,242
-------- --------
Total liabilities ...................................................... 247,908liabilities................................................... 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--0 and 800,000 shares at January 30, 1994
and January 29, 1995, respectively;outstanding--800,000 shares; liquidation preference of $20,000 ..... --$20,000....... 8 8
Common Stock, $.01 par value
Authorized--16,000,000 shares; issued--6,987,120issued--7,018,885 shares;
outstanding--6,930,253outstanding--6,983,400 and 6,983,4007,015,165 shares at January 30, 199429, 1995 and
January 29, 1995, respectively ........................................ 6928, 1996, respectively....................................... 70 70
Additional paid-in capital ................................................... 72,275capital............................................. 90,700 90,612
Less--Notes receivable from sale of common stock ............................. (171)stock....................... (151) Accumulated deficit .......................................................... (10,346)(93)
Retained earnings (accumulated deficit)................................ (8,049) 2,660
-------- --------
Total stockholders' equity ............................................. 61,827equity............................................ 82,578 93,257
-------- --------
Total liabilities and stockholders' equity ............................. $309,735equity............................ $292,659 ======== ========
The accompanying notes are an integral part of these consolidated statements.
F-3
30
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED
--------------------------------------
JANUARY 31, JANUARY 30, JANUARY 29,
1993 1994 1995
----------- ----------- -----------
SALES ...................................................................... $346,158 $365,077 $441,646
COST OF GOODS SOLD ......................................................... 224,599 234,326 281,379
-------- -------- --------
Gross margin ...................................................... 121,559 130,751 160,267
SELLING AND OTHER EXPENSES ................................................. 85,240 91,302 120,323
GENERAL AND ADMINISTRATIVE EXPENSES ........................................ 14,704 15,500 17,535
PRE-OPENING EXPENSES ....................................................... 924 2,221 7,525
-------- -------- --------
Operating income .................................................. 20,691 21,728 14,884
WRITE-DOWN IN CARRYING AMOUNT OF ASSET HELD
FOR DISPOSAL ............................................................. 2,007 -- --
INTEREST EXPENSE, net ...................................................... 16,725 11,563 12,587
-------- -------- --------
Income before provision for income taxes and extraordinary items .. 1,959 10,165 2,297
PROVISION FOR INCOME TAXES ................................................. 866 -- --
-------- -------- --------
Income before extraordinary items ................................. 1,093 10,165 2,297
EXTRAORDINARY ITEMS:
REALIZATION OF NET OPERATING LOSS CARRYFORWARDS ............................ 438 -- --
LOSS ON EXTINGUISHMENT OF DEBT, NET OF TAX BENEFIT
OF $428 AT JANUARY 31, 1993 .............................................. (638) (9,318) --
-------- -------- --------
Net income ........................................................ 893 847 2,297
PREFERRED STOCK DIVIDENDS EARNED ........................................... 4,208 814 1,115
-------- -------- --------
Net income (loss) available to common stock ....................... $ (3,315) $ 33 $ 1,182
======== ======== ========
INCOME PER COMMON AND EQUIVALENT SHARE:
INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS ................................... $ (2.52) $ 1.57 $ 0.17
EXTRAORDINARY ITEMS ........................................................ (0.16) (1.57) 0.00
-------- -------- --------
Net income (loss) per common and equivalent share ................. $ (2.68) $ 0.01 $ 0.17
======== ======== ========
WEIGHTED AVERAGE NUMBER OF COMMON AND
EQUIVALENT SHARES ......................................................... 1,238 5,951 6,984
========$305,536
======== ========
The accompanying notes are an integral part of these consolidated statements.
F-4
31ORCHARD 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-5
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)(In thousands, except share data)
ADDI- NOTES
PREFERRED STOCK COMMON STOCK TIONAL RECEIVABLE
---------------- --------------- PAID-IN FOR CAPITAL ACCUMULATED TOTAL
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCK DEFICIT EQUITYNotes Retained
Preferred Stock Common Stock Receivable Earnings
------------------- ----------------- Paid-In for Capital (Accumulated Total
Shares Amount Shares Amount Capital Stock Deficit) Equity
----------- ------ --------- ------ ------ ------ ------- ----------- ----------- ------------------ --------
BALANCE, JANUARY 26, 1992 ................... 1,604,152 $16 1,205,158 $12 $26,056 $(370) $(12,086) $13,628
Repurchase of common stock ......... -- -- (1,279) -- (10) 1 -- (9)
Repurchase of Series A
preferred stock ................. (1,666) -- -- -- (17) 1 -- (16)
Reissuance of common stock ......... -- -- 3,719 -- 31, (11) -- 20
Issuance of warrants ............... -- -- -- -- 332 -- -- 332
Net income ......................... -- -- -- -- -- -- 893 893
--------- --- --------- --- ------- ----- -------- -------
BALANCE, JANUARY 31, 1993 ...................1993........... 1,602,486 $ 16 1,207,598 12 26,392 (379) (11,193) 14,848
Payments$12 $26,392 $(379) $(11,193) $14,848
Payment of notes receivable from
sale of common stock ............stock.............. -- -- -- -- -- 208 -- 208
Repurchase of common stock .........stock......... -- -- (200) -- (3) -- -- (3)
Repurchase of Series A
redeemable preferred stock .................stock........ (333) -- -- -- (3) -- -- (3)
Issuance of common stock, net of
transaction costs ...............costs................. -- -- 3,800,000 38 48,333 -- -- 48,371
Issuance of common stock
resulting from exercise of
options ........options.......................... -- -- 7,225 -- 60 -- -- 60
Reclassification of Series A
preferred stock .................stock................... (1,602,153) (16) 1,915,630 19 (3) -- -- --
Payment of cash dividend on
Series A preferred stock .................stock.......... -- -- -- -- (2,500) -- -- (2,500)
Payment of fractional shares .......shares....... -- -- -- -- (1) -- -- (1)
Net income .........................income......................... -- -- -- -- -- -- 847 847
---------- ------ --------- --- --------- --------- ------- ---------------- ------------ -------- -------
BALANCE, JANUARY 30, 1994 ...................1994........... -- -- 6,930,253 69 72,275 (171) (10,346) 61,827
PaymentsPayment of notes receivable from
sale of common stock ............stock.............. -- -- -- -- -- 20 -- 20
Issuance of convertible preferred
stock, net of transaction costs .costs... 800,000 8 -- -- 19,099 -- -- 19,107
Issuance of common stock
resulting from exercise of
warrants .......options and warrants............. -- -- 52,44853,147 1 436441 -- -- 437442
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............. -- -- 69931,765 -- 5212 -- -- 5212
Dividend on convertible preferred
stock .................stock............................. -- -- -- -- (1,115)(300) -- -- (1,115)(900) (1,200)
Net income .........................income......................... -- -- -- -- -- -- 2,297 2,29711,609 11,609
---------- ------ --------- --- --------- --------- ------- ---------------- ------------ -------- -------
BALANCE, JANUARY 29, 1995 ...................28, 1996........... 800,000 $ 8 6,983,4007,015,165 $70 $90,700 $(151)$90,612 $ (8,049) $82,578(93) $ 2,660 $93,257
========== ====== ========= === ========= ========= ======= ================ ============ ======== =======
The accompanying notes are an integral part of these consolidated statements.
F-5
32
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED
-------------------------------------
JANUARY 31, JANUARY 30, JANUARY 29,
1993 1994 1995
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ....................................................... $ 893 $ 847 $ 2,297
Non-cash adjustments to net income--
Depreciation and amortization ................................. 7,080 6,845 8,682
Prepayment premium on senior and subordinated
senior debentures .......................................... -- 6,335 --
Write-off of deferred financing costs ......................... 1,066 2,745 --
Accretion of debt discounts ................................... 1,682 313 --
Loss on asset disposals ....................................... 115 65 803
Write-down in carrying amount of asset held for disposal ...... 2,007 -- --
Changes in assets and liabilities --
Increase in accounts receivable ............................... (216) (477) (1,172)
Increase in inventory ......................................... (3,131) (8,636) (20,944)
Increase in prepaid expenses and other ........................ (925) (2,430) (2,631)
Increase in accounts payable and other current liabilities .... 1,524 7,517 16,228
Decrease in other liabilities ................................. (577) -- (999)
------- ------- -------
Net cash provided by operating activities ............... 9,518 13,124 2,264
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment .............................. (4,318) (29,491) (30,577)
Purchase of investments .......................................... -- -- (3,000)
Purchase of leasehold rights ..................................... -- (6,511) --
------- ------- -------
Net cash used in investing activities ................... (4,318) (36,002) (33,577)
------- ------- -------
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 ......................... 46,110 103,079 1,752
Principal payments on capital leases and long-term debt .......... (48,324) (50,757) (52,335)
Deferred financing costs paid .................................... (2,076) (2,736) (433)
Payment of preferred stock dividends ............................. -- (2,500) (1,115)
Repayment of notes payable, net .................................. (1,770) (1,727) (2,473)
Repurchase of capital stock ...................................... (27) (6) --
Proceeds from issuance of capital stock .......................... 31 60 442
Payment (Issuance) of notes receivable from sale of capital stock (9) 208 20
------- ------- -------
Net cash provided by (used in) financing activities ........ (6,065) 93,991 (35,035)
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ...................... (865) 71,113 (66,348)
CASH AND CASH EQUIVALENTS, beginning of period ............................ 5,340 4,475 75,588
------- ------- -------
CASH AND CASH EQUIVALENTS, end of period .................................. $ 4,475 $75,588 $ 9,240
======= ======= =======
The accompanying notes are an integral part of these consolidated statements.
F-6
33ORCHARD 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-7
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 29, 199528, 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 asoperates 60
hardware super stores located in California. As of January 29,
1995, operates 56 hardware superstores28, 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
Short-term investments consist of investment grade securities with a
maturity date of February 22, 1995. The investments are carried at cost, which
approximates fair market value. 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").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-
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.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. Accordingly,
the carrying value of the former warehouse site was reduced by approximately
$2.0 million in the year ended January 31, 1993. Assets held for disposal are
not subject to depreciation.
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-8
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Buildings ....................................Buildings.......................... 25-40 years
Leasehold improvements .......................improvements............. 14-25 years or life of lease
Land improvements ............................improvements.................. 15 years or life of lease
Machinery and equipment ......................equipment............ 3-10 years
F-7
34
Betterment and extraordinary repairs that extend the life of the asset
are capitalized; normal repairs and maintenance are expensed.
The Company capitalized interest costs of $28,000 in the year ended
January 31, 1993 during
the construction period of a new warehouse.
During the years ended January 30, 1994, and January 29, 1995 and January 28,
1996, the Company capitalized interest costs of $448,000, $870,000 and $870,000, respectively,$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 (loss) per common and equivalent share is computed by dividing net
income (loss) 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 the management notes receivable from sale of common stock (using the treasury stock
method, unless antidilutive). TheOptions 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.
F-8Net Income per common and equivalent share on a fully diluted basis
reflects the assumed conversion of preferred stock to common stock, if dilutive.
F-9
35ORCHARD 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 30, JANUARYJanuary 29, 1994January 28,
1995 1996
----------- -----------
Property and Equipment
Land ...................................................................Land..................................... $ 16,72326,980 $ 26,980
Land improvements ...................................................... 1,073improvements........................ 1,652 Buildings .............................................................. 29,8812,074
Buildings................................ 37,394 37,782
Machinery and equipment ................................................ 26,596equipment.................. 37,703 43,540
Leasehold improvements ................................................. 29,574improvements................... 49,249 53,910
Construction in progress ............................................... 23,370progress................. 4,382 3,807
Assets under capital leases ............................................ 1,867leases................ 1,849 1,834
-------- --------
129,084 159,209 169,927
Accumulated depreciation and amortization .............................. (23,210)amortization.. (29,369) (37,282)
-------- --------
Net property and equipment ....................................... $105,874equipment............... $129,840 $132,645
======== ========
Accumulated amortization on assets under capital leaseslease was approximately $0.9$1.0
million and $1.0$1.1 million for the years ended January 30, 199429, 1995 and January 29, 1995,28,
1996, respectively.
During the year ended January 30, 1994, the Company acquired the fee
interest in three former Builders Emporium ("BE") sites for $13.7 million and
leases on six other BE sites for $6.0 million. The sites were renovated prior to
the opening of the stores in April and May 1994 at which time the carrying
amounts were reclassified from construction in progress.
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 29, 199528, 1996 are as follows (in
thousands):
FUTURE MINIMUM
RENTALS
YEAR ENDING
JANUARYFuture Minimum
Year Ending January, Rentals
--------------------------------- --------------
1996 ...................................................................1997............................. $ 17,476
1997 ................................................................... 17,181
1998 ................................................................... 15,769
1999 ................................................................... 15,153
2000 ................................................................... 13,531
Thereafter ............................................................. 140,74721,199
1998............................. 20,007
1999............................. 19,480
2000............................. 17,573
2001............................. 15,707
Thereafter....................... 217,524
--------
Total minimum lease payments ........................................ $219,857payments... $311,490
========
F-9
36
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
----------------Total Contingent
Year Ended Rentals Rentals
- ------------------ ------- ----------
January 28, 1996.................. $20,656 $689
January 29, 1995 ....................................................... $16,867 $5731995.................. 17,067 573
January 30, 1994 ....................................................... 12,4861994.................. 12,532 486
January 31, 1993 ....................................................... 10,971 510
F-10
ORCHARD 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-sharingprofit
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
----------------401(k) Profit
Year Ended Contributions Sharing
---------- ------------- -------
January 28, 1996................ $762 $1,219
January 29, 1995 ....................................................... $624 $6711995................ 624 671
January 30, 1994 .......................................................1994................ 468 990
January 31, 1993 ....................................................... 459 763
5. LONG-TERM DEBT AND CREDIT ARRANGEMENTS:
Long-term debt as of January 30, 1994 and January 29, 1995 consists of the following (in thousands):
JANUARY 30, JANUARYJanuary 29, 1994January
1995 28, 1996
----------- -------------------
93/9 3/8% Senior notes .....................................................senior notes................ $100,000 $100,000
Store and warehouse mortgages .......................................... 36,043mortgages...... 35,412 32,829
Obligations under capital leases ....................................... 1,635leases... 1,540 9.0% Senior notes ...................................................... 30,000 --
14.5% Senior subordinated discount notes ............................... 19,322 --1,437
-------- --------
Total debt ............................................................. 187,000debt......................... 136,952 134,266
Less--Current maturities ............................................... 30,727maturities........... 1,720 2,024
-------- --------
$156,273 $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.
F-10
37
93/9 3/8% SENIOR NOTESSenior Notes
On January 20, 1994, the Company, as guarantor, and Orchard Supply, as
issuer, issued $100.0$100 million of unsecured 93/9 3/8% senior notes. The notes mature
on February 15, 2002 and may be redeemed at Orchard Supply's option at various
redemption dates as specified in the agreement.indenture. The terms of the notes limit
among other things,
the ability of Orchard Supply and the Company to pay dividends, incur
indebtedness, issue stock, transfer funds to affiliates and dispose of assets.
9.0% SENIOR NOTES
On January 26, 1994, Orchard Supply notified the holders of the 9.0%
senior notes of its intention to redeem the notes prior to their stated maturity
date of July 1, 1997. On February 25, 1994, the notes were redeemed using the
proceeds from the 93/8% senior notes.Store and Warehouse Mortgages
The notes are included in the current
portion of long-term debt at January 30, 1994 since the notes were repaid from
cash on hand at January 30, 1994.
SENIOR SUBORDINATED DISCOUNT NOTES
In July 1989, Orchard Supply completed the sale of its senior
subordinated discount notes for $55.2 million which are general unsecured
obligations and accreted to a full maturity value of $64 million in July 1992.
The interest related to these notes was payable at 8.63% through July 1992 and
together with accretion calculated using the effective interest method yielded
14.5%. Subsequent to July 1992, the interest related to these notes was payable
at a rate of 14.5%.
On April 30, 1993, the Company used the net proceeds of the initial
public offering to retire approximately $44.7 million of the senior subordinated
discount notes. Additionally, on January 26, 1994, Orchard Supply notified the
holders of the remaining approximately $19.3 million of senior subordinated
discount notes of its intention to redeem the notes. On February 25, 1994, the
notes were redeemed using the proceeds from a preferred stock offering (see Note
6). The subordinated notes are included in long-term debt at January 30, 1994
due to the long-term nature of the replacement securities issued.
STORE AND WAREHOUSE MORTGAGES
The store mortgage notes currently bear interest at 10.1%. Beginning
May 1995, 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% for the sixth through twelfth years.(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 at the end of 12 years.in 2002. Payments are based on a 20 yeartwenty-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 loan requires
payments of interest only for the first three years with the first principal payment of
$0.9 million duewas paid on May 31, 1995. Further principal payments are due each
anniversary date through 2002, increasing by $0.2 million each year.
In November 1993, Orchard Supply assumed a mortgage note of
approximately $1.0 million pursuant to the purchase of the former BE sites
discussed in Note 2. The note bears interest at 12.0% with principal and
interest payments monthly through 2005.F-11
ORCHARD 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 $52.9$50.4 million at January 29, 1995.
F-11
38
REVOLVING CREDIT FACILITY
The28, 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 inventories,inventory
and accounts receivable and certain intangible assets,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. InterestThe maximum available borrowings under the revolving credit
facility are $40.0 million. In addition, there is payable monthly at onea $10.0 million sublimit for
letters of two rates elected bycredit under the Company:
1.Bank base rate,revolving credit facility. Letters of credit
outstanding as defined, plus one percent per annum, or
2.LIBOR, plus 3.25% per annum.of January 29, 1995 and January 28, 1996 totaled $5.2 million and
$8.5 million, respectively.
The revolving credit facility remains effective through October 29,
1995May 31, 1999 and
bears interest payable monthly at which time it will be automatically continued unless terminated at
Orchard Supply'seither the bank reference rate, as defined, or
LIBOR plus 1.375% per annum, as elected by the lender's election.Company.
The following summarizes activity applicable to the revolving credit
facilityfacilities (dollar amounts in thousands):
JANUARY 30, JANUARYJanuary 29, 1994January 28,
1995 1996
----------- -----------
Balance outstanding at end of year .........................................year.................... $ -- $ --
Weighted average balance outstanding during the year ....................... 1,152year.. 120 889
Maximum amount outstanding during the year ................................. 11,448year............ 4,625 11,290
Weighted average interest rate ............................................. 7.00%rate........................ 8.77% 9.79%
Interest rate at end of period ............................................. 7.00%period........................ 9.50% 8.50%
Letters of credit outstanding as of January 30, 1994 and January 29,
1995 totaled $5.8 million and $5.2 million, respectively.
In November 1993, in connection with the acquisition of the nine new
former BE store sites, Orchard Supply increased the borrowings available under
the revolving credit facility from $20.0 million to $40.0 million. The
additional available borrowings bore substantially the same terms and conditions
as the original facility. On January 28, 1994, all outstanding borrowings of
approximately $28.0 million were repaid with a portion of the proceeds of the
93/8% senior notes and the availability under the facility were reduced to the
original $20.0 million.
CAPITAL LEASESCapital Leases
Orchard Supply leases two stores and certain equipment under capital lease
agreements. The leases bear interest at an implicit rate of approximately 10.0%10%.
FINANCING COSTSFinancing Costs
In connection with the early extinguishments of debt during the yearsyear ended January 31, 1993 and
January 30, 1994, the Company recorded extraordinary charges of $0.6 million and $9.3 million, respectively.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-12
39
PRINCIPALORCHARD SUPPLY HARDWARE STORES CORPORATION AND INTEREST PAYMENTSSUBSIDIARY
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 LEASESFuture Minimum
Principal Rental Payments
Payments On Pursuant to
Year Ending January, Long-Term Debt Capital Leases
-------------------- -------------- ---------------
1996 ..........................................................1997................................ $ 1,6171,910 $ 253
1997 .......................................................... 1,9181998................................ 2,216 252
1999................................ 2,534 252
2000................................ 2,861 253
1998 .......................................................... 2,280 252
1999 .......................................................... 2,607 252
2000 .......................................................... 2,9432001................................ 3,198 253
Thereafter .................................................... 124,047 1,133Thereafter.......................... 120,110 866
-------- ------
135,412 2,396132,829 2,129
Less--Amount representing interest ............................ 856interest.. 692
------
Present value of future commitments ........................... 1,540commitments. 1,437
Less--Current portion ......................................... 1,617 103portion............... 1,910 114
-------- ------
Long-term portion ............................................. $133,795 $1,437portion................... $130,919 $1,323
======== ======
Total cash paid by the Company for interest was as follows (in thousands):
YEAR ENDEDYear ended
----------
January 28, 1996......... $13,050
January 29, 1995 ................................................... $1995......... 9,531
January 30, 1994 ...................................................1994......... 10,905
January 31, 1993 ................................................... 13,285
6. PREFERRED STOCK:
In connection with the Company's initial public offering of common
stock, in April 1993, 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 800,000325,000
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-13
40ORCHARD 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 $14.00$14 per share.
COMMON STOCK WARRANTSCommon Stock Warrants
In connection with the issuance of the 9% senior notes since redeemed, the Company
issued warrants to purchase 79,669 shares of common stock at $8.33 per share.
At
January 29, 1995, 27,221 warrants were outstanding.
STOCK SUBSCRIPTION AGREEMENTS
Under Stock Subscription Agreements between the Company and eachAll of the employee stockholders, common shares vested 20% at the datewarrants have been exercised as of purchase and vest
an additional 20% on each of the first through fourth anniversaries of the
acquisition date. Vested and unvested shares are both subject to repurchase at
the option of the Company. Holders of unvested shares are entitled to receive an
amount equal to $8.33 per share at the time of repurchase while holders of
vested shares are entitled to receive the greater of $8.33 per share or $8.33
per share plus a pro rata portion of any retained earnings for the period from
the acquisition date of May 27, 1989 to the end of the quarter preceding the
repurchase of shares.
STOCK OPTIONSJanuary 28, 1996.
Stock Options
Under the 1989 Nonqualified Stock Option Plan, options to purchase
shares of common stock 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 as determined by the
Board of Directors, 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 29, 1995,28, 1996, options covering 136,001217,113 shares of common stock
were outstanding, of which 85,751111,888 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 402,076394,314 shares of
common stock for issuance under the plans.
F-14
41
Following is a detail of activity for the stock option plans:
OPTIONS OPTIONS PRICE
AVAILABLE OUTSTANDING PER SHAREOptions Options Price
Available Outstanding Per Share
--------- ----------- ---------------------
January 26, 1992 6,665 53,335 $8.33
Granted31, 1993.. 7,561 52,439 $ 8.33
Authorized..... 360,000 -- --
--
Cancelled 896 (896) $8.33
------- -------
January 31, 1993 7,561 52,439 $8.33
Authorized 350,000 -- --
Granted (95,000) 95,000 $17.10
Cancelled 2,324 (2,324) $8.33-17.10
ExercisedGranted........ (105,000) 105,000 12.83-17.10
Cancelled...... 2,784 (2,784) 8.33-17.10
Exercised...... -- (7,225) $8.33
-------8.33
-------- -------
January 30, 1994 264,885 137,890 $8.33-17.10
Cancelled 1,190 (1,190) $8.33-17.10
Exercised1994.. 265,345 147,430 8.33-17.10
Cancelled...... 13,105 (13,105) 8.33-17.10
Exercised...... -- (699) $8.33
-------8.33
-------- -------
January 29, 1995 266,075 136,001 $8.33-17.10
=======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-14
ORCHARD 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:
Through January 31, 1993, the Company accounted for income taxes
pursuant to Accounting Principles Board (APB) Opinion No. 11. Effective February
1, 1993, the Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes." Upon adoption, the
Company elected not to restate prior periods. The effect of the cumulative
catch-up entry on the balance sheet at January 31, 1994 and the statement of
operations for the year then ended was not material.
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.
Under APB Opinion No. 11, the
realization of operating loss carryforwards was recorded as an extraordinary
item. For the year ended January 31, 1993, the Company recorded an extraordinary
item due to the realization of operating loss carryforwards.
F-15
42
The major components of deferred tax assets and liabilities are as follows
(in thousands):
FEBRUARY 1, JANUARYJanuary 30, JANUARYJanuary 29, 1993January 28,
1994 1995 1996
----------- ----------- -----------
Deferred tax assets--
Net operating losses and tax credits ...................... $3,498 $3,814 $4,913losses........... $ 3,814 $ 4,913 $1,476
AMT payments made ......................................... 787made.............. 1,951 1,951 Other ..................................................... 1,841 1,548 2,285
------ ------4,028
Other.......................... 2,383 1,531 3,217
------- ------- ------
Total assets ........................................... 6,126 7,313 9,149assets.................. 8,148 8,395 8,721
Valuation allowance ....................................... (3,859) (3,248) (3,661)
------ ------allowance............ (4,083) (2,907) --
------- ------- ------
Net assets ............................................. 2,267assets.................... 4,065 5,488 ------ ------8,721
------- ------- ------
Deferred tax liabilities--
Depreciation .............................................. 1,480Depreciation................... 2,114 2,732 4,743
Software costs ............................................ --costs................. -- 805 ------ ------1,294
------- ------- ------
Total liabilities ...................................... 1,480liabilities............. 2,114 3,537 ------ ------6,037
------- ------- ------
Total net deferred tax asset ...........................asset.. $ 787 $1,951 $1,951
====== ======1,951 $ 1,951 $2,684
======= ======= ======
The $-0- provisions forsignificant 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-15
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a reconciliation of the years ended January 30, 1994 and January
29, 1995 resulted from the recognition of net operating loss carryforwards
against which a valuation allowance had previously been provided. The provision
for income taxes for the year ended January 31, 1993 differs from the amount
computed by applyingeffective tax rate to the
statutory federal income tax rate to income before
taxes as follows:rate:
JANUARY 31,
1993January 30, January 29, January 28,
1994 1995 1996
----------- ----------- -----------
Statutory federal income tax rate ..............................................rate................ 34.0% 34.0% 34.0%
State income taxes net of federal benefit .....................................benefit........ 6.1 6.1 6.1
Adjustments to valuation allowance............... (70.3) (51.2) (18.2)
Goodwill amortization .......................................................... 3.2
Other .......................................................................... 0.9
----
44.2%
====and other permanent
differences.................................... 30.2 11.1 5.1
----- ----- -----
0% 0% 27.0%
===== ===== =====
As of January 29, 1995,28, 1996, for tax purposes, the Company has net operating
loss carryforwards of approximately $11.3$4.0 million and $6.4$1.1 million available to
offset federal and California taxable income, respectively. These federal net operating
loss carryforwards expire at various dates through the fiscal year ending
2009January 2010 and state loss carryforwards expire at various dates through 1999.
The Company also has net operating loss carryforwards available for alternative
minimum tax purposes and jobs tax credit carryforwards.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.
F-16
43
The Company has made income tax payments of approximately $0.4 million,
$1.2 million,
$-0- and $-0-$2.8 million in the years ended January 31, 1993, January 30, 1994, and 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-TermLong-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
estimated by management to be approximately $119.9$135.6 million versus the carrying amount of approximately $137.0$134.3
million at January 29, 1995.28, 1996.
F-16
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
INCOME (LOSS)
PER COMMON
INCOME AND EQUIVALENT
(LOSS) BEFORE SHARE BEFORE
EXTRAORDINARY NET INCOME EXTRAORDINARY
SALES GROSS MARGIN ITEMS (LOSS) ITEMSIncome (Loss)
Per Common
and Equivalent
Share
Net Income on a Fully
Sales Gross Margin (Loss) Diluted Basis
-------- ------------ ------------- ---------- --------------
(in(In thousands, except per share data)
YEAR ENDED JANUARY 30, 1994
First quarter(1) ................. $ 90,361 $ 31,948 $ 1,986 $(3,377) $ 0.40
Second quarter ................... 101,206 35,741 5,540 5,540 0.80
Third quarter .................... 88,888 32,137 2,469 2,469 0.35
Fourth Quarter(1) ................ 84,622 30,925 170 (3,785) 0.02
-------- -------- ------- ------- ------
Year ............................. $365,077 $130,751 $10,165 $ 847 $ 1.57
======== ======== ======= ======= ======
YEAR ENDED JANUARYended January 29, 1995
First quarter ....................quarter............. $ 96,555 $ 34,606 $ (917) $ (917) $(0.16)
Second quarter ...................quarter............ 125,566 44,970 3,305 3,305 0.430.40
Third quarter ....................quarter............. 111,790 41,043 598 598 0.04
Fourth Quarter ...................quarter............ 107,735 39,648 (689) (689) (0.14)
-------- -------- ------- ------- ------
Year .............................Year...................... $441,646 $160,267 $ 2,297 $ 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
======== ======== ======= ======
The following event impacted the results above:
(1) As discussed in Note 5, the Company recorded extraordinary charges
in connection with the early extinguishment of debt during the
first and fourth quarters of the year ended January 30, 1994.
F-17
44ORCHARD 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:subsidiary (in thousands):
JANUARY 30, JANUARYJanuary 29, 1994January 28,
1995 1996
----------- -----------
Current assets ........................................................ $184,028assets.................. $144,453 $156,193
Non-current assets .................................................... 125,700assets.............. 148,198 149,344
-------- --------
309,728 292,651$292,651 $305,537
======== ========
Current liabilities ................................................... $ 89,030liabilities............. $ 73,412 $ 80,037
Non-current liabilities ............................................... 158,869liabilities......... 136,669 132,242
-------- --------
247,899 210,081 212,279
-------- --------
Redeemable preferred stock ............................................stock...... -- --
Other equity .......................................................... 61,829equity.................... 82,570 93,258
-------- --------
61,829 82,570 93,258
-------- --------
$309,728 $292,651 $305,537
======== ========
YEAR ENDEDYear Ended
-------------------------------------
JANUARY 31, JANUARYJanuary 30, JANUARYJanuary 29, 1993January 28,
1994 1995 1996
----------- ----------- -----------
Sales ........................................................ $346,158Sales............................... $365,077 $441,646 $532,439
Gross profit ................................................. 121,559margin........................ 130,751 160,267 192,675
Income (loss) before provisionprovisions for taxes
and extraordinary credit .................................. 1,944items........... 10,170 2,339 15,938
Net income (loss) ............................................ 878income.......................... 852 2,339 11,649
The 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-18
45
REPORT 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 included inof Orchard Supply Hardware Stores
Corporation's Annual Report to StockholdersCorporation included in this Form 10-K and have issued our report thereon dated
March 3, 1995.February 23, 1996. Our audits were made for the purpose of forming an opinion
on thosethe basic financial statements taken as a whole. The accompanying schedules listed in Item 14 are the responsibility of the Company's
management and
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.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
San Jose, California
March 3, 1995February 23, 1996
S-1
46
ORCHARD SUPPLY HARDWARE STORES CORPORATION
SCHEDULE I --- CONDENSED FINANCIAL INFORMATION OF SUBSIDIARY
CONDENSED BALANCE SHEETS
FOR THE FISCAL YEARS ENDED
(IN THOUSANDS)(In thousands)
JANUARY 30, JANUARYJanuary 29, 1994January 28,
1995 1996
----------- -----------
ASSETS
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 75,583equivalents................................. $ 9,235 Investments$ 7,930
Investments............................................... 3,000 --
3,000
Accounts receivable 13,684receivable....................................... 14,414 Inventory 82,49416,598
Inventory................................................. 103,438 116,761
Prepaid expenses and other 6,134other................................ 8,221 8,391
Assets held for disposal 6,133disposal.................................. 6,145 6,513
-------- ---------------
Total current assets 184,028assets..................................... 144,453 156,193
PROPERTY AND EQUIPMENT, net 105,874net................................ 129,840 132,645
OTHER ASSETS, net 19,826net.......................................... 18,358 16,699
-------- ---------------
Total assets $309,728assets............................................. $292,651 $305,537
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 56,809 $liabilities.................. 70,919 77,329
Notes payable 1,494payable............................................. 773 684
Current portion of capital leases and long-term debt 30,727debt...... 1,720 2,024
-------- ---------------
Total current liabilities 89,030liabilities................................ 73,412 80,037
OTHER LIABILITIES 2,596LIABILITIES.......................................... 1,437 --
CAPITAL LEASES AND LONG-TERM DEBT, net of current portion 156,273portion.. 135,232 132,242
-------- ---------------
Total liabilities 247,899liabilities........................................ 210,081 212,279
-------- ---------------
STOCKHOLDERS' EQUITY:
Additional paid-in-capital 60,977paid-in capital................................ 80,231 82,509
Retained earnings 852earnings......................................... 2,339 10,749
-------- ---------------
Total stockholders' equity 61,829equity............................... 82,570 93,258
-------- ---------------
Total liabilities and stockholders' equity $309,728equity............... $292,651 $305,537
======== ========
The accompanying notes are an integral part of these consolidated statements.
S-2
47
ORCHARD SUPPLY HARDWARE STORES CORPORATION
SCHEDULE I --- CONDENSED FINANCIAL INFORMATION OF SUBSIDIARY
CONDENSED STATEMENTS OF INCOME
FOR THE FISCAL YEARS ENDED
(IN THOUSANDS)(In thousands)
YEAR ENDED
-------------------------------------
JANUARY 31, JANUARYYear Ended
---------------------------------------
January 30, JANUARYJanuary 29, 1993January 28,
1994 1995 1996
----------- ----------- -----------
SALES .......................................................................... $346,158SALES.......................................... $365,077 $441,646 $532,439
COST OF GOODS SOLD ............................................................. 224,599SOLD............................. 234,326 281,379 339,764
-------- -------- --------
Gross margin .......................................................... 121,559margin.................................. 130,751 160,267 192,675
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ................................... 100,859EXPENSES... 108,998 145,332 163,392
-------- -------- --------
Operating income ...................................................... 20,700income.............................. 21,753 14,935 WRITE-DOWN IN CARRYING AMOUNT OF ASSET HELD
FOR DISPOSAL .............................................................. 2,007 -- --29,283
INTEREST EXPENSE, net .......................................................... 16,749net.......................... 11,583 12,596 13,345
-------- -------- --------
Income before provision for income taxes and
extraordinary items ...... 1,944items.......................... 10,170 2,339 15,938
PROVISION FOR INCOME TAXES ..................................................... 866TAXES..................... -- -- 4,289
-------- -------- --------
Income before extraordinary items ..................................... 1,078items............. 10,170 2,339 11,649
EXTRAORDINARY ITEMS ............................................................ (200)ITEMS............................ (9,318) -- -------- -------- ----------
Net income ............................................................ $ 878income.................................... $ 852 $ 2,339 $ 11,649
======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
S-3
48
ORCHARD SUPPLY HARDWARE STORES CORPORATION
SCHEDULE I --- CONDENSED FINANCIAL INFORMATION OF SUBSIDIARY
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED
(IN THOUSANDS)(In thousands)
YEAR ENDED
-------------------------------------
JANUARY 31, JANUARYYear Ended
---------------------------------------
January 30, JANUARYJanuary 29, 1993January 28,
1994 1995 --------- ----------1996
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................................... $ 878income......................................................... $ 852 $ 2,3392,239 $ 11,649
Non-cash adjustments to net income--income -
Depreciation and amortization ..................................... 7,080amortization.................................... 6,845 8,682 10,715
Prepayment premium on senior and subordinated senior debentures ...debentures.. 6,335 -- 6,335 --
Write-off of deferred financing costs ............................. 1,066costs............................ 2,745 -- --
Accretion of debt discount ........................................ 1,682discounts...................................... 313 -- --
Loss on asset disposals ........................................... 115disposals.......................................... 65 803
Write-down in carrying amount of asset held for disposal .......... 2,007 -- --55 15
Changes in assets and liabilities ---
Increase in accounts receivable ................................... (218)receivable.................................. (477) (1,171) (2,184)
Increase in inventory ............................................. (3,131)inventories.......................................... (8,636) (20,944) Increase(13,323)
(Increase) decrease in prepaid expenses and other ............................ (925)other................ (2,429) (2,631) (355)
Increase in accounts payable and other current liabilities ........ 1,524liabilities....... 7,506 16,237
Decrease in other liabilities ..................................... (577) -- (999)
------- ------- -------15,986 5,465
--------- --------- ---------
Net cash provided by operating activities ...................... 9,501activities...................... 13,119 2,316 ------- ------- -------11,982
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment .................................. (4,318)equipment......................... (29,491) (30,577) Purchase(12,500)
(Purchase) Redemption of investments ..............................................investments............................... -- -- (3,000) 3,000
Purchase of leasehold rights ......................................... --rights....................................... (6,511) -- ------- -------- ----------
--------- --------- ---------
Net cash used in investing activities .......................... (4,318)activities.......................... (36,002) (33,577) ------- -------- --------(9,500)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt ............................. 46,110debt........................... 103,079 1,752 --
Principal payments on capital leases and long-term debt .............. (48,324)debt............ (50,757) (52,335) (2,686)
Deferred financing costs paid ........................................ (2,076)paid...................................... (2,736) (433) (51)
Repayment of notes payable, net ...................................... (1,770)net.................................... (1,727) (2,473) (89)
Contributions from (distributions to) parent Company .................................... 12company............... 46,132 18,402 ------ -------- --------(961)
--------- --------- ---------
Net cash provided by (used in) financing activities ............... (6,048)activities.............. 93,991 (35,087) ------ -------- --------(3,787)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS .......................... (865)EQUIVALENTS........................................................ 71,108 (66,348) (1,305)
CASH AND CASH EQUIVALENTS, Beginningbeginning of Period ................................ 5,340period....................... 4,475 75,583 -------- --------9,235
--------- --------- ---------
CASH AND CASH EQUIVALENTS, Endend of Period ...................................... $ 4,475period............................. $ 75,583 $ 9,235 ======== ========$ 7,930
========= ========= =========
The accompanying notes are an integral part of these consolidated statements.
S-4
49
ORCHARD SUPPLY HARDWARE STORES CORPORATION
SCHEDULE II --- VALUATION AND QUALIFYING ACCOUNTS
FOR THE FISCAL YEAR ENDED
(IN THOUSANDS)(In thousands)
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS/ TOOF COSTS / OTHER AT END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- ----------- --------- -------- -------------------------------------- ------------ ---------- ---------- ---------- ---------
JANUARY 31, 1993
Accounts receivable reserves ............................ $ 888 $1,180 $484 $(1,285) $1,267
JANUARY 30, 1994
Accounts receivable reserves ............................reserves.. $1,267 $1,215 $214 $(1,520) $1,176
JANUARY 29, 1995
Accounts receivable reserves ............................reserves.. $1,176 $1,172 $210 $(1,357) $1,201
JANUARY 28, 1996
Accounts receivable reserves.. $1,201 $1,488 $176 $(1,322) $1,543
S-5 50
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
+3.1 Certificate of Incorporation of the Orchard Supply Hardware
Stores Corporation (formerly Orchard Holding Corporation) as
amended to date.
*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 93/8% 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.
51
EXHIBIT
NUMBER DESCRIPTION
------- -----------
++++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.
++++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 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.
*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.
52
EXHIBIT
NUMBER DESCRIPTION
------- -----------
*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 January 1, 1989
between Orchard Supply Hardware Corporation and Maynard Jenkins.
+10.46 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.
+10.47 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.
++10.48 Orchard Supply Hardware Corporation Performance Bonus Plan
dated February 1, 1994.
***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.
++27.1 Financial Data Schedule for the fiscal year ended January 29,
1995.
* 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 Quarterly Report on Form 10-Q (File No. 0-21182) on
June 14, 1994.
++ Filed herewith.