1
FORM 10-Q
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
( X )[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 29, 1995April 28, 1996
OR
( )[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ___________________ .
Commission file number 0-21182
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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.)Idenfication
incorporation or organization) No.)
6450 Via Del Oro, San Jose, California 95119
- ---------------------------------------- ---------------------------------------
(Address of principal executive offices) (Zip Code)
(408) 281-3500
----------------------------------------------------- ----------------------------------------
(Registrant's telephone number,
including area code)
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[X] No ____[_]
At October 29, 1995April 28, 1996 there were 6,984,4757,535,673 shares of the registrant's Common Stock,
$0.01 par value, outstanding.
Page 1 of 13
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ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
- ------- ---------------------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets:
October 29, 1995April 28, 1996 and January 29, 199528, 1996 3
Condensed Consolidated Statements of Income:
Three and Nine Month Periods Ended October 29,April 28, 1996
and April 30, 1995
and October 30, 1994 4
Condensed Consolidated Statements of Cash Flows:
NineThree Month Periods Ended October 29,April 28, 1996
and April 30, 1995 and
October 30, 1994 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II. OTHER INFORMATION
- -------- -----------------
Item 6. Exhibits and Reports on Form 8-K 1211
Signatures 1312
2
3
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENT
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
October 29,April 28, January 29,
1995 199528,
1996 1996
----------- -----------
(Unaudited)
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 15,87322,001 $ 9,240
Investments - 3,0007,930
Accounts receivable, net 17,508 14,41720,079 16,597
Inventories 107,233 103,438118,521 116,761
Prepaid expenses and other 8,879 8,2219,437 8,391
Assets held for disposal 6,384 6,1456,513 6,513
-------- --------
Total current assets 155,877 144,461176,551 156,192
PROPERTY AND EQUIPMENT, net 132,183 129,840132,664 132,645
OTHER ASSETS, net 17,076 18,35816,283 16,699
-------- --------
Total assets $305,136 $292,659$325,498 $305,536
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable, accrued and other liabilities $ 76,53082,343 $ 70,91977,329
Notes payable 698 7731,069 684
Current portion of capital leases
and long term debt 2,014 1,7202,047 2,024
-------- --------
Total current liabilities 79,242 73,412
OTHER LIABILITIES, net of current portion 408 1,43785,459 80,037
CAPITAL LEASES AND LONG-TERM DEBT,
net of current portion 133,430 135,232132,008 132,242
-------- --------
Total liabilities 213,080 210,081217,467 212,279
-------- --------
STOCKHOLDERS' EQUITY:
Common stock 7075 70
Preferred stock 8 8
Additional paid-in-capital 90,408 90,700102,102 90,612
Less notes receivable from
sale of common stock (124) (151)(66) (93)
Retained earnings (accumulated deficit) 1,694 (8,049)5,912 2,660
-------- --------
Total stockholders' equity 92,056 82,578108,031 93,257
-------- --------
Total liabilities and stockholders' equity $305,136 $292,659$325,498 $305,536
======== ========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In Thousands, Except Per Share Data)
Nine Months Ended Three Months Ended
------------------------ ------------------------
October 29, October----------------------
April 28, April 30,
October 29, October 30,1996 1995
1994 1995 1994
----------- ----------- ----------- -------------------- ---------
Sales $402,314 $333,911 $131,497 $111,790$141,111 $125,352
Cost of goods sold 256,831 213,292 83,981 70,74789,906 79,708
-------- --------
Gross margin 145,483 120,619 47,516 41,04351,205 45,644
Selling, general and administrative expenses 119,371 101,424 40,277 36,66541,689 37,458
Pre-opening expenses 2,241 6,973 1,219 595
-------- --------221 995
-------- --------
Operating income 23,871 12,222 6,020 3,7839,295 7,191
Interest expense 10,068 9,236 3,149 3,185
-------- --------3,267 3,515
-------- --------
Income before provision for income taxes 13,803 2,986 2,871 5986,028 3,676
Income tax provision 3,460 - 1,051 -
-------- --------2,476 754
-------- --------
Net income 10,343 2,986 1,820 5983,552 2,922
Preferred stock dividends 900 823 300 303
-------- --------300
-------- --------
Net income available to common stock $ 9,4433,252 $ 2,163 $ 1,520 $ 295
======== ========2,622
======== ========
Income per common share:
Primary $ 1.350.44 $ 0.31 $ 0.22 $ 0.04
======== ========0.38
======== ========
Fully diluted $ 1.240.41 $ 0.31 $ 0.22 $ 0.04
======== ========0.35
======== ========
Weighted average number of shares outstanding:
Primary 7,020 6,985 7,060 6,990
======== ========7,368 6,976
======== ========
Fully diluted 8,315 8,265 8,340 8,270
======== ========8,670 8,273
======== ========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
NineThree Months Ended
---------------------------
October 29, October--------------------------------
April 28, 1996 April 30, 1995
1994
----------- ------------------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $10,343 $ 2,9863,552 $ 2,922
Non-cash adjustments to net income-
Depreciation and amortization 8,010 6,1102,774 2,628
Loss on asset disposals 507 789189 14
Changes in assets and liabilities-
Increase in accounts receivable (3,091) (2,040)(3,482) (643)
Increase in inventories (3,795) (14,861)(1,760) (2,740)
Increase in prepaid expenses and other (658) (1,438)(1,046) (797)
Increase in other noncurrent assets (161)(17) -
Increase in accounts payable, accrued and other liabilities 4,582 11,1225,014 3,085
------- ---------------
Total Adjustments 5,394 (318)adjustments 1,672 1,547
------- ---------------
Net cash provided by operating activities 15,737 2,6685,224 4,469
------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (9,648) (26,563)(2,540) (3,810)
Redemption (purchase) of investments - 3,000
(3,000)
------- ---------------
Net cash used in investing activities (6,648) (29,563)(2,540) (810)
------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferredcommon stock, net 11,253 - 19,400
Common stock issued upon exercise of warrants and options 8 439242 -
Proceeds from issuance of notes payable, net 385 318
Payment of notes receivable from sale of capital stock 27 165
Principal payments on capital leases and long-term debt (1,508) (49,858)
Premium on redemption of long-term debt - (2,287)(211) (193)
Payment of preferred stock dividend (900) (660)(300) (300)
Transaction costs (8) (679)
Repayment of notes payable, net (75) (569)(9) -
------- ---------------
Net cash used inprovided by (used in) financing activities (2,456) (34,198)11,387 (170)
------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,633 (61,093)14,071 3,489
CASH AND CASH EQUIVALENTS, beginning of period 7,930 9,240
75,588
------- ---------------
CASH AND CASH EQUIVALENTS, end of period $15,873 $ 14,495$22,001 $12,729
======= ===============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
---------------------
The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission (SEC). Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. However, the Company believes that the
disclosures are adequate to make the information presented not misleading.
These condensed consolidated financial statements should be read in conjunction
with the financial statements and the notes thereto for the year ended January
29, 199528, 1996 included in the Company's Form 10-K.
The unaudited condensed consolidated financial statements included herein
reflect all adjustments (which include only normal, recurring adjustments) that
are, in the opinion of management, necessary to state fairly the results for the
periods presented. The results for such periods are not necessarily indicative
of the results to be expected for the full fiscal year.
2. EARNINGS PER SHARE
------------------
Net income per common and equivalent share is computed by dividing net income
available to common stock (net income less preferred stock dividend
requirements) by the weighted average number of common and equivalent shares.
Common and common equivalent shares include common stock issuable upon exercise
of stock options and warrants (using the treasury stock method) less shares
assumed repurchased with the proceeds from the management notes. Common
equivalents included in the weighted average number of shares assume the
conversion of options outstanding under the Nonqualified Stock Option Plan, the
1993 Non-Employee Directors Plan, the 1993 Stock Option Plan and the warrants,
unless antidilutive. Certain options granted to the President are excluded from
the calculation due to their contingent nature.
For purposes of the calculation of earnings per share on a fully-diluted basis,
outstanding shares of convertible preferred stock are assumed to be converted if
dilutive.
3. INCOME TAX PROVISION
--------------------
The effective tax rate for the quarter ended October 29, 1995April 28, 1996 reflects the
estimated tax rate for the year endedending January 28, 199626, 1997 based upon projected
income and other factors. This rate differs fromfactors and approximates the combined federal and state of
California statutory rates primarily due to expected reductions inrates. The rate for the quarter ended April 30, 1995 reflects the
reversal of a previously established valuation allowance related tofor deferred tax
assets, primarily net operating loss carryforwards.
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4. RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
Effective January 29, 1996, the Company adopted the provisions of Statement of
Financial Accounting Standard (SFAS) No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of". This
pronouncement requires that long-lived assets and certain identifiable
intangible assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. An impairment loss is to be recognized when the sum of
undiscounted cash flows is less than the carrying amount of the asset. The
adoption of this pronouncement did not have a material impact on the Company's
financial condition or results of operations.
5. PUBLIC SALE OF COMMON STOCK (THE OFFERING)
------------------------------------------
In March, 1996, the Company received net proceeds of approximately $11.3 million
in connection with the public sale of 500,000 shares of its common stock. The
Company intends to use the net proceeds for general corporate purpose.
Pursuant to the public offering, the Company's largest stockholder also sold
2,375,000 shares and reduced its beneficial ownership from 48% to 18%.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
SinceThe following discussion and analysis should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended January
28, 1996 included in the Company's initial public offeringForm 10-K. This Form 10-Q contains forward-
looking statements which involve risks and uncertainties. The Company's actual
results may differ significantly from the results discussed in April 1993, new store expansion
has increased. In fiscal 1994 the forward-
looking statements. Factors that might cause such a difference include, but are
not limited to, those discussed in "Business-Risk Factors" in the Company's Form
10-K.
GENERAL
- -------
The Company opened 14 stores nine through the
acquisition of former Builders Emporium store sites, on a base of 43 stores.
Five stores will open in fiscal 19951994 and five stores in fiscal 1995. The
Company plans to tenopen five stores in fiscal 1996. As a result of the Company's
accelerated expansion and entry into Southern California, the Company incurred
substantial store openingspre-opening expenses amounting to $7.5 million for fiscal 1994
and $2.4 million for fiscal 1995. These pre-opening expenses consist
principally of store merchandising and stocking expenses, personnel recruitment
and training costs and grand-opening advertising and promotional expenses. In
fiscal 1996, the Company expects pre-opening expenses to be approximately $0.4
million to $0.5 million per year
are planned thereafter.store.
As the Company implements its new store opening program, operating expenses as a
percent of sales for the new stores will initially be higher, 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 Angeles market where a significant amount of its future
expansion will be directed.Southern 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.California stores.
The Company expects
thatexperienced a strong comparable store sales increase in fiscal 1995,
especially in the impactsecond half of these factors will bethe year. The Company does not expect to
reduce operating margins so long assustain its rate of comparable store sales growth in fiscal 1996, particularly
in the Company continues to open a large numbersecond half of stores relative to its existing
store base.the year.
The Company's results of operations exhibit some measuredegree of seasonality.
During the three fiscal years ended January 29, 1995, approximately 28.0% ofGenerally, the Company's annual sales and approximately 37.0% to 40.0% of its annual
operating income before pre-opening expenses were generatedare highest in the second
fiscalquarter and lowest in the fourth quarter. This is due primarily attributable to
increasedseasonality in sales of garden, nursery and related products during the first and second quarters, which ispeak at the
beginning of the spring/summer gardening season. WeatherThe Company has experienced losses
in the fourth quarter in the past and may experience losses in that quarter in
the future.
The Company's business can be negatively impacted by adverse weather conditions,
haveparticularly the
most impact on sales of these outdoor relatedgarden and nursery products during this period.
Conversely, during the three years ended January 29, 1995,which comprised
approximately 24.0%27% of the Company's annualtotal sales and approximately 13.0% to 19.0% of its annual
operating income before pre-opening expenses were generatedfor fiscal 1995. For example,
the Company's results in the fourthfirst half of fiscal quarter, due primarily to decreased sales of garden,1995 were adversely impacted
by unusually wet weather in Northern and Central California, and nursery and
related
productsgarden sales were also negatively affected during this quarter.
7the prolonged drought in
California in the early 1990s.
8
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RESULTS OF OPERATIONS
- ---------------------
The following table sets forth selected results of operations as percentages of
sales for the periods indicated:
Three Months Ended
Nine Months Ended
----------------------------- ----------------------------
October 29, October---------------------------
April 28, April 30,
October 29, October 30,1996 1995
1994 1995 1994
----------- ----------- ----------- --------------------- ---------
Sales 100.0% 100.0%
100.0% 100.0%
Gross margin 36.1 36.7 36.2 36.136.3 36.4
Selling general and
administrative expenses 30.6 32.8 29.7 30.429.5 29.9
Pre-opening expense 0.9 0.5 0.6 2.1
----- ----- ----- -----0.2 0.8
---------- ---------
Operating income 4.6 3.4 5.9 3.76.6 5.7
Interest expense, net 2.42.3 2.8
2.5 2.8
----- ----- ----- --------------- ---------
Income before provision 2.2 0.5 3.4 0.9for
income taxes 4.3 2.9
Income tax provision 0.8 - 0.9 -
----- ----- ----- -----1.8 0.6
---------- ---------
Net income 1.4% 0.5% 2.6% 0.9%
===== ===== ===== =====2.5% 2.3%
========== =========
THREE MONTHS ENDED OCTOBER 29,APRIL 28, 1996 AND APRIL 30, 1995
AND OCTOBER 30, 1994- ----------------------------------------------------
Sales for the thirdfirst quarter ended October 29,April 28, 1996 were $141.1 million, compared
to $125.4 million in the first quarter of fiscal 1995, were $131.5 million, an increase of 17.6% over sales of $111.8 million in the third quarter of fiscal
1994. This12.6%.
The increase reflects a 10.1%9.2% rise in comparable store sales gain during the quarter
as well as fivethree new stores opened since the thirdfirst quarter of last year.fiscal 1995. The
increase in the comparable store percentage partially reflects the diminishing
effect of eight competing warehouse home centers that opened primarilyan improving economic
climate in the
second half of fiscal 1993, which now have passed their anniversary. As a
group, the stores which were impacted by the eight warehouse openings showed a
positive comparable sales gain for the current quarter. Also, favorably
affecting comparable store sales were the recent closing of four competing
warehouse home centers, andCalifornia, the inclusion of sales gains achieved by 13maturing Orchard
stores opened duringwithin the last year which are now part oftwo years and sales generated through an increased
focus on the comparable store base.commercial customer segment and the Company's private label credit
program.
Gross margin increased $6.5$5.6 million (12.3%) from $41.0$45.6 million for the thirdfirst
quarter of fiscal 19941995 to $47.5$51.2 million for the comparable period this year.
Gross margin as a percent of sales decreased from 36.7%36.4% for the thirdfirst quarter of
fiscal 19941995 to 36.1%36.3% for the thirdfirst quarter of fiscal 1995. The decrease in gross margin
percentage is attributable primarily1996 due mainly to a lower markup on merchandise purchased
during the 1995 third quarter compared with an unusually high markupslightly
more promotional activity in the comparable period of 1994, partially offset by lower inventory shrinkage and
the leveraging of warehouse operating costs as the number of stores has
increased.fiscal 1996 first quarter.
Selling, general and administrative expenses for the thirdfirst quarter of fiscal
19951996 were 30.6%29.5% of sales compared with 32.8%29.9% of sales in the thirdfirst quarter
fiscal 1994.1995. Operating efficiencies as well as the sales gain for the quarter
resulted in a significant leveraging of payroll as a percentage of sales.
Most
other expense categories also experienced percent of sales reductions, although
to a lesser degree.
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9
Operating income for the thirdfirst quarter of fiscal 19951996 increased $2.2$2.1 million to
$6.0$9.3 million from $3.8$7.2 million in last year's third quarter. Operating income
before pre-opening expenses increased 65.3% to $7.2 million in the current
year's third quarter from $4.4 million in the previous year's thirdfirst quarter. Increased sales
and the leveraging of expenses were primarily responsible for the increase in
operating income. Pre-openingIn addition, pre-opening expenses in the thirdfirst quarter of
1995 increasedfiscal 1996 decreased to $1.5$0.2 million from $0.6$1.0 million in the thirdfirst quarter of
1994.fiscal 1995.
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The increasedecrease is primarily the result ofdue to two new stores being opened during theopening in last year's first quarter
of the current year and only oneversus no new store openedopenings in the comparable
quarter last year.
The Company recorded an income tax provisionthis year's first quarter.
Interest expense decreased by $0.2 million from $3.5 million for the thirdfirst
quarter of fiscal 1995 at an effective tax rate of 36.6% based onto $3.3 million for the estimated annual tax rate
for fiscal 1995 which takes into account projected income and other factors.
In the thirdfirst quarter of 1994, the Company did not record an income tax
provisionfiscal 1996.
Interest on mortgage loans decreased as a result of the benefitreduction in principal
balances and a decreased interest rate on the store mortgage loan due 2002 based
on an annual rate adjustment. In addition, the Company's improved cash position
in fiscal 1996 resulted in reduced borrowing under Orchard Supply's senior
revolving credit facility, as well as increased interest income on temporary
investments.
Income taxes were included in the fiscal 1995 first quarter results at an
effective rate of only 20.5% as compared with a fully taxed rate of 41.0% in
fiscal 1996. The provision for fiscal 1995 reflects the reversal of a
previously established valuation allowance against deferred tax assets,
primarily net operating losses. The valuation allowance attributable to net
operating loss carry forwards
against which a valuation allowance had previously been provided. See Note 3
to the Condensed Consolidated Financial Statements.
NINE MONTHS ENDED OCTOBER 29, 1995 AND OCTOBER 30, 1994
Sales for the nine months ended October 29, 1995 increased by 20.5% to $402.3
million from $333.9 millioncarryforwards was fully reversed in the comparable period of fiscal 1994. The
increase is attributable to a 6.3% gain in comparable store sales and a portion
of the sales contributed by 18 stores opened since the beginning of fiscal
1994. As previously discussed, the comparable store sales increase reflects
the diminishing effect of eight competing warehouse home centers that opened
primarily in 1993, the recent closing of four competing warehouse home centers,
and sales gains achieved by 13 Orchard stores opened last year which are now
part of the comparable store base.
Gross margin increased $24.9 million from $120.6 million for the first nine
months of fiscal 1994 to $145.5 million for the comparable period of 1995. As
a percentage of sales gross margin increased from 36.1% for the first nine
months of fiscal 1994 to 36.2% for the first nine months of fiscal 1995. The
increase in gross margin resulted primarily from reduced inventory shrinkage
and leveraging of warehouse operating costs.
Selling, general and administrative expenses increased by $17.9 million from
$101.4 million for the first nine months of fiscal 1994 to $119.4 million for
the first nine months of fiscal 1995. As a percentage of sales these expenses
decreased from 30.4% for the first nine months of fiscal 1994 to 29.7% for the
comparable period of 1995. Decreased payroll cost as a percentage of sales was
offset partially by an increase in occupancy cost as a percentage of sales.
Operating income increased by $11.6 million from $12.2 million in the first
nine months of fiscal 1994 to $23.9 million in the first nine months of fiscal
1995. Operating income before pre-opening expenses for the first nine months
of fiscal 1995 increased by $6.9 million or 36.0% from the comparable period of
1994. Sales increases and the leveraging of expenses were the main
contributors to increased operating income. Pre-opening expenses decreased to
$2.2 million for the first nine months of fiscal 1995 from $7.0 million for the
comparable period of last year. The decrease in pre-opening expense is due to
four new store openings in the first nine months of fiscal 1995 versus 13
stores in the same nine month period of last year.
Interest expense increased by $0.8 million from $9.2 million for the first nine
months of fiscal 1994 to $10.1 million for the first nine months of fiscal
1995. In the first nine months of fiscal 1994 the Company capitalized an
additional $0.8 million of construction period interest on new store
construction projects and realized $0.5 million more in interest income than in
the comparable period of 1995. The
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10
increase in interest expense was partially offset by a $0.4 expense reduction
due to a decrease in long-term debt.
The Company recorded an income tax provision for the first nine months of
fiscal 1995 at an effective tax rate of 25.1% based on the estimated annual tax
rate for fiscal 1995 which takes into account projected income and other
factors. In the first nine months of fiscal 1994, the Company did not record
an income tax provision as a result,
of the benefit of net operating loss carry
forwards against which a valuation allowance had previously been provided.effective tax rates for future periods are expected to approximate the rate
for the fiscal 1996 first quarter. See Note 3 to the Condensed Consolidated
Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's liquidity needs arise primarily from the funding of the Company's
capital expenditures, working capital requirements, ongoing expansion program,
and debt service on indebtedness.
The Company's wholly-owned subsidiary, Orchard Supply, Hardware Corporation
("Orchard Supply"), has fundedhad long-term debt and
capital lease obligations as of October 29, 1995April 28, 1996 of $133.9 million, including (i)
$100.0 million of 9 3/8% senior notes due February 15, 2002, (ii) $20.0 million
of store mortgage notes and (iii) $12.8 million of warehouse mortgage notes. In
addition, the Company has up to $40.0 million of revolving credit availability
under Orchard Supply's senior revolving credit facility (the "Financing
Agreement") (with a $10.0 million sublimit for guarantees of letters of credit) (the "Financing Agreement") of which no
borrowings and $5.9$4.9 million of guarantees of letters of credit were outstanding as of October 29, 1995, (ii) $20.2 million outstanding under a
store mortgage facility, (iii) $12.8 million aggregate principal amount of
warehouse mortgage notes, (iv) $1.0 million of store mortgage assumed in
connection with the acquisition of a former Builders Emporium store site and
(v) $100.0 million aggregate principal amount of 9 3/8% senior notes due
February 15, 2002.at April 28,
1996. Orchard Supply's debt instruments contain financial and operating
covenants including, among other things, requirements that Orchard Supply
maintain certain financial ratios and satisfy certain financial tests and
limitations on Orchard Supply's ability to make capital expenditures, to incur
other indebtedness, and to pay dividends. As of October 29, 1995,At April 28, 1996, the Company and
Orchard Supply were in compliance with all covenants contained in such debt
instruments. Aggregate scheduled principal repayments on Orchard
Supply's long term debt instruments, including capital leases, for fiscal
1995, 1996 and 1997 are $1.7 million, $2.0 million and $2.4 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 May 1999.
10
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. The Company expects that for its metropolitan Los Angeles stores,
pre-opening expenses for a new store will
range from approximately $500,000$0.4 million to $600,000
(compared to $400,000 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
10
11 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 - $6,000,000$4.0 million to $7.0 million if the
entire property were to be owned by the Company.
The Company's three-year capital expenditure plan for fiscal 1995, 1996 and 1997 provides for
annual capital expenditures of $11.8 million, $19.6$19.8 million and $17.0 million, respectively.
This capital expenditure plan includes the expenditures of approximately $4.0
million to $5.0 million annually for the maintenance of existing facilities.
The remainder of the annual budgeted amounts will be used primarily for the
opening of new stores, including fixtures and leasehold improvements with
respect to the new stores, and computer equipment. The Company has historically
obtained some of its equipment through operating leases, and expects to be able
to procure such arrangements in the future. The inability of the Company to
procure such arrangements for its capital expenditure program may have a
negative impact on the ability of the Company to make capital expenditures.
In March 1996, the Company received net proceeds of approximately $11.3 million
in connection with the public sale of 500,000 shares of its common stock. The
Company intends to use the net proceeds of the Offering for general corporate
purposes, including working capital, and to fund its continuing new store
expansion.
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 Company's operating
requirements and capital expenditure program and meet its debt and dividend
obligations for the next several years.
Any material shortfalls of operating cash flow could require the Company to
reduce its expansion plans.
EFFECT OF INFLATION
- -------------------
The effect of inflation on the Company's result of operations has not been
material in the periods discussed.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In March 1995, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 121 "Accounting for the Impairment of Long- Lived Assets and for
Long-Lived Assets to Be Disposed of." This pronouncement requires that
long-lived assets and certain identifiable intangible assets be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. An impairment loss is to
be recognized when the sum of undiscounted cash flows is less than the carrying
amount of the asset. Measurement of the loss for assets that the entity
expects to hold and use are to be based on the fair value of the asset.
Although management does not expect this pronouncement to have a material
impact on the Company's financial condition or results of operations at
adoption, its provisions, when adopted, will be applicable to any future
assessments of its long-lived assets. SFAS No. 121 must be adopted no later
than fiscal 1996.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit Number
--------------
10.1 Eighth Amendment to Note Agreement dated as of August
7, 1995 by and among Orchard Supply Hardware
Corporation, Orchard Supply Hardware Stores Corporation (formerly1993 Stock Option
Plan dated November 19, 1993, as amended. Incorporated by
reference to Exhibit A of the Company's Proxy Statement
dated April 10, 1996.
10.2 Orchard Holding Corporation)
and Teachers Insurance and Annuity AssociationSupply Hardware Stores Corporation 1996 Non-Employee
Directors Stock Option Plan. Incorporated by reference to
Exhibit B of America, with respect to the 10.64% Senior Secured
Notes due 2002.Company's Proxy Statement dated April 10,
1996.
27 Financial data schedule for the ninethree months ended October 29, 1995.April 28,
1996. Filed herewith.
(b) Reports on Form 8-K.
None.Current Report on Form 8-K dated February 23, 1996
containing the financial statements referenced in subsection
(a) of Item 14 of the Company's Annual Report on Form 10-K
for the fiscal year ended January 28, 1996.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ORCHARD SUPPLY HARDWARE STORES CORPORATION
Date: DecemberJune 11, 19951996 By: /s/ Maynard Jenkins
--------------------------------
Maynard Jenkins
Chief Executive Officer
Date: DecemberJune 11, 19951996 By: /s/ Stephen M. Hilberg
--------------------------------
Stephen M. Hilberg
Chief Financial Officer and
Vice President-Finance
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