<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 29, 1995
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
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) (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 No ____
At October 29, 1995 there were 6,984,475 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
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
- ------- ---------------------
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets:
October 29, 1995 and January 29, 1995 3
Condensed Consolidated Statements of Income:
Three and Nine Month Periods Ended October 29, 1995
and October 30, 1994 4
Condensed Consolidated Statements of Cash Flows:
Nine Month Periods Ended October 29, 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 12
Signatures 13
</TABLE>
2
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PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENT
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
October 29, January 29,
1995 1995
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 15,873 $ 9,240
Investments - 3,000
Accounts receivable, net 17,508 14,417
Inventories 107,233 103,438
Prepaid expenses and other 8,879 8,221
Assets held for disposal 6,384 6,145
-------- --------
Total current assets 155,877 144,461
PROPERTY AND EQUIPMENT, net 132,183 129,840
OTHER ASSETS, net 17,076 18,358
-------- --------
Total assets $305,136 $292,659
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, accrued and other
liabilities $ 76,530 $ 70,919
Notes payable 698 773
Current portion of capital leases
and long term debt 2,014 1,720
-------- --------
Total current liabilities 79,242 73,412
OTHER LIABILITIES, net of current portion 408 1,437
CAPITAL LEASES AND LONG-TERM DEBT,
net of current portion 133,430 135,232
-------- --------
Total liabilities 213,080 210,081
-------- --------
STOCKHOLDERS' EQUITY:
Common stock 70 70
Preferred stock 8 8
Additional paid-in-capital 90,408 90,700
Less notes receivable from
sale of common stock (124) (151)
Retained earnings (accumulated deficit) 1,694 (8,049)
-------- --------
Total equity 92,056 82,578
-------- --------
Total liabilities and stockholders'
equity $305,136 $292,659
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
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ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
------------------------ ------------------------
October 29, October 30, October 29, October 30,
1995 1994 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales $402,314 $333,911 $131,497 $111,790
Cost of goods sold 256,831 213,292 83,981 70,747
Gross margin 145,483 120,619 47,516 41,043
Selling, general and administrative expenses 119,371 101,424 40,277 36,665
Pre-opening expenses 2,241 6,973 1,219 595
-------- -------- -------- --------
Operating income 23,871 12,222 6,020 3,783
Interest expense 10,068 9,236 3,149 3,185
-------- -------- -------- --------
Income before provision for income taxes 13,803 2,986 2,871 598
Income tax provision 3,460 - 1,051 -
-------- -------- -------- --------
Net income 10,343 2,986 1,820 598
Preferred stock dividends 900 823 300 303
-------- -------- -------- --------
Net income available to common stock $ 9,443 $ 2,163 $ 1,520 $ 295
======== ======== ======== ========
Income per common share:
Primary $ 1.35 $ 0.31 $ 0.22 $ 0.04
======== ======== ======== ========
Fully diluted $ 1.24 $ 0.31 $ 0.22 $ 0.04
======== ======== ======== ========
Weighted average number of shares outstanding:
Primary 7,020 6,985 7,060 6,990
======== ======== ======== ========
Fully diluted 8,315 8,265 8,340 8,270
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
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ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------
October 29, October 30,
1995 1994
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $10,343 $ 2,986
Non-cash adjustments to net income-
Depreciation and amortization 8,010 6,110
Loss on asset disposals 507 789
Changes in assets and liabilities-
Increase in accounts receivable (3,091) (2,040)
Increase in inventories (3,795) (14,861)
Increase in prepaid expenses and other (658) (1,438)
Increase in other noncurrent assets (161) -
Increase in accounts payable, accrued and
other liabilities 4,582 11,122
------- --------
Total Adjustments 5,394 (318)
------- --------
Net cash provided by operating activities 15,737 2,668
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (9,648) (26,563)
Redemption (purchase) of investments 3,000 (3,000)
------- --------
Net cash used in investing activities (6,648) (29,563)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock - 19,400
Common stock issued upon exercise of warrants
and options 8 439
Payment of notes receivable from sale of
capital stock 27 16
Principal payments on capital leases and long-term
debt (1,508) (49,858)
Premium on redemption of long-term debt - (2,287)
Payment of preferred stock dividend (900) (660)
Transaction costs (8) (679)
Repayment of notes payable, net (75) (569)
------- --------
Net cash used in financing activities (2,456) (34,198)
------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,633 (61,093)
CASH AND CASH EQUIVALENTS, beginning of period 9,240 75,588
------- --------
CASH AND CASH EQUIVALENTS, end of period $15,873 $ 14,495
======= ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
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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, 1995 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
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, 1995 reflects the
estimated tax rate for the year ended January 28, 1996 based upon projected
income and other factors. This rate differs from the combined federal and
state of California statutory rates primarily due to expected reductions in the
previously established valuation allowance related to deferred tax assets,
primarily net operating loss carryforwards.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
Since the Company's initial public offering in April 1993, new store expansion
has increased. In fiscal 1994 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 1995 and five to ten store openings per year
are planned thereafter.
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. In addition, the Company expects that it will generally experience
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. The Company believes, however, that these higher
expenses will be offset by higher sales at these stores than are typical of
mature Orchard stores in Northern and Central California. The Company expects
that the impact of these factors will be to reduce 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 generated 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
beginning of the spring/summer gardening season. Weather conditions have 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%
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.
7
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RESULTS OF OPERATIONS
The following table sets forth selected results of operations as percentages of
sales for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------- ----------------------------
October 29, October 30, October 29, October 30,
1995 1994 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0%
Gross margin 36.1 36.7 36.2 36.1
Selling general and
administrative expenses 30.6 32.8 29.7 30.4
Pre-opening expense 0.9 0.5 0.6 2.1
----- ----- ----- -----
Operating income 4.6 3.4 5.9 3.7
Interest expense, net 2.4 2.8 2.5 2.8
----- ----- ----- -----
Income before provision 2.2 0.5 3.4 0.9
Income tax provision 0.8 - 0.9 -
----- ----- ----- -----
Net income 1.4% 0.5% 2.6% 0.9%
===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED OCTOBER 29, 1995 AND OCTOBER 30, 1994
Sales for the third quarter ended October 29, 1995 were $131.5 million, an
increase of 17.6% over sales of $111.8 million in the third quarter of fiscal
1994. This increase reflects a 10.1% comparable store sales gain during the
quarter as well as five new stores opened since the third quarter of last year.
The increase in comparable store percentage partially reflects the diminishing
effect of eight competing warehouse home centers that opened primarily 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, and the inclusion of sales gains achieved by 13 Orchard
stores opened during last year which are now part of the comparable store base.
Gross margin increased $6.5 million from $41.0 million for the third quarter of
fiscal 1994 to $47.5 million for the comparable period this year. Gross margin
as a percent of sales decreased from 36.7% for the third quarter of fiscal 1994
to 36.1% for the third quarter of fiscal 1995. The decrease in gross margin
percentage is attributable primarily to a lower markup on merchandise purchased
during the 1995 third quarter compared with an unusually high markup 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.
Selling, general and administrative expenses for the third quarter of fiscal
1995 were 30.6% of sales compared with 32.8% of sales in the third quarter
fiscal 1994. 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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Operating income for the third quarter of fiscal 1995 increased $2.2 million to
$6.0 million from $3.8 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 third quarter.
Increased sales and the leveraging of expenses were primarily responsible for
the increase in operating income. Pre-opening expenses in the third quarter of
1995 increased to $1.5 million from $0.6 million in the third quarter of 1994.
The increase is primarily the result of two new stores being opened during the
quarter of the current year and only one new store opened in the comparable
quarter last year.
The Company recorded an income tax provision for the third quarter of fiscal
1995 at an effective tax rate of 36.6% based on the estimated annual tax rate
for fiscal 1995 which takes into account projected income and other factors.
In the third quarter of 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. 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 million 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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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. 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 funded debt obligations as of October 29, 1995
including (i) up to $40.0 million of revolving credit availability under
Orchard Supply's senior revolving credit facility (with a $10.0 million
sublimit for guarantees of letters of credit) (the "Financing Agreement") of
which no borrowings and $5.9 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. 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, 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 1994 of
$11.1 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.
In connection with Orchard's expansion plans, the Company anticipates capital
expenditures of approximately $900,000 for furniture, fixtures and equipment
for each new store opened, a portion of which may be leased under operating
leases. The Company expects that for its metropolitan Los Angeles stores,
pre-opening expenses will range from approximately $500,000 to $600,000
(compared to $400,000 in its Northern and Central California markets). The
initial inventory requirement for new stores, net of trade credit, is estimated
at $900,000 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
to $1,500,000 per store. If the
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Company elects to purchase the real estate, the capital expenditure would range
from approximately $2,500,000 for owned store improvements constructed on
leased land to $4,000,000 - $6,000,000 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 million
and $17.0 million, respectively. This capital expenditure plan includes the
expenditures of approximately $4.0 million to $5.0 million annually for the
maintenance of existing facilities. The remainder of the annual budgeted
amounts will be used primarily for the opening of new stores, including
fixtures and leasehold improvements with respect to the new stores, and
computer equipment. The Company has historically obtained some of its
equipment through operating leases, and expects to be able to procure such
arrangements in the future. The inability of the Company to procure such
arrangements for its capital expenditure program may have a negative impact on
the ability of the Company to make capital expenditures.
The Company believes that funds from operations, together with borrowings 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.
11
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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 (formerly Orchard Holding Corporation)
and Teachers Insurance and Annuity Association of
America, with respect to the 10.64% Senior Secured
Notes due 2002.
27 Financial data schedule for the nine months ended
October 29, 1995.
(b) Reports on Form 8-K.
None.
12
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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: December 11, 1995 By: /s/ Maynard Jenkins
--------------------------------
Maynard Jenkins
Chief Executive Officer
Date: December 11, 1995 By: /s/ Stephen M. Hilberg
--------------------------------
Stephen M. Hilberg
Chief Financial Officer and
Vice President-Finance
13
<PAGE> 1
EXHIBIT 10.1
EIGHTH AMENDMENT
TO
NOTE AGREEMENT
This Eighth Amendment to the Note Agreement (the "Amendment") is
entered into as of August 7, 1995 by and among ORCHARD SUPPLY HARDWARE
CORPORATION, a Delaware corporation (the "Company"), ORCHARD SUPPLY HARDWARE
STORES CORPORATION (formerly Orchard Holding Corporation), a Delaware
corporation ("Holding"), and TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF
AMERICA ("Teachers").
A. This Amendment amends the Note Agreement dated as of May 15,
1992, as amended by Amendment to Note Agreement dated as of February 8, 1993,
Second Amendment to Note Agreement dated as of November 23, 1993, Third
Amendment to Note Agreement dated as of November 30, 1993, the Fourth Amendment
to Note Agreement dated as of January 19, 1994, the Fifth Amendment to Note
Agreement dated as of January 29, 1994, the Sixth Amendment to Note Agreement
dated as of April 27, 1994 and the Seventh Amendment to Note Agreement dated as
of May 31, 1994 (collectively, the "Agreement") by and among the Company,
Holding and Teachers pursuant to which the Company's 10.64% Senior Secured
Notes due May 31, 2002 (the "Notes") were issued.
B. The purpose of this Amendment is to set forth the
understandings and agreements of the Company, Holding and Teachers with respect
to the following amendments of the provisions of the Agreement on the
conditions stated herein.
C. Section 19 of the Agreement provides that the Agreement may be
amended by an instrument in writing executed by the Company and the written
consent of the holders of at least 66-2/3% in aggregate principal amount of
outstanding Notes.
NOW, THEREFORE, based upon the foregoing and in consideration of the
covenants, agreements and undertakings contained in this Amendment, the parties
hereto agree as follows:
1. Section 14 of the Agreement is hereby amended by amending the
defined terms listed below to read in their entirety as follows:
a. Change of Control: the happening of either of the following
events: (i) Holding shall cease to own, beneficially and of record, 100% of the
capital stock of the Company; or (ii) a sale or transfer of 51% or more of the
equity of Holding to an entity that is not an Affiliate of the Company or
Holding, provided that for purposes of calculating the percentage of shares of
common stock or voting power of Holding so owned or controlled, shares issued
in connection with an underwritten registered public offering shall be excluded
from the calculation.
<PAGE> 2
b. Credit Agreement: that certain Credit Agreement dated as of
August 8, 1995 between the Company and Bank of America National Trust and
Savings Association, as the same may be amended, amended and restated,
supplemented, or otherwise modified from time to time.
c. Holding Guaranty: the guaranty of Holding dated as of August
8, 1995, executed by Holding in respect of the Obligations.
2. Section 11.4(e) of the Agreement is hereby amended to read in
its entirety as follows:
"(e) the Company may become and remain liable with respect to
reimbursement obligations in respect of Letters of Credit, provided,
that the Company's actual and contingent reimbursement obligations
with respect to all Letters of Credit shall not exceed, in the
aggregate, $10,000,000 at any time;"
3. By its signature below the Company further represents that
upon the effectiveness of this Amendment there are no defaults or Events of
Default under the terms of the Agreement.
4. The amendments to the Agreement specified herein shall become
effective as of the date specified above when executed by all of the parties
hereto.
5. All terms used herein without definition shall have the
meanings ascribed to them in the Agreement.
6. In the event of any conflict or inconsistency between the
provisions of this Amendment and the provisions of the Agreement with respect
to the matters set forth herein, the provisions of this Amendment shall
control. Each and every other term, condition, covenant, representation,
warranty and provisions set forth in the Agreement shall remain in full force
and effect and is hereby ratified, adopted and confirmed in full. All
references to the Agreement in any other agreement or document shall hereafter
be deemed to refer to the Agreement, as amended.
-2-
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first written above.
ORCHARD SUPPLY HARDWARE CORPORATION,
a Delaware corporation
ATTEST: /s/ Stephen M. Hilberg
-----------------------------------
Stephen M. Hilberg,
Chief Financial Officer
By:_______________________
Michael Seda, Secretary
ORCHARD SUPPLY HARDWARE STORES
CORPORATION (formerly, ORCHARD HOLDING
CORPORATION), a Delaware corporation
ATTEST: /s/ Stephen M. Hilberg
-------------------------------------
Stephen M. Hilberg,
Chief Financial Officer
By:_______________________
Michael Seda, Secretary
TEACHERS INSURANCE AND ANNUITY
ASSOCIATION OF AMERICA
By: /s/ Mary E. Brennan
----------------------------------
Its: Associate Director-Private
Placements
ATTEST: $12,806,300.00
----------------------------------
Principal Amount of Notes
By: /s/
------------------------
-3-
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<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-28-1996
<PERIOD-START> JAN-30-1995
<PERIOD-END> OCT-29-1995
<EXCHANGE-RATE> 1
<CASH> 15,873
<SECURITIES> 0
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<ALLOWANCES> 1,527
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<PP&E> 167,264
<DEPRECIATION> 35,081
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<COMMON> 70
0
8
<OTHER-SE> 91,978
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<SALES> 402,314
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<INCOME-TAX> 3,460
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<EPS-PRIMARY> 1.35
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</TABLE>
