<PAGE>
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 April 30, 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 April 30, 1995 there were 6,983,400 shares of the registrant's Common Stock,
$0.01 par value, outstanding.
Page 1 of 12
<PAGE>
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
- ------- --------------------- --------
<C> <S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets:
April 30, 1995 and January 29, 1995 3
Condensed Consolidated Statements of Income:
Three Month Periods Ended April 30, 1995
and May 1, 1994 4
Condensed Consolidated Statements of Cash Flows:
Three Month Periods Ended April 30, 1995 and
May 1, 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 4. Submission of Matters to a Vote of
Security Holders 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
</TABLE>
2
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENT
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
April 30, January 29,
1995 1995
---------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 12,729 $ 9,240
Investments - 3,000
Accounts receivable, net 15,060 14,417
Inventories 106,178 103,438
Prepaid expenses and other 9,018 8,221
Assets held for disposal 6,177 6,145
-------- --------
Total current assets 149,162 144,461
PROPERTY AND EQUIPMENT, net 131,388 129,840
OTHER ASSETS, net 17,946 18,358
-------- --------
Total assets $298,496 $292,659
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable, accrued and other liabilities $ 74,107 $ 70,919
Notes payable 1,091 773
Current portion of capital leases
and long term debt 1,741 1,720
-------- --------
Total current liabilities 76,939 73,412
OTHER LIABILITIES, net of current portion 1,334 1,437
CAPITAL LEASES AND LONG-TERM DEBT,
net of current portion 135,018 135,232
-------- --------
Total liabilities 213,291 210,081
-------- --------
STOCKHOLDERS' EQUITY:
Common stock 70 70
Preferred stock 8 8
Additional paid-in-capital 90,400 90,700
Less notes receivable from
sale of common stock (146) (151)
Accumulated deficit (5,127) (8,049)
-------- --------
Total equity 85,205 82,578
-------- --------
Total liabilities and stockholders' equity $298,496 $292,659
======== ========
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements.
3
<PAGE>
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended
----------------------------
April 30, May 1,
1995 1994
--------- ----------
<S> <C> <C>
Sales $125,352 $96,555
Cost of goods sold 79,708 61,949
-------- -------
Gross margin 45,644 34,606
Selling, general and administrative expenses 37,458 28,818
Pre-opening expenses 995 3,766
-------- -------
Operating income 7,191 2,022
Interest expense 3,515 2,939
-------- -------
Income (loss) before provision for income taxes 3,676 (917)
Income tax provision 754 -
-------- -------
Net income (loss) 2,922 (917)
Preferred stock dividends 300 217
-------- -------
Net income (loss) available to common stock $ 2,622 $(1,134)
======== =======
Income (loss) per common share:
Primary $ 0.38 $ (0.16)
======== =======
Fully diluted $ 0.35 $ (0.16)
======== =======
Weighted average number of shares outstanding:
Primary 6,976 6,969
======== =======
Assuming full dilution 8,273 6,969
======== =======
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements.
4
<PAGE>
ORCHARD SUPPLY HARDWARE CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------
April 30, 1995 May 1, 1994
-------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,922 $ (917)
Non-cash adjustments to net income-
Depreciation and amortization 2,628 1,867
Loss on asset disposals 14 -
Changes in assets and liabilities-
Increase in accounts receivable (643) (556)
Increase in inventories (2,740) (3,645)
Increase in prepaid expenses and other (797) (2,142)
Increase in accounts payable, accrued and other liabilities 3,085 8,737
------- --------
Total Adjustments 1,547 4,261
------- --------
Net cash provided by operating activities 4,469 3,344
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (3,810) (11,200)
Redemption of investments 3,000 -
------- --------
Net cash used in investing activities (810) (11,200)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock - 19,400
Common stock issued upon exercise of warrants and options - 439
Proceeds from issuance of notes payable, net 318 -
Payment of notes receivable from sale of capital stock 5 5
Principal payments on capital leases and long-term debt (193) (49,496)
Premium on redemption of long-term debt - (2,287)
Payment of preferred stock dividend (300) -
Transaction costs - (614)
Repayment of notes payable, net - (712)
------- --------
Net cash provided by (used in) financing activities (170) (33,265)
------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,489 (41,121)
CASH AND CASH EQUIVALENTS, beginning of period 9,240 75,588
------- --------
CASH AND CASH EQUIVALENTS, end of period $12,729 $ 34,467
======= ========
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements
5
<PAGE>
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 (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 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 Amended 1989 Nonqualified Stock
Option 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 April 30, 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
<PAGE>
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.
Current plans call for four or five store openings in fiscal 1995 and five to
ten store openings per year 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
<PAGE>
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
-----------------------
April 30, May 1,
1995 1994
--------- ---------
<S> <C> <C>
Sales 100.0% 100.0%
Gross margin 36.4 35.8
Selling general and
administrative expenses 29.9 29.8
Pre-opening expense 0.8 3.9
----- -----
Operating income 5.7 2.1
Interest expense, net 2.8 3.0
----- -----
Income before provision 2.9 (0.9)
Income tax provision 0.6 -
----- -----
Net income 2.3% 0.9%
===== =====
</TABLE>
THREE MONTHS ENDED APRIL 30, 1995 AND MAY 1, 1994
- -------------------------------------------------
Sales for the first quarter ended April 30, 1995 increased by 29.8% to $125.4
million from $96.6 million in the first quarter of 1994. This increase reflects
16 new stores opened since the beginning of fiscal 1994 and a 1.8% increase in
comparable store sales. Comparable store sales were impacted favorably by the
diminishing effect of eight competing warehouse home centers that opened
primarily in the second half of 1993 which have now passed their first
anniversary, as well as the recent closing of four competing warehouse home
centers. Exceptionally rainy and cold weather in March and April had a negative
effect on sales.
Gross margin increased $11.0 million from $34.6 million for the first quarter of
fiscal 1994 to $45.6 million for the comparable period this year. Gross margin
as a percent of sales increased from 35.8% for the first quarter of fiscal 1994
to 36.4% for the first quarter of fiscal 1995. The increase in gross margin
percentage is attributable primarily to the reduction of inventory shrinkage and
warehouse operating costs as a percent of sales. Management believes that
programs instituted over the last two years involving installation at the stores
of tool corrals and electronic merchandise surveillance and increased employee
awareness have been beneficial in controlling inventory shrinkage. Improved
systems and tight expense controls coupled with the leveraging of fixed
warehouse costs have resulted in lowering the ratio of warehouse expenses to
sales.
Selling, general and administrative expenses increased from $28.8 million or
29.8% of sales for the first quarter of 1994 to $37.5 million or 29.9% of sales
for the first quarter of fiscal 1995. The inclusion in the first quarter of
1995 of sixteen stores opened since the beginning of last year that have not yet
reached sales maturity increased the ratio of store selling expenses to sales.
However, this impact was largely offset by a reduction in corporate
headquarters expenses as a percent of sales. As these new stores pass their
first anniversary starting in the second quarter of 1995 it is expected that
8
<PAGE>
the current year's ratio of selling, general and administrative expenses will
compare more favorably with last year's ratio.
Operating income for the first quarter of fiscal 1995 increased $5.2 million to
$7.2 million from $2.0 million in last year's first quarter. Operating income
before pre-opening expenses increased by 41.4% to $8.2 million in the current
year's first quarter from $5.8 million in the previous year's first quarter.
Increased sales and higher gross margin percentage contributed to the increase
in operating income.
Interest expense increased from $2.9 million for the first quarter of 1994 to
$3.5 million for the first quarter of 1995. A reduction of interest cost of
$0.3 million resulted from a decrease in long-term debt. However, in the first
quarter of 1994 the Company capitalized an additional $0.6 million of
construction period interest on new store construction projects and realized
$0.3 million more in interest income than in the comparable period of 1995.
The Company recorded an income tax provision for the first quarter of fiscal
1995 at an effective tax rate of 20.5% based on the estimated annual tax rate
for fiscal 1995 which takes into account projected income and other factors. In
the first quarter of 1995, the Company did not record an income tax benefit 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 including (i) up to $20.0
million of revolving credit availability under Orchard Supply's senior revolving
credit facility (the "Financing Agreement") (with an $8.0 million sublimit for
guarantees of letters of credit) of which no borrowings and $3.2 million of
guarantees of letters of credit were outstanding as of April 30, 1995, (ii)
$20.5 million outstanding under a store mortgage facility, (iii) $13.7 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 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. As of April 30, 1995, the
Company and Orchard Supply were in compliance with all covenants contained in
such debt instruments. Aggregate scheduled principal repayments on the
Company'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
9
<PAGE>
capital and general corporate purposes. The Financing Agreement remains
effective through October 29, 1995. Orchard Supply is currently negotiating a
new four year revolving credit facility.
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 $600,000 to $700,000 (compared to
$450,000 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 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 $10.8 million, $16.2 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.
10
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on May 19, 1995
to (1) elect eight Directors to serve until the next Annual Meeting of
Stockholders and until their respective successors are elected and qualified and
(2) ratify the appointment of Arthur Andersen & Co. as the Company's independent
auditors (the "Auditors") for the fiscal year ending January 28, 1996.
All eight nominees were duly elected. The following sets forth the
number of votes cast for, against or withheld, as well as the number of
abstentions and broker nonvotes, as to each nominee:
<TABLE>
<CAPTION>
ABSTENTIONS
AGAINST OR AND BROKER
NOMINEE FOR WITHHELD NONVOTES
- -------------------- --------- ---------- -----------
<S> <C> <C> <C>
Matt L. Figel 6,439,805 48,081 0
Morton Godlas 6,441,955 45,931 0
William A. Hall 6,441,805 46,081 0
Stephen M. Hilberg 6,441,955 45,931 0
Maynard Jenkins 6,441,415 46,471 0
J. Frederick Simmons 6,439,805 48,081 0
Ronald P. Spogli 6,440,455 47,431 0
William M. Wardlaw 6,440,105 47,781 0
</TABLE>
The appointment of the Auditors was duly ratified. The following sets
forth the number of votes cast for, against or withheld, as well as the number
of abstentions and broker nonvotes, as to the appointment of the Auditors:
<TABLE>
<CAPTION>
ABSTENTIONS
AGAINST OR AND BROKER
FOR WITHHELD NONVOTES
--------- ---------- -----------
<S> <C> <C>
6,459,662 20,496 7,728
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit Number
--------------
27.1 Financial data schedule for the three months ended April 30,
1995.
(b) Reports on Form 8-K.
None.
11
<PAGE>
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: June 12, 1995 By: /s/ Maynard Jenkins
---------------------------- --------------------------------
Maynard Jenkins
President and
Chief Executive Officer
Date: June 12, 1995 By: /s/ Stephen M. Hilberg
---------------------------- --------------------------------
Stephen M. Hilberg
Chief Financial Officer and
Vice President-Finance
12
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- ------------------------------------------------------------
<C> <S>
27.1 Financial Data Schedule for the three months ended April 30,
1995.
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-29-1995
<PERIOD-START> JAN-30-1995
<PERIOD-END> APR-30-1995
<CASH> 12,729
<SECURITIES> 0
<RECEIVABLES> 16,282
<ALLOWANCES> 1,222
<INVENTORY> 106,178
<CURRENT-ASSETS> 149,162
<PP&E> 162,926
<DEPRECIATION> 31,538
<TOTAL-ASSETS> 298,496
<CURRENT-LIABILITIES> 76,939
<BONDS> 135,018
<COMMON> 70
0
8
<OTHER-SE> 85,127
<TOTAL-LIABILITY-AND-EQUITY> 298,496
<SALES> 125,352
<TOTAL-REVENUES> 125,352
<CGS> 79,708
<TOTAL-COSTS> 79,708
<OTHER-EXPENSES> 38,453
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,515
<INCOME-PRETAX> 3,676
<INCOME-TAX> 754
<INCOME-CONTINUING> 2,922
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,922
<EPS-PRIMARY> 0.38
<EPS-DILUTED> 0.35
</TABLE>
