<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 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
---------
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 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] No [_]
At April 28, 1996 there were 7,535,673 shares of the registrant's Common Stock,
$0.01 par value, outstanding.
Page 1 of 13
<PAGE>
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
- ------- ---------------------
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets:
April 28, 1996 and January 28, 1996 3
Condensed Consolidated Statements of Income:
Three Month Periods Ended April 28, 1996
and April 30, 1995 4
Condensed Consolidated Statements of Cash Flows:
Three Month Periods Ended April 28, 1996
and April 30, 1995 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
<CAPTION>
PART II. OTHER INFORMATION
- -------- -----------------
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 28, January 28,
1996 1996
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 22,001 $ 7,930
Accounts receivable, net 20,079 16,597
Inventories 118,521 116,761
Prepaid expenses and other 9,437 8,391
Assets held for disposal 6,513 6,513
-------- --------
Total current assets 176,551 156,192
PROPERTY AND EQUIPMENT, net 132,664 132,645
OTHER ASSETS, net 16,283 16,699
-------- --------
Total assets $325,498 $305,536
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable, accrued and other liabilities $ 82,343 $ 77,329
Notes payable 1,069 684
Current portion of capital leases
and long term debt 2,047 2,024
-------- --------
Total current liabilities 85,459 80,037
CAPITAL LEASES AND LONG-TERM DEBT,
net of current portion 132,008 132,242
-------- --------
Total liabilities 217,467 212,279
-------- --------
STOCKHOLDERS' EQUITY:
Common stock 75 70
Preferred stock 8 8
Additional paid-in-capital 102,102 90,612
Less notes receivable from
sale of common stock (66) (93)
Retained earnings 5,912 2,660
-------- --------
Total stockholders' equity 108,031 93,257
-------- --------
Total liabilities and stockholders' equity $325,498 $305,536
======== ========
</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 28, April 30,
1996 1995
--------- ---------
<S> <C> <C>
Sales $141,111 $125,352
Cost of goods sold 89,906 79,708
-------- --------
Gross margin 51,205 45,644
Selling, general and administrative expenses 41,689 37,458
Pre-opening expenses 221 995
-------- --------
Operating income 9,295 7,191
Interest expense 3,267 3,515
-------- --------
Income before provision for income taxes 6,028 3,676
Income tax provision 2,476 754
-------- --------
Net income 3,552 2,922
Preferred stock dividends 300 300
-------- --------
Net income available to common stock $ 3,252 $ 2,622
======== ========
Income per common share:
Primary $ 0.44 $ 0.38
======== ========
Fully diluted $ 0.41 $ 0.35
======== ========
Weighted average number of shares outstanding:
Primary 7,368 6,976
======== ========
Fully diluted 8,670 8,273
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
<PAGE>
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------
April 28, 1996 April 30, 1995
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,552 $ 2,922
Non-cash adjustments to net income-
Depreciation and amortization 2,774 2,628
Loss on asset disposals 189 14
Changes in assets and liabilities-
Increase in accounts receivable (3,482) (643)
Increase in inventories (1,760) (2,740)
Increase in prepaid expenses and other (1,046) (797)
Increase in other noncurrent assets (17) -
Increase in accounts payable, accrued and other liabilities 5,014 3,085
------- -------
Total adjustments 1,672 1,547
------- -------
Net cash provided by operating activities 5,224 4,469
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (2,540) (3,810)
Redemption of investments - 3,000
------- -------
Net cash used in investing activities (2,540) (810)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net 11,253 -
Common stock issued upon exercise of warrants and options 242 -
Proceeds from issuance of notes payable, net 385 318
Payment of notes receivable from sale of capital stock 27 5
Principal payments on capital leases and long-term debt (211) (193)
Payment of preferred stock dividend (300) (300)
Transaction costs (9) -
------- -------
Net cash provided by (used in) financing activities 11,387 (170)
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 14,071 3,489
CASH AND CASH EQUIVALENTS, beginning of period 7,930 9,240
------- -------
CASH AND CASH EQUIVALENTS, end of period $22,001 $12,729
======= =======
</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
28, 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 April 28, 1996 reflects the
estimated tax rate for the year ending January 26, 1997 based upon projected
income and other factors and approximates the combined federal and state of
California rates. The rate for the quarter ended April 30, 1995 reflects the
reversal of a previously established valuation allowance for deferred tax
assets, primarily net operating loss carryforwards.
6
<PAGE>
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%.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended January
28, 1996 included in the Company's Form 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 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 in fiscal 1994 and five stores in fiscal 1995. The
Company plans to open five stores in fiscal 1996. As a result of the Company's
accelerated expansion and entry into Southern California, the Company incurred
substantial store pre-opening expenses amounting to $7.5 million for fiscal 1994
and $2.4 million for fiscal 1995. These pre-opening expenses consist
principally of store merchandising and stocking expenses, personnel recruitment
and training costs and grand-opening advertising and promotional expenses. In
fiscal 1996, the Company expects pre-opening expenses to be approximately $0.4
million to $0.5 million per store.
As the Company implements its new store opening program, operating expenses as a
percent of sales for 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 has generally experienced higher marketing, distribution
and occupancy costs in its new stores in the Southern California market. The
Company believes, however, that these higher expenses should be offset by higher
sales at these stores (when these stores achieve maturity), bringing margins for
Southern California stores in line with those for Northern and Central
California stores.
The Company experienced a strong comparable store sales increase in fiscal 1995,
especially in the second half of the year. The Company does not expect to
sustain its rate of comparable store sales growth in fiscal 1996, particularly
in the second half of the year.
The Company's results of operations exhibit some degree of seasonality.
Generally, the Company's sales and operating income are highest in the second
quarter and lowest in the fourth quarter. This is primarily attributable to
seasonality in sales of garden, nursery and related products which peak at the
beginning of spring/summer gardening season. The 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,
particularly the sales of garden and nursery products which comprised
approximately 27% of the Company's total sales for fiscal 1995. For example,
the Company's results in the first half of fiscal 1995 were adversely impacted
by unusually wet weather in Northern and Central California, and nursery and
garden sales were also negatively affected during the prolonged drought in
California in the early 1990s.
8
<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 28, April 30,
1996 1995
---------- ---------
<S> <C> <C>
Sales 100.0% 100.0%
Gross margin 36.3 36.4
Selling general and
administrative expenses 29.5 29.9
Pre-opening expense 0.2 0.8
---------- ---------
Operating income 6.6 5.7
Interest expense, net 2.3 2.8
---------- ---------
Income before provision for
income taxes 4.3 2.9
Income tax provision 1.8 0.6
---------- ---------
Net income 2.5% 2.3%
========== =========
</TABLE>
THREE MONTHS ENDED APRIL 28, 1996 AND APRIL 30, 1995
- ----------------------------------------------------
Sales for the first quarter ended April 28, 1996 were $141.1 million, compared
to $125.4 million in the first quarter of fiscal 1995, an increase of 12.6%.
The increase reflects a 9.2% rise in comparable store sales during the quarter
as well as three new stores opened since the first quarter of fiscal 1995. The
increase in the comparable store percentage reflects an improving economic
climate in California, the inclusion of sales gains achieved by maturing Orchard
stores opened within the last two years and sales generated through an increased
focus on the commercial customer segment and the Company's private label credit
program.
Gross margin increased $5.6 million (12.3%) from $45.6 million for the first
quarter of fiscal 1995 to $51.2 million for the comparable period this year.
Gross margin as a percent of sales decreased from 36.4% for the first quarter of
fiscal 1995 to 36.3% for the first quarter of fiscal 1996 due mainly to slightly
more promotional activity in the fiscal 1996 first quarter.
Selling, general and administrative expenses for the first quarter of fiscal
1996 were 29.5% of sales compared with 29.9% of sales in the first quarter
fiscal 1995. Operating efficiencies as well as the sales gain for the quarter
resulted in a significant leveraging of payroll as a percentage of sales.
Operating income for the first quarter of fiscal 1996 increased $2.1 million to
$9.3 million from $7.2 million in last year's first quarter. Increased sales
and the leveraging of expenses were primarily responsible for the increase in
operating income. In addition, pre-opening expenses in the first quarter of
fiscal 1996 decreased to $0.2 million from $1.0 million in the first quarter of
fiscal 1995.
9
<PAGE>
The decrease is due to two new stores opening in last year's first quarter
versus no new store openings in this year's first quarter.
Interest expense decreased by $0.2 million from $3.5 million for the first
quarter of fiscal 1995 to $3.3 million for the first quarter of fiscal 1996.
Interest on mortgage loans decreased as a result of the reduction 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 carryforwards was fully reversed in fiscal 1995 and as a result,
the 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 service on indebtedness.
The Company's wholly-owned subsidiary, Orchard Supply, had long-term debt and
capital lease obligations as of April 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 letters of credit) of which no
borrowings and $4.9 million of letters of credit were outstanding 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. At April 28, 1996, the Company and
Orchard Supply were in compliance with all covenants contained in such debt
instruments.
The Company's business strategy requires that it maintain broad product lines
and large inventories, however, the effect of this strategy on working capital
is somewhat minimized through the receipt of trade credit. The Company's
working capital is also affected by accounts receivable arising from its
proprietary credit card which had an average monthly balance for fiscal 1995 of
$12.5 million. The Company will fund its working capital needs through a
combination of funds from operations and borrowings under the Financing
Agreement. The Financing Agreement permits borrowings based on percentages of
the Company's eligible inventory and accounts receivable and remains effective
through May 1999.
10
<PAGE>
In connection with Orchard's expansion plans, the Company anticipates capital
additions of approximately $0.9 million for furniture, fixtures and equipment
for each new store opened, a portion of which may be acquired under operating
leases. The Company expects that pre-opening expenses for a new store will
range from approximately $0.4 million to $0.5 million. The initial inventory
requirement for new stores, net of trade credit, is estimated at $1.0 million
per store. In the event that the Company is responsible for the renovation or
remodeling of the existing space to be leased, the Company anticipates incurring
additional capital expenditures of approximately $1.0 million to $1.8 million
per store. If the Company elects to purchase the real estate, the capital
expenditure would range from approximately $2.5 million for owned store
improvements constructed on leased land to $4.0 million to $7.0 million if the
entire property were to be owned by the Company.
The Company's capital expenditure plan for fiscal 1996 and 1997 provides for
annual capital expenditures of $19.8 million and $17.0 million, respectively.
This capital expenditure plan includes the expenditures of approximately $4.0
million to $5.0 million annually for the maintenance of existing facilities.
The remainder of the annual budgeted amounts will be used primarily for the
opening of new stores, including fixtures and leasehold improvements with
respect to the new stores, and computer equipment. The Company has historically
obtained some of its equipment through operating leases, and expects to be able
to procure such arrangements in the future. The inability of the Company to
procure such arrangements for its capital expenditure program may have a
negative impact on the ability of the Company to make capital expenditures.
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 the 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.
EFFECT OF INFLATION
- -------------------
The effect of inflation on the Company's result of operations has not been
material in the periods discussed.
11
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit Number
--------------
10.1 Orchard Supply Hardware Stores Corporation 1993 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 Supply Hardware Stores Corporation 1996 Non-Employee
Directors Stock Option Plan. Incorporated by reference to
Exhibit B of the Company's Proxy Statement dated April 10,
1996.
27 Financial data schedule for the three months ended April 28,
1996. Filed herewith.
(b) Reports on Form 8-K.
Current Report on Form 8-K dated February 23, 1996
containing the financial statements referenced in subsection
(a) of Item 14 of the Company's Annual Report on Form 10-K
for the fiscal year ended January 28, 1996.
12
<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 11, 1996 By: /s/ Maynard Jenkins
Maynard Jenkins
Chief Executive Officer
Date: June 11, 1996 By: /s/ Stephen M. Hilberg
Stephen M. Hilberg
Chief Financial Officer and
Vice President-Finance
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-26-1997
<PERIOD-START> JAN-29-1996
<PERIOD-END> APR-28-1996
<CASH> 22,001
<SECURITIES> 0
<RECEIVABLES> 21,668
<ALLOWANCES> 1,589
<INVENTORY> 118,521
<CURRENT-ASSETS> 176,551
<PP&E> 171,957
<DEPRECIATION> 39,293
<TOTAL-ASSETS> 325,498
<CURRENT-LIABILITIES> 85,459
<BONDS> 132,008
0
8
<COMMON> 75
<OTHER-SE> 107,948
<TOTAL-LIABILITY-AND-EQUITY> 325,498
<SALES> 141,111
<TOTAL-REVENUES> 141,111
<CGS> 89,906
<TOTAL-COSTS> 89,906
<OTHER-EXPENSES> 41,910
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,267
<INCOME-PRETAX> 6,028
<INCOME-TAX> 2,476
<INCOME-CONTINUING> 3,552
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,552
<EPS-PRIMARY> 0.44
<EPS-DILUTED> 0.41
</TABLE>
