“We remain confident in and committed to our real estate strategy,” added Baker. “We are pleased with the results to-date of our new and remodeled stores and plan to continue our roll-out of the concept in fiscal 2013. This is only one part of our plan to reposition the Company and the Orchard brand; we are also focused on strengthening our financial position and driving improvement in other key areas of the business, including merchandising, marketing and store operations, which we believe will provide the foundation for improved sales and profitability over the long-term.”

Balance Sheet and Cash Flow

As of October 27, 2012, inventories totaled $173.8 million compared to $161.2 million at October 29, 2011. The increase of 7.8% reflects lower than expected sales, as well as seasonal merchandise the Company began selling on a year-round basis in fiscal 2012. Cash and cash equivalents at the end of the third quarter were $10.5 million. As of quarter-end, total debt and capital lease obligations were $228.4 million.

Financial Position Update

The Company has taken a number of steps in fiscal 2012 to strengthen its financial position. These steps include generating proceeds and securing tenant improvement allowances through multiple sale-leaseback transactions, refinancing its credit facility, and reducing debt. The Company amended its Senior Secured Credit Facility in October 2012, which increased borrowing capacity from $100 million to $127.5 million at lower rates. In November 2012, the Company finalized a non-binding term sheet to further amend the credit facility, whereby total capacity would increase to $145 million through a $17.5 million last-in-last-out term loan tranche. The Company is also pursuing additional sales and/or sale-leaseback transactions on its remaining owned properties.

In addition, the Company is continuing to work with Moelis & Co. to refinance its Senior Secured Term Loan. As previously disclosed, the Company obtained a waiver from its Senior Secured Term Loan holders in anticipation of not being in compliance with its leverage ratio covenant at the October 27, 2012 measurement date. The Company anticipates that it will also not be in compliance with this leverage ratio covenant at the next measurement date of February 2, 2013, which is Orchard’s fiscal year-end. The Company is working towards the refinancing or modification of its Senior Secured Term Loan by the end of its fiscal year through several alternatives, including possibly issuing new long-term debt and/or equity, although no assurances can be made that such transactions will be consummated.

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