<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 18, 1994
REGISTRATION NO. 33-51437
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
ORCHARD SUPPLY HARDWARE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 5251 95-4214111
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD (I.R.S. EMPLOYER
OF INCORPORATION INDUSTRIAL CLASSIFICATION IDENTIFICATION NO.)
OR ORGANIZATION) CODE NUMBER)
ORCHARD SUPPLY HARDWARE
STORES CORPORATION
(EXACT NAME OF CO-REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 5251 95-4214109
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD (I.R.S. EMPLOYER
OF INCORPORATION INDUSTRIAL CLASSIFICATION IDENTIFICATION NO.)
OR ORGANIZATION) CODE NUMBER)
6450 VIA DEL ORO
SAN JOSE, CALIFORNIA 95119
(408) 281-3500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S AND CO-REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
STEPHEN M. HILBERG
CHIEF FINANCIAL OFFICER
ORCHARD SUPPLY HARDWARE CORPORATION
6450 VIA DEL ORO
SAN JOSE, CALIFORNIA 95119
(408) 281-3500
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
----------------
COPIES TO:
ROGER H. LUSTBERG, ESQ. RICHARD A. BOEHMER, ESQ.
RIORDAN & MCKINZIE O'MELVENY & MYERS
300 SOUTH GRAND AVENUE, 29TH FLOOR 400 SOUTH HOPE STREET, 15TH FLOOR
LOS ANGELES, CALIFORNIA 90071 LOS ANGELES, CALIFORNIA 90071
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after the Registration Statement becomes
effective.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [_]
----------------
THE REGISTRANT AND THE CO-REGISTRANT HEREBY AMEND THIS REGISTRATION
STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE
DATE UNTIL THE REGISTRANT AND THE CO-REGISTRANT SHALL FILE A FURTHER AMENDMENT
WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER
BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933
OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS
THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
ORCHARD SUPPLY HARDWARE CORPORATION
ORCHARD SUPPLY HARDWARE STORES CORPORATION
CROSS-REFERENCE SHEET PURSUANT TO
ITEM 501(B) OF REGULATION S-K
SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY ITEMS OF FORM S-1
<TABLE>
<CAPTION>
ITEM NUMBER AND HEADING IN FORM S-1 HEADING OR LOCATION IN PROSPECTUS
----------------------------------- ---------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and Outside Front
Cover Page of Prospectus ............................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of Prospectus... Inside Front Cover Page; Additional
Information; Outside Back Cover
Page
3. Summary Information, Risk Factors and Ratio of Earnings
to Fixed Charges ....................................... Prospectus Summary; Investment
Considerations; The Company;
Selected Consolidated Financial
Data; Unaudited Pro Forma
Financial Data
4. Use of Proceeds .......................................... Prospectus Summary; Use of Proceeds;
Unaudited Pro Forma Financial
Data
5. Determination of Offering Price .......................... Outside Front Cover Page;
Underwriting
6. Dilution ................................................. Not Applicable
7. Selling Security Holders ................................. Not Applicable
8. Plan of Distribution ..................................... Outside Front Cover Page;
Underwriting
9. Description of Securities to be Registered ............... Description of Notes
10. Interests of Named Experts and Counsel ................... Legal Matters; Experts
11. Information with Respect to the Registrant................ Outside Front Cover Page; Prospectus
Summary; The Company;
Investment Considerations;
Capitalization; Unaudited Pro
Forma Financial Data; Selected
Consolidated Financial Data;
Management's Discussion and
Analysis of Financial Condition and
Results of Operations; Business;
Management; Certain Transactions;
Principal Stockholders; Consolidated
Financial Statements
12. Disclosure of Commission Position on Indemnification for
Securities Act Liabilities.............................. Not Applicable
</TABLE>
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject To Completion, dated January 18, 1994
PROSPECTUS
$100,000,000
[LOGO OF ORCHARD SUPPLY HARDWARE APPEARS HERE]
ORCHARD SUPPLY HARDWARE CORPORATION
% SENIOR NOTES DUE 2002
------------
UNCONDITIONALLY GUARANTEED BY
ORCHARD SUPPLY HARDWARE STORES CORPORATION
------------
Interest Payable and
------------
Orchard Supply Hardware Corporation ("Orchard Supply") is offering (the
"Offering") $100,000,000 aggregate principal amount of its % Senior Notes
Due 2002 (the "Notes"). Interest on the Notes will be payable semi-annually on
and of each year, commencing , 1994. The Notes will be redeemable at
the option of Orchard Supply, in whole or in part, on or after , 1998, at
the redemption prices set forth herein. The Notes will not be subject to any
mandatory sinking fund provisions.
Upon the occurrence of a Change of Control (as defined), each holder of the
Notes will have the option to cause Orchard Supply to repurchase all or a
portion of such holder's Notes at 101% of the principal amount thereof, plus
accrued interest to the date of repurchase.
The Notes will be unsecured and will rank pari passu in right of payment with
all senior indebtedness of Orchard Supply. The Notes will be unconditionally
guaranteed on a senior basis (the "Parent Guarantee") by Orchard Supply
Hardware Stores Corporation, the parent of Orchard Supply. As of October 31,
1993, the aggregate amount of senior indebtedness of Orchard Supply, as
adjusted to give effect to the application of the estimated net proceeds from
this Offering, would have been approximately $139.7 million. See "Description
of Notes."
------------
SEE "INVESTMENT CONSIDERATIONS" FOR CERTAIN FACTORS THAT SHOULD BE CONSIDERED
BY PROSPECTIVE INVESTORS.
------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
Price to Underwriting Proceeds to
Public(1) Discount(2) Company(1)(3)
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Note.................................. % % %
- ---------------------------------------------------------------------------------
Total..................................... $ $ $
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
</TABLE>
(1) Plus accrued interest, if any, from , 1994 to the date of delivery.
(2) Orchard Supply has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(3) Before deducting expenses payable by Orchard Supply estimated at $500,000.
------------
The Notes offered by this Prospectus are offered by the Underwriters subject
to prior sale, withdrawal, cancellation or modification of the offer without
notice, to delivery to and acceptance by the Underwriters and to certain
further conditions. It is expected that delivery of the Notes will be made at
the offices of Lehman Brothers Inc., New York, New York, on or about , 1994.
------------
LEHMAN BROTHERS
JEFFERIES & COMPANY, INC.
MONTGOMERY SECURITIES
, 1994
<PAGE>
[COMPANY LOGO]
[MAP OF CALIFORNIA] [PHOTO 1]
Existing Stores, Store located in Salinas,
Distribution Center and California.
Expected 1994 Store
Openings
[PHOTO 2]
Quick and easy check
out.
[PHOTO 4] [PHOTO 3]
Extensive selection of Orchard offers a broad range
striking tools and of quality plants, shrubs
replacement handles. and bedding plants.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES OFFERED
HEREBY AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements (including the Notes thereto) appearing
elsewhere in this Prospectus. As used in this Prospectus, the term "Orchard
Holding" refers to Orchard Supply Hardware Stores Corporation, a Delaware
corporation, the term "Orchard Supply" refers to its wholly owned subsidiary,
Orchard Supply Hardware Corporation, a Delaware corporation, and unless the
context indicates otherwise, the terms "Company" and "Orchard" refer to Orchard
Holding and Orchard Supply and its predecessor company. Unless otherwise
indicated, as used in this Prospectus all references to a fiscal year shall
mean the fiscal year of the Company which commences in such year (for example,
the fiscal year commencing January 27, 1992 and ending January 31, 1993 is
referred to herein as fiscal 1992).
THE COMPANY
Orchard, founded in 1931, operates 43 hardware superstores which average
approximately 40,000 square feet of interior and exterior selling space. All of
the Company's current stores are located in Northern and Central California.
Orchard primarily targets the "fix-it" homeowner focused on repair and
maintenance projects and is positioned in a unique niche between small, high-
priced independent hardware retailers and large warehouse home center chains.
Orchard strives to offer the service and convenience of a "mom and pop"
hardware store and a greater depth and breadth of "fix-it" products in its core
product categories than the large warehouse home center chains.
Orchard's business strategy is to provide a broad merchandise selection,
outstanding service, convenient, well organized stores and fair everyday
pricing, thereby encouraging its customers to perceive Orchard as the primary
destination for their "fix-it" needs.
Broad Selection. Orchard offers a wide selection of brand name and private
label merchandise, including many products not carried by its competitors, in
its core areas of hardware, plumbing, electrical and garden and nursery.
Orchard's stores carry approximately 45,000 stock keeping units ("SKUs") and
maintain a high in stock position (98% on average) to ensure the availability
of its merchandise to customers. This breadth of selection contrasts with the
Company's warehouse competitors, which typically carry only 25,000 to 33,000
SKUs.
High Levels of Customer Service. The Company is committed to furnishing
outstanding levels of customer service through knowledgeable, well trained
personnel and a number of value-added services. These services include pick-up
stations at each location, a proprietary credit card and "how-to" fairs.
Convenient, Well Organized Stores. Orchard currently operates 43 conveniently
located stores. Orchard stores have low profile shelving, descriptive signs and
efficient check-out stations which provide customers an attractive shopping
environment and the ability to get in and out of the store quickly. The
Company's stores follow a standard merchandise layout and maintain a consistent
appearance.
Value Pricing. The Company provides the customer with value through a
combination of broad merchandise selection, outstanding service, convenient,
well organized stores and fair everyday pricing. Fair everyday pricing entails
competitive pricing on high visibility, high volume products and higher margins
on other products which in many cases are not carried by competitors.
Consistent with the Company's expansion strategy to increase market share in
existing markets and to open stores in attractive new markets, the Company
announced on November 9, 1993 its intent to acquire nine former Builders
Emporium store sites (the "Expansion"). The Company completed the acquisition
of
3
<PAGE>
six of these sites (Pasadena, Burbank, Van Nuys and Hollywood in metropolitan
Los Angeles, and Pismo Beach and Redding in Central and Northern California,
respectively) on November 16, 1993 and completed the acquisition of the
remaining three sites (South Pasadena and West Los Angeles in metropolitan Los
Angeles and Goleta in Central California) on December 22, 1993. All nine
Expansion stores will be converted into the Orchard format and are expected to
open in the second quarter of fiscal 1994. The Expansion store sites are proven
retail hardware locations and include seven of the top eight sales volume
stores in the Builders Emporium chain. The Company plans to finance the
Expansion from a portion of the estimated net proceeds from the Offering. See
"Investment Considerations--Expansion Program," "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Building on its current 43 store base, the Company intends to open 14 stores
in fiscal 1994, including the nine Expansion stores, six of which will be
located in metropolitan Los Angeles. The remaining five new stores for fiscal
1994 will be located in Northern and Central California. Management believes
that the metropolitan Los Angeles market, one of the largest do-it-yourself
("DIY") markets in the United States, presents an attractive opportunity for
the broad selection, high service Orchard format, particularly in light of the
recent liquidation of the Builders Emporium chain which operated approximately
40 DIY stores in metropolitan Los Angeles. In fiscal 1995, the Company plans to
open five to ten new stores, the majority of which are expected to be in
metropolitan Los Angeles. The Company believes it has the potential to expand
to a total of 70 stores in Northern and Central California and 45 stores in
metropolitan Los Angeles and Orange County.
THE EQUITY INVESTMENT
In order to improve the Company's capital structure and to enhance its
financial flexibility, Orchard Holding has entered into an agreement (the
"Preferred Stock Agreement") to sell 800,000 shares of 6% Cumulative
Convertible Preferred Stock, $.01 par value per share (the "Preferred Stock"),
with an aggregate liquidation preference of $20.0 million (the "Preferred Stock
Offering") to an affiliate of Freeman Spogli & Co. ("FS&Co."). The Preferred
Stock Agreement contains certain customary conditions to closing which will be
eliminated upon the closing of the Offering, at which time the purchase of the
Preferred Stock will become unconditional. The aggregate net proceeds of $19.3
million will be contributed as common equity to Orchard Supply to fund the
redemption of Orchard Supply's outstanding 14.5% Senior Subordinated Discount
Notes (the "14.5% Subordinated Notes") at their stated redemption price of
107.25% of the principal amount thereof. The purchase of the Preferred Stock
will be consummated not later than the time the proceeds are needed to fund the
redemption of the 14.5% Subordinated Notes. After giving effect to the
Preferred Stock Offering, FS&Co. through its affiliates will own approximately
48.4% of the outstanding Common Stock (assuming full conversion of the
Preferred Stock). See "Certain Transactions" and "Description of Capital
Stock--Preferred Stock."
BACKGROUND
The Company is the successor to the Orchard Supply Hardware division ("OSH"
or the "Predecessor Company") of Wickes Companies, Inc. ("Wickes"). The Company
acquired certain assets and liabilities of the Predecessor Company in May 1989
in a transaction (the "1989 Transaction") organized by FS&Co. The Company
completed its initial public offering of 3,800,000 shares of Common Stock (the
"Initial Public Offering") in April 1993 and immediately thereafter
reclassified its Series A Preferred Stock, $.01 par value per share (the
"Series A Preferred Stock"), into Common Stock (the "Reclassification"). In
November 1993, in connection with the Expansion, Orchard Supply increased its
borrowing capacity under its revolving credit facility (the "Financing
Agreement") to $40.0 million from $20.0 million to finance the purchase of the
nine Expansion store sites. The Company intends to reduce its credit line to
$20.0 million following the application of the proceeds of this Offering.
4
<PAGE>
THE OFFERING
Securities Offered...... $100.0 million principal amount of % Senior Notes
due 2002.
Interest Payment Dates.. and , commencing , 1994.
Maturity Date........... , 2002.
Sinking Fund............ None.
Optional Redemption..... The Notes will be redeemable at the option of Orchard
Supply, in whole or in part, on or after , 1998,
at the redemption prices set forth herein, together
with accrued and unpaid interest to the redemption
date. See "Description of Notes--Redemption."
Ranking................. The Notes will be senior unsecured obligations of Or-
chard Supply. The Notes will be senior to all subor-
dinated indebtedness of Orchard Supply and will rank
pari passu in right of payment with all senior in-
debtedness of Orchard Supply. As of October 31, 1993,
the aggregate amount of senior indebtedness of Or-
chard Supply, as adjusted to give effect to the ap-
plication of the estimated net proceeds from this Of-
fering, would have been approximately $139.7 million.
Parent Guarantee........ The Notes will be unconditionally guaranteed on a se-
nior unsecured basis by Orchard Holding.
Change of Control....... Upon the occurrence of a Change of Control (as de-
fined herein), each holder of the Notes will have the
option to cause Orchard Supply to repurchase such
holder's Notes, in whole or in part, at 101% of the
principal amount thereof, plus accrued interest to
the date of repurchase. There can be no assurance
that Orchard Supply would have sufficient funds to
satisfy its obligations to repurchase Notes upon a
Change of Control. See "Investment Considerations--
Exercise of Change of Control Rights" and "Descrip-
tion of Notes--Certain Covenants of Orchard Supply--
Repurchase of Notes Upon Change of Control."
Certain Covenants....... The Indenture under which the Notes will be issued
will contain certain restrictive covenants that,
among other things, will limit the ability of Orchard
Supply to incur additional Indebtedness (as defined
herein), create liens, issue preferred stock of sub-
sidiaries, pay dividends, repurchase capital stock,
make certain other Restricted Payments (as defined
herein), engage in transactions with affiliates, sell
assets, engage in sale and leaseback transactions and
engage in mergers or consolidations. See "Description
of Notes--Certain Covenants of Orchard Supply."
Use of Proceeds......... Orchard Supply will use the estimated net proceeds
from the issuance of the Notes as follows: (i) ap-
proximately $30.9 million to retire Orchard Supply's
9% senior notes due 1997 (the "Old Senior Notes") at
their stated redemption price of 103.0% of the prin-
cipal amount thereof, (ii) $20.0 million to repay ad-
ditional borrowings under the Financing Agreement
used to finance the Expansion, (iii) $35.0 million to
fund additional investments required to open the nine
Expansion stores and (iv) the remainder for general
corporate purposes. See "Use of Proceeds."
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The summary consolidated historical financial information presented below
should be read in conjunction with the Consolidated Financial Statements and
Condensed Consolidated Financial Statements of the Company and related Notes
thereto, "Capitalization," "Selected Consolidated Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PREDECESSOR COMPANY THE COMPANY(1)
----------------------- ------------------------------------------------------------------------
FOUR MONTHS EIGHT MONTHS YEAR ENDED NINE MONTHS ENDED
YEAR ENDED ENDED ENDED ----------------------------------- -----------------------
JANUARY 28, MAY 27, JANUARY 28, JANUARY 27, JANUARY 26, JANUARY 31, OCTOBER 25, OCTOBER 31,
1989 1989 1990 1991 1992 1993 1992 1993
(52 WEEKS) (17 WEEKS) (35 WEEKS) (52 WEEKS) (52 WEEKS) (53 WEEKS) (39 WEEKS) (39 WEEKS)
----------- ----------- ------------ ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT STORE DATA) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales.................. $255,541 $ 91,757 $194,759 $299,924 $308,562 $346,158 $259,365 $280,455
Gross margin(2)(3)..... 89,418 31,446 52,834 108,109 109,510 121,559 90,034 99,826
Operating expenses(2).. 74,223 25,261 57,411 88,444 91,296 99,944 72,562 79,022
Pre-opening expenses... 559 177 869 579 1,192 924 910 1,713
Operating income
(loss)................ 14,636 6,008 (5,446) 19,086 17,022 20,691 16,562 19,091
Interest expense(4).... 310 99 10,658 15,160 14,773 16,725 12,376 9,096
Write-off of deferred
financing charges..... -- -- 2,157 -- -- -- -- --
Income (loss) before
provision for income
taxes................. 14,326 5,909 (18,261) 3,926 2,249 1,959 2,179 9,995
Income (loss) before
extraordinary
items(5).............. 8,350 3,462 (18,261) 2,259 1,278 1,093 1,245 9,995
Extraordinary items(5). -- -- -- 1,667 971 (200) 934 (5,363)
Net income (loss)...... 8,350 3,462 (18,261) 3,926 2,249 893 2,179 4,632
Preferred stock
dividends(6).......... -- -- 1,780 3,046 3,446 4,208 3,031 814
Net income (loss)
available to common
stock................. $ 8,350 $ 3,462 $(20,041) $ 880 $ (1,197) $ (3,315) $ (852) $ 3,818
OTHER DATA:
EBITDA(7).............. $ 19,769 $ 7,733 $ (1,276) $ 25,371 $ 23,115 $ 26,731 $ 21,123 $ 23,648
Depreciation and
amortization(8)....... 5,133 1,725 4,757 7,153 6,998 7,080 5,383 5,062
Capital
expenditures(9)....... 4,890 2,535 2,722 10,999 19,675 4,318 2,466 7,704
Comparable store sales
growth................ 2.9% 5.2% 8.8% 1.9% (1.3)% 5.3% 4.6% 3.2%
Number of stores (at
end of period)........ 30 31 33 34 37 39 39 43
Ratio of EBITDA to cash
interest
expense(7)(10)........ 63.8x 78.1x -- 2.2x 2.2x 1.9x 2.1x 2.8x
Ratio of EBITDA to cash
interest expense and
preferred stock
dividends(6)(7)(10)... 63.8x 78.1x -- 1.7x 1.6x 1.5x 1.6x 2.5x
BALANCE SHEET DATA:
Working capital........ $ 35,867 $ 35,082 $ 32,227 $ 34,090 $ 44,649 $ 52,274 $ 54,359 $ 56,282
Total assets........... 149,921 153,242 165,215 175,549 198,463 197,996 199,825 207,757
Long-term debt and
capital leases........ 2,783 2,684 109,056 111,648 125,892 130,374 130,855 85,173
Stockholders' equity... 112,816 112,940 7,499 11,432 13,628 14,848 15,791 65,632
</TABLE>
(See Notes on following page)
6
<PAGE>
NOTES TO SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(1) On May 27, 1989, the Company acquired substantially all of the assets and
assumed certain liabilities of the Predecessor Company from Wickes in the
1989 Transaction which was accounted for as a purchase transaction.
(2) The Predecessor Company incurred certain expenses for legal services,
audit and tax services and employee benefits administration which were
paid by Wickes prior to the 1989 Transaction. In addition, increases in
real estate taxes and insurance expenses have occurred as a result of the
1989 Transaction. These expenses, which are estimated by management to be
approximately $0.6 million annually, are not reflected in the historical
financial information prior to May 27, 1989 set forth herein, but are
included in the historical financial statements for subsequent periods.
Operating results for all periods subsequent to the 1989 Transaction
include charges associated with the purchase accounting adjustments
recorded as a result of the 1989 Transaction. These charges include the
amortization of goodwill and other intangible assets, the income effect
related to the initial carrying value of inventories and increased
depreciation resulting from the adjustment of the carrying values of
depreciable property to estimated fair values at the acquisition dates.
(3) In the 1989 Transaction, the Company allocated the purchase price of the
acquired assets and liabilities to reflect their relative fair market
values. In connection with the allocation, the Company valued its
inventories at amounts equal to selling prices less a reasonable profit
allowance for selling efforts, which resulted in an inventory valuation
which exceeded the pre-acquisition basis in the Company's inventory by
$16.7 million. The carrying amount of inventory as of the acquisition date
has been charged to cost of goods sold during the eight-month period ended
January 28, 1990.
(4) Data includes non-cash amortization of deferred financing costs and
original issue discount related to debt incurred in the 1989 Transaction
and subsequent refinancings.
(5) Extraordinary items include: (i) the loss on extinguishment of debt
resulting from the premium paid for the partial redemption of the 14.5%
Subordinated Notes at 109.06% of the principal amount thereof and the
write-off of deferred financing costs in connection therewith pursuant to
the Initial Public Offering, (ii) the loss on extinguishment of debt
resulting from the write-off of deferred financing costs in connection
with the refinancing in fiscal 1992 of the indebtedness incurred pursuant
to the Company's senior credit facility and (iii) the realization of
income tax benefits from net operating loss carryforwards.
(6) Preferred stock dividends reflect dividends earned on the Series A
Preferred Stock prior to the Reclassification which occurred in April
1993. Prior to April 1993, no preferred stock dividends had been declared.
In April 1993, all previously earned dividends were declared and paid. The
payment consisted of a cash payment of $2.5 million and the settlement of
the remaining dividends through the issuance of additional shares of
Series A Preferred Stock. The shares of Series A Preferred Stock were then
converted into shares of Common Stock pursuant to the Reclassification. In
addition, preferred stock dividend requirements of $1.2 million annually
will be applicable upon the consummation of the Preferred Stock Offering.
(7) EBITDA represents net income before taking into consideration interest
expense, income tax expense, extraordinary items, the write-down in
carrying value of assets held for disposal, depreciation and amortization
expense. EBITDA is presented as an alternative measure of the Company's
financial condition. This data is not intended to be substituted for net
income as a measure of the Company's profitability.
(8) Data includes non-cash amortization of deferred financing costs related to
debt incurred in the 1989 Transaction and subsequent refinancings.
(9) Amounts for the years ended January 27, 1991 and January 26, 1992 include
capital expenditures for the new warehouse facility of $5.1 million and
$14.3 million, respectively.
(10) Cash interest expense excludes non-cash amortization of deferred financing
costs and original issue discount in the amounts of $1.8 million, $3.6
million, $4.1 million, $2.7 million, $2.5 million and $0.6 million for the
eight month period ended January 28, 1990, the year ended January 27,
1991, the year ended January 26, 1992, the year ended January 31, 1993,
the nine month period ended October 25, 1992 and the nine month period
ended October 31, 1993, respectively.
7
<PAGE>
SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA
The following summary unaudited pro forma financial data has been derived
from and should be read in conjunction with the Unaudited Pro Forma Financial
Data included elsewhere in this Prospectus and has been prepared by the Company
based on certain adjustments to the Consolidated Financial Statements of the
Company which are included elsewhere in this Prospectus. The pro forma amounts
reflect adjustments for the Initial Public Offering, the Reclassification, the
Preferred Stock Offering and the Offering as if such transactions had occurred
as of the beginning of the period presented for income statement data and other
data and as of October 31, 1993 (with the exception of the Initial Public
Offering and Reclassification which occurred on April 6, 1993) for balance
sheet data.
The pro forma financial data does not purport to present the financial
position and results of operations of the Company had the Initial Public
Offering, the Reclassification, the Preferred Stock Offering and the Offering
and the application of the net proceeds therefrom actually occurred as of such
dates, nor is it necessarily indicative of the results of operations that may
be achieved in the future. The pro forma amounts presented do not reflect the
anticipated operating results of the Expansion stores.
<TABLE>
<CAPTION>
YEAR NINE MONTHS
ENDED ENDED
JANUARY 31, OCTOBER 31,
1993 1993
----------- -------------
(IN THOUSANDS)
<S> <C> <C>
INCOME STATEMENT DATA:
Sales............................................... $346,158 $ 280,455
Gross margin........................................ 121,559 99,826
Operating expenses.................................. 99,944 79,022
Pre-opening expenses................................ 924 1,713
Operating income.................................... 20,691 19,091
Write-down in carrying amount of asset held for
disposal........................................... 2,007 --
Interest expense(1)................................. 14,115 10,292
Income before provision for income taxes(2)......... 4,569 8,799
Income before extraordinary items(3)................ 2,656 8,799
Preferred stock dividends(4)........................ 1,200 900
Income before extraordinary items available to
common stock(3).................................... 1,456 7,899
OTHER DATA:
EBITDA(5)........................................... $ 26,731 $ 23,648
Ratio of EBITDA to cash interest expense(6)......... 2.0x
Ratio of EBITDA to cash interest expense and
preferred stock dividends(6)....................... 1.8x
- -----------
- -
Ratio of LTM EBITDA to LTM cash interest expense(6). 2.2x
Ratio of LTM EBITDA to LTM cash interest expense and
preferred stock dividends(6)....................... 2.0x
<CAPTION>
OCTOBER 31,
1993
-------------
<S> <C> <C>
BALANCE SHEET DATA: (IN THOUSANDS)
Working capital(7).................................. $ 102,102
Total assets(8)..................................... 274,846
Long-term debt and capital leases(9)................ 137,100
Stockholders' equity(10)............................ 80,794
</TABLE>
(See Notes on following page)
8
<PAGE>
NOTES TO SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA
(1) The unaudited pro forma financial data reflects: (i) a decrease in
interest expense which results from the application of the net proceeds of
the Initial Public Offering to redeem approximately $44.7 million
aggregate principal amount of 14.5% Subordinated Notes which offset an
increase in interest resulting from the borrowings under the Financing
Agreement to finance the $2.5 million cash dividend on the Series A
Preferred Stock; (ii) the reduced interest expense resulting from the
application of the net proceeds from the Preferred Stock Offering to
redeem the remaining $19.3 million principal amount of the 14.5%
Subordinated Notes; (iii) the increased interest costs resulting from the
Notes (assuming an interest rate of 9.0%); (iv) the increased interest
expense associated with the $1.0 million mortgage debt assumed pursuant to
the Expansion; and (v) the reduced interest costs resulting from the use
of a portion of the proceeds from the Offering to retire the Old Senior
Notes.
(2) As of February 1, 1993, the Company adopted SFAS 109. If SFAS 109 had been
adopted retroactively, the income tax provision for the year ended January
31, 1993 would have been zero due to the effective tax rate of zero
applicable to the Company. Such rate reflects available net operating loss
carry forwards for which a valuation allowance exists.
(3) Extraordinary items include: (i) the loss on extinguishment of debt
resulting from the premiums paid or to be paid for the redemptions of the
14.5% Subordinated Notes and the Old Senior Notes, (ii) the loss on
extinguishment of debt resulting from the write-off of deferred financing
costs in connection with the redemptions of the 14.5% Subordinated Notes
and the Old Senior Notes, the reduction in the credit facility under the
Financing Agreement and the refinancing in fiscal 1992 of the revolving
credit agreement and (iii) the realization of income tax benefits from net
operating loss carryforwards in fiscal 1992. The redemption of the 14.5%
Subordinated Notes is assumed to have occurred with the call premium
amounts actually paid or payable (9.06% on the principal amount of $44.7
million and 7.25% on the remaining principal amount of $19.3 million). Had
the amounts actually been redeemed at the beginning of the periods
presented, the call premiums would have been the contractually specified
amounts on the applicable dates.
(4) Pro forma adjustments reflect the elimination of the earned dividends on
the Series A Preferred Stock offset by dividends earned on the Preferred
Stock.
(5) EBITDA represents net income before taking into consideration interest
expense, income tax expense, extraordinary items, the write-down in
carrying value of assets held for disposal, depreciation and amortization
expense. EBITDA is presented as an alternative measure of the Company's
financial condition. This data is not intended to be substituted for net
income as a measure of the Company's profitability.
(6) Pro forma cash interest expense excludes non-cash amortization of deferred
financing costs in the amount of $0.7 million and $0.7 million for the
year ended January 31, 1993 and the 12 months ("LTM") ended October 31,
1993.
(7) Pro forma amounts reflect (i) the use of internal cash available of $1.5
million to pay the call premium of $1.4 million and a portion of the
transaction-related costs, and (ii) the estimated cash remaining after the
application of proceeds as described in "Use of Proceeds."
(8) Pro forma amounts reflect the items discussed in Note 7 above, as well as
(i) the write-off of deferred financing costs totaling $0.5 million due to
the redemption of the remaining $19.3 million principal amount of the
14.5% Subordinated Notes, (ii) the acquisition of the store sites pursuant
to the Expansion at a purchase price of $19.7 million, (iii) the addition
of estimated deferred financing costs totaling $3.0 million related to the
Notes, and (iv) the write-off of deferred financing costs totaling $0.9
million due to the retirement of the Old Senior Notes.
(9) Reflects the revised capitalization arising from the Preferred Stock
Offering and the Offering--see "Capitalization."
(10) Reflects the net proceeds of $19.3 million from the Preferred Stock
Offering partially offset by extraordinary charges of $4.1 million. See
Note 3 above.
9
<PAGE>
INVESTMENT CONSIDERATIONS
Prospective investors should consider carefully, in addition to other
information contained in this Prospectus, the following factors before
purchasing the Notes offered hereby.
EXPANSION PROGRAM
The Company currently operates 43 hardware superstores located in Northern
and Central California. The Company has acquired nine former Builders Emporium
store sites, including six in metropolitan Los Angeles, with planned openings
in the spring of 1994. The Company expects to open five additional stores in
Northern and Central California during fiscal 1994 and an additional five to
ten stores, mostly in metropolitan Los Angeles, in fiscal 1995. This compares
to four store openings completed by the Company in fiscal 1993.
The Company's ability to execute its expansion plans will depend to a great
extent on the Company's ability to obtain acceptable store sites and open them
on a timely basis. The Company may encounter substantial delays, increased
expenses or loss of potential sites due to the complexities associated with the
regulatory and permitting processes involved in opening retail stores. The
Company's expansion will further depend on its ability to obtain financing, to
complete tenant improvements in a timely manner, to hire and train competent
store managers and staff and to integrate these employees and new stores into
its overall systems and operations. The Company's future sales and earnings may
be adversely affected if it is unable to execute its store opening program.
The Company believes that the Expansion and its entry into metropolitan Los
Angeles, one of the largest DIY markets in the United States, presents an
attractive growth opportunity. However, the success of the Company's expansion
into this new market area will depend to a significant degree on its ability to
achieve name recognition in a large and complex market and to reach acceptable
sales volumes in its new stores to recover higher than average start-up,
marketing and distribution costs. The Company anticipates that it will incur
for each of the six metropolitan Los Angeles Expansion stores pre-opening
expenses of approximately $850,000. The Company expects that for its subsequent
metropolitan Los Angeles stores, pre-opening expenses will average
approximately $600,000 (compared to $450,000 in its Northern and Central
California markets). The Los Angeles media market is more expensive than
Northern and Central California, and Orchard will initially lack the store
concentration it enjoys in its existing markets. Accordingly, the Company
expects to incur substantially higher marketing costs per store, and there can
be no assurance that the Company will be able to reduce these costs over time.
In addition, metropolitan Los Angeles is approximately 350 miles from the
Company's Tracy, California distribution center, which will result in higher
transportation costs, and there can be no assurance that the Company will
achieve the number of stores in this area necessary to support a local
distribution center.
To achieve the desired economies in distribution and advertising and to
establish critical market presence, the Company believes it is necessary to
open more stores in metropolitan Los Angeles in addition to the six Expansion
stores. Due to the high density and level of commercial development prevalent
in metropolitan Los Angeles, the Company may experience difficulties in
identifying suitable locations at acceptable prices which may delay the
Company's store opening program. Moreover, the metropolitan Los Angeles market
is large and complex and there can be no assurance that these new stores will
be profitable, or as to their level of profitability.
As the Company accelerates its store opening program, it will incur
additional pre-opening costs as well as higher operating costs as a percentage
of sales in its new stores, thereby adversely affecting overall margins until
the new stores achieve sales maturity. This effect will initially be magnified
due to the additional operating costs in its Expansion stores. Orchard's stores
typically have an operating loss in the fiscal year in which they commence
operations, due primarily to the stores' pre-opening expenses. In the
subsequent fiscal year, a new store is generally profitable before allocation
of overhead expenses not directly related to the
10
<PAGE>
store. While this has been the Company's historical experience, no assurance
can be given that similar store level profitability will be achieved in
connection with future new stores. Sales in an existing store may be adversely
affected by the opening of a new Orchard store within the same market; however,
these new stores are intended to increase overall market penetration and
customer convenience.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "Business--Expansion Strategy."
COMPETITION
The retail hardware business is highly competitive, and some of the Company's
competitors have substantially greater resources than the Company. The Company
competes with numerous warehouse home center chains, traditional home
improvement centers and local independent retailers. Management believes that
the warehouse home center chains, including HomeBase (formerly Home Club, Inc.)
and The Home Depot, Inc. ("Home Depot"), are its primary competitors. Since
1984, when the first warehouse home center was opened in Orchard's markets,
HomeBase and Home Depot have opened and currently operate 12 and 21 stores,
respectively, in the Company's Northern and Central California markets. As of
October 31, 1993, the Company estimates that 32 Orchard stores competed with
warehouse operators. Management believes that the competitive situation in
metropolitan Los Angeles is substantially similar to the highly competitive
environment of Orchard's existing Northern and Central California markets.
Management believes that HomeBase and Home Depot currently operate
approximately 12 and 17 stores, respectively, in metropolitan Los Angeles and
that three of the six metropolitan Los Angeles Expansion stores will be in
direct competition with two HomeBase stores and two Home Depot stores. See
"Business--Competition."
SEASONALITY AND SENSITIVITY TO WEATHER
The Company's results of operations exhibit some degree of seasonality.
During the three years ended January 31, 1993, approximately 28% of the
Company's annual sales and approximately 37% to 43% of its annual operating
income were generated in the second fiscal quarter. This is due primarily to
increased sales during this quarter of garden, nursery and related products.
Sales in the second quarter of the fiscal year generate a substantial
percentage of the Company's annual operating income; therefore, any adverse
impact on second quarter sales and profitability has a disproportionate effect
on the Company's financial results for that year. Conversely, during the three
years ended January 31, 1993, approximately 24% of the Company's annual sales
and approximately 13% to 18% of its annual operating income were generated in
the fourth fiscal quarter, due primarily to lower sales of garden, nursery and
related products during this quarter. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and Note 12 to Consolidated
Financial Statements for certain quarterly financial information.
Sales of garden and nursery products, which comprised 26.6% of the Company's
total sales in fiscal 1992, can be negatively impacted by adverse weather
conditions, particularly during the spring gardening season. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Results of Operations."
COMPARABLE STORE SALES
The Company's historical comparable store sales have been affected by a
variety of factors, including consumer confidence, promotional marketing
efforts, the maturation of new stores, weather conditions and the opening of
competing stores. In fiscal 1990, comparable store sales increased by only 1.9%
and in fiscal 1991, comparable store sales decreased by 1.3%. Although
comparable store sales increased by 5.3% for fiscal 1992 and by 3.2% through
the third quarter of fiscal 1993, there can be no assurance that the Company
will achieve similar increases in the future. Competing store openings, current
economic conditions and comparison to last year's fourth quarter which
experienced a strong 7.9% comparable store sales gain are expected to have a
negative impact on fourth quarter 1993 comparable store sales. See "Selected
Consolidated
11
<PAGE>
Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Results of Operations."
REGIONAL ECONOMY
The economy in California as a whole is suffering from the effects of a
prolonged recession. Areas of Southern California, including metropolitan Los
Angeles, have been especially hard hit by the recession. If the current
weakness in California's economy continues or increases, there may be an
adverse impact on the Company's sales and profitability and the ability of the
Company to expand at the planned rate.
LEVERAGE AND CERTAIN RESTRICTIONS IMPOSED BY LENDERS
The Company is, and after the completion of the Offering will continue to be,
highly leveraged. After giving effect to the Preferred Stock Offering, the
Offering and the application of the estimated net proceeds therefrom, as of
October 31, 1993, the Company's ratio of long-term debt to stockholders' equity
would have been approximately 1.7:1 and the Company's long-term debt as a
percentage of total capitalization would have been 63%. See "Capitalization."
The Company's operating results have been and will continue to be impacted by
significant fixed charges related to its indebtedness and dividends with
respect to its preferred stock. The debt instruments of Orchard Supply 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. If the Company
fails to comply with the various covenants, the lenders will be able to either
accelerate the maturity of or cause the Company to repurchase the applicable
indebtedness. See "Terms of Continuing Debt Instruments."
The degree to which the Company is leveraged and the terms governing Orchard
Supply's indebtedness, including restrictive covenants and events of default,
could have important consequences to holders of the Notes, including the
following: (i) a substantial portion of the Company's cash flow from operations
must be dedicated to service its indebtedness; (ii) the Company may be more
leveraged than other providers of similar products and services, which may
place the Company at a competitive disadvantage; and (iii) the Company's
leverage could make it more vulnerable to changes in general economic
conditions. Assuming that the Company successfully completes the Preferred
Stock Offering and the Offering, the Company believes that funds from
operations, together with borrowings under the Financing Agreement and
financings through operating leases, will be adequate to fund the Company's
operating requirements and capital expenditure program and meet its debt and
dividend obligations through at least fiscal 2000. However, unexpected declines
in the Company's future business, increases in interest rates, or the inability
to borrow additional funds for its operations if and when required could impair
the Company's ability to meet its debt service obligations and, therefore,
could have a materially adverse effect on the Company's business and future
prospects. No assurance can be given that additional debt or equity funds would
be available if needed or, if available, on terms which are favorable to the
Company. See "Capitalization," "Unaudited Pro Forma Financial Data," "Selected
Consolidated Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources," "Description of Notes" and "Terms of Continuing Debt Instruments."
TRADING MARKET FOR NOTES
There is no existing market for the Notes. The Underwriters have advised the
Company that they currently intend to make a market in the Notes. However, they
are not obligated to do so, and any market making with respect to the Notes may
be discontinued at any time without notice. The Company does not intend to
apply for the listing of the Notes on any securities exchange. Accordingly,
there can be no assurance as to the liquidity of any markets that may develop
for the Notes, the ability of holders of the Notes to sell their Notes or the
price such holders would receive upon the sale of their Notes. If such a market
were to develop, the Notes could trade at prices that may be lower than the
initial offering price thereof, depending
12
<PAGE>
on many factors, including prevailing interest rates, the Company's operating
results and the market for similar debt securities.
CONTROL OF THE COMPANY
Orchard Supply is a wholly-owned subsidiary of Orchard Holding. Presently,
the Boards of Directors of Orchard Holding and Orchard Supply are identical,
and six of the eight members of each are affiliated with FS&Co. or management.
FS&Co. currently controls through affiliates the power to vote 38.9% (48.4% if
the proposed Preferred Stock is fully converted) of the outstanding shares of
Common Stock of the Company. As a result, FS&Co. may effectively control the
Company's management policy and financing decisions and may have the power to
elect the Board of Directors; however, all major corporate transactions
including certain mergers and acquisitions, sales of substantially all assets
of the Company or going private transactions require approval of a majority of
the Company's outstanding stock entitled to vote thereon (other than
transactions subject to Section 203 of the Delaware General Corporation Law).
FS&Co. does not control such stockholder approval. See "Management," "Principal
Stockholders" and "Description of Notes--Certain Covenants of Orchard Supply--
Limitations on Transactions with Affiliates."
EXERCISE OF CHANGE OF CONTROL RIGHTS
Upon the occurrence of a Change of Control, the holders of the Notes will
have the right to require Orchard Supply to offer to purchase the Notes at 101%
of their principal amount, together with all accrued and unpaid interest, if
any. A change of control would also trigger a repurchase right or default under
all of Orchard Supply's other indebtedness. If a change of control occurs,
Orchard Supply may not have sufficient resources to satisfy all of its
repayment and repurchase obligations resulting therefrom and, in such event,
the lenders will be able to accelerate the maturity of the applicable
indebtedness.
THE COMPANY
Orchard, founded in 1931, operates 43 hardware superstores which average
approximately 40,000 square feet of interior and exterior selling space. All of
the Company's current stores are located in Northern and Central California.
Orchard primarily targets the "fix-it" homeowner focused on repair and
maintenance projects and is positioned in a unique niche between small, high-
priced independent hardware retailers and large warehouse home center chains.
Orchard strives to offer the service and convenience of a "mom and pop"
hardware store and a greater depth and breadth of "fix-it" products in its core
product categories than the large warehouse home center chains.
Orchard's business strategy is to provide a broad merchandise selection,
outstanding service, convenient, well organized stores and fair everyday
pricing, thereby encouraging its customers to perceive Orchard as the primary
destination for their "fix-it" needs.
Broad Selection. Orchard offers a wide selection of brand name and private
label merchandise, including many products not carried by its competitors, in
its core areas of hardware, plumbing, electrical and garden and nursery.
Orchard's stores carry approximately 45,000 stock keeping units ("SKUs") and
maintain a high in stock position (98% on average) to ensure the availability
of its merchandise to customers. This breadth of selection contrasts with the
Company's warehouse competitors, which typically carry only 25,000 to 33,000
SKUs.
High Levels of Customer Service. The Company is committed to furnishing
outstanding levels of customer service through knowledgeable, well trained
personnel and a number of value-added services. These services include pick-up
stations at each location, a proprietary credit card and "how-to" fairs.
13
<PAGE>
Convenient, Well Organized Stores. Orchard currently operates 43 conveniently
located stores. Orchard stores have low profile shelving, descriptive signs and
efficient check-out stations which provide customers an attractive shopping
environment and the ability to get in and out of the store quickly. The
Company's stores follow a standard merchandise layout and maintain a consistent
appearance.
Value Pricing. The Company provides the customer with value through a
combination of broad merchandise selection, outstanding service, convenient,
well organized stores and fair everyday pricing. Fair everyday pricing entails
competitive pricing on high visibility, high volume products and higher margins
on other products which in many cases are not carried by competitors.
Consistent with the Company's expansion strategy to increase market share in
existing markets and to open stores in attractive new markets, the Company
announced on November 9, 1993 its intent to acquire nine former Builders
Emporium store sites. The Company completed the acquisition of six of these
sites (Pasadena, Burbank, Van Nuys and Hollywood in metropolitan Los Angeles,
and Pismo Beach and Redding in Central and Northern California, respectively)
on November 16, 1993 and completed the acquisition of the remaining three sites
(South Pasadena and West Los Angeles in metropolitan Los Angeles and Goleta in
Central California) on December 22, 1993. All nine Expansion stores will be
converted into the Orchard format and are expected to open in the second
quarter of fiscal 1994. The Expansion store sites are proven retail hardware
locations and include seven of the top eight sales volume stores in the
Builders Emporium chain. The Company plans to finance the Expansion from a
portion of the estimated net proceeds from the Offering. See "Investment
Considerations--Expansion Program," "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Building on its current 43 store base, the Company intends to open 14 stores
in fiscal 1994, including the nine Expansion stores, six of which are located
in metropolitan Los Angeles. The remaining five new stores for fiscal 1994 will
be located in Northern and Central California. Management believes that the
metropolitan Los Angeles market, one of the largest DIY markets in the United
States, presents an attractive opportunity for the broad selection, high
service Orchard format, particularly in light of the recent liquidation of the
Builders Emporium chain which operated approximately 40 DIY stores in
metropolitan Los Angeles. In fiscal 1995, the Company plans to open five to ten
new stores, the majority of which are expected to be in metropolitan Los
Angeles. The Company believes it has the potential to expand to a total of 70
stores in Northern and Central California and 45 stores in metropolitan Los
Angeles and Orange County.
The principal executive offices of the Company and Orchard Supply are located
at 6450 Via Del Oro, San Jose, California 95119 and the telephone number is
(408) 281-3500.
14
<PAGE>
USE OF PROCEEDS
The net proceeds to Orchard Supply from the Offering are estimated to be
approximately $97.0 million, after deducting the estimated underwriting
discounts and offering expenses. Orchard Supply will use the estimated net
proceeds of the Offering as follows: (i) $30.9 million to retire the Old Senior
Notes at their stated redemption price of 103.0% of the principal amount
thereof, (ii) $20.0 million to repay additional borrowings under the Financing
Agreement used to finance the Expansion, (iii) $35.0 million to fund additional
investments required to open the nine Expansion stores (consisting of capital
expenditures of approximately $10.0 million for renovation and $9.0 million for
furniture, fixtures and equipment; inventory of approximately $8.1 million (net
of trade credit); pre-opening expenses of approximately $6.8 million; and
estimated transaction costs relating to the Expansion of approximately $1.0
million) and (iv) the remainder for general corporate purposes. The indenture
pursuant to which the Old Senior Notes were issued requires 30 days' notice to
redeem the Old Senior Notes; therefore, the Old Senior Notes will be called for
redemption promptly following the closing of the Offering and will be redeemed
30 days thereafter. The Old Senior Notes bear interest at the rate of 9.0% per
annum, payable semi-annually, and have a final maturity date of July 1, 1997.
The Financing Agreement provides for a total credit facility of up to $40.0
million, with an $8.0 million sublimit for guarantees of letters of credit.
Amounts outstanding under the Financing Agreement bear interest, at the
election of the Company, at a defined prime rate plus 1.0% or at a defined
London Interbank Offered Rate plus 3.25%. See "Unaudited Pro Forma Financial
Data," "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources" and "Terms of Continuing Debt
Instruments--Description of the Financing Agreement."
15
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated short-term debt and
capitalization of the Company as of October 31, 1993. The as adjusted for
Preferred Stock amounts reflect the anticipated sale of 800,000 shares of
Preferred Stock and the redemption of the 14.5% Subordinated Notes with the
proceeds therefrom. The pro forma as adjusted amounts reflect (i) the items set
forth in the as adjusted for Preferred Stock column and (ii) the sale of the
Notes pursuant to the Offering in the principal amount of $100.0 million and
the application of the estimated net proceeds therefrom as described in "Use of
Proceeds" and the assumption of mortgage debt of $1.0 million in the Expansion.
See "Unaudited Pro Forma Financial Data."
<TABLE>
<CAPTION>
OCTOBER 31, 1993
-------------------------------
AS ADJUSTED
FOR PRO FORMA
PREFERRED AS
ACTUAL STOCK ADJUSTED
-------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt(1):
Current portion of capitalized leases and
long-term debt.............................. $ 748 $ 748 $ 748
Notes payable................................ 1,872 1,872 1,872
-------- -------- --------
Total short-term debt...................... $ 2,620 $ 2,620 $ 2,620
======== ======== ========
Long-term debt:
% senior notes due 2002..................... $ -- $ -- $100,000
Mortgage financing(2)........................ 34,542 34,542 35,535
9% senior notes due 1997..................... 29,744 29,744 --
14.5% subordinated notes due 1999............ 19,322 -- --
Obligations under capitalized leases......... 1,565 1,565 1,565
-------- -------- --------
Total long-term debt....................... 85,173 65,851 137,100
-------- -------- --------
Stockholders' equity:
Preferred Stock $.01 par value; liquidation
preference of $25.00 per share: 2,000,000
shares authorized, no shares issued and out-
standing actual; 800,000 shares issued and
outstanding, as adjusted for Preferred Stock
and pro forma as adjusted(3)................ -- 20,000 20,000
Common Stock $.01 par value: 8,000,000 shares
authorized, 6,933,693 shares issued,
6,929,973 shares outstanding(4)............. 69 69 69
Additional paid-in capital(5)................ 72,299 71,549 71,549
Less: notes receivable from sale of capital
stock....................................... (175) (175) (175)
Accumulated deficit(6)....................... (6,561) (8,479) (10,649)
-------- -------- --------
Total stockholders' equity................. 65,632 82,964 80,794
-------- -------- --------
Total capitalization..................... $150,805 $148,815 $217,894
======== ======== ========
</TABLE>
(See Notes on following page)
16
<PAGE>
NOTES TO CAPITALIZATION
(1) At October 31, 1993, no borrowings were outstanding under the Financing
Agreement. Effective November 15, 1993, the Company amended the Financing
Agreement to provide for an additional $20.0 million in borrowings and
immediately borrowed all of the additional $20.0 million for the Expansion.
The $20.0 million is assumed to be repaid with a portion of the estimated
net proceeds from the Offering, and, following the repayment, the Company
intends to reduce its credit line to $20.0 million.
(2) See "Terms of Continuing Debt Instruments" for a discussion of existing
mortgage financing.
(3) See "Description of Capital Stock" for a description of the Preferred
Stock. The Preferred Stock is carried at its liquidation preference of
$25.00 per share. See Note 5 below.
(4) Amounts do not include 160,506 shares issuable upon the exercise of stock
options as of November 29, 1993, 79,669 shares issuable upon the exercise
of outstanding warrants as of November 29, 1993 and shares which may be
issuable upon conversion of the Preferred Stock. See "Description of
Capital Stock--Preferred Stock."
(5) The as adjusted for Preferred Stock and pro forma as adjusted amounts
reflect the reduction in additional paid-in capital resulting from the
liquidation preference applicable to the Preferred Stock over the net
proceeds of the Preferred Stock Offering.
(6) The as adjusted for Preferred Stock amounts reflect the extraordinary
charges for the $1.4 million call premium and $0.5 million write-off of
deferred financing costs associated with the redemption of the 14.5%
Subordinated Notes at their stated redemption price of 107.25% of the
principal amount thereof. The pro forma as adjusted amounts reflect the
items set forth above in this Note 6 and the extraordinary charges for: (i)
the $0.9 million call premium and $0.9 million write-off of deferred
financing costs associated with the redemption of the Old Senior Notes at
their stated redemption price of 103.0% of the principal amount thereof,
(ii) the $0.3 million write-off of the remaining original issue discount on
the Old Senior Notes and (iii) the $0.2 million write-off of deferred
financing costs incurred to temporarily increase the available borrowings
under the Financing Agreement.
17
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
The following unaudited pro forma financial data has been prepared by the
Company based on certain adjustments to the Consolidated Financial Statements
of the Company which are included elsewhere in this Prospectus. The pro forma
amounts reflect adjustments for the Initial Public Offering, the
Reclassification, the Preferred Stock Offering and the Offering as if such
transactions occurred as of the beginning of the period presented for income
statement data and other data and as of October 31, 1993 (with the exception
of the Initial Public Offering and Reclassification which occurred on April 6,
1993) for balance sheet data. Initial Public Offering adjustments reflect the
sale of 3,800,000 shares of Common Stock and the application of the net
proceeds therefrom and the Reclassification, including the $2.5 million cash
dividend on the Series A Preferred Stock. The Preferred Stock Offering
adjustments reflect the anticipated sale of 800,000 shares of Preferred Stock
and the application of the proceeds therefrom. The Offering adjustments
reflect the issuance of the Notes in the principal amount of $100.0 million
and the use of the estimated net proceeds therefrom as described in "Use of
Proceeds."
The pro forma financial data should be read in conjunction with the
Consolidated Financial Statements of the Company and the related Notes thereto
contained elsewhere in this Prospectus and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The pro forma
financial data is based on the assumptions and adjustments described above and
in the accompanying Notes and does not purport to present the financial
position and results of operations of the Company had the Initial Public
Offering, the Reclassification, the Preferred Stock Offering and the Offering
and the application of the net proceeds therefrom actually occurred as of such
dates, nor is it necessarily indicative of the results of operations that may
be achieved in the future. The pro forma amounts presented do not reflect the
anticipated operating results of the Expansion stores.
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, 1993
-------------------------------------------------
ADJUSTMENTS
----------------------------
INITIAL PREFERRED
PUBLIC STOCK
ACTUAL OFFERING OFFERING OFFERING PRO FORMA
-------- -------- --------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales.......................... $346,158 -- -- -- $346,158
Cost of goods sold............. 224,599 -- -- -- 224,599
-------- ------- ------- ------- --------
Gross margin................. 121,559 -- -- -- 121,559
Operating expenses............. 99,944 -- -- -- 99,944
Pre-opening expenses........... 924 -- -- -- 924
-------- ------- ------- ------- --------
Operating income............. 20,691 -- -- -- 20,691
Write-down in carrying amount
of asset held for disposal.... 2,007 -- -- -- 2,007
Interest expense (1)........... 16,725 $(6,539) $(2,907) $ 6,836 14,115
-------- ------- ------- ------- --------
Income before provision for
income taxes................ 1,959 6,539 2,907 (6,836) 4,569
Provision for income taxes (2). 866 2,622 1,166 (2,741) 1,913
-------- ------- ------- ------- --------
Income before extraordinary
items (3)................... 1,093 3,917 1,741 (4,095) 2,656
Preferred stock dividends (4).. 4,208 (4,208) 1,200 -- 1,200
-------- ------- ------- ------- --------
Income (loss) before
extraordinary items
available to common stock
(3)......................... $ (3,115) $ 8,125 $ 541 $(4,095) $ 1,456
======== ======= ======= ======= ========
OTHER DATA:
EBITDA (5)..................... $ 26,731 $ 26,731
Ratio of earnings to fixed
charges and preferred stock
dividends (6)................. 1.2x
Ratio of EBITDA to cash
interest expense (7).......... 2.0x
Ratio of EBITDA to cash
interest expense and preferred
stock dividends (7)........... 1.8x
</TABLE>
(See Pro Forma Income Statement Data, Other Data,
Balance Sheet Data and Notes on following pages)
18
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED OCTOBER 31, 1993
------------------------------------------------
ADJUSTMENTS
----------------------------
INITIAL PREFERRED
PUBLIC STOCK
ACTUAL OFFERING OFFERING OFFERING PRO FORMA
-------- -------- --------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales........................... $280,455 -- -- -- $280,455
Cost of goods sold.............. 180,629 -- -- -- 180,629
-------- ------- ------- ------- --------
Gross margin................... 99,826 -- -- -- 99,826
Operating expenses.............. 79,022 -- -- -- 79,022
Pre-opening expenses............ 1,713 -- -- -- 1,713
-------- ------- ------- ------- --------
Operating income............... 19,091 -- -- -- 19,091
Interest expense(1)............. 9,096 $(1,495) $(2,172) $ 4,863 10,292
-------- ------- ------- ------- --------
Income before provision for
income taxes.................. 9,995 1,495 2,172 (4,863) 8,799
Provision for income taxes(2)... -- -- -- -- --
-------- ------- ------- ------- --------
Income before extraordinary
items(3)...................... 9,995 1,495 2,172 (4,863) 8,799
Preferred stock dividends(4).... 814 (814) 900 -- 900
-------- ------- ------- ------- --------
Income (loss) before
extraordinary items available
to common stock(3)............ $ 9,181 $ 2,309 $ 1,272 $(4,863) $ 7,899
======== ======= ======= ======= ========
OTHER DATA:
EBITDA(5)....................... $ 23,648 $ 23,648
Ratio of earnings to fixed
charges and preferred stock
dividends(6)................... 1.6x
- -------------------
- -
Ratio of LTM EBITDA to LTM cash
interest
expense(7)..................... 2.2x
Ratio of LTM EBITDA to LTM cash
interest
expense and preferred stock
dividends(7)................... 2.0x
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31, 1993
---------------------------------------
ADJUSTMENTS
-------------------
PREFERRED
STOCK
ACTUAL OFFERING OFFERING PRO FORMA
-------- --------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (8)...................... $ 56,282 $ (1,473) $ 47,293 $102,102
Total assets(9).......................... 207,757 (1,990) 69,079 274,846
Long-term debt and capital leases(10).... 85,173 (19,322) 71,249 137,100
Stockholders' equity(11)................. 65,632 17,332 (2,170) 80,794
</TABLE>
(See Notes on following pages)
19
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL DATA
(1) The Initial Public Offering adjustments reflect a decrease in interest
expense resulting from the application of the net proceeds to redeem
approximately $44.7 million aggregate principal amount of 14.5%
Subordinated Notes which offset an increase in interest costs resulting
from the borrowings under the Financing Agreement to finance the $2.5
million cash dividend on the Series A Preferred Stock. The Preferred Stock
Offering adjustments reflect the reduced interest expense resulting from
the redemption of the remaining $19.3 million principal amount of the
14.5% Subordinated Notes. The Offering adjustments reflect the increased
interest costs resulting from the Notes (assuming an interest rate of
9.00%) and the interest expense associated with the $1.0 million mortgage
debt assumed pursuant to the Expansion net of the reduced interest costs
resulting from the use of a portion of the proceeds from the Offering to
retire the Old Senior Notes.
The following summarizes the net change in interest costs (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED ---------------------------------
JANUARY 31, 1993 OCTOBER 25, 1992 OCTOBER 31, 1993
---------------- ---------------- ----------------
<S> <C> <C> <C>
INITIAL PUBLIC OFFERING
ADJUSTMENTS
Reduction from
retirement of 14.5%
Subordinated Notes:
Interest expense.... $ 6,478 $ 4,860 $ 1,487
Elimination of
amortization of
existing deferred
financing costs.... 249 185 42
Increase in interest
costs to fund Series
A Preferred Stock
dividend............. (188) (141) (34)
------- ------- --------
6,539 4,904 1,495
------- ------- --------
PREFERRED STOCK OFFERING
ADJUSTMENTS
Reduction from
retirement of 14.5%
Subordinated Notes:
Interest expense.... 2,802 2,102 2,102
Elimination of
amortization of
existing deferred
financing costs.... 105 80 70
------- ------- --------
2,907 2,182 2,172
------- ------- --------
OFFERING ADJUSTMENTS
Increase in interest
costs from Notes:
Interest expense.... (9,000) (6,750) (6,750)
Amortization of new
deferred financing
costs.............. (375) (281) (281)
Increase in interest
expense related to
$1.0 million mortgage
debt assumed in the
Expansion............ (119) (89) (89)
Reduction from
retirement of debt
under previous bank
facility and Old
Senior Notes:
Interest expense.... 2,294 1,578 2,073
Elimination of
amortization of
existing deferred
financing costs.... 364 304 184
------- ------- --------
(6,836) (5,238) (4,863)
------- ------- --------
Net (increase) decrease
in interest cost....... $ 2,610 $ 1,848 $ (1,196)
======= ======= ========
</TABLE>
(2) As of February 1, 1993, the Company adopted SFAS 109. If SFAS 109 had been
adopted retroactively, the income tax provision for the year ended January
31, 1993 would have been zero due to the effective tax rate of zero
applicable to the Company. Such rate reflects available net operating loss
carryforwards for which a valuation allowance exists.
(Notes continued on following page)
20
<PAGE>
(3) Extraordinary items include: (i) the loss on extinguishment of debt
resulting from the premiums paid or to be paid for the redemptions of the
14.5% Subordinated Notes and the Old Senior Notes, (ii) the loss on
extinguishment of debt resulting from the write-off of deferred financing
costs in connection with the redemptions of the 14.5% Subordinated Notes
and the Old Senior Notes, the reduction in the credit facility under the
Financing Agreement and the refinancing in fiscal 1992 of the revolving
credit agreement and (iii) the realization of income tax benefits from net
operating loss carryforwards in fiscal 1992. See Note 11 below. The
redemption of the 14.5% Subordinated Notes is assumed to have occurred
with the call premium amounts actually paid or payable (9.06% on the
principal amount of $44.7 million and 7.25% on the remaining principal
amount of $19.3 million). Had the amounts actually been redeemed at the
beginning of the periods presented, the call premiums would have been the
contractually specified amounts on the applicable dates.
(4) Initial Public Offering adjustments reflect the elimination of the earned
dividends on the Series A Preferred Stock. No dividends were actually paid
until the Reclassification, which occurred in conjunction with the Initial
Public Offering. The Preferred Stock Offering adjustments reflect
dividends earned on the Preferred Stock at a 6.0% dividend rate.
(5) EBITDA represents net income before taking into consideration interest
expense, income tax expense, extraordinary items, the write-down in
carrying value of assets held for disposal, depreciation and amortization
expense. EBITDA is presented as an alternative measure of the Company's
financial condition. This data is not intended to be substituted for net
income as a measure of the Company's profitability.
(6) Earnings are computed as income before extraordinary items and provision
for income taxes, plus fixed charges. Fixed charges consist of: (i)
interest costs, including amortization of deferred financing costs and
(ii) the portion of rental expense representing interest.
(7) Pro forma cash interest expense excludes non-cash amortization of deferred
financing costs in the amount of $0.7 million and $0.7 million for the
year ended January 31, 1993 and the 12 months ("LTM") ended October 31,
1993, respectively.
(8) Preferred Stock Offering adjustments reflect the use of internal cash
available of $1.5 million to pay the call premium of $1.4 million and a
portion of the transaction-related costs. Offering adjustments reflect the
estimated cash remaining after the application of proceeds as described in
"Use of Proceeds."
(9) Adjustments reflect the items discussed in Note 8 above. In addition,
Preferred Stock Offering adjustments reflect the write-off of deferred
financing costs totaling $0.5 million due to the redemption of the
remaining $19.3 million principal amount of the 14.5% Subordinated Notes.
Offering adjustments reflect (i) the acquisition of the store sites
pursuant to the Expansion at a purchase price of $19.7 million, (ii) the
addition of estimated deferred financing costs totaling $3.0 million
related to the Notes, and (iii) the write-off of deferred financing costs
totaling $0.9 million due to the retirement of the Old Senior Notes.
(10) Reflects the revised capitalization arising from the Preferred Stock
Offering and the Offering. See "Capitalization."
(11) Reflects the net proceeds of $19.3 million from the Preferred Stock
Offering partially offset by the following extraordinary charges (in
thousands):
<TABLE>
<S> <C>
Repayment of the $19.3 million principal amount of 14.5% Subordi-
nated Notes:
Call premium.................................................... $1,401
Write-off of deferred financing costs........................... 517
Repayment of $30.0 million principal amount of Old Senior Notes:
Call premium.................................................... 900
Write-off of deferred financing costs........................... 864
Write-off of remaining original issue discount.................. 256
Reduction in credit facility under Financing Agreement:
Write-off of deferred financing costs........................... 150
------
$4,088
======
</TABLE>
21
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below has been derived
from the historical consolidated financial statements of the Predecessor
Company and of the Company, except store data. The selected consolidated
financial data for the year ended January 28, 1989, the four-month period ended
May 27, 1989, the eight-month period ended January 28, 1990, and the years
ended January 27, 1991, January 26, 1992 and January 31, 1993 have been derived
from financial statements which were audited by Arthur Andersen & Co.,
independent public accountants. The selected unaudited, condensed consolidated
financial data for the nine months ended October 25, 1992 and October 31, 1993,
respectively, reflects all normal recurring adjustments that are, in the
opinion of management, necessary to state fairly the results for the periods
presented. The results for the nine months ended October 31, 1993 are not
necessarily indicative of the results expected for a full fiscal year. The
information set forth below should be read in conjunction with the Consolidated
Financial Statements and the Condensed Consolidated Financial Statements of the
Company and the Notes thereto, "Capitalization" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PREDECESSOR COMPANY THE COMPANY(1)
---------------------- ----------------------------------------------------------------------------------
FOUR EIGHT
YEAR MONTHS MONTHS YEAR ENDED NINE MONTHS ENDED
ENDED ENDED ENDED ------------------------------------------- -----------------------
JANUARY 28, MAY 27, JANUARY 28, JANUARY 27, JANUARY 26, JANUARY 31, OCTOBER 25, OCTOBER 31,
1989 1989 1990 1991 1992 1993 1992 1993
(52 WEEKS) (17 WEEKS) (35 WEEKS) (52 WEEKS) (52 WEEKS) (53 WEEKS) (39 WEEKS) (39 WEEKS)
----------- ---------- ----------- ------------ ------------ ------------ ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT
DATA:
Sales............... $255,541 $91,757 $194,759 $ 299,924 $ 308,562 $ 346,158 $259,365 $280,455
Cost of goods
sold(2)(3)......... 166,123 60,311 141,925 191,815 199,052 224,599 169,331 180,629
-------- ------- -------- ------------ ------------ ------------ -------- --------
Gross margin....... 89,418 31,446 52,834 108,109 109,510 121,559 90,034 99,826
Operating
expenses(2)........ 74,223 25,261 57,411 88,444 91,296 99,944 72,562 79,022
Pre-opening
expenses........... 559 177 869 579 1,192 924 910 1,713
-------- ------- -------- ------------ ------------ ------------ -------- --------
Operating income
(loss)............ 14,636 6,008 (5,446) 19,086 17,022 20,691 16,562 19,091
Write-down in
carrying amount of
asset held for
disposal........... -- -- -- -- -- 2,007 2,007 --
Interest expense(4). 310 99 10,658 15,160 14,773 16,725 12,376 9,096
Write-off of
deferred financing
charges............ -- -- 2,157 -- -- -- -- --
-------- ------- -------- ------------ ------------ ------------ -------- --------
Income (loss)
before provision
for income taxes.. 14,326 5,909 (18,261) 3,926 2,249 1,959 2,179 9,995
Provision for income
taxes.............. 5,976 2,447 -- 1,667 971 866 934 --
-------- ------- -------- ------------ ------------ ------------ -------- --------
Income (loss)
before
extraordinary items(5). 8,350 3,462 (18,261) 2,259 1,278 1,093 1,245 9,995
Extraordinary
items(5)........... -- -- -- 1,667 971 (200) 934 (5,363)
-------- ------- -------- ------------ ------------ ------------ -------- --------
Net income (loss).. $ 8,350 $ 3,462 (18,261) 3,926 2,249 893 2,179 4,632
======== =======
Preferred stock
dividends(6)....... 1,780 3,046 3,446 4,208 3,031 814
-------- ------------ ------------ ------------ -------- --------
Net income (loss)
available to
common stock...... $(20,041) $ 880 $ (1,197) $ (3,315) $ (852) $ 3,818
======== ============ ============ ============ ======== ========
Net income (loss)
per common and
equivalent
share(7)........... $(16.16) $0.71 $(0.96) $(2.68) $(0.70) $0.68
Weighted average
number of common
and equivalent
shares(7).......... 1,240 1,242 1,242 1,238 1,218 5,613
</TABLE>
(See Other Data, Balance Sheet Data
and Notes on following pages)
22
<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR COMPANY THE COMPANY(1)
---------------------- ------------------------------------------------------------------------
FOUR EIGHT
YEAR MONTHS MONTHS YEAR ENDED NINE MONTHS ENDED
ENDED ENDED ENDED ------------------------------------ -----------------------
JANUARY 28, MAY 27, JANUARY 28, JANUARY 27, JANUARY 26, JANUARY 31, OCTOBER 25, OCTOBER 31,
1989 1989 1990 1991 1992 1993 1992 1993
(52 WEEKS) (17 WEEKS) (35 WEEKS) (52 WEEKS) (52 WEEKS) (53 WEEKS) (39 WEEKS) (39 WEEKS)
----------- ---------- ----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT STORE DATA) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA(8)............... $ 19,769 $ 7,733 $ (1,276) $ 25,371 $ 23,115 $ 26,731 $ 21,123 $ 23,648
Depreciation and
amortization(9)........ 5,133 1,725 4,757 7,153 6,998 7,080 5,383 5,062
Capital
expenditures(10)....... 4,890 2,535 2,722 10,999 19,675 4,318 2,466 7,704
Comparable store sales
growth................. 2.9% 5.2% 8.8% 1.9% (1.3)% 5.3% 4.6% 3.2%
Number of stores (at end
of period)............. 30 31 33 34 37 39 39 43
Ratio of earnings to
fixed charges and
preferred stock
dividends(11).......... 7.5x 8.2x -- 1.0x -- -- -- 1.7x
Ratio of EBITDA to cash
interest
expense(8)(12)......... 63.8x 78.1x -- 2.2x 2.2x 1.9x 2.1x 2.8x
Ratio of EBITDA to cash
interest expense and
preferred stock
dividends(6)(8)(12).... 63.8x 78.1x -- 1.7x 1.6x 1.5x 1.6x 2.5x
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 25, OCTOBER 31,
JANUARY 28, MAY 27, JANUARY 28, JANUARY 27, JANUARY 26, JANUARY 31, 1992 1993
1989 1989 1990 1991 1992 1993 (39 WEEKS) (39 WEEKS)
----------- -------- ----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital......... $ 35,867 $ 35,082 $ 32,227 $ 34,090 $ 44,649 $ 52,274 $ 54,359 $ 56,282
Total assets............ 149,921 153,242 165,215 175,549 198,463 197,996 199,825 207,757
Long-term debt and
capital leases......... 2,783 2,684 109,056 111,648 125,892 130,374 130,855 85,173
Stockholders' equity.... 112,816 112,940 7,499 11,432 13,628 14,848 15,791 65,632
</TABLE>
- --------
(1) On May 27, 1989, the Company acquired substantially all of the assets and
assumed certain liabilities of the Predecessor Company from Wickes in the
1989 Transaction which was accounted for as a purchase transaction.
(2) The Predecessor Company incurred certain expenses for legal services,
audit and tax services and employee benefits administration which were
paid by Wickes prior to the 1989 Transaction. In addition, increases in
real estate taxes and insurance expenses have occurred as a result of the
1989 Transaction. These expenses, which are estimated by management to be
approximately $0.6 million annually, are not reflected in the historical
financial information prior to May 27, 1989 set forth herein, but are
included in the historical financial statements for subsequent periods.
Operating results for all periods subsequent to the 1989 Transaction
include charges associated with the purchase accounting adjustments
recorded as a result of the 1989 Transaction. These charges include the
amortization of goodwill and other intangible assets, the income effect
related to the initial carrying value of inventories and increased
depreciation resulting from the adjustment of the carrying values of
depreciable property to estimated fair values at the acquisition dates.
(3) In the 1989 Transaction, the Company allocated the purchase price of the
acquired assets and liabilities to reflect their relative fair market
values. In connection with the allocation, the Company valued its
inventories at amounts equal to selling prices less a reasonable profit
allowance for selling efforts, which resulted in an inventory valuation
which exceeded the pre-acquisition basis in the Company's inventory by
$16.7 million. The carrying amount of inventory as of the acquisition date
has been charged to cost of goods sold during the eight-month period ended
January 28, 1990.
(Notes continued on following page)
23
<PAGE>
(4) Data includes non-cash amortization of deferred financing costs and
original issue discount related to debt incurred in the 1989 Transaction
and subsequent refinancings.
(5) Extraordinary items include: (i) the loss on extinguishment of debt
resulting from the premium paid for the partial redemption of the 14.5%
Subordinated Notes at 109.06% of the principal amount thereof and the
write-off of deferred financing costs in connection therewith pursuant to
the Initial Public Offering, (ii) the loss on extinguishment of debt
resulting from the write-off of deferred financing costs in connection
with the refinancing in fiscal 1992 of the indebtedness incurred pursuant
to the Company's senior credit facility and (iii) the realization of
income tax benefits from net operating loss carryforwards.
(6) Preferred stock dividends reflect dividends earned on the Series A
Preferred Stock prior to the Reclassification which occurred in April
1993. Prior to April 1993, no preferred stock dividends had been declared.
In April 1993, all previously earned dividends were declared and paid. The
payment consisted of a cash payment of $2.5 million and the settlement of
the remaining dividends through the issuance of additional shares of
Series A Preferred Stock. The shares of Series A Preferred Stock were then
converted into shares of Common Stock pursuant to the Reclassification. In
addition, preferred stock dividend requirements of $1.2 million annually
will be applicable upon the consummation of the Preferred Stock Offering.
(7) See Note 2 to Consolidated Financial Statements for information regarding
the calculation of per share data.
(8) EBITDA represents net income before taking into consideration interest
expense, income tax expense, extraordinary items, the write-down in
carrying value of assets held for disposal, depreciation and amortization
expense. EBITDA is presented as an alternative measure of the Company's
financial condition. This data is not intended to be substituted for net
income as a measure of the Company's profitability.
(9) Data includes non-cash amortization of deferred financing costs related to
debt incurred in the 1989 Transaction and subsequent refinancings.
(10) Amounts for the years ended January 27, 1991 and January 26, 1992 include
capital expenditures for the new warehouse facility of $5.1 million and
$14.3 million, respectively.
(11) Earnings are computed as income before the provision for income taxes,
plus fixed charges. Fixed charges consist of: (i) interest costs,
including the non-cash amortization of deferred financing costs and
original issue discount and (ii) the portion of rental expense
representing interest. Earnings did not cover fixed charges plus preferred
stock dividends by $20.0 million, $1.2 million, $2.2 million and $0.9
million for the eight month period ended January 28, 1990, the year ended
January 26, 1992, the year ended January 31, 1993 and the nine month
period ended October 25, 1992, respectively.
(12) Cash interest expense excludes non-cash amortization of deferred financing
costs and original issue discount in the amount of $1.8 million, $3.6
million, $4.1 million, $2.7 million, $2.5 million and $0.6 million for the
eight month period ended January 28, 1990, the year ended January 27,
1991, the year ended January 26, 1992, the year ended January 31, 1993,
the nine month period ended October 25, 1992 and the nine month period
ended October 31, 1993, respectively.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the "Selected Consolidated
Financial Data" and the Consolidated Financial Statements and Condensed
Consolidated Financial Statements of the Company and related Notes thereto
appearing elsewhere in this Prospectus.
GENERAL
The first Orchard Supply Hardware Store was opened by 30 Santa Clara Valley
orchardists in 1931 as a farmers' cooperative. In May 1989, the Company
acquired certain assets and liabilities of the Predecessor Company in a
transaction organized by FS&Co. and since that transaction, the Company's store
base has increased from 31 to 43 stores. In April 1993, the Company completed
its initial public offering of 3,800,000 shares of Common Stock and immediately
thereafter reclassified its Series A Preferred Stock into Common Stock. In
November 1993, the Company announced its intention to acquire the nine
Expansion store sites.
The Company will incur substantial pre-opening expenses in connection with
opening the nine Expansion store sites (approximately $6.8 million in the
aggregate). The Company anticipates these new stores will be opened in the
second quarter of fiscal 1994. These pre-opening expenses, which consist
principally of store merchandising and stocking expenses, personnel recruitment
and training costs and grand-opening advertising and promotional expenses, will
commence in the fourth quarter of fiscal 1993 and continue until the stores
have opened. Although it is difficult to precisely forecast the timing of
incurrence, the Company expects that the most significant impact of these pre-
opening expenditures on net income will be experienced in the first quarter of
fiscal 1994.
As the Company accelerates 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. 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 in
fiscal 1994 and thereafter so long as the Company continues to open a large
number of stores relative to its existing store base.
The Company will apply the net proceeds from the Preferred Stock Offering to
redeem the outstanding 14.5% Subordinated Notes at their stated redemption
price of 107.25% of the principal amount thereof. The Company intends to use a
portion of the net proceeds of this Offering to redeem the Old Senior Notes and
to repay $20.0 million in additional borrowings under the Financing Agreement
used to purchase the Expansion sites. These early retirements of debt will give
rise to extraordinary charges of $1.9 million, $2.0 million and $0.2 million,
respectively, during the fourth quarter of fiscal 1993 and/or the first quarter
of fiscal 1994.
The Company's results of operations exhibit some measure of seasonality.
During the three years ended January 31, 1993, approximately 28% of the
Company's annual sales and approximately 37% to 43% of its annual operating
income were generated in the second fiscal quarter. This is due primarily to
increased sales of garden, nursery and related products during this quarter,
which is the beginning of the spring/summer gardening season. Conversely,
during the three years ended January 31, 1993, approximately 24% of the
Company's annual sales and approximately 13% to 18% of its annual operating
income were generated in the fourth fiscal quarter, due primarily to decreased
sales of garden, nursery and related products during this quarter. See
"Investment Considerations--Seasonality and Sensitivity to Weather."
As a consequence of the Company's high leverage, the percentage variance of
the Company's net income from period to period has been and may continue to be
magnified. Therefore, relatively small increases in
25
<PAGE>
expenses such as interest expense have resulted and will continue to result in
substantial percentage decreases in net income.
The following table sets forth selected results of operations as percentages
of sales for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED(1) NINE MONTHS ENDED(1)
----------------------------------- -----------------------
JANUARY 27, JANUARY 26, JANUARY 31, OCTOBER 25, OCTOBER 31,
1991 1992 1993 1992 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Sales................... 100.0% 100.0% 100.0% 100.0% 100.0%
Gross Margin............ 36.0 35.5 35.1 34.7 35.6
Selling general and
administrative
expenses............... 29.5 29.6 28.9 28.0 28.2
Pre-opening expenses.... 0.2 0.4 0.3 0.4 0.6
----- ----- ----- ----- -----
Operating income........ 6.4 5.5 6.0 6.4 6.8
Write-down of asset held
for disposal........... -- -- 0.6 0.8 --
Interest expense........ 5.1 4.8 4.8 4.8 3.2
----- ----- ----- ----- -----
Income (loss) before
provision for income
taxes and extraordinary
items.................. 1.3 0.7 0.6 0.8 3.6
Income tax provision
(benefit).............. 0.6 0.3 0.3 0.4 --
----- ----- ----- ----- -----
Income before
extraordinary items.... 0.8 0.4 0.3 0.5 3.6
Extraordinary items..... 0.6 0.3 (0.1) 0.4 (1.9)
----- ----- ----- ----- -----
Net income (loss)....... 1.3% 0.7% 0.3% 0.8% 1.7%
===== ===== ===== ===== =====
</TABLE>
- --------
(1) Amounts may not total due to rounding.
RESULTS OF OPERATIONS
Nine Months (39 Weeks) ended October 31, 1993 compared to Nine Months (39
Weeks) ended October 25, 1992.
Sales for the first nine months of fiscal 1993 increased 8.1% to $280.5
million from $259.4 million in the comparable period in the prior year. This
sales increase is due in part to the opening of four new stores during the
first nine months of fiscal 1993 and the inclusion of full period results for
fiscal 1993 of the stores opened during the first nine months of fiscal 1992.
This sales increase was also due in part to a 3.2% increase in comparable store
sales for the first nine months of fiscal 1993 from the first nine months of
fiscal 1992. Sales in the first nine months of fiscal 1993 were negatively
impacted by unseasonable cool and rainy weather from the beginning of April to
the first week of June and continued sluggishness of the California economy.
During the three months ended October 31, 1993, comparable store sales
increased 2.6% over the corresponding period in the prior year. Since late
October 1993, Home Depot has opened five competing stores. These new competing
stores, current economic conditions and comparison to last year's fourth
quarter which experienced a strong 7.9% comparable store sales gain are
expected to have a negative impact on fourth quarter 1993 comparable store
sales.
Gross margin increased from $90.0 million in the first nine months of fiscal
1992 to $99.8 million in the first nine months of fiscal 1993. As a percentage
of sales, gross margin increased from 34.7% for the first nine months of fiscal
1992 to 35.6% for the first nine months of fiscal 1993. The increase in gross
margin percentage resulted primarily from an increase in purchase markup of
0.8%, due mainly to improved purchasing made possible by the Company's new
warehouse which opened in February 1992. Other favorable factors including
improved inventory shrinkage of 0.2% and reduced warehousing costs of 0.2% were
offset by higher promotional markdowns of 0.3%.
26
<PAGE>
Selling, general and administrative expenses for the nine months ended
October 31, 1993 were 28.2% of sales compared with 28.0% of sales for the nine
months ended October 25, 1992, or an increase of 0.2%. The increase was
attributable mainly to the impact on payroll and occupancy costs of the four
new stores opened during the past nine months.
Operating income increased $2.5 million, or 15.3%, to $19.1 million for the
first nine months of fiscal 1993 from $16.6 million for the first nine months
of fiscal 1992. Operating income as a percent of sales increased from 6.4% last
year to 6.8% this year. The increase in operating income was achieved despite
an additional $0.8 million of pre-opening expenses for new stores in the
current fiscal year's first nine months.
Interest expense decreased from $12.4 million for the first nine months of
fiscal 1992 to $9.1 million for the first nine months of fiscal 1993, or a
decrease of $3.3 million. This decrease is due primarily to the redemption of
$44.7 million of the 14.5% Subordinated Notes on April 30, 1993.
The Company's effective income tax rate for the first nine months of fiscal
1992 was 42.9%. There was no income tax provision in the fiscal 1993 first nine
months. See Note 4 to the Condensed Consolidated Financial Statements.
The results of operations for the first nine months of fiscal 1993 include an
extraordinary charge of $5.4 million resulting from the early extinguishment of
$44.7 million aggregate principal amount of the 14.5% Subordinated Notes due in
1999. Last year's first nine months had an extraordinary credit of $0.9 million
representing the income tax benefit from the realization of net operating loss
carryforwards.
Net income for the first nine months of fiscal 1993 was $4.6 million versus
net income of $2.2 million for the comparable period of fiscal 1992. Net income
for the nine months ended October 25, 1992 was negatively impacted by a $2.0
million one-time non-cash write-down in the carrying value of the Company's old
warehouse while the $5.4 million one-time extraordinary charge associated with
the early retirement of debt discussed above impacted the first nine months of
fiscal 1993.
53 Weeks ended January 31, 1993 (fiscal 1992) compared to 52 Weeks ended
January 26, 1992 (fiscal 1991).
Sales increased from $308.6 million in fiscal 1991 to $346.2 million in
fiscal 1992, an increase of $37.6 million or 12.2%. Approximately $5.4 million
of the increase in sales or 1.8% is attributable to the additional week in
fiscal 1992. The increase also reflects an increase of comparable store sales
(those stores open for more than one year) of 5.3% from fiscal 1991 to fiscal
1992 (as adjusted to remove the effect of the additional week in fiscal 1992).
Management believes that improved consumer confidence favorably impacted
comparable store sales in December 1992 and January 1993. The Company's sales
also benefitted from an increase in sales of garden and nursery products due to
an easing of the water restrictions imposed during the six year drought in
Northern and Central California. The remainder of the sales increase was
attributable to the full year effect of the three new stores opened during
fiscal 1991 and sales from two new stores opened during fiscal 1992. The
increase in sales was accomplished despite the opening of three new warehouse
home center stores by the Company's competitors which impacted five of the
Company's stores.
Gross margin increased $12.1 million from $109.5 million in fiscal 1991 to
$121.6 million in fiscal 1992. Gross margin as a percentage of sales decreased
from 35.5% in fiscal 1991 to 35.1% in fiscal 1992. The decrease in gross margin
as a percentage of sales reflects an increase in warehouse costs of 0.4% of
sales and an increase in inventory shrinkage of 0.3% of sales, which was offset
by a reduction in permanent markdowns of 0.2% of sales due primarily to reduced
Christmas and winter clearance markdowns and a 0.1% of sales improvement in
purchase markons. Since a portion of warehouse costs is fixed, an increase in
sales should reduce warehouse costs as a percentage of sales. See "Business--
Expansion Strategy." Management believes that the increase in inventory
shrinkage was caused in part by the recession experienced in the Company's
27
<PAGE>
markets. Orchard has acted to reduce inventory shrinkage by increasing its
security staff, installing electronic theft devices and rearranging merchandise
displays in stores with the highest inventory shrinkage.
Selling, general and administrative expenses as a percentage of sales
decreased from 29.6% in fiscal 1991 to 28.9% in fiscal 1992, a decrease of
0.7%. Tight payroll controls contributed to reducing store and administrative
base payrolls by 0.6% of sales. In addition, fringe benefits were reduced by
0.3% of sales due primarily to improved workman's compensation and medical
claims experience.
Operating income increased $3.7 million from $17.0 million in fiscal 1991 to
$20.7 million in fiscal 1992. Operating income as a percentage of sales
increased from 5.5% in fiscal 1991 to 6.0% in fiscal 1992. The higher operating
income in fiscal 1992 compared to fiscal 1991 principally reflects the decrease
in selling, general and administrative and pre-opening expenses which was
partially offset by the decrease in the Company's gross margin. The 53rd week
in fiscal 1992 is estimated to have contributed an additional $0.6 million to
the Company's operating income.
Interest expense in fiscal 1992 was $16.7 million as compared to interest
expense of $14.8 million in fiscal 1991. The increase of $1.9 million is
primarily a result of interest incurred in connection with the financing of the
Company's new warehouse facility and the higher interest on borrowings used to
refinance Orchard Supply's senior credit facility. The Company capitalized the
interest associated with the new warehouse until February 1992, when it began
expensing such interest.
The Company's effective income tax rates in fiscal 1991 and 1992 were 43.2%
and 44.2%, respectively. See Note 10 to Consolidated Financial Statements.
Net income decreased from $2.2 million in fiscal 1991 to $0.9 million in
fiscal 1992. Net income for fiscal 1992 was adversely affected by a $2.0
million pre-tax nonoperating write-down in the carrying amount of the Company's
old warehouse in San Jose, California to reflect management's estimate of its
net realizable value. In addition, the Company's net income in fiscal 1992 was
affected by extraordinary items consisting of a tax benefit relating to net
operating loss carryforwards of $0.4 million offset by an extraordinary charge
of $0.6 million relating to the early extinguishment of debt in connection with
the refinancing of Orchard Supply's senior credit facility. Net income in
fiscal 1991 was favorably impacted by an extraordinary tax benefit relating to
net operating loss carryforwards of $1.0 million.
52 Weeks Ended January 26, 1992 (fiscal 1991) Compared to 52 Weeks Ended
January 27, 1991 (fiscal 1990).
Sales in fiscal 1991 were $308.6 million which represents an increase of 2.9%
from the $299.9 million in sales in fiscal 1990. The increase was the result of
revenue generated by three new stores and was offset in part by the 1.3%
decrease in comparable store sales from fiscal 1991 to fiscal 1990. The Company
believes that the Persian Gulf War, the sluggish economy in fiscal 1991, the
California drought and inclement weather during the crucial start of the
spring/summer gardening season (which hurt sales but did not relieve the
drought) contributed to the decline in comparable store sales. The Company's
sales results were also affected by the opening of four additional stores by
the Company's warehouse home center competitors which impacted four Orchard
stores.
Gross margin as a percentage of sales decreased from 36.0% in fiscal 1990 to
35.5% in fiscal 1991, or a decrease of 0.5% of sales. The decrease was due
primarily to an increase in inventory shrinkage of 0.4% of sales. To a lesser
extent, increased markdowns also impacted gross margin in fiscal 1991. Such
markdowns resulted from the discontinuation of certain product lines following
the completion of remerchandising projects in the hardware department.
Selling, general and administrative expenses increased from 29.5% of sales in
fiscal 1990 to 29.6% of sales in fiscal 1991, or an increase of 0.1% of sales.
The increase was due, in large part, to the opening of two more stores in
fiscal 1991 than in fiscal 1990. See "--Liquidity and Capital Resources."
28
<PAGE>
Operating income decreased from $19.1 million in fiscal 1990 to $17.0 million
in fiscal 1991 or a decrease of $2.1 million. Operating income as a percentage
of sales decreased from 6.4% in fiscal 1990 to 5.5% in fiscal 1991. The
decrease is due primarily to the decline in comparable store sales, the
increase in inventory shrinkage and the increase in both selling, general and
administrative and pre-opening expenses relating to the opening of two
additional stores in fiscal 1991.
Interest expense declined from $15.2 million in fiscal 1990 to $14.8 million
in fiscal 1991, or a decrease of $0.4 million. The decrease resulted primarily
from the lower effective interest rates on variable rate indebtedness under
Orchard Supply's senior credit facility experienced in fiscal 1991 as compared
to fiscal 1990.
The Company reported provisions for income taxes of $1.7 million and $1.0
million, and its effective income tax rates were 42.5% and 43.2% for fiscal
1990 and fiscal 1991, respectively. See Note 10 to Consolidated Financial
Statements.
Net income decreased from $3.9 million in fiscal 1990 to $2.2 million in
fiscal 1991, primarily as a result of the decrease in operating income which
was partially offset by a reduction in interest expense. Extraordinary income
tax benefits from net operating loss carryforwards of $1.7 million and $1.0
million are included in net income for fiscal 1990 and 1991, respectively.
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 incurred in connection with the 1989
Transaction and the subsequent refinancings thereof.
Orchard Supply's funded debt obligations include (i) up to $40.0 million of
revolving credit availability under the Financing Agreement (with an $8.0
million sublimit for guarantees of letters of credit) of which no borrowings
and $4.5 million of guarantees of letters of credit were outstanding as of
October 31, 1993, and of which $20.0 million was borrowed on November 15, 1993
to finance the Expansion and (ii) $21.5 million outstanding under the Store
Mortgage Facility (as defined under "Terms of Continuing Debt Instruments"),
(iii) $13.7 million aggregate principal amount of the Warehouse Mortgage Notes
(as defined under "Terms of Continuing Debt Instruments"), (iv) $30.0 million
aggregate principal amount of the Old Senior Notes and (v) $19.3 million
aggregate principal amount of 14.5% Subordinated Notes. 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 October 31, 1993, the Company and Orchard Supply were in compliance with
all covenants contained in such debt instruments. See "Terms of Continuing Debt
Instruments."
The Company intends to use the net proceeds of the Preferred Stock Offering
to redeem the 14.5% Subordinated Notes at their stated redemption price of
107.25% of their principal amount, resulting in a call premium of $1.4 million
which will be paid with available cash from operations. As a result of the
redemption of the 14.5% Subordinated Notes, the Company's cash interest expense
will be reduced by approximately $2.8 million on an annual basis. The Company
expects to incur extraordinary charges of approximately $0.5 million and $1.4
million in the period the 14.5% Subordinated Notes are redeemed, which will
consist of a loss on extinguishment of debt resulting from the write-off of
deferred financing costs and the payment of the call premium, respectively. The
Company's dividend requirements on the Preferred Stock will be $1.2 million per
year.
The estimated net proceeds from this Offering will be applied as follows: (i)
approximately $30.9 million to retire the Old Senior Notes at their stated
redemption price of 103.0% of the principal amount thereof, (ii) $20.0 million
to repay additional borrowings under the Financing Agreement used to finance
the Expansion, (iii) $35.0 million to fund additional investments required to
open the nine Expansion stores and (iv) the
29
<PAGE>
remainder for general corporate purposes. Assuming the Company successfully
completes the Preferred Stock Offering and this Offering, the Company estimates
that cash interest expense for borrowings for the fiscal years 1994, 1995 and
1996 will be approximately $13.0 million, $12.9 million and $12.7 million,
respectively (assuming (i) the interest rate for borrowings under the Notes,
the Store Mortgage Facility, the Warehouse Mortgage Notes and the Financing
Agreement is 9.0%, 10.1%, 10.64%, and 7.5%, respectively, (ii) an average
outstanding balance under the Financing Agreement of $0.8 million and (iii)
only scheduled amortization payments on the Warehouse Mortgage Notes and the
Store Mortgage Facility are made during this period). Aggregate scheduled
principal repayments for fiscal 1994, 1995 and 1996 will be $0.7 million, $1.7
million and $2.0 million, respectively. Assuming that the Company successfully
completes the Preferred Stock Offering and the Offering, the Company believes
that funds from operations, together with borrowings under the Financing
Agreement and financings through operating leases, will be adequate to fund the
Company's operating requirements and capital expenditure program and meet its
debt and dividend obligations through at least fiscal 2000.
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 1992 of
$11.6 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. As of October 31, 1993, Orchard
Supply had no outstanding borrowings and $4.5 million in letter of credit
guarantees and had additional borrowing capacity under the Financing Agreement
of $15.5 million. On November 15, 1993 the Company increased availability under
the Financing Agreement to $40.0 million and borrowed $20.0 million to provide
initial financing for the Expansion. The Financing Agreement remains effective
for the two-year period ending October 29, 1995. Upon the repayment of the
$20.0 million in borrowings to finance the Expansion with a portion of the
proceeds from this Offering, the Company plans to reduce its credit line under
the Financing Agreement to $20.0 million.
Orchard Supply has historically financed its store capital expenditures
through cash flow from operations and through operating leases. Total capital
expenditures for fiscal years 1990, 1991 and 1992 were $11.0 million, $19.7
million and $4.3 million, respectively, which amounts include capital
expenditures for the new warehouse facility for fiscal 1990 and 1991 of $5.1
million and $14.3 million, respectively. Capital expenditures for the new
warehouse were originally funded through borrowings under the former senior
credit facility and were subsequently refinanced by the Warehouse Mortgage
Notes.
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 pre-opening expenses for the nine Expansion
stores (approximately $6.8 million in the aggregate) will average approximately
$850,000 for the six metropolitan Los Angeles stores and $550,000 for the
remaining stores. The Company expects that for its subsequent metropolitan Los
Angeles stores, pre-opening expenses will average approximately $600,000
(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 $500,000
to $1,200,000 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 capital expenditure
plan for fiscal 1994 assumes three purchased stores, 10 leased stores and the
construction of one store on a ground lease.
The Company's three-year capital expenditure plan for fiscal 1993 through
1995 provides for annual capital expenditures of $37.0 million, $16.5 million
and $10.9 million to $12.8 million (depending on the
30
<PAGE>
actual number of stores opened during the period), respectively. The capital
expenditure plan for fiscal 1993 includes the $19.7 million purchase price for
the nine Expansion store sites. The 1993 and 1994 plans include approximately
$9.0 million for furniture, fixtures and equipment and $10.0 million for tenant
improvements for all the Expansion stores combined. This capital expenditure
plan includes the expenditures of approximately $2.0 million to $2.5 million
annually for the maintenance of existing facilities. The remainder of the
annual budgeted amounts will be used primarily for the opening of other planned
new stores, including new store fixtures and leasehold improvements with
respect to the new stores, and computer equipment. Since the 1989 Transaction,
the Company has financed some of its equipment through operating leases, and
expects to be able to procure such financings in the future. The inability of
the Company to procure such financing for its capital expenditure program may
have a negative impact on the ability of the Company to make capital
expenditures.
Assuming that the Company successfully completes the Preferred Stock Offering
and the Offering, the Company believes that funds from operations, together
with borrowings under the Financing Agreement and financings through operating
leases, will be adequate to fund the Company's operating requirements and
capital expenditure program and meet its debt and dividend obligations through
at least fiscal 2000. Any material shortfalls of operating cash flow could
require the Company to reduce its expansion plans.
As a result of the Initial Public Offering, the Company's ability to utilize
its Federal income tax net operating loss carryforwards is limited.
Accordingly, the income taxes payable by the Company may increase. See Note 10
to Consolidated Financial Statements.
EFFECT OF INFLATION
The effect of inflation on the Company's results of operations has not been
material in the periods discussed.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
The Company does not provide post-retirement benefits other than through the
benefit plans discussed in Note 5 to Consolidated Financial Statements.
Accordingly, Statement of Financial Accounting Standard ("SFAS") No. 106
"Accounting for Post-Retirement Benefits Other Than Pensions" will not impact
the Company. The Company generally does not provide benefits for periods after
employment but prior to retirement. Accordingly, SFAS No. 112 "Employers'
Accounting for Postemployment Benefits" will have an immaterial impact.
The Company adopted the provisions of SFAS No. 109 "Accounting for Income
Taxes" in its fiscal year beginning February 1, 1993. The effect of the
adoption was not material. See Note 4 to the Condensed Consolidated Financial
Statements as of October 31, 1993 and for the nine months then ended included
elsewhere in this Prospectus.
31
<PAGE>
BUSINESS
GENERAL
Orchard operates 43 hardware superstores which average approximately 40,000
square feet of interior and exterior selling space. All of the Company's
current stores are located in Northern and Central California, but in November
1993 the Company announced its intention to enter the metropolitan Los Angeles
market through its acquisition of six store locations. See "--Expansion
Strategy." Orchard primarily targets the "fix-it" homeowner focused on repair
and maintenance projects and is positioned in a unique niche between small,
high-priced independent hardware retailers and large warehouse home center
chains. Orchard strives to offer the service and convenience of a "mom and pop"
hardware store and a greater depth and breadth of "fix-it" products in its core
product categories than the large warehouse home center chains.
The first Orchard Supply Hardware store was opened by 30 Santa Clara Valley
orchardists in 1931 as a farmers' cooperative. As the population of the Santa
Clara Valley increased and the cooperative grew to 2,500 members, Orchard's
merchandise line was expanded to include nonagricultural products. The
Company's roots as a purveyor of orchard and farm supplies are reflected in its
emphasis on garden and nursery products. From 1979 to 1986, under the ownership
of W.R. Grace & Co., Orchard expanded from 8 stores to 21 stores. Under Wickes'
ownership from 1986 to 1989, the Company's store base increased to 31, and
since the 1989 Transaction, the Company has grown to 43 stores.
INDUSTRY
The home improvement industry caters primarily to homeowners interested in
performing repairs, maintenance and minor remodeling projects on their homes.
Retail sales of home improvement products have grown from $55.9 billion in 1981
to $105.8 billion in 1992. The industry is highly fragmented and competitive
and is comprised primarily of local independent retailers (those with five or
fewer stores), traditional home improvement centers and warehouse home center
chains. Local independent retailers compete on the basis of service and
convenience, but typically offer small stores and relatively high prices. While
home centers (which include warehouse home center chains with average store
sizes in excess of 90,000 square feet and smaller traditional home improvement
centers) target the customer involved in major remodeling and project-oriented
home improvements, Orchard targets shoppers for "fix-it" products with its
40,000 square foot hardware superstores. This difference in business focus is
evidenced by the fact that approximately one third of the sales of a major
warehouse competitor are building materials, lumber and floor and wall
coverings as opposed to the less than 5% of Orchard's sales being attributable
to these products.
BUSINESS STRATEGY
Orchard's business strategy is to provide a broad merchandise selection,
outstanding service, convenient, well organized stores and fair everyday
pricing, thereby encouraging its customers to perceive Orchard as the primary
destination for their "fix-it" needs.
Broad Selection. Orchard offers a wide selection of brand name and private
label merchandise, including many products not carried by its competitors, in
its core areas of hardware, plumbing, electrical and garden and nursery.
Orchard's stores carry approximately 45,000 SKUs and maintain a high in stock
position (98% on average) to ensure the availability of its merchandise to
customers. This breadth of selection contrasts with the Company's warehouse
competitors, which typically carry only 25,000 to 33,000 SKUs.
The following table sets forth the Company's percentage of sales by product
category for fiscal 1992, which the Company believes will not change
substantially in fiscal 1993:
<TABLE>
<S> <C>
Hardware............................................................ 22.2%
Plumbing............................................................ 15.3
Electrical.......................................................... 11.4
Garden and Nursery.................................................. 26.6
Other............................................................... 24.5
-----
Total Sales....................................................... 100.0%
=====
</TABLE>
32
<PAGE>
Hardware. Orchard carries a wide line of hardware products, including
fasteners, power tools, hand tools and accessories. The Company stocks over
3,000 SKUs of nuts, bolts, screws and other fasteners, many of which are not
carried by its competitors. Orchard offers these fasteners for sale in a
variety of quantities, repackaging bulk shipments from its vendors at the
Tracy, California distribution center for sale in smaller, more profitable unit
counts. The Company also carries over 150 brand name power tools, including
Black & Decker, Skil, Makita, Freud, Milwaukee, Bosch, Delta, DeWalt, Dremel,
Wissota, Campbell Hausfeld, Homelite, McCulloch, Echo and Coleman Power Mate.
Orchard offers over 1,200 different power tool accessories, such as drill bits
and saw blades, which generate high gross margins and increase shopping
frequency due to their consumable nature. Orchard further stocks an extensive
selection of handtools, including 30 and 150 SKUs of pipe wrenches and hammers,
respectively, and also offers replacement products for these tools, including
handles.
Plumbing. Orchard distinguishes itself from its competitors by carrying a
broad selection of repair and maintenance plumbing parts. The Company stocks
over 1,300 different PVC, ABS, galvanized, copper, brass, polystyrene and cast
iron fittings, as well as over 1,250 faucet, toilet and sink repair parts
including hard-to-find parts for discontinued faucets and toilets. Orchard also
offers a variety of faucets, toilets and sinks. In addition, Orchard's
selection of nearly 400 sprinkler and drip irrigation SKUs appeals to both
homeowners and commercial landscapers.
Electrical. Orchard stocks nearly 300 different light bulbs and 150 types of
extension cords. With over 350 different lamp parts, repair and maintenance is
emphasized. Orchard is also well equipped in basic electrical components and
stocks a broad selection of electric boxes, wire and circuit breakers commonly
used in residential and commercial construction.
Garden and Nursery. Garden and nursery products are a strong focus of
Orchard's business, reflecting Orchard's heritage as a farmers' cooperative.
Orchard offers both the price and convenience of a mass merchant and the
selection, quality and expertise of an independent nursery. It carries a broad
selection of landscape container and bedding plants, most of which are contract
grown to the Company's specifications. Orchard's nurseries carry more than 30
varieties of ground cover, over twice as many as are offered by its major
competitors. Orchard has the largest display of Ames and Corona garden tools in
the United States. Orchard also offers a wide selection of tank sprayers,
liquid and dry fertilizers, weed killers, insecticides, hoses and hose-end
products. In addition, the Company supplies a variety of organic bag goods,
including bark, mulch, soil conditioners, potting soils, planting mixes and
peat moss.
Other. In addition to the "fix-it" items above, the Company carries an
extensive selection of housewares, paint, paint supplies and automotive
supplies, as well as certain destination items such as bottled water. The
Company also offers a unique merchandise selection of impulse items which
captures incremental sales from its frequent customer base and further
differentiates Orchard from its competition.
High Levels of Customer Service. The Company is committed to furnishing
outstanding levels of customer service through knowledgeable, well trained
personnel. Orchard seeks to hire personnel with prior repair and "fix-it"
experience and provides its employees with extensive training. The Company
requires all of its employees to pass written tests in their respective
departments as a condition of employment and requires ongoing testing in other
departments in order to be eligible for advancement. For example, the Company
provides compensation incentives to its garden and nursery employees to become
certified California Nurserymen. This certification, awarded by the California
Association of Nurserymen, is based on completing 3,120 hours of relevant work
experience and passing a test which displays proficiency in plant
identification, landscape design and insect and weed control. The Company
currently employs 36 certified California Nurserymen. In addition, Orchard
provides its customers with the following value-added services which the
Company believes create high customer loyalty.
Pick-Up Stations. All Orchard stores operate convenient pick-up stations for
hard-to-handle items. A customer may purchase oversized items by simply taking
a pull-tag located at the product display rack within
33
<PAGE>
the store, checking out at the register and driving to the pick-up station,
where an Orchard employee loads the product into the customer's vehicle.
OSH Credit Card. Orchard offers a proprietary credit card to its retail and
commercial customers to build customer loyalty. The Company had an average of
42,000 active accounts in fiscal 1992, which comprised approximately 16% of the
Company's sales in that year. Approximately 80% of those credit card sales were
attributable to commercial customers. The Company also offers its commercial
customers added services such as the ability to selectively restrict their
employee purchases and detailed descriptions of all purchases on a monthly
basis.
"How-To" Fairs. The Company conducts two annual "how-to" fairs in its
existing market areas in Northern and Central California. These fairs are
designed to provide customers with DIY information through vendor booths and
specialized classes. Management estimates that its Santa Clara County "how-to"
fair in February 1993, which featured Norm Abrams from "This Old House" and
"The New Yankee Workshop" shown on PBS, attracted approximately 150,000 people.
ZIP Service. Orchard offers added convenience and fast pick-up through its
"ZIP" service for commercial customers, which enables them to place orders over
the phone and have them pre-assembled for immediate pick-up at no additional
charge.
Custom Cutting. Orchard will custom cut to a customer's specifications
products such as pipe, electrical wire, shade cloth, rope, chain, tubing and
screening.
Eager Beaver Engine Shop. Orchard offers customers repair and maintenance
service for power driven equipment such as lawn mowers, chain saws and edgers
through its factory authorized service facility located at its Tracy,
California distribution center. Customers can drop off the equipment to be
repaired at their local Orchard store and pick it up typically within seven
days.
Convenient, Well Organized Stores. To encourage ease of shopping, Orchard's
stores are designed in a conventional supermarket format with low profile
shelving as opposed to warehouse racking. This allows customers to view the
entire store upon entering in order to easily and quickly find the products
they need. Every store is organized so that related departments are located
adjacent to one another, and most SKUs are displayed according to centrally
developed plan-o-grams designed to optimize space utilization. Product labels
and descriptive signs assist customers in easy identification of merchandise,
and efficient check-out stations minimize customer lines at the cash register.
The Company's stores follow a standard merchandise layout and maintain a
consistent appearance. In addition, all stores have ample parking facilities
and wide aisles. These features provide customers with an attractive shopping
environment and the ability to get in and out of the store quickly.
Value Pricing. The Company provides the customer with value through a
combination of broad merchandise selection, outstanding service, convenient,
well organized stores and fair everyday pricing. Fair everyday pricing entails
competitive pricing on high visibility, high volume products and higher margins
on other products which in many cases are not carried by competitors. In
addition, the Company seeks to increase its margins by concentrating on non-
commodity products and through the selective use of private label merchandise
and in-house repackaging of bulk shipments into smaller, more profitable unit
counts.
This strategy of providing value, together with the Company's broad market
presence achieved by operating more stores than any of its competitors within
its markets, has resulted in strong name identification in its Northern and
Central California markets. Management believes that the average customer
purchase is approximately $17.
EXPANSION STRATEGY
The Company's expansion strategy is to increase market share in existing
markets and to open stores in attractive new markets. Building on its current
43 store base, the Company intends to open 14 stores in fiscal
34
<PAGE>
1994, including the nine Expansion stores, six of which will be located in
metropolitan Los Angeles. The remaining five new stores for fiscal 1994 will be
located in Northern and Central California. Management believes that the
metropolitan Los Angeles market, which is one of the largest DIY markets in the
United States, presents an attractive opportunity for the broad selection, high
service Orchard format, particularly in light of the recent liquidation of the
Builders Emporium chain which operated approximately 40 DIY stores in
metropolitan Los Angeles. In fiscal year 1995, the Company plans to open five
to ten new stores, the majority of which are expected to be in metropolitan Los
Angeles. The Company believes it has the potential to expand to a total of 70
stores in Northern and Central California and 45 stores in metropolitan Los
Angeles and Orange County.
Consistent with this expansion strategy, on November 9, 1993 the Company
announced its plans to acquire nine former Builders Emporium store sites. The
Company completed the acquisition of six of these sites (Pasadena, Burbank, Van
Nuys and Hollywood in metropolitan Los Angeles, and Pismo Beach and Redding in
Central and Northern California, respectively) on November 16, 1993 and
completed the acquisition of the remaining three sites (South Pasadena and West
Los Angeles in metropolitan Los Angeles and Goleta in Central California) on
December 22, 1993. All nine Expansion stores will be converted into the Orchard
format and are expected to open in the second quarter of fiscal 1994. Three of
the new stores (Van Nuys, Hollywood and Pismo Beach) are owned, and the
remainder are leased.
The $19.7 million purchase price for the nine Expansion store sites was
financed through $18.7 million in additional borrowings under the Financing
Agreement and the assumption of $1.0 million in outstanding mortgage debt. The
Company expects to refinance the additional borrowings under the Financing
Agreement and to finance the $35.0 million additional investment required to
open the stores with a portion of the proceeds from the issuance of the Notes.
See "Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
The Expansion store sites are proven retail hardware locations and include
seven of the top eight sales volume stores in the Builders Emporium chain. The
Company has in the past successfully converted former Builders Emporium stores
to the Orchard format. Based on the historical sales volume in the Expansion
stores, management believes that the stores located in metropolitan Los Angeles
will have average mature store sales in excess of the average mature store
sales of the Company's existing stores. Six of the Expansion store sites also
provide a unique opportunity to enter the metropolitan Los Angeles market with
immediate market presence. However, because the Los Angeles media market is
more expensive than the Northern and Central California market and Orchard will
initially lack the store concentration it enjoys in its existing markets, the
Company's advertising and marketing expenses will increase as a percent of
sales. The Company expects to execute its standard print advertising campaign
in metropolitan Los Angeles, but will initially make only limited use of
electronic media.
The Company expects to service all the acquired Expansion stores in
metropolitan Los Angeles and Goleta from its warehouse and distribution center
located in Tracy, California using an independent common carrier. Due to the
distance of the Los Angeles metropolitan market from the Tracy warehouse,
management expects transportation expenses as a percent of sales for these
Expansion stores to be higher than its other stores. The Company expects to
open an additional warehouse to service the metropolitan Los Angeles stores
after approximately 15 stores are open in that area.
In order to achieve the desired economies in distribution and advertising and
to establish critical market presence, management believes it is necessary to
open more stores in metropolitan Los Angeles in addition to the six Expansion
stores. Entering into a new market area, particularly one as large and complex
as Los Angeles, presents significant risks to the Company. See "Investment
Considerations--Expansion Program."
35
<PAGE>
1994 STORE OPENING SCHEDULE*
<TABLE>
<CAPTION>
INTERIOR AND
ANTICIPATED FISCAL 1994 EXTERIOR SELLING
STORE LOCATIONS OPENING SQ. FOOTAGE
---------------------------------- ----------------------- ----------------
<S> <C> <C>
Van Nuys+......................... Second Quarter 42,971
Burbank+.......................... Second Quarter 59,709
Hollywood+........................ Second Quarter 24,832
Pasadena+......................... Second Quarter 34,054
West Los Angeles+................. Second Quarter 26,338
South Pasadena+................... Second Quarter 40,096
Pismo Beach++..................... Second Quarter 34,208
Goleta++.......................... Second Quarter 32,929
Redding++......................... Second Quarter 34,775
Sonora............................ Second Quarter 33,148
Merced............................ Second Quarter 35,611
Petaluma.......................... Second Quarter 33,500
San Luis Obispo................... Third or Fourth Quarter 30,600
Hanford........................... Third or Fourth Quarter 33,240
</TABLE>
- --------
* This schedule represents management's current estimate with respect to
anticipated store openings; however, there is no assurance that the Company
will be able to achieve its expansion plan, including the 1994 store
openings detailed above, or that the new stores will be profitable. See
"Investment Considerations--Expansion Program."
+ Metropolitan Los Angeles Expansion store location.
++ Expansion store location.
COMPETITION
The Company competes with warehouse home center chains, traditional home
improvement centers and local independent retailers, including neighborhood
hardware stores and garden and nursery centers. Management believes that the
Company's "fix-it" orientation, broad merchandise selection, convenient
locations, value-added services and high name recognition in Northern and
Central California distinguish it from its competitors, including larger
warehouse home center chains and independent hardware stores.
Management believes that the warehouse home center chains, including HomeBase
and Home Depot, are its primary competitors. Since 1984 when the first
warehouse home center was opened in Orchard's markets, HomeBase and Home Depot
have opened and currently operate 12 and 21 stores, respectively, in the
Company's Northern and Central California markets. As of October 31, 1993, the
Company estimates that 32 Orchard stores faced competition from warehouse
operators. Despite this warehouse competition, the Company's operating income
has increased from $14.6 million in fiscal 1988 to $20.7 million in fiscal
1992. Since late October 1993, Home Depot has opened five competing stores. The
Company believes Home Depot will open two to four stores in fiscal 1994 in the
Company's Northern and Central California markets. HomeBase is expected to open
one store in the first quarter of calendar year 1994. Management believes this
is the only store opening in the Company's Northern and Central California
markets announced by HomeBase since 1991. If the anticipated Home Depot and
HomeBase store openings occur and the Company's fiscal 1994 expansion plan
takes place on schedule, then following fiscal 1994, HomeBase and Home Depot
will operate 37 stores in the Company's Northern and Central California markets
and 33 Orchard stores will face competition from warehouse competitors in these
markets.
Management believes that the competitive situation in metropolitan Los
Angeles is substantially similar to the highly competitive environment of
Orchard's existing Northern and Central California markets. Management believes
that HomeBase and Home Depot currently operate approximately 12 and 17 stores,
36
<PAGE>
respectively, in metropolitan Los Angeles and that three of the six
metropolitan Los Angeles Expansion stores will be in direct competition with
two HomeBase stores and two Home Depot stores.
ADVERTISING AND MARKETING
Consistent with its emphasis on building a concentrated market presence in
its Northern and Central California markets, Orchard utilizes advertising and
marketing campaigns across three major media categories: newspaper, circulars
and broadcasting. These campaigns are currently centered around Easter,
Memorial Day, July 4th, Labor Day and Christmas. The Company uses a significant
portion of its advertising and marketing allowance, which it obtains from
vendors that participate in the Company's co-operative advertising program, to
offset the costs of these campaigns, particularly television advertising
expenses. Co-operative advertising is the rebate received by the Company from a
merchandise vendor in return for featuring that vendor's product in the
Company's advertising media. The Company also maximizes the efficiency of its
advertising program in its Northern and Central California markets by spreading
these costs over a large number of stores contained in a concentrated
geographical area. In addition to the seasonal advertising campaigns, Orchard
regularly places newspaper ads and circulars in its Northern and Central
California markets and conducts an institutional image-building television and
radio campaign. Another major part of the Company's advertising program is its
"how-to" fairs which are held annually in two of the Company's major markets.
Each fair attracts approximately 150,000 potential customers and over 350
vendors, which purchase booths where they perform product demonstrations and
distribute discount coupons which are redeemable only at Orchard stores.
The Los Angeles media market is more expensive than Northern and Central
California, and Orchard will initially lack the store concentration it enjoys
in its existing markets. Accordingly, the Company expects to experience an
increase in marketing costs as a percentage of sales as a result of its fiscal
1994 openings in metropolitan Los Angeles. The Company expects to execute its
standard print advertising campaign in the Los Angeles market, but will
initially make only limited use of electronic media. As a new entrant into a
large and complex advertising market, there can be no assurances that the
Company will be able to achieve the same level of name recognition as in its
current Northern and Central California markets. See "Investment
Considerations--Expansion Program."
PURCHASING
Orchard's computerized point-of-sale systems automatically generate store
merchandise orders and track inventory by SKU. The majority of Orchard's
merchandise is purchased directly from the manufacturer and is shipped to the
Company's central warehouse located in Tracy, California. Orchard stores have
no significant storage space and rely on the warehouse for a majority of their
merchandise. The merchandising department controls inventory flow through a
purchase order management ("POM") system which tracks SKU levels and generates
reorder quantities for replenishment. This new warehouse facility stocks
approximately 25,000 SKUs, accounting for approximately 70% of the total dollar
sales. Moving to the new warehouse has allowed Orchard to add approximately
4,500 new items which can be carried at enhanced gross margins in the warehouse
relative to direct shipments to the stores from distributors and manufacturers.
Of the remaining 30% of the total dollar sales of the stores, 3% is obtained
through pool consolidation orders, which are received at the warehouse and
immediately shipped to the individual stores, and 27% is obtained through
direct shipments from distributors and manufacturers to the stores. Orchard
buys goods from approximately 1,000 different vendors. The Company's top 10
suppliers account for less than 18% of its total purchases, with no single
supplier accounting for more than 6% of the total. As its expansion rate
increases in fiscal 1994, the Company expects to benefit from greater volume
discounts created by growing sales volume generated by new stores.
DISTRIBUTION
Orchard's new warehouse facility, which commenced operations in February
1992, was designed to improve the in-stock position in the Company's stores by
increasing the amount of warehouse delivered
37
<PAGE>
merchandise versus vendor delivered merchandise, improving inventory management
and leveraging the Company's fixed cost structure as it expands its store base.
The 350,000 square foot warehouse facility is situated on approximately 28.5
acres of land in Tracy, California and replaced the Company's warehouse located
in San Jose, California, which was reaching its full capacity. The centrally
located warehouse is within a one day round trip (approximately a 300 mile
radius) of each Northern and Central California store. Management estimates
that the new warehouse will be able to support, with additional shifts, at
least 68 stores. The building was designed to be expanded by approximately
100,000 square feet at an estimated cost of $2.5 million. The warehouse allows
the Company to continue with its store expansion plans and maintain its ability
to process orders within 24 hours, thereby ensuring high in-stock levels (98%
on average). By removing the need for in-store storage space, Orchard maximizes
the selling space available in its stores, increases the stock level on each
store's shelves and reduces overall inventory requirements, thereby increasing
Orchard's high in-stock position.
Metropolitan Los Angeles is approximately 350 miles from the Company's
distribution center, which will result in significantly higher transportation
costs than in its current Northern and Central California markets. Management
expects to outsource the delivery of merchandise to the new stores south of
Santa Maria by use of an independent common carrier. As a result, management
expects transportation expenses as a percent of sales to be approximately 1.3%
higher for the metropolitan Los Angeles stores. The Company plans to process
orders from its metropolitan Los Angeles stores within 24 hours. The Company
expects to open an additional warehouse to service the metropolitan Los Angeles
stores after approximately 15 stores are open in that area. While the
additional warehouse will reduce transportation costs, it will initially have a
higher operating cost than the existing warehouse in Tracy, California. These
costs as a percentage of sales will be reduced as more stores are opened in the
metropolitan Los Angeles and Orange County markets.
Orchard operates a fleet of 29 tractors and 118 trailers, which are driven
and maintained by a non-union work force. The Company will be required to
expand its fleet of tractors and trailers when it opens a new distribution
center in metropolitan Los Angeles.
OPERATIONS
Orchard manages its operations on a centralized basis. Its headquarters staff
is responsible for all pricing, purchasing, advertising and promotional
programs, new site selection and administrative functions such as accounting,
payroll and management information systems. The Company's stores are operated
by store managers who report to one of five regional managers, four for the
Northern and Central California regions and one who will be responsible for
metropolitan Los Angeles. Orchard's store managers, who average in excess of 10
years of service with the Company, are responsible for day-to-day store
operations, subject to operating procedures established at headquarters.
The Company expects to add approximately 108 clerical and 17 management
workers to staff the Expansion stores. All management employees will undergo a
12 week training program and all other employees will undergo an eight week
training program prior to the Expansion store openings.
Orchard stores are open seven days a week. Depending on the size and sales
volume of the facility, the total number of personnel per store varies from 57
to 130, 25 to 49 of whom are full-time employees. A typical store is staffed
with a store manager, one first assistant manager, three assistant managers and
12 department managers.
MANAGEMENT INFORMATION SYSTEMS
Orchard's information systems have been designed and developed to sustain
growth through increased productivity and address a wide range of functions
that include sales analysis, merchandise ordering and processing, merchandise
management and presentation, management of human resources and financial
management. The Company's management is provided with concise relevant
information on performance
38
<PAGE>
that includes the daily individual store and department information necessary
for financial and merchandising decisions and periodic results reporting for
strategic planning and analysis.
Sales analysis reporting includes daily and periodic store sales results
detailed by department, classification and SKU movement. Merchandise ordering
is supported by the POM system which employs forecasting to calculate item
suggested order quantities for warehouse inventory replenishment. Purchase
orders are reviewed or created on-line and are electronically transmitted to
suppliers that participate in the hardware industry's "Eagle" Electronic Data
Interchange ("EDI") system. Price change control is an integral part of the POM
system.
The Store Order system is tightly coupled with the POM system and processes
daily transmitted store orders and produces warehouse pick tickets, shipping
manifests, "pool" (cross dock) distribution reports and productivity reports.
On-line capability of the system provides the warehouse with real-time
inventory data such as purchase order receiving, processing manifest exceptions
and updating inventory levels. This system is linked to the Retail Stock Ledger
financial system for store accounting.
The Point-of-Sale system is a fully integrated store sales, credit, inventory
and data collection system. The system provides automatic price look-up and
Orchard and bank card credit authorization at point-of-sale; sales audit
reporting; advertised item reporting; item sales performance and history; daily
computer review; and forecast and order generation of all warehouse replenished
items as well as suggested order quantities for items ordered directly from
vendors. The system provides improved customer service, reduces store operating
expense and provides disciplined inventory management. The Company expects to
install bar code scanning capabilities in all of its stores by the end of
fiscal 1993 and plans to install a UNIX based system in fiscal 1994.
Financial management is addressed by the retail stock ledger, accounts
payable, general ledger, fixed assets, bank card transmission, accounts
receivable and credit systems. These systems are traditional retail financial
control and operational systems with the exception of having on-line capability
wherever feasible in order to enhance productivity.
Management believes its systems are excellent and a key component to the
Company's ability to evaluate and respond to its markets and customers.
EMPLOYEES
As of October 31, 1993, Orchard had 3,857 total employees of whom 2,885 were
full time.
Management believes that its relationship with its employees is good. The
Company has never experienced a material interruption of business caused by
labor disputes. All of Orchard's employees are non-union.
PROPERTIES
Of the Company's 43 stores, eight are owned and 35 are leased under long-term
ground or building arrangements with various renewal options. All of these 35
leases are scheduled to expire after 2000 (including options to renew). See
Note 4 to Consolidated Financial Statements.
Orchard completed the acquisition of six former Builders Emporium stores on
November 16, 1993 and the acquisition of three former Builders Emporium stores
on December 22, 1993. Six of these stores are located in metropolitan Los
Angeles (Pasadena, South Pasadena, Burbank, Van Nuys, Hollywood and West Los
Angeles) and three of these stores are in new single-store markets previously
targeted for entry (Redding, Goleta and Pismo Beach). Orchard purchased three
of these stores (Van Nuys, Hollywood and Pismo Beach) and is leasing the
remainder. All but one of the Expansion store leases will expire after 2000
(including options to renew).
39
<PAGE>
The Company owns its new 350,000 square foot warehouse which commenced
operations in February 1992 and is located on 28.5 acres (including acreage
reserved for warehouse expansion) in Tracy, California. The Company also owns
its former San Jose warehouse which consists of several buildings totalling
282,000 square feet located on 17.4 acres. The Company has listed this facility
for sale at an asking price of $5.9 million and, in the alternative, is seeking
to enter into a long-term lease. The Company has also listed 11 acres it owns
adjacent to its distribution center in Tracy, California for $1.0 million.
The Company's corporate offices are located in a 75,761 square foot building
of which the Company leases 58,180 square feet. The Company's lease terminates
in November 1999, subject to the Company's option to renew the lease for a
five-year term at 90% of the market rate at the time of renewal. In addition,
the Company has a right of first refusal to lease the remaining space in 1997,
or earlier in the event that the space is vacated by the current tenant. The
Company believes that the facility is adequate for its present needs and that
the adjacent property subject to the right of first refusal will be available
to accommodate further expansion if needed.
LEGAL PROCEEDINGS
There are no material legal proceedings pending or, to the knowledge of
management of the Company, threatened against the Company.
40
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning each person who
is an executive officer, Director or significant employee of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Maynard Jenkins....... 51 President, Chief Executive Officer and Director
Brad R. Tukey......... 47 Executive Vice President
Stephen M. Hilberg.... 49 Vice President-Finance, Chief Financial Officer and
Director
William G. Collard.... 56 Vice President-Distribution
Joseph A. DiRocco..... 43 Vice President-Marketing
Robert A. Lewis....... 48 Vice President-Purchasing and General Merchandise
Manager
Carolyn J. McInnes.... 49 Vice President-Human Resources
Lee Nemechek.......... 60 Vice President-Stores
Bradford M. Freeman*+. 51 Director
Morton Godlas*+....... 70 Director
J. Frederick Simmons*. 39 Director
Ronald P. Spogli*+.... 45 Director
William E. Walsh...... 62 Director
William M. Wardlaw+... 47 Director
</TABLE>
- --------
*Member of the Compensation Committee.
+Member of the Audit Committee.
Each executive officer and Director of the Company serves in the same
capacity with Orchard Supply.
Mr. Jenkins has served as President of the Company and a Director since May
1989 and as Chief Executive Officer since 1986. Mr. Jenkins has over twenty-
five years of retail experience. Before joining the Company, Mr. Jenkins served
as the President and Chief Operating Officer of Pay 'n Save drug stores, where
he was responsible for operations, merchandising and advertising of the 108-
store chain with sales in excess of $500 million. Mr. Jenkins serves on the
advisory board of Malsham Group, Inc. ("Malsham"), a Canadian subsidiary of
Molson Companies, Ltd. Malsham operates the Aikenhead chain of warehouse home
centers and a chain of retail lumber yards and traditional home centers.
Mr. Tukey has served as Executive Vice President since July 1993. Prior to
joining Orchard, he served in senior management positions at several retailers,
including Standard Brands Paint Company, HomeBase and Handyman Home Centers,
Inc. Merchandising, marketing, real estate and store planning report to Mr.
Tukey.
Mr. Hilberg has served as Chief Financial Officer and Vice President-Finance
of the Company since 1981 and as a Director since May 1989. Until 1978, Mr.
Hilberg worked for Touche Ross & Co. where he advanced to the position of Audit
Manager and specialized in retail and distribution industries. From 1978 to
1981, Mr. Hilberg served as the Corporate Controller of Franklin Stores.
Mr. Collard has served as Vice President-Distribution of the Company since
1986. Mr. Collard joined the Company in 1979 and has over 30 years of
warehousing and distribution experience. Prior to joining the Company, Mr.
Collard served for seven years as the Operations Supervisor for Fleming Foods
and for nine years as the Warehouse Foreman for Louis Stores. Mr. Collard is
currently responsible for the Company's warehouse and distribution activities.
41
<PAGE>
Mr. DiRocco has served as Vice President-Marketing of the Company since 1986.
From 1983 to May 1986, Mr. DiRocco worked in the marketing and advertising
departments of the Company. Mr. DiRocco joined the Company in 1983 and has over
15 years of marketing experience in the retail industry.
Mr. Lewis has served as Vice President-Purchasing and General Merchandise
Manager of the Company since 1986. Mr. Lewis began his career at the Company in
1961 and is responsible for all aspects of the Company's merchandising and
buying program.
Ms. McInnes has served as Vice President-Human Resources of the Company since
1986. Ms. McInnes joined the Company in 1979 as Director of Training. She is
responsible for all of the Company's training, personnel, wage and benefits
related matters.
Mr. Nemechek joined the Company in March 1987 as a Regional Manager and was
promoted to Vice President-Stores in July 1990. Prior to joining Orchard, Mr.
Nemechek had over 30 years of experience in grocery and general merchandise
retailing. Mr. Nemechek is responsible for all aspects of store operations.
Mr. Freeman is a founding partner of FS&Co. Mr. Freeman became a Director of
the Company in connection with the 1989 Transaction. Mr. Freeman is also a
member of the Board of Directors of Duff & Phelps Corporation and Buttrey Food
and Drug Stores Company.
Mr. Godlas became a Director of the Company in July 1993 and is a management
consultant with more than 45 years of retail experience. Since 1982, Mr. Godlas
has been President and Chief Executive Officer of M. Godlas, Inc. From 1978 to
1982, Mr. Godlas was Corporate Senior Vice President-General Merchandise at
Lucky Stores, Inc. and served as President of GEMCO/MEMCO membership department
stores from 1976 to 1978. From 1976 to 1982, Mr. Godlas was a director of the
International Mass Retailing Association.
Mr. Simmons joined FS&Co. in 1986 and became a general partner in January
1991. Mr. Simmons became a Director of the Company in connection with the 1989
Transaction. Mr. Simmons is also a member of the Board of Directors of Buttrey
Food and Drug Stores Company, Purity Supreme, Inc. and EnviroSource, Inc.
Mr. Spogli is a founding partner of FS&Co. Mr. Spogli became a Director of
the Company in connection with the 1989 Transaction. Mr. Spogli is the Chairman
of the Board and a Director of EnviroSource, Inc. Mr. Spogli also serves on the
Board of Directors of Mac Frugal's Bargains . Close-Outs Inc., Buttrey Food and
Drug Stores Company and Purity Supreme, Inc. and on the Board of
Representatives of Brylane, L.P.
Mr. Walsh became a Director of the Company in July 1993 and is currently Head
Coach of the Stanford University football team. As head coach of the San
Francisco 49ers from 1979 to 1988, he led the team to three Super Bowl
championship titles. In addition to the numerous coaching positions he has held
since 1957, Mr. Walsh has also served as Executive Vice President for football
operations for the San Francisco 49ers and as a football analyst for NBC
television. He was elected to the Pro Football Hall of Fame in 1993. Mr. Walsh
is also a member of the Board of Directors of American Building Maintenance,
Inc.
Mr. Wardlaw joined FS&Co. in March 1988 and became a general partner in
January 1991. From 1984 to 1988, Mr. Wardlaw was a principal of the law firm of
Riordan & McKinzie. Mr. Wardlaw became a Director of the Company in connection
with the 1989 Transaction. Mr. Wardlaw is also a member of the Board of
Directors of Buttrey Food and Drug Stores Company, Purity Supreme, Inc. and
EnviroSource, Inc.
Each Director is elected to hold office until the next annual meeting of
stockholders and until his respective successor is elected and qualified.
Officers serve at the discretion of the Board of Directors. Non-employee
Directors not affiliated with FS&Co. receive $2,500 for each regular Board
meeting attended and $1,500 for each special Board meeting attended. All
Directors are reimbursed for their out-of-pocket expenses in serving on the
Board of Directors. See "--1993 Non-Employee Directors Stock Option Plan."
42
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the cash compensation paid or accrued by the
Company to the President and Chief Executive Officer and to each of the four
additional most highly compensated executive officers for each of the fiscal
years in the three-year period ended January 31, 1993:
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------- ------- ----------
OTHER ALL
ANNUAL OPTIONS LTIP OTHER
NAME AND PRINCIPAL POSITIONS YEAR SALARY(1) BONUS(1)(2) COMPENSATION(3) (#)(4) PAYOUTS(5) COMPENSATION(3)
- ---------------------------- ---- --------- ----------- --------------- ------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Maynard Jenkins.......... 1992 $299,578 $286,747 -- 12,045 -- $4,723
President and Chief Ex-
ecutive 1991 293,000 -- -- --
Officer 1990 285,000 170,655 -- $206,300
Stephen M. Hilberg....... 1992 117,484 39,287 -- -- -- 2,182
Vice President-Finance
and 1991 115,000 -- -- --
Chief Financial Officer 1990 110,000 54,770 -- --
Robert A. Lewis.......... 1992 101,923 34,623 -- -- -- 1,903
Vice President-Purchas-
ing and 1991 100,000 -- -- --
General Merchandise Man-
ager 1990 95,000 47,400 -- --
John K. Self(6).......... 1992 97,692 28,223 -- -- -- 411
Vice President-Store
Planning 1991 99,000 -- -- --
1990 94,000 47,848 -- --
Joseph A. DiRocco........ 1992 92,704 31,860 -- -- -- 1,789
Vice President-Marketing 1991 91,000 -- -- --
1990 86,000 42,920 -- --
</TABLE>
- --------
(1) Amounts shown include compensation earned and received by executive
officers as well as amounts earned but deferred at the election of those
officers.
(2) Represents payments made to executive officers pursuant to the Company's
Performance Bonus Plan and a $100,000 bonus paid to Maynard Jenkins for
fiscal 1992 pursuant to his employment agreement. See "--Employment
Agreement."
(3) In accordance with the transitional provisions of the new executive
compensation disclosure rules adopted by the Securities and Exchange
Commission (the "Commission"), amounts of Other Annual Compensation and All
Other Compensation for fiscal 1990 and 1991 are excluded from this table.
(4) Represents options to purchase 12,045 shares of Common Stock made outside
the Option Plan (as defined below) to Maynard Jenkins on April 15, 1992
pursuant to a Nonqualified Stock Option Agreement.
(5) Represents a payment made pursuant to a discontinued long-term incentive
plan.
(6) Mr. Self resigned his position as Vice President-Store Planning and left
the Company in April 1993.
EMPLOYMENT AGREEMENT
Mr. Jenkins is party to an employment agreement which provides for a base
annual salary of not less than $275,000 per year and bonuses and fringe
benefits determined from time to time by the Company. In April 1992, Mr.
Jenkins' employment agreement was amended to provide for an additional $100,000
bonus to be paid to him annually. Upon termination of employment for death or
disability, Mr. Jenkins is entitled to a severance payment equal to six months
of his salary. Upon termination of employment other than for cause, death or
disability, Mr. Jenkins is entitled to a severance payment consisting of two
years' base salary, the target bonus applicable to the earning year in progress
at the date of termination and the $100,000 bonus for the year in progress at
the date of termination. See "--Performance Bonus."
43
<PAGE>
AMENDED 1989 NONQUALIFIED STOCK OPTION PLAN
Officers and certain employees, including Directors who are officers or
employees, of the Company who are chosen by the Compensation Committee of the
Company (the "Compensation Committee") are eligible to participate in the
Amended 1989 Nonqualified Stock Option Plan (the "Option Plan"). Only officers
and employees who do not own capital stock possessing more than 10% of the
total combined voting power or value of all classes of capital stock of the
Company are eligible to receive grants of options under the Option Plan. Under
the Option Plan, the participants may be granted nonqualified options (the
"Options") to purchase shares of the Company's Common Stock at a purchase price
determined by the Company's Compensation Committee. In no event shall such
purchase price be less than the fair market value of the underlying shares at
the time the Option is granted. The Options are not intended to qualify for
treatment as incentive stock options under Section 422 of the Internal Revenue
Code of 1986, as amended. Up to 60,000 shares of the Company's Common Stock may
be issued under the Option Plan upon the exercise of Options granted
thereunder. As of November 18, 1993, Options covering 43,741 shares of Common
Stock were outstanding under the Option Plan, and Options to purchase 6,945
shares of Common Stock had been exercised.
The following table sets forth information concerning options granted to each
of the named executive officers during fiscal 1992:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
INDIVIDUAL GRANTS ANNUAL RATES
------------------------------------------------------ OF STOCK
% OF TOTAL EXERCISE PRICE APPRECIATION
OPTIONS GRANTED TO OR BASE FOR OPTION TERM
EMPLOYEES IN PRICE EXPIRATION ---------------------
NAME OPTIONS GRANTED FISCAL YEAR ($/SH) DATE 5% 10%
---- --------------- ------------------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Maynard Jenkins......... 12,045(1) 100% $8.33 05/15/02 $ 174,346 $ 337,048
Stephen M. Hilberg...... -- -- N/A N/A N/A N/A
Robert A. Lewis......... -- -- N/A N/A N/A N/A
John K. Self(2)......... -- -- N/A N/A N/A N/A
Joseph A. DiRocco....... -- -- N/A N/A N/A N/A
</TABLE>
- --------
(1) This option was granted outside the Option Plan pursuant to a Nonqualified
Stock Option Agreement and is only exercisable upon the occurrence of
certain mergers, consolidations, business combinations, asset sales, tender
offers, exchange offers or liquidations involving the Company (an
"Extraordinary Corporate Event").
(2) Mr. Self resigned his position as Vice President-Store Planning and left
the Company in April 1993.
The Options granted or to be granted under the Option Plan terminate at the
earliest to occur of (i) 90 days after the participant's termination of
employment by the Company (unless such termination results from the
participant's death or disability, or the participant dies within 90 days after
such termination of employment, in which case, the Option shall terminate 180
days after the date of the participant's termination of employment); (ii) ten
years from the date of grant; or (iii) on the effective date of a dissolution,
liquidation or sale of all of the business, properties and assets of the
Company or upon certain reorganizations, mergers or consolidations.
The Options vest and become exercisable in annual installments of 20% per
year over five years. Upon the occurrence of certain events constituting an
Extraordinary Corporate Event, the vesting of any outstanding Option will be
accelerated and each outstanding Option (and any portion thereof) will become
immediately and fully exercisable. Upon the occurrence of any event other than
an Extraordinary Corporate Event, the Compensation Committee may, in its sole
discretion, elect to accelerate the vesting of all or any portion of the
Options then outstanding.
44
<PAGE>
Under the Option Plan, any time prior to four years after the date of grant
of an Option, the Company has the option to repurchase all of the shares of
Common Stock acquired by the participant upon the exercise of such Option for a
period of 90 days after the date of termination of the participant due to
retirement, voluntary resignation, or dismissal, with or without cause (but
excluding death or disability). The purchase price for such repurchased shares
shall equal the greater of $8.33 or their fair market value. In addition, the
Company has a right of first refusal in the event a participant proposes to
sell any shares purchased upon exercise of such participant's Options. After
the termination of a participant's employment, the Options may be exercised
only with respect to that number of shares of Common Stock which could have
been purchased upon exercise of the Options at the time of the termination of
such employment.
The following table sets forth information concerning options held by each of
the named executive officers.
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
1992 FY-END 1992 FY-END
SHARES ACQUIRED ------------------------- -------------------------
NAME ON EXERCISE VALUE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- --------------- -------------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Maynard Jenkins......... -- -- 6,313/16,254 $35,795/$23,865
Stephen M. Hilberg...... -- -- 3,157/ 2,105 17,900/ 11,935
Robert A. Lewis......... -- -- 3,157/ 2,105 17,900/ 11,935
John K. Self(1)......... -- -- 2,104/ 1,403 11,930/ 7,955
Joseph A. DiRocco....... -- -- 3,157/ 2,105 17,900/ 11,935
</TABLE>
- --------
(1) Mr. Self resigned his position as Vice President-Store Planning and left
the Company in April 1993.
1993 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
Non-employee Directors of the Company, excluding Directors who are affiliated
with FS&Co., are eligible to participate in the 1993 Non-Employee Directors
Stock Option Plan (the "Non-Employee Directors Plan"). Under the Non-Employee
Directors Plan, the Options are not intended to qualify for treatment as
incentive stock options under Section 422 of the Internal Revenue Code of 1986,
as amended. Participants in the Non-Employee Directors Plan may be granted
Options to purchase shares of the Company's Common Stock at a purchase price
determined by the Compensation Committee. In no event shall such purchase price
be less than 85% of the fair market value of the underlying shares at the time
the Option is granted, or less than 110% of the fair market value in the case
of any participant who owns capital stock possessing more than 10% of the total
combined voting power or value of all classes of capital stock of the Company
or its subsidiaries. The Options vest and become exercisable in annual
installments of 20% per year over five years. Up to 10,000 shares of the
Company's Common Stock may be issued under the Non-Employee Directors Plan upon
the exercise of Options granted thereunder. As of November 19, 1993, Options
covering 10,000 shares of Common Stock had been granted under the Non-Employee
Directors Plan, and no Options to purchase shares of Common Stock had been
exercised.
1993 STOCK OPTION PLAN
Officers and certain employees, including Directors who are officers or
employees, of the Company who are chosen by the Compensation Committee are
eligible to participate in the 1993 Stock Option Plan (the "1993 Plan"). Only
officers and employees who do not own capital stock possessing more than 10% of
the total combined voting power or value of all classes of capital stock of the
Company or its subsidiaries are eligible to receive grants of options under the
1993 Plan. Under the 1993 Plan, options may be intended to qualify for
treatment as incentive stock options under Section 422 of the Internal Revenue
Code of 1986, as amended. Participants in the 1993 Plan may be granted
incentive stock options or nonqualified stock options to purchase shares of the
Company's Common Stock at a purchase price determined by the Compensation
Committee. In no event shall such purchase price of incentive stock options be
less than the fair market value
45
<PAGE>
of the underlying shares at the time the incentive stock option is granted. The
options vest as determined by the Compensation Committee. Up to 350,000 shares,
plus an annual increase equal to 1% of the total issued and outstanding shares
on the first day of each calendar year, of the Company's Common Stock may be
issued under the 1993 Plan upon the exercise of options granted thereunder. As
of November 19, 1993, options covering 95,000 shares of Common Stock had been
granted under the 1993 Plan, which grants were subject to stockholder approval
at the Company's annual meeting to be held in the spring of 1994.
EMPLOYEE STOCK SUBSCRIPTION PLAN
In connection with the 1989 Transaction in May 1989, the Board of Directors
adopted the 1989 Employee Stock Subscription Plan, as amended on August 7, 1989
and June 11, 1991 (as amended, the "Subscription Plan") pursuant to which an
aggregate of 97,200 shares of Series A Preferred Stock and 58,320 shares of
Common Stock were issued, at a purchase price of $10.00 and $8.33 per share,
respectively, to management and certain other key employees of the Company.
Pursuant to the Reclassification, all shares of Series A Preferred Stock were
converted into shares of Common Stock. All of the shares were purchased
pursuant to the Subscription Agreements which provide that one-fifth of the
shares of Common Stock purchased were deemed "vested" upon purchase, with the
remainder vesting in four equal annual installments. All of the shares of
Series A Preferred Stock were deemed vested upon purchase. If a purchaser's
employment with the Company is terminated prior to the fourth anniversary of
the date of purchase, the Company retains the right to repurchase all unvested
shares at their original purchase price. Except for certain permitted transfers
to family members, upon death or pursuant to a registered public offering, no
shares may be sold or transferred prior to the fourth anniversary of the date
of purchase. As of November 18, 1993, an aggregate of 147,169 shares of Common
Stock were outstanding under the Subscription Plan.
Members of management and employees may elect to pay a portion of the
purchase price for their shares purchased under the Subscription Plan through
the delivery of five-year, full recourse promissory notes, bearing interest at
the rate designated by Bankers Trust Company as its prime rate, as adjusted
from time to time. Accrued interest on the promissory notes is payable
quarterly, and the principal balance of, including all accrued and unpaid
interest on, the promissory notes is payable in full at maturity. For the
participants electing to deliver promissory notes, their shares are pledged to
the Company to secure payment of the notes. As of November 18, 1993, promissory
notes in the aggregate amount of $175,080 remained outstanding to the Company
by management and employees.
After giving effect to the Reclassification, the following executive officers
of the Company have acquired the number of shares of Common Stock set forth
after their names pursuant to the Subscription Plan: Maynard Jenkins, 35,920
shares of Common Stock; Stephen M. Hilberg, 17,960 shares of Common Stock; John
K. Self, 11,972 shares of Common Stock; Joseph A. DiRocco, 17,960 shares of
Common Stock; Robert A. Lewis, 17,960 shares of Common Stock; Carolyn J.
McInnes, 11,972 shares of Common Stock; William G. Collard, 11,972 shares of
Common Stock; and Lee Nemechek, 2,394 shares of Common Stock. For Messrs.
Hilberg, Self, DiRocco and Nemechek and Ms. McInnes, $50,000, $50,000, $75,000,
$10,000 and $30,000 of their purchase price, respectively, was financed through
the delivery of promissory notes. After giving effect to the Reclassification,
in addition to the preceding eight executive officers, 83 other employees of
the Company acquired 55,880 shares of Common Stock of the Company pursuant to
the Subscription Plan.
SALARY DEFERRAL AND PROFIT SHARING PLAN
All of Orchard's salaried and hourly employees over 21 years of age are
eligible to participate in the Company's Your Employee Savings Plus Plan, or
YES Plus Plan, after one year of employment. The YES Plus Plan allows eligible
employees to invest up to 6% of their pre-tax compensation and an additional 6%
of after-tax compensation. All amounts contributed by the employee are
immediately fully vested. Orchard matches 50% of employee contributions to the
YES Plus Plan up to a maximum employee contribution of 3% of the employee's
compensation. In addition, the Company may, in its discretion, contribute
amounts to a profit sharing pool which is then allocated to the accounts of all
eligible employees based on their covered
46
<PAGE>
earnings. This contribution is determined yearly based on the Company's
performance and profitability. The Company's contributions only vest after two
years of service at which time such contributions are 40% vested. Thereafter,
the contributions vest at a rate of 20% for each year so that the Company's
contributions are fully vested after five years of service. Notwithstanding the
foregoing, the Company's contributions immediately vest when the employee
reaches 55 or upon the death or permanent disability of the employee while so
employed.
PERFORMANCE BONUS
The Company has instituted a bonus plan (the "Performance Bonus Plan")
covering senior management (the President and seven Vice Presidents) which
provides for annual bonus payments based upon the Company's performance against
annually established target levels of "EBDIT" (earnings before depreciation,
amortization of deferred charges, interest and income taxes) and "Free Cash
Flow" (EBDIT minus capital expenditures and plus or minus the change in working
capital). The amounts awarded each year are based on specified percentages of
each person's salary upon the Company's attaining such target levels. In
addition, if performance exceeds the target levels, senior management receives
a percentage of the excess amount.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Ronald P. Spogli, J. Frederick Simmons and Maynard Jenkins, the President and
Chief Executive Officer of the Company, served on the Compensation Committee
during fiscal 1992. Mr. Jenkins resigned from the Compensation Committee on
February 26, 1993. In April 1992, the Company and Maynard Jenkins entered into
an amendment to Mr. Jenkins' existing employment agreement. In addition, the
Company granted a nonqualified stock option outside of the Option Plan to Mr.
Jenkins. See "--Employment Agreement" and "--Amended 1989 Nonqualified Stock
Option Plan."
CERTAIN TRANSACTIONS
The Company has entered into an agreement to sell to FS Equity Partners III,
L.P., an affiliate of FS&Co. ("FSEP III"), 800,000 shares of Preferred Stock
with an aggregate liquidation preference of $20.0 million, resulting in
aggregate net proceeds to the Company of $19.3 million (net of $150,000 of
transaction costs). The Preferred Stock Agreement contains certain customary
conditions to closing which will be eliminated upon the closing of the
Offering, at which time the purchase of the Preferred Stock will become
unconditional. The purchase of the Preferred Stock will be consummated not
later than the time the proceeds are needed to fund the redemption of the 14.5%
Subordinated Notes. See "Principal Stockholders" and "Description of Capital
Stock--Preferred Stock."
Immediately following consummation of the Initial Public Offering, borrowings
under the Financing Agreement were used to pay $2.5 million of the accrued and
unpaid dividends on the Series A Preferred Stock, which was owned by FS Equity
Partners II, L.P., an affiliate of FS&Co. ("FSEP II"), and management
(including the executive officers set forth in the table under the caption
"Management"). The remainder of the accrued and unpaid dividends totalling
$10.8 million were paid in additional shares of Series A Preferred Stock. After
payment of the Series A Preferred Stock dividends, the Company completed the
Reclassification by amending its Certificate of Incorporation on the closing
date of the Initial Public Offering to reclassify its Series A Preferred Stock
into shares of Common Stock.
47
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's capital stock as of December 1, 1993 (i) by each
person who is known by the Company to own beneficially more than 5% of Common
Stock, (ii) by certain of the Company's executive officers and each of the
Company's Directors and (iii) by all executive officers and Directors of the
Company as a group.
<TABLE>
<CAPTION>
DIRECTORS, OFFICERS AND 5% STOCKHOLDERS(1) SHARES PERCENT
------------------------------------------ --------- -------
<S> <C> <C>
Freeman Spogli & Co.(2).......................................... 2,693,023 38.9%
Maynard Jenkins(3)............................................... 44,338 *
Stephen M. Hilberg(4)............................................ 18,170 *
Robert A. Lewis.................................................. 32,170 *
John K. Self(5).................................................. -- --
Joseph A. DiRocco................................................ 6,000 *
Bradford M. Freeman(2)........................................... -- --
Morton Godlas.................................................... 500 *
J. Frederick Simmons(2).......................................... -- --
Ronald P. Spogli(2).............................................. -- --
William E. Walsh................................................. -- --
William M. Wardlaw(2)............................................ -- --
Directors and Executive Officers as a Group (15 persons)(2)(6)... 2,822,813 40.6%
</TABLE>
- --------
* Less than 1%.
(1) The persons named in this table have sole voting power and investment power
with respect to all shares of capital stock shown as beneficially owned by
them, subject to community property laws where applicable and the
information contained in this table and these notes.
(2) All shares are held of record by FSEP II. As general partner of FSEP II,
FS&Co. has the sole power to vote and dispose of such shares. Messrs.
Freeman, Simmons, Spogli and Wardlaw, each of whom is a Director of the
Company, and John M. Roth are general partners of FS&Co., and as such may
be deemed to be the beneficial owners of the shares of the Company's
capital stock indicated as beneficially owned by FS&Co. The business
address of FS&Co., its general partners and FSEP II is 11100 Santa Monica
Boulevard, Suite 1900, Los Angeles, California 90025. The Company has
entered into an agreement to sell 800,000 shares of Preferred Stock to FSEP
III. Assuming full conversion of the Preferred Stock, FS&Co. through its
affiliates will own approximately 48.4% of the outstanding Common Stock and
the Directors and executive officers as a group will own approximately
49.8% of the outstanding Common Stock. See "Certain Transactions" and
"Description of Capital Stock--Preferred Stock."
(3) Mr. Jenkins is a Director of the Company. 35,920 shares of Common Stock are
held by Maynard L. Jenkins, Jr. and Susan M. Jenkins, Co-Trustees under the
Living Trust dated November 10, 1988. The amount stated includes 8,418
shares of Common Stock covered by Options which are exercisable within the
next sixty days.
(4) Mr. Hilberg is a Director of the Company. Includes 4,210 shares of Common
Stock covered by Options which are exercisable within the next sixty days.
(5) Mr. Self resigned from the Company in April 1993.
(6) The amount of shares of Common Stock stated includes 23,012 shares of
Common Stock covered by Options which are exercisable within the next sixty
days.
48
<PAGE>
DESCRIPTION OF NOTES
The Notes will be issued under an indenture (the "Indenture") dated as of
, 1994, among Orchard Supply, Orchard Holding, as Guarantor, and U.S. Trust
Company of California, N.A., as trustee (the "Trustee"). The terms of the Notes
will include those stated in the Indenture and those made part of the Indenture
by reference to the Trust Indenture Act of 1939 (the "Trust Indenture Act"), as
in effect on the date of the Indenture. The Notes will be subject to all such
terms, and prospective investors are referred to the Indenture and the Trust
Indenture Act for a statement of such terms.
The statements under this caption relating to the Notes and the Indenture are
summaries and do not purport to be complete. Such summaries make use of certain
terms defined in the Indenture and are qualified in their entirety by express
reference to the Indenture, a copy of which is filed as an exhibit to the
Registration Statement of which this Prospectus is a part.
GENERAL
The Notes will bear interest from the date the Notes are first issued under
the Indenture at the rate shown on the cover page of this Prospectus, payable
semiannually on and of each year, commencing , 1994, to holders of
record at the close of business on or immediately preceding each such
interest payment date. The Notes will be due on , 2002 and will be issued
only in registered form, without coupons, in denominations of $1,000 and
integral multiples thereof.
The Notes will be senior obligations of Orchard Supply limited to an
aggregate amount of $100 million. The Notes will be senior to all subordinated
indebtedness of Orchard Supply and will rank pari passu in right of payment
with all senior indebtedness of Orchard Supply. At October 31, 1993, on an
adjusted basis after giving effect to the offering of the Notes and the
Preferred Stock and the application of the estimated net proceeds therefrom,
Orchard Supply would have had $39.7 million of indebtedness outstanding other
than the Notes. The ability of Orchard Supply and its Subsidiaries to incur
additional indebtedness will be limited by the "Limitations on Indebtedness"
covenant of the Indenture, and the ability of Orchard Supply and its
Subsidiaries to incur additional secured indebtedness will be limited by the
"Limitations on Liens" covenant of the Indenture.
PARENT GUARANTEE
Under the terms of the Indenture and subject to the provisions thereof,
Orchard Holding will unconditionally guarantee to the holders of the Notes from
time to time the due and punctual payment of the principal of, and premium and
interest on and any other Obligation of Orchard Supply with respect to, the
Notes when and as they shall become due and payable, whether at maturity, by
acceleration, redemption, repayment or otherwise, in accordance with the terms
of the Notes and the Indenture. In the event of a default in the payment of
principal, premium or interest or other Obligation by Orchard Supply, whether
at maturity, upon acceleration, redemption, repayment or otherwise, Orchard
Holding agrees to cause such payment to be made as if such payment were to be
made by Orchard Holding directly and the Indenture provides that the Trustee
may proceed directly against the Guarantor without first proceeding against
Orchard Supply. Orchard Holding is a holding company. The only material asset
of Orchard Holding is the capital stock of Orchard Supply.
REDEMPTION
Optional Redemption. The Notes may not be redeemed prior to , 1998, except
as provided below. On or after , 1998, Orchard Supply may, at its option,
redeem the Notes in whole or in part, from time to time, at the following
redemption prices (expressed in percentages of the principal amount thereof),
in each case together with accrued interest, if any, to the date of redemption.
49
<PAGE>
If redeemed during the twelve-month period beginning ,
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
1998.......................... %
1999..........................
2000.......................... 100
2001.......................... 100
</TABLE>
Selection and Notice of Redemption. In the event that less than all of the
Notes are to be redeemed at any time, selection of Notes or portions thereof
for redemption will be made by the Trustee pro rata, by lot or by any other
method the Trustee shall deem fair and reasonable; provided, however, that no
Notes of $1,000 or less shall be redeemed in part. Notice of redemption to the
holders of the Notes to be redeemed in whole or in part shall be given by
mailing notice of such redemption by first-class mail, postage prepaid, at
least 30 days and not more than 60 days prior to the date fixed for redemption
to such holders of the Notes at their addresses as they shall appear upon the
registry books. On and after the redemption date, interest ceases to accrue on
the Notes or portions thereof called for redemption.
Sinking Fund. There will be no sinking fund for the Notes.
CERTAIN COVENANTS OF ORCHARD SUPPLY
The following is a summary of certain covenants that will be contained in the
Indenture. Such covenants will be applicable (unless waived or amended as
permitted by the Indenture) so long as any of the Notes are outstanding.
Reports to Holders of the Notes. So long as any of the Notes remain
outstanding, Orchard Holding will continue to remain subject to the periodic
reporting requirements of the Exchange Act, and will continue to furnish the
information required thereby to the Commission and to the Trustee. If Orchard
Supply files periodic reports under the Exchange Act, Orchard Supply will
furnish such reports to the Trustee.
Repurchase of Notes Upon Change of Control. In the event that there shall
occur a Change of Control, each holder of the Notes shall have the right, at
the holder's option, to require Orchard Supply to purchase all or any part of
such holder's Notes on the date (the "Repurchase Date") that is no later than
60 days after notice of the Change of Control, at 101% of the principal amount
thereof, plus accrued interest to the Repurchase Date.
On or before the thirtieth day after the Change of Control, Orchard Supply is
obligated to mail, or cause to be mailed, to all holders of record of such
Notes a notice regarding the Change of Control and the repurchase right. The
notice shall state the Repurchase Date, the date by which the repurchase right
must be exercised, the price for such Notes and the procedure which the holder
must follow to exercise such right. Substantially simultaneously with mailing
of the notice, Orchard Supply shall cause a copy of such notice to be published
in a newspaper of general circulation in the Borough of Manhattan, The City of
New York. To exercise such right, the holder of such Note must deliver at least
ten days prior to the Repurchase Date written notice to Orchard Supply (or an
agent designated by Orchard Supply for such purpose) of the holder's exercise
of such right, together with the Note with respect to which the right is being
exercised, duly endorsed for transfer; provided, that, if mandated by
applicable tender offer rules and regulations a holder may be permitted to
deliver such written notice nearer to the Repurchase Date as may be specified
by Orchard Supply.
Orchard Supply will comply with all applicable tender offer rules and
regulations, including Section 14(e) of the Exchange Act and the rules
thereunder, if Orchard Supply is required to give a notice of right of
repurchase as a result of a Change of Control.
"Change of Control" means (i) any sale, lease or other transfer (in one
transaction or a series of transactions) of all or substantially all of the
assets of Orchard Supply to any Person (other than a Wholly
50
<PAGE>
Owned Subsidiary of Orchard Supply); (ii) Orchard Holding fails to own,
beneficially and of record, 100% of the Capital Stock of Orchard Supply; (iii)
a "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the
Exchange Act (other than FS&Co. or its Affiliates)) becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act) of Capital Stock of
Orchard Holding representing 50% or more of the voting power of the Capital
Stock of Orchard Holding; (iv) the Common Stock of Orchard Holding is no longer
registered under Section 12 of the Exchange Act; (v) Continuing Directors of
Orchard Holding or Orchard Supply cease to constitute at least a majority of
the Board of Directors of Orchard Holding or Orchard Supply, respectively; or
(vi) the stockholders of Orchard Holding or Orchard Supply approve any plan or
proposal for the liquidation or dissolution of Orchard Holding or Orchard
Supply; provided, however, that in the event that Orchard Holding is merged
into Orchard Supply in compliance with the terms of the Indenture and the
beneficial owners of the Capital Stock of Orchard Holding immediately prior to
such transaction beneficially own all the Capital Stock of Orchard Supply
immediately after such transaction, the provisions of clause (vi) above shall
not apply to such transaction and thereafter clause (ii) above shall no longer
be applicable and all references in this definition of Change of Control to
Orchard Holding shall be deemed to refer to Orchard Supply.
"Continuing Director" means a director who either was a member of the Board
of Directors of a Person on the date of the Indenture or who became a director
of the Person subsequent to such date and whose election, or nomination for
election by the Person's stockholders, was duly approved by a majority of the
Continuing Directors then on the Board of Directors of the Person, either by a
specific vote or by approval of the proxy statement issued by the Person on
behalf of the entire Board of Directors of the Person in which such individual
is named as nominee for director.
With respect to the disposition of assets, the phrase "all or substantially
all" as used in the Indenture (including as set forth under "Limitations on
Mergers, Consolidations and Sales of Assets" below) varies according to the
facts and circumstances of the subject transaction, has no clearly established
meaning under New York law (which governs the Indenture) and is subject to
judicial interpretation. Accordingly, in certain circumstances there may be a
degree of uncertainty in ascertaining whether a particular transaction would
involve a disposition of "all or substantially all" of the assets of Orchard
Supply, and therefore it may be unclear as to whether a Change of Control has
occurred and whether the holders have the right to require Orchard Supply to
repurchase Notes.
None of the provisions relating to a repurchase upon a Change of Control are
waivable by the Board of Directors of Orchard Supply. Orchard Supply could, in
the future, enter into certain transactions, including certain
recapitalizations of Orchard Supply, that would not constitute a "Change of
Control" with respect to the Change of Control purchase feature of the Notes,
but would increase the amount of indebtedness outstanding at such time.
The Indenture will require the payment of money for Notes or portions thereof
validly tendered to and accepted for payment by Orchard Supply pursuant to a
Change of Control offer. If a Change of Control were to occur, there can be no
assurance that Orchard Supply would have sufficient funds to pay the purchase
price for all Notes that Orchard Supply is required to repurchase. See
"Investment Considerations--Exercise of Change of Control Rights."
Failure by Orchard Supply to purchase the Notes when required upon a Change
of Control will result in an Event of Default with respect to the Notes.
These provisions could have the effect of deterring hostile or friendly
acquisitions of Orchard Supply or Orchard Holding where the person attempting
the acquisition views itself as unable to finance the purchase of the principal
amount of Notes which may be tendered to Orchard Supply upon the occurrence of
a Change of Control.
Limitations on Indebtedness. Orchard Supply will not, and will not permit any
of its Subsidiaries, directly or indirectly, to, create, incur, assume, become
liable for or guarantee the payment of (collectively,
51
<PAGE>
an "incurrence") any Indebtedness (including Acquired Indebtedness); provided
Orchard Supply may incur Indebtedness, including Acquired Indebtedness, and may
permit any Subsidiary of Orchard Supply to incur Acquired Indebtedness, if (i)
at the time of such event and after giving effect thereto, on a pro forma
basis, the Consolidated Fixed Charge Coverage Ratio of Orchard Supply would
have been greater than 2.0 to 1.0, and (ii) no Default or Event of Default
shall have occurred and be continuing at the time of or occur as a consequence
of the incurrence of such Indebtedness.
The foregoing limitations will not apply to the incurrence of (i) Permitted
Indebtedness, (ii) Refinancing Indebtedness and (iii) additional Indebtedness
of Orchard Supply the aggregate principal amount of which does not exceed $20.0
million outstanding at any one time.
Limitations on Preferred Stock of Subsidiaries. Orchard Supply will not
permit any of its Subsidiaries to issue any Preferred Stock (other than to
Orchard Supply or a Wholly Owned Subsidiary of Orchard Supply).
Limitations on Restricted Payments. Orchard Supply will not, and will not
permit any of its Subsidiaries to, directly or indirectly, make any Restricted
Payment unless:
(i) no Default or Event of Default shall have occurred and be continuing
at the time of or after giving effect to such Restricted Payment;
(ii) immediately after giving effect to such Restricted Payment, Orchard
Supply could incur at least $1.00 of Indebtedness (other than Permitted
Indebtedness) pursuant to the first paragraph of the "Limitations on
Indebtedness" covenant; and
(iii) immediately after giving effect to such Restricted Payment, the
aggregate amount of all Restricted Payments (the fair market value of any
such Restricted Payment if other than cash as determined in good faith by
Orchard Supply's Board of Directors and evidenced by a resolution of such
Board) declared or made after the Issue Date does not exceed the sum of (a)
50% of the Consolidated Net Income of Orchard Supply on a cumulative basis
during the period (taken as one accounting period) from and including the
first full fiscal quarter of Orchard Supply commencing after the Issue Date
and ending on the last day of Orchard Supply's last fiscal quarter ending
prior to the date of such Restricted Payment (or in the event such
Consolidated Net Income shall be a deficit, minus 100% of such deficit),
plus (b) 100% of the aggregate net cash proceeds of, and the fair market
value of marketable securities (as determined in good faith by Orchard
Supply's Board of Directors and evidenced by a resolution of such Board)
received by Orchard Supply from (1) a contribution of capital after the
Issue Date; (2) the issue or sale after the Issue Date of Capital Stock of
Orchard Supply (other than the issue or sale of (a) Disqualified Stock or
(b) Capital Stock of Orchard Supply to any Subsidiary of Orchard Supply);
and (3) the issue or sale after the Issue Date of any Indebtedness or other
securities of Orchard Supply convertible into or exercisable for Capital
Stock (other than Disqualified Stock) of Orchard Supply which has been so
converted or exercised, as the case may be.
The foregoing clauses (ii) and (iii) will not prohibit: (a) the payment of
any dividend within 60 days of its declaration if such dividend could have been
made on the date of its declaration without violation of the provisions of the
Indenture; (b) the repurchase, redemption or retirement of any shares of
Capital Stock of Orchard Supply in exchange for, or in an amount not in excess
of the net proceeds of the substantially concurrent sale (other than to a
Subsidiary of Orchard Supply) of, other shares of Capital Stock (other than
Disqualified Stock) of Orchard Supply; (c) the repurchase, redemption or
retirement of subordinated Indebtedness of Orchard Supply in exchange for, by
conversion into, or in an amount not in excess of the net proceeds of, a
substantially concurrent (x) issue or sale of Capital Stock (other than
Disqualified Stock) of Orchard Supply, (y) capital contribution to Orchard
Supply or (z) incurrence of Refinancing Indebtedness with respect to such
subordinated Indebtedness; (d) the making of Restricted Payments to Orchard
Holding for the purpose of paying the quarterly dividends accrued by Orchard
Holding on the outstanding 6% Cumulative Convertible Preferred Stock of Orchard
Holding; and (e) the making of Restricted Payments to Orchard Holding to cover
administrative expenses payable by Orchard Holding not exceeding $250,000 in
the aggregate in any 12-month period; provided, that, each Restricted Payment
described in clauses (a) through (e) (other than subclause (z) of clause (c))
of this sentence shall be taken into account for purposes
52
<PAGE>
of computing the aggregate amount of all Restricted Payments pursuant to clause
(iii) of the immediately preceding paragraph.
Limitations on Transactions with Affiliates. So long as any of the Notes
remain outstanding, Orchard Supply will not, and will not permit any of its
Subsidiaries to, make any loan, advance, guarantee or capital contribution to,
or for the benefit of, or sell, lease, transfer or otherwise dispose of any of
its properties or assets to, or for the benefit of, or purchase or lease any
property or assets from, or enter into or amend any contract, agreement or
understanding with, or for the benefit of, any Affiliate of Orchard Supply or
any Affiliate of any of Orchard Supply's Subsidiaries or any holder of 10% or
more of any class of Capital Stock of Orchard Supply (including any Affiliates
of such holders) (each, an "Affiliate Transaction") except for any Affiliate
Transaction the terms of which are at least as favorable as the terms which
could be obtained by Orchard Supply or such Subsidiary, as the case may be, in
a comparable transaction made on an arm's length basis with Persons who are not
such a holder, an Affiliate of such holder or an Affiliate of Orchard Supply or
any of Orchard Supply's Subsidiaries; provided that the payments described in
clauses (a), (d) and (e) of the last paragraph under the heading "Limitations
on Restricted Payments" above and in clauses (a) and (b) of the proviso in the
definition of Restricted Payment will not be deemed Affiliate Transactions.
In addition, Orchard Supply will not, and will not permit any Subsidiary of
Orchard Supply to, enter into an Affiliate Transaction, or any series of
related Affiliate Transactions, unless (i) with respect to such Transaction or
Transactions involving or having a value of more than $700,000, Orchard Supply
has (x) obtained the approval of a majority of the Board of Directors of
Orchard Supply in the exercise of their fiduciary duties and (y) either
obtained the approval of a majority of Orchard Supply's disinterested directors
or obtained an opinion of an independent financial advisor of national
recognition to the effect that such Transaction or Transactions are fair to
Orchard Supply or such Subsidiary, as the case may be, from a financial point
of view and (ii) with respect to such Transaction or Transactions involving or
having a value of more than $10 million, Orchard Supply has (x) obtained the
approval of a majority of the Board of Directors of Orchard Supply in the
exercise of their fiduciary duties and (y) delivered to the Trustee an opinion
of an independent financial advisor of national recognition to the effect that
such Transaction or Transactions are fair to Orchard Supply or such Subsidiary,
as the case may be, from a financial point of view.
Limitations on Dispositions of Assets of Orchard Supply. The Indenture will
provide that (i) Orchard Supply will not, and will not permit any of its
Subsidiaries to, make any Asset Disposition unless (x) Orchard Supply (or its
Subsidiary, as the case may be) receives consideration at the time of such sale
or other disposition at least equal to the fair market value thereof (as
determined in good faith by Orchard Supply's Board of Directors and evidenced
by a resolution of such Board), and (y) not less than 75% of the consideration
received by Orchard Supply (or its Subsidiary, as the case may be) is in the
form of cash, and (ii) the Net Cash Proceeds of such an Asset Disposition shall
be within 360 days, at Orchard Supply's election, (a) invested in the business
or businesses of Orchard Supply or a Subsidiary as of the Issue Date or any
related business, or (b) to the extent not so invested, applied to make a Net
Cash Proceeds Offer to purchase the Notes (on a pro rata basis if the amount
available for such repurchase is less than the principal amount of the Notes
tendered in such Net Cash Proceeds Offer plus accrued interest to the date of
repurchase) at a purchase price of 100% of the principal amount thereof plus
accrued interest to the date of repurchase. The provisions of clause (y) above
shall not apply to a sale of Orchard Supply's existing warehouse in San Jose,
California. Notwithstanding the foregoing, Orchard Supply and its Subsidiaries
will not be required to apply such Net Cash Proceeds to the repurchase or
repayment of the Notes in accordance with clause (ii) above except to the
extent that such Net Cash Proceeds, together with the aggregate Net Cash
Proceeds of prior Asset Dispositions, which have not been applied in accordance
with this provision, exceed $5 million, provided that when any non-cash
consideration is converted into cash, such cash shall constitute Net Cash
Proceeds and be subject to clause (ii) of the preceding sentence. The 75%
limitation of clause (y) above shall not apply to any Asset Disposition in
which the cash portion of the consideration received therefor is equal to or
greater than what the net after-tax proceeds would have been had such Asset
Disposition complied with the
53
<PAGE>
aforementioned 75% limitation if Orchard Supply shall have received an opinion
of independent tax counsel confirming the appropriateness of the tax treatment
of such Asset Disposition.
Limitations on Liens. Orchard Supply will not, and will not permit any
Subsidiary of Orchard Supply to, issue, assume, guarantee or suffer to exist
any Indebtedness secured by a Lien (other than a Permitted Lien) upon any
Property of Orchard Supply or any Subsidiary of Orchard Supply or any shares of
stock or debt of any Subsidiary of Orchard Supply, whether such Property is
owned at the date of the Indenture or thereafter acquired, without making
effective provision whereby the Notes shall be secured by such Lien equally and
ratably with such Indebtedness, so long as such Indebtedness shall be so
secured.
Limitations on Sale and Leaseback Transactions. Orchard Supply will not, and
will not permit any Subsidiary of Orchard Supply to, enter into any sale and
leaseback transaction with respect to any Property (whether now owned or
hereafter acquired) unless (i) if the sale or transfer of the Property to be
leased does not occur within 180 days after the acquisition of such Property,
Orchard Supply complies with the requirements of the "Limitations on
Dispositions of Assets of Orchard Supply" covenant and (ii) Orchard Supply or
such Subsidiary would be entitled under the "Limitations on Indebtedness"
covenant to incur at least $1.00 of Indebtedness after giving effect to such
sale and leaseback transaction on a pro forma basis; provided that this clause
(ii) shall not be applicable with respect to the premises owned by the Company
located in Pismo Beach, California and San Rafael, California if a sale and
leaseback transaction is consummated with respect thereto within the time
periods specified in the Indenture.
Limitations on Dividend and Other Payment Restrictions Affecting
Subsidiaries. Orchard Supply will not, and will not permit any of its
Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any consensual encumbrance or restriction on the
ability of any Subsidiary of Orchard Supply to (i) (a) pay dividends or make
any other distributions on its Capital Stock, or any other interest or
participation in or measured by its profits, owned by Orchard Supply or any
other Subsidiary of Orchard Supply, or (b) pay any Indebtedness owed to Orchard
Supply or any other Subsidiary of Orchard Supply, (ii) make loans or advances
to Orchard Supply or a Subsidiary of Orchard Supply or (iii) transfer any of
its properties or assets to Orchard Supply or any other Subsidiary of Orchard
Supply, except for Permitted Liens and such other encumbrances or restrictions
existing under or by reason of (a) any restrictions, with respect to a
Subsidiary that is not a Subsidiary of Orchard Supply on the Issue Date, under
any agreement in existence at the time such Subsidiary becomes a Subsidiary of
Orchard Supply (unless such agreement was entered into in connection with, or
in contemplation of, such entity becoming a Subsidiary of Orchard Supply on or
after the Issue Date), (b) any restrictions under any agreement evidencing any
Acquired Indebtedness of a Subsidiary of Orchard Supply incurred pursuant to
the provisions of the "Limitations on Indebtedness" covenant; provided that
such restrictions shall not restrict or encumber any assets of Orchard Supply
or its Subsidiaries other than such Subsidiary, (c) terms relating to the
nonassignability of any operating lease, (d) customary provisions restricting
assignment of any contract (or any rights thereunder), (e) any encumbrance or
restriction existing under any agreement that refinances or replaces the
agreements containing restrictions described in clauses (a)-(d), provided that
the terms and conditions of any such restrictions are no less favorable to the
holders of the Notes than those under the agreement so refinanced or replaced,
or (f) any encumbrance or restriction due to applicable law.
Limitations on Mergers, Consolidations and Sales of Assets. Orchard Supply
will not consolidate or merge with or into, or sell, lease, convey or otherwise
dispose of all or substantially all of its assets (as an entirety or
substantially an entirety in one transaction or a series of related
transactions, including by way of liquidation or dissolution) to, any Person
unless: (i) the entity formed by or surviving any such consolidation or merger
(if other than Orchard Supply), or to which sale, lease, conveyance or other
disposition shall have been made (the "Surviving Entity"), is a corporation
organized and existing under the laws of the United States, any state thereof
or the District of Columbia; (ii) the Surviving Entity assumes by supplemental
indenture all of the obligations of Orchard Supply on the Notes and under the
Indenture; (iii) immediately after giving effect to such transaction, no
Default or Event of Default shall have occurred and be continuing; (iv)
immediately after giving effect to such transaction and the use of any net
proceeds therefrom on a pro
54
<PAGE>
forma basis, the Consolidated Tangible Net Worth of Orchard Supply or the
Surviving Entity, as the case may be, would be at least equal to the
Consolidated Tangible Net Worth of Orchard Supply immediately prior to such
transaction; and (v) immediately after giving effect to such transaction and
the use of any net proceeds therefrom on a pro forma basis, Orchard Supply or
the Surviving Entity, as the case may be, could incur at least $1.00 of
Indebtedness (other than Permitted Indebtedness) pursuant to the first
paragraph of the "Limitations on Indebtedness" covenant. Notwithstanding the
foregoing, any Wholly Owned Subsidiary may merge with or into the Company so
long as (a) all of the conditions specified above, except for clause (v), are
satisfied, and (b) the Company is the surviving entity.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms as well as any other capitalized terms used herein for which no
definition is provided.
"Acquired Indebtedness" means (i) with respect to any Person that becomes a
Subsidiary of Orchard Supply (or is merged into Orchard Supply or any of its
Subsidiaries) after the Issue Date, Indebtedness of, or Preferred Stock issued
by, such Person or any of its Subsidiaries existing at the time such Person
becomes a Subsidiary of Orchard Supply (or is merged into Orchard Supply or any
of its Subsidiaries) that was not incurred in connection with, or in
contemplation of, such Person becoming a Subsidiary of Orchard Supply (or being
merged into Orchard Supply or any of its Subsidiaries) and (ii) with respect to
Orchard Supply or any of its Subsidiaries, any Indebtedness assumed by Orchard
Supply or any of its Subsidiaries or Non-recourse Indebtedness to which
Property acquired by Orchard Supply or any of its Subsidiaries is subject, in
each case in connection with the acquisition of any assets from another Person
(other than Orchard Supply or any of its Subsidiaries), which Indebtedness was
not incurred by such other Person in connection with, or in contemplation of,
such acquisition. Notwithstanding the foregoing, in no event will Preferred
Stock of Orchard Supply be deemed Acquired Indebtedness.
"Affiliate" means, when used with reference to a specified Person, any Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with the Person specified. For the purposes of this definition,
"control," when used with respect to any Person, means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
Notwithstanding the foregoing, the term "Affiliate" shall not include, (i) with
respect to Orchard Supply, any Subsidiary of Orchard Supply, or (ii) with
respect to any Subsidiary of Orchard Supply, Orchard Supply or any other
Subsidiary of Orchard Supply.
"Asset Disposition" means, any sale, transfer, conveyance, lease or other
disposition (including, without limitation, by way of merger, consolidation or
sale and leaseback or sale of shares of Capital Stock in any Subsidiary) (each,
a "transaction") by Orchard Supply or any of its Subsidiaries to any Person
(other than (i) a transaction between Orchard Supply and a Wholly Owned
Subsidiary of Orchard Supply or a transaction between Wholly Owned Subsidiaries
of Orchard Supply; provided, that, if such sale, transfer, conveyance, lease or
other disposition is to a Wholly Owned Subsidiary, and the fair market value of
the assets that are the subject thereof is $1,000,000 or greater, such Wholly
Owned Subsidiary shall, in order for such transaction not to be deemed an
"Asset Disposition", enter into a supplemental indenture wherein such Wholly
Owned Subsidiary shall unconditionally guarantee all of the obligations of
Orchard Supply under the Indenture and the Notes and (ii) a transaction in the
ordinary course of business (including such a transaction with a Wholly Owned
Subsidiary)) of any Property. For purposes of this definition, the term "Asset
Disposition" shall not include any sale, transfer, conveyance, lease or other
disposition of assets and properties of Orchard Supply that is governed by the
provisions relating to "Limitations on Mergers, Consolidations and Sales of
Assets."
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations, or other equivalents (however designated) of or in
such Person's capital stock, and options, rights or warrants to purchase such
capital stock, whether now outstanding or issued after the Issue Date,
including, without limitation, all Common Stock and Preferred Stock.
55
<PAGE>
"Capitalized Lease Obligations" of any Person means the obligations of such
Person to pay rent or other amounts under a lease that is required to be
capitalized for financial reporting purposes in accordance with GAAP; and the
amount of such obligation shall be the capitalized amount thereof determined in
accordance with GAAP.
"Commodity Agreement" of any Person means any option or futures contract or
similar agreement or arrangement designed to protect such Person or any of its
Subsidiaries against fluctuations in commodity prices.
"Consolidated Cash Flow Available for Fixed Charges" of Orchard Supply for
any period means, without duplication, the amounts for such period of the sum
of (i) Consolidated Net Income, plus (ii) taxes based upon the income of
Orchard Supply with respect to the period, plus (iii) interest expense for such
period, plus (iv) all depreciation and amortization and all other non-cash
charges to earnings (excluding any such non-cash charge constituting an
extraordinary item of loss or any non-cash charge that requires an accrual of
or a reserve for cash charges for any future period), minus (v) all non-cash
items increasing Consolidated Net Income; all as determined on a consolidated
basis for Orchard Supply and its Subsidiaries in accordance with GAAP.
Consolidated Cash Flow Available for Fixed Charges for any period shall be
adjusted to give pro forma effect (to the extent applicable) to (i) any
Investment by Orchard Supply or a Subsidiary of Orchard Supply from the
beginning of such period through the applicable determination date (the
"Reference Period") in any Person which, as a result of such Investment,
becomes a Subsidiary of Orchard Supply or, in the acquisition of assets from
any Person which constitutes substantially all of an operating unit or business
of such Person, but only if the financial statements of such Person or
operating unit or business used in calculating such pro forma effect shall have
been audited by independent accountants and (ii) the sale or other disposition
of any assets (including capital stock) of Orchard Supply or a Subsidiary of
Orchard Supply, other than in the ordinary course of business, during the
Reference Period as if such Investment or sale or disposition of assets by
Orchard Supply or a Subsidiary of Orchard Supply occurred on the first day of
the Reference Period.
"Consolidated Fixed Charge Coverage Ratio" of Orchard Supply means, with
respect to any determination date, the ratio of (i) Consolidated Cash Flow
Available for Fixed Charges of Orchard Supply for the prior four full fiscal
quarters for which financial results have been reported immediately preceding
such determination date; to (ii) Consolidated Fixed Charges which Orchard
Supply shall accrue during the next succeeding four full fiscal quarters for
which financial results will be reported immediately following such
determination date, such Consolidated Fixed Charges to be calculated on the
basis of the amount of Orchard Supply's Indebtedness (on a consolidated basis)
outstanding on the determination date and reasonably anticipated by the Board
of Directors of Orchard Supply to be outstanding from time to time during such
period.
"Consolidated Fixed Charges" of Orchard Supply for any period means the sum
of: (i) the aggregate amount of interest which, in conformity with GAAP, would
be set forth opposite the caption "interest expense" or any like caption on a
consolidated income statement for Orchard Supply and its Subsidiaries
(including, but not limited to, imputed interest included on Capitalized Lease
Obligations, all commissions, discounts and other fees and charges owed with
respect to letters of credit and banker's acceptance financing, the net costs
associated with Commodity Agreements, Currency Agreements and Interest
Protection Agreements, amortization of other financing fees and expenses, the
interest portion of any deferred payment obligation, amortization of discount
premium, if any, and all other non-cash interest expense other than interest
amortized to cost of sales), plus (ii) interest incurred during the period and
capitalized by Orchard Supply and its Subsidiaries, on a consolidated basis in
accordance with GAAP, plus (iii) the amount of Preferred Stock dividends
accrued by Orchard Holding or any of Orchard Supply's Subsidiaries on any
Preferred Stock (other than Preferred Stock dividends payable to Orchard Supply
or any Wholly Owned Subsidiary) whether or not paid during such period;
provided that, in making such computation, the Consolidated Fixed Charges
attributable to interest on any Indebtedness computed on a pro forma basis and
bearing a floating interest rate shall be computed as if the rate in effect on
the date of computation will be the applicable rate for the entire period.
56
<PAGE>
"Consolidated Net Income" of Orchard Supply for any period means the net
income (or loss) of Orchard Supply and its Subsidiaries for such period,
determined on a consolidated basis in accordance with GAAP; provided that there
shall be excluded from the computation of net income (loss) (to the extent
otherwise included therein) without duplication: (i) the net income (or loss)
of any Person (other than a Subsidiary of Orchard Supply) in which any Person
other than Orchard Supply or any of its Subsidiaries has an ownership interest,
except to the extent that any such income has actually been received by Orchard
Supply or any of its Subsidiaries in the form of dividends or similar
distributions during such period; (ii) the net income (or loss) of any Person
that accrued prior to the date that (a) such Person becomes a Subsidiary of
Orchard Supply or is merged into or consolidated with Orchard Supply or any of
its Subsidiaries or (b) the assets of such Person are acquired by Orchard
Supply or any of its Subsidiaries, except for purposes of a pro forma
calculation pursuant to clause (i) of the second sentence of the definition of
Consolidated Cash Flow Available for Fixed Charges, the net income (or loss) of
such Person shall be taken into account for the full four-quarter period for
which the calculation is being made; (iii) the net income of any Subsidiary of
Orchard Supply to the extent that (but only as long as) the declaration or
payment of dividends or similar distributions by such Subsidiary of that income
is not permitted by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental regulation
applicable to the Subsidiary during such period; (iv) any gain or loss,
together with any related provisions for taxes on any such gain or loss,
realized during such period by Orchard Supply or any of its Subsidiaries upon
(a) the acquisition of any securities, or the extinguishment of any
Indebtedness, of Orchard Supply or any of its Subsidiaries or (b) any Asset
Disposition by Orchard Supply or any of its Subsidiaries; (v) any extraordinary
gain or loss, together with any related provision for taxes on any such
extraordinary gain or loss, realized by Orchard Supply or any of its
Subsidiaries during such period; (vi) in the case of a successor to Orchard
Supply by consolidation, merger or transfer of its assets, any earnings of the
successor prior to such merger, consolidation or transfer of assets, except for
purposes of a pro forma calculation pursuant to clause (v) under "Certain
Covenants of Orchard Supply--Limitations on Mergers, Consolidations and Sales
of Assets" above; and (vii) amortization of debt discount and other debt
issuance costs relating to the issuance of the Notes; and provided further,
that there shall be included in such net income (to the extent not otherwise
included therein) the net income of any Subsidiary of Orchard Supply to the
extent such net income is actually received by Orchard Supply or a Subsidiary
of Orchard Supply in the form of cash dividends or other cash distributions
from such Subsidiary.
"Consolidated Tangible Net Worth" means, with respect to any Person, the
consolidated stockholder's equity (including any Preferred Stock that is
classified as equity under GAAP, other than Disqualified Stock) of such Person
and its Subsidiaries, as determined in accordance with GAAP, less the book
value of all Intangible Assets reflected on the consolidated balance sheet of
Orchard Supply and its Subsidiaries as of such date.
"Credit Agreement" means the Financing Agreement, dated October 29, 1992, as
amended as of July 29, 1993, November 12, 1993 and November 24, 1993, between
Orchard Supply and The CIT Group/Business Credit, Inc., as the same may be
amended hereafter from time to time and any subsequent agreement or agreements
constituting a refinancing, extension, modification or substitution thereof in
whole or in part.
"Currency Agreement" of any Person means any foreign exchange contract,
currency swap agreement of other similar agreement or arrangement designed to
protect such Person or any of its Subsidiaries against fluctuations in currency
values.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event (other than a change in
control which would not occur prior to a Change of Control under the
Indenture), (i) matures or is mandatorily redeemable, pursuant to a sinking
fund obligation or otherwise, or is redeemable at the option of the holder
thereof, in whole or in part, on or prior to the final maturity date of the
Notes or (ii) is convertible into or exchangeable for (whether at the option of
the issuer or the holder thereof) (a) debt securities or (b) any Capital Stock
referred to in (i) above, in each case, at any time prior to the final maturity
date of the Notes.
57
<PAGE>
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, as in effect on the Issue Date.
"Indebtedness" of any Person means, without duplication, (i) any liability of
such Person (a) for borrowed money, or under any reimbursement obligation
relating to a letter of credit, (b) evidenced by a bond, note, debenture or
similar instrument (including a purchase money obligation) given in connection
with the acquisition of any business, properties or assets of any kind or with
services incurred in connection with capital expenditures, or (c) in respect of
Capitalized Lease Obligations, (ii) any Indebtedness of others that such person
has guaranteed or that is otherwise its legal liability, (iii) to the extent
not otherwise included, obligations under Currency Agreements, Commodity
Agreements or Interest Protection Agreements, and (iv) all Indebtedness of
others secured by a Lien on any asset of such Person, whether or not such
Indebtedness is assumed by such Person, provided that Indebtedness shall not
include accounts payable (including, without limitation, accounts payable to
such Person by any of its Subsidiaries or to any such Subsidiary by such Person
or any of its other Subsidiaries, in each case, in accordance with customary
industry practice) or liabilities to trade creditors of such Person arising in
the ordinary course of business. The amount of Indebtedness of any Person at
any date shall be (a) the outstanding balance at such date of all unconditional
obligations as described above, (b) the maximum liability of such Person for
any contingent obligations under clause (ii) above at such date and (c) in the
case of clause (iv) above, the lesser of (1) the fair market value of any asset
subject to a Lien securing the Indebtedness of others on the date that the Lien
attaches and (2) the amount of the Indebtedness secured.
"Intangible Assets" of any Person means all unamortized debt discount and
expense, unamortized deferred charges, goodwill, patents, trademarks, service
marks, trade names, copyrights, write-ups of assets over their prior carrying
values (other than write-ups which occurred prior to the Issue Date and other
than, in connection with the acquisition of an asset, the write-up of the value
of such asset (within one year of its acquisition) to its fair market value in
accordance with GAAP), and all other items which would be treated as
intangibles on the consolidated balance sheet of Orchard Supply and its
Subsidiaries prepared in accordance with GAAP.
"Interest Protection Agreement" of any Person means any interest rate swap
agreement, interest rate collar agreement, option or future contract or other
similar agreement or arrangement designed to protect such Person or any of its
Subsidiaries against fluctuations in interest rates.
"Investment" of any Person means (i) all investments by such Person in any
other Person in the form of loans, advances or capital contributions, (ii) all
guarantees of Indebtedness or other obligations of any other Person by such
Person, (iii) all purchases (or other acquisitions for consideration) by such
Person of Indebtedness, Capital Stock or other securities of any other Person
and (iv) all other items that would be classified as investments (including,
without limitation, purchases of assets outside the ordinary course of
business) on a balance sheet of such Person prepared in accordance with GAAP.
"Issue Date" means the date on which the Notes are originally issued under
the Indenture.
"Lien" means, with respect to any Property, any mortgage, easement, lien,
lease, pledge, charge, security interest or encumbrance of any kind in respect
of such Property. For purposes of this definition, Orchard Supply shall be
deemed to own subject to a Lien any Property which it has acquired or holds
subject to the interest of a vendor or lessor under any conditional sale
agreement, capital lease or other title retention agreement relating to such
Property.
"Net Cash Proceeds" means with respect to an Asset Disposition, cash payments
received (including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise (including
any cash received upon sale or disposition of such note or receivable), but
58
<PAGE>
only as and when received), excluding any other consideration received in the
form of assumption by the acquiring Person of Indebtedness or other obligations
relating to the Property disposed of in such Asset Disposition or received in
any other non-cash form unless and until such non-cash consideration is
converted into cash therefrom, in each case, net of all legal, title and
recording tax expenses, commissions and other fees and expenses incurred, and
all federal, state, provincial, foreign and local taxes paid or required to be
accrued as a liability under GAAP as a consequence of such Asset Disposition,
and in each case net of a reasonable reserve for the after-tax cost of any
indemnification payments (fixed and contingent) attributable to the seller's
indemnities to the purchaser undertaken by Orchard Supply or any of its
Subsidiaries in connection with such Asset Disposition (but excluding any
payments, which by the terms of the indemnities will not, under any
circumstances, be made during the term of the Notes), and net of all payments
made on any Indebtedness which is secured by such Property, in accordance with
the terms of any Lien upon or with respect to such Property, or which must by
its terms or by applicable law be repaid out of the proceeds from such Asset
Disposition, and net of all distributions and other payments made to minority
interest holders in Subsidiaries or joint ventures as a result of such Asset
Disposition.
"Permitted Indebtedness" means (i) Indebtedness of Orchard Supply and its
Subsidiaries outstanding immediately following the offering of the Notes and
the application of the proceeds therefrom in the manner set forth under "Use of
Proceeds"; (ii) Indebtedness under the Credit Agreement, provided that (a)
during a period of 30 consecutive days during each fiscal year of Orchard
Supply, the amount of borrowings outstanding under the Credit Agreement,
excluding obligations under the Credit Agreement relating to letters of credit,
does not exceed $20.0 million and (b) the maximum amount of Indebtedness
permitted under this clause (ii) shall not exceed at any time 40% of the
aggregate amount of Orchard Supply's accounts receivable and inventory (as
determined in accordance with GAAP); (iii) any guarantee of the Notes by a
Subsidiary of Orchard Supply; (iv) Indebtedness in respect of obligations of
Orchard Supply to the Trustee under the Indenture; (v) intercompany debt
obligations (including intercompany notes and guarantees by Orchard Supply of
Indebtedness of its Subsidiaries) of Orchard Supply and each of its
Subsidiaries; provided, however, that the obligations of Orchard Supply to any
of its Subsidiaries or other Persons with respect to such Indebtedness shall be
subject to a subordination agreement providing for the subordination of such
obligations in right of payment from and after such time as all Notes issued
and outstanding shall become due and payable (whether at stated maturity, by
acceleration or otherwise) to the payment and performance of Orchard Supply's
obligations under the Indenture and the Notes; provided further, that any
Indebtedness of Orchard Supply or any of its Subsidiaries owed to any other
Subsidiary of Orchard Supply that ceases to be such a Subsidiary shall be
deemed to be incurred and shall be treated as an incurrence for purposes of the
first paragraph of the covenant described under "Limitations on Indebtedness"
at the time the Subsidiary in question ceased to be a Subsidiary of Orchard
Supply; and (vi) Indebtedness of Orchard Supply or its Subsidiaries under any
Currency Agreements, Commodity Agreements or Interest Protection Agreements.
"Permitted Liens" means (i) Liens existing on the Issue Date, (ii) Liens on
the Company's accounts receivable and inventory (and related general
intangibles and proceeds) securing Indebtedness under the Credit Agreement
provided that the maximum amount of Indebtedness secured by Liens permitted
under this clause (ii) shall not exceed at any time 40% of the aggregate amount
of Orchard Supply's accounts receivable and inventory (as determined in
accordance with GAAP), (iii) Liens securing Indebtedness collateralized by
Property of, or any shares of stock of or debt of, any corporation existing at
the time such corporation becomes a Subsidiary of Orchard Supply or at the time
such corporation is merged into Orchard Supply or any of its Subsidiaries,
provided that such Liens are not incurred in connection with, or in
contemplation of, such corporation becoming a Subsidiary of Orchard Supply or
merging into Orchard Supply or any of its Subsidiaries, (iv) Liens securing
Refinancing Indebtedness used to refund, refinance or extend Indebtedness,
provided that any such Lien does not extend to or cover any Property or class
of Property, shares or debt other than the Property or class of Property,
shares or debt securing the Indebtedness so refunded, refinanced or extended,
(v) Liens in favor of Orchard Supply or any of its Subsidiaries, (vi) Liens on
Property of Orchard Supply or any of its Subsidiaries acquired after the Issue
Date in favor of governmental bodies to secure progress or advance payments
relating to such Property, (vii) Liens on
59
<PAGE>
Property of Orchard Supply or any of its Subsidiaries acquired after the Issue
Date securing industrial revenue or pollution control bonds issued in
connection with the acquisition or refinancing of such Property, (viii) Liens
to secure certain Indebtedness that is otherwise permitted under the Indenture
and that is used to finance the cost of Property of Orchard Supply or any of
its Subsidiaries acquired after the Issue Date, provided that (a) any such Lien
is created solely for the purpose of securing Indebtedness representing, or
incurred to finance, refinance or refund, the cost (including sales and excise
taxes, installation and delivery charges and other direct costs of, and other
direct expenses paid or charged in connection with, such purchase or
construction) of such Property, (b) the principal amount of the Indebtedness
secured by such Lien does not exceed 100% of such cost, (c) the Indebtedness
secured by such Lien is incurred by Orchard Supply or its Subsidiary within 180
days of the acquisition of such Property by Orchard Supply or its Subsidiary,
as the case may be, and (d) such Lien does not extend to or cover any Property
other than such item of Property and any improvements on such item, (ix) Liens
to secure Indebtedness that is otherwise permitted under the Indenture the
aggregate principal amount of which does not exceed $5 million outstanding at
any one time, (x) Liens or deposits incidental to the conduct of business or
the ownership of properties and assets (including Liens or deposits in
connection with worker's compensation, unemployment insurance and other like
laws, statutory landlords', carriers', warehouseman's, mechanics', suppliers',
materialmen's, repairmen's or similar Liens) and Liens or deposits to secure
the performance of bids, tenders or trade contracts, or to secure statutory
obligations, surety or appeal bonds or other Liens or deposits of like general
nature incurred in the ordinary course of business and with respect to amounts
which are not yet delinquent or are being contested in good faith by
appropriate proceedings, and if a reserve or other appropriate provision, if
any, as shall be required in conformity with GAAP shall have been made
therefor, (xi) Liens arising by reason of any judgment, decree or order of any
court so long as such Liens are being contested in good faith by appropriate
proceedings and the execution or other enforcement of such Liens is effectively
stayed, (xii) Liens for taxes, assessments or governmental charges not yet
delinquent or which are being contested in good faith by appropriate
proceedings and for which adequate reserve or other appropriate provision has
been made in accordance with GAAP; (xiii) easements, reservations, licenses,
rights of way, zoning restrictions and covenants and restrictions and other
similar encumbrances or title defects which, in the aggregate, do not
materially detract from the use by Orchard Supply or any Subsidiary of the
Property subject thereto, or materially interfere with the ordinary conduct of
the business of Orchard Supply or any of its Subsidiaries; and (xiv) the
interest of a lessee under any lease under which Orchard Supply or any
Subsidiary is a lessor.
"Person" means any individual, corporation, limited or general partnership,
joint venture, association, joint stock company, trust, unincorporated
organization or government or any agency or political subdivision thereof.
"Preferred Stock" of any Person means all Capital Stock of such Person which
has a preference in liquidation or a preference with respect to the payment of
dividends.
"Property" of any Person means all types of real, personal, tangible,
intangible or mixed property owned by such Person whether or not included in
the most recent consolidated balance sheet of such Person and its Subsidiaries
under GAAP.
"Refinancing Indebtedness" means Indebtedness that refunds, refinances or
extends any Indebtedness of Orchard Supply or its Subsidiaries outstanding on
the Issue Date or other Indebtedness permitted to be incurred by Orchard Supply
or its Subsidiaries pursuant to the terms of the Indenture (other than
Indebtedness referred to in clause (iii) of the second paragraph of the
"Limitations on Indebtedness" covenant), but only to the extent that (i) the
Refinancing Indebtedness is subordinated to the Notes to the same extent as the
Indebtedness being refunded, refinanced or extended, if at all, (ii) the
Refinancing Indebtedness is scheduled to mature either (a) no earlier than the
Indebtedness being refunded, refinanced or extended, or (b) after the maturity
date of the Notes, (iii) the portion, if any, of the Refinancing Indebtedness
that is scheduled to mature on or prior to the maturity date of the Notes has a
weighted average life to maturity at the time such Refinancing Indebtedness is
incurred that is equal to or greater than the weighted average life to maturity
of the portion of the Indebtedness being refunded, refinanced or extended that
is scheduled to mature on or prior to the maturity date of the Notes, (iv) such
Refinancing Indebtedness is in an aggregate principal amount that is equal to
or less than the sum of (a) the aggregate principal amount
60
<PAGE>
then outstanding under the Indebtedness being refunded, refinanced or extended,
(b) the amount of accrued and unpaid interest, if any, on such Indebtedness
being refunded, refinanced or extended and (c) the amount of customary fees,
expenses and costs related to the incurrence of such Refinancing Indebtedness,
and (v) such Refinancing Indebtedness is incurred by the same Person that
initially incurred the Indebtedness being refunded, refinanced or extended,
except that (a) Orchard Supply may incur Refinancing Indebtedness to refund,
refinance or extend Indebtedness of any Subsidiary of Orchard Supply and (b)
any Subsidiary of Orchard Supply may incur Refinancing Indebtedness to refund,
refinance or extend Indebtedness of a Subsidiary of Orchard Supply.
"Restricted Investment" means, with respect to any Person, any Investment by
such Person in (i) any of its Affiliates or in any Person that becomes an
Affiliate as a result of such Investment, (ii) any executive officer or
director of such Person or (iii) any executive officer or director of any
Affiliate of such Person; provided, that, loans not in excess of $150,000 in
the aggregate at any one time outstanding and not in excess of $50,000 to any
one individual executive officer or director of such Person will not be a
Restricted Investment if, in the case of the President of Orchard Supply, the
loan was approved by a majority of the disinterested directors and, in the case
of all other individuals, the loans were approved by the President of Orchard
Supply.
"Restricted Payment" means any of the following: (i) the declaration or
payment of any dividend or any other distribution on Capital Stock of Orchard
Supply or any Subsidiary of Orchard Supply or any payment made to the direct or
indirect holders (in their capacities as such) of Capital Stock of Orchard
Supply or any Subsidiary of Orchard Supply (other than (a) dividends or
distributions payable solely in Capital Stock (other than Disqualified Stock)
and (b) in the case of Subsidiaries of Orchard Supply, dividends or
distributions payable to Orchard Supply or to a Subsidiary of Orchard Supply);
(ii) the purchase, redemption or other acquisition or retirement for value of
any Capital Stock, or any option, warrant, or other right to acquire shares of
Capital Stock, of Orchard Supply or any of its Subsidiaries; (iii) the making
of any principal payment on, or the purchase, defeasance, repurchase,
redemption or other acquisition or retirement for value, prior to any scheduled
maturity, scheduled repayment or scheduled sinking fund payment, of any
Indebtedness which is subordinated in right of payment to the Notes other than
with the proceeds from the incurrence of Refinancing Indebtedness related
thereto; and (iv) the making of any Restricted Investment or guarantee of any
Restricted Investment in any Person; provided that, notwithstanding the
foregoing, (a) advances to employees, officers, directors, agents and
representatives for travel and other reasonable and ordinary business expenses
and (b) advances and loans to employees and officers in connection with their
relocation shall not be deemed Restricted Payments.
"Subsidiary" means, with respect of any Person, any corporation or other
entity of which a majority of the Capital Stock or other ownership interests
having ordinary voting power to elect a majority of the Board of Directors or
other persons performing similar functions are at the time directly or
indirectly owned or controlled by such Person.
"Wholly Owned Subsidiary" of any Person means, at any time, a Subsidiary all
of the Capital Stock of which (except directors' qualifying shares, if any) are
at the time owned directly or indirectly by such Person.
EVENTS OF DEFAULT AND NOTICE THEREOF
The term "Event of Default" when used in the Indenture will mean any one of
the following: (i) failure of Orchard Supply to pay interest on the Notes when
due and continuance of such failure for 30 days; (ii) failure of Orchard Supply
to pay principal of or premium on the Notes when due, whether at maturity, upon
acceleration, redemption or otherwise; (iii) failure of Orchard Supply or
Orchard Holding to perform any other covenant in the Indenture for 30 days
after notice from the Trustee or the holders of 25% in principal amount of the
Notes outstanding (except in the case of a default with respect to the "Change
of Control" and "Limitations on Mergers, Consolidations and Sales of Assets"
covenants, which will constitute Events of Default with notice but without
passage of time); (iv) failure of Orchard Supply or any of its Subsidiaries to
make any payment when due (after giving effect to any applicable grace period)
under any other senior
61
<PAGE>
Indebtedness (including, without limitation, Indebtedness under the Credit
Agreement) in excess of $5.0 million; (v) failure of Orchard Supply or any of
its Subsidiaries to perform any term, covenant, condition or provision of any
other Indebtedness in excess of $5.0 million individually or $10.0 million in
the aggregate, which failure results in the acceleration of the maturity of
such Indebtedness; (vi) a final judgment or judgments for the payment of money
not fully covered by insurance, which judgments exceed $5.0 million
individually or $10.0 million in the aggregate, is entered against Orchard
Supply or any of its Subsidiaries and is not satisfied, stayed, annulled or
rescinded within 60 days of being entered; and (vii) certain events of
bankruptcy, insolvency or reorganization of Orchard Supply or any of its
Subsidiaries.
The Indenture will provide that the Trustee shall, within 90 days after the
occurrence of any Default (the term "Default" to include the events specified
above without grace or notice) known to it, give to the holders of the Notes
notice of such Default; provided that, except in the case of a Default in the
payment of principal of or interest on any of the Notes, the Trustee shall be
protected in withholding such notice if it in good faith determines that the
withholding of such notice is in the interest of the holders of the Notes. The
Indenture will require Orchard Supply to certify to the Trustee annually as to
whether any Default occurred during such year.
In case an Event of Default (other than Event of Default described in clause
(viii) above with respect to Orchard Supply) shall occur and be continuing, the
Trustee or the holders of at least 25% in aggregate principal amount of the
Notes then outstanding, by notice in writing to Orchard Supply (and to the
Trustee if given by the holders of the Notes), may declare all unpaid principal
and accrued interest on the Notes then outstanding to be due and payable
immediately. Such acceleration may be annulled and past Defaults (except,
unless theretofore cured, a Default in payment of principal of or interest on
the Notes) may be waived by the holders of a majority in principal amount of
the Notes then outstanding, upon the conditions provided in the Indenture. If
an Event of Default described in clause (vii) above occurs with respect to
Orchard Supply and is continuing, then the principal of, premium, if any, and
accrued interest on, all the Notes will be due and payable immediately without
any declaration or other act on the part of the Trustee or any holder of a
Note.
The Indenture will provide that no holder of a Note may pursue any remedy
under the Indenture unless the Trustee shall have failed to act after notice of
an Event of Default and request by holders of at least 25% in principal amount
of the Notes and the offer to the Trustee of indemnity satisfactory to it;
provided, however, that such provision does not affect the right to sue for
enforcement of any overdue payment on the Notes.
MODIFICATION AND WAIVER
Modification and amendment of the Indenture may be made by Orchard Supply and
the Trustee with the consent of the holders of not less than a majority in
principal amount of the outstanding Notes, provided that no such modification
or amendment may, without the consent of the holder of each Note affected
thereby, (i) reduce the rate, or change the time or place for payment, of
interest on any Note, or reduce any amount payable on the redemption thereof or
upon a Change of Control, (ii) reduce the principal, or change the fixed
maturity or place of payment, of any Note, (iii) change the currency of payment
of principal of or interest on any Note, (iv) impair the right to institute
suit for the enforcement of any payment on or with respect to any Note, (v)
reduce the principal amount of outstanding Notes necessary to modify or amend
the Indenture, (vi) modify any of the provisions under the "Repurchase of Notes
Upon Change of Control" covenant, or (vii) modify any of the foregoing
provisions or reduce the principal amount of outstanding Notes necessary to
waive any covenant or past Default. Holders of not less than a majority in
principal amount of the outstanding Notes may waive certain past Defaults. See
"--Events of Default and Notice Thereof."
The Indenture or the Notes may be amended or supplemented, without the
consent of any holder of the Notes, (i) to cure any ambiguity, defect or
inconsistency, (ii) to evidence the succession of another Person to Orchard
Supply or any Subsidiary of Orchard Supply and the assumption by any such
successor of the covenants of Orchard Supply or such Subsidiary, as the case
may be, (iii) to evidence the release and discharge
62
<PAGE>
of the obligations of any Subsidiary of Orchard Supply the Capital Stock of
which has been sold or otherwise disposed of in accordance with the applicable
provisions of the Indenture or (iv) to make any other change that does not have
a material adverse effect on the rights of any holder of the Notes.
DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
Orchard Supply may, at its option and at any time, elect to have the
obligations of Orchard Supply and Orchard Holding discharged in accordance with
the provisions set forth below with respect to the outstanding Notes. Such
defeasance means that Orchard Supply and Orchard Holding shall be deemed to
have paid and discharged the entire indebtedness represented by the outstanding
Notes and to have satisfied all their other obligations under the Notes and the
Indenture, except for (i) the rights of holders of outstanding Notes to receive
payments in respect of the principal of, premium, if any, and interest on such
Notes when such payments are due, (ii) Orchard Supply's obligations with
respect to the Notes concerning issuing temporary Notes, registration of Notes,
mutilated, destroyed, lost or stolen Notes and the maintenance of an office or
agency for payment and money for security payments held in trust, (iii) the
rights, powers, trusts, duties and immunities of the Trustee, and (iv) the
defeasance provisions of the Indenture. In addition, Orchard Supply may, at its
option and at any time, elect to have the obligations of Orchard Supply
released with respect to certain covenants that are described in the Indenture
("covenant defeasance") and any omission to comply with such obligations shall
not constitute a Default or an Event of Default with respect to the Notes. In
the event covenant defeasance occurs, certain events (not including non-
payment, bankruptcy and insolvency events) described under "Events of Default
and Notice Thereof" will no longer constitute an Event of Default with respect
to the Notes.
In order to exercise either defeasance or covenant defeasance, (i) Orchard
Supply or Orchard Holding must irrevocably deposit with the Trustee, in trust,
for the benefit of the holders of the Notes, cash in U.S. dollars, U.S.
Government Obligations (as defined in the Indenture), or a combination thereof,
in such amounts as will be sufficient, in the opinion of a nationally
recognized firm of independent public accountants, to pay the principal of,
premium, if any, and interest on the outstanding Notes on the stated maturity
of such principal or installment of principal or interest; (ii) in the case of
defeasance, Orchard Supply shall have delivered to the Trustee an opinion of
counsel in the United States stating that (a) Orchard Supply has received from,
or there has been published by, the Internal Revenue Service a ruling or (b)
since the date of the Indenture, there has been a change in the applicable
federal income tax law, in either case to the effect that, and based thereon
such opinion of counsel shall confirm that, the holders of the outstanding
Notes will not recognize income, gain or loss for federal income tax purposes
as a result of such defeasance and will be subject to federal income tax on the
same amounts, in the same manner and at the same times as would have been the
case if such defeasance had not occurred; (iii) in the case of covenant
defeasance, Orchard Supply shall have delivered to the Trustee an opinion of
counsel in the United States to the effect that the holders of the outstanding
Notes will not recognize income, gain or loss for federal income tax purposes
as a result of such covenant defeasance and will be subject to federal income
tax on the same amounts, in the same manner and at the same times as would have
been the case if such covenant defeasance had not occurred; (iv) no Default or
Event of Default shall have occurred and be continuing on the date of such
deposit; (v) such defeasance or covenant defeasance shall not result in a
breach or violation of, or constitute a default under, the Indenture or any
other material agreement or instrument to which Orchard Supply or Orchard
Holding is a party or by which it is bound; (vi) in the case of defeasance or
covenant defeasance, Orchard Supply shall have delivered to the Trustee an
opinion of counsel to the effect that after the 91st day following the deposit,
the trust funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally; (vii) Orchard Supply and Orchard Holding shall have delivered to the
Trustee officers' certificates stating that the deposit was not made by Orchard
Supply or Orchard Holding with the intent of preferring the holders of Notes
over the other creditors of Orchard Supply or Orchard Holding with the intent
of defecting, hindering, delaying or defrauding creditors of Orchard Supply,
Orchard Holding or others; and (viii) Orchard Supply and Orchard Holding shall
have delivered to
63
<PAGE>
the Trustee officers' certificates and opinions of counsel, each stating that
all conditions precedent provided for relating to either the defeasance or the
covenant defeasance, as the case may be, have been complied with.
SATISFACTION AND DISCHARGE
The Indenture will cease to be of further effect (except as to surviving
rights of registration of transfer or exchange of the Notes, as expressly
provided for in the Indenture) as to all outstanding Notes when (i) either (a)
all such Notes theretofore authenticated and delivered (except lost, destroyed
or wrongfully taken Notes which have been replaced or paid) have been delivered
to the Trustee for cancellation or (b) all such Notes not theretofore delivered
to the Trustee for cancellation have become due and payable or will become due
and payable within one year and Orchard Supply or Orchard Holding has
irrevocably deposited or caused to be deposited with the Trustee funds in an
amount sufficient to pay and discharge the entire indebtedness for principal
of, premium, if any and interest to the date of deposit (in the case of the
Notes that have become due and payable) or to maturity or the redemption date
on the Notes not theretofore delivered to the Trustee for cancellation; (ii)
Orchard Supply or Orchard Holding has paid all other sums payable under the
Indenture by Orchard Supply or Orchard Holding; and (iii) Orchard Supply has
delivered to the Trustee an officers' certificate and an opinion of counsel
each stating that (a) all conditions precedent under the Indenture relating to
the satisfaction and discharge of the Indenture have been complied with and (b)
such satisfaction and discharge will not result in a breach or violation of, or
constitute a default under, the Indenture or any other material agreement or
instrument to which Orchard Supply or Orchard Holding is a party or by which it
is bound.
CONCERNING THE TRUSTEE
The Indenture will contain certain limitations on the rights of the Trustee,
should it become a creditor of Orchard Supply, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage in
other transactions; provided, however, if it acquires any conflicting interest
(as defined in Section 310(b) of the Trust Indenture Act), it must eliminate
such conflict or resign.
The holders of a majority in principal amount of all outstanding Notes will
have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy or power available to the Trustee,
provided that such direction does not conflict with any Rule of law or with the
Indenture.
In case an Event of Default shall occur (and shall not be cured or waived),
the Trustee will be required to exercise its powers with the degree of care and
skill of a prudent person in the conduct of his own affairs. Subject to such
provisions, the Trustee will be under no obligation to exercise any of its
rights or powers under the Indenture at the request of any of the holders of
Notes, unless they shall have offered to the Trustee security and indemnity
satisfactory to it.
TERMS OF CONTINUING DEBT INSTRUMENTS
The following summary of Orchard Supply's debt instruments which will be
outstanding following the Preferred Stock Offering and the Offering does not
purport to be complete and is subject to the detailed provisions of, and
qualified in its entirety by reference to, the definitive agreements and
instruments governing such indebtedness, copies of which are available upon
request to the Company. Capitalized terms used herein which are not otherwise
defined shall have the meaning assigned to them in the definitive agreements
and instruments governing such indebtedness.
DESCRIPTION OF THE FINANCING AGREEMENT
General. Under the Financing Agreement, The CIT Group/Business Credit, Inc.
(the "Lender") provides a revolving credit facility to Orchard Supply. As
amended in connection with the Expansion to
64
<PAGE>
provide for an additional $20.0 million in availability, the Financing
Agreement provides for a total credit facility of up to $40.0 million, with a
$8.0 million sublimit for guarantees of letters of credit, and is comprised of
(i) a $20.0 million revolving credit facility (the "Revolving Credit Facility")
to be used for working capital and general corporate purposes of Orchard
Supply, (ii) a letter of credit guarantee subfacility (the "Letter of Credit
Facility") to be used primarily to aid in the procurement of or to guarantee
letters of credit used by Orchard Supply to, among other things, secure the
purchase of inventory and (iii) a second revolving credit facility of $20.0
million, all of which has been borrowed to provide the original financing of
the Expansion. Following the Offering and the application of a portion of the
net proceeds therefrom to repay the $20.0 million in borrowings under the
second revolving credit facility, Orchard Supply plans to eliminate the second
revolving credit facility. The Financing Agreement is secured by present and
future Accounts, Inventory, Documents of Title and General Intangibles of
Orchard Supply (each as defined in the Financing Agreement). This description
is qualified in its entirety by reference to the Financing Agreement which has
been filed or incorporated by reference as an exhibit to the Registration
Statement of which this Prospectus forms a part. Capitalized terms used herein
and not otherwise defined shall have the meanings assigned to them in the
Financing Agreement.
The commitment of the Lender to make loans pursuant to the Financing
Agreement expires, and all amounts outstanding under the Revolving Credit
Facility must be repaid, on or after October 29, 1995, upon either party giving
60 days prior written notice of termination; provided that (i) the Lender may
terminate the Financing Agreement at any time upon the occurrence of an event
of default, and (ii) Orchard Supply may terminate the Financing Agreement at
any time upon 60 days prior written notice, provided that Orchard Supply must
pay the Lender an Early Termination Fee (as defined) if it terminates the
Financing Agreement prior to October 29, 1994. Borrowings and usage of the
Letter of Credit Facility under the Financing Agreement are permitted up to the
lesser of (i) $40.0 million and (ii) a defined borrowing base determined
according to a percentage of Orchard Supply's eligible inventory and accounts
receivable, less the sum of certain reserves. As of November 30, 1993, Orchard
Supply had $20.0 million in borrowings outstanding under the Financing
Agreement and, after giving effect to the issuance of guarantees of letters of
credit for $4.7 million, had additional borrowing capacity under the Financing
Agreement of $15.3 million. Borrowings outstanding under the Financing
Agreement bear interest, at the election of Orchard Supply, at a defined prime
rate plus 1.0% or at a defined London Interbank Offered Rate plus 2.75%.
Interest is payable monthly as of the end of each month. In addition, Orchard
Supply is required to pay the Lender a Revolving Line of Credit Fee (as
defined) on the last business day of each month and a fee equal to 1.0% per
annum, payable monthly, of the average aggregate outstanding amount of letters
of credit.
Financial Covenants. The Financing Agreement imposes on Orchard Supply
certain financial tests with respect to Orchard Supply's net worth, working
capital and ability to make capital expenditures and with respect to Orchard
Supply's fixed charge coverage and leverage ratios which require that Orchard
Supply (i) have on the last day of each fiscal quarter an Effective Net Worth
(as defined) not less than $85.0 million less the carrying value of the
Company's old San Jose warehouse, (ii) have on the last day of each fiscal
quarter Working Capital (as defined) of not less than $35.0 million, (iii) not
make capital expenditures in an aggregate amount in excess of $40.0 million for
the fiscal year ended January 1994, $20.0 million for the fiscal year ended
January 1995 and $9.0 million for each fiscal year thereafter, (iv) maintain a
Fixed Charge Coverage Ratio (as defined) at levels increasing from 1.00 to 1
for the quarter ended January 31, 1993, 1.1 to 1 for the two quarters ended May
2, 1993, 1.2 to 1 for the three quarters ended August 1, 1993 and 1.35 to 1 for
the four quarters ended January 30, 1994 and for any four quarters thereafter,
and (v) have on the last day of each fiscal quarter a Leverage Ratio (as
defined) of not more than 0.9 to 1.
Other Covenants. The Financing Agreement contains certain additional
restrictive covenants which, among other things, limit (subject to certain
exceptions) Orchard Supply with respect to (a) the incurrence of indebtedness;
(b) the existence of liens; (c) the payment of dividends or repurchases of
capital stock of Orchard Supply; (d) the making of investments, loans and
advances; (e) mergers, consolidations, liquidations and sales of assets; (f)
the incurrence of capital expenditures or the entering into of operating
leases; and (g)
65
<PAGE>
transactions with affiliates. Orchard Supply and the Lender have entered into
an amendment to the Financing Agreement to permit Orchard Supply to pay
dividends to Orchard Holding to provide the funds necessary to pay regularly
scheduled quarterly dividends on the Preferred Stock, subject in each case to
there not being at the time each such dividend is paid any default or event of
default under the Financing Agreement. Orchard Supply has had preliminary
conversations with the Lender to permit the incurrence of indebtedness in the
Offering and certain related changes and expects to obtain an amendment to such
effect.
Guarantee. Orchard Holding has guaranteed the obligations of Orchard Supply
under the Financing Agreement.
Events of Default. The Financing Agreement contains a change of control
(defined as the transfer or encumbrance of a majority of the stock of Orchard
Holding held by FS&Co.) and a minimum adjusted operating earnings event of
default, as well as other customary events of default.
DESCRIPTION OF STORE MORTGAGE FACILITY
Orchard Supply entered into the Store Mortgage Facility in 1990 with an
insurance company lender. The Store Mortgage Facility provides for a twelve-
year, $21.8 million facility. The obligations under the Store Mortgage Facility
mature in 2002 and are secured by eight of Orchard Supply's owned and one
leased store locations. This description is qualified in its entirety by
reference to the Store Mortgage Facility and the amendment thereto which have
been incorporated by reference as an exhibit to the Registration Statement of
which this Prospectus is a part. Capitalized terms used herein and not
otherwise defined shall have the meanings assigned to them in the Store
Mortgage Facility.
Interest. Amounts outstanding under the Store Mortgage Facility bear interest
(i) at a fixed rate of 10.1% per annum to and including the last day of the
fifth Loan Year (as hereinafter defined), and (ii) at an adjusted rate for each
of the sixth through twelfth Loan Years equal to 275 basis points above the
average imputed yield on one year United States Treasury securities effective
on the first day of each such Loan Year. For purposes of the Store Mortgage
Facility, "Loan Year" means each successive period of twelve calendar months,
the first of which such period commenced April 1, 1990.
Payments. Interest is payable on the first day of each month. Mandatory
monthly payments of principal commence at the beginning of the fourth Loan Year
and are based on a twenty year amortization schedule with a final balloon
payment of $13.9 million on March 31, 2002 (the end of the twelfth Loan Year).
Prepayment. Orchard Supply may not prepay the principal amount outstanding
under the Store Mortgage Facility in whole or in part prior to the first day of
the fourth Loan Year (except in the case of a sale of any of the properties
encumbered under the Store Mortgage Facility in accordance with the terms
thereof.) Except as set forth therein, all prepayments, including those after
the first day of the fourth Loan Year, are subject to a Note Prepayment Fee (as
defined). Orchard Supply may not make any partial prepayments of the principal
balance under the Store Mortgage Facility (other than the prepayments made in
connection with the sale of any of the Properties (as defined) in accordance
with the terms thereof) which, in the aggregate throughout the term thereof,
exceed 25% of the original principal amount of the Store Mortgage Facility.
Covenants. The Store Mortgage Facility contains a number of restrictive
financial and other covenants including the following:
Minimum Net Worth. Orchard Supply must maintain an Adjusted Net Worth (as
defined) at the end of each fiscal quarter of at least $65.0 million. In the
event that Orchard Supply fails to satisfy the Adjusted Minimum Net Worth
requirement for any fiscal quarter, Orchard Supply is obligated to offer to
prepay (a "Prepayment Offer") an amount equal to 25% of the original principal
balance of the Store Mortgage Facility. Any prepayment will include payment of
the applicable Note Prepayment Fee (as defined). Failure of Orchard Supply to
satisfy the minimum Adjusted Net Worth requirement for any single fiscal
66
<PAGE>
quarter will not constitute a breach and will not constitute an Event of
Default provided that (i) Orchard Supply timely complies with all obligations
regarding the making of the Prepayment Offer; (ii) there has not occurred and
is not continuing any other Event of Default under the Store Mortgage Facility
and there does not exist any uncured breach or default under the Store Mortgage
Facility with respect to which the Mortgage Lender has given notice; and (iii)
the Adjusted Net Worth requirement is satisfied for the immediately following
fiscal quarter.
Additional Covenants. The Store Mortgage Facility contains certain
--------------------
additional covenants which impose limitations (subject to certain exceptions)
on Orchard Supply with respect to, among other things (a) selling, leasing or
disposing of more than 40% of Orchard Supply's assets other than in the
ordinary course of business; (b) creating, incurring or assuming indebtedness
or contingent obligations; (c) declaring dividends with respect to, or
repurchases of, shares of capital stock of Orchard Supply and Orchard Holding;
(d) certain transactions with affiliates; (e) material changes in Orchard
Supply's business operations; (f) liens on the Properties; (g) mergers,
consolidations or amalgamation; (h) making investments; (i) change of control;
and (j) certain acquisitions and asset transfers. Orchard Supply, Orchard
Holding and the lender have entered into an amendment to the Store Mortgage
Facility to permit Orchard Supply to pay dividends to Orchard Holding to
provide the funds necessary to pay regularly scheduled quarterly dividends on
the Preferred Stock, subject in each case to there not being at the time each
such dividend is paid any default or event of default under the Store Mortgage
Facility. Orchard Supply has had preliminary conversations with the lender to
permit the incurrence of indebtedness in the Offering and certain related
changes and expects to obtain an amendment to such effect.
Events of Default. The Store Mortgage Facility contains customary events of
default, including a change of control default (defined as (i) any change in or
transfer of the legal beneficial ownership of Orchard Supply or any pledge,
hypothecation, grant or creation of a security interest in Orchard Supply's
stock by Orchard Holding or (ii) the acquisition by any person or related
persons (other than FS&Co. and the present and future executive management
employees of Orchard Supply or FS&Co.) of the power to elect, appoint or cause
the election or appointment of at least a majority of the board of directors of
Orchard Supply or Orchard Holding).
DESCRIPTION OF WAREHOUSE MORTGAGE NOTES
Orchard Supply issued approximately $13.7 million principal amount of
Warehouse Mortgage Notes pursuant to the terms of a Note Agreement (the "Note
Agreement") dated May 15, 1992 among Orchard Supply, Orchard Holding and the
holder thereof. The Warehouse Mortgage Notes mature on May 31, 2002 and are
secured by a deed of trust on Orchard Supply's warehouse located in Tracy,
California. This description is qualified in its entirety by reference to the
Note Agreement which has been incorporated by reference as an exhibit to the
Registration Statement of which this prospectus is a part. Capitalized terms
used herein and not otherwise defined shall have the meanings assigned to them
in the Note Agreement.
Interest. The Warehouse Mortgage Notes bear interest at a fixed rate of
10.64% per annum.
Payments. Interest is payable on the last day of each month. Mandatory annual
payments of principal commence on May 31, 1995 (the "Initial Payment") and on
each May 31 thereafter (each a "Subsequent Payment") with a final balloon
payment due on May 31, 2002. Principal payments shall be in an amount of $1.0
million for the Initial Payment increasing by $250,000 for each Subsequent
Payment and shall include interest accrued to the payment date.
Prepayment. The Warehouse Mortgage Notes are redeemable, in whole or in part
(in integral multiples of $1.0 million), at the option of Orchard Supply at any
time at a redemption price equal to the principal amount of Warehouse Mortgage
Notes to be redeemed, plus accrued interest to the redemption date and a Make-
Whole Premium (as defined). At any time on or after May 31, 1995, upon the
occurrence of a Change In Control (as defined) Orchard Supply may, at its
option, prepay all Warehouse Mortgage Notes then
67
<PAGE>
outstanding at the principal amount thereof, plus accrued interest and a Change
In Control Prepayment Premium (as defined).
In the event of a Change In Control or a proposed Change In Control, Orchard
Supply is obligated to offer to prepay the Warehouse Mortgage Notes at 101% of
the principal amount thereof, plus accrued interest, subject to the actual
occurrence of a Change In Control.
Further, in the event of a Total Destruction (as defined) or a Total Taking
(as defined), Orchard Supply must prepay the Warehouse Mortgage Notes.
Covenants. The Warehouse Mortgage Notes contain certain covenants which
impose limitations (subject to certain exceptions) on Orchard Holding, Orchard
Supply and their subsidiaries with respect to, among other things (a) the
making of investments, loans and advances; (b) creating, incurring or assuming
any debt, contingent obligations or leases; (c) declaring dividends with
respect to shares of capital stock of Orchard Supply or Orchard Holding and
repurchases of capital stock of Orchard Supply; (d) certain transactions with
affiliates; (e) fundamental changes in Orchard Supply's business operations;
(f) the creation of liens; (g) mergers, consolidations, liquidations or sales
of assets; (h) change of control; (i) sale lease-back transactions; (j)
purchases of 14.5% Subordinated Notes; and (k) amendments to the Subordinated
Debt Documents (as defined). In addition, Orchard Holding and its subsidiaries
are subject to certain financial tests with respect to leverage, fixed charge
coverage and net worth. These covenants require that Orchard Holding and its
subsidiaries (i) maintain a ratio of Consolidated Effective Net Worth (as
defined) during each fiscal quarter at certain specified levels which begin at
1.61 to 1.00 for the fiscal quarter ending January, 1992 and which decrease
thereafter to .83 to 1.00 for the fiscal quarter ending October, 1996 and each
fiscal quarter thereafter; (ii) maintain a fixed charge coverage ratio as
determined as of the end of each fiscal quarter at certain specified levels
which begin at 1.04 to 1.00 for the fiscal quarter ending January, 1992 and
which increase thereafter to 1.20 to 1.00 for the fiscal quarter ending July,
1996 and each fiscal quarter thereafter; and (iii) maintain a Consolidated
Effective Net Worth (as defined) during each fiscal quarter at specified
amounts which begin at $54.0 million for the fiscal quarter ending January,
1992 and which increase thereafter to $69.0 million for the fiscal quarter
ending January, 1997 and each fiscal quarter thereafter. Orchard Supply,
Orchard Holding and the holder of the Warehouse Mortgage Notes have entered
into an amendment to the Note Agreement (i) to permit Orchard Supply to pay
dividends to Orchard Holding to provide the funds necessary to pay regularly
scheduled quarterly dividends on the Preferred Stock and (ii) to permit Orchard
Holding to redeem the shares of Preferred Stock upon a Change In Control,
subject in each case to there not being at the time each such dividend is paid
or such Change In Control occurs any default or event of default under the
Store Mortgage Facility.
Events of Default. The Warehouse Mortgage Notes contain customary events of
default. In the event of a default by Orchard Supply pursuant to the terms of
the Note Agreement, the outstanding Warehouse Mortgage Notes will be entitled
to receive, in addition to principal and accrued interest on the Warehouse
Mortgage Notes, a Make-Whole Premium (as defined).
68
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Orchard Supply's authorized capital stock consists of 5,000 shares of common
stock, $.01 par value, of which 2,000 shares were outstanding and held by
Orchard Holding as of December 1, 1993. Orchard Holding's authorized capital
stock consists of 8,000,000 shares of Common Stock, $.01 par value, and
2,000,000 shares of preferred stock, $.01 par value.
COMMON STOCK
As of November 19, 1993, there were 6,929,973 shares of Common Stock
outstanding held of record by 276 stockholders, excluding shares issuable upon
the exercise of outstanding Warrants (as discussed below) to purchase an
aggregate of 79,669 shares of Common Stock held by six Warrant holders and
outstanding options to purchase an aggregate of 160,506 shares of Common Stock
held by employees, management and Directors. See "Principal Stockholders."
PREFERRED STOCK
Orchard Holding's Certificate of Incorporation authorizes the issuance in
series of up to 2,000,000 shares of preferred stock, and permits Orchard
Holding's Board of Directors to establish the voting rights, designations,
powers, preferences and relative and other special rights and the
qualifications, limitations and restrictions of each of such series. As of the
date hereof, no shares of preferred stock are issued and outstanding.
There will be 800,000 shares of Preferred Stock outstanding upon consummation
of the Preferred Stock Offering, a portion of which shall be designated "Series
1 Preferred Stock" and a portion of which shall be designated "Series 2
Preferred Stock" (the Series 1 Preferred Stock and the Series 2 Preferred Stock
are referred to herein collectively as the "Preferred Stock"). Orchard Holding
will issue 325,000 shares of Series 1 Preferred Stock and will issue 475,000
shares of Series 2 Preferred Stock. Dividends on the Preferred Stock will
accrue at 6% per annum from the date of original issuance and will be payable
quarterly on each March 15, June 15, September 15 and December 15, commencing
March 15, 1994, when, as and if declared by the Board of Directors. The annual
cumulative dividend rate on the Series 2 Preferred Stock will increase,
retroactive to the original issue date, to 12% per annum (with the additional
6% mandatorily payable in additional shares of Series 2 Preferred Stock) if an
increase in Orchard Holding's authorized shares of Common Stock is not approved
by Orchard Holding's stockholders by June 15, 1994, and shall remain at 12%
until such increase in authorized shares is approved. FS&Co. has agreed to
cause FSEP II to vote in favor of amending Orchard Holding's Certificate of
Incorporation to increase the authorized shares of Common Stock. In the event
of any liquidation, dissolution or winding up of the Company, the holders of
Preferred Stock will be entitled to receive an amount equal to $25.00 per
share, plus all accrued but unpaid dividends, before any payment to the holders
of Common Stock. Shares of Series 1 Preferred Stock will be convertible at any
time at the option of the holder, unless previously redeemed, into Common Stock
at an initial conversion rate of 1.6 shares of Common Stock for each share of
Series 1 Preferred Stock (equivalent to a conversion price of $15.625 per share
of Common Stock), subject to adjustment upon certain circumstances. The Series
2 Preferred Stock will be convertible upon the same terms and conditions as the
Series 1 Preferred Stock after Orchard Holding's stockholders approve the
increase in Orchard Holding's authorized shares of Common Stock. Orchard
Holding may redeem the outstanding shares of Preferred Stock at any time after
December 15, 1996, in whole or in part, for cash initially at a redemption
price of $26.50 per share of Preferred Stock, and thereafter at prices
decreasing ratable annually to $25.00 per share on and after December 15, 2002,
plus accrued and unpaid dividends to the redemption date. Upon the occurrence
of an event deemed to be a Change of Control (as defined), each holder of
Preferred Stock will have the option to require Orchard Holding to redeem all
or any part of the Preferred Stock owned by such holder at $25.00 per share,
plus accrued and unpaid dividends to the redemption date. Holders of the
Preferred Stock will not be entitled to vote in the election of directors
unless dividends on the Preferred Stock are in arrears for at least six
consecutive full quarterly dividends, in which case holders of the Preferred
Stock will be entitled (voting separately as a class together with holders of
shares of any one or more other series of capital stock of
69
<PAGE>
Orchard Holding ranking on a parity with the Preferred Stock as to dividends
and having like voting rights) to elect two additional directors who shall
serve until such dividend arrearage is eliminated. Orchard Holding has obtained
waivers from the applicable lenders to permit Orchard Supply (i) to pay
dividends to Orchard Holding to provide the funds necessary to pay the
regularly scheduled quarterly dividends on the Preferred Stock, and (ii) to
redeem the Preferred Stock upon a Change of Control, subject in each case to
there not being any default or event of default under the applicable debt
instrument.
WARRANTS
As of November 19, 1993, there were Warrants outstanding to purchase up to an
aggregate of 79,669 shares of Common Stock at an exercise price of $8.33 per
share, subject to adjustment. Each Warrant contains provisions for the
adjustment of the exercise price relating thereto under certain circumstances,
including sales of Common Stock at less than the Fair Market Price (as defined
in the Warrants), stock dividends, stock splits, mergers or acquisitions, and
expires on July 1, 1999. The issuance of the Preferred Stock will not represent
a sale of Common Stock at less than Fair Market Price. Upon occurrence of a Put
Event (as defined in the Warrants), the Company is required to offer to
purchase all of the outstanding Warrants in full for an amount equal to the
Agreed Consideration (as defined in the Warrants).
UNDERWRITING
The underwriters named below (the "Underwriters") have severally agreed,
subject to the terms and conditions of the Underwriting Agreement (the form of
which is filed as an exhibit to the Registration Statement of which this
Prospectus is a part), to purchase from Orchard Supply, and Orchard Supply has
agreed to sell to the Underwriters, the principal amount of Notes set forth
opposite their respective names below:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
UNDERWRITERS OF NOTES
------------ ------------
<S> <C>
Lehman Brothers Inc. ............................................. $
Jefferies & Company, Inc. ........................................
Montgomery Securities.............................................
------------
Total........................................................... $100,000,000
============
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
to purchase Notes are subject to certain conditions, and that if any Notes are
purchased by the Underwriters pursuant to the Underwriting Agreement, all of
the Notes agreed to be purchased by the Underwriters pursuant to the
Underwriting Agreement must be so purchased.
The Company has been advised that the Underwriters propose to offer the Notes
initially at the public offering price set forth on the cover page of this
Prospectus, and to certain selected dealers (who may include Underwriters) at
such public offering price less a selling concession not to exceed % of the
principal amount of the Notes. The selected dealers may reallow a concession to
certain other dealers not to exceed % of the principal amount of the Notes.
After the initial public offering of the Notes, the public offering price, the
concession to selected dealers and the reallowance to other dealers may be
changed by the Underwriters.
The Company has agreed in the Underwriting Agreement to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, and to contribute to payments that the Underwriters may be
required to make in respect thereof.
The Company has no plans to list the Notes on any securities exchange. The
Company has been advised by each Underwriter that it presently intends to make
a market in the Notes; however, the Underwriters are not obliged to do so. Any
such market-making activity may be discontinued at any time, for any reason,
without notice. If each Underwriter ceases to act as a market marker for the
Notes for any reason, there can be no assurance that another firm or person
will make a market in the Notes. There can be no assurance that an active
market for the Notes will develop or, if a market does develop, at what prices
the Notes will trade.
70
<PAGE>
LEGAL MATTERS
Certain legal matters in connection with the securities offered hereby will
be passed upon for the Company by Riordan & McKinzie, a Professional
Corporation, Los Angeles, California. Certain legal matters will be passed upon
for the Underwriters by O'Melveny & Myers. Principals and employees of Riordan
& McKinzie are limited partners in a partnership which is a limited partner of
FSEP, the Company's principal stockholder. See "Principal Stockholders."
EXPERTS
The consolidated financial statements and schedules of the Company as of
January 26, 1992 and January 31, 1993 and for each of the three years in the
period ended January 31, 1993 included in this Prospectus have been audited by
Arthur Andersen & Co., independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
ADDITIONAL INFORMATION
The Company has filed a Registration Statement on Form S-1 under the
Securities Act of 1933, as amended, with the Commission with respect to the
Notes offered by this Prospectus. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. Statements contained herein concerning the provisions of any
documents are not necessarily complete and, in each instance, reference is made
to the copy of such documents filed as an exhibit to the Registration
Statement, and each such statement shall be deemed qualified in its entirety by
such reference.
The Company is subject to the informational requirements of the Exchange Act
and, in accordance therewith, files reports and other information with the
Commission. A copy of the reports and other information filed by the Company in
accordance with the Exchange Act may be inspected without charge at the offices
of the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549,
and will also be available for inspection and copying at the regional offices
of the Commission located at Suite 1400, 75 Park Place, New York, New York
10007 and at Room 3190, Northwestern Atrium Center, 500 West Madison Street,
Chicago, Illinois 60661-2511. Copies of such material may also be obtained from
the Public Reference Section of the Commission, Washington, D.C. 20549, upon
payment of the fees prescribed by the Commission. Such reports, proxy
statements and other information concerning the Company are also available for
inspection at the offices of the Nasdaq National Market, Reports Section, 1735
K Street, Washington, D.C. 20006.
71
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................................. F-2
Consolidated Balance Sheets as of January 26, 1992 and January 31, 1993... F-3
Consolidated Statements of Operations for the years ended January 27,
1991, January 26, 1992 and January 31, 1993.............................. F-5
Consolidated Statements of Stockholders' Equity for the years ended Janu-
ary 27, 1991, January 26, 1992 and January 31, 1993...................... F-6
Consolidated Statements of Cash Flows for the years ended January 27,
1991, January 26, 1992 and January 31, 1993.............................. F-7
Notes to Consolidated Financial Statements................................ F-8
- ---------------------
Report of Independent Public Accountants.................................. F-19
Condensed Consolidated Balance Sheets as of January 31, 1993 and October
31, 1993 (Unaudited)..................................................... F-20
Condensed Consolidated Statements of Operations for the three months and
nine months ended October 25, 1992 and October 31, 1993 (Unaudited)...... F-21
Condensed Consolidated Statements of Cash Flows for the nine months ended
October 25, 1992 and October 31, 1993 (Unaudited)........................ F-22
Notes to Condensed Consolidated Financial Statements (Unaudited).......... F-23
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Orchard Supply Hardware Stores Corporation:
We have audited the accompanying consolidated balance sheets of Orchard
Supply Hardware Stores Corporation (formerly Orchard Holding Corporation) and
Subsidiary as of January 31, 1993 and January 26, 1992 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended January 31, 1993. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Orchard Supply Hardware Stores
Corporation and Subsidiary as of January 31, 1993 and January 26, 1992 and the
results of its operations and its cash flows for each of the three years in the
period ended January 31, 1993 in conformity with generally accepted accounting
principles.
As explained in Note 2 to the consolidated financial statements, the Company
has restated all periods presented for the effect of the change in accounting
for inventories to the use of the first-in, first-out method.
Arthur Andersen & Co.
San Jose, California
March 5, 1993
F-2
<PAGE>
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JANUARY 26, JANUARY 31,
1992 1993
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................ $ 5,340 $ 4,475
Accounts receivable, less allowance of $888 and
$1,267 at January 26, 1992 and January 31, 1993, re-
spectively.......................................... 12,993 13,209
Inventories.......................................... 70,727 73,858
Prepaid expenses and other........................... 3,852 4,777
Assets held for disposal............................. 7,507 6,133
-------- --------
Total current assets............................... 100,419 102,452
PROPERTY, PLANT AND EQUIPMENT, net..................... 82,371 80,779
LEASEHOLD RIGHTS, net of accumulated amortization of
$1,554 and $2,161 at January 26, 1992 and January 31,
1993, respectively.................................... 5,572 4,965
DEFERRED CHARGES, net of accumulated amortization of
$3,205 and $5,426 at January 26, 1992 and January 31,
1993, respectively.................................... 4,261 4,116
GOODWILL, net of accumulated amortization of $417 and
$573 at January 26, 1992 and January 31, 1993, respec-
tively................................................ 5,840 5,684
-------- --------
Total assets....................................... $198,463 $197,996
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-3
<PAGE>
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JANUARY 26, JANUARY 31,
1992 1993
----------- -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Outstanding checks, not cleared by the bank.......... $ 2,897 $ 1,730
Accounts payable..................................... 25,832 27,086
Accrued payroll and related items.................... 6,754 6,481
Accrued advertising.................................. 1,722 2,436
Accrued sales taxes.................................. 4,751 5,420
Other accrued expenses............................... 3,534 3,861
Notes payable........................................ 5,642 2,649
Current portion of capital leases and long-term debt. 4,638 515
-------- --------
Total current liabilities.......................... 55,770 50,178
OTHER LIABILITIES...................................... 3,173 2,596
CAPITAL LEASES AND LONG-TERM DEBT, net of current por-
tion.................................................. 125,892 130,374
-------- --------
Total liabilities.................................. 184,835 183,148
-------- --------
STOCKHOLDERS' EQUITY:
Series A Preferred Stock, $.01 par value, aggregate
liquidating preference plus accumulated dividends of
approximately $24,377,000 and $28,505,000 at January
26, 1992 and January 31, 1993, respectively
Authorized--2,000,000 shares; issued--1,616,483
shares; outstanding-- 1,604,152 and 1,602,486
shares at January 26, 1992 and January 31, 1993,
respectively....................................... 16 16
Common Stock, $.01 par value
Authorized--3,000,000 shares; issued--1,211,118
shares; outstanding--1,205,158 and 1,207,598 shares
at January 26, 1992 and January 31, 1993,
respectively....................................... 12 12
Additional paid-in capital........................... 26,056 26,392
Less notes receivable from sale of common stock...... (370) (379)
Accumulated deficit.................................. (12,086) (11,193)
-------- --------
Total stockholders' equity......................... 13,628 14,848
-------- --------
Total liabilities and stockholders' equity......... $198,463 $197,996
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------
JANUARY 27, JANUARY 26, JANUARY 31,
1991 1992 1993
----------- ----------- -----------
<S> <C> <C> <C>
Sales...................................... $ 299,924 $ 308,562 $ 346,158
Cost of goods sold......................... 191,815 199,052 224,599
--------- --------- ---------
Gross margin............................. 108,109 109,510 121,559
Selling and other expenses................. 74,695 77,638 85,240
General and administrative expenses........ 13,749 13,658 14,704
Pre-opening expenses....................... 579 1,192 924
--------- --------- ---------
Operating income......................... 19,086 17,022 20,691
Write-down in carrying amount of asset held
for disposal.............................. -- -- 2,007
Interest expense........................... 15,160 14,773 16,725
--------- --------- ---------
Income before provision for income taxes
and extraordinary items................. 3,926 2,249 1,959
Provision for income taxes................. 1,667 971 866
--------- --------- ---------
Income before extraordinary items........ 2,259 1,278 1,093
Extraordinary items:
Realization of net operating loss
carryforwards........................... 1,667 971 438
Loss on extinguishment of debt, net of
tax benefit of $428..................... -- -- (638)
--------- --------- ---------
Net income............................... 3,926 2,249 893
Earned, but undeclared, dividends on pre-
ferred stock.............................. 3,046 3,446 4,208
--------- --------- ---------
Net income (loss) available to common
stock................................... $ 880 $ (1,197) $ (3,315)
========= ========= =========
Income per common and equivalent share:
Income (loss) before extraordinary items. $ (0.63) $ (1.74) $ (2.52)
Extraordinary items...................... 1.34 0.78 (0.16)
--------- --------- ---------
Net income (loss) per common and equiva-
lent share.............................. $ 0.71 $ (0.96) $ (2.68)
========= ========= =========
Weighted average number of common and
equivalent shares......................... 1,242 1,242 1,238
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SERIES A NOTES RETAINED
PREFERRED STOCK COMMON STOCK RECEIVABLE EARNINGS
----------------- ----------------- PAID-IN FOR CAPITAL (ACCUMULATED TOTAL
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCK DEFICIT) EQUITY
--------- ------ --------- ------ ------- ----------- ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 28,
1990................... 1,615,484 $16 1,209,319 $12 $26,205 $(473) $(18,261) $ 7,499
Payment of notes re-
ceivable from sale of
Capital Stock......... -- -- -- -- -- 5 -- 5
Repurchase of Common
Stock at $8.33 per
share................. -- -- (400) -- (4) 2 -- (2)
Repurchase of Series A
Preferred Stock at $10
per share............. (666) -- -- -- (7) 4 -- (3)
Reissuance of Common
Stock at $8.33 per
share................. -- -- 601 -- 5 (3) -- 2
Reissuance of Series A
Preferred Stock at $10
per share............. 999 -- -- -- 10 (5) -- 5
Net income............. -- -- -- -- -- -- 3,926 3,926
--------- --- --------- --- ------- ----- -------- -------
BALANCE, JANUARY 27,
1991................... 1,615,817 16 1,209,520 12 26,209 (470) (14,335) 11,432
Payment of notes re-
ceivable from sale of
Capital Stock......... -- -- -- -- -- 20 -- 20
Repurchase of Common
Stock at $8.33 per
share................. -- -- (7,002) -- (58) 28 -- (30)
Repurchase of Series A
Preferred Stock at $10
per share............. (11,665) -- -- -- (117) 57 -- (60)
Reissuance of Common
Stock at $8.33 per
share................. -- -- 2,640 -- 22 (5) -- 17
Net income............. -- -- -- -- -- -- 2,249 2,249
--------- --- --------- --- ------- ----- -------- -------
BALANCE, JANUARY 26,
1992................... 1,604,152 16 1,205,158 12 26,056 (370) (12,086) 13,628
Repurchase of Common
Stock at $8.33 per
share................. -- -- (1,279) -- (10) 1 -- (9)
Repurchase of Series A
Preferred Stock at $10
per share............. (1,666) -- -- -- (17) 1 -- (16)
Reissuance of Common
Stock at $8.33 per
share................. -- -- 3,719 -- 31 (11) -- 20
Issuance of warrants... -- -- -- -- 332 -- -- 332
Net income............. -- -- -- -- -- -- 893 893
--------- --- --------- --- ------- ----- -------- -------
BALANCE, JANUARY 31,
1993................... 1,602,486 $16 1,207,598 $12 $26,392 $(379) $(11,193) $14,848
========= === ========= === ======= ===== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------
JANUARY 27, JANUARY 26, JANUARY 31,
1991 1992 1993
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................ $ 3,926 $ 2,249 $ 893
Non-cash adjustments to net income --
Depreciation and amortization............ 7,153 6,998 7,080
Loss on extinguishment of debt........... -- -- 1,066
Accretion of debt discount............... 2,752 3,156 1,682
Loss on asset disposals.................. 3 108 115
Write-down in carrying amount of asset
held for disposal....................... -- -- 2,007
Changes in assets and liabilities --
Increase in accounts receivable.......... (1,319) (480) (216)
Increase in inventories.................. (4,381) (8,468) (3,131)
(Increase) decrease in prepaid expenses
and other............................... 378 (920) (925)
Increase in accounts payable and other
current liabilities..................... 4,941 348 1,524
Decrease in other liabilities............ (56) (685) (577)
-------- -------- --------
Total adjustments....................... 9,471 57 8,625
-------- -------- --------
Net cash provided by operating activi-
ties.................................. 13,397 2,306 9,518
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equip-
ment, net................................ (10,999) (19,675) (4,318)
Proceeds from sale of asset held for dis-
posal.................................... 635 -- --
-------- -------- --------
Net cash used in investing activities.... (10,364) (19,675) (4,318)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from working capital loan........ 2,561 2,565 --
Proceeds from issuance of notes payable... 2,166 2,378 2,389
Proceeds from mortgage and construction
loans.................................... 21,759 15,700 13,721
Proceeds from Senior Notes................ -- -- 30,000
Deferred financing costs paid............. (763) -- (2,076)
Repayment of construction and working cap-
ital loans............................... -- -- (19,312)
Repayment of notes payable................ (1,789) (2,576) (1,770)
Principal payments on capital leases and
long-term debt........................... (26,876) (168) (29,012)
Repurchase of capital stock............... (11) (175) (27)
Proceeds from reissuance of capital stock. 15 22 31
Payment of notes receivable from sale of
capital stock............................ 11 105 2
Issuance of notes receivable from sale of
capital stock............................ (8) (5) (11)
-------- -------- --------
Net cash provided by (used in) financing
activities.............................. (2,935) 17,846 (6,065)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................... 98 477 (865)
CASH AND CASH EQUIVALENTS, beginning of pe-
riod...................................... 4,765 4,863 5,340
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of period... $ 4,863 $ 5,340 $ 4,475
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE>
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1993
1. FORMATION AND ORGANIZATION OF THE COMPANY AND BASIS OF FINANCIAL STATEMENTS:
On April 11, 1989, Orchard Supply Hardware Stores Corporation--"Company" or
"Stores," formerly Orchard Holding Corporation (a Delaware corporation) and its
wholly-owned subsidiary, Orchard Supply Hardware Corporation (a Delaware
corporation)--"Company" or "Orchard," and FS Equity Partners II, L.P. entered
into an Asset Purchase Agreement with Wickes Companies, Inc. ("Wickes") to
purchase substantially all of the assets and to assume certain liabilities of
the Orchard Supply Hardware division of Wickes. The total cost of the
acquisition was approximately $139.4 million, including approximately $130.6
million in consideration payable to Wickes, the refinancing or assumption of
approximately $3.0 million in existing Orchard indebtedness and capital lease
obligations and approximately $5.7 million of fees and expenses incurred by the
buyer related to the acquisition. The initial financing included a $25.6
million capital contribution by Orchard Holding Corporation, approximately $3.0
million of existing indebtedness, $60.0 million of Senior Subordinated
Increasing Rate Notes and approximately $51.5 million of bank debt.
This transaction was accounted for as a purchase by the Company and,
accordingly, the assets and liabilities of the Orchard Supply Hardware division
acquired from Wickes were recorded at their fair market values as of May 27,
1989. The final allocation of the purchase price, including related costs of
the acquisition, is shown below (in thousands):
<TABLE>
<S> <C>
Current assets................................................... $ 87,698
Current liabilities.............................................. (53,755)
--------
Working capital................................................ 33,943
Property, plant and equipment.................................... 70,947
Other long-term assets........................................... 5,823
Leasehold rights................................................. 6,995
Goodwill......................................................... 6,257
Other long-term liabilities...................................... (4,157)
Long-term debt................................................... (94,184)
--------
Net assets purchased........................................... $ 25,624
========
</TABLE>
The Company's 39 stores (as of January 31, 1993) are geographically located
in northern and central California.
2. SIGNIFICANT ACCOUNTING POLICIES:
Inventories--During the year ended January 31, 1993, the Company adopted the
retail first-in, first-out ("FIFO") method which requires the restatement of
the financial statements for all periods presented; accordingly, all periods
present inventories accounted for at the lower of cost or market using the FIFO
method. Previously, inventories were valued at the lower of cost or market
using the retail dollar-value last-in, first-out ("LIFO") method.
The change in accounting method was made because (i) the Company manages its
business using FIFO inventory amounts, (ii) it will not expose the Company to
earnings fluctuations associated with the LIFO estimates required to be made by
the Company on a quarterly basis and (iii) it will provide comparability with
the Company's primary competitors.
Property, Plant and Equipment--Property, plant and equipment are stated at
cost and are depreciated primarily on the straight-line basis over the
estimated useful lives of the assets. Leasehold improvements are
F-8
<PAGE>
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
amortized over the lesser of the lease term or the estimated useful life of the
improvements. The range of estimated useful lives used by the Company is as
follows:
<TABLE>
<S> <C>
Buildings.................................... 25-40 years
Leasehold improvements....................... 14-25 years or life of lease
Land improvements............................ 15 years or life of lease
Machinery and equipment...................... 3-10 years
</TABLE>
All development costs related to the new warehouse have been capitalized
during the construction period, including interest and property taxes incurred
on the project. The Company capitalized interest costs of $87,000, $1,013,000
and $28,000 in the years ended January 27, 1991, January 26, 1992, and January
31, 1993, respectively.
Leasehold Rights--Leasehold rights represent the difference between the fair
market value of the Company's lease rentals and the stated rental rates at the
time of acquisition. Leasehold rights are amortized over the lives of the lease
terms ranging from 5 to 35 years.
Pre-Opening Expenses--Costs of setting up new stores are expensed as
incurred.
Cash and Cash Equivalents--All highly liquid debt instruments with an
original maturity of three months or less are included in cash and cash
equivalents. "Outstanding checks, not cleared by bank" included in current
liabilities consists of checks outstanding against zero balance accounts.
Deferred Charges--Deferred charges relate primarily to deferred financing
costs which are being amortized over the lives of the respective debt
instruments.
Consolidation--The consolidated financial statements include the accounts of
Orchard Supply Hardware Stores Corporation and its wholly-owned subsidiary,
Orchard Supply Hardware Corporation. All intercompany accounts and transactions
have been eliminated in consolidation.
Assets Held for Disposal--Assets held for disposal represent the Company's
former warehouse building (see Note 7 regarding the new warehouse) and the
underlying land, and, as of January 31, 1993, a parcel of land adjacent to the
new warehouse site with a carrying amount of approximately $0.6 million which
had previously been included in property, plant and equipment, and are
currently being held for sale. The Company carries these assets at amounts not
to exceed net realizable value. Accordingly, the carrying value of the former
warehouse site was reduced by approximately $2.0 million in the year ended
January 31, 1993. These assets are not subject to depreciation.
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 equivalent shares include common stock
issuable upon exercise of stock options and warrants (using the treasury stock
method). Equivalents included in the weighted average number of shares assume
the conversion of options outstanding under the Nonqualified Stock Option Plan
and the warrants, unless antidilutive. Options outstanding pursuant to the
Performance Stock Option Plan (now terminated) and the options granted to the
President are excluded from the calculation due to their contingent nature.
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No.
83, common stock issued by the Company during the 12-month period prior to the
initial public offering and stock options and warrants granted during the same
period for which a measurement date has been established have been included in
the calculation of common and common equivalent shares using the treasury stock
method and the public offering price as if they were outstanding for all
applicable periods.
F-9
<PAGE>
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The number of common and equivalent shares has been restated for all periods
presented to reflect the 1.2 for 1 stock split which was effected on January
28, 1993.
Reclassifications--Certain reclassifications were made to previously issued
financial statements to conform to the current presentation.
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are summarized below (in thousands):
<TABLE>
<CAPTION>
JANUARY 26, JANUARY 31,
1992 1993
----------- -----------
<S> <C> <C>
Property, Plant and Equipment, excluding Assets Under
Capital Leases ("PP&E"):
Land................................................ $ 17,365 $ 16,723
Land improvements................................... 971 1,060
Buildings........................................... 29,276 29,534
Machinery and equipment............................. 21,561 23,923
Leasehold improvements.............................. 23,324 24,122
Construction in progress............................ 1,030 1,590
-------- --------
Gross PP&E.......................................... 93,527 96,952
Accumulated depreciation and amortization........... (12,356) (17,221)
-------- --------
Net PP&E............................................ 81,171 79,731
-------- --------
Assets Under Capital Leases:
Buildings........................................... 1,382 1,382
Machinery and equipment............................. 485 485
-------- --------
Gross assets under capital leases................... 1,867 1,867
Accumulated amortization............................ (667) (819)
-------- --------
Net assets under capital leases..................... 1,200 1,048
-------- --------
$ 82,371 $ 80,779
======== ========
</TABLE>
4. OPERATING LEASES:
Orchard has entered into certain long-term operating leases primarily for
buildings and equipment. Future annual minimum lease commitments under
noncancelable operating leases as of January 31, 1993 are as follows (in
thousands):
<TABLE>
<CAPTION>
FUTURE MINIMUM
RENTALS
YEAR ENDING
JANUARY
--------------
<S> <C>
1994........................................................ $ 10,710
1995........................................................ 10,461
1996........................................................ 9,689
1997........................................................ 9,310
1998........................................................ 8,327
Thereafter.................................................. 105,239
--------
Total minimum lease payments............................ $153,736
========
</TABLE>
F-10
<PAGE>
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Store leases contain certain provisions for contingent rents based upon
defined percentages of the dollar value of sales at individual stores. Total
net rent expense is as follows (in thousands):
<TABLE>
<CAPTION>
TOTAL CONTINGENT
YEAR ENDED RENTALS RENTALS
---------- ------- ----------
<S> <C> <C>
January 31, 1993........................................ $10,971 $510
January 26, 1992........................................ 8,904 394
January 27, 1991........................................ 7,871 485
</TABLE>
5. BENEFIT PLANS:
Orchard maintains a profit-sharing benefit plan and a 401(k) plan covering
substantially all employees. Orchard matches 50% of employee contributions to
the 401(k) plan up to a maximum employee contribution of 3% of the employee's
compensation. Orchard may also make additional profit sharing contributions to
employee accounts at the discretion of the Board of Directors. The Company's
expenses for the 401(k) and profit-sharing plans were as follows (in
thousands):
<TABLE>
<CAPTION>
401(K) PROFIT
YEAR ENDED CONTRIBUTIONS SHARING
---------- ------------- -------
<S> <C> <C>
January 31, 1993..................................... $459 $ 763
January 26, 1992..................................... 409 858
January 27, 1991..................................... 418 1,027
</TABLE>
The Company does not provide post-retirement benefits other than those
provided through the plans discussed above. Accordingly, Statement of Financial
Accounting Standard (SFAS) No. 106 "Accounting for Post-Retirement Benefits
Other Than Pensions" will not impact the Company. The Company also anticipates
that SFAS No. 112 "Employers' Accounting for Postemployment Benefits," issued
in November 1992, will have an immaterial impact.
6. RELATED PARTY TRANSACTIONS:
Orchard reimburses an affiliate of FS Equity Partners II, L.P. for certain
direct costs incurred by it on the Company's behalf. Such costs were not
material for the periods presented in these financial statements.
7. LONG-TERM DEBT AND CREDIT ARRANGEMENTS:
Long-term debt as of January 26, 1992 and January 31, 1993 consists of the
following (in thousands):
<TABLE>
<CAPTION>
LESS
TOTAL CURRENT LONG-TERM
DEBT MATURITIES DEBT
-------- ---------- ---------
<S> <C> <C> <C>
January 26, 1992:
Senior subordinated discount notes due in 1999. $ 62,337 $ -- $ 62,337
Acquisition facility due in installments
through 1996.................................. 28,874 4,500 24,374
Construction facility due in 1993.............. 11,700 -- 11,700
Working capital facility relating to construc-
tion due in 1993.............................. 4,000 -- 4,000
Store mortgages................................ 21,759 -- 21,759
Obligations under capital leases............... 1,860 138 1,722
-------- ------ --------
$130,530 $4,638 $125,892
======== ====== ========
January 31, 1993:
Senior subordinated discount notes due in 1999. $ 64,000 $ -- $ 64,000
Senior notes................................... 29,687 -- 29,687
Store and warehouse mortgages.................. 35,480 428 35,052
Obligations under capital leases............... 1,722 87 1,635
-------- ------ --------
$130,889 $ 515 $130,374
======== ====== ========
</TABLE>
F-11
<PAGE>
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company and Orchard have complied with the restrictive loan covenants
contained in the above obligations which provide among other things that (1)
minimum working capital and net worth levels be maintained, (2) minimum fixed
charge ratios be met, (3) capital expenditures be restricted, and (4)
additional long-term debt be limited.
SENIOR SUBORDINATED DISCOUNT NOTES
In July 1989, Orchard completed the sale of its senior subordinated discount
notes for approximately $55.2 million which are general unsecured obligations
of the Company and accreted to a full maturity value of $64 million in July
1992. The interest related to these notes was payable at 8.63% through July
1992 and together with accretion calculated using the effective interest method
yielded 14.5%. Subsequent to July 1992, the interest related to these notes is
payable at a rate of 14.5%.
Orchard is required to redeem $21 million principal amount of the securities
on July 15, 1997 and on July 15, 1998 and $22 million principal amount on July
15, 1999.
BANK FACILITY (REFINANCED DURING THE YEAR ENDED JANUARY 31, 1993)
A syndication of banks extended a credit facility to Orchard which was
secured by substantially all of the Company's non-real estate assets. As of
January 26, 1992 under the credit facility, Orchard had approximately $28.9
million outstanding under the acquisition loan, $9.1 million outstanding under
the working capital loan ($4.0 million applying to the warehouse construction
and included in "capital leases and long-term debt" and $5.1 million reflected
as "notes payable" in the financial statements) and $11.7 million outstanding
under the construction loan. In May 1992 the construction loan balance of $15.7
million was retired primarily through proceeds from the warehouse loan
discussed below. In October 1992, the bank facility was refinanced with senior
notes and a new credit facility as discussed below.
At the option of the Company, the acquisition loan, working capital loan and
construction loan bore interest as follows:
1. if a prime rate loan, then at the sum of the prime rate plus 1.50% per
annum;
2. if a Eurodollar rate loan, then at the sum of the adjusted Eurodollar
rate plus 2.50% per annum; and
3. if a CD rate loan, then at the sum of the adjusted CD rate plus 2.75%
per annum.
The following information is applicable to the working capital facility
(dollar amounts in thousands):
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 27,
1992
YEAR TO OCTOBER
ENDED 29, 1992
JANUARY (DATE OF
26, 1992 REFINANCING)
-------- ------------
<S> <C> <C>
Balance outstanding at end of year.................... $ 9,126 $ --
Average balance outstanding........................... 4,302 5,351
Maximum amount outstanding............................ 11,153 11,312
Weighted average interest rate........................ 9.48% 7.56%
Interest rate at end of period........................ 8.00% N/A
</TABLE>
The weighted average interest rate is determined by dividing total interest
costs by the average daily balance outstanding.
F-12
<PAGE>
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
REFINANCING
On October 29, 1992 the Company, as guarantor, and Orchard, as issuer,
consummated a refinancing (the "Refinancing") of its credit facility through a
series of transactions including (i) the sale by the Company of an aggregate of
$30.0 million principal amount of 9% senior notes due July 1, 1997 and warrants
to purchase 79,669 shares of common stock of the Company and (ii) the execution
of a financing agreement between the Company and a lender providing for a
revolving credit facility of up to $20.0 million with an $8.0 million sublimit
for guarantees of letters of credit. In connection with the Refinancing, the
Company incurred a loss on extinguishment of debt resulting from the write-off
of deferred financing charges of approximately $1.1 million which was recorded
upon completion of the Refinancing on October 29, 1992.
A portion of the amount of the proceeds has been assigned to the warrants and
included in additional paid-in capital in the accompanying balance sheets. The
carrying amount of the senior notes will accrete to the principal amount
thereof over the term of the senior notes.
SENIOR NOTES
The senior notes are unsecured obligations of Orchard, mature on July 1, 1997
and interest is payable semi-annually at 9% per annum. On October 15, 1995 and
October 15, 1996 Orchard must redeem $3.0 million and $4.5 million,
respectively, and the remaining principal amount is payable at maturity.
The Company is required to exchange the senior notes with substantially
identical notes effectively registered with the Securities and Exchange
Commission prior to August 30, 1993.
REVOLVING CREDIT FACILITY
Borrowings under the revolving credit facility are included in Notes Payable
in the accompanying balance sheets and are secured by inventories, accounts
receivable, and certain intangible assets and are limited to an amount equal to
75% of eligible accounts receivable, as defined, plus 50% of eligible
inventory, as defined. Interest is payable monthly at one of two rates elected
by the Company:
1. bank base rate, as defined, plus one percent per annum, or
2. LIBOR, plus 3.25% per annum.
The revolving credit facility remains effective through October 29, 1995 at
which time it will be automatically continued unless terminated by the
Company's or lender's election.
The following summarizes activity applicable to the revolving credit facility
(dollar amounts in thousands):
<TABLE>
<S> <C>
Balance outstanding at end of year................................ $1,514
Average balance outstanding since origination..................... 2,468
Maximum amount outstanding........................................ 7,500
Weighted average interest rate.................................... 7.00%
Interest rate at end of period.................................... 7.00%
</TABLE>
Letters of credit outstanding as of January 31, 1993 totaled $4.8 million.
STORE AND WAREHOUSE MORTGAGES
In March 1990, Orchard obtained approximately $19.4 million of mortgage
financing on certain store properties. The proceeds were used to retire a then
existing mortgage debt of $0.5 million and to pay down a portion of a $20.0
million installment due in May 1990 under the bank credit facility. An
additional borrowing of $2.3 million was made in September 1990 on one other
owned property. The mortgage notes bear interest at 10.1% for the first through
fifth years and at a rate equal to the average yield imputed from one-year
United States Treasury securities, determined annually, plus 2.75% for the
sixth through twelfth years. Principal payments commence in May 1993 with a
final balloon payment due at the end of twelve years. Payments are based on a
twenty-year amortization schedule.
F-13
<PAGE>
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In May 1992, a life insurance company loaned Orchard approximately $13.7
million through a first mortgage loan on the new warehouse facility located in
Tracy, California. The mortgage note bears interest of 10.64% payable monthly
on the outstanding loan balance. The loan requires payments of interest only
for the first three years with the first principal payment due May 31, 1995.
The net book value of the assets mortgaged pursuant to the above mortgage
loans approximated $46.4 million at January 31, 1993.
CAPITAL LEASES
Orchard leases two stores and certain equipment under lease agreements which
are accounted for as capital leases. The leases bear interest at an implicit
rate of approximately 10%.
PRINCIPAL AND INTEREST PAYMENTS
The following summarizes the required future payments pursuant to the various
long-term debt instruments, including capital leases, discussed above (in
thousands):
<TABLE>
<CAPTION>
PRINCIPAL FUTURE MINIMUM
PAYMENTS RENTAL PAYMENTS
ON LONG- PURSUANT TO
YEAR ENDING JANUARY, TERM DEBT CAPITAL LEASES
-------------------- --------- ---------------
<S> <C> <C>
1994.............................................. $ 428 $ 255
1995.............................................. 624 253
1996.............................................. 4,606 253
1997.............................................. 27,405 253
1998.............................................. 45,402 252
Thereafter........................................ 50,702 1,629
-------- ------
129,167 2,895
Less--amount representing interest................ 1,173
------
Present value of future commitments............... 1,722
Less--current portion............................. 428 87
-------- ------
Long-term portion................................. $128,739 $1,635
======== ======
</TABLE>
Total cash paid by the Company for interest was as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
----------
<S> <C>
January 31, 1993.................................................. $13,285
January 26, 1992.................................................. 10,928
January 27, 1991.................................................. 11,352
</TABLE>
As discussed in Note 2, portions of the interest costs incurred have been
capitalized.
8. PREFERRED STOCK:
The rights, privileges and provisions of the Series A Preferred shares are as
follows:
DIVIDEND RIGHTS
The holders of Series A Preferred Stock are entitled to receive cumulative
dividends of $.40 per share on a quarterly basis plus an amount equal to 16%
annually, compounded quarterly, on any accrued but unpaid dividends. Dividends
are payable in cash or additional Series A Preferred shares at the discretion
of the Board
F-14
<PAGE>
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
of Directors. No dividend shall be declared, paid or set aside to the holders
of outstanding shares of Common Stock unless all accrued but unpaid dividends
have been paid to the holders of outstanding shares of Series A Preferred
Stock. No dividends have been declared to date. Accumulated dividends, which
are undeclared and unpaid, total approximately $12.5 million at January 31,
1993.
EXCHANGE PROVISION
The Company, at its sole option, may require all or part of the Series A
Preferred Stock to be exchanged for junior subordinated notes (due May 30,
2001) paying interest semi-annually at a rate of 16% per annum. The exchange
rate is $10 of principal in junior subordinated notes for each share of Series
A Preferred Stock. No such exchange may be required by the Company unless all
accrued but unpaid dividends on all Series A Preferred shares, whether or not
they are to be exchanged, have been paid.
REDEMPTION PROVISION
The Company, at its sole option, may at any time redeem all or a portion of
the then outstanding shares of Series A Preferred Stock. The redemption price
shall be $10 per share plus an amount equal to all accrued but unpaid
dividends.
LIQUIDATION RIGHTS
In the event of any liquidation, dissolution or winding up of the Company,
the holders of Series A Preferred shares are entitled to be paid, out of the
assets of the Company available for distribution to its stockholders, an amount
equal to $10 per share plus an amount equal to all accrued but unpaid dividends
prior to any distribution to the holders of Common Stock.
VOTING RIGHTS
Holders of Series A Preferred shares are entitled to two votes per share of
Series A Preferred Stock.
9. COMMON STOCK:
Common stockholders are entitled to one vote per share of Common Stock. Under
the Stock Subscription Agreements between the Company and each of the employee
stockholders, common shares vested 20% at the date of purchase and vest an
additional 20% on each of the first through fourth anniversaries of the
acquisition date. Vested and unvested shares are both subject to repurchase at
the option of the Company. Holders of unvested shares are entitled to receive
an amount equal to $8.33 per share at the time of repurchase while holders of
vested shares are entitled to receive the greater of $8.33 per share or $8.33
per share plus a pro rata portion of any retained earnings for the period from
the acquisition (Note 1) to the end of the quarter preceding the repurchase of
shares.
In connection with the acquisition of Orchard Supply Hardware by the Company,
two stock option plans, the 1989 Employee Performance Stock Option Plan and the
1989 Nonqualified Stock Option Plan, were instituted to award officers of the
Company and other key employees, respectively, for services provided to the
Company. Subsequent to January 31, 1993, all holders of the 31,500 options
outstanding at January 31, 1993 tendered their options for cancellation and the
Performance Plan was terminated.
Under the 1989 Nonqualified Stock Option Plan, options may be granted to
qualified personnel of the Company to purchase shares of common stock at a
price no less than the fair market value of such shares, as determined by the
Board of Directors, at the time the option is granted. Consequently, no
compensation expense has been recognized in relation to this plan. Under the
provisions of the plan, options shall vest and become exercisable in annual
installments of 20% and shall be fully vested no later than five years from the
F-15
<PAGE>
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
date of grant. At January 31, 1993, options covering 52,439 shares of common
stock were outstanding, of which 31,358 shares were vested under the plan. The
Board of Directors may accelerate the vesting at its discretion. Options expire
ten years after the date of grant. The Company has reserved 60,000 shares of
common stock for issuance under the plan.
Following is a detail of activity in the Nonqualified Stock Option Plan:
<TABLE>
<CAPTION>
OPTIONS OPTIONS PRICE
AVAILABLE OUTSTANDING PER SHARE
--------- ----------- ---------
<S> <C> <C> <C>
January 28, 1990.......................... 702 59,298 $8.33
Granted.................................. (526) 526 8.33
Cancelled................................ 350 (350) 8.33
----- ------
January 27, 1991.......................... 526 59,474 8.33
Granted.................................. -- -- --
Cancelled................................ 6,139 (6,139) 8.33
----- ------
January 26, 1992.......................... 6,665 53,335 8.33
Granted.................................. -- -- --
Cancelled................................ 896 (896) 8.33
----- ------
January 31, 1993.......................... 7,561 52,439 8.33
===== ======
</TABLE>
In April 1992, the Company granted a nonqualified stock option outside of the
1989 Nonqualified Stock Option Plan to its President covering 12,045 shares of
common stock at an exercise price of $8.33 per share. The option is only
exercisable upon the occurrence of certain mergers, consolidation, business
combinations, asset sales, tender offers and liquidations involving the
Company. Because of the contingent nature of the shares, no measurement date,
as defined, has been established. No compensation expense has been recorded
attributable to these options.
10. INCOME TAXES:
The provision for income taxes differs from the amount computed by applying
the statutory Federal income tax rate to income before taxes as follows:
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------
JANUARY 27, JANUARY 26, JANUARY 31,
1991 1992 1993
----------- ----------- -----------
<S> <C> <C> <C>
Statutory Federal income
tax rate............... 34.0% 34.0% 34.0%
State income taxes, net
of Federal benefit..... 6.1 6.1 6.1
Goodwill amortization... 2.1 2.8 3.2
Other................... 0.3 0.3 0.9
---- ---- ----
42.5% 43.2% 44.2%
==== ==== ====
</TABLE>
For each of the three years in the period ended January 31, 1993, the Company
recorded an extraordinary benefit from the realization of net operating loss
carryforwards which originated in the period ended January 28, 1990. The
Company has book net operating loss carryforwards remaining of approximately
$10.0 million as of January 31, 1993.
As of January 31, 1993, for tax purposes, the Company has net operating loss
carryforwards of approximately $8.7 million for regular tax purposes available
to offset future Federal taxable income through the Company's fiscal year
ending January 2008. Differences between the Company's net operating loss
carryforwards for tax and financial reporting purposes primarily relate to
depreciation, general and administrative costs capitalizable for tax purposes,
and deductions for reserves and allowances. The Tax
F-16
<PAGE>
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Reform Act of 1986 contains provisions which may limit the utilization of net
operating loss carryforwards in any given year upon occurrence of certain
events, including significant changes in ownership interests. Due to
limitations imposed by Section 382 of the Internal Revenue Code, as amended,
the Company's ability to utilize its Federal income tax net operating loss
carryforwards will likely be limited annually to the value of the Company's
stock immediately prior to consummation of a change in ownership multiplied by
a rate specified monthly by the IRS (currently 5.9%). In addition, any annual
limitation amount determined by this computation that is not used in the
current year increases the succeeding year's annual limitation amount. The
Company's ability to utilize net operating loss carryforwards as computed for
California income tax purposes may be similarly limited. The limitation on the
use of net operating loss carryforwards may have the effect of accelerating a
portion of the Company's income tax liability to an earlier year, and may also
result in an overall increase in income taxes payable by the Company. Whether
the Company's liability for taxes will be accelerated or increased will depend
on numerous factors, including whether and the extent to which future annual
taxable income of the Company exceeds the annual limitation, whether the
Company is paying tax based on its regular taxable income or its alternative
minimum taxable income, and whether and the extent to which California permits
corporations to deduct net operating loss carryforwards for California income
tax purposes.
The Company has made income tax payments of approximately $0.1 million, $0.3
million and $0.4 million in the years ended January 27, 1991, January 26, 1992
and January 31, 1993, respectively, primarily toward tax liabilities computed
for alternative minimum tax purposes. Such payments are recorded as prepayments
which will be applied against future liabilities computed for regular tax
purposes.
In February 1992, the Financial Accounting Standards Board issued Statement
No. 109, "Accounting for Income Taxes," which supersedes SFAS 96. The Company
is required to adopt the provisions of this statement in fiscal year 1994. The
Company expects the impact of the implementation to be immaterial.
11. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS:
WORKING CAPITAL ACCOUNTS
The carrying amounts of cash and cash equivalents, accounts receivable and
accounts payable approximate fair value because of the short maturity of these
instruments.
LONG-TERM DEBT
Based on the borrowing rates currently available to the Company for loans
with similar terms and average maturities, the fair value of long-term debt is
approximately $137.1 million versus the carrying amount of approximately $130.9
million at January 31, 1993.
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
<TABLE>
<CAPTION>
INCOME (LOSS)
PER COMMON AND
INCOME EQUIVALENT SHARE
(LOSS) BEFORE BEFORE
EXTRAORDINARY NET INCOME EXTRAORDINARY
SALES GROSS MARGIN ITEMS (LOSS) ITEMS
-------- ------------ ------------- ---------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
YEAR ENDED JANUARY 26,
1992
First quarter......... $ 73,305 $ 26,290 $ (361) $ (361) $(0.96)
Second quarter........ 87,366 30,957 2,337 3,718 1.18
Third quarter......... 74,766 26,666 174 322 (0.59)
Fourth quarter........ 73,125 25,597 (872) (1,430) (1.37)
-------- -------- ------ ------- ------
Year.................. $308,562 $109,510 $1,278 $ 2,249 $(1.74)
======== ======== ====== ======= ======
</TABLE>
F-17
<PAGE>
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
INCOME (LOSS)
PER COMMON AND
INCOME EQUIVALENT SHARE
(LOSS) BEFORE BEFORE
EXTRAORDINARY NET INCOME EXTRAORDINARY
SALES GROSS MARGIN ITEMS (LOSS) ITEMS
-------- ------------ ------------- ---------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
YEAR ENDED JANUARY 31,
1993
First quarter......... $ 81,656 $ 28,510 $ 530 $ 919 $(0.35)
Second quarter........ 95,360 33,355 2,099 3,537 0.86
Third quarter(1)...... 82,349 28,169 (1,384) (2,277) (1.96)
Fourth quarter(2)..... 86,793 31,525 (152) (1,286) (1.07)
-------- -------- ------- ------- ------
Year.................. $346,158 $121,559 $ 1,093 $ 893 $(2.52)
======== ======== ======= ======= ======
</TABLE>
The following events impacted the results above:
(1) The Company recognized a write-down of $2.0 million in the carrying value
of the former warehouse (asset held for sale) in the third quarter of the
year ended January 31, 1993.
(2) Each of the quarters in fiscal 1992 and 1993 includes 13 weeks, except for
the fourth quarter of 1993 which includes 14 weeks. Management estimates
the inclusion of the additional week increased pretax income by $0.6
million.
13. SUMMARIZED FINANCIAL INFORMATION FOR ORCHARD SUPPLY HARDWARE CORPORATION:
All operations of the Company are conducted through its wholly-owned
subsidiary, Orchard Supply Hardware Corporation. The following summarizes the
financial position and results of operations for Orchard Supply Hardware
Corporation:
<TABLE>
<CAPTION>
JANUARY 26, JANUARY 31,
1992 1993
----------- -----------
<S> <C> <C>
Current assets..................................... $100,398 $102,433
Non-current assets................................. 98,044 95,544
-------- --------
198,442 197,977
======== ========
Current liabilities................................ $ 55,770 $ 50,178
Non-current liabilities............................ 129,065 132,970
-------- --------
184,835 183,148
-------- --------
Redeemable preferred stock......................... -- --
Other equity....................................... 13,607 14,829
-------- --------
13,607 14,829
-------- --------
$198,442 $197,977
======== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------
JANUARY 27, JANUARY 26, JANUARY 31,
1991 1992 1993
----------- ----------- -----------
<S> <C> <C> <C>
Sales................................. $299,924 $308,562 $346,158
Gross profit.......................... 108,109 109,510 121,559
Income (loss) before provision for
taxes and extraordinary credit....... 3,879 2,253 1,944
Net income (loss)..................... 3,879 2,253 878
</TABLE>
The various debt instruments of Orchard Supply Hardware Corporation restrict
the payment of dividends to the parent.
F-18
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Orchard Supply Hardware Stores Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of
Orchard Supply Hardware Stores Corporation (a Delaware corporation) as of
October 31, 1993, and the related condensed statements of operations for the
three months and nine months then ended and cash flows for the nine months then
ended. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
Arthur Andersen & Co.
San Jose, California
November 21, 1993
F-19
<PAGE>
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 31, OCTOBER 31,
1993 1993
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................ $ 4,475 $ 6,199
Accounts receivable, net............................. 13,209 14,642
Inventories.......................................... 73,858 77,817
Prepaid expenses and other........................... 4,777 5,847
Assets held for disposal............................. 6,133 6,133
-------- --------
Total current assets............................... 102,452 110,638
PROPERTY, PLANT AND EQUIPMENT, net..................... 80,779 84,440
OTHER ASSETS, net...................................... 14,765 12,679
-------- --------
Total assets....................................... $197,996 $207,757
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities............. $ 47,014 $ 51,736
Notes payable........................................ 2,649 1,872
Current portion of capital leases and long-term debt. 515 748
-------- --------
Total current liabilities.......................... 50,178 54,356
OTHER LIABILITIES...................................... 2,596 2,596
CAPITAL LEASES AND LONG-TERM DEBT, net of current por-
tion.................................................. 130,374 85,173
-------- --------
Total liabilities.................................. 183,148 142,125
-------- --------
STOCKHOLDERS' EQUITY:
Common stock......................................... 12 69
Preferred stock...................................... 16 --
Additional paid-in-capital........................... 26,392 72,299
Less notes receivable from sale of common stock...... (379) (175)
Accumulated deficit.................................. (11,193) (6,561)
-------- --------
Total equity....................................... 14,848 65,632
-------- --------
Total liabilities and stockholders' equity......... $197,996 $207,757
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-20
<PAGE>
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------- -----------------------
OCTOBER 25, OCTOBER 31, OCTOBER 25, OCTOBER 31,
1992 1993 1992 1993
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales.......................... $82,349 $88,888 $259,365 $280,455
Cost of goods sold............. 54,180 56,751 169,331 180,629
------- ------- -------- --------
Gross margin.................. 28,169 32,137 90,034 99,826
Selling, general and adminis-
trative expenses.............. 23,960 26,637 72,562 79,022
Pre-opening expenses........... 368 466 910 1,713
------- ------- -------- --------
Operating income.............. 3,841 5,034 16,562 19,091
Write-down in carrying amount
of asset held for disposal.... 2,007 -- 2,007 --
Interest expense............... 4,111 2,565 12,376 9,096
------- ------- -------- --------
Income (loss) before provision
for income taxes and
extraordinary items.......... (2,277) 2,469 2,179 9,995
Provision for income taxes..... (953) -- 934 --
------- ------- -------- --------
Income (loss) before extraor-
dinary items................. (1,324) 2,469 1,245 9,995
Extraordinary items............ (953) -- 934 (5,363)
------- ------- -------- --------
Net income (loss)............. (2,277) 2,469 2,179 4,632
Preferred stock dividends...... 1,049 -- 3,031 814
------- ------- -------- --------
Net income (loss) available to
common stock................. $(3,326) $ 2,469 $ (852) $ 3,818
======= ======= ======== ========
Income per common and equiva-
lent share:
Income (loss) before extraor-
dinary items................. $ (1.96) $ 0.35 $ (1.47) $ 1.64
Extraordinary items........... (0.79) -- 0.77 (0.96)
------- ------- -------- --------
Net income (loss)............. $ (2.75) $ 0.35 $ (0.70) $ 0.68
======= ======= ======== ========
Weighted average number of com-
mon and common
equivalent shares outstanding. 1,211 6,970 1,218 5,613
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-21
<PAGE>
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------
OCTOBER 25, OCTOBER 31,
1992 1993
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................ $ 2,179 $ 4,632
Noncash adjustments to net income --
Depreciation and amortization........................ 5,383 5,062
Accretion of debt discount........................... 1,663 57
Loss on asset disposals.............................. 90 65
Write-down in carrying amount of asset held for dis-
posal............................................... 2,007 --
Write-off of deferred financing costs................ -- 1,315
Premium on repayment of subordinated debentures...... -- 4,048
Changes in assets and liabilities --
Increase in accounts receivable...................... (1,599) (1,433)
Decrease in inventories.............................. (2,709) (3,959)
Increase in prepaid expenses and other............... (768) (1,070)
Increase in noncurrent assets........................ -- (249)
Increase in accounts payable and accrued liabilities. 2,412 4,722
Decrease in noncurrent liabilities................... (590) --
------- -------
Total adjustments................................... 5,889 8,558
------- -------
Net cash provided by operating activities.......... 8,068 13,190
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment, net....... (2,466) (7,704)
------- -------
Net cash used in investing activities................ (2,466) (7,704)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from public stock offering............... -- 48,396
Proceeds from issuance of senior notes................ 13,721 --
Proceeds from issuance of notes payable............... 2,431 737
Proceeds from sale of capital stock................... 10 58
Payment of notes receivable from sale of capital
stock................................................ 2 204
Repayment of subordinated debentures including premi-
um................................................... -- (48,726)
Repayment of construction and working capital loans... (15,700) --
Payment of preferred stock dividend................... -- (2,500)
Deferred financing costs.............................. (466) (64)
Repayment of notes payable............................ (126) (1,514)
Repurchase of capital stock........................... (25) (6)
Issuance of notes receivable from sale of capital
stock................................................ (3) --
Principal payments on capital leases and long-term
debt................................................. (4,612) (347)
------- -------
Net cash used in financing activities................ (4,768) (3,762)
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS.............. 834 1,724
CASH AND CASH EQUIVALENTS, Beginning of Period......... 5,340 4,475
------- -------
CASH AND CASH EQUIVALENTS, End of Period............... $ 6,174 $ 6,199
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-22
<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 31, 1993 included in the Company's Registration Statement on Form
S-1 (the "Registration Statement").
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 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.
Equivalents included in the weighted average number of shares assume the
conversion of options outstanding under the Nonqualified Stock Option Plan and
the warrants, unless antidilutive. Options outstanding pursuant to the
Performance Stock Option Plan (now terminated) and certain options granted to
the President are excluded from the calculation due to their contingent nature.
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No.
83, common stock issued by the Company during the 12-month period prior to the
initial public offering and stock options and warrants granted during the same
period for which a measurement date has been established have been included in
the calculation of common and common equivalent shares using the treasury stock
method as if they were outstanding for all applicable periods.
3. EQUITY OFFERING AND REDEMPTION OF SENIOR SUBORDINATED DEBENTURES:
On April 6, 1993, the Company consummated a series of transactions consisting
of the following:
1. Issuing 3.8 million shares of common stock in an initial public
offering (the "Offering") at a price of $14 per share.
2. Declaring dividends on preferred stock of $13.3 million equal to all
earned but undeclared dividends. Of this amount, $2.5 million was paid in
cash and funded by borrowings under the Company's revolving credit facility
(the "Financing Agreement"). The remainder was paid through the issuance of
1,915,630 additional shares of preferred stock.
3. Converting all outstanding shares of preferred stock, including those
issued pursuant to the dividends discussed above, into 3,128,028 shares of
common stock pursuant to a statutory reclassification at the market
offering price.
On April 30, 1993, the Company used the net proceeds of the Offering to
retire approximately $44.7 million of the Company's Senior Subordinated
Discount Notes due 1999 (the "Subordinated Notes"). In connection with the
early extinguishment of debt, the Company recorded an extraordinary charge of
approximately $5.4 million consisting of a prepayment premium of approximately
$4.1 million and the write-off of deferred financing charges of $1.3 million.
F-23
<PAGE>
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
The unaudited pro forma financial data presented below have been prepared by
the Company based on certain adjustments to reflect the transactions enumerated
above. The pro forma financial data assume these transactions occurred as of
the beginning of the applicable fiscal year. The pro forma financial data do
not purport to present the financial position and results of operations of the
Company had these transactions actually occurred as of such dates nor is it
necessarily indicative of the results of operations that may be achieved in the
future. The pro forma financial data for the three and nine month periods ended
October 25, 1992 also assumes an income tax provision of zero computed under
the method of accounting adopted for the nine months ended October 31, 1993 as
discussed in Note 4.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------- -----------------------
OCTOBER 25, OCTOBER 31, OCTOBER 25, OCTOBER 31,
1992 1993 1992 1993
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Income per common and
equivalent share before
extraordinary items....... $ (0.10) $ 0.36 $ 1.08 $ 1.67
======= ====== ====== ======
Weighted average common and
common equivalent shares
outstanding............... 6,574 6,912 6,588 6,894
======= ====== ====== ======
</TABLE>
4. INCOME TAXES:
Through January 31, 1993, the Company accounted for income taxes pursuant to
Accounting Principles Board (APB) Opinion No. 11. Effective February 1, 1993,
the Company adopted the provisions of Statement of Financial Accounting
Standard (SFAS) No. 109, "Accounting for Income Taxes." Upon adoption, the
Company elected not to restate prior periods and the effect of the cumulative
catch-up entry on the current period's balance sheet and statement of
operations is not material.
In accordance with SFAS 109, all deferred tax assets and liabilities are
quantified. Deferred tax assets include operating loss and tax credit
carryforwards. A valuation allowance against the tax assets is required to
adjust the assets to realizable amounts. Changes in the valuation allowance are
generally a component of the income tax provision. Under APB Opinion No. 11,
the realization of operating loss carryforwards was recorded as an
extraordinary item. For each of the three years in the period ended January 31,
1993, the Company recorded an extraordinary item due to the realization of
operating loss carryforwards.
The major components of deferred tax assets and liabilities are as follows
(in thousands):
<TABLE>
<CAPTION>
FEBRUARY 1, OCTOBER 31,
1993 1993
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating losses.................................. $ 3,498 $ 2,292
AMT payments made..................................... 787 1,250
Other................................................. 1,841 2,082
------- -------
Total assets........................................ 6,126 5,624
Valuation allowance................................... (3,859) (2,683)
------- -------
Net assets............................................ 2,267 2,941
------- -------
Deferred tax liabilities:
Depreciation.......................................... 1,480 1,691
------- -------
Total liabilities................................... 1,480 1,691
------- -------
Total net deferred tax asset........................ $ 787 $ 1,250
======= =======
</TABLE>
F-24
<PAGE>
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
As disclosed above, the valuation allowance decreased by $1.2 million during
the nine months ended October 31, 1993. The Company's tax operating loss
carryforwards as of January 31, 1993 are as follows (in thousands):
<TABLE>
<CAPTION>
EXPIRATION FEDERAL CALIFORNIA
---------- ------- ----------
<S> <C> <C>
Year ending January:
2005.................................................... $3,264 $3,006
2006.................................................... 5,975 2,809
------ ------
$9,239 $5,815
====== ======
</TABLE>
The provision for the nine month period ended October 31, 1993 is based on an
estimated annual provision of zero. The components of the provisions and the
effective rate reconciliation for the nine months ended October 25, 1992 have
not been included since the information is not significantly different from the
disclosures in the Company's Registration Statement for the year ended January
31, 1993.
5. SUBSEQUENT EVENTS:
In November, 1993, the Company acquired six store sites located in Southern
California for approximately $17.3 million. The Company owns the fee interest
in three sites and leases the other three sites. The existing improvements will
be renovated prior to the planned opening of the stores.
In October, 1993, the Company entered into an agreement to acquire the
leasehold interest in an additional three store sites in Southern California.
The transaction is expected to close in January, 1994 and the acquisition price
is $2.35 million.
In November, 1993, in connection with the acquisition of the new store sites,
the Company increased the borrowings available under the revolving credit
facility from $20.0 million to $40.0 million. The additional borrowings
available bear substantially the same terms and conditions as the original
facility.
6. STOCKHOLDERS' EQUITY (In thousands, except share data):
<TABLE>
<CAPTION>
SERIES A NOTES
PREFERRED STOCK COMMON STOCK RECEIVABLE
------------------ ----------------- PAID-IN FOR CAPITAL ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCK DEFICIT
---------- ------ --------- ------ ------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 31,
1993................... 1,602,486 $ 16 1,207,598 $ 12 $26,392 $(379) $(11,193)
Repurchase of shares.... (333) -- (200) -- (7) -- --
Issuance of Common Stock
resulting from Initial
Public Offering and
exercise of stock op-
tions.................. -- -- 3,806,945 38 48,417 -- --
Reclassification of Se-
ries A Preferred Stock. (1,602,153) (16) 1,915,630 19 (3) -- --
Payments of cash divi-
dend on Series A Pre-
ferred Stock........... -- -- -- -- (2,500) -- --
Payments of notes
receivable............. -- -- -- -- -- 204 --
Net income.............. -- -- -- -- -- -- 4,632
---------- ---- --------- ---- ------- ----- --------
Balance, October 31,
1993................... -- $-- 6,929,973 $ 69 $72,299 $(175) $ (6,561)
========== ==== ========= ==== ======= ===== ========
</TABLE>
F-25
<PAGE>
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
7. QUARTERLY FINANCIAL INFORMATION (in thousands, except share data):
<TABLE>
<CAPTION>
INCOME (LOSS)
PER COMMON AND
INCOME EQUIVALENT SHARE
(LOSS) BEFORE BEFORE
GROSS EXTRAORDINARY NET INCOME EXTRAORDINARY
SALES MARGIN ITEMS (LOSS) ITEMS
-------- ------- ------------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED JANUARY 30,
1994
First quarter(1)...... $90,361 $31,948 $1,986 $(3,377) $0.40
Second quarter........ 101,206 35,741 5,540 5,540 0.80
Third quarter......... 88,888 32,137 2,469 2,469 0.35
-------- ------- ------ ------- -----
Year.................. $280,455 $99,826 $9,995 $ 4,632 $1.64
======== ======= ====== ======= =====
</TABLE>
- --------
(1) The net loss reflects the extraordinary charge discussed in Note 3.
8. SUMMARIZED FINANCIAL INFORMATION FOR ORCHARD SUPPLY HARDWARE CORPORATION:
All operations of the Company are conducted through its wholly-owned
subsidiary, Orchard Supply Hardware Corporation. The following summarizes the
financial position and results of operations for Orchard Supply Hardware
Corporation (In thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
1993
-----------
<S> <C>
Current assets................................................. $110,663
Non-current assets............................................. 97,119
--------
$207,782
========
Current liabilities............................................ $ 54,348
Non-current liabilities........................................ 87,769
--------
142,117
--------
Redeemable preferred stock..................................... --
Other equity................................................... 65,665
--------
65,665
--------
$207,782
========
</TABLE>
<TABLE>
<CAPTION>
NINE-MONTHS ENDED
-----------------------
OCTOBER 25, OCTOBER 31,
1992 1993
----------- -----------
<S> <C> <C>
Sales............................................. $259,365 $280,455
Gross profit...................................... 90,034 99,826
Income before provision for taxes and extraordi-
nary credit...................................... 2,169 10,026
Net income........................................ 2,169 4,663
</TABLE>
The various debt instruments of Orchard Supply Hardware Corporation restrict
the payment of dividends to the parent.
F-26
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
SELECTION
- --------------------------------------------------------------------------------
[PHOTO 1] [PHOTO 2] [PHOTO 3]
[PHOTO 4] [PHOTO 5] [PHOTO 6]
[COMPANY LOGO]
[PHOTO 7]
New warehouse and distribution facility
CONVENIENT, WELL
SERVICE ORGANIZED STORES
- ---------------------------------------------------- -------------------------
[PHOTO 8] [PHOTO 9] [PHOTO 10] [PHOTO 11]
Custom cutting ZIP service Drive through
pick-up station
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY ORCHARD SUPPLY, ORCHARD HOLDING OR ANY OF
THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY
SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION WHERE SUCH
AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Investment Considerations................................................. 10
The Company............................................................... 13
Use of Proceeds........................................................... 15
Capitalization............................................................ 16
Unaudited Pro Forma Financial Data........................................ 18
Selected Consolidated Financial Data...................................... 22
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 25
Business.................................................................. 32
Management................................................................ 41
Certain Transactions...................................................... 47
Principal Stockholders.................................................... 48
Description of Notes...................................................... 49
Terms of Continuing Debt Instruments...................................... 64
Description of Capital Stock.............................................. 69
Underwriting.............................................................. 70
Legal Matters............................................................. 71
Experts................................................................... 71
Additional Information.................................................... 71
Index to Consolidated Financial Statements................................ F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$100,000,000
LOGO
ORCHARD SUPPLY
HARDWARE
CORPORATION
% SENIOR NOTES DUE 2002
UNCONDITIONALLY GUARANTEED BY
ORCHARD SUPPLY HARDWARE
STORES CORPORATION
-----------------
PROSPECTUS
, 1994
-----------------
Lehman Brothers
Jefferies & Company, Inc.
Montgomery Securities
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
GRAPHICS APPENDIX LIST
<TABLE>
<CAPTION>
INSIDE FRONT COVER
<C> <S>
Map Map of California with symbols indicating the locations of existing
stores, the distribution center and expected 1994 store openings
Photo 1 Photograph of exterior of store and parking lot in Salinas, California
Photo 2 Photograph of check-out lines inside store
Photo 3 Photograph of plant nursery section of store
Photo 4 Photograph of store aisle containing rows of hammers
<CAPTION>
INSIDE BACK COVER
<C> <S>
Photo 1 Photograph of store aisle containing rows of garden hoses
Photo 2 Photograph of store aisle of miscellaneous screws
Photo 3 Photograph of store aisle of shovels
Photo 4 Photograph of store aisle of wrenches
Photo 5 Close-up photograph of store aisle of miscellaneous screws
Photo 6 Photograph of store aisle of miscellaneous faucets
Photo 7 Photograph of exterior of distribution facility and trucks in parking
lot
Photo 8 Photograph of employee cutting hose
Photo 9 Photograph of ZIP Services center
Photo 10 Photograph of employee loading cement onto the back of a customer's
truck
Photo 11 Photograph of store interior showing how aisles are arranged
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses and costs (other than
underwriting discounts and commissions) expected to be incurred in connection
with the sale and distribution of the securities being registered. All of the
amounts shown are estimated except the registration fee of the Securities and
Exchange Commission.
<TABLE>
<CAPTION>
ITEM AMOUNT
---- -----------
<S> <C>
Securities and Exchange Commission registration fee............. $ 34,483.00
NASD filing fee................................................. 10,500.00
Blue Sky fees and expenses...................................... 8,000.00
Printing and engraving expenses................................. 87,000.00
Legal fees and expenses......................................... 200,000.00
Accounting fees and expenses.................................... 100,000.00
Trustee's fees and expenses..................................... 5,000.00
Miscellaneous................................................... 55,017.00
-----------
Total....................................................... $500,000.00
===========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Each of Orchard Supply Hardware Stores Corporation (the "Company") and
Orchard Supply Hardware Corporation ("Orchard Supply") is a Delaware
corporation. Article VI of each of the Company's and Orchard Supply's Bylaws
provide that the Company and Orchard Supply may indemnify its officers and
Directors to the full extent permitted by law. Section 145 of the General
Corporation Law of the State of Delaware ("GCL") provides that a Delaware
corporation has the power to indemnify its officers and directors in certain
circumstances.
Subsection (a) of Section 145 of the GCL empowers a corporation to indemnify
any director or officer, or former director or officer, who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation),
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred in connection with such action,
suit or proceeding provided that such director or officer acted in good faith
and in a manner reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, provided that such director or officer had no cause to believe his
or her conduct was unlawful.
Subsection (b) of Section 145 of the GCL empowers a corporation to indemnify
any director or officer, or former director or officer, who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a judgment in
its favor by reason of the fact that such person acted in any of the capacities
set forth above, against expenses actually and reasonably incurred in
connection with the defense or settlement of such action or suit provided that
such director or officer acted in good faith and in a manner reasonably
believed to be in or not opposed to the best interests of the corporation,
except that no indemnification may be made in respect of any claim, issue or
matter as to which such director or officer shall have been adjudged to be
liable to the corporation unless and only to the extent that the Court of
Chancery or the court in which such action was brought shall determine that
despite the adjudication of liability such director or officer is fairly and
reasonably entitled to indemnity for such expenses which the court shall deem
proper.
II-1
<PAGE>
Section 145 of the GCL further provides that to the extent a director or
officer of a corporation has been successful in the defense of any action, suit
or proceeding referred to in subsections (a) and (b) or in the defense of any
claim, issue or matter therein, he or she shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him or her in
connection therewith; that indemnification provided for by Section 145 shall
not be deemed exclusive of any other rights to which the indemnified party may
be entitled; and that the corporation shall have power to purchase and maintain
insurance on behalf of a director or officer of the corporation against any
liability asserted against him or her or incurred by him or her in any such
capacity or arising out of his or her status as such whether or not the
corporation would have the power to indemnify him or her against such
liabilities under Section 145.
Article Ninth of each of the Company's and Orchard Supply's Certificate of
Incorporation currently provide that each Director shall not be personally
liable to the Company, Orchard Supply or their respective stockholders, as the
case may be, for monetary damages for breach of fiduciary duty as a Director,
except for liability (i) for any breach of the Director's duty of loyalty to
the Company, Orchard Supply or their respective stockholders, as the case may
be, (ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the GCL,
or (iv) for any transaction from which the Director derived an improper
benefit.
The Company has entered into indemnity agreements with each of its Directors.
The indemnity agreements generally indemnify such persons against liabilities
arising out of their service in their capacities as Directors, officers,
employees or agents of the Company, including their service as Directors of
Orchard Supply. Each of the Company and Orchard Supply may from time to time
enter into indemnity agreements with additional individuals who become officers
or Directors of the Company or Orchard Supply.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On April 6, 1993, the Company amended its Certificate of Incorporation to
reclassify its Series A Preferred Stock into Common Stock (the
"Reclassification"). Each share of Series A Preferred Stock was converted
pursuant to the Reclassification into the number of shares of Common Stock
determined by dividing the liquidation preference of the outstanding Series A
Preferred Stock, including shares issued upon payment of dividends, by $14.00,
the initial public offering price of the Common Stock. Accordingly, the
registrant issued 1,915,630 shares of its Common Stock in exchange for all of
its outstanding Series A Preferred Stock in reliance upon the provisions of
Section 3(a)(9) of the Securities Act, in that the Reclassification involved an
exchange by the Company with its existing security holders exclusively where no
commission or other remuneration was paid or given directly or indirectly for
soliciting such exchange. The securities were issued with an investment legend
thereon, and stop transfer instructions were noted on the Company's transfer
ledgers.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
+++1.1 Form of Underwriting Agreement.
+3.1 Certificate of Incorporation of the Orchard Supply Hardware Stores
Corporation (formerly Orchard Holding Corporation) as amended through
December 13, 1993.
*3.2 Bylaws of the Orchard Supply Hardware Stores Corporation (formerly
Orchard Holding Corporation), as amended to date.
+3.3 Certificate of Incorporation of Orchard Supply Hardware Corporation
(formerly OSH Acquisition Corporation), as amended to date.
*3.4 Bylaws of Orchard Supply Hardware Corporation (formerly OSH
Acquisition Corporation), as amended to date.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
-------- -----------
<C> <S>
*4.1 Indenture dated as of July 15, 1989 between Orchard Supply Hardware
Corporation and United States Trust Company of New York, as Trustee,
with respect to the Senior Subordinated Discount Notes due 1999, with
form of Note attached thereto as Exhibit A.
*4.2 Registration Rights Agreement dated as of July 26, 1989 by and among
Orchard Supply Hardware Corporation and the purchasers who are
signatories thereto.
*4.3 Stockholder Agreement dated as of July 26, 1989 pursuant to the
Purchase Agreement (included as Exhibit 4.2 hereto), by and among FS
Equity Partners II, L.P. and the purchasers who are signatories
thereto.
*4.4 Common Stock Registration Rights Agreement dated as of July 26, 1989
among Orchard Holding Corporation and the purchasers who are
signatories thereto.
*4.5 First Supplemental Indenture dated as of December 22, 1989 between
Orchard Supply Hardware Corporation and United States Trust Company
of New York, as Trustee.
*4.6 Indenture dated as of October 15, 1992 among Orchard Supply Hardware
Corporation, Orchard Holding Corporation, as Guarantor, and U.S.
Trust Company of California, N.A., as Trustee, with respect to the
Senior Notes due 1997, with form of Series A Note attached thereto as
Exhibit A and form of Series B Note attached thereto as Exhibit B.
*4.7 Form of Warrant to Purchase Shares of Common Stock of Orchard Holding
Corporation issued pursuant to the Note Purchase Agreement dated as
of October 15, 1992 among Orchard Supply Hardware Corporation,
Orchard Holding Corporation and the purchasers named therein.
**4.8 Stockholder Agreement dated May 30, 1989 by and among FS Equity
Partners II, L.P. and the investors named therein.
***4.9 First Supplemental Indenture dated as of February 8, 1993 among
Orchard Supply Hardware Corporation, Orchard Supply Hardware Stores
Corporation (formerly Orchard Holding Corporation) and U.S. Trust
Company of California, N.A., as Trustee.
***4.10 Form of Amendment to the Warrant to Purchase Shares of Common Stock
of Orchard Supply Hardware Corporation (formerly Orchard Holding
Corporation).
****4.11 Form of Waiver regarding the Indenture dated as of October 15, 1992
among Orchard Supply Hardware Corporation, Orchard Holding
Corporation, as Guarantor, and U.S. Trust Company of California,
N.A., as Trustee, with respect to the Senior Notes due 1997.
+++4.12 Indenture among Orchard Supply Hardware Corporation, Orchard Supply
Hardware Stores Corporation, as Guarantor, and U.S. Trust Company of
California, N.A., as Trustee, with respect to the Senior Notes due
2002, with form of note attached thereto as Exhibit A.
+++4.13 Form of Consent to Amendment regarding the Indenture dated as of
October 15, 1992 among Orchard Supply Hardware Corporation, Orchard
Supply Hardware Stores Corporation (formerly Orchard Holding
Corporation), as Guarantor and U.S. Trust Company of California,
N.A., as Trustee.
+++4.14 Form of Certificate of Designation of Rights and Preferences of the
6% Cumulative Convertible Preferred Stock of Orchard Supply Hardware
Stores Corporation.
+++5.1 Opinion of Riordan & McKinzie.
**10.1 Stock Purchase Agreement dated as of May 30, 1989 by and among
Orchard Holding Corporation and the investors who are signatories
thereto.
*10.2 Purchase Agreement dated as of July 26, 1989 by and among Orchard
Holding Corporation, Orchard Supply Hardware Corporation and the
purchasers who are signatories thereto.
*10.3 Letter Agreement between Orchard Supply Hardware Corporation and
Metropolitan Life Insurance Company dated as of November 8, 1989.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
-------- -----------
<C> <S>
***10.4 Loan Agreement dated as of March 19, 1990 between Orchard Supply
Hardware Corporation and Metropolitan Life Insurance Company.
***10.5 First Amendment to Loan Agreement dated as of September 12, 1990
between Orchard Supply Hardware Corporation and Metropolitan Life
Insurance Company.
*10.6 Note Agreement dated as of May 15, 1992 among Orchard Supply Hardware
Corporation, Orchard Holding Corporation and the purchasers named
therein, with respect to the 10.64% Senior Secured Notes due 2002,
with form of Note and Deed of Trust, Assignment of Rents and Security
Agreement attached as exhibits thereto.
*10.7 Note Purchase Agreement dated as of October 15, 1992 among Orchard
Supply Hardware Corporation, Orchard Holding Corporation and the
purchasers named therein, including certain schedules and exhibits.
*10.8 Financing Agreement dated as of October 29, 1992 between Orchard
Supply Hardware Corporation and The CIT Group/Business Credit, Inc.
*10.9 Orchard Holding Corporation Amended 1989 Employee Stock Subscription
Plan dated May 23, 1989, as amended on August 7, 1989.
*10.10 Form of Stock Subscription Agreement by and between Orchard Holding
Corporation and certain members of management who purchased shares of
common stock of Orchard Holding Corporation for cash, with form of
pledge agreement attached thereto as Exhibit A.
*10.11 Form of Stock Subscription Agreement by and between Orchard Holding
Corporation and certain members of management who purchased shares of
common stock of Orchard Holding Corporation for cash and promissory
notes, with form of note and pledge agreement attached thereto as
Exhibits A and B, respectively.
*10.12 Orchard Holding Corporation Amended 1989 Nonqualified Stock Option
Plan dated May 24, 1989, as amended on August 7, 1989.
*10.13 Form of Nonqualified Stock Option Agreement by and between Orchard
Holding Corporation and certain members of management.
*10.14 Orchard Holding Corporation 1989 Nonqualified Performance Stock
Option Plan dated May 24, 1989.
*10.15 Form of Nonqualified Performance Stock Option Agreement by and
between Orchard Holding Corporation and certain members of
management.
*10.16 Supplemental Letter Agreement dated April 11, 1989 between FS Equity
Partners II, L.P. and Bankers Trust Company.
*10.17 Employment Agreement between Maynard Jenkins and Wickes Companies,
Inc. dated January 1, 1989 (assumed by Orchard Supply Hardware
Corporation).
*10.18 Orchard Holding Corporation Second Amended and Restated 1989 Employee
Stock Subscription Plan dated May 23, 1989, as amended and restated
on June 11, 1991.
*10.19 Form of Indemnity Agreement by and among Orchard Holding Corporation,
Orchard Supply Hardware Corporation and each director.
*10.20 First Amendment to Employment Agreement dated January 1, 1989 between
Orchard Supply Hardware Corporation and Maynard Jenkins.
*10.21 Form of Nonqualified Stock Option Agreement between Orchard Holding
Corporation and Maynard Jenkins.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
--------- -----------
<C> <S>
***10.22 First Amendment to Note Agreement dated as of February 8, 1993 among
Orchard Supply Hardware Corporation, Orchard Supply Hardware Stores
Corporation and Teachers Insurance and Annuity Association of
America.
***10.23 Amendment to Financing Agreement dated as of February 23, 1993
between Orchard Supply Hardware Corporation and The CIT
Group/Business Credit, Inc.
****10.24 Form of Waiver regarding the Note Agreement dated as of May 15, 1992
among Orchard Supply Hardware Corporation, Orchard Holding
Corporation and the purchasers named therein, with respect to the
10.64% Senior Secured Notes due 2002.
****10.25 Form of Waiver regarding the Financing Agreement dated as of October
29, 1992 between Orchard Supply Hardware Corporation and The CIT
Group/Business Credit, Inc.
****10.26 Form of Waiver regarding the Loan Agreement dated as of March 19,
1990 between Orchard Supply Hardware Corporation and Metropolitan
Life Insurance Company.
++10.27 Orchard Supply Hardware Stores Corporation 1993 Non-Employee
Directors Stock Option Plan dated July 26, 1993.
+10.28 Form of Nonqualified Stock Option Agreement by and between Orchard
Supply Hardware Stores Corporation and certain non-employee
directors (other than directors affiliated with Freeman Spogli &
Co.).
+10.29 Orchard Supply Hardware Stores Corporation 1993 Stock Option Plan
dated November 19, 1993.
+10.30 Form of Incentive Stock Option Agreement by and between Orchard
Supply Hardware Stores Corporation and certain officers and key
employees.
+++10.31 Form of Registration Rights Agreement by and between Orchard Supply
Hardware Stores Corporation and FS Equity Partners III, L.P.
+++10.32 Securities Purchase Agreement entered into as of December 29, 1993
by and between Orchard Supply Hardware Stores Corporation and FS
Equity Partners III, L.P.
+++10.33 Form of Amendment to Financing Agreement dated as of February 23,
1993 by and between Orchard Supply Hardware Corporation and The CIT
Group/Business Credit, Inc.
+++10.34 Form of Fourth Amendment to the Note Agreement dated as of May 15,
1992 by and among Orchard Supply Hardware Corporation, Orchard
Supply Hardware Stores Corporation (formerly Orchard Holding
Corporation) and the purchasers named therein, with respect to the
10.64% Senior Secured Notes due 2002.
+15.1 Letter from Arthur Andersen & Co. regarding report on unaudited
interim financial information.
***18.1 Preferability Letter dated March 5, 1993 from Arthur Andersen & Co.
regarding change in accounting principle.
+++23.1 Consent of Riordan & McKinzie (contained in Exhibit 5.1 hereto).
+++23.2 Consent of Arthur Andersen & Co. for Orchard Supply Hardware Stores
Corporation.
+24.1 Powers of Attorney of Messrs. Jenkins, Hilberg, Seda, Wardlaw,
Freeman, Simmons, Spogli, Godlas and Walsh.
+25.1 Form T-1 Statement of Eligibility and Qualification under the Trust
Indenture Act of 1939 of the Trustee.
</TABLE>
- --------
* Filed as an exhibit to Registration Statement on Form S-4 (Registration
No. 33-55190) on November 30, 1992.
** Filed with Registration Statement on Form S-1 (Registration No. 33-57752)
on February 2, 1993.
II-5
<PAGE>
*** Filed with Amendment No. 1 to Registration Statement on Form S-1
(Registration No. 33-57752) on March 9, 1993.
**** Filed with Amendment No. 2 to Registration Statement of Form S-1
(Registration No. 33-57752) on March 23, 1993.
***** Filed with Amendment No. 3 to Registration Statement on Form S-1
(Registration No. 33-57752) on March 29, 1993.
+ Filed with Registration Statement on Form S-1 (Registration No. 33-51437)
on December 14, 1993.
++ Filed with Amendment No. 1 to Registration Statement on Form S-1
(Registration No. 33-51437) on December 29, 1993.
+++ Filed herewith.
(B) FINANCIAL STATEMENT SCHEDULES
Reports of Independent Public Accountants on Schedules.
<TABLE>
<C> <S>
--Condensed Financial Information of Orchard Supply Hardware
Schedule III Corporation
Schedule V --Property, Plant and Equipment
Schedule VI --Accumulated Depreciation and Amortization of Property, Plant
and Equipment
Schedule VIII --Valuation and Qualifying Accounts
Schedule X --Supplementary Income Statement Information
</TABLE>
All other schedules are omitted since the required information is not present
in amounts sufficient to require submission of the schedule, or because the
information required is included in the financial statements and notes hereto.
ITEM 17. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of Registrant pursuant to the foregoing provisions, or otherwise, Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by Registrant of expenses incurred or paid
by a director, officer or controlling person of Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(b) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Amendment No. 2 to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized in the City of San Jose, State of California, on this 18th day
of January, 1994.
Orchard Supply Hardware Corporation
By: /s/ Stephen M. Hilberg
--------------------------------
STEPHEN M. HILBERG
VICE PRESIDENT-FINANCE AND CHIEF
FINANCIAL OFFICER
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* President, Chief Executive January 18, 1994
- ------------------------------------- Officer and Director
MAYNARD JENKINS (Principal Executive
Officer)
/s/ Stephen M. Hilberg Vice President-Finance, January 18, 1994
- ------------------------------------- Chief Financial Officer
STEPHEN M. HILBERG and Director (Principal
Financial Officer)
* Controller (Principal January 18, 1994
- ------------------------------------- Accounting Officer)
MICHAEL SEDA
* Director January 18, 1994
- -------------------------------------
BRADFORD M. FREEMAN
* Director January 18, 1994
- -------------------------------------
J. FREDERICK SIMMONS
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Director January 18, 1994
- -------------------------------------
RONALD P. SPOGLI
* Director January 18, 1994
- -------------------------------------
WILLIAM M. WARDLAW
* Director January 18, 1994
- -------------------------------------
MORTON GODLAS
* Director January 18, 1994
- -------------------------------------
WILLIAM E. WALSH
*By /s/ Stephen M. Hilberg
---------------------------------
STEPHEN M. HILBERG
ATTORNEY-IN-FACT
</TABLE>
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Amendment No. 2 to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized in the City of San Jose, State of California, on this 18th day
of January, 1994.
Orchard Supply Hardware Stores Corporation
By: /s/ Stephen M. Hilberg
----------------------------------
STEPHEN M. HILBERG
VICE PRESIDENT-FINANCE AND CHIEF
FINANCIAL OFFICER
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* President, Chief Executive January 18, 1994
- ------------------------------------- Officer and Director
MAYNARD JENKINS (Principal Executive
Officer)
/s/ Stephen M. Hilberg Vice President-Finance, January 18, 1994
- ------------------------------------- Chief Financial Officer
STEPHEN M. HILBERG and Director (Principal
Financial Officer)
* Controller (Principal January 18, 1994
- ------------------------------------- Accounting Officer)
MICHAEL SEDA
* Director January 18, 1994
- -------------------------------------
BRADFORD M. FREEMAN
* Director January 18, 1994
- -------------------------------------
J. FREDERICK SIMMONS
</TABLE>
II-9
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Director
- ------------------------------------- January 18, 1994
RONALD P. SPOGLI
* Director
- ------------------------------------- January 18, 1994
WILLIAM M. WARDLAW
* Director
- ------------------------------------- January 18, 1994
MORTON GODLAS
* Director
- ------------------------------------- January 18, 1994
WILLIAM E. WALSH
*By /s/ Stephen M. Hilberg
----------------------------------
STEPHEN M. HILBERG
ATTORNEY-IN-FACT
</TABLE>
II-10
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES
We have audited in accordance with generally accepted auditing standards, the
financial statements of Orchard Supply Hardware Stores Corporation as of
January 26, 1992 and January 31, 1993 and for each of the three years in the
period ended January 31, 1993 included in this registration statement and have
issued our report thereon dated March 5, 1993. Our audits were made for the
purpose of forming an opinion on the basic financial statements taken as a
whole. The schedules listed in Item 16b are the responsibility of the Company's
management and are presented for purposes of complying with the Securities and
Exchange Commission's rules and are not part of the basic financial statements.
These schedules have been subjected to the auditing procedures applied in the
audit of the basic financial statements and, in our opinion, fairly state in
all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen & Co.
San Jose, California
March 5, 1993
S-1
<PAGE>
SCHEDULE III
ORCHARD SUPPLY HARDWARE STORES CORPORATION
CONDENSED FINANCIAL INFORMATION OF ORCHARD SUPPLY HARDWARE CORPORATION
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 26, JANUARY 31,
1992 1993
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................ $ 5,340 $ 4,475
Accounts receivable, net............................. 12,990 13,208
Inventories.......................................... 70,727 73,858
Prepaid expenses and other........................... 3,834 4,759
Assets held for disposal............................. 7,507 6,133
-------- --------
Total current assets............................... 100,398 102,433
PROPERTY, PLANT AND EQUIPMENT, net..................... 82,371 80,779
OTHER ASSETS, net...................................... 15,673 14,765
-------- --------
Total assets....................................... $198,442 $197,977
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities............. $ 45,490 $ 47,014
Notes payable........................................ 5,642 2,649
Current portion of capital leases and long term debt. 4,638 515
-------- --------
Total current liabilities.......................... 55,770 50,178
OTHER LIABILITIES...................................... 3,173 2,596
CAPITAL LEASES AND LONG-TERM DEBT, net of current por-
tion.................................................. 125,892 130,374
-------- --------
Total liabilities.................................. 184,835 183,148
-------- --------
STOCKHOLDER'S EQUITY:
Common stock......................................... -- --
Additional paid-in-capital........................... 11,354 13,951
Retained earnings.................................... 2,253 878
-------- --------
Total equity....................................... 13,607 14,829
-------- --------
Total liabilities and stockholder's equity......... $198,442 $197,977
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed statements.
S-2
<PAGE>
SCHEDULE III
ORCHARD SUPPLY HARDWARE STORES CORPORATION
CONDENSED FINANCIAL INFORMATION OF ORCHARD SUPPLY HARDWARE CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------
JANUARY 27, JANUARY 26, JANUARY 31,
1991 1992 1993
----------- ----------- -----------
<S> <C> <C> <C>
Sales...................................... $299,924 $308,562 $346,158
Cost of goods sold......................... 191,815 199,052 224,599
-------- -------- --------
Gross margin............................. 108,109 109,510 121,559
Selling, general and administrative ex-
penses.................................... 89,023 92,447 100,859
-------- -------- --------
Operating income......................... 19,086 17,063 20,700
Write-down in carrying amount of asset held
for disposal.............................. -- -- 2,007
Interest expense........................... 15,207 14,810 16,749
-------- -------- --------
Income before provision for income taxes
and extraordinary items................. 3,879 2,253 1,944
Provision for income taxes................. 1,649 971 866
-------- -------- --------
Income before extraordinary items........ 2,230 1,282 1,078
Exraordinary items......................... 1,649 971 (200)
-------- -------- --------
Net income (loss)........................ $ 3,879 $ 2,253 $ 878
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed statements.
S-3
<PAGE>
SCHEDULE III
ORCHARD SUPPLY HARDWARE STORES CORPORATION
CONDENSED FINANCIAL INFORMATION OF ORCHARD SUPPLY HARDWARE CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------
JANUARY 27, JANUARY 26, JANUARY 31,
1991 1992 1993
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................ $ 3,879 $ 2,253 $ 878
Noncash adjustments to net income --
Depreciation and amortization............ 7,153 6,998 7,080
Loss on extinguishment of debt........... -- -- 1,066
Accretion of debt discount............... 2,752 3,156 1,682
Loss on asset disposals.................. 3 108 115
Write-down in carrying amount of asset
held for disposal....................... -- -- 2,007
Changes in assets and liabilities --
Increase in accounts receivable.......... (1,301) (498) (218)
Increase in inventories.................. (4,381) (8,468) (3,131)
(Increase) decrease in prepaid expenses
and other............................... 396 (920) (925)
Increase in accounts payable and accrued
liabilities............................. 4,923 366 1,524
Decrease in noncurrent liabilities....... (56) (685) (577)
-------- -------- --------
Total adjustments....................... 9,489 57 8,623
-------- -------- --------
Net cash provided by operating activi-
ties.................................. 13,368 2,310 9,501
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equip-
ment, net................................ (10,999) (19,675) (4,318)
Proceeds from sale of asset held for dis-
posal................................... 635 -- --
-------- -------- --------
Net cash used in investing activities.... (10,364) (19,675) (4,318)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from working capital loan........ 2,561 2,565 --
Proceeds from issuance of notes payable... 2,166 2,378 2,389
Proceeds from mortgage and construction
loans.................................... 21,759 15,700 13,721
Proceeds from Senior Notes................ -- -- 30,000
Repayment of construction and working cap-
ital loans............................... -- -- (19,312)
Deferred financing costs.................. (763) -- (2,076)
Repayment of notes payable................ (1,789) (2,576) (1,770)
Contributions from (distributions to) par-
ent company.............................. 36 (57) 12
Principal payments on capital leases and
long-term debt........................... (26,876) (168) (29,012)
-------- -------- --------
Net cash provided (used in) financing ac-
tivities................................ (2,906) 17,842 (6,048)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................... 98 477 (865)
CASH AND CASH EQUIVALENTS, Beginning of Pe-
riod...................................... 4,765 4,863 5,340
-------- -------- --------
CASH AND CASH EQUIVALENTS, End of Period... $ 4,863 $ 5,340 $ 4,475
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed statements.
S-4
<PAGE>
SCHEDULE III
Notes to condensed financial information:
(1) The consolidated debt obligations of Orchard Supply Hardware Stores
Corporation are obligations of its wholly-owned subsidiary, Orchard
Supply Hardware Corporation. Accordingly, all disclosures in the
"long-term debt and credit arrangement" note to the financial
statements address the debt obligations of Orchard Supply Hardware
Corporation and have not been repeated here.
(2) No dividends have been paid to Orchard Supply Hardware Stores
Corporation in each of the three years in the period ended January
31, 1993.
S-5
<PAGE>
SCHEDULE V
ORCHARD SUPPLY HARDWARE STORES CORPORATION
PROPERTY, PLANT AND EQUIPMENT
FOR THE YEAR ENDED JANUARY 27, 1991
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
OTHER
CHANGES
BALANCE ADD BALANCE
BEGINNING ADDITIONS (DEDUCT) END OF
CLASSIFICATION OF PERIOD AT COST RETIREMENTS SEE (1) PERIOD
- ------------------------------ --------- --------- ----------- -------- -------
<S> <C> <C> <C> <C> <C>
PROPERTY, PLANT & EQUIPMENT:
Land........................ $20,101 $ 2,212 $-- $ (569) $21,744
Land Improvements........... 591 113 -- 66 770
Buildings................... 15,168 205 -- 781 16,154
Machinery & Equipment....... 17,935 567 (4) 878 19,376
Leasehold Improvements...... 16,511 263 -- 3,308 20,082
Construction in Progress.... 1,715 7,639 -- (5,364) 3,990
------- ------- ---- ------ -------
Subtotal.................. 72,021 10,999 (4) (900) 82,116
------- ------- ---- ------ -------
CAPITAL LEASE ASSETS:
Land........................ -- -- -- -- --
Land Improvements........... -- -- -- -- --
Buildings................... 1,382 -- -- -- 1,382
Machinery & Equipment....... 485 -- -- -- 485
Leasehold Improvements...... -- -- -- -- --
Construction in Progress.... -- -- -- -- --
------- ------- ---- ------ -------
Subtotal.................. 1,867 -- -- -- 1,867
------- ------- ---- ------ -------
Total..................... $73,888 $10,999 $ (4) $ (900) $83,983
======= ======= ==== ====== =======
</TABLE>
- --------
(1) Represents construction in progress--close-outs and adjustments to asset
balances related to purchase price valuations subsequent to the acquisition
date. Construction in progress close-outs offset, and consequently, the net
total in "Other Changes" represents purchase price adjustments.
S-6
<PAGE>
SCHEDULE V
ORCHARD SUPPLY HARDWARE STORES CORPORATION
PROPERTY, PLANT AND EQUIPMENT
FOR THE YEAR ENDED JANUARY 26, 1992
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
OTHER
CHANGES
BALANCE ADD BALANCE
BEGINNING ADDITIONS (DEDUCT) END OF
CLASSIFICATION OF PERIOD AT COST RETIREMENTS SEE (1) PERIOD
- ----------------------------- --------- --------- ----------- -------- -------
<S> <C> <C> <C> <C> <C>
PROPERTY, PLANT & EQUIPMENT:
Land....................... $21,744 $ 358 $ -- $ (4,737) $17,365
Land Improvements.......... 770 -- -- 201 971
Buildings.................. 16,154 6 -- 13,116 29,276
Machinery & Equipment...... 19,376 266 (433) 2,352 21,561
Leasehold Improvements..... 20,082 67 -- 3,175 23,324
Construction in Progress... 3,990 18,978 -- (21,938) 1,030
------- ------- ----- -------- -------
Subtotal................. 82,116 19,675 (433) (7,831) 93,527
------- ------- ----- -------- -------
CAPITAL LEASE ASSETS:
Land....................... -- -- -- -- --
Land Improvements.......... -- -- -- -- --
Buildings.................. 1,382 -- -- -- 1,382
Machinery & Equipment...... 485 -- -- -- 485
Leasehold Improvements..... -- -- -- -- --
Construction in Progress... -- -- -- -- --
------- ------- ----- -------- -------
Subtotal................. 1,867 -- -- -- 1,867
------- ------- ----- -------- -------
Total.................... $83,983 $19,675 $(433) $ (7,831) $95,394
======= ======= ===== ======== =======
</TABLE>
- --------
(1) Represents construction in progress--close-outs and reclassifications to
assets held for disposal. Construction in progress close-outs offset, and
consequently, the net total in "Other Changes" represents asset
reclassifications.
S-7
<PAGE>
SCHEDULE V
ORCHARD SUPPLY HARDWARE STORES CORPORATION
PROPERTY, PLANT AND EQUIPMENT
FOR THE YEAR ENDED JANUARY 31, 1993
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
OTHER
CHANGES
BALANCE ADD BALANCE
BEGINNING ADDITIONS (DEDUCT) END OF
CLASSIFICATION OF PERIOD AT COST RETIREMENTS SEE (1) PERIOD
- ------------------------------ --------- --------- ----------- -------- -------
<S> <C> <C> <C> <C> <C>
PROPERTY, PLANT & EQUIPMENT:
Land........................ $17,365 $ -- $ -- $(642) $16,723
Land Improvements........... 971 32 -- 57 1,060
Buildings................... 29,276 335 -- (77) 29,534
Machinery & Equipment....... 21,561 2,577 (260) 45 23,923
Leasehold Improvements...... 23,324 810 -- (12) 24,122
Construction in Progress.... 1,030 564 -- (4) 1,590
------- ------ ----- ----- -------
Subtotal.................. 93,527 4,318 (260) (633) 96,952
------- ------ ----- ----- -------
CAPITAL LEASE ASSETS:
Land........................ -- -- -- -- --
Land Improvements........... -- -- -- -- --
Buildings................... 1,382 -- -- -- 1,382
Machinery & Equipment....... 485 -- -- -- 485
Leasehold Improvements...... -- -- -- -- --
Construction in Progress.... -- -- -- -- --
------- ------ ----- ----- -------
Subtotal.................. 1,867 -- -- -- 1,867
------- ------ ----- ----- -------
Total..................... $95,394 $4,318 $(260) $(633) $98,819
======= ====== ===== ===== =======
</TABLE>
- --------
(1) Represents construction in progress--close-outs and reclassifications to
assets held for disposal. Construction in progress close-outs offset, and
consequently, the net total in "Other Changes" represents asset
reclassifications.
S-8
<PAGE>
SCHEDULE VI
ORCHARD SUPPLY HARDWARE STORES CORPORATION
ACCUMULATED DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT
FOR THE YEAR ENDED JANUARY 27, 1991
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS OTHER
BALANCE CHARGED TO CHANGES BALANCE
BEGINNING COSTS AND ADD END OF
CLASSIFICATION OF PERIOD EXPENSES RETIREMENTS (DEDUCT) PERIOD
- ----------------------------- --------- ---------- ----------- -------- -------
<S> <C> <C> <C> <C> <C>
PROPERTY, PLANT & EQUIPMENT:
Land........................ $ -- $ -- $ -- $ -- $ --
Land Improvements........... 31 45 -- -- 76
Buildings................... 427 516 -- -- 943
Machinery & Equipment....... 2,013 3,109 (1) -- 5,121
Leasehold Improvements...... 792 1,252 -- -- 2,044
Construction in Progress.... -- -- -- -- --
------ ------ ----- ----- ------
Subtotal................... 3,263 4,922 (1) -- 8,184
------ ------ ----- ----- ------
CAPITAL LEASE ASSETS:
Land........................ -- -- -- -- --
Land Improvements........... -- -- -- -- --
Buildings................... 61 91 -- -- 152
Machinery & Equipment....... 178 147 -- -- 325
Leasehold Improvements...... -- -- -- -- --
Construction in Progress.... -- -- -- -- --
------ ------ ----- ----- ------
Subtotal................... 239 238 -- -- 477
------ ------ ----- ----- ------
Total...................... $3,502 $5,160 $ (1) $ -- $8,661
====== ====== ===== ===== ======
</TABLE>
S-9
<PAGE>
SCHEDULE VI
ORCHARD SUPPLY HARDWARE STORES CORPORATION
ACCUMULATED DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT
FOR THE YEAR ENDED JANUARY 26, 1992
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
OTHER
ADDITIONS CHANGES
BALANCE CHARGED TO ADD BALANCE
BEGINNING COSTS AND (DEDUCT) END OF
CLASSIFICATION OF PERIOD EXPENSES RETIREMENTS SEE (1) PERIOD
- ----------------------------- --------- ---------- ----------- -------- -------
<S> <C> <C> <C> <C> <C>
PROPERTY, PLANT & EQUIPMENT:
Land........................ $ -- $ -- $ -- $ -- $ --
Land Improvements........... 76 60 -- -- 136
Buildings................... 943 597 -- (324) 1,216
Machinery & Equipment....... 5,121 2,617 (325) -- 7,413
Leasehold Improvements...... 2,044 1,547 -- -- 3,591
Construction in Progress.... -- -- -- -- --
------ ------ ----- ----- -------
Subtotal................... 8,184 4,821 (325) (324) 12,356
------ ------ ----- ----- -------
CAPITAL LEASE ASSETS:
Land........................ -- -- -- -- --
Land Improvements........... -- -- -- -- --
Buildings................... 152 92 -- -- 244
Machinery & Equipment....... 325 98 -- -- 423
Leasehold Improvements...... -- -- -- -- --
Construction in Progress.... -- -- -- -- --
------ ------ ----- ----- -------
Subtotal................... 477 190 -- -- 667
------ ------ ----- ----- -------
Total...................... $8,661 $5,011 $(325) $(324) $13,023
====== ====== ===== ===== =======
</TABLE>
- --------
(1) Represents reclassification to assets held for disposal.
S-10
<PAGE>
SCHEDULE VI
ORCHARD SUPPLY HARDWARE STORES CORPORATION
ACCUMULATED DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT
FOR THE YEAR ENDED JANUARY 31, 1993
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
OTHER
ADDITIONS CHANGES
BALANCE CHARGED TO ADD BALANCE
BEGINNING COSTS AND (DEDUCT) END OF
CLASSIFICATION OF PERIOD EXPENSES RETIREMENTS SEE (1) PERIOD
- ----------------------------- --------- ---------- ----------- -------- -------
<S> <C> <C> <C> <C> <C>
PROPERTY, PLANT & EQUIPMENT:
Land........................ $ -- $ -- $ -- $ -- $ --
Land Improvements........... 136 70 -- -- 206
Buildings................... 1,216 898 -- -- 2,114
Machinery & Equipment....... 7,413 2,328 (145) -- 9,596
Leasehold Improvements...... 3,591 1,714 -- -- 5,305
Construction in Progress.... -- -- -- -- --
------- ------ ----- ----- -------
Subtotal................... 12,356 5,010 (145) -- 17,221
------- ------ ----- ----- -------
CAPITAL LEASE ASSETS:
Land........................ -- -- -- -- --
Land Improvements........... -- -- -- -- --
Buildings................... 244 91 -- -- 335
Machinery & Equipment....... 423 61 -- -- 484
Leasehold Improvements...... -- -- -- -- --
Construction in Progress.... -- -- -- -- --
------- ------ ----- ----- -------
Subtotal................... 667 152 -- -- 819
------- ------ ----- ----- -------
Total...................... $13,023 $5,162 $(145) $ -- $18,040
======= ====== ===== ===== =======
</TABLE>
- --------
(1) Represents reclassification to assets held for disposal.
S-11
<PAGE>
SCHEDULE VIII
ORCHARD SUPPLY HARDWARE STORES CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED JANUARY 27, 1991
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS DEDUCTIONS
------------------------ --------------
ALLOWANCE CHARGED CHARGED TO ACCOUNTS
ALLOWANCE FOR BEGINNING OF TO COSTS AND OTHER WRITTEN OFF BALANCE END
DOUBTFUL ACCOUNTS PERIOD EXPENSES ACCOUNTS(1) PERIOD-TO-DATE OF PERIOD
- ------------------------ ------------ ------------ ----------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Notes Receivable........ $ -- $ -- $ -- $ -- $ --
Accounts Receivable..... 912 720 289 (1,027) 894
----- ----- ----- ------- -----
Total............... $ 912 $ 720 $ 289 $(1,027) $ 894
===== ===== ===== ======= =====
</TABLE>
- --------
(1) Represents collections of accounts written off.
S-12
<PAGE>
SCHEDULE VIII
ORCHARD SUPPLY HARDWARE STORES CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED JANUARY 26, 1992
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS DEDUCTIONS
------------------------ ----------
ALLOWANCE CHARGED CHARGED TO ACCOUNTS
ALLOWANCE FOR BEGINNING OF TO COSTS AND OTHER WRITTEN OFF BALANCE END
DOUBTFUL ACCOUNTS PERIOD EXPENSES ACCOUNTS(1) PERIOD-TO-DATE OF PERIOD
- ------------------------ ------------ ------------ ----------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Notes Receivable........ $ -- $ -- $ -- $ -- $ --
Accounts Receivable..... 894 1,202 290 (1,498) 888
----- ------ ----- ------- -----
Total................. $ 894 $1,202 $ 290 $(1,498) $ 888
===== ====== ===== ======= =====
</TABLE>
- --------
(1) Represents collections of accounts written off.
S-13
<PAGE>
SCHEDULE VIII
ORCHARD SUPPLY HARDWARE STORES CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED JANUARY 31, 1993
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS DEDUCTIONS
------------------------ -----------
ACCOUNTS
ALLOWANCE CHARGED CHARGED TO WRITTEN OFF
ALLOWANCE FOR BEGINNING OF TO COSTS AND OTHER PERIOD-TO- BALANCE END OF
DOUBTFUL ACCOUNTS PERIOD EXPENSES ACCOUNTS(1) DATE PERIOD
- ------------------------ ------------ ------------ ----------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Notes Receivable........ $ -- $ -- $ -- $ -- $ --
Accounts Receivable..... 888 1,180 484 (1,285) 1,267
----- ------ ----- ------- ------
Total............... $ 888 $1,180 $ 484 $(1,285) $1,267
===== ====== ===== ======= ======
</TABLE>
- --------
(1) Represents collections of accounts written off.
S-14
<PAGE>
SCHEDULE X
ORCHARD SUPPLY HARDWARE STORES CORPORATION
SUPPLEMENTARY INCOME STATEMENT INFORMATION
FOR THE YEAR ENDED JANUARY 27, 1991
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B
-------- ---------------------------
ITEM CHARGED TO COSTS & EXPENSES
---- ---------------------------
<C> <S> <C>
1. Maintenance and repairs..................... $4,148
2. Depreciation and amortization of intangible
assets, preoperating costs and similar
deferrals.................................. 7,153
3. Taxes, other than payroll and income taxes.. 439
Property Taxes.............................. 1,529
4. Royalties................................... --
5. Advertising Costs........................... 6,872
</TABLE>
S-15
<PAGE>
SCHEDULE X
ORCHARD SUPPLY HARDWARE STORES CORPORATION
SUPPLEMENTARY INCOME STATEMENT INFORMATION
FOR THE YEAR ENDED JANUARY 26, 1992
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B
-------- ---------------------------
ITEM CHARGED TO COSTS & EXPENSES
---- ---------------------------
<C> <S> <C>
1. Maintenance and repairs..................... $4,143
2. Depreciation and amortization of intangible
assets, preoperating costs and similar
deferrals.................................. 6,998
3. Taxes, other than payroll and income taxes.. 532
Property Taxes.............................. 1,522
4. Royalties................................... --
5. Advertising Costs........................... 7,132
</TABLE>
S-16
<PAGE>
SCHEDULE X
ORCHARD SUPPLY HARDWARE STORES CORPORATION
SUPPLEMENTARY INCOME STATEMENT INFORMATION
FOR THE YEAR ENDED JANUARY 31, 1993
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B
-------- ---------------------------
ITEM CHARGED TO COSTS & EXPENSES
---- ---------------------------
<C> <S> <C>
1. Maintenance and repairs..................... $4,812
2. Depreciation and amortization of intangible
assets, preoperating costs and similar
deferrals.................................. 8,119
3. Taxes, other than payroll and income taxes.. 720
Property Taxes.............................. 2,329
4. Royalties................................... --
5. Advertising Costs........................... 7,699
</TABLE>
S-17
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
-------- -----------
<C> <S>
+++1.1 Form of Underwriting Agreement.
+3.1 Certificate of Incorporation of the Orchard Supply Hardware Stores
Corporation (formerly Orchard Holding Corporation) as amended through
December 13, 1993.
*3.2 Bylaws of the Orchard Supply Hardware Stores Corporation (formerly
Orchard Holding Corporation), as amended to date.
+3.3 Certificate of Incorporation of Orchard Supply Hardware Corporation
(formerly OSH Acquisition Corporation), as amended to date.
*3.4 Bylaws of Orchard Supply Hardware Corporation (formerly OSH
Acquisition Corporation), as amended to date.
*4.1 Indenture dated as of July 15, 1989 between Orchard Supply Hardware
Corporation and United States Trust Company of New York, as Trustee,
with respect to the Senior Subordinated Discount Notes due 1999, with
form of Note attached thereto as Exhibit A.
*4.2 Registration Rights Agreement dated as of July 26, 1989 by and among
Orchard Supply Hardware Corporation and the purchasers who are
signatories thereto.
*4.3 Stockholder Agreement dated as of July 26, 1989 pursuant to the
Purchase Agreement (included as Exhibit 4.2 hereto), by and among FS
Equity Partners II, L.P. and the purchasers who are signatories
thereto.
*4.4 Common Stock Registration Rights Agreement dated as of July 26, 1989
among Orchard Holding Corporation and the purchasers who are
signatories thereto.
*4.5 First Supplemental Indenture dated as of December 22, 1989 between
Orchard Supply Hardware Corporation and United States Trust Company
of New York, as Trustee.
*4.6 Indenture dated as of October 15, 1992 among Orchard Supply Hardware
Corporation, Orchard Holding Corporation, as Guarantor, and U.S.
Trust Company of California, N.A., as Trustee, with respect to the
Senior Notes due 1997, with form of Series A Note attached thereto as
Exhibit A and form of Series B Note attached thereto as Exhibit B.
*4.7 Form of Warrant to Purchase Shares of Common Stock of Orchard Holding
Corporation issued pursuant to the Note Purchase Agreement dated as
of October 15, 1992 among Orchard Supply Hardware Corporation,
Orchard Holding Corporation and the purchasers named therein.
**4.8 Stockholder Agreement dated May 30, 1989 by and among FS Equity
Partners II, L.P. and the investors named therein.
***4.9 First Supplemental Indenture dated as of February 8, 1993 among
Orchard Supply Hardware Corporation, Orchard Supply Hardware Stores
Corporation (formerly Orchard Holding Corporation) and U.S. Trust
Company of California, N.A., as Trustee.
***4.10 Form of Amendment to the Warrant to Purchase Shares of Common Stock
of Orchard Supply Hardware Corporation (formerly Orchard Holding
Corporation).
****4.11 Form of Waiver regarding the Indenture dated as of October 15, 1992
among Orchard Supply Hardware Corporation, Orchard Holding
Corporation, as Guarantor, and U.S. Trust Company of California,
N.A., as Trustee, with respect to the Senior Notes due 1997.
+++4.12 Indenture among Orchard Supply Hardware Corporation, Orchard Supply
Hardware Stores Corporation, as Guarantor, and U.S. Trust Company of
California, N.A., as Trustee, with respect to the Senior Notes due
2002, with form of note attached thereto as Exhibit A.
+++4.13 Form of Consent to Amendment regarding the Indenture dated as of
October 15, 1992 among Orchard Supply Hardware Corporation, Orchard
Supply Hardware Stores Corporation (formerly Orchard Holding
Corporation), as Guarantor and U.S. Trust Company of California,
N.A., as Trustee.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
-------- -----------
<C> <S>
+++4.14 Form of Certificate of Designation of Rights and Preferences of the
6% Cumulative Convertible Preferred Stock of Orchard Supply Hardware
Stores Corporation.
+++5.1 Opinion of Riordan & McKinzie.
**10.1 Stock Purchase Agreement dated as of May 30, 1989 by and among
Orchard Holding Corporation and the investors who are signatories
thereto.
*10.2 Purchase Agreement dated as of July 26, 1989 by and among Orchard
Holding Corporation, Orchard Supply Hardware Corporation and the
purchasers who are signatories thereto.
*10.3 Letter Agreement between Orchard Supply Hardware Corporation and
Metropolitan Life Insurance Company dated as of November 8, 1989.
***10.4 Loan Agreement dated as of March 19, 1990 between Orchard Supply
Hardware Corporation and Metropolitan Life Insurance Company.
***10.5 First Amendment to Loan Agreement dated as of September 12, 1990
between Orchard Supply Hardware Corporation and Metropolitan Life
Insurance Company.
*10.6 Note Agreement dated as of May 15, 1992 among Orchard Supply Hardware
Corporation, Orchard Holding Corporation and the purchasers named
therein, with respect to the 10.64% Senior Secured Notes due 2002,
with form of Note and Deed of Trust, Assignment of Rents and Security
Agreement attached as exhibits thereto.
*10.7 Note Purchase Agreement dated as of October 15, 1992 among Orchard
Supply Hardware Corporation, Orchard Holding Corporation and the
purchasers named therein, including certain schedules and exhibits.
*10.8 Financing Agreement dated as of October 29, 1992 between Orchard
Supply Hardware Corporation and The CIT Group/Business Credit, Inc.
*10.9 Orchard Holding Corporation Amended 1989 Employee Stock Subscription
Plan dated May 23, 1989, as amended on August 7, 1989.
*10.10 Form of Stock Subscription Agreement by and between Orchard Holding
Corporation and certain members of management who purchased shares of
common stock of Orchard Holding Corporation for cash, with form of
pledge agreement attached thereto as Exhibit A.
*10.11 Form of Stock Subscription Agreement by and between Orchard Holding
Corporation and certain members of management who purchased shares of
common stock of Orchard Holding Corporation for cash and promissory
notes, with form of note and pledge agreement attached thereto as
Exhibits A and B, respectively.
*10.12 Orchard Holding Corporation Amended 1989 Nonqualified Stock Option
Plan dated May 24, 1989, as amended on August 7, 1989.
*10.13 Form of Nonqualified Stock Option Agreement by and between Orchard
Holding Corporation and certain members of management.
*10.14 Orchard Holding Corporation 1989 Nonqualified Performance Stock
Option Plan dated May 24, 1989.
*10.15 Form of Nonqualified Performance Stock Option Agreement by and
between Orchard Holding Corporation and certain members of
management.
*10.16 Supplemental Letter Agreement dated April 11, 1989 between FS Equity
Partners II, L.P. and Bankers Trust Company.
*10.17 Employment Agreement between Maynard Jenkins and Wickes Companies,
Inc. dated January 1, 1989 (assumed by Orchard Supply Hardware
Corporation).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
--------- -----------
<C> <S>
*10.18 Orchard Holding Corporation Second Amended and Restated 1989
Employee Stock Subscription Plan dated May 23, 1989, as amended and
restated on June 11, 1991.
*10.19 Form of Indemnity Agreement by and among Orchard Holding
Corporation, Orchard Supply Hardware Corporation and each director.
*10.20 First Amendment to Employment Agreement dated January 1, 1989
between Orchard Supply Hardware Corporation and Maynard Jenkins.
*10.21 Form of Nonqualified Stock Option Agreement between Orchard Holding
Corporation and Maynard Jenkins.
***10.22 First Amendment to Note Agreement dated as of February 8, 1993 among
Orchard Supply Hardware Corporation, Orchard Supply Hardware Stores
Corporation and Teachers Insurance and Annuity Association of
America.
***10.23 Amendment to Financing Agreement dated as of February 23, 1993
between Orchard Supply Hardware Corporation and The CIT
Group/Business Credit, Inc.
****10.24 Form of Waiver regarding the Note Agreement dated as of May 15, 1992
among Orchard Supply Hardware Corporation, Orchard Holding
Corporation and the purchasers named therein, with respect to the
10.64% Senior Secured Notes due 2002.
****10.25 Form of Waiver regarding the Financing Agreement dated as of October
29, 1992 between Orchard Supply Hardware Corporation and The CIT
Group/Business Credit, Inc.
****10.26 Form of Waiver regarding the Loan Agreement dated as of March 19,
1990 between Orchard Supply Hardware Corporation and Metropolitan
Life Insurance Company.
++10.27 Orchard Supply Hardware Stores Corporation 1993 Non-Employee
Directors Stock Option Plan dated July 26, 1993.
+10.28 Form of Nonqualified Stock Option Agreement by and between Orchard
Supply Hardware Stores Corporation and certain non-employee
directors (other than directors affiliated with Freeman Spogli &
Co.).
+10.29 Orchard Supply Hardware Stores Corporation 1993 Stock Option Plan
dated November 19, 1993.
+10.30 Form of Incentive Stock Option Agreement by and between Orchard
Supply Hardware Stores Corporation and certain officers and key
employees.
+++10.31 Form of Registration Rights Agreement by and between Orchard Supply
Hardware Stores Corporation and FS Equity Partners III, L.P.
+++10.32 Securities Purchase Agreement entered into as of December 29, 1993
by and between Orchard Supply Hardware Stores Corporation and FS
Equity Partners III, L.P.
+++10.33 Form of Amendment to Financing Agreement dated as of February 23,
1993 by and between Orchard Supply Hardware Corporation and The CIT
Group/Business Credit, Inc.
+++10.34 Form of Waiver regarding the Note Agreement dated as of May 15, 1992
by and among Orchard Supply Hardware Corporation, Orchard Supply
Hardware Stores Corporation (formerly Orchard Holding Corporation)
and the purchasers named therein, with respect to the 10.64% Senior
Secured Notes due 2002.
+15.1 Letter from Arthur Andersen & Co. regarding report on unaudited
interim financial information.
***18.1 Preferability Letter dated March 5, 1993 from Arthur Andersen & Co.
regarding change in accounting principle.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
-------- -----------
<C> <S>
+++23.1 Consent of Riordan & McKinzie (contained in Exhibit 5.1 hereto).
+++23.2 Consent of Arthur Andersen & Co. for Orchard Supply Hardware Stores
Corporation.
+24.1 Powers of Attorney of Messrs. Jenkins, Hilberg, Seda, Wardlaw,
Freeman, Simmons, Spogli, Godlas and Walsh.
+25.1 Form T-1 Statement of Eligibility and Qualification under the Trust
Indenture Act of 1939 of the Trustee.
</TABLE>
- --------
* Filed as an exhibit to Registration Statement on Form S-4 (Registration
No. 33-55190) on November 30, 1992.
** Filed with Registration Statement on Form S-1 (Registration No. 33-57752)
on February 2, 1993.
*** Filed with Amendment No. 1 to Registration Statement on Form S-1
(Registration No. 33-57752) on March 9, 1993.
**** Filed with Amendment No. 2 to Registration Statement of Form S-1
(Registration No. 33-57752) on March 23, 1993.
***** Filed with Amendment No. 3 to Registration Statement on Form S-1
(Registration No. 33-57752) on March 29, 1993.
+ Filed with Registration Statement on Form S-1 (Registration No. 33-51437)
on December 14, 1993.
++ Filed with Amendment No. 1 to Registration Statement on Form S-1
(Registration No. 33-51437) on December 29, 1993.
+++ Filed herewith.
<PAGE>
EXHIBIT 1.1
ORCHARD SUPPLY HARDWARE CORPORATION
___% Senior Notes due 2002
Guaranteed by
ORCHARD SUPPLY HARDWARE STORES CORPORATION
Underwriting Agreement
January __, 1994
LEHMAN BROTHERS INC.
JEFFERIES & COMPANY, INC.
MONTGOMERY SECURITIES
c/o LEHMAN BROTHERS INC.
3 World Financial Center
New York, New York 10285
Ladies and Gentlemen:
Orchard Supply Hardware Corporation, a Delaware corporation (the
"Company"), proposes to sell to the underwriters named in Schedule I hereto (the
"Underwriters"), for whom you (the "Representatives") are acting as
representatives, the principal amount of its ____% Senior Notes due 2002
guaranteed (the "Guarantee") by Orchard Supply Hardware Stores Corporation (the
"Guarantor"), a Delaware corporation and the parent corporation of the Company
(the "Securities", which term includes the Guarantee), to be issued under an
indenture (the "Indenture") dated as of January __, 1994, between the Company,
the Guarantor and U.S. Trust Company of California, N.A., as trustee (the
"Trustee"). If the firm or firms listed in Schedule I hereto include only the
firm or firms listed above, then the terms "Underwriters" and "Representatives",
as used herein, shall each be deemed to refer to such firm or firms.
1. Representations and Warranties. The Company and the Guarantor,
------------------------------
jointly and severally, represent, warrant and agree that:
(a) A registration statement on Form S-1 with respect to the
Securities has (i) been prepared by the Company in conformity with the
requirements of the United States Securities Act of 1933, as amended (the
"Securities Act"), and the rules and regulations (the "Rules and
Regulations") of the United States Securities and Exchange Commission (the
"Commission") thereunder and complies with the requirements of the
Securities Act and the Rules and Regulations, (ii) been filed with the
Commission under the Securities Act and (iii) become effective under the
Securities Act. If any post-effective amendment to such
<PAGE>
registration statement has been filed with the Commission prior to the
execution and delivery of this Agreement, the most recent such amendment
has been declared effective by the Commission. Copies of such registration
statement as amended to date have been delivered by the Company to the
Representatives. As used in this Agreement, "Effective Time" means the
date and the time as of which such registration statement, or the most
recent post-effective amendment thereto, if any, was declared effective by
the Commission; "Effective Date" means the date of the Effective Time;
"Preliminary Prospectus" means each prospectus included in such
registration statement, or amendments thereof, before it became effective
under the Securities Act; "Registration Statement" means such registration
statement, as amended at the Effective Time, including all information
deemed to be a part thereof as of the Effective Time pursuant to paragraph
(b) of Rule 430A of the Rules and Regulations; and "Prospectus" means the
form of prospectus relating to the Securities, as first filed with the
Commission pursuant to Rule 424(b) of the Rules and Regulations or, if no
prospectus is required to be filed pursuant to Rule 424(b), such term means
the prospectus included in the Registration Statement. The Commission has
not issued any order preventing or suspending the use of any Preliminary
Prospectus or the Prospectus.
(b) The Registration Statement contains, and any post-effective
amendment to the Registration Statement filed with the Commission after the
Effective Time will contain, all statements which are required by the
Securities Act, the Rules and Regulations, the Trust Indenture Act of 1939,
as amended (the "Trust Indenture Act") and the rules and regulations of the
Commission thereunder; on the Effective Date, the Registration Statement
did not, and any post-effective amendment to the Registration Statement
filed with the Commission after the Effective Time will not, as of the time
it is declared effective, contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading; on the Effective
Date and on the Closing Date (as defined in Section 3 hereof), the
Indenture did or will comply in all material respects with the requirements
of the Trust Indenture Act and the rules and regulations of the Commission
thereunder; and, on the Effective Date, the Prospectus did not, and on the
Closing Date, the Prospectus will not, include any untrue statement of a
material fact or omit to state a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they
were made, not misleading; provided, however, that no representation or
-------- -------
warranty is made as to (i) that part of the Registration Statement which
shall constitute the Statement of Eligibility and Qualification (Form T-1)
under the Trust Indenture Act of the Trustee or (ii) the
2
<PAGE>
information contained in or omitted from the Registration Statement,
Preliminary Prospectus or the Prospectus in reliance upon and in conformity
with written information furnished to the Company by the Representatives
specifically for inclusion therein.
(c) Each of the Company and the Guarantor has been duly organized
and is validly existing as a corporation in good standing under the laws of
its jurisdiction of incorporation, is duly qualified to do business and is
in good standing as a foreign corporation in each jurisdiction in which
ownership or lease of property or the conduct of its business requires such
qualification except to the extent that the failure to be so qualified or
be in good standing would not have a material adverse effect on the
Guarantor and the Company, taken as a whole, has all corporate power and
authority necessary to own or hold its properties and to conduct its
business as described in the Prospectus and has full power (corporate and
other) to enter into this Agreement and to carry out all the terms and
provisions hereof to be carried out by it. The Company is the only
subsidiary of the Guarantor. There are no subsidiaries of the Company.
(d) The Indenture has been duly authorized, executed and delivered
by the Company and the Guarantor and constitutes a valid and binding
agreement of each of the Company and the Guarantor enforceable against each
of the Company and the Guarantor in accordance with its terms, except as
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium and other similar laws relating to or affecting creditors'
rights generally or by general equitable principles; the Indenture conforms
to the description thereof contained in the Prospectus; the Securities have
been duly authorized, and, when duly executed, authenticated, issued and
delivered as provided in the Indenture, will be duly and validly issued and
outstanding, and will constitute valid and binding obligations of the
Company and the Guarantor entitled to the benefits of the Indenture and
enforceable in accordance with their terms, except as enforceability may be
limited by bankruptcy, insolvency, reorganization, moratorium and other
similar laws relating to or affecting creditors' rights generally or by
general equitable principles; and the Securities, when issued and
delivered, will conform to the description thereof contained in the
Prospectus.
(e) The Guarantor has an authorized capitalization as set forth in
the Prospectus, and all of the outstanding shares of Common Stock, par
value $.01 per share, and Preferred Stock, par value $.01 per share, of the
Guarantor have been duly and validly authorized and issued, are fully paid
and nonassessable and conform to the
3
<PAGE>
description thereof contained in the Prospectus; and all of the outstanding
shares of capital stock of the Company have been duly and validly
authorized and issued and are fully paid, nonassessable and owned
beneficially and of record by the Guarantor, free and clear of all liens,
encumbrances, equities or claims.
(f) There are no preemptive rights or other rights to subscribe
for or to purchase, or any restriction upon the voting of, any shares of
capital stock of the Company pursuant to the Company's certificate of
incorporation, bylaws or other governing documents or any agreement or
other instrument to which the Company is a party or by which it may be
bound other than those rights or restrictions described in the Prospectus
or contained in any document filed as an exhibit to the Registration
Statement.
(g) The execution, delivery and performance of this Agreement, the
Indenture and the Securities by the Company and the Guarantor and the
consummation of the transactions contemplated hereby and thereby will not
conflict with or result in a breach or violation of any of the terms or
provisions of, or constitute a default (or an event that with notice or the
passage of time or both would constitute a default) under, or result in the
creation or imposition of any lien or security interest on any property or
assets of the Company or the Guarantor pursuant to, any indenture,
mortgage, deed of trust, loan agreement or other agreement or instrument to
which the Company or the Guarantor is a party or by which the Company or
the Guarantor is bound or to which any of the property or assets of the
Company or the Guarantor is subject, which conflict, breach or violation
would have a material adverse effect on the business, properties,
conditions or results of operations of the Guarantor and the Company, taken
as a whole, nor will such actions result in any violation of the provisions
of the charter or bylaws of the Company or the Guarantor or any statute or
any order, rule or regulation of any court or governmental agency or body
having jurisdiction over the Company or the Guarantor or any of their
properties or assets, which violation would have a material adverse effect
on the business, properties, conditions or results of operations of the
Guarantor and the Company, taken as a whole, or result in the creation or
imposition of any lien, charge, claim or encumbrance upon any material
property or asset of the Guarantor or the Company; and except for the
registration of the Securities under the Securities Act and such consents,
approvals, authorizations, registrations or qualifications as may be
required under applicable state securities laws in connection with the
purchase and distribution of the Securities by the Underwriters, no consent
(other than consents which have been waived or satisfied), approval,
authorization or order of, or filing
4
<PAGE>
or registration with, any court or governmental agency or body is required
for the execution, delivery and performance of this Agreement or the
Indenture by the Company or the Guarantor and the consummation of the
transactions contemplated hereby and thereby.
(h) No holder of the securities of the Company or Guarantor has
a right to the registration of such securities under the Registration
Statement. Except for the Common Stock Registration Rights Agreement,
dated July 26, 1989, the registration rights of holders of outstanding
Warrants and the Registration Rights Agreement relating to the registration
under the Securities Act of the 800,000 shares of the Guarantor's 6%
Cumulative Convertible Preferred Stock and the shares of the Guarantor's
common stock issuable upon conversion thereof, as described in the
Prospectus, there are no contracts, agreements or understandings between
the Company or the Guarantor and any person granting such person the right
(other than rights which have been waived or satisfied) to require the
Company or the Guarantor to file a registration statement under the
Securities Act at any time on or prior to 180 days from the date hereof
with respect to any securities of the Company or the Guarantor owned or to
be owned by such person or to require the Company or the Guarantor to
include such securities in the securities registered pursuant to the
Registration Statement.
(i) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, neither the Company
nor the Guarantor has sustained any loss or interference with its business
from fire, explosion, flood or other calamity, whether or not covered by
insurance, or from any labor dispute or court or governmental action, order
or decree that would have a material adverse effect on the Guarantor and
the Company, taken as a whole, otherwise than as set forth or contemplated
in the Prospectus; and, since such dates, there has not been any change in
the number of shares of capital stock, any change in agreements and
instruments with respect to rights to or in connection with shares of
capital stock or any change in long-term debt of the Company or the
Guarantor (other than repayments or borrowings under its existing
indebtedness made in the ordinary course of business) except as set forth
in the Prospectus or any material adverse change in or affecting the
general affairs, management, financial position, stockholders' equity or
results of operations of the Company or the Guarantor, otherwise than as
set forth or contemplated in the Prospectus.
(j) Arthur Andersen & Co., who have certified certain financial
statements of the Guarantor and whose report appears in the Prospectus and
the Registration
5
<PAGE>
Statement, are independent public accountants as required by the Securities
Act and the Rules and Regulations.
(k) The financial statements (including the related notes and
excluding the supporting schedules and the pro forma financial data)
included in the Registration Statement, the Preliminary Prospectus and the
Prospectus present fairly the financial condition, results of operations
and changes in the financial condition of the entities purported to be
shown thereby, at the dates and for the periods indicated, and have been
prepared in conformity with generally accepted accounting principles
applied on a consistent basis throughout the periods indicated (except as
indicated therein); the supporting schedules included in the Registration
Statement present fairly the information required to be stated therein; and
the pro forma financial data included in the Registration Statement have
been prepared in accordance with all applicable rules and guidelines of the
Commission with respect to pro forma financial data, and the adjustments
used therein are appropriate to give effect to the transactions or
circumstances referred to therein.
(l) The Company and the Guarantor have good and marketable title
in fee simple to all real property and good and marketable title to all
personal property owned by them as described in the Prospectus, in each
case free and clear of all liens, encumbrances and defects except such as
are described in the Prospectus or such as do not materially affect the
value of such property and do not interfere with the use made of such
property by the Company or the Guarantor, as the case may be; and all real
property and buildings held under lease by the Company and the Guarantor
described in the Prospectus are held by them under valid, subsisting and
enforceable leases, with such exceptions as are not material and do not
materially interfere with the use made of such property and buildings by
the Company and the Guarantor.
(m) There are no legal or governmental proceedings pending to
which the Company or the Guarantor is a party or to which any property of
the Company or the Guarantor is subject which, if determined adversely to
the Company or the Guarantor, are reasonably likely to result in any
material adverse change in the condition (financial or other), results of
operations or business of the Guarantor and the Company, taken as a whole;
and to the best of the Company's or the Guarantor's knowledge, no such
proceedings are threatened or contemplated by governmental authorities or
others.
(n) Neither the Company nor the Guarantor is in violation of any
law, ordinance, governmental rule or
6
<PAGE>
regulation or court decree to which it or its property may be subject or
has failed to obtain any material license, permit, certificate, franchise
or other governmental authorization or permit necessary to the ownership of
its property or to the conduct of its business as described in the
Prospectus which violation or failure to obtain is reasonably likely to
have a material adverse effect on the condition (financial or other),
results of operations or business of the Guarantor and the Company, taken
as a whole.
(o) Neither the Company nor the Guarantor is (i) in violation of
its charter or bylaws or (ii) in default in any material respect, and no
event has occurred which, with notice or lapse of time or both, would
constitute such a default, in the due performance or observance of any
term, covenant or condition contained in any material agreement, indenture
or instrument.
(p) No labor dispute with the employees of the Company or the
Guarantor exists or to the best of the Company's or the Guarantor's
knowledge is threatened or imminent that is reasonably likely to result in
a material adverse change in the condition (financial or otherwise), net
worth or results of operations of the Guarantor and the Company, taken as a
whole.
(q) The Company and the Guarantor are insured against such losses
and risks and in such amounts as are prudent and customary in the
businesses in which they are engaged.
(r) The Company and the Guarantor have filed all foreign, federal,
state and local tax returns that are required to be filed or have requested
extensions thereof (except in any case in which the failure so to file
would not have a material adverse effect on the Guarantor and the Company,
taken as a whole) and have paid all taxes required to be paid by either of
them and any other assessment, fine or penalty levied against either of
them, to the extent that any of the foregoing is due and payable, except
for any such assessment, fine or penalty that is currently being contested
in good faith or as described in or contemplated by the Prospectus.
(s) Neither the Company nor the Guarantor is in violation of any
federal or state law or regulation relating to occupational safety and
health or to the storage, handling or transportation of hazardous or toxic
materials and the Company and the Guarantor have received all permits,
licenses or other approvals required of them under applicable federal and
state occupational safety and health and environmental laws and regulations
to conduct their respective businesses, and the Company and the Guarantor
are
7
<PAGE>
in compliance with all terms and conditions of any such permit, license or
approval, except any such violation of law or regulation, failure to
receive required permits, licenses or other approvals or failure to comply
with the terms and conditions of such permits, licenses or approvals which
would not, singly or in the aggregate, result in a material adverse change
in the condition (financial or otherwise), net worth or results of
operations of the Guarantor and the Company, taken as a whole.
(t) This Agreement has been duly authorized, executed and
delivered by each of the Company and the Guarantor, constitutes the valid
and binding agreement of each of the Company and the Guarantor, and is
enforceable against each of the Company and the Guarantor in accordance
with its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws relating
to or affecting creditors' rights generally or by general equitable
principles.
2. Purchase and Sale. Subject to the terms and conditions and in
-----------------
reliance upon the representations and warranties herein set forth, the Company
agrees to sell to each Underwriter, and each Underwriter agrees, severally and
not jointly, to purchase from the Company, at a purchase price equal to ____% of
the principal amount thereof, the principal amount of the Securities set forth
opposite such Underwriter's name in Schedule I hereto.
3. Delivery and Payment. Delivery of and payment for the Securities
--------------------
shall be made at the office of O'Melveny & Myers, 400 South Hope Street, Los
Angeles, California at 7:00 A.M., Los Angeles time, on the fifth full business
day following the date of this Agreement or at such other date or place as shall
be determined by agreement between the Representatives and the Company. This
date and time are sometimes referred to as the "Closing Date". Delivery of the
Securities shall be made to the Representatives for the respective accounts of
the several Underwriters against payment by the several Underwriters through the
Representatives of the purchase price thereof to or upon the order of the
Company by certified or official bank check or checks drawn on or by a New York
Clearing House bank and payable in next day funds. Certificates for the
Securities shall be registered in such names and in such denominations as the
Representatives may request not less than three full business days in advance of
the Closing Date.
The Company agrees to have the Securities available for inspection,
checking and packaging by the Representatives in New York, New York, not later
than 1:00 P.M. on the business day prior to the Closing Date.
8
<PAGE>
4. Agreements. The Company and the Guarantor, jointly and
----------
severally, covenant and agree with the several Underwriters:
(a) To prepare the Prospectus in a form approved by the
Representatives and to file such Prospectus pursuant to Rule 424(b) under
the Securities Act not later than Commission's close of business on the
second business day following the execution and delivery of this Agreement
or, if applicable, such earlier time as may be required by Rule 430A under
the Securities Act; to make no further amendment or any supplement to the
Registration Statement or to the Prospectus except as permitted herein; to
advise the Representatives, promptly after it receives notice thereof, of
the time when any amendment to the Registration Statement has been filed or
becomes effective or any supplement to the Prospectus or any amended
Prospectus has been filed and to furnish the Representatives with copies
thereof; to notify you promptly of any request by the Commission for any
amendment of or supplement to the Registration Statement or the Prospectus
or for additional information; to prepare and file with the Commission,
promptly upon your request, any amendments or supplements to the
Registration Statement or the Prospectus which, in your opinion, may be
necessary or advisable in connection with the distribution of the
Securities; to make no further amendment or supplement to the Registration
Statement or the Prospectus, which filing is not consented to by you after
reasonable notice thereof, such consent not to be unreasonably withheld or
delayed; to advise the Representatives, promptly after either the Company
or the Guarantor receives notice thereof, of the issuance by the Commission
of any stop order or of any order preventing or suspending the use of any
Preliminary Prospectus or the Prospectus, of the suspension of the
qualification of the Securities for offering or sale in any jurisdiction,
of the initiation or threatening of any proceeding for any such purpose;
and, in the event of the issuance of any stop order or of any order
preventing or suspending the use of any Preliminary Prospectus or the
Prospectus or suspending any such qualification, to use promptly their
respective best efforts to obtain its withdrawal;
(b) To furnish promptly to each of the Representatives and to
counsel for the Underwriters a signed copy of the Registration Statement as
originally filed with the Commission, and each amendment thereto filed with
the Commission, including all consents and exhibits filed therewith, and to
furnish to the Underwriters such number of conformed copies of the
Registration Statement, as originally filed and each amendment thereto
(excluding exhibits other than this Agreement), the Prospectus and all
amendments and supplements to any of such documents, in each
9
<PAGE>
case as soon as available and in such quantities as the Representatives may
from time to time reasonably request;
(c) Within the time during which the Prospectus relating to the
Securities is required to be delivered under the Securities Act, each of
the Company and the Guarantor shall comply with all requirements imposed
upon it by the Securities Act, as now and hereafter amended, and by the
Rules and Regulations, as from time to time in force, so far as is
necessary to permit the continuance of sales of or dealings in the
Securities as contemplated by the provisions hereof and by the Prospectus.
If during such period any event occurs as a result of which the Prospectus
as then amended or supplemented would include an untrue statement of a
material fact or omit to state a material fact necessary to make the
statements therein, in the light of the circumstances then existing, not
misleading, or if during such period it is necessary to amend the
Registration Statement or supplement the Prospectus to comply with the
Securities Act, the Company and the Guarantor shall promptly notify you and
shall amend the Registration Statement or supplement the Prospectus (at the
expense of the Company) so as to correct such statement or omission or to
effect such compliance.
(d) As soon as practicable after the Effective Date, and in any
event not later than 45 days after the end of its fiscal quarter in which
the first anniversary date of the Effective Date occurs, to make generally
available to the Company's security holders and to deliver to the
Representatives an earning statement of the Company and the Guarantor
(which need not be audited) complying with Section 11(a) of the Securities
Act and the Rules and Regulations (including, at the option of the Company,
Rule 158);
(e) For a period of three years following the date of this
Agreement, to furnish to the Representatives copies of all materials
furnished by the Guarantor to its stockholders and all public reports and
all reports and financial statements furnished by the Guarantor to the
principal national securities exchange upon which any of its securities may
be listed pursuant to requirements of or agreements with such exchange or
to the Commission pursuant to the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), or any rule or regulation of the Commission
thereunder;
(f) Promptly from time to time use its best efforts to take such
action as the Representatives may reasonably request to qualify the
Securities for offering and sale under the securities laws of such
jurisdictions as the Representatives may request and to comply with such
laws so as to permit the continuance of sales and dealings in such
jurisdictions for
10
<PAGE>
as long as may be necessary to complete the distribution of the Securities;
provided that in connection therewith the Company shall not be required to
--------
qualify as a foreign corporation or to file a general consent to service of
process in any jurisdiction;
(g) Until 180 days following the Closing Date, neither the
Company nor the Guarantor will, without the consent of the Representatives,
offer, sell or contract to sell, or otherwise dispose of, directly or
indirectly, or announce the offering of, any debt securities issued or
guaranteed by the Company or the Guarantor (other than the Securities);
provided, however, that the foregoing shall not prohibit the private offer
or sale, subsequent to 30 days following the Closing Date, of secured debt
in connection with the financing of capital expenditures.
(h) To apply the net proceeds from the sale of the Securities as
set forth in the Prospectus. The Company shall take such steps as shall be
necessary to ensure that neither the Company nor the Guarantor shall become
an "investment company" within the meaning of such term under the
Investment Company Act of 1940, as amended, and the rules and regulations
of the Commission thereunder; and
(i) Each of the Company and the Guarantor confirms as of the date
hereof that it is in compliance with all provisions of Section 1 of Laws of
Florida, Chapter 92-198, An Act Relating to Disclosure of Doing Business
-----------------------------------------------
with Cuba, and each of the Company and the Guarantor further agrees that if
---------
it commences engaging in business with the government of Cuba or with any
person or affiliate located in Cuba after the date hereof, it will provide
the Florida Department of Banking and Finance (the "Department") notice of
such business or change, as appropriate, in a form acceptable to the
Department.
5. Expenses. Whether or not this Agreement becomes effective or is
--------
terminated or the sale of the Securities to the Underwriters is consummated, the
Company agrees to pay or cause to be paid (a) the costs incident to the
authorization, issuance, sale and delivery of the Securities and any taxes
payable in that connection; (b) all fees and expenses (including, without
limitation, fees and expenses of the Company's accountants and counsel, but
excluding fees and expenses of counsel for the Underwriters) in connection with
the preparation, printing and filing under the Securities Act of the
Registration Statement (including the financial statements therein and all
amendments and exhibits thereto), each Preliminary Prospectus, the Prospectus
and any amendments or supplements of the foregoing; (c) the costs of
distributing the Registration Statement as originally filed and each amendment
thereto and any post-effective amendments thereof (including, in each case,
exhibits), any Preliminary Prospectus, the Prospectus and any amendment or
supplement to the Prospectus; (d) the costs of printing, delivering and shipping
this Agreement; (e) the costs
11
<PAGE>
of distributing the terms of the agreement relating to the organization of the
underwriting syndicate and the selling group to the members thereof by mail,
telex or other means of communication; (f) the filing fees incident to securing
any required review by the National Association of Securities Dealers, Inc. of
the terms of sale of the Securities; (g) any fees charged by securities rating
services for rating the Securities; (h) the fees and expenses of qualifying the
Securities under the securities laws of the several jurisdictions as provided in
Section 4(f) and of preparing, printing and distributing a Blue Sky Memorandum
(including reasonable related fees and expenses of counsel to the Underwriters);
(i) the cost of preparing and printing certificates representing the Securities;
(j) the fees and expenses of the Trustee and any agent of the Trustee and the
fees and disbursements of counsel for the Trustee in connection with the
Indenture and the Securities; and (k) all other costs and expenses incident to
the performance of the obligations of the Company and the Guarantor under this
Agreement; provided that, except as provided in Sections 5, 7 and 10, the
--------
Underwriters shall pay their own costs and expenses, including the costs and
expenses of their counsel, any transfer taxes on resale of any of the Securities
by them and the expenses of advertising any offering of the Securities made by
them.
6. Conditions to the Obligations of the Underwriters. The respective
-------------------------------------------------
obligations of the Underwriters hereunder are subject to the accuracy, when made
and as of the Closing Date, of the representations and warranties of the Company
and the Guarantor contained herein, to the performance by the Company and the
Guarantor of their obligations hereunder, and to each of the following
additional terms and conditions:
(a) The Prospectus shall have been timely filed with the
Commission; all post-effective amendments to the Registration Statement
shall have become effective, and all filings required by Rule 424 of the
Rules and Regulations shall have been made; no stop order suspending the
effectiveness of the Registration Statement or any part thereof shall have
been issued and no proceeding for that purpose shall have been initiated or
threatened by the Commission; and any request of the Commission for
inclusion of additional information in the Registration Statement or the
Prospectus or otherwise shall have been complied with.
(b) No Underwriter shall have been advised by the Company or shall
have discovered and disclosed to the Company that the Registration
Statement or the Prospectus or any amendment or supplement thereto contains
an untrue statement of fact which in the opinion of the Representatives or
counsel for the Underwriters, is material or omits to state a fact which,
in the opinion of the Representatives or such counsel, is material and is
required
12
<PAGE>
to be stated therein or is necessary to make the statements therein not
misleading.
(c) All corporate proceedings and other legal matters incident to
the authorization, form and validity of this Agreement, the Indenture, the
Securities, the Registration Statement and the Prospectus, and all other
legal matters relating to this Agreement and the transactions contemplated
hereby shall be reasonably satisfactory in all material respects to counsel
for the Underwriters, and the Company and the Guarantor shall have
furnished to such counsel all documents and information that they may
reasonably request to enable them to pass upon such matters.
(d) The Representatives shall have received from O'Melveny &
Myers, counsel for the Underwriters, such opinion or opinions, dated the
Closing Date, with respect to the issuance and sale of the Securities, the
Indenture, the Registration Statement, the Prospectus, and other related
matters as the Representatives may reasonably request, and such counsel
shall have received such documents and information as they request to
enable them to pass upon such matters.
(e) Riordan & McKinzie, special counsel to the Company, shall have
furnished to the Representatives its written opinion, addressed to the
Underwriters and dated the Closing Date, in form and substance satisfactory
to the Representatives, to the effect that:
(i) the Company and the Guarantor have been duly incorporated
and are validly existing as corporations in good standing under the
laws of their respective jurisdictions of incorporation, are duly
qualified to do business and are in good standing as foreign
corporations in each jurisdiction in which their respective ownership
or lease of property or the conduct of their respective businesses
requires such qualification except to the extent that the failure to
be so qualified or be in good standing would not have a material
adverse effect on the Guarantor and the Company, taken as a whole, and
have all corporate power and authority necessary to own or hold their
respective properties and conduct the businesses as described in the
Prospectus;
(ii) the Guarantor has an authorized capitalization as set
forth in the Prospectus, and all outstanding shares of capital stock
of the Guarantor have been duly and validly authorized and issued, are
fully paid and nonassessable, and conform in all material respects to
the description thereof contained
13
<PAGE>
in the Prospectus; and all of the outstanding shares of capital stock
of the Company have been duly and validly authorized and issued and
are fully paid, nonassessable and owned of record by the Guarantor, to
the best of such counsel's knowledge, free and clear of all liens,
encumbrances, equities or claims;
(iii) the Indenture conforms to the requirements of the Trust
Indenture Act and the applicable rules and regulations thereunder and
has been duly authorized, executed and delivered by the Company and
the Guarantor and constitutes a valid and binding agreement of the
Company and the Guarantor enforceable against the Company and the
Guarantor in accordance with its terms, except as may be limited by
bankruptcy, insolvency, reorganization, moratorium and other similar
laws relating to or affecting creditors' rights generally or by
general equitable principles (regardless of whether such
enforceability is considered in a proceeding in equity or at law); the
Securities and the Guarantees have been duly authorized and executed
by the Company and the Guarantor, respectively, and when duly
authenticated as provided in the Indenture and delivered to and paid
for by the Underwriters pursuant to this Agreement, will be duly and
validly issued and outstanding, and will constitute valid and binding
obligations of the Company and the Guarantor, respectively, entitled
to the benefits of the Indenture and enforceable in accordance with
their terms, except as may be limited by bankruptcy, insolvency,
reorganization, moratorium and other similar laws relating to or
affecting creditors' rights generally or by general equitable
principles (regardless of whether such enforceability is considered in
a proceeding in equity or at law); and the Securities conform in all
material respects to the description thereof contained in the
Prospectus;
(iv) to the best of such counsel's knowledge, there are no
legal or governmental proceedings pending to which the Company or the
Guarantor is a party or of which any property of the Company or the
Guarantor is the subject which, if determined adversely to the Company
or the Guarantor, would have a material adverse effect on the
consolidated financial position, stockholders' equity, results of
operations or business of the Guarantor and the Company, taken as a
whole; and, to the best of such counsel's knowledge, no such
proceedings are threatened or contemplated by governmental authorities
or threatened by others and there is no franchise, contract or other
document of a character required to be described in the Registration
14
<PAGE>
Statement or the Prospectus, or to be filed as an exhibit to the
Registration Statement, which is not described or filed as required;
and the statements included in the Prospectus describing any legal
proceedings or material contracts or agreements relating to the
Company or the Guarantor fairly summarize such matters;
(v) the Registration Statement and all post-effective
amendments thereto have been declared effective under the Securities
Act and, to the best of such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement has been
issued and, to the knowledge of such counsel, no proceeding for that
purpose is pending or threatened by the Commission;
(vi) the Registration Statement and the Prospectus and any
further amendments or supplements thereto made by the Company prior to
the Closing Date (other than the financial statements and related
schedules therein, as to which such counsel need express no opinion)
comply as to form in all material respects with the requirements of
the Securities Act, the Rules and Regulations, the Trust Indenture Act
and the rules and regulations of the Commission thereunder;
(vii) the Company has corporate power and corporate authority
to enter into this Agreement and the Indenture, to issue, sell and
deliver the Securities, and to carry out all of the terms and
provisions of this Agreement, the Indenture and the Securities to be
carried out by it; and the execution and delivery of this Agreement
has been duly authorized by all necessary corporate action of the
Company and this Agreement has been duly executed and delivered by the
Company;
(viii) the Guarantor has corporate power and corporate
authority to enter into this Agreement and the Indenture, to issue,
sell and deliver the Guarantees, and to carry out all of the terms and
provisions of this Agreement, the Indenture and the Guarantees to be
carried out by it; and the execution and delivery of the Agreement has
been duly authorized by all necessary corporate action of the
Guarantor and this Agreement has been duly executed and delivered by
the Guarantor; and
(ix) based solely upon on such counsel's review of the
agreements referred to in Section 1(h), no holder of securities of the
Company or the Guarantor has a right to the registration of such
securities under the Registration Statement; and
15
<PAGE>
(x) neither the execution and delivery of the Indenture, the
issue and sale of the Securities, nor the consummation of any other of
the transactions herein contemplated will conflict with or result in a
breach or violation of any of the terms or provisions of, or
constitute a default (or an event that with notice or lapse of time or
both would become a default) under, any indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument identified as
material in an Officers' Certificate of the Guarantor and the Company
to which the Guarantor or the Company is a party or by which the
Guarantor or the Company is bound or to which any of the property or
assets of the Guarantor or the Company is subject which conflict,
breach or violation would have a material adverse effect on the
properties, business, results of operations or conditions (financial
or otherwise) of the Guarantor and the Company, taken as a whole, nor
will such actions result in any violation of the provisions of the
charter or bylaws of the Guarantor or the Company or to the best of
such counsel's knowledge any statute or any order, rule or regulation
known to such counsel of any court or governmental agency or body
having jurisdiction over the Guarantor or the Company or any of their
properties which violation would have a material adverse effect on the
business, properties, conditions or results of operations of the
Guarantor and the Company, taken as a whole; and, except for the
registration of the Securities under the Securities Act, such
consents, approvals, authorizations, registrations or qualifications
as may be required under the Exchange Act and applicable state
securities laws in connection with the purchase and distribution of
the Securities by the Underwriters and the approval of the
underwriting arrangements by the NASD, no consent (other than consents
which have been waived or satisfied), approval, authorization or order
of, or filing or registration with, any such court or governmental
agency or body is required for the execution, delivery and performance
of this Agreement, the Indenture or the Securities by the Company and
the Guarantor and the consummation of the transactions contemplated
hereby and thereby.
In rendering such opinion, such counsel may (i) state that its opinion
is limited to matters governed by the Federal laws of the United States of
America, the laws of the State of California and the General Corporate Law of
the State of Delaware and that such counsel is not admitted to practice law in
the State of Delaware and (ii) rely (to the extent such counsel deems proper and
specifies in its opinion), as to matters involving the application of the laws
of the State of New York upon the opinion of O'Melveny & Myers and as to the
application of the laws of other
16
<PAGE>
jurisdictions upon the opinion of other counsel of good standing (provided that
such other counsel is satisfactory to counsel for the Underwriters and such
other counsel furnishes a copy of its opinion to the Representatives). Such
counsel shall also state that they do not believe that the Registration
Statement, as of its effective date (except for the Form T-1 filed by the
Trustee in connection with the Registration Statement and the financial
statements and other financial and statistical information contained therein, as
to which such counsel need not express any belief), contained any untrue
statement of a material fact or omitted to state any material fact required to
be stated therein or necessary to make the statements therein not misleading or
that the Prospectus, as of its date or the date of such opinion (except for the
financial statements and other financial and statistical information contained
therein), included or includes any untrue statement of a material fact or
omitted or omits to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
(f) On the Closing Date, the Company shall have furnished to the
Representatives a letter (the "bring-down letter") of Arthur Andersen &
Co., addressed to the Underwriters and dated the Closing Date, in form and
substance satisfactory to the Representatives, (i) confirming that they are
independent public accountants within the meaning of the Securities Act and
are in compliance with the applicable requirements relating to the
qualification of accountants under Rule 2-01 of Regulation S-X of the
Commission, (ii) stating, as of the date of the bring-down letter (or, with
respect to matters involving changes or developments since the respective
dates as of which specified financial information is given in the
Prospectus, as of a date not more than five days prior to the date of the
bring-down letter), the conclusions and findings of such firm with respect
to the financial information and other matters covered by its letter (the
"initial letter") delivered to the Representatives concurrently with the
execution of this Agreement and (iii) confirming in all material respects
the conclusions and findings set forth in the initial letter.
(g) Each of the Guarantor and the Company shall have furnished to
the Representatives a certificate, dated the Closing Date, of its President
and its Chief Financial Officer stating that:
(i) The representations, warranties and agreements of the
Guarantor or the Company, as the case may be, in this Agreement are
true and correct as if made at and as of the Closing Date; the
Guarantor or the Company, as the case may be, has complied in all
material respects with all agreements contained herein;
17
<PAGE>
and the obligations of the Guarantor or the Company, as the case may
be, set forth herein have been fulfilled;
(ii) To the best of such officer's knowledge, no stop order
suspending the effectiveness of the Registration Statement has been
issued, and no proceeding for that purpose has been initiated or
threatened; and
(iii) They have carefully examined the Registration Statement
and the Prospectus and, in their opinion (A) as of the Effective Date,
the Registration Statement and Prospectus did not include any untrue
statement of a material fact and did not omit to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading, and (B) since the Effective Date no event has
occurred which should have been set forth in such a supplement or
amendment to the Registration Statement or Prospectus.
(h) Since the Effective Date, (i) neither the Company nor the
Guarantor shall have sustained any loss or interference with its business
from fire, explosion, flood or other calamity, whether or not covered by
insurance, or from any labor dispute or court or governmental action, order
or decree, otherwise than as set forth or contemplated in the Prospectus
and (ii) there shall not have been any change in the number of shares of
capital stock, any change in agreements and instruments with respect to
rights to or in connection with shares of capital stock or, any change in
long-term debt of the Company or the Guarantor (other than repayments or
borrowings under its existing indebtedness made in the ordinary course of
business) except as set forth in the Prospectus or any change in or
affecting the general affairs, management, financial condition,
stockholders' equity or results of operations of the Company or the
Guarantor, otherwise than as set forth or contemplated in the Prospectus,
the effect of which, in any such case described in clause (i) or (ii), is,
in the reasonable judgment of the Representatives, so material and adverse
as to make it impracticable or inadvisable to proceed with the public
offering or the delivery of the Securities on the terms and in the manner
contemplated in the Prospectus.
(i) Subsequent to the date of this Agreement there shall not have
occurred any of the following: (i) trading in securities generally on the
New York Stock Exchange, the American Stock Exchange or the
over-the-counter market shall have been suspended or minimum prices shall
have been established on either of such exchanges or such market by the
Commission, by such exchange or by any other regulatory body or
governmental authority having jurisdiction, (ii) a
18
<PAGE>
banking moratorium shall have been declared by Federal or state
authorities, (iii) the United States shall have become engaged in
hostilities, there shall have been an escalation in hostilities involving
the United States or there shall have been a declaration of a national
emergency or war by the United States or (iv) there shall have occurred
such a material adverse change in general economic, political or financial
conditions (or the effect of international conditions on the financial
markets in the United States shall be such) as to make it, in the judgment
of a majority in interest of the several Underwriters, inadvisable or
impractical to proceed with the public offering or the delivery of the
Securities on the terms and in the manner contemplated in the Prospectus.
(j) Subsequent to the date of this Agreement, there shall not have
been any decrease in the rating of the Securities by any "nationally
recognized statistical rating organization" (as defined for purposes of
Rule 436(g) under the Act) or any notice given of any intended or potential
decrease in such rating or of a possible change in such rating that does
not indicate the direction of the possible change.
(k) On or prior to the Closing Date, the Company shall have duly
mailed notice of the redemption of the Company's 14.5% Senior Subordinated
Discount Notes.
(l) The Representatives shall have been furnished such additional
documents and certificates as you or counsel for the Underwriters may
reasonably request.
If any of the conditions specified in this Section 6 shall not have been
fulfilled in all material respects when and as provided in this Agreement, or if
any of the opinions, letters, evidence and certificates mentioned above or
elsewhere in the Agreement shall not be in all material respects satisfactory in
form and substance to the Representatives and counsel for the Underwriters, this
Agreement and all obligations of the Underwriters hereunder may be canceled at,
or at any time prior to, the Closing Date by the Representatives. Notice of
such cancellation shall be given to the Company in writing or by telephone or
telegraph confirmed in writing.
7. Indemnification and Contribution.
--------------------------------
(a) The Company and the Guarantor, jointly and severally, shall
indemnify and hold harmless each Underwriter and each person, if any, who
controls any Underwriter within the meaning of the Securities Act, from and
against any loss, claim, damage or liability, joint or several, or any
action in respect thereof (including, but not limited to, any loss, claim,
damage, liability or action relating to purchases and sales of Securities),
to which that Underwriter or controlling person may become subject, under
the Securities Act or otherwise, insofar as such loss, claim, damage,
liability or action arises out of, or is
19
<PAGE>
based upon, (i) any untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus as amended or supplemented, or (ii) the
omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not
misleading, and shall reimburse each Underwriter and each such controlling
person promptly upon demand for any legal or other expenses reasonably
incurred by that Underwriter or controlling person in connection with
investigating or defending or preparing to defend against any such loss,
claim, damage, liability or action as such expenses are incurred,
notwithstanding the possibility that payments for such expenses might later
be held to be improper, in which case such payments shall be promptly
refunded; provided, however, that neither the Company nor the Guarantor
-------- -------
shall be liable in any such case to the extent that any such loss, claim,
damage, liability or action arises out of, or is based upon, any untrue
statement or alleged untrue statement or omission or alleged omission made
in any Preliminary Prospectus, the Registration Statement or the Prospectus
as amended or supplemented, in reliance upon and in conformity with written
information furnished to the Company through the Representatives by or on
behalf of any Underwriter specifically for inclusion therein; provided,
--------
further, however, that the Company shall not be liable to any Underwriter
------- -------
pursuant to this Section 7 in any such case to the extent that such loss,
claim, damage, liability or action is caused by any such untrue statement
of a material fact contained in, or omission of a material fact from any
preliminary prospectus if (A) such Underwriter sold Securities to the
person alleging such loss, claim, damage, liability or action without
sending or giving such person, and such person shall not have otherwise
received, a copy of the Prospectus within the time required by the
Securities Act and (B) the Prospectus would have corrected such untrue
statement or omission and the Company had previously furnished copies
thereof to such Underwriter. The foregoing indemnity agreement is in
addition to any liability which the Company and the Guarantor may otherwise
have to any Underwriter or to any controlling person of that Underwriter.
(b) Each Underwriter, severally and not jointly, shall indemnify
and hold harmless the Company, the Guarantor, each of their directors, each
of their officers who signed the Registration Statement and each person, if
any, who controls the Company or the Guarantor within the meaning of the
Securities Act, from and against any loss, claim, damage or liability,
joint or several, or any action in respect thereof, to which the Company,
the Guarantor or any such director, officer or controlling person may
become subject, under the Securities Act or otherwise, insofar as
20
<PAGE>
such loss, claim, damage, liability or action arises out of, or is based
upon, (i) any untrue statement or alleged untrue statement of a material
fact contained in any Preliminary Prospectus, the Registration Statement or
the Prospectus as amended or supplemented, or (ii) the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, but in each case
only to the extent that the untrue statement or alleged untrue statement or
omission or alleged omission was made in reliance upon and in conformity
with written information furnished to the Company through the
Representatives by or on behalf of that Underwriter specifically for
inclusion therein. The foregoing indemnity agreement is in addition to any
liability which any Underwriter may otherwise have to the Company, the
Guarantor or any such director, officer or controlling person.
(c) Promptly after receipt by an indemnified party under this
Section 7 of notice of any claim or the commencement of any action, the
indemnified party shall, if a claim in respect thereof is to be made
against the indemnifying party under this Section 7, notify the
indemnifying party in writing of the claim or the commencement of that
action; provided, however, that the failure to notify the indemnifying
-------- -------
party shall not relieve it from any liability which it may have under this
Section 7 except to the extent it has been materially prejudiced by such
failure, and, provided further, that the failure to notify the indemnifying
-------- -------
party shall not relieve it from any liability that it may have to an
indemnified party otherwise than under this Section 7. If any such claim
or action shall be brought against an indemnified party, and it shall
notify the indemnifying party thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it wishes, jointly
with any other similarly notified indemnifying party, to assume the defense
thereof with counsel reasonably satisfactory to the indemnified party.
After notice from the indemnifying party to the indemnified party of its
election to assume the defense of such claim or action, the indemnifying
party shall not be liable to the indemnified party under this Section 7 for
any legal or other expenses subsequently incurred by the indemnified party
in connection with the defense thereof other than reasonable costs of
investigation; provided, however, that the Representatives shall have the
-------- -------
right to employ counsel to represent jointly the Representatives and those
other Underwriters and their respective controlling persons who may be
subject to liability arising out of any claim in respect of which indemnity
may be sought by the Underwriters against the Company or the Guarantor
under this Section 7 if the Representatives have been advised by counsel in
writing that there may be one or more legal defenses available to the
Representatives, the Underwriters
21
<PAGE>
and controlling persons which are different from or additional to those
available to the indemnifying party. In such case, if the Representatives
have notified the indemnifying party in writing that they elect to employ
separate counsel at the expense of the indemnifying party, the indemnifying
party shall not have the right to assume the defense of such action, claim
or proceeding on behalf of the Underwriters, it being understood, however,
that the indemnifying party shall not be liable for the reasonable fees and
expenses of more than one separate firm of attorneys (together with
appropriate local counsel) at any time for all such indemnified parties,
unless in the reasonable judgment of counsel to any such indemnified party,
expressed in writing to the Company, a conflict of interest may exist
between such indemnified party and any other of such indemnified parties
with respect to such claim or action, in which event the indemnifying party
shall be obligated to pay the reasonable fees and expenses of the minimum
number of counsel required to represent all of the indemnified parties.
(d) If the indemnification provided for in this Section 7 shall
for any reason be unavailable to or insufficient to hold harmless an
indemnified party under Section 7(a) or (b) in respect of any loss, claim,
damage or liability, or any action in respect thereof, referred to therein,
then each indemnifying party shall, in lieu of indemnifying such
indemnified party, contribute to the amount paid or payable by such
indemnified party as a result of such loss, claim, damage or liability, or
action in respect thereof, (i) in such proportion as shall be appropriate
to reflect the relative benefits received by the Guarantor and the Company
on the one hand and the Underwriters on the other from the offering of the
Securities or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law or if the indemnified party failed to give the
notice required under Section 7(c), in such proportion as is appropriate to
reflect not only the relative benefits referred to in clause (i) above but
also the relative fault of the Guarantor and the Company on the one hand
and the Underwriters on the other with respect to the statements or
omissions which resulted in such loss, claim, damage or liability, or
action in respect thereof, as well as any other relevant equitable
considerations. The relative benefits received by the Guarantor and the
Company on the one hand and the Underwriters on the other with respect to
such offering shall be deemed to be in the same proportion as the total net
proceeds from the offering of the Securities purchased under this Agreement
(before deducting expenses) received by the Company bear to the total
underwriting discounts and commissions received by the Underwriters with
respect to the Securities purchased under this Agreement, in each case as
22
<PAGE>
set forth in the table on the cover page of the Prospectus. The relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact relates to information supplied
by the Company or the Guarantor on the one hand or the Underwriters on the
other, the intent of the parties and their relative knowledge, access to
information and opportunity to correct or prevent such statement or
omission. The Company, the Guarantor and the Underwriters agree that it
would not be just and equitable if contributions pursuant to this Section
7(d) were to be determined by pro rata allocation (even if the Underwriters
were treated as one entity for such purpose) or by any other method of
allocation which does not take into account the equitable considerations
referred to herein. The amount paid or payable by an indemnified party as
a result of the loss, claim, damage or liability, or action in respect
thereof, referred to above in this Section 7(d) shall be deemed to include,
for purposes of this Section 7(d), any legal or other expenses reasonably
incurred by such indemnified party in connection with investigating,
preparing to defend or defending any such action or claim. Notwithstanding
the provisions of this Section 7(d), no Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at
which the Securities underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which such
Underwriter has otherwise paid or become liable to pay by reason of any
untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute as provided in this Section 7(d)
are several in proportion to their respective underwriting obligations and
not joint. Each party entitled to contribution agrees that upon the
service of a summons or other initial legal process upon it in any action
instituted against it in respect to which contribution may be sought, it
shall promptly give written notice of such service to the party or parties
from whom contribution may be sought, but the omission so to notify such
party or parties of any such service shall not relieve the party from whom
contribution may be sought for any obligation it may have hereunder or
otherwise except to the extent it has been materially prejudiced by such
omission.
(e) The Underwriters severally confirm that the statements with
respect to the public offering of the Securities set forth in the last
paragraph on the cover page of, and in the third paragraph and the second
sentence of the fifth paragraph under the caption "Underwriting" in, the
23
<PAGE>
Prospectus are correct and were furnished in writing to the Company by or
on behalf of the Underwriters severally for inclusion in the Registration
Statement and the Prospectus.
8. Default by an Underwriter. If any one or more Underwriters shall
-------------------------
fail to purchase and pay for any of the Securities agreed to be purchased by
such Underwriter or Underwriters hereunder and such failure to purchase shall
constitute a default in the performance of its or their obligations under this
Agreement, the remaining non-defaulting Underwriters shall be obligated
severally to purchase and pay for (in the respective proportions which the
amount of Securities set forth opposite their names in Schedule I hereto bears
to the aggregate amount of Securities set forth opposite the names of all the
remaining Underwriters) the Securities which the defaulting Underwriter or
Underwriters agreed but failed to purchase; provided, however, that the
-------- -------
remaining non-defaulting Underwriters shall not be obligated to purchase any of
the Securities if the aggregate principal amount of Securities which the
defaulting Underwriter or Underwriters agreed but failed to purchase exceeds
9.09% of the aggregate principal amount of Securities and any remaining
non-defaulting Underwriter shall not be obligated to purchase more than 110% of
the principal amount of Securities set forth opposite its name in Schedule I
hereto. If the foregoing maximums are exceeded, the remaining non-defaulting
Underwriters, or those other underwriters satisfactory to the Representatives
who so agree, shall have the right, but shall not be obligated, to purchase, in
such proportion as may be agreed upon among them, all the Securities to be
purchased by the defaulting Underwriter or Underwriters. If the remaining
Underwriters or other underwriters satisfactory to the Representatives do not
elect to purchase Securities which the defaulting Underwriter or Underwriters
agreed but failed to purchase, this Agreement shall terminate without liability
on the part of any non-defaulting Underwriter of the Company except that the
Company will continue to be liable for the payment of expenses to the extent set
forth in Section 9. As used in this Agreement, the term "Underwriter" includes,
for all purposes of this Agreement unless the context requires otherwise, any
party not listed in Schedule I hereto who, pursuant to this Section 8, purchases
Securities which a defaulting Underwriter agreed but failed to purchase.
Nothing contained herein shall relieve a defaulting Underwriter of any
liability it may have for damages caused by its default. If other underwriters
are obligated or agree to purchase the Securities of a defaulting or withdrawing
Underwriter, either the Representatives or the Company may postpone the Closing
Date for up to seven full business days in order to effect any changes that in
the opinion of counsel for the Company or counsel for the Underwriters may be
necessary in the Registration Statement, the Prospectus or in any other document
or arrangement.
24
<PAGE>
9. Termination. The obligations of the Underwriters hereunder may
-----------
be terminated by the Representatives, by notice given to and received by the
Company prior to delivery of and payment for the Securities if, prior to that
time, any of the events described in Section 6(i) shall have occurred or if the
Underwriters shall decline to purchase the Securities for any reason permitted
under this Agreement.
10. Reimbursement of Underwriters' Expenses. If (a) the Company
---------------------------------------
shall fail to tender the Securities for delivery to the Underwriters for any
reason permitted under this Agreement or (b) the Underwriters shall decline to
purchase the Securities for any reason permitted under this Agreement (including
the termination of this Agreement pursuant to Section 9 other than by reason of
the occurrence of any of the events described in Sections 6(i) or 8), the
Company shall reimburse the Underwriters for the reasonable fees and expenses of
their counsel and for such other out-of-pocket expenses as shall have been
incurred by them in connection with this Agreement and the proposed purchase of
the Securities, and upon demand the Company shall pay the full amount thereof to
the Representatives. If this Agreement is terminated pursuant to Section 8 by
reason of the default of one or more Underwriters or pursuant to Section 9 by
reason of the occurrence of any of the events described in Section 6(i), the
Company shall not be obligated to reimburse any defaulting Underwriter on
account of those expenses.
11. Notices, etc. All statements, requests, notices and agreements
------------
hereunder shall be in writing, and:
(a) if to the Underwriters, shall be delivered or sent by mail,
telex or facsimile transmission to Lehman Brothers Inc., 3 World
Financial Center, 11th Floor, New York, New York 10285-1100,
Attention: Syndicate Registration Department;
(b) if to the Company or the Guarantor, shall be delivered or
sent by mail, telex or facsimile transmission to the address of the
Company set forth in the Registration Statement, Attention: Chief
Financial Officer;
provided, however, that any notice to an Underwriter pursuant to Section 7 shall
- -------- -------
be delivered or sent by mail, telex or facsimile transmission to such
Underwriter at its address set forth in its acceptance telex to the
Representatives, which address will be supplied to any other party hereto by the
Representatives upon request. Any such statements, requests, notices or
agreements shall take effect at the time of receipt thereof. The Company and
the Guarantor shall be entitled to act and rely upon any request, consent,
notice or agreement given or made on behalf of the Underwriters by Lehman
Brothers Inc. on behalf of the Representatives.
25
<PAGE>
12. Persons Entitled to Benefit of Agreement. This Agreement shall
----------------------------------------
inure to the benefit of and be binding upon the Underwriters, the Company and
the Guarantor and their respective successors and the officers and directors and
controlling persons referred to in Section 7 hereof, and no other person will
have any right or obligation hereunder. Nothing in this Agreement is intended
or shall be construed to give any person, other than the persons referred to in
this Section 12, any legal or equitable right, remedy or claim under or in
respect of this Agreement or any provision contained herein.
13. Applicable Law. This Agreement shall be governed by and
--------------
construed in accordance with the laws of the State of New York, without giving
effect to the choice of law or conflict of law principles thereof.
14. Jurisdiction; Consent to Service of Process.
-------------------------------------------
(a) The Company and the Guarantor irrevocably and unconditionally
submit to the jurisdiction and venue of any United States District Court or
state court of competent jurisdiction in which any action, suit or
proceeding is brought against any Underwriter, any director, officer,
employee or agent of any Underwriter or any person who controls any
Underwriter, in which such person, as a defendant, may seek to implead the
Company or the Guarantor for contribution or indemnity in accordance with
Section 7. In addition, the Company and the Guarantor hereby irrevocably
and unconditionally submit to the jurisdiction and venue of the United
States District Court for the Southern District of New York or, if subject
matter jurisdiction is not available thereunder, of any New York State
Court sitting in New York County, in any other action or proceeding, other
than an action or proceeding referred to in the immediately preceding
sentence, arising out of or relating to this Agreement.
(b) Nothing in this Agreement is intended to or does confer any
rights on any third party.
15. Counterparts. This Agreement may be executed in one or more
------------
counterparts and, if executed in more than one counterpart, the executed
counterparts shall each be deemed to be an original but all such counterparts
shall together constitute one and the same instrument.
16. Headings. The headings herein are inserted for convenience of
--------
reference only and are not intended to be part of, or to affect the meaning or
interpretation of, this Agreement.
26
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicate hereof, whereupon
this letter and your acceptance shall represent a binding agreement among the
Company, the Guarantor and the several Underwriters.
Very truly yours,
ORCHARD SUPPLY HARDWARE CORPORATION
By: _________________________________
Maynard Jenkins
President and Chief Executive Officer
ORCHARD SUPPLY HARDWARE STORES CORPORATION
By: __________________________________
Maynard Jenkins
President and Chief Executive Officer
Accepted:
LEHMAN BROTHERS INC.
JEFFERIES & COMPANY, INC.
MONTGOMERY SECURITIES
For themselves and as
Representatives for each of
the several Underwriters named
in Schedule I hereto
By: LEHMAN BROTHERS INC.
By: _____________________________
Authorized Representative
27
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Principal Amount
of Securities to
Underwriters be Purchased
------------ ----------------
<S> <C>
Lehman Brothers $
Jefferies & Company, Inc.
Montgomery Securities
____________
Total ................. $100,000,000
============
</TABLE>
28
<PAGE>
ORCHARD SUPPLY HARDWARE CORPORATION, the Company
and
ORCHARD SUPPLY HARDWARE STORES CORPORATION, the Guarantor
$100,000,000
% Senior Notes due 2002
___________________
INDENTURE
Dated as of [ ], 1994
___________________
U.S. Trust Company of California, N.A., as Trustee
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
ARTICLE ONE
<S> <C> <C>
DEFINITIONS AND INCORPORATION BY REFERENCE ........... 1
SECTION 1.01. Definitions....................................... 1
SECTION 1.02. Other Definitions............................... 16
SECTION 1.03. Incorporation by Reference of Trust
Indenture Act................................... 16
SECTION 1.04. Rules of Construction........................... 17
<CAPTION>
ARTICLE TWO
<S> <C> <C>
THE SECURITIES .......................... 17
SECTION 2.01. Form and Dating................................. 17
SECTION 2.02. Execution and Authentication.................... 18
SECTION 2.03. Registrar and Paying Agent...................... 19
SECTION 2.04. Paying Agent to Hold Money in Trust............. 19
SECTION 2.05. Securityholder Lists............................ 20
SECTION 2.06. Transfer and Exchange........................... 20
SECTION 2.07. Replacement Securities.......................... 21
SECTION 2.08. Outstanding Securities.......................... 22
SECTION 2.09. Treasury Securities............................. 22
SECTION 2.10. Temporary Securities............................ 23
SECTION 2.11. Cancellation.................................... 23
SECTION 2.12. Defaulted Interest.............................. 23
<CAPTION>
ARTICLE THREE
<S> <C> <C>
REDEMPTION............................. 24
SECTION 3.01. Notices to Trustee.............................. 24
SECTION 3.02. Selection of Securities To Be Redeemed.......... 24
SECTION 3.03. Notice of Redemption............................ 25
SECTION 3.04. Effect of Notice of Redemption.................. 25
SECTION 3.05. Deposit of Redemption Price; Unclaimed Moneys... 26
SECTION 3.06. Securities Redeemed in Part..................... 26
<CAPTION>
ARTICLE FOUR
<S> <C> <C>
COVENANTS.............................. 27
SECTION 4.01. Payment of Securities........................... 27
SECTION 4.02. Maintenance of Office or Agency................. 27
SECTION 4.03. Limitation on Transactions with Affiliates...... 28
SECTION 4.04. Limitation on Indebtedness...................... 28
SECTION 4.05. Limitation on Liens............................. 29
SECTION 4.06. Limitation on Asset Dispositions, Etc........... 29
</TABLE>
i
<PAGE>
<TABLE>
<S> <C> <C>
SECTION 4.07. Limitation on Restricted Payments............... 32
SECTION 4.08. Corporate Existence............................. 34
SECTION 4.09. Payment of Taxes and Other Claims............... 34
SECTION 4.10. Notice of Defaults.............................. 34
SECTION 4.11. Maintenance of Properties....................... 35
SECTION 4.12. Compliance Certificates......................... 35
SECTION 4.13. Reports......................................... 36
SECTION 4.14. Waiver of Stay, Extension or Usury Laws......... 36
SECTION 4.15. Repurchase of Securities Upon Change of Control. 36
SECTION 4.16. Limitation on Sale and Leaseback Transactions... 38
SECTION 4.17. Limitation on Dividends and Other Payment
Restrictions Affecting Subsidiaries............. 38
SECTION 4.18. Limitation on Issuance of Preferred
Stock by Subsidiaries........................... 39
<CAPTION>
ARTICLE FIVE
<S> <C> <C>
MERGERS; SUCCESSOR CORPORATION................ 39
SECTION 5.01. Restriction on Mergers and Consolidations
and Sales of Assets............................. 39
SECTION 5.02. Successor Corporation Substituted............... 40
<CAPTION>
ARTICLE SIX
<S> <C> <C>
DEFAULT AND REMEDIES........................ 41
SECTION 6.01. Events of Default............................... 41
SECTION 6.02. Acceleration.................................... 42
SECTION 6.03. Other Remedies.................................. 43
SECTION 6.04. Waiver of Past Default.......................... 43
SECTION 6.05. Control by Majority............................. 43
SECTION 6.06. Limitation on Suits............................. 44
SECTION 6.07. Rights of Holders To Receive Payment............ 44
SECTION 6.08. Collection Suit by Trustee...................... 44
SECTION 6.09. Trustee May File Proofs of Claim................ 45
SECTION 6.10. Priorities...................................... 45
SECTION 6.11. Undertaking for Costs........................... 46
<CAPTION>
ARTICLE SEVEN
<S> <C> <C>
TRUSTEE..................................... 46
SECTION 7.01. Duties of Trustee............................... 46
SECTION 7.02. Rights of Trustee............................... 47
SECTION 7.03. Individual Rights of Trustee.................... 48
SECTION 7.04. Trustee's Disclaimer............................ 48
SECTION 7.05. Notice of Defaults.............................. 48
SECTION 7.06. Reports by Trustee to Holders................... 49
SECTION 7.07. Compensation and Indemnity...................... 49
SECTION 7.08. Replacement of Trustee.......................... 50
SECTION 7.09. Successor Trustee by Merger, etc................ 51
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C> <C>
SECTION 7.10. Eligibility; Disqualification................... 51
SECTION 7.11. Preferential Collection of Claims............... 52
<CAPTION>
ARTICLE EIGHT
<S> <C> <C>
DISCHARGE OF INDENTURE; DEFEASANCE............. 52
SECTION 8.01. Satisfaction and Discharge...................... 52
SECTION 8.02. Defeasance and Covenant Defeasance.............. 53
SECTION 8.03. Application of Trust Money...................... 55
SECTION 8.04. Repayment to Company............................ 56
SECTION 8.05. Reinstatement................................... 56
<CAPTION>
ARTICLE NINE
<S> <C> <C>
AMENDMENTS, SUPPLEMENTS AND WAIVERS........ 57
SECTION 9.01. Without Consent of Holders...................... 57
SECTION 9.02. With Consent of Holders......................... 57
SECTION 9.03. Compliance with Trust Indenture Act............. 58
SECTION 9.04. Revocation and Effect of Consents............... 58
SECTION 9.05. Notation on or Exchange of Securities........... 59
SECTION 9.06. Trustee To Sign Amendments, etc................. 59
SECTION 9.07. Execution and Effect of Amendments, Waivers and
Supplemental Indentures......................... 59
<CAPTION>
ARTICLE TEN
<S> <C> <C>
GUARANTEE.................................. 60
SECTION 10.01. Guarantee....................................... 60
<CAPTION>
ARTICLE ELEVEN
<S> <C> <C>
MISCELLANEOUS.............................. 61
SECTION 11.01. Trust Indenture Act Controls.................... 61
SECTION 11.02. Notices......................................... 61
SECTION 11.03. Communications by Holders with Other Holders.... 63
SECTION 11.04. Certificate and Opinion as to Conditions
Precedent....................................... 63
SECTION 11.05. Statements Required in Certificate or Opinion... 63
SECTION 11.06. Rules by Trustee, Paying Agent, Registrar....... 64
SECTION 11.07. Governing Law................................... 64
SECTION 11.08. No Recourse Against Others...................... 64
SECTION 11.09. Successors...................................... 65
SECTION 11.10. Counterpart Originals........................... 65
SECTION 11.11. Severability.................................... 65
SECTION 11.12. No Adverse Interpretation of Other Agreements... 65
SECTION 11.13. Legal Holidays.................................. 65
SECTION 11.14. Securities as Specified Senior Indebtedness..... 65
</TABLE>
SIGNATURES
iii
<PAGE>
EXHIBIT A - Form of Security............................................. A-1
NOTE: This Table of Contents shall not, for any purpose, be deemed to be a
part of the Indenture.
iv
<PAGE>
CROSS-REFERENCE TABLE
<TABLE>
<CAPTION>
Indenture
Trust Indenture Act Section Section
<S> <C> <C>
(S) 310(a)(1)..................................... 7.10
(a)(2)..................................... 7.10
(a)(3)..................................... N.A.
(a)(4)..................................... N.A.
(a)(5)..................................... N.A.
(b) ...................................... 7.08; 7.10; 11.02
(c) ...................................... N.A.
(S) 311(a) ...................................... 7.11
(b) ...................................... 7.11
(c) ...................................... N.A.
(S) 312(a) ...................................... 2.05
(b) ...................................... 11.03
(c) ...................................... 11.03
(S) 313(a) ...................................... 7.06
(b)(1)..................................... N.A.
(b)(2)..................................... 7.06
(c) ...................................... 7.06; 11.02
(d) ...................................... 7.06
(S) 314(a) ...................................... 4.13; 11.02
(b) ...................................... N.A.
(c)(1)..................................... 11.04
(c)(2)..................................... 11.04
(c)(3)..................................... N.A.
(d) ...................................... N.A.
(e) ...................................... N.A.
(f) ...................................... N.A.
(S) 315(a) ...................................... 7.01(b)
(b) ...................................... 7.05; 11.02
(c) ...................................... 7.01(a)
(d) ...................................... 7.01(c)
(e) ...................................... 6.11
(S) 316(a)(last sentence)......................... 2.09
(a)(1)(A).................................. 6.05
(a)(1)(B).................................. 6.04
(a)(2)..................................... N.A.
(b) ...................................... 6.07
(c) ...................................... N.A.
(S) 317(a)(1)..................................... 6.08
(a)(2)..................................... 6.09
(b) ...................................... 2.04
(S) 318(a)........................................ 11.01
</TABLE>
N.A. means Not Applicable.
NOTE: This Cross-Reference Table shall not, for any purpose, be deemed to be
a part of the Indenture.
v
<PAGE>
INDENTURE dated as of [ ], 1994 between ORCHARD SUPPLY HARDWARE
CORPORATION, a Delaware corporation (the "Company"), ORCHARD SUPPLY HARDWARE
STORES CORPORATION, a Delaware corporation (the "Guarantor"), and U.S. TRUST
COMPANY OF CALIFORNIA, N.A., a national banking association validly organized
and existing under the laws of the United States, as Trustee (the "Trustee").
Intending to be legally bound hereby, the parties agree as follows for the
benefit of each of the parties hereto and for the equal and ratable benefit of
the Holders of the Company's _____% Senior Notes due 2002 (the "Securities").
ARTICLE ONE
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.01. Definitions.
-----------
"Acquired Indebtedness" means (i) with respect to any Person that becomes a
---------------------
Subsidiary of the Company (or is merged into the Company or any of its
Subsidiaries) after the Issue Date, Indebtedness of, or Preferred Stock issued
by, such Person or any of its Subsidiaries existing at the time such Person
becomes a Subsidiary of the Company (or is merged into the Company or any of its
Subsidiaries) that was not incurred in connection with, or in contemplation of,
such Person becoming a Subsidiary of the Company (or being merged into the
Company or any of its Subsidiaries) and (ii) with respect to the Company or any
of its Subsidiaries, any Indebtedness assumed by the Company or any of its
Subsidiaries or Non-recourse Indebtedness to which Property acquired by the
Company or any of its Subsidiaries is subject, in each case in connection with
the acquisition of any assets from another Person (other than the Company or any
of its Subsidiaries), which Indebtedness was not incurred by such other Person
in connection with, or in contemplation of, such acquisition. Notwithstanding
the foregoing, in no event will Preferred Stock of the Company be deemed
Acquired Indebtedness.
"Affiliate" means, when used with reference to a specified Person, any
---------
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with the Person specified. For the purposes of this
definition, "control," when used with respect to any Person, means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing. Notwithstanding the foregoing, the term "Affiliate" shall not
include, (i) with respect to the Company, any Subsidiary of the Company, or (ii)
with respect to any Subsidiary of the Company, the Company or any other
Subsidiary of the Company.
<PAGE>
"Agent" means any Registrar, Paying Agent or co-Registrar.
-----
"Asset Disposition" means any sale, transfer, conveyance, lease or other
-----------------
disposition (including, without limitation, by way of merger, consolidation or
sale and leaseback or sale of shares of Capital Stock in any Subsidiary) (each,
a "transaction") by the Company or any of its Subsidiaries to any Person (other
than (i) a transaction between the Company and a Wholly Owned Subsidiary of the
Company or a transaction between Wholly Owned Subsidiaries of the Company;
provided, that, if such sale, transfer, conveyance, lease or other disposition
is to a Wholly Owned Subsidiary, and the fair market value of the assets that
are the subject thereof is $1 million or greater, such Wholly Owned Subsidiary
shall, in order for such transaction not to be deemed an "Asset Disposition,"
enter into a supplemental indenture wherein such Wholly Owned Subsidiary shall
unconditionally guarantee all of the obligations of the Company under this
Indenture and the Securities and (ii) a transaction in the ordinary course of
business (including such a transaction with a Wholly Owned Subsidiary)) of any
Property. For purposes of this definition, the term "Asset Disposition" shall
not include any sale, transfer, conveyance, lease or other disposition of assets
and properties of the Company that is governed by Section 4.07 or Section 5.01.
"Board of Directors" means the Board of Directors of the Company or any
------------------
authorized committee of that Board.
"Board Resolution" means, with respect to any Person, a duly adopted
----------------
resolution of the Board of Directors of such Person.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
------------
that is not a day on which banking institutions in the City of New York or in
Los Angeles, California, the city of the Corporate Trust Office of the Trustee,
are authorized or obligated by law, resolution or executive order to close.
"Capital Stock" means, with respect to any Person, any and all shares,
-------------
interests, participations, or other equivalents (however designated) of or in
such Person's capital stock, and options, rights or warrants to purchase such
capital stock, whether outstanding on or issued after the Issue Date, including,
without limitation, all Common Stock and Preferred Stock.
"Capitalized Lease Obligations" of any Person means the obligations of such
-----------------------------
Person to pay rent or other amounts under a lease that is required to be
capitalized for financial reporting purposes in accordance with GAAP; and the
amount of such obligation shall be the capitalized amount thereof determined in
accordance with GAAP.
2
<PAGE>
"Change of Control" means (i) any sale, lease or other transfer (in one
-----------------
transaction or a series of transactions) of all or substantially all of the
assets of the Company to any Person (other than a Wholly Owned Subsidiary of the
Company); (ii) Guarantor fails to own, beneficially and of record, 100% of the
Capital Stock of the Company; (iii) a "person" or "group" (within the meaning of
Sections 13(d) and 14(d)(2) of the Exchange Act (other than FS&Co. or its
Affiliates)) becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act) of Capital Stock of the Company representing 50% or more of the
voting power of such Capital Stock; (iv) the Common Stock of the Guarantor is no
longer registered under Section 12 of the Exchange Act; (v) Continuing Directors
of the Company or the Guarantor cease to constitute at least a majority of the
Board of Directors of the Company or the Guarantor, respectively; or (vi) the
stockholders of the Company or the Guarantor approve any plan or proposal for
the liquidation or dissolution of the Company or the Guarantor; provided,
however, that in the event the Guarantor is merged into the Company in
compliance with the terms of this Indenture and the beneficial owners of the
Capital Stock of the Guarantor immediately prior to such transaction
beneficially own all the Capital Stock of the Company immediately after such
transaction, the provisions of clause (vi) above shall not apply to such
transaction and thereafter clause (ii) above shall no longer be applicable and
all references in this definition to the Guarantor shall be deemed to refer to
the Company.
"Company" means the Person named as the "Company" in the first paragraph of
-------
this Indenture until a Successor shall have become such pursuant to the
applicable provisions of this Indenture, and thereafter "Company" shall mean
such successor.
"Company Order" means a written order or request signed in the name of the
-------------
Company by its President or Vice President, and by its Treasurer, Assistant
Treasurer, Secretary or Assistant Secretary, and delivered to the Trustee.
"Commodity Agreement" of any Person means any option or futures contract or
-------------------
similar agreement or arrangement designed to protect such Person or any of its
Subsidiaries against fluctuations in commodity prices.
"Common Stock" means, with respect to any Person, any and all shares,
------------
interests or other participations in, and other equivalents (however designated
and whether voting or nonvoting) of, such Person's common stock, whether
outstanding on the Issue Date or issued after the Issue Date, and includes,
without limitation, all series and classes of such common stock.
"Consolidated Cash Flow Available for Fixed Charges" means, for any period,
--------------------------------------------------
without duplication, the amounts for such period of the sum of (i) Consolidated
Net Income, plus (ii) taxes
3
<PAGE>
based upon the income of the Company with respect to the period, plus (iii)
interest expense for such period, plus (iv) all depreciation and amortization
and all other non-cash charges to earnings (excluding any such non-cash charge
constituting an extraordinary item of loss or any non-cash charge that requires
an accrual of or a reserve for cash charges for any future period), minus (v)
all non-cash items increasing Consolidated Net Income; all as determined on a
consolidated basis for the Company and its Subsidiaries in accordance with
GAAP. Consolidated Cash Flow Available for Fixed Charges for any period shall
be adjusted to give pro forma effect (to the extent applicable) to (i) any
Investment by the Company or a Subsidiary of the Company from the beginning of
such period through the applicable determination date (the "Reference Period")
in any Person which, as a result of such Investment, becomes a Subsidiary of the
Company or in the acquisition of assets from any Person which constitutes
substantially all of an operating unit or business of such Person, but only if
the financial statements of such Person or operating unit or business used in
calculating such pro forma effect shall have been audited by independent
accountants and (ii) the sale or other disposition of any assets (including
capital stock) of the Company or a Subsidiary of the Company, other than in the
ordinary course of business, during the Reference Period as if such Investment
or sale or disposition of assets by the Company or a Subsidiary of the Company
occurred on the first day of the Reference Period.
"Consolidated Fixed Charge Coverage Ratio" of the Company means, with
----------------------------------------
respect to any determination date, the ratio of (i) Consolidated Cash Flow
Available for Fixed Charges of the Company for the prior four full fiscal
quarters for which financial results have been reported immediately preceding
such determination date; to (ii) Consolidated Fixed Charges which the Company
shall accrue during the next succeeding four full fiscal quarters for which
financial results will be reported immediately following such determination
date, such Consolidated Fixed Charges to be calculated on the basis of the
amount of the Company's Indebtedness (on a consolidated basis) outstanding on
the determination date and reasonably anticipated by the Board of Directors of
the Company to be outstanding from time to time during such period.
"Consolidated Fixed Charges" of the Company for any period means the sum
--------------------------
of: (i) the aggregate amount of interest which, in conformity with GAAP, would
be set forth opposite the caption "interest expense" or any like caption on a
consolidated income statement for the Company and its Subsidiaries (including,
but not limited to, imputed interest included on Capitalized Lease Obligations,
all commissions, discounts and other fees and charges owed with respect to
letters of credit and banker's acceptance financing, the net costs associated
with Commodity Agreements, Currency Agreements and Interest Protection
Agreements, amortization of other financing fees and expenses,
4
<PAGE>
the interest portion of any deferred payment obligation, amortization of
discount premium, if any, and all other non-cash interest expense other than
interest amortized to cost of sales), plus (ii) interest incurred during the
----
period and capitalized by the Company and its Subsidiaries, on a consolidated
basis in accordance with GAAP, plus (iii) the amount of Preferred Stock
----
dividends accrued by the Guarantor or any of the Company's Subsidiaries on any
Preferred Stock (other than Preferred Stock dividends payable to the Company or
any Wholly Owned Subsidiary) whether or not paid during such period, provided
--------
that, in making such computation, the Consolidated Fixed Charges attributable to
interest on any Indebtedness computed on a pro forma basis and bearing a
--- -----
floating interest rate shall be computed as if the rate in effect on the date of
computation will be the applicable rate for the entire period.
"Consolidated Net Income" of the Company for any period means the net
-----------------------
income (or loss) of the Company and its Subsidiaries for such period, determined
on a consolidated basis in accordance with GAAP; provided that there shall be
--------
excluded from the computation of net income (loss) (to the extent otherwise
included therein) without duplication: (i) the net income (or loss) of any
Person (other than a Subsidiary of the Company) in which any Person other than
the Company or any of its Subsidiaries has an ownership interest, except to the
extent that any such income has actually been received by the Company or any of
its Subsidiaries in the form of dividends or similar distributions during such
period; (ii) the net income (or loss) of any Person that accrued prior to the
date that (a) such Person becomes a Subsidiary of the Company or is merged into
or consolidated with the Company or any of its Subsidiaries or (b) the assets of
such Person are acquired by the Company or any of its Subsidiaries, except for
purposes of a pro forma calculation pursuant to clause (i) of the second
sentence of the definition of Consolidated Cash Flow Available for Fixed
Charges, the net income (or loss) of such Person shall be taken into account of
the full four-quarter period for which the calculation is being made; (iii) the
net income of any Subsidiary of the Company to the extent that (but only as long
as) the declaration or payment of dividends or similar distributions by such
Subsidiary of that income is not permitted by operation of the terms of its
charter or any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to the Subsidiary during such period; (iv)
any gain or loss, together with any related provisions for taxes on any such
gain or loss, realized during such period by the Company or any of its
Subsidiaries upon (a) the acquisition of any securities, or the extinguishment
of any Indebtedness, of the Company or any of its Subsidiaries or (b) any Asset
Disposition by the Company or any of its Subsidiaries; (v) any extraordinary
gain or loss, together with any related provision for taxes on any such
extraordinary gain or loss, realized by the Company or any of its Subsidiaries
during such period; (vi) in the case of a successor
5
<PAGE>
to the Company by consolidation, merger or transfer of its assets, any earnings
of the successor prior to such merger, consolidation or transfer of assets,
except for purposes of a pro forma calculation pursuant to Section 5.01(v); and
(vii) amortization of debt discount and other debt issuance costs relating to
the issuance of the Securities; and provided, further, that there shall be
-------- -------
included in such net income (to the extent not otherwise included therein) the
net income of any Subsidiary of the Company to the extent such net income is
actually received by the Company or a Subsidiary of the Company in the form of
cash dividends or other cash distributions from such Subsidiary.
"Consolidated Tangible Net Worth" means, with respect to any Person, the
-------------------------------
consolidated stockholder's equity (including any Preferred Stock that is
classified as equity under GAAP, other than Disqualified Stock) of such Person
and its Subsidiaries, as determined in accordance with GAAP, less the book value
----
of all Intangible Assets reflected on the consolidated balance sheet of the
Company and its Subsidiaries as of such date.
"Continuing Director" means a director who either was a member of the Board
-------------------
of Directors of a Person on the date of this Indenture or who became a director
of a Person subsequent to such date and whose election, or nomination for
election by the Person's stockholders, was duly approved by a majority of the
Continuing Directors then on the Board of Directors of the Person, either by a
specific vote or by approval of the proxy statement issued by the Person on
behalf of the entire Board of Directors of the Person in which such individual
is named as nominee for director.
"Corporate Trust Office of the Trustee" shall be at the address of the
-------------------------------------
Trustee specified in Section 11.02 or such other address as the Trustee may give
notice to the Company.
"Credit Agreement" means the Financing Agreement, dated October 29, 1992,
----------------
as amended on July 29, 1993, November 12, 1993 and November 24, 1993, between
the Company and The CIT Group/Business Credit, Inc., as the same may be amended
hereafter from time to time and any subsequent agreement or agreements
constituting a refinancing, extension, modification or substitution thereof in
whole or in part.
"Currency Agreement" of any Person means any foreign exchange contract,
------------------
currency swap agreement or other similar agreement or arrangement designed to
protect such Person or any of its Subsidiaries against fluctuations in currency
values.
"Default" means any event which is, or after notice or passage of time or
-------
both would be, an Event of Default.
6
<PAGE>
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
------------------
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event (other than a change in
control which would not occur prior to a Change of Control under this
Indenture), (i) matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is redeemable at the option of the holder thereof,
in whole or in part, on or prior to the final maturity date of the Securities or
(ii) is convertible into or exchangeable for (whether at the option of the
issuer or the holder thereof) (a) debt securities or (b) any Capital Stock
referred to in clause (i) above, in each case, at any time prior to the Maturity
Date.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
------------
the rules and regulations promulgated by the SEC thereunder.
"FS&Co." means Freeman Spogli & Co., a California general
------
partnership.
"GAAP" means generally accepted accounting principles set forth in the
----
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, as in effect on the Issue Date.
"Guarantee" means the unconditional guarantee of the payment of the
---------
principal of or any premium or interest on the Securities by the Guarantor, as
more fully set forth in Article 10.
"Guarantor" means the Person named as the "Guarantor" in the first
---------
paragraph of this Indenture until a Successor shall have become such pursuant to
the applicable provisions of this indenture, and thereafter "Guarantor" shall
mean such successor.
"Guarantor's Board of Directors" means the board of directors of the
------------------------------
Guarantor or any committee of that board duly authorized to act generally or in
any particular respect for the Guarantor hereunder.
"Guarantor's Board Resolution" means a copy of one or more resolutions,
----------------------------
certified by the Secretary or an Assistant Secretary of the Guarantor to have
been duly adopted by the Guarantor's Board of Directors and to be in full force
and effect on the date of such certification, is delivered to the Trustee.
"Guarantor's Officers' Certificate" means a certificate signed by the
---------------------------------
President or a Vice President and by the Treasurer,
7
<PAGE>
an Assistant Treasurer, the Secretary or an Assistant Secretary, of the
Guarantor, that complies with the requirements of Section 14(e) of the TIA and
is delivered to the Trustee.
"Guarantor Request" and "Guarantor Order" mean, respectively, a written
----------------- ---------------
request or order signed in the name of the Guarantor by the President or a Vice
President, and by the Treasurer, an Assistant Treasurer, the Secretary or an
Assistant Secretary, of the Guarantor and delivered to the Trustee.
"Holder" or "Securityholder" means the Person in whose name a Security is
------ --------------
registered on the books of the Registrar or any co-Registrar.
"Indebtedness" of any Person means, without duplication, (i) any liability
------------
of such Person (a) for borrowed money, or under any reimbursement obligation
relating to a letter of credit, (b) evidenced by a bond, note, debenture or
similar instrument (including a purchase money obligation) given in connection
with the acquisition of any business, properties or assets of any kind or with
services incurred in connection with capital expenditures, or (c) in respect of
Capitalized Lease Obligations, (ii) any Indebtedness of others that such Person
has guaranteed or that is otherwise its legal liability, (iii) to the extent not
otherwise included, obligations under Currency Agreements, Commodity Agreements
or Interest Protection Agreements, and (iv) all Indebtedness of others secured
by a Lien on any asset of such Person, whether or not such Indebtedness is
assumed by such Person, provided that Indebtedness shall not include accounts
--------
payable (including, without limitation, accounts payable to such Person by any
of its Subsidiaries or to any such Subsidiary by such Person or any of its other
Subsidiaries, in each case, in accordance with customary industry practice) or
liabilities to trade creditors of such Person arising in the ordinary course of
business. The amount of Indebtedness of any Person at any date shall be (a) the
outstanding balance at such date of all unconditional obligations as described
above, (b) the maximum liability of such Person for any contingent obligations
under clause (ii) above at such date and (c) in the case of clause (iv) above,
the lesser of (1) the fair market value of any asset subject to a Lien securing
the Indebtedness of others on the date that the Lien attaches and (2) the amount
of the Indebtedness secured.
"Indenture" means this Indenture as amended or supplemented from time to
---------
time.
"Intangible Assets" of any Person means all unamortized debt discount and
-----------------
expense, unamortized deferred charges, goodwill, patents, trademarks, service
marks, trade names, copyrights, write-ups of assets over their prior carrying
values (other than write-ups which occurred prior to the Issue Date and other
than, in connection with the acquisition of an asset, the
8
<PAGE>
write-up of the value of such asset (within one year of its acquisition) to its
fair market value in accordance with GAAP), and all other items which would be
treated as intangibles on the consolidated balance sheet of the Company and its
Subsidiaries prepared in accordance with GAAP.
"Interest Payment Date" means the Stated Maturity of an installment of
---------------------
interest on the Securities.
"Interest Protection Agreement" of any Person means any interest rate swap
-----------------------------
agreement, interest rate collar agreement, option or future contract or other
similar agreement or arrangement designed to protect such Person or any of its
Subsidiaries against fluctuations in interest rates.
"Investment" of any Person means (i) all investments by such Person in any
----------
other Person in the form of loans, advances or capital contributions, (ii) all
guarantees of Indebtedness or other obligations of any other Person by such
Person, (iii) all purchases (or other acquisitions for consideration) by such
Person of Indebtedness, Capital Stock or other securities of any other Person
and (iv) all other items that would be classified as investments (including,
without limitation, purchases of assets outside the ordinary course of business)
on a balance sheet of such Person prepared in accordance with GAAP.
"Issue Date" means the date on which the Securities are originally issued
----------
under this Indenture.
"Lien" means, with respect to any Property, any mortgage, easement, lien,
----
lease, pledge, charge, security interest or encumbrance of any kind in respect
of such Property. For purposes of this definition, the Company shall be deemed
to own subject to a Lien any Property which it has acquired or holds subject to
the interest of a vendor or lessor under any conditional sale agreement, capital
lease or other title retention agreement relating to such Property.
"Maturity Date" means the date, which is set forth on the face of the
-------------
Securities, on which the Securities will mature.
"Net Cash Proceeds" means with respect to an Asset Disposition, cash
-----------------
payments received (including any cash payments received by way of deferred
payment of principal pursuant to a note or installment receivable or otherwise
(including any cash received upon sale or disposition of such note or
receivable), but only as and when received), excluding any other consideration
received in the form of assumption by the acquiring Person of Indebtedness or
other obligations relating to the Property disposed of in such Asset Disposition
or received in any other non-cash form unless and until such non-cash
consideration is converted into cash therefrom, in each case, net of all legal,
title and recording tax expenses, commissions and other fees and
9
<PAGE>
expenses incurred, and all federal, state, provincial, foreign and local taxes
paid or required to be accrued as a liability under GAAP as a consequence of
such Asset Disposition, and in each case net of a reasonable reserve for the
after-tax cost of any indemnification payments (fixed and contingent)
attributable to the seller's indemnities to the purchaser undertaken by the
Company or any of its Subsidiaries in connection with such Asset Disposition
(but excluding any payments which by the terms of the indemnities will not,
under any circumstances, be made during the term of the Securities), and net of
all payments made on any indebtedness which is secured by such Property, in
accordance with the terms of any Lien upon or with respect to such Property or
which must by its terms or by applicable law be repaid out of the proceeds from
such Asset Disposition, and net of all distributions and other payments made to
minority interest holders in Subsidiaries or joint ventures as a result of such
Asset Disposition.
"Non-recourse Indebtedness" with respect to any Person means Indebtedness
-------------------------
of such Person for which (i) the sole legal recourse for collection of principal
of, premium, if any, and interest on such Indebtedness is against the specific
Property identified in the instruments evidencing or securing such Indebtedness,
and (ii) neither the Company, the Guarantor or any Subsidiary of the Company
(other than the issuer of such Non-recourse Indebtedness) is directly or
indirectly liable to make any payment thereon, has made any guarantee of payment
of performance thereof or has pledged or granted any lien or encumbrance on any
assets as collateral or security with respect thereto.
"Obligations" means any principal, premiums, interest, penalties, fees and
-----------
other liabilities payable under the documentation governing the Securities.
"Officer" means the President, any Vice President, the Chief Financial
-------
Officer, the Treasurer, or the Secretary of a Person.
"Officers' Certificate" means a certificate signed by two Officers of the
---------------------
Company or by an Officer of the Company and an Assistant Treasurer or Assistant
Secretary of the Company complying with Sections 11.04 and 11.05.
"Opinion of Counsel" means a written opinion from legal counsel who is
------------------
reasonably acceptable to the Trustee. The counsel may be an employee of or
counsel to the Company or the Trustee.
"Permitted Indebtedness" means (i) Indebtedness of the Company and its
----------------------
Subsidiaries outstanding immediately following the offering of the Securities
and the application of the proceeds therefrom in the manner set forth under the
caption "Use of Proceeds" in the prospectus relating to the offering of the
10
<PAGE>
Securities; (ii) Indebtedness under the Credit Agreement, provided that (a)
during a period of 30 consecutive days during each fiscal year of the Company,
the amount of borrowings outstanding under the Credit Agreement, excluding
obligations under the Credit Agreement relating to letters of credit, does not
exceed $20 million and (b) the maximum amount of Indebtedness permitted under
this clause (ii) shall not exceed at any time 40% of the aggregate of the
Company's accounts receivable and inventory (as determined in accordance with
GAAP); (iii) any guarantee of the Securities by a Subsidiary of the Company;
(iv) the Securities; (v) Indebtedness in respect of obligations of the Company
to the Trustee under this Indenture; (vi) intercompany debt obligations
(including intercompany notes and guarantees by the Company of Indebtedness of
its Subsidiaries) of the Company and each of its Subsidiaries; provided,
--------
however, that the obligations of the Company to any of its Subsidiaries or other
- -------
Persons with respect to such Indebtedness shall be subject to a subordination
agreement providing for the subordination of such obligations in right of
payment from and after such time as all Securities issued and outstanding shall
become due and payable (whether at Stated Maturity, by acceleration or
otherwise) to the payment and performance of the Company's obligations under
this Indenture and the Securities; provided, further, that any Indebtedness of
-------- -------
the Company or any of its Subsidiaries owed to any other Subsidiary of the
Company that ceases to be such a Subsidiary shall be deemed to be incurred and
shall be treated as an incurrence for purposes of the first paragraph of Section
4.04 at the time the Subsidiary in question ceased to be a Subsidiary of the
Company; and (vii) Indebtedness of the Company or its Subsidiaries under any
Currency Agreements, Commodity Agreements or Interest Protection Agreements.
"Permitted Liens" means (i) Liens existing on the Issue Date, (ii) Liens
---------------
on the Company's accounts receivable and inventory (and related general
intangibles and proceeds) securing Indebtedness under the Credit Agreement
provided that the maximum amount of Indebtedness secured by Liens permitted
under this clause (ii) shall not exceed at any time 40% of the aggregate amount
of the Company's accounts receivable and inventory (as determined in accordance
with GAAP), (iii) Liens securing Indebtedness collateralized by Property of, or
any shares of stock of or debt of, any corporation existing at the time such
corporation becomes a Subsidiary of the Company or at the time such corporation
is merged into the Company or any of its Subsidiaries, provided that such Liens
--------
are not incurred in connection with, or in contemplation of, such corporation
becoming a Subsidiary of the Company or merging into the Company or any of its
Subsidiaries, (iv) Liens securing Refinancing Indebtedness used to refund,
refinance or extend Indebtedness, provided that any such Lien does not extend to
--------
or cover any Property or class of Property, shares or debt other than the
Property or class of Property, shares or debt securing the Indebtedness so
refunded, refinanced or extended, (v) Liens in favor of the Company or any of
its Subsidiaries, (vi) Liens on
11
<PAGE>
Property of the Company or any of its Subsidiaries acquired after the
Issue Date in favor of governmental bodies to secure progress or advance
payments relating to such Property, (vii) Liens on Property of the Company or
any of its Subsidiaries acquired after the Issue Date securing industrial
revenue or pollution control bonds issued in connection with the acquisition or
refinancing of such Property, (viii) Liens to secure Indebtedness that is
otherwise permitted under this Indenture and that is used to finance the cost of
Property of the Company or any of its Subsidiaries acquired after the Issue
Date, provided that (a) any such Lien is created solely for the purpose of
--------
securing Indebtedness representing, or incurred to finance, refinance or refund,
the cost (including sales and excise taxes, installation and delivery charges
and other direct costs of, and other direct expenses paid or charged in
connection with, such purchase or construction) of such Property, (b) the
principal amount of the Indebtedness secured by such Lien does not exceed 100%
of such cost, (c) the Indebtedness secured by such Lien is incurred by the
Company or its Subsidiary within 180 days of the acquisition of such Property by
the Company or its Subsidiary, as the case may be, and (d) such Lien does not
extend to or cover any Property other than such item of Property and any
improvements on such item, (ix) Liens to secure Indebtedness that is otherwise
permitted under this Indenture the aggregate principal amount of which does not
exceed $5 million outstanding at any one time, (x) Liens or deposits incidental
to the conduct of business or the ownership of properties and assets (including
Liens or deposits in connection with worker's compensation, unemployment
insurance and other like laws, statutory landlords', carriers', warehouseman's,
mechanics', suppliers', materialmen's, repairmen's, or similar Liens) and Liens
or deposits to secure the performance of bids, tenders or trade contracts, or to
secure statutory obligations, surety or appeal bonds or other Liens or deposits
of like general nature incurred in the ordinary course of business and with
respect to amounts which are not yet delinquent or are being contested in good
faith by appropriate proceedings, and if a reserve or other appropriate
provision, if any, as shall be required in conformity with GAAP shall have been
made therefor, (xi) Liens arising by reason of any judgment, decree or order of
any court so long as such Liens are being contested in good faith by appropriate
proceedings and the execution or other enforcement of such Liens is effectively
stayed, (xii) Liens for taxes, assessments or governmental charges not yet
delinquent or which are being contested in good faith by appropriate proceedings
and for which adequate reserve or other appropriate provision has been made in
accordance with GAAP; (xiii) easements, reservations, licenses, rights or way,
zoning restrictions and covenants and restrictions and other similar
encumbrances or title defects which, in the aggregate, do not materially detract
from the use by the Company or any of its Subsidiaries of the Property subject
thereto, or materially interfere with the ordinary conduct of the business of
the Company or any of its Subsidiaries; and (xiv) the interest of a
12
<PAGE>
lessee under any lease under which the Company or any Subsidiary is a
lessor.
"Person" means any individual, corporation, limited or general partnership,
------
joint venture, association, joint stock company, trust, unincorporated
organization or government or any agency or political subdivision thereof.
"Preferred Stock" of any Person means all Capital Stock of such Person
---------------
which has a preference in liquidation or a preference with respect to the
payment of dividends.
"principal" of a debt security means the principal of the security plus,
---------
when appropriate, the premium, if any, on the security.
"Property" of any Person means all types of real, personal, tangible,
--------
intangible or mixed property owned by such Person whether or not included in the
most recent consolidated balance sheet of such Person and its Subsidiaries under
GAAP.
"redemption date," when used with respect to any Security to be redeemed,
---------------
means the date fixed for such redemption pursuant to this Indenture.
"redemption price," when used with respect to any Security to be redeemed,
----------------
means the price fixed for such redemption pursuant to this Indenture as set
forth in the form of Security annexed as Exhibit A.
"Refinancing Indebtedness" means Indebtedness that refunds, refinances or
------------------------
extends any Indebtedness of the Company or its Subsidiaries outstanding on the
Issue Date or other Indebtedness permitted to be incurred by the Company or its
Subsidiaries pursuant to the terms of this Indenture (other than Indebtedness
referred to in clause (iii) of the second paragraph of Section 4.04), but only
to the extent that (i) the Refinancing Indebtedness is subordinated to the
Securities to the same extent as the Indebtedness being refunded, refinanced or
extended, if at all, (ii) the Refinancing Indebtedness is scheduled to mature
either (a) no earlier than the Indebtedness being refunded, refinanced or
extended, or (b) after the Maturity Date, (iii) the portion, if any, of the
Refinancing Indebtedness that is scheduled to mature on or prior to the Maturity
Date has a weighted average life to maturity at the time such Refinancing
Indebtedness is incurred that is equal to or greater than the weighted average
life to maturity of the portion of the Indebtedness being refunded, refinanced
or extended that is scheduled to mature on or prior to the Maturity Date, (iv)
such Refinancing Indebtedness is in an aggregate principal amount that is equal
to or less than the sum of (a) the aggregate principal amount then outstanding
under the Indebtedness being refunded, refinanced or extended, (b) the amount of
accrued and unpaid
13
<PAGE>
interest, if any, on such Indebtedness being refunded, refinanced or extended
and (c) the amount of customary fees, expenses and costs related to the
incurrence of such Refinancing Indebtedness; and (v) such Refinancing
Indebtedness is incurred by the same Person that initially incurred the
Indebtedness being refunded, refinanced, or extended, except that (a) the
Company may incur Refinancing Indebtedness to refund, refinance or extend
Indebtedness of any Subsidiary of the Company and (b) any Subsidiary of the
Company may incur Refinancing Indebtedness to refund, refinance or extend
Indebtedness of a Subsidiary of the Company.
"Restricted Investment" means, with respect to any Person, any Investment
---------------------
by such Person in (i) any of its Affiliates or in any Person that becomes an
Affiliate as a result of such Investment, (ii) any executive officer or director
of such Person or (iii) any executive officer or director of any Affiliate of
such Person; provided that loans not in excess of $150,000 in the aggregate at
--------
any one time outstanding and not in excess of $50,000 to any one individual
executive officer or director of such Person will not be a Restricted Investment
if, in the case of the President of the Company, the loan was approved by a
majority of the members of the full Board of Directors not having any interest
in the transaction or transactions giving rise to such loan and, in the case of
all other individuals, the loans were approved by the President of the Company.
"Restricted Payment" means any of the following: (i) the declaration or
------------------
payment of any dividend or any other distribution on Capital Stock of the
Company or any Subsidiary of the Company or any payment made to the direct or
indirect holders (in their capacities as such) of Capital Stock of the Company
or any Subsidiary of the Company (other than (a) dividends or distributions
payable solely in Capital Stock (other than Disqualified Stock) and (b) in the
case of Subsidiaries of the Company, dividends or distributions payable to the
Company or to a Subsidiary of the Company); (ii) the purchase, redemption or
other acquisition or retirement for value of any Capital Stock, or any option,
warrant, or other right to acquire shares of Capital Stock, of the Company or
any of its Subsidiaries; (iii) the making of any principal payment on, or the
purchase, defeasance, repurchase, redemption or other acquisition or retirement
for value, prior to any scheduled maturity, scheduled repayment or scheduled
sinking fund payment, of any Indebtedness which is subordinated in right of
payment to the Securities other than with the proceeds from the incurrence of
Refinancing Indebtedness related thereto; and (iv) the making of any Restricted
Investment or guarantee of any Restricted Investment in any Person; provided
--------
that, notwithstanding the foregoing, (a) advances to employees, officers,
directors, agents and representatives for travel and other reasonable and
ordinary business expenses, and (b) advances and loans to employees and
14
<PAGE>
officers in connection with their relocation shall not be deemed Restricted
Payments.
"SEC" means the Securities and Exchange Commission.
---
"Securities" means the % Senior Notes due 2002 that are issued under this
----------
Indenture.
"Stated Maturity," when used with respect to any Security or any
---------------
installment of interest thereon, means the date specified in such Security as
the fixed date on which the principal of such Security or such installment of
interest is due and payable.
"Subsidiary" means, with respect of any Person, any corporation or other
----------
entity of which a majority of the Capital Stock or other ownership interests
having ordinary voting power to elect a majority of the board of directors or
other persons performing similar functions are at the time directly or
indirectly owned or controlled by such Person.
"TIA" means the Trust Indenture Act of 1939 (15 U.S. Code (S)(S)
---
77aaa-77bbbb) as in effect on the date of this Indenture, except as provided in
Section 9.03.
"Trustee" means the party named as such in this Indenture until a successor
-------
replaces it in accordance with the provisions of this Indenture and thereafter
means such successor.
"Trust Officer" means any officer within the corporate trust administration
-------------
department (or any successor group of the Trustee), including any vice
president, assistant vice president, assistant secretary or any other officer or
assistant officer of the Trustee customarily performing functions similar to
those performed by the persons who at that time shall be such officers, and also
means, with respect to a particular corporate trust matter, any other officer to
whom such trust matter is referred because of his or her knowledge of and
familiarity with the particular subject.
"United States Government Obligations" means securities which are direct
------------------------------------
obligations of (i) the United States or (ii) an agency or instrumentality of the
United States, the payment of which is unconditionally guaranteed by the United
States, which, in either case, are full faith and credit obligations of the
United States and are not callable or redeemable at the option of the issuer
thereof, and shall also include a depository receipt issued by a bank or trust
company as custodian with respect to any such United States Government
Obligations or a specific payment of interest on or principal of any such United
States Government Obligations held by such custodian for the account of the
holder of a depository receipt; provided that (except as required by law) such
--------
custodian is not authorized to make any
15
<PAGE>
deduction from the amount received by the custodian in respect of the United
States Government Obligations for the specific payment of interest or principal
of the United States Government Obligations evidenced by such depository
receipt.
"Wholly Owned Subsidiary" of any Person means, at any time, a Subsidiary
-----------------------
all of the Capital Stock of which (except director's qualifying shares, if any)
are at the time owned directly or indirectly by such Person.
SECTION 1.02. Other Definitions.
-----------------
<TABLE>
<CAPTION>
Term Defined in Section
---- ------------------
<S> <C>
"Affiliate Transaction" 4.03
"Available Amount" 4.06
"Bankruptcy Law" 6.01
"covenant defeasance" 8.02
"Custodian" 6.01
"defeasance" 8.02
"Event of Default" 6.01
"incurrence" 4.04
"Net Cash Proceeds Offer" 4.06
"Paying Agent" 2.03
"Purchase Date" 4.06
"Registrar" 2.03
"Repurchase Date" 4.15
"Repurchase Right" 4.15
"Required Filing Dates" 4.13
"Surviving Entity" 5.01
</TABLE>
SECTION 1.03. Incorporation by Reference of Trust
Indenture Act.
-----------------------------------
Whenever this Indenture refers to a provision of the TIA, the provision is
incorporated by reference in and made a part of this Indenture. The following
TIA terms used in this Indenture have the following meanings:
"Commission" means the SEC.
----------
"indenture securities" means the Securities.
--------------------
"indenture security holder" means a Securityholder.
-------------------------
"indenture to be qualified" means this Indenture.
-------------------------
"indenture trustee" or "institutional trustee" means the Trustee.
----------------- ---------------------
"obligor" on the indenture securities means the Company or any other
-------
obligor on the Securities.
16
<PAGE>
All other TIA terms used in this Indenture that are defined by the TIA,
defined by TIA reference to another statute or defined by Commission rule and
not otherwise defined herein have the meanings assigned to them therein.
SECTION 1.04. Rules of Construction.
---------------------
Unless the context otherwise requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the meaning assigned
to it in accordance with generally accepted accounting principles in effect
on the Issue Date, and any other reference in this Indenture to "generally
accepted accounting principles" refers to GAAP;
(3) "or" is not exclusive;
(4) words in the singular include the plural, and
words in the plural include the singular;
(5) provisions apply to successive events and transactions; and
(6) "herein," "hereof" and other words of similar import refer to
this Indenture as a whole and not to any particular Article, Section or
other subdivision.
ARTICLE TWO
THE SECURITIES
SECTION 2.01. Form and Dating.
---------------
The Securities and the Trustee's certificates of authentication shall
be substantially in the form of Exhibit A. The Securities may have notations,
legends or endorsements required by law, securities exchange rule or usage. Any
notations, legends or endorsements not contained in the form of Security
contained in Exhibit A shall be delivered in writing to the Trustee. The
Company shall approve the form of the Securities and any notation, legend or
endorsement on them. Each Security shall be dated the date of its
authentication.
The terms and provisions contained in the form of the Securities,
annexed hereto as Exhibit A, shall constitute, and are hereby expressly made, a
part of this Indenture.
17
<PAGE>
SECTION 2.02. Execution and Authentication.
----------------------------
Two Officers shall sign the Securities for the Company by manual or
facsimile signature. The Company's seal shall appear on the Securities and may
be reproduced manually or by facsimile.
If an Officer whose signature is on a Security no longer holds that
office at the time the Trustee authenticates the Security, the Security
shall be valid nevertheless.
A Security shall not be valid until the Trustee manually signs the
certificate of authentication on the Security. The signature shall be
conclusive evidence that the Security has been authenticated under this
Indenture.
The Trustee shall authenticate Securities for original issue in the
aggregate principal amount of up to $100,000,000, upon a Company Order of the
Company signed by two Officers of the Company or by an Officer and an Assistant
Treasurer or Assistant Secretary of the Company. The order shall specify the
amount of Securities to be authenticated and the date on which the original
issue of Securities is to be authenticated. The aggregate principal amount of
Securities outstanding at any time may not exceed $100,000,000 except as
provided in Section 2.07.
The Trustee may appoint an authenticating agent acceptable to the
Company and eligible to qualify as a Trustee hereunder pursuant to Section 7.10
to authenticate Securities other than upon original issuance. Any such
appointment shall be evidenced by an instrument in writing signed by a Trust
Officer of the Trustee, and a copy of such instrument shall be promptly
furnished to the Company. The Company shall pay all fees payable to the
authenticating agent. Any authenticating agent appointed hereunder shall be
entitled to the benefits of Section 7.07. Unless limited by the terms of such
appointment, any authenticating agent may authenticate Securities whenever the
Trustee may do so. Each reference in this Indenture to authentication by the
Trustee includes authentication by such agent. An authenticating agent has the
same rights as an Agent to deal with the Company or an Affiliate as provided in
Section 7.03. The provisions of Sections 7.08, 7.09 and 7.10 shall apply to any
authenticating agent appointed hereunder with the same effect as if such
authenticating agent were the Trustee hereunder.
The Securities shall be issuable only in registered form without coupons
and only in denominations of $1,000 and any integral multiple thereof.
18
<PAGE>
SECTION 2.03. Registrar and Paying Agent.
--------------------------
The Company shall maintain an office which may include an office of the
Company, any Subsidiary of the Company or any Affiliate of the Company) or
agency where Securities may be presented for registration of transfer or for
exchange ("Registrar") and an office (which may include an office of the
Company, any Subsidiary of the Company or any Affiliate of the Company) or
agency where Securities may be presented for payment ("Paying Agent"). The
Registrar shall keep a register of the Securities and of the transfer and
exchange thereof. The Company may have one or more co-Registrars and one or
more additional paying agents. The term "Paying Agent" includes any additional
paying agent. The Company may change any Registrar or Paying Agent without
prior notice to any Holder.
The Company shall enter into an appropriate agency agreement with any
Agent not a party to this Indenture. The agreement shall implement the
provisions of this Indenture that relate to such Agent and shall, if required,
incorporate the provisions of the TIA. The Company shall notify the Trustee of
the name and address of any such Agent. If the Company fails to maintain a
Registrar or Paying Agent, the Trustee shall act as such and shall be entitled
to appropriate compensation in accordance with the provisions of Section 7.07.
The Company initially appoints the Trustee as Registrar and Paying
Agent. The Company shall give written notice to the Trustee in the event that
the Company decides to act as Registrar or Paying Agent.
SECTION 2.04. Paying Agent to Hold Money in Trust.
-----------------------------------
The Company shall require each Paying Agent to agree in writing to hold
in trust for the benefit of Securityholders or the Trustee all money held by the
Paying Agent for the payment of principal of or interest on the Securities
(whether such money has been paid to it by the Company, the Guarantor or any
other obligor on the Securities), and to notify the Trustee of any default by
the Company, the Guarantor or any other obligor on the Securities in making any
such payment. If the Company, the Guarantor or a Subsidiary of the Company acts
as Paying Agent, it shall segregate the money and hold it as a separate trust
fund. The Company at any time may require a Paying Agent to pay all money held
by it to the Trustee and account for any funds disbursed and the Trustee may at
any time during the continuance of any payment Default, upon written request to
a Paying Agent, require such Paying Agent to pay all money held by it to the
Trustee and to account for any funds disbursed. Upon making such payment the
Paying Agent shall have no further liability for the money delivered to the
Trustee.
19
<PAGE>
SECTION 2.05. Securityholder Lists.
--------------------
The Trustee shall preserve in as current a form as is reasonably
practicable the most recent list available to it of the names and addresses of
Securityholders. If the Trustee is not the Registrar, the Company shall furnish
to the Trustee at least five Business Days before each Interest Payment Date and
at such other times as the Trustee may request in writing a list in such form
and as of such date as the Trustee may reasonably require of the names and
addresses of Securityholders.
Every Holder of a Security, by receiving and holding the same, agrees
with the Company and the Trustee that neither the Company nor the Trustee nor
any agent of either of them shall be held accountable by reason of the
disclosure of any information as to the names and addresses of the Holders
required by Section 312 of the TIA, and that the Trustee shall not be held
accountable by reason of mailing any material required to be disclosed pursuant
to a request made under Section 312(b) of the TIA.
SECTION 2.06. Transfer and Exchange.
---------------------
When Securities are surrendered to the Registrar or a co-Registrar with
a request to register the transfer or to exchange them for an equal principal
amount of Securities of other authorized denominations, the Registrar shall
register the transfer or make the exchange as requested if its requirements for
such transactions are met. Every Security surrendered for registration of
transfer or exchange shall be duly endorsed by, or be accompanied by a written
instrument of transfer in form satisfactory to the Company and the Registrar
duly executed by, the Holder thereof or such Holder's attorney duly authorized
in writing. To permit registrations of transfers and exchanges, the Company and
the Guarantor shall execute and the Trustee shall authenticate Securities at the
Registrar's request, subject to such rules as the Trustee may reasonably
require. The date of any Security issued pursuant to this Section 2.06 shall be
the date of such transfer or exchange. No service charge shall be made to the
Securityholder for any registration of transfer or exchange, but the Company may
require from the Securityholder payment of a sum sufficient to cover any
transfer tax or similar governmental charge payable in connection therewith
(other than any such transfer tax or similar governmental charge payable upon
exchanges not involving any transfer pursuant to Section 2.10, 3.06 or 9.05, in
which event the Company shall be responsible for the payment of
such taxes).
The Company shall not be required (i) to register the transfer of or
exchange Securities during a period beginning at the opening of business 15 days
before the day of the selection for redemption of Securities under Section 3.02
and ending at the close of business on the day of the mailing of the relevant
20
<PAGE>
notice of redemption, (ii) to register the transfer of or exchange any Security
so selected for redemption in whole or in part, except the unredeemed portion of
any Security being redeemed in part, or (iii) to register the transfer of or
exchange any Security which has been surrendered for payment or repayment at the
option of the Holder pursuant to Section 4.06 or Section 4.15, except the
portion, if any, of such Security not to be so paid or repaid.
No service charge shall be made to the Holder for any registration of
transfer or exchange (except as otherwise expressly permitted herein), but the
Company may require from the transferring or exchanging Holder payment of a sum
sufficient to cover any transfer tax or similar governmental charge payable in
connection therewith (other than such transfer tax or similar governmental
charge payable upon exchanges (without a transfer to another Person) pursuant to
Section 2.07, 2.10, 3.06, or 9.05 hereof in which event the Company will be
responsible for the payment of any such taxes).
Prior to due presentment for registration of transfer of any Security,
the Trustee, any Agent and the Company may deem and treat the Person in whose
name any Security is registered as the absolute owner of such Security for the
purpose of receiving payment of principal of and interest on such Security and
for all other purposes whatsoever, whether or not such Security is overdue, and
none of the Trustee, any Agent or the Company shall be affected by notice to the
contrary.
SECTION 2.07. Replacement Securities.
----------------------
If a mutilated Security is surrendered to the Trustee or if the Holder
of a Security claims that the Security has been lost, destroyed or wrongfully
taken, then, in the absence of notice to the Company or the Trustee that such
lost, destroyed or wrongfully taken Security has been acquired by a bona fide
purchaser, the Company and the Guarantor shall issue and the Trustee shall
authenticate, upon the written request of the Company, a replacement Security if
the requirements of the Company and the Trustee are met. The Company and the
Trustee may require (i) evidence to their satisfaction of the loss, destruction
or wrongful taking of a Security and (ii) such security or indemnity in an
amount sufficient in the judgement of the Company and the Trustee to protect the
Company, the Guarantor, the Trustee and any Agent from any loss which any of
them may suffer if such Security is replaced. The Company and the Trustee each
may charge such Holder for its expenses in replacing such Security.
To the extent lawful, the provisions of this Section 2.07 are exclusive
and shall preclude all other rights and remedies with respect to the replacement
or payment of mutilated, destroyed, lost or stolen Securities.
21
<PAGE>
Every replacement Security is an additional obligation of the Company
and shall be entitled to the benefits of this Indenture.
SECTION 2.08. Outstanding Securities.
----------------------
Securities outstanding at any time are all Securities that have been
authenticated by the Trustee except for those cancelled by it, those delivered
to it for cancellation and those described in this Section or Section 2.09 as
not outstanding. Subject to Section 2.09, a Security does not cease to be
outstanding because the Company, the Guarantor or one of their respective
Affiliates holds the Security.
If a Security is replaced pursuant to Section 2.07, it ceases to be
outstanding unless the Trustee receives proof satisfactory to it that the
replaced Security is held by a bona fide purchaser.
Securities with respect to which the Company has effected defeasance
and/or covenant defeasance as provided in Article Eight shall cease to be
outstanding on and after the date of such defeasance and/or covenant defeasance,
except to the extent provided in Section 8.02.
If the Paying Agent (other than the Company, a Subsidiary of the Company
or an Affiliate of the Company) holds on a redemption date, a Purchase Date, a
Repurchase Date or Maturity Date (or in the event that the Company, a Subsidiary
of the Company or an Affiliate is acting as Paying Agent, if the Company, such
Subsidiary or Affiliate sets aside and segregates in trust on a redemption date,
a Purchase Date, a Repurchase Date or Maturity Date) money sufficient to pay the
principal of and interest on Securities payable on that date, then on and after
that date such Securities cease to be outstanding and interest on them ceases to
accrue.
SECTION 2.09. Treasury Securities.
-------------------
In determining whether the Holders of the required principal amount of
Securities have concurred in any direction, request, waiver or consent,
Securities owned by the Company, the Guarantor, any Subsidiary of the Company or
the Guarantor or an Affiliate of the Company or the Guarantor shall be
disregarded and not treated as outstanding, except that for the purposes of
determining whether the Trustee shall be protected in relying on any such
direction, request, waiver or consent, only Securities which the Trustee
actually knows are so owned shall be so disregarded and treated.
The Trustee may require an Officers' Certificate listing securities
owned by the Company, the Guarantor, a
22
<PAGE>
Subsidiary of the Company or the Guarantor or an Affiliate of the Company or the
Guarantor.
SECTION 2.10. Temporary Securities.
--------------------
Until definitive Securities are ready for delivery, the Company may
prepare and the Trustee shall authenticate temporary Securities. Temporary
Securities shall be substantially in the form of definitive Securities but may
have variations that the Company considers appropriate for temporary
Securities. Without unreasonable delay, the Company shall prepare and the
Trustee shall authenticate definitive Securities in exchange for temporary
Securities upon surrender of such temporary securities. Until such exchange,
temporary Securities shall be entitled to the same rights, benefits and
privileges as definitive Securities.
SECTION 2.11. Cancellation.
------------
The Company at any time may deliver Securities to the Trustee for
cancellation. The Registrar and the Paying Agent shall forward to the Trustee
for cancellation any Securities surrendered to them for transfer, exchange,
repayment, redemption or payment. The Trustee and no one else shall promptly
cancel all Securities so delivered to the Trustee or surrendered for transfer,
exchange, repayment, redemption, payment or cancellation. The Company may not
issue and the Trustee shall not authenticate new Securities to replace or
reissue or resell Securities which the Company has redeemed, paid, purchased,
repurchased, purchased on the open market or otherwise, or otherwise acquired or
have been delivered to the Trustee for cancellation. The Trustee (subject to
the record retention requirements of the Exchange Act) shall destroy all
cancelled Securities and promptly deliver a certificate of destruction to the
Company unless the Company shall by written order direct that cancelled
Securities be returned to it.
SECTION 2.12. Defaulted Interest.
------------------
If the Company defaults in a payment of interest on the Securities, it
or the Guarantor shall pay the defaulted interest, plus any interest payable on
the defaulted interest pursuant to Section 4.01 hereof, to the persons who are
Securityholders on a subsequent special record date, and such term, as used in
this Section 2.12 with respect to the payment of any defaulted interest, shall
mean the fifteenth day next preceding the date fixed by the Company or the
Guarantor for the payment of defaulted interest, whether or not such day is a
Business Day. At least 15 days before such special record date, the Company or
the Guarantor shall mail to each Securityholder and to the Trustee, or the
Trustee in the name and at the expense of the Company or the Guarantor shall
mail to each Securityholder, a
23
<PAGE>
notice that states such special record date, the payment date and the amount of
defaulted interest to be paid.
Alternatively, in lieu of paying such defaulted interest pursuant to the
preceding paragraph, the Company or the Guarantor may make payment of such
defaulted interest in any other lawful manner, if, after notice given by the
Company or the Guarantor to the Trustee of the proposed payment pursuant to this
paragraph, such manner of payment shall be deemed practicable by the Trustee and
if the Securities are listed on any securities exchange, then in such manner as
is not inconsistent with the requirements of, and upon such notice as may be
required by, such securities exchange.
ARTICLE THREE
REDEMPTION
SECTION 3.01. Notices to Trustee.
------------------
If the Company wants to redeem Securities pursuant to paragraph 5 of the
Securities at the applicable redemption price set forth thereon, it shall notify
the Trustee in writing of the redemption date and the principal amount of
Securities to be redeemed.
The Company shall give the notice provided for in this Section at least
45 days before the redemption date (unless a shorter notice shall be agreed to
by the Trustee in writing), together with an Officers' Certificate stating that
such redemption will comply with the conditions contained herein.
SECTION 3.02. Selection of Securities To Be Redeemed.
--------------------------------------
If less than all of the Securities are to be redeemed pursuant to
paragraph 5 thereof, the Trustee shall select the Securities to be redeemed by
any method that complies with the requirements of the principal national
securities exchange, if any, on which the Securities being redeemed are listed,
at the discretion of the Trustee, or, if the Securities are not so listed, by
lot, pro rata or in such other manner as the Trustee shall deem fair and
reasonable; provided that no Security with a principal amount of $1,000 or less
--------
shall be redeemed in part. The Trustee shall make the selection from the
Securities then outstanding, subject to redemption and not previously called for
redemption. The Trustee may select for redemption portions (equal to $1,000 or
any integral multiple thereof) of the principal of Securities that have
denominations larger than $1,000. The Trustee shall promptly notify the Company
in writing of the Securities selected for redemption and, in the case of any
Securities selected for partial redemption, the principal amount thereof to be
redeemed. Provisions of this Indenture that apply
24
<PAGE>
to Securities called for redemption also apply to portions of Securities called
for redemption.
SECTION 3.03. Notice of Redemption.
--------------------
At least 30 days but not more than 60 days before a redemption date, the
Company shall mail a notice of redemption by first class mail, postage prepaid,
to each Holder whose Securities are to be redeemed.
The notice shall identify the Securities to be redeemed and shall state:
(1) the redemption date;
(2) the redemption price;
(3) the CUSIP number of the Securities;
(4) the name and address of the Paying Agent to which the Securities
are to be surrendered for redemption;
(5) that Securities called for redemption must be surrendered to the
Paying Agent to collect the redemption price;
(6) that, unless the Company defaults in making the redemption
payment, interest on Securities called for redemption ceases to accrue on
and after the redemption date and the only remaining right of the Holders
is to receive payment of the redemption price upon surrender to the Paying
Agent; and
(7) if any Security is being redeemed in part, the portion of the
principal amount of such Security to be redeemed and that, after the
redemption date, upon surrender of such Security, a new Security or
Securities in principal amount equal to the unredeemed portion thereof will
be issued.
At the Company's request made at least 45 days before the redemption
date (unless a shorter time period shall be agreed to by the Trustee in
writing), the Trustee shall give the notice of redemption on behalf of the
Company, in the Company's name and at the Company's expense.
SECTION 3.04. Effect of Notice of Redemption.
------------------------------
Once a notice of redemption is mailed, Securities called for redemption
become due and payable on the redemption date and at the redemption price and
from and after the redemption date (unless the Company defaults in making the
redemption payment) such Securities shall cease to accrue
25
<PAGE>
interest. Upon surrender to the Paying Agent, such Securities shall be paid at
the redemption price, plus accrued interest thereon to the redemption date, but
interest installments whose maturity is on or prior to such redemption date
shall be payable to the Holders of record at the close of business on the
relevant record dates referred to in the Securities. The Trustee shall not be
required to (i) issue, authenticate, register the transfer of or exchange any
Security during a period beginning 15 days before the date a notice of
redemption is mailed and ending at the close of business on the date the
redemption notice is mailed, or (ii) register the transfer or exchange of any
Security so selected for redemption in whole or in part, except the unredeemed
portion of any Security being redeemed in part.
SECTION 3.05. Deposit of Redemption Price; Unclaimed Moneys.
---------------------------------------------
Not later than 10:00 A.M., New York time, on the redemption date, the
Company shall deposit with the Paying Agent (or if the Company is its own Paying
Agent, shall, on or before the redemption date, segregate and hold in trust)
money sufficient to pay the redemption price of and accrued interest on all
Securities to be redeemed on that date other than Securities or portions thereof
called for redemption on that date which have been delivered by the Company to
the Trustee for cancellation.
If money on deposit with the Trustee or the Paying Agent, as the case
may be, for the payment of principal or interest remains unclaimed for two
years, the Trustee and the Paying Agent will pay the money back to the Company
at its request. Thereafter, Security Holders entitled to the money must look to
the Company for payment unless an abandoned property law designates another
person and all liability of the Trustee and such Paying Agent with respect to
such money shall cease.
SECTION 3.06. Securities Redeemed in Part.
---------------------------
Upon surrender of a Security that is redeemed in part (with, if so
required by the Company or the Trustee, due endorsement by, or accompanied by a
written instrument of transfer in form satisfactory to the Company and the
Trustee duly executed by, the Holder thereof or such Holder's attorney duly
authorized in writing), the Trustee shall authenticate for the Holder a new
Security in principal amount equal to and in exchange for the unredeemed portion
of the Security surrendered.
26
<PAGE>
ARTICLE FOUR
COVENANTS
SECTION 4.01. Payment of Securities.
---------------------
The Company shall pay the principal of and interest on the Securities in
the manner provided in the Securities. An installment of principal or interest
shall be considered paid on the date due if the Trustee or Paying Agent (other
than the Company, a Subsidiary of the Company or an Affiliate of the Company)
holds on that date money designated for and sufficient to pay the installment in
full.
The Company shall pay interest on overdue principal at the same rate per
---
annum borne by the Securities. The Company shall pay interest on overdue
- -----
installments of interest at the same rate per annum borne by the Securities, to
---------
the extent lawful.
SECTION 4.02. Maintenance of Office or Agency.
-------------------------------
The Company shall maintain in the Borough of Manhattan, The City of New
York, an office (which may include an office of the Company, a Subsidiary of the
Company or an Affiliate of the Company) or agency where securities may be
surrendered for registration of transfer or exchange or for presentation for
payment and where notices and demands to or upon the Company in respect of the
Securities and this Indenture may be served. The Company shall give prompt
written notice to the Trustee of the location, and any change in the location,
of such office or agency. If at any time the Company shall fail to maintain any
such required office or agency or shall fail to furnish the Trustee with the
address thereof, such presentations, surrenders, notices and demands may be made
or served at the Corporate Trust Office of the Trustee. The Company hereby
initially designates the office or agency of the Trustee located at United
States Trust Company of New York, 114 West 47th Street, 15th Floor, New York,
New York 10036-1532, Attention: Corporate Trust Department as its office or
agency in the Borough of Manhattan, The City of New York, to receive all such
representations, surrenders, notices or demands.
The Company may also from time to time designate one or more other
offices (which may include an office of the Company, a Subsidiary of the Company
or an Affiliate of the Company) or agencies where the Securities may be
presented or surrendered for any or all such purposes and may from time to time
rescind such designations; provided that no such designation or rescission shall
--------
in any manner relieve the Company of its obligation to maintain an office or
agency in the Borough of Manhattan, The City of New York, for such purposes.
The Company shall give prompt written notice to the Trustee of any such
designation or rescission and of any change in the location of any such other
office or agency.
27
<PAGE>
SECTION 4.03. Limitation on Transactions with Affiliates.
------------------------------------------
The Company shall not, and shall not permit any of its Subsidiaries to,
directly or indirectly, make any loan, advance, guarantee or capital
contribution to, or for the benefit of, or sell, lease, transfer or otherwise
dispose of any of its properties or assets to, or for the benefit of, or
purchase or lease any property or assets from, or enter into or amend any
contract, agreement or understanding with, or for the benefit of, any Affiliate
of the Company or any Affiliate of any of the Company's Subsidiaries or any
holder of 10% or more of any class of Capital Stock of the Company (including
any Affiliates of such holders) (each, an "Affiliate Transaction") except for
any Affiliate Transaction the terms of which are at least as favorable as
the terms which could be obtained by the Company or such Subsidiary, as the case
may be, in a comparable transaction made on an arm's length basis with Persons
who are not such a holder, an Affiliate of such holder or an Affiliate of the
Company or any of the Company's Subsidiaries; provided that the payments
--------
described in clauses (A), (D) and (E) of the last paragraph of Section 4.07 and
in clauses (a) and (b) of the proviso in the definition of Restricted Payment
contained in Section 1.01 hereof will not be deemed Affiliate Transactions.
In addition, the Company shall not, and shall not permit any Subsidiary
of the Company to, enter into an Affiliate Transaction, or any series of related
Affiliate Transactions, unless (i) with respect to such transaction or
transactions involving or having a value of more than $700,000, the Company has
(x) obtained the approval of a majority of the full Board of Directors in the
exercise of their fiduciary duties and (y) either obtained the approval of a
majority of the members of the full Board of Directors not having any interest
in such transaction or transactions or obtained an opinion of an independent
financial advisor of national recognition to the effect that such transaction or
transactions are fair to the Company or such Subsidiary, as the case may be,
from a financial point of view and (ii) with respect to such transaction or
transactions involving or having a value of more than $10 million, the Company
has (x) obtained the approval of a majority of the full Board of Directors in
the exercise of their fiduciary duties and (y) delivered to the Trustee an
opinion of an independent financial advisor of national recognition to the
effect that such transaction or transactions are fair to the Company or such
Subsidiary, as the case may be, from a financial point of view.
SECTION 4.04. Limitation on Indebtedness.
--------------------------
The Company shall not, and shall not permit any of its Subsidiaries,
directly or indirectly, to create, incur, assume, become liable for or guarantee
the payment of (collectively, an
28
<PAGE>
"incurrence") any Indebtedness (including Acquired Indebtedness); provided the
--------
Company may incur Indebtedness, including Acquired Indebtedness, and may permit
any Subsidiary of the Company to incur Acquired Indebtedness, if (i) at the time
of such event and after giving effect thereto, on a pro forma basis, the
---------
Consolidated Fixed Charge Coverage Ratio of the Company would have been greater
than 2.0 to 1.0, and (ii) no Default or Event of Default shall have occurred and
be continuing at the time of or occur as a consequence of the incurrence of such
Indebtedness.
The foregoing limitations shall not apply to the incurrence of (i)
Permitted Indebtedness, (ii) Refinancing Indebtedness, and (iii) Indebtedness of
the Company in addition to that permitted in clauses (i) and (ii) above, the
aggregate principal amount of which does not exceed $20 million outstanding at
any one time.
SECTION 4.05. Limitation on Liens.
-------------------
The Company shall not, and shall not permit any Subsidiary of the
Company to, issue, assume, guarantee or suffer to exist any Indebtedness secured
by a Lien (other than a Permitted Lien) upon any Property of the Company or any
Subsidiary of the Company or any shares of Capital Stock or debt of any
Subsidiary of the Company, whether such Property is owned at the date of this
Indenture or thereafter acquired, without making effective provision whereby the
Securities shall be secured by such Lien equally and ratably with such
Indebtedness, so long as such Indebtedness shall be so secured.
SECTION 4.06. Limitation on Asset Dispositions, Etc.
-------------------------------------
(a) Asset Dispositions. (i) The Company shall not, and shall not
------------------
permit any or its Subsidiaries to, make any Asset Disposition unless (x) the
Company (or its Subsidiary, as the case may be) receives consideration at the
time of such sale or other disposition at least equal to the fair market value
thereof (as determined in good faith by the Board of Directors and evidenced by
a Board Resolution) and (y) not less than 75% of the consideration received by
the Company (or its Subsidiary, as the case may be) is in the form of cash, and
(ii) the Net Cash Proceeds of such an Asset Disposition shall be within 360
days, at the Company's election, (A) invested in the business or businesses of
the Company or a Subsidiary of the Company as of the Issue Date or any related
business or (B) to the extent not so invested (the "Available Amount"), applied
to make an offer to purchase the Securities (a "Net Cash Proceeds Offer") (on a
pro rata basis if the Available Amount is less than the principal amount of the
- --------
Securities tendered in such Net Cash Proceeds Offer plus accrued interest to the
date of purchase, with such adjustments as may be deemed appropriate by the
Company so that only Securities in denominations of $1,000 or integral multiples
of $1,000 shall be acquired) at a purchase price of 100% of the principal amount
thereof plus accrued interest to the date of purchase (the "Purchase Date").
The provisions of subclause (y) of the immediately preceding sentence shall not
apply to a
29
<PAGE>
sale of the warehouse in San Jose, California owned by the Company on the Issue
Date. Notwithstanding the foregoing, the Company and its Subsidiaries will not
be required to apply such Net Cash Proceeds to the purchase of the Securities in
accordance with clause (ii) of the immediately preceding sentence except to the
extent that such Net Cash Proceeds, together with the aggregate Net Cash
Proceeds of prior Asset Dispositions which have not been applied in accordance
herewith, exceed $5 million, provided that when any non-cash consideration is
--------
converted into cash, such cash shall constitute Net Cash Proceeds and be subject
to subclause (ii) of the preceding sentence. The 75% limitation of clause (y)
of the first sentence of this paragraph shall not apply to any Asset Disposition
in which the cash portion of the consideration received therefor is equal to or
greater than what the net after-tax proceeds would have been had such Asset
Disposition complied with the aforementioned 75% limitation if the Company shall
have received an opinion of independent tax counsel confirming the
appropriateness of the tax treatment of such Asset Disposition.
In the event that the Capital Stock of a Subsidiary of the Company,
which has entered into a supplemental indenture guaranteeing the obligations of
the Company under the Securities and this Indenture, is sold or otherwise
disposed of in a transaction with any Person that is not an Affiliate of the
Company, such Subsidiary shall be deemed automatically and unconditionally
released and discharged from any of its obligations under such supplemental
indenture without any further action on the part of the Trustee or any Holder of
the Securities; provided that the Net Cash Proceeds of such sale or other
--------
disposition are applied in accordance with the applicable provisions of this
Section 4.06.
(b) Procedure for Purchase of Securities. The Company shall provide
------------------------------------
the Trustee with written notice of a Net Cash Proceeds Offer at least 30 days
before any notice of such Net Cash Proceeds Offer is mailed to Holders of the
Securities (unless shorter notice is acceptable to the Trustee). Notice of a
Net Cash Proceeds Offer shall be mailed by the Company, or by the Trustee in the
name of and at the expense of the Company, to all Holders of Securities not less
than 10 days nor more than 60 days before the Purchase Date at their last
registered address with a copy to the Trustee and the Paying Agent. The Net
Cash Proceeds Offer shall remain open from the time of mailing for at least 20
Business Days and until at least 4:00 p.m., New York City time, on the Business
Day next preceding the Purchase Date. The notice, which shall govern the terms
of the Net Cash Proceeds Offer, shall include such disclosures as are required
by law and shall state:
(i) that the Net Cash Proceeds Offer is being made pursuant to this
Section 4.06;
30
<PAGE>
(ii) the purchase price (including the amount of accrued interest, if
any) for each Security and the Purchase Date;
(iii) that any Security not tendered or accepted for payment will
continue to accrue interest in accordance with the terms thereof;
(iv) that, unless the Company defaults in making the payment, any
Security accepted for payment pursuant to the Net Cash Proceeds Offer shall
cease to accrue interest after the Purchase Date;
(v) that Holders electing to have Securities purchased pursuant to a
Net Cash Proceeds Offer will be required to surrender their Securities to
the Paying Agent at the address specified in the notice prior to 4:00 p.m.,
New York City time, on the Business Day next preceding the Purchase Date
and must complete any form letter of transmittal proposed by the Company
and acceptable to the Trustee and the Paying Agent;
(vi) that Holders will be entitled to withdraw their election if the
Paying Agent receives, not later than 4:00 p.m., New York City time, on the
Business Day next preceding the Purchase Date, a tested telex, facsimile
transmission or letter setting forth the name of the Holder, the principal
amount of Securities the Holder delivered for purchase, the Security
certificate number (if any) and a statement that such Holder is withdrawing
his or her election to have such Securities purchased;
(vii) that if Securities in a principal amount in excess of the
Available Amount are tendered pursuant to the Net Cash Proceeds Offer, the
Company shall purchase Securities on a pro rata basis among the Securities
--- ----
tendered (with such adjustments as may be deemed appropriate by the Company
so that only Securities in denominations of $1,000 or integral multiples of
$1,000 shall be acquired);
(viii) that Holders whose Securities are purchased only in part will
be issued new Securities equal in principal amount to the unpurchased
portion of the Securities surrendered; and
(ix) the instructions that Holders must follow in order to tender
their Securities.
On or before the Purchase Date, the Company shall (i) deposit, or cause
to be deposited, the Available Amount in immediately available funds with the
Paying Agent, (ii) accept for payment, on a pro rata basis among the Securities
--- ----
tendered in the event that Securities in a principal amount in excess of the
31
<PAGE>
Available Amount are tendered pursuant to the Net Cash Proceeds Offer (and in
any event with such adjustments as may be deemed appropriate by the Company so
that only Securities in denominations of $1,000 or integral multiples of $1,000
shall be purchased), Securities or portions thereof tendered for purchase
pursuant to the Net Cash Proceeds Offer and (iii) deliver to the Paying Agent
the Securities so accepted together with an Officers' Certificate setting forth
the Securities or portions thereof tendered for purchase and accepted for
payment by the Company. The Paying Agent shall promptly mail or deliver to
Holders of Securities so accepted payment in an amount equal to the purchase
price, and the Trustee shall promptly authenticate and mail or deliver to such
Holders a new Security equal in principal amount to any unpurchased portion of
the Security surrendered. Any Securities not so accepted shall be promptly
mailed or delivered by the Company to the Holders thereof. To the extent a Net
Cash Proceeds Offer is not fully subscribed to by the Holders, the Company may
retain (free and clear of the Lien of this Indenture) any unutilized portion of
the Available Amount. The Paying Agent shall promptly deliver to the Company
the balance of such Available Amount held by the Paying Agent after payment to
the Holders of Securities as aforesaid.
The Company shall comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Securities pursuant to the
Net Cash Proceeds Offer. To the extent that the provisions of any securities
laws or regulations conflict with provisions of this Section 4.06, the Company
shall comply with the applicable securities laws and regulations and shall not
be deemed to have breached its obligations under this Section 4.06 by virtue
thereof.
No purchase of Securities required under this Section 4.06 shall occur
until the Trustee shall have received, on or prior to the Purchase Date, an
Officers' Certificate and an Opinion of Counsel as to (i) the Company's
compliance with this Section 4.06 and (ii) the fulfillment of all conditions
precedent to such purchase.
SECTION 4.07. Limitation on Restricted Payments.
---------------------------------
The Company shall not, and shall not permit any of its Subsidiaries to,
directly or indirectly, make any Restricted Payment unless:
(i) no Default or Event of Default shall have occurred and be
continuing at the time of or after giving effect to such Restricted
Payment;
(ii) immediately after giving effect to such Restricted Payment, the
Company could incur at least $1.00 of
32
<PAGE>
Indebtedness (other than Permitted Indebtedness) pursuant to the first
paragraph of Section 4.04; and
(iii) immediately after giving effect to such Restricted Payment, the
aggregate amount of all Restricted Payments (the fair market value of any
such Restricted Payment if other than cash as determined in good faith by
the Board of Directors and evidenced by a Board Resolution) declared or
made after the Issue Date does not exceed the sum of (a) 50% of the
Consolidated Net Income of the Company on a cumulative basis during the
period (taken as one accounting period) from and including the first full
fiscal quarter of the Company commencing after the Issue Date and ending on
the last day of the Company's last fiscal quarter ending prior to the date
of such Restricted Payment (or in the event such Consolidated Net Income
shall be a deficit, minus 100% of such deficit), (b) 100% of the aggregate
net cash proceeds of, and the fair market value of marketable securities
(as determined in good faith by the Board of Directors and evidenced by a
Board Resolution) received by the Company from (1) a contribution of
capital after the Issue Date; (2) the issue or sale after the Issue Date of
Capital Stock of the Company (other than the issue or sale of (A)
Disqualified Stock or (B) Capital Stock of the Company to any Subsidiary of
the Company); and (3) the issue or sale after the Issue Date of any
Indebtedness or other securities of the Company convertible into or
exercisable for Capital Stock (other than Disqualified Stock) of the
Company which has been so converted or exercised, as the case may be.
The foregoing clauses (ii) and (iii) will not prohibit: (A) the payment
of any dividend within 60 days of its declaration if such dividend could have
been made on the date of its declaration without violation of the provisions of
this Indenture; (B) the repurchase, redemption or retirement of any shares of
Capital Stock of the Company in exchange for, or in an amount not in excess of
the net proceeds of the substantially concurrent sale (other than to a
Subsidiary of the Company) of, other shares of Capital Stock (other than
Disqualified Stock) of the Company; (C) the repurchase, redemption or retirement
of Indebtedness of the Company subordinated in right of payment to the
Securities in exchange for, by conversion into, or in an amount not in excess of
the net proceeds of, a substantially concurrent (x) issue or sale of Capital
Stock (other than Disqualified Stock) of the Company (y) capital contribution to
the Company or (z) incurrence of Refinancing Indebtedness with respect to such
subordinated Indebtedness; (D) the making of Restricted Payments to the
Guarantor for the purpose of paying the quarterly dividends accrued by the
Guarantor on the outstanding 6% Cumulative Convertible Preferred Stock of the
Guarantor; and (E) the making of Restricted Payments to the Guarantor to cover
administrative expenses payable by the Guarantor
33
<PAGE>
not exceeding $250,000 in the aggregate in any 12-month period; provided
--------
that each Restricted Payment described in clauses (A) through (E) (other than
subclause (z) of clause (C)) of this sentence shall be taken into account for
purposes of computing the aggregate amount of all Restricted Payments pursuant
to clause (iii) of the immediately preceding paragraph.
SECTION 4.08. Corporate Existence.
-------------------
Subject to Article Five, the Company and the Guarantor shall do or cause
to be done all things necessary to preserve and keep in full force and effect
its corporate existence and the corporate, partnership or other existence of
each of its Subsidiaries in accordance with the respective organizational
documents of each Subsidiary and the rights (charter and statutory) and material
franchises of the Company, the Guarantor and each of its Subsidiaries; provided,
--------
that neither the Company nor the Guarantor shall be required to preserve any
such right or franchise, or the corporate existence of any Subsidiary, if the
board of directors of the Company or the Guarantor, as the case may be, shall
determine that the preservation thereof is no longer desirable in the conduct of
the business of the Company and its Subsidiaries, taken as a whole, and that the
loss thereof is not, and will not be, adverse in any material respect to the
Holders.
SECTION 4.09. Payment of Taxes and Other Claims.
---------------------------------
The Company shall pay or discharge or cause to be paid or discharged,
before the same shall become delinquent, (1) all material taxes, assessments and
governmental charges levied or imposed upon the Company or any of its
Subsidiaries or upon the income, profits or property of the Company or any of
its Subsidiaries and (2) all lawful claims for labor, materials and supplies
which, in each case, if unpaid, might by law become a material liability, or
Lien upon the property, of the Company or any of its Subsidiaries; provided,
--------
that the Company shall not be required to pay or discharge or cause to be paid
or discharged any such tax, assessment, charge or claim whose amount,
applicability or validity is being contested in good faith by appropriate
proceedings and for which appropriate provision has been made.
SECTION 4.10. Notice of Defaults.
------------------
(1) In the event that any Indebtedness of the Company or any of its
Subsidiaries or of the Guarantor is declared due and payable before its maturity
because of the occurrence of any default under such Indebtedness, the Company or
the Guarantor, as the case may be, shall promptly give written notice to the
Trustee of such declaration, the status of such default or event and what action
is being taken or is proposed to be taken with respect thereto.
34
<PAGE>
(2) Upon becoming aware of any Default or Event of Default, the Company
or the Guarantor, as the case may be, shall promptly deliver an Officers'
Certificate or a Guarantor's Officers' Certificate, as the case may be, to the
Trustee specifying the Default or Event of Default.
SECTION 4.11. Maintenance of Properties.
-------------------------
The Company shall cause all material properties owned by or leased to it
or any of its Subsidiaries and used or useful in the conduct of its business or
the business of any of its Subsidiaries to be maintained and kept in normal
condition, repair and working order, all as in the judgment of the Company may
be necessary, so that the business carried on in connection therewith may be
properly and advantageously conducted at all times; provided, that nothing in
--------
this Section shall prevent the Company or any of its Subsidiaries from
discontinuing the use, operation or maintenance of any of such properties, or
disposing of any of them, if such discontinuance or disposal is, in the judgment
of the Board of Directors or of the board of directors of any Subsidiary of the
Company concerned, or of an officer (or other agent employed by the Company or
of any of its Subsidiaries) of the Company or any of its Subsidiaries having
managerial responsibility for any such property, desirable in the conduct of the
business of the Company or any Subsidiary of the Company, and if such
discontinuance or disposal is not adverse in any material respect to the
Holders.
SECTION 4.12. Compliance Certificates.
-----------------------
The Company shall deliver to the Trustee within 100 days after the close
of each fiscal year an Officers' Certificate stating that a review of the
activities of the Company has been made under the supervision of the signing
officers with a view to determining whether a Default or Event of Default has
occurred and whether or not the signers know of any Default or Event of Default
by the Company that occurred during such fiscal year. If they do know of such a
Default or Event of Default, the certificate shall describe all such Defaults or
Events of Default, their status and the action the Company is taking or proposes
to take with respect thereto. The first certificate to be delivered by the
Company pursuant to this Section 4.12 shall be for the fiscal year ending
January 29, 1995.
The Guarantor shall deliver to the Trustee within 100 days after the
close of each fiscal year a Guarantor's Officers' Certificate stating that a
review of the activities of the Guarantor has been made under the supervision of
the signing officers with a view to determining whether a Default or Event of
Default has occurred and whether or not the signers know of any Default or Event
of Default by the Guarantor that occurred during such fiscal year. If they do
know of such a Default or Event of Default, the certificate shall describe all
such Defaults or
35
<PAGE>
Events of Default, their status and the action the Guarantor is taking or
proposes to take with respect thereto. The first certificate to be delivered by
the Company pursuant to this Section 4.12 shall be for the fiscal year ending
January 29, 1995.
SECTION 4.13. Reports.
-------
So long as any of the Securities is outstanding, whether or not the
Guarantor is subject to Section 13(a) or 15(d) of the Exchange Act, to the
extent permitted by the SEC, the Guarantor shall file with the SEC the annual
reports, quarterly reports and other documents which the Guarantor would have
been required to file with the SEC pursuant to such Sections 13(a) and 15(d) if
the Guarantor were so subject, such documents to be filed with the SEC on or
prior to the respective dates (the "Required Filing Dates") by which the
Guarantor would have been required so to file such documents if the Guarantor
were so subject. The Guarantor and, if the Company is then subject to Section
13(a) or 15(d) of the Exchange Act, the Company shall also in any event (x)
within 15 days after each Required Filing Date file with the Trustee copies of
the annual reports, quarterly reports and other documents which the Guarantor or
the Company was or the Guarantor would have been required to file with the SEC
pursuant to Sections 13(a) and 15(d) of the Exchange Act if the Guarantor were
subject to such Sections and (y) if filing such documents by the Guarantor with
the SEC is not permitted under the Exchange Act, promptly upon written request
supply copies of such documents to any prospective Holder. The Guarantor and
the Company shall also comply with the other provisions of TIA Section 314(a).
SECTION 4.14. Waiver of Stay, Extension or Usury Laws.
---------------------------------------
The Company and the Guarantor covenant (to the extent that they may
lawfully do so) that they shall not at any time insist upon, plead, or in any
manner whatsoever claim or take the benefit or advantage of, any stay or
extension law or any usury law or other law, which would prohibit or forgive the
Company or the Guarantor from paying all or any portion of the principal of
and/or interest on the Securities as contemplated herein, wherever enacted, now
or at any time hereafter in force, or which may affect the covenants or the
performance of this Indenture; and (to the extent that they may lawfully do so)
the Company and the Guarantor hereby expressly waive all benefit or advantage of
any such law, and covenants that they shall not hinder, delay or impede the
execution of any power herein granted to the Trustee, but shall suffer and
permit the execution of every such power as though no such law had been enacted.
SECTION 4.15. Repurchase of Securities Upon Change of Control.
-----------------------------------------------
(a) Upon the occurrence of a Change of Control, each Holder of the
Securities shall have the right (the "Repurchase Right"), at such Holder's
option, to require the Company to
36
<PAGE>
repurchase all or any part of such Holder's Securities on a date specified in
the notice referred to below (the "Repurchase Date") that is no later than 60
days after notice of the Change of Control, at 101% of the principal amount
thereof, plus accrued interest to the Repurchase Date.
(b) On or before the thirtieth day after the Change of Control, the
Company shall deliver, or cause to be delivered, by first-class mail, to all
holders of record of such Securities and the Trustee (or the Trustee, in the
name and at the expense of the Company, shall deliver) a notice regarding the
Change of Control and the Repurchase Right. Each such notice shall state
(i) the Repurchase Date;
(ii) the date by which the Repurchase Right must be exercised;
(iii) the price (including the amount of accrued interest, if any)
for such Securities; and
(iv) the procedure which the Holder of Securities must follow to
exercise the Repurchase Right.
Substantially simultaneously with mailing of the notice, the Company
shall cause a copy of such notice to be published in a newspaper of general
circulation in the Borough of Manhattan, The City of New York.
(c) To exercise the Repurchase Right, the Holder of a Security must
deliver at least ten days prior to the Repurchase Date written notice to the
Company (or any agent designated by the Company for such purpose) of such
Holder's exercise of the Repurchase Right, together with the Security with
respect to which such Repurchase Right is being exercised, duly endorsed for
transfer; provided that, if mandated by applicable tender offer rules and
--------
regulations, a Holder may be permitted to deliver such written notice nearer to
the Repurchase Date, as may be specified by the Company.
(d) In the event a Repurchase Right shall be exercised in accordance
with the terms hereof, the Company shall pay or cause to be paid the price
payable with respect to the Securities as to which the Repurchase Right has been
exercised in cash to the Holder of such Securities, on the Repurchase Date. In
the event that a Repurchase Right is exercised with respect to less than the
entire principal amount of a surrendered Security, the Company shall execute and
deliver to the Trustee and the Trustee shall authenticate for issuance in the
name of the Holder a new Security or Securities in the aggregate principal
amount of that portion of such surrendered Security not repurchased.
37
<PAGE>
(e) The Company shall comply with all applicable tender offer rules and
regulations, including Section 14(e) of the Exchange Act and the rules
thereunder, if the Company is required to give a notice of the Repurchase Right
as a result of a Change of Control. To the extent that the provisions of any
securities laws or regulations conflict with provisions of this Section 4.15,
the Company shall comply with the applicable securities laws and regulations and
shall not be deemed to have breached its obligations under this Section 4.15 by
virtue thereof.
(f) No repurchase of Securities under this Section 4.15 shall occur
until the Trustee shall have received, on or prior to the Repurchase Date an
Officers' Certificate and an opinion of Counsel as to (i) the Company's
compliance with this Section 4.15 and (ii) the fulfillment of all conditions
precedent to such repurchase.
SECTION 4.16. Limitation on Sale and Leaseback Transactions.
---------------------------------------------
The Company shall not, and shall not permit any Subsidiary of the
Company to, enter into any sale and leaseback transaction with respect to any
Property (whether now owned or hereafter acquired) unless (i) if the sale or
transfer of the Property to be leased does not occur within 180 days after the
acquisition of such Property, the Company complies with the requirements of
Section 4.06 and (ii) the Company or such Subsidiary would be entitled under
Section 4.04 to incur at least $1 of Indebtedness after giving effect to such
sale and leaseback transaction on a pro forma basis, provided that this clause
--- -----
(ii) shall not be applicable with respect to the premises owned by the Company
at the Issue Date located in Pismo Beach, California and San Rafael, California
if a sale and leaseback transaction is consummated with respect thereto within
one year after the Issue Date, in the case of the Pismo Beach premises, and
prior to July 31, 1995, in the case of the San Rafael premises.
SECTION 4.17. Limitation on Dividends and Other Payment
Restrictions Affecting Subsidiaries.
-----------------------------------
The Company shall not, and shall not permit any of its Subsidiaries to,
directly or indirectly, create or otherwise cause or suffer to exist or become
effective any consensual encumbrance or restriction on the ability of any
Subsidiary of the Company to (i) (a) pay dividends or make any other
distributions on its Capital Stock, or any other interest or participation in or
measured by its profits, owned by the Company or any other Subsidiary of the
Company, or (b) pay any Indebtedness owed to the Company or any other Subsidiary
of the Company, (ii) make loans or advances to the Company or a Subsidiary of
the Company or (iii) transfer any of its properties or assets to the Company or
any other Subsidiary of the Company, except for Permitted Liens and such other
encumbrances or
38
<PAGE>
restrictions existing under or by reason of (a) any restrictions, with respect
to a Subsidiary that is not a Subsidiary of the Company on the Issue Date, under
any agreement in existence at the time such Subsidiary becomes a Subsidiary of
the Company (unless such agreement was entered into in connection with, or in
contemplation of, such entity becoming a Subsidiary of the Company on or after
the Issue Date), (b) any restrictions under any agreement evidencing any
Acquired Indebtedness of a Subsidiary of the Company incurred pursuant to the
provisions of Section 4.04; provided that such restrictions shall not restrict
--------
or encumber any assets of the Company or its Subsidiaries other than such
Subsidiary, (c) terms relating to the nonassignability of any operating lease,
(d) customary provisions restricting assignment of any contract (or any rights
thereunder), (e) any encumbrance or restriction existing under any agreement
that refinances or replaces the agreements containing restrictions described in
clauses (a) through (d), provided that the terms and conditions of any such
--------
restrictions are no less favorable to the Holders of the Securities than those
under the agreement so refinanced or replaced, or (f) any encumbrance or
restriction due to applicable law.
SECTION 4.18. Limitation on Issuance of Preferred
Stock by Subsidiaries.
-----------------------------------
The Company shall not cause or permit any of its Subsidiaries to issue
any Preferred Stock or to have outstanding at any time any shares of Preferred
Stock, except issuances of Preferred Stock to the Company or a Wholly Owned
Subsidiary of the Company; provided, that the Company or a Wholly Owned
--------
Subsidiary of the Company is at all times the sole beneficial and record owner
of such Capital Stock.
ARTICLE FIVE
MERGERS; SUCCESSOR CORPORATION
SECTION 5.01. Restriction on Mergers and Consolidations
and Sales of Assets.
-----------------------------------------
The Company shall not consolidate or merge with or into, or sell, lease,
convey or otherwise dispose of all or substantially all of its assets (as an
entirety or substantially an entirety in one transaction or a series of related
transactions, including by way of liquidation or dissolution) to, any Person
unless:
(i) the entity formed by or surviving any such consolidation or
merger (if other than the Company), or to which sale, lease, conveyance or
other disposition shall
39
<PAGE>
have been made (the "Surviving Entity"), is a corporation organized and
existing under the laws of the United States, any state thereof or the
District of Columbia;
(ii) the Surviving Entity assumes by supplemental indenture all of
the obligations of the Company on the Securities and under this Indenture;
(iii) immediately after giving effect to such transaction, no Default
or Event of Default shall have occurred and be continuing;
(iv) immediately after giving effect to such transaction and the use
of any net proceeds therefrom on a pro forma basis, the Consolidated
--- -----
Tangible Net Worth of the Company or the Surviving Entity, as the case may
be, would be at least equal to the Consolidated Tangible Net Worth of the
Company immediately prior to such transaction;
(v) immediately after giving effect to such transaction and the use
of any net proceeds therefrom on a pro forma basis, the Company or the
--- -----
Surviving Entity, as the case may be, could incur at least $1.00 of
Indebtedness (other than Permitted Indebtedness) pursuant to the first
paragraph of Section 4.04; and
(vi) the Guarantor shall have delivered to the Trustee a Guarantor's
Officers' Certificate and an Opinion of Counsel, each stating that the
Guarantor's obligations hereunder shall remain in full force and effect
after such transaction.
Notwithstanding the foregoing, any Wholly Owned Subsidiary may merge
with or into the Company so long as (a) all of the conditions specified above,
except for clause (v), are satisfied and (b) the Company is the surviving
entity.
SECTION 5.02. Successor Corporation Substituted.
----------------------------------
Upon any consolidation or merger, or any sale, lease, conveyance or
other disposition of all or substantially all of the assets of the Company in
accordance with Section 5.01, the surviving Person shall succeed to, and be
substituted for, and may exercise every right and power of, the Company under
this Indenture with the same effect as if such surviving Person had been named
as the Company herein.
40
<PAGE>
ARTICLE SIX
DEFAULT AND REMEDIES
SECTION 6.01. Events of Default.
-----------------
An "Event of Default" occurs if:
(i) the Company fails to pay interest on any of the Securities when
the same becomes due and payable and such failure continues for a period of
30 days;
(ii) the Company fails to pay the principal of or premium on any of
the Securities when the same becomes due and payable whether at maturity,
upon acceleration, redemption or otherwise;
(iii) the Company or the Guarantor fails to observe or perform any
other covenant in this Indenture for 30 days after notice from the Trustee
or the holders of 25% in principal amount of the Securities outstanding
(except in the case of a default with respect to Section 4.15 and Section
5.01, which will constitute Events of Default with such notice but without
passage of time);
(iv) the Company fails to make any payment when due (after giving
effect to any applicable grace period) under any Indebtedness in a
principal amount in excess of $5 million which is not subordinated to the
Securities (including, without limitation, Indebtedness under the Credit
Agreement) or any of its Subsidiaries fails to make payment when due (after
giving effect to any applicable grace period) under any Indebtedness in a
principal amount in excess of $5 million;
(v) the Company or any of its Subsidiaries fails to perform any term,
covenant, condition or provision of any Indebtedness (other than the
Securities) in a principal amount in excess of $5 million individually or
$10 million in the aggregate, which failure results in the acceleration of
the maturity of such Indebtedness;
(vi) a final judgment or judgments for the payment of money not fully
covered by insurance, which judgments exceed $5 million individually or $10
million in the aggregate, is entered against the Company or any of its
Subsidiaries and is not satisfied, stayed, annulled or rescinded within 60
days of being entered;
(vii) the Company or any of its Subsidiaries pursuant to or within
the meaning of any Bankruptcy Law:
(A) commences a voluntary case or proceeding,
41
<PAGE>
(B) consents to the entry of an order for relief against it in an
involuntary case or proceeding,
(C) consents to the appointment of a Custodian of it or for all
or substantially all of its property, or
(D) makes a general assignment for the benefit of its creditors;
or
(iii) a court of competent jurisdiction enters an order or decree
under any Bankruptcy Law that:
(A) is for relief against the Company or any of its Subsidiary
in an involuntary case or proceeding,
(B) appoints a Custodian of the Company or any of its Subsidiary
or for all or substantially all of its property, or
(C) orders the liquidation of the Company or any of its
Subsidiary,
and in each case the order or decree remains unstayed and in effect for 30
days; provided that if the entry of such order or decree is appealed and
--------
dismissed on appeal then the Event of Default hereunder by reason of the
entry of such order or decree shall be deemed to have been cured.
The term "Bankruptcy Law" means Title 11, U.S. Code or any similar
Federal, state or foreign law for the relief of debtors. The term "Custodian"
means any receiver, trustee, assignee, liquidator, sequestrator or similar
official under any Bankruptcy Law.
The Trustee shall, within 90 days after the occurrence of any Default
known to it, give to the holders of Securities notice of such Default; provided
--------
that, except in the case of a Default in the payment of principal of or interest
on any of the Securities, the Trustee shall be protected in withholding such
notice if it in good faith determines that the withholding of such notice is in
the interest of the Holders of Securities.
SECTION 6.02. Acceleration.
------------
In case an Event of Default (other than an Event of Default described in
clause (vii) or (viii) of Section 6.01 above with respect to the Company) shall
occur and be continuing, the Trustee or the holders of at least 25% in aggregate
principal amount of the Securities then outstanding, by notice in writing to the
Company (and to the Trustee if given by the holders of Securities), may declare
all unpaid principal and accrued interest on the Securities then outstanding to
be due and payable immediately. Any such declaration with respect to the
Securities
42
<PAGE>
may be annulled or rescinded by the Holders of not less than a majority in
principal amount of the outstanding Securities in accordance with Section 6.04.
If an Event of Default specified in clause (vii) or (viii) of Section
6.01 occurs with respect to Company and is continuing, then all unpaid principal
of, premium, if any, and accrued interest on the outstanding Securities shall
ipso facto become immediately due and payable without any declaration or other
- ---- -----
act on the part of the Trustee or any Holder thereof.
SECTION 6.03. Other Remedies.
--------------
If an Event of Default occurs and is continuing, the Trustee may pursue
any available remedy by proceeding at law or in equity to collect the payment of
principal of or interest on the Securities or to enforce the performance of any
provision of the Securities or this Indenture.
The Trustee may maintain a proceeding even if it does not possess any of
the Securities or does not produce any of them in the proceeding. A delay or
omission by the Trustee or any Securityholder in exercising any right or remedy
maturing upon an Event of Default shall not impair the right or remedy or
constitute a waiver of or acquiescence in the Event of Default. No remedy is
exclusive of any other remedy. All available remedies are cumulative to the
extent permitted by law.
SECTION 6.04. Waiver of Past Default.
----------------------
Subject to Sections 6.07 and 9.02, the Holders of not less than a
majority in aggregate principal amount of the outstanding Securities by written
notice to the Trustee may annul, rescind or waive an existing Default or Event
of Default and its consequences, except, unless theretofore cured, a Default in
the payment of principal of or interest on any Security as specified in clauses
(i) and (ii) of Section 6.01. The Company shall deliver to the Trustee an
Officers' Certificate stating that the requisite percentage of Holders have
consented to such annulment, rescission or waiver and attaching copies of such
consents. When a Default or Event of Default is so waived, it is cured.
SECTION 6.05. Control by Majority.
-------------------
The Holders of not less than a majority in principal amount of the
outstanding Securities may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on it. However, the Trustee may refuse to follow any direction
that conflicts with law or this Indenture, that the Trustee determines may be
unduly prejudicial to the rights of another Securityholder, or that may involve
the Trustee in personal
43
<PAGE>
liability; provided that the Trustee may take any other action deemed proper by
--------
the Trustee which is not inconsistent with such direction. In the event the
Trustee takes any action or follows any direction pursuant to this Indenture,
the Trustee shall be entitled to indemnification satisfactory to it in its sole
discretion against any loss or expense caused by taking such action or following
such direction.
SECTION 6.06. Limitation on Suits.
-------------------
A Securityholder may not pursue any remedy with respect to this
Indenture or the Securities unless:
(1) the Holder gives to the Trustee written notice of a continuing
Event of Default;
(2) the Holders of at least 25% in principal amount of the
outstanding Securities make a written request to the Trustee to pursue a
remedy;
(3) such Holder or Holders offer and, if requested, provide to the
Trustee indemnity satisfactory to the Trustee against any loss, liability
or expense;
(4) the Trustee does not comply with the request within 60 days
after receipt of the request and the offer and, if requested, the provision
of indemnity; and
(5) during such 60-day period the Holders of a majority in
principal amount of the outstanding Securities do not give the Trustee a
direction which, in the opinion of the Trustee, is inconsistent with the
request.
A Securityholder may not use this Indenture to prejudice the rights of
another Securityholder or to obtain a preference or priority over such other
Securityholder.
SECTION 6.07. Rights of Holders To Receive Payment.
------------------------------------
Notwithstanding any other provision of this Indenture, the right of any
Holder to receive payment of principal of and interest on the Security, on or
after the respective due dates expressed in the Security, or to bring suit for
the enforcement of any such payment on or after such respective dates, shall not
be impaired or affected without the consent of the Holder.
SECTION 6.08. Collection Suit by Trustee.
--------------------------
If an Event of Default in payment of interest or principal specified in
Section 6.01(i) or (ii) occurs and is continuing, the Trustee may recover
judgment in its own name and as trustee of an express trust against the Company,
the Guarantor or any other obligor on the Securities for the whole amount of
44
<PAGE>
principal and accrued interest remaining unpaid, together with interest overdue
on principal and to the extent that payment of such interest is lawful, interest
on overdue installments of interest, in each case at the rate per annum borne by
--- -----
the Securities and such further amount as shall be sufficient to cover the costs
and expenses of collection, including the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel.
SECTION 6.09. Trustee May File Proofs of Claim.
--------------------------------
The Trustee may file such proofs of claim and other papers or documents
as may be necessary or advisable in order to have the claims of the Trustee
(including any claim for the reasonable compensation, expenses, disbursements
and advances of the Trustee, its agents and counsel) and the Securityholders
allowed in any judicial proceedings relative to the Company, the Guarantor or
any other obligor upon the Securities, their creditors or their property and
shall be entitled and empowered to collect and receive any monies or other
property payable or deliverable on any such claims and to distribute the same,
and any custodian in any such judicial proceedings is hereby authorized by each
Securityholder to make such payments to the Trustee and, in the event that the
Trustee shall consent to the making of such payments directly to the
Securityholders, to pay to the Trustee any amount due to it for the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agent and
counsel, and any other amounts due the Trustee under Section 7.07. Nothing
herein contained shall be deemed to authorize the Trustee to authorize or
consent to or accept or adopt on behalf of any Securityholder any plan of
reorganization, arrangement, adjustment or composition affecting the Securities
or the rights of any Holder thereof, or to authorize the Trustee to vote in
respect of the claim of any Securityholder in any such proceeding.
SECTION 6.10. Priorities.
----------
If the Trustee collects any money or property pursuant to this Article
Six, it shall pay out the money or property in the following order:
First: to the Trustee for amounts due under Section 7.07;
Second: to Holders for amounts due and unpaid on the Securities for
principal and interest, ratably, without preference or priority of any
kind, according to the amounts due and payable on the Securities for
principal and interest, respectively; and
Third: to the Company or any other Person or Persons entitled
thereto.
45
<PAGE>
The Trustee, upon prior written notice to the Company and the Guarantor,
may fix a record date and payment date for any payment to Securityholders
pursuant to this Section 6.10.
SECTION 6.11. Undertaking for Costs.
---------------------
In any suit for the enforcement of any right or remedy under this
Indenture or in any suit against the Trustee for any action taken or omitted by
it as Trustee, a court in its discretion may require the filing by any party
litigant in the suit of an undertaking to pay the costs of the suit, and the
court in its discretion may assess reasonable costs, including reasonable
attorneys, fees, against any party litigant in the suit, having due regard to
the merits and good faith of the claims or defenses made by the party litigant.
This Section 6.11 shall not apply to a suit by the Trustee, a suit by Holders of
more than 10% in aggregate principal amount of the outstanding Securities, or to
any suit instituted by any Holder for the enforcement or the payment of the
principal or interest on any Securities on or after the respective due dates
expressed in the Security.
ARTICLE SEVEN
TRUSTEE
SECTION 7.01. Duties of Trustee.
-----------------
(a) If an Event of Default has occurred and is continuing, the
Trustee shall exercise such of the rights and powers vested in it by this
Indenture and use the same degree of care and skill in their exercise as a
prudent person would exercise or use under the circumstances in the conduct of
his or her own affairs. Subject to such provisions, the Trustee will be under
no obligation to exercise any of its rights or powers under this Indenture at
the request of any of the holders of Securities, unless they shall have offered
to the Trustee security and indemnity satisfactory to it.
(b) Except during the continuance of an Event of Default actually
known to the Trustee:
(1) The Trustee need perform only those duties as are specifically
set forth herein and no others and no implied covenants or obligations
shall be read into this Indenture against the Trustee.
(2) In the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the correctness of
the opinions expressed therein, upon certificates or opinions and such
other documents delivered to it pursuant to Section 11.04 hereof
46
<PAGE>
furnished to the Trustee and conforming to the requirements of this
Indenture. However, the Trustee shall examine the certificates and
opinions to determine whether or not they conform to the requirements of
this Indenture.
(c) The Trustee may not be relieved from liability for its own
negligent action, its own negligent failure to act, or its own willful
misconduct, except that:
(1) This paragraph does not limit the effect of paragraph (b) of this
Section 7.01.
(2) The Trustee shall not be liable for any error of judgment made in
good faith by a Trust Officer, unless it is proved that the Trustee was
negligent in ascertaining the pertinent facts.
(3) The Trustee shall not be liable with respect to any action it
takes or omits to take in good faith in accordance with a direction
received by it pursuant to Section 6.05.
(d) No provision of this Indenture shall require the Trustee to expend
or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder or to take or omit to take any action
under this Indenture or take any action at the request or direction of Holders
if it shall have reasonable grounds for believing that repayment of such funds
is not assured to it or it does not receive an indemnity satisfactory to it in
its sole discretion against such risk, liability, loss, fee or expense which
might be incurred by it in compliance with such request or direction.
(e) Every provision of this Indenture that in any way relates to the
Trustee is subject to paragraphs (a), (b), (c) and (d) of this Section 7.01.
(f) The Trustee shall not be liable for interest on any money
received by it except as the Trustee may agree in writing with the Company or
the Guarantor, as the case may be. Money held in trust by the Trustee need not
be segregated from other funds except to the extent required by law.
SECTION 7.02. Rights of Trustee.
-----------------
Subject to Section 7.01:
(a) The Trustee may rely on any document believed by it to be
genuine and to have been signed or presented by the proper person. The
Trustee need not investigate any fact or matter stated in the document.
47
<PAGE>
(b) Before the Trustee acts or refrains from acting, it may
require an Officers' Certificate and an Opinion of Counsel or, if such
matter relates to the Guarantor, a Guarantor's Officers' Certificate and
Opinion of Counsel, in each case which shall conform to the provisions of
Section 11.05. The Trustee shall not be liable for any action it takes or
omits to take in good faith in reliance on such certificate or opinion.
(c) The Trustee may act through its attorneys and agents and shall
not be responsible for the misconduct or negligence of any agent (other
than an agent who is an employee of the Trustee) appointed with due care.
(d) The Trustee shall not be liable for any action it takes or
omits to take in good faith which it reasonably believes to be authorized
or within its rights or powers.
(e) The Trustee may consult with counsel and the advice or opinion
of such counsel as to matters of law shall be full and complete
authorization and protection from liability in respect of any action taken,
omitted or suffered by it hereunder in good faith and in accordance with
the advice or opinion of such counsel.
SECTION 7.03. Individual Rights of Trustee.
----------------------------
The Trustee in its individual or any other capacity may become the owner or
pledgee of Securities and may otherwise deal with the Company or its Affiliates
with the same rights it would have if it were not Trustee. Any Agent may do the
same with like rights. However, the Trustee is subject to Sections 7.10 and
7.11.
SECTION 7.04. Trustee's Disclaimer.
--------------------
The Trustee shall not be responsible for and makes no representation as to
the validity or adequacy of this Indenture or the Securities, it shall not be
accountable for the Company's use of the proceeds from the Securities, and it
shall not be responsible for any statement of the Company in this Indenture or
any document issued in connection with the sale of Securities or any statement
in the Securities other than the Trustee's certificate of authentication.
SECTION 7.05. Notice of Defaults.
------------------
If a Default or an Event of Default occurs and is continuing and the
Trustee receives actual notice of such event, the Trustee shall mail to each
Securityholder notice of the Default or Event of Default within 90 days after
receipt of such notice. Except in the case of a Default or an Event of Default
48
<PAGE>
in payment of principal of or interest on any Security, the Trustee may withhold
the notice if and so long as a committee of its Trust Officers in good faith
determines that withholding the notice is in the interest of Securityholders.
SECTION 7.06. Reports by Trustee to Holders.
-----------------------------
If required by TIA (S) 313(a) within 60 days after each May 15 beginning
with the May 15 following the date of this Indenture, the Trustee shall mail to
each Securityholder a report dated as of such May 15 that complies with TIA (S)
313(a). The Trustee also shall comply with TIA (S) 313(b), (c) and (d).
A copy of each such report at the time of its mailing to Securityholders
shall be filed with the SEC and each securities exchange, if any, on which the
Securities are listed.
The Company shall promptly notify the Trustee in writing if the Securities
become listed on any securities exchange or of any delisting thereof.
SECTION 7.07. Compensation and Indemnity.
--------------------------
The Company shall pay to the Trustee from time to time reasonable
compensation for its services rendered hereunder. The Trustee's compensation
shall not be limited by any law on compensation of a trustee of an express
trust. The Company shall reimburse the Trustee upon request for all reasonable
disbursements, expenses and advances (including fees and expenses of counsel)
incurred or made by it in addition to the compensation for its services, except
any such disbursements, expenses and advances as may be attributable to the
Trustee's negligence or bad faith. Such expenses shall include the reasonable
compensation, disbursements and expenses of the Trustee's agents and counsel and
any taxes or other expenses incurred by a trust created pursuant to Section 8.01
hereof.
The Company shall indemnify the Trustee for, and hold it harmless against,
any loss or liability incurred by the Trustee without negligence, bad faith or
willful misconduct on its part in connection with the administration of this
trust and its duties under this Indenture, including the reasonable expenses and
attorneys' fees of defending itself against any claim of liability arising
hereunder. The Trustee shall notify the Company promptly of any claim asserted
against the Trustee for which it may seek indemnity. However, the failure by
the Trustee to so notify the Company shall not relieve the Company of its
obligations hereunder, except to the extent such failure shall have prejudiced
the Company. The Company shall defend the claim and the Trustee shall cooperate
in the defense. If the Trustee is advised by counsel that its interests
conflict with or are adverse to the Company's, then the Trustee may have
separate counsel and the Company shall pay the reasonable fees of such
49
<PAGE>
counsel. The Company need not pay for any settlement made without its written
consent, which consent shall not be unreasonably withheld. The Company need not
reimburse any expense or indemnify against any loss or liability incurred by the
Trustee as a result of the violation of this Indenture by the Trustee if such
violation arose from the Trustee's negligence or bad faith and willful
misconduct.
To secure the Company's payment obligations in this Section 7.07, the
Trustee shall have a senior claim prior to the Securities against all money or
property held or collected by the Trustee, in its capacity as Trustee, except
money or property held in trust to pay principal of or interest on particular
Securities.
When the Trustee incurs expenses or renders services after an Event of
Default specified in clause (vii) or (viii) of Section 6.01 occurs, the expenses
(including the reasonable fees and expenses of its agents and counsel) and the
compensation for the services shall be preferred over the status of the Holders
in a proceeding under any Bankruptcy Law and are intended to constitute expenses
of administration under any Bankruptcy Law. The Company's obligations under this
Section 7.07 and any claim arising hereunder shall survive the resignation or
removal of any Trustee, the discharge of the Company's obligations pursuant to
Article Eight and any rejection or termination under any Bankruptcy Law.
SECTION 7.08. Replacement of Trustee.
----------------------
The Trustee may resign at any time by so notifying the Company and the
Guarantor in writing. The Holders of a majority in principal amount of the
outstanding Securities may remove the Trustee by so notifying the Trustee in
writing and may appoint a successor Trustee with the Company's consent. The
Company may remove the Trustee if:
(1) the Trustee fails to comply with Section 7.10;
(2) the Trustee is adjudged a bankrupt or an insolvent or an order
for relief is entered with respect to the Trustee under any Bankruptcy Law;
(3) a receiver or other public officer takes charge of the Trustee or
its property; or
(4) the Trustee becomes incapable of acting.
If the Trustee resigns or is removed or if a vacancy exists in the
office of Trustee for any reason (the Trustee in such event being referred to
herein as the retiring Trustee), the Company shall promptly appoint a successor
Trustee. Within one year after the successor Trustee takes office, the Holders
of a
50
<PAGE>
majority in principal amount of the Securities may appoint a successor Trustee
to replace the successor Trustee appointed by the Company.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company and the Guarantor.
Immediately after that, the retiring Trustee shall transfer, after payment of
all sums then owing to the Trustee pursuant to Section 7.07, all property held
by it as Trustee to the successor Trustee, subject to the senior claim provided
in Section 7.07, the resignation or removal of the retiring Trustee shall become
effective, and the successor Trustee shall have the rights, powers and duties of
the Trustee under this Indenture. A successor Trustee shall mail notice of its
succession to each Securityholder.
If a successor Trustee does not take office within 60 days after the
retiring Trustee resigns or is removed, the retiring Trustee, the Company or the
Holders of at least 10% in principal amount of the outstanding Securities may
petition any court of competent jurisdiction for the appointment of a successor
Trustee.
If the Trustee fails to comply with Section 7.10, any Securityholder may
petition any court of competent jurisdiction for the removal of the Trustee and
the appointment of a successor Trustee.
Notwithstanding replacement of the Trustee pursuant to this Section
7.08, the Company's obligations under Section 7.07 shall continue for the
benefit of the retiring Trustee.
SECTION 7.09. Successor Trustee by Merger, etc.
--------------------------------
If the Trustee consolidates with, merges or converts into, or transfers
all or substantially all of its corporate trust business to, another corporation
or banking corporation, the resulting, surviving or transferee corporation or
banking corporation without any further act shall be the successor Trustee,
provided that such successor is eligible and qualified under this Article Seven.
SECTION 7.10. Eligibility; Disqualification.
-----------------------------
This Indenture shall always have a Trustee which shall be eligible to
act as Trustee under TIA (S)(S) 310(a)(1) and 310(a)(2). The Trustee shall have
(or in the case of a corporation included in a bank holding company structure,
the related bank holding company shall have) a combined capital and surplus of
at least $100,000,000 as set forth in its most recent published annual report of
condition. If the Trustee has or shall acquire any "conflicting interest"
within the meaning of TIA (S) 310(b), the Trustee and the Company shall comply
with the provisions of TIA (S) 310(b). If at any time the Trustee shall cease
to be eligible in accordance with the provisions of this Section, the
51
<PAGE>
Trustee shall resign immediately in the manner and with the effect hereinafter
specified in this Article Seven.
SECTION 7.11. Preferential Collection of Claims.
---------------------------------
The Trustee, in its capacity as Trustee hereunder, shall comply with TIA
(S) 311(a), excluding any creditor relationship listed in TIA (S) 311(b). A
Trustee who has resigned or been removed shall be subject to TIA (S) 311(a) to
the extent indicated therein.
ARTICLE EIGHT
DISCHARGE OF INDENTURE; DEFEASANCE
SECTION 8.01. Satisfaction and Discharge.
--------------------------
This Indenture shall cease to be of further effect (except as to
surviving rights of registration of transfer or exchange of the Securities, as
expressly provided for in Section 2.06, and except as to Section 7.07) as to all
outstanding Securities when (i) either (a) all such Securities theretofore
authenticated and delivered (except (1) lost, destroyed or wrongfully taken
Securities which have been replaced or paid as provided in Section 2.07 and (2)
Securities for whose payment money as theretofore been deposited with the
Trustee or any Paying Agent and thereafter repaid to the Company or the
Guarantor as provided in Section 8.04) have been delivered to the Trustee for
cancellation or (b) all such Securities not theretofore delivered to the Trustee
for cancellation either have become due and payable, will become due and payable
at their Stated Maturity within one year or are redeemable at the option of the
Company and are to be called for redemption within one year under arrangements
satisfactory to the Trustee for the giving of notice of redemption by the
Trustee in the name and at the expense of the Company or the Guarantor, and, in
any event, the Company or the Guarantor has irrevocably deposited or caused to
be deposited with the Trustee funds in an amount sufficient to pay and discharge
the entire indebtedness for principal of, premium, if any and interest to the
date of such deposit (in the case of Securities that have become due and
payable) or to the Maturity Date or redemption date, as the case may be, on the
Securities not theretofore delivered to the Trustee for cancellation; (ii) the
Company or the Guarantor has paid or caused to be paid all other sums payable
under this Indenture by the Company or the Guarantor; and (iii) the Company or
the Guarantor has delivered to the Trustee an Officers' Certificate and a
Guarantor's Officers' Certificate, and an Opinion of Counsel each stating that
(A) all conditions precedent under this Indenture relating to the satisfaction
and discharge of this Indenture have been complied with and (B) such
satisfaction and discharge will not result in a breach or violation of, or
52
<PAGE>
constitute a default under, this Indenture or any other material agreement or
instrument to which the Company or the Guarantor is a party or by which they are
bound.
After such delivery or irrevocable deposit and delivery of an Officers'
Certificate, Guarantor's Officers' Certificate, and Opinion of Counsel, the
Trustee upon request shall acknowledge in writing the discharge of the Company's
and Guarantor's obligations under the Securities and this Indenture except for
those surviving obligations specified above.
Notwithstanding the satisfaction and discharge of this Indenture, if
money shall have been deposited with the Trustee pursuant to subclause (b) of
clause (i) of the first paragraph of this Section 8.01, the obligations of the
Trustee under Sections 8.03 and 8.04 shall survive.
SECTION 8.02. Defeasance and Covenant Defeasance.
----------------------------------
(a) The Company and the Guarantor may, at their option and at anytime
elect to have the obligations of the Company and the Guarantor discharged with
respect to the outstanding Securities (a "defeasance") by fulfilling the
applicable conditions of Section 8.02(b). Such defeasance means that the
Company and the Guarantor shall be deemed to have paid and discharged the entire
Indebtedness represented by the outstanding Securities, and to have satisfied
all their other obligations under such Securities and this Indenture (and the
Trustee, at the expense of the Company, shall execute proper instruments
acknowledging the same), except for the following which shall survive unless
otherwise terminated or discharged hereunder: (i) the rights of Holders of
outstanding Securities to receive, solely from the trust fund described in
Sections 8.02(b) and 8.03, payments in respect of the principal of, premium, if
any, and interest on such Securities when such payments are due, (ii) the
Company's obligations with respect to the Securities concerning issuing
temporary Securities (Section 2.10), registration of transfer or exchange of
Securities (Section 2.06), mutilated, destroyed, lost or stolen Securities
(Section 2.07) and the maintenance of an office or agency for payment (Section
4.02) and money for security payments held in trust (Section 2.04), (iii) the
rights, powers, trusts, duties and immunities of the Trustee set forth in
Article Seven and (iv) the defeasance provisions this Article Eight. In
addition, the Company may, at its option and at any time, elect to have the
obligations of the Company released with respect to any covenants contained in
Sections 4.03, 4.04, 4.05, 4.06, 4.07, 4.13, 4.15, 4.16, 4.17, 4.18, 4.19 and
5.01 (a "covenant defeasance") by fulfilling the applicable provisions of
Section 8.02(b) and such Securities shall thereafter be deemed not to be
outstanding for the purposes of any direction, waiver, consent, declaration or
any other act or action of the Holders (and the consequences of any thereof)
taken or to be taken in connection with any of such
53
<PAGE>
covenants, but shall continue to be deemed outstanding for all other purposes
hereunder. For this purpose such covenant defeasance means with respect to such
outstanding Securities that the Company may omit to comply with and shall have
no liability in respect of any term, condition or limitation set forth in any
such Section or by reason of reference in any such Section to any other
provision herein or in any other document, and such omission to comply with any
such term, condition or limitation shall not constitute a Default or an Event of
Default with respect to the Securities. In the event covenant defeasance
occurs, the events described in clauses (iii) (as it applies to the covenants
listed in the foregoing sentence), (iv), (v) and (vi) of Section 6.01 shall no
longer constitute Events of Default with respect to the Securities. Except as
specified above, the remainder of this Indenture and such Securities shall be
unaffected by such covenant defeasance.
(b) The following shall be the conditions to application of this Section 8.02:
(i) the Company or the Guarantor shall have deposited or caused to be
deposited irrevocably with the Trustee as trust funds, in trust for the
benefit of the Holders of the Securities, cash in U.S. dollars, United
States Government Obligations, or a combination thereof, in an amount
sufficient, in the opinion of a nationally recognized firm of independent
public accountants expressed in a written certification thereof delivered
to the Trustee, to pay the principal of, premium, if any, and interest on
the outstanding Securities on the Stated Maturity of such principal or
installment of principal or interest;
(ii) in the case of defeasance, the Company shall have delivered to
the Trustee an Opinion of Counsel in the United States stating that (A) the
Company has received from, or there has been published by, the Internal
Revenue Service a ruling or (B) since the date of this Indenture, there has
been a change in the applicable federal income tax law, in either case to
the effect that, and based thereon such Opinion of Counsel shall confirm
that, the Holders of the outstanding Securities will not recognize income,
gain or loss for federal income tax purposes as a result of such defeasance
and will be subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such defeasance
had not occurred;
(iii) in the case of covenant defeasance, the Company shall have
delivered to the Trustee an Opinion of Counsel in the United States to the
effect that the Holders of the outstanding Securities will not recognize
income, gain or loss for federal income tax purposes as a result of such
covenant defeasance and will be subject to federal income
54
<PAGE>
tax on the same amounts, in the same manner and at the same times as would
have been the case if such covenant defeasance had not occurred;
(iv) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit or, insofar as clauses (vii) and
(viii) of Section 6.01 are concerned, at any time during the period ending
on the 91st day after the date of such deposit (it being understood that
this condition shall not be deemed satisfied until the expiration of such
period);
(v) such defeasance or covenant defeasance shall not result in a
breach or violation of, or constitute a default under, this Indenture or
any other material agreement or instrument to which the Company or the
Guarantor is a party or by which it is bound;
(vi) in the case of defeasance or covenant defeasance, the Company
shall have delivered to the Trustee an Opinion of Counsel to the effect
that after the 91st day following the deposit, the trust funds will not be
subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally;
(vii) the Company and the Guarantor shall have delivered to the
Trustee an Officers' Certificate and a Guarantor's Officers' Certificate,
respectively, stating that the deposit was not made by the Company or the
Guarantor, as the case may be, with the intent of preferring the Holders of
Securities over the other creditors of the Company or the Guarantor with
the intent of defecting, hindering, delaying or defrauding creditors of the
Company, the Guarantor or others; and
(viii) the Company and the Guarantor shall have delivered to the
Trustee an Officers' Certificate and a Guarantor's Officers' Certificate,
respectively, and an Opinion of Counsel, each stating that all conditions
precedent provided for relating to either the defeasance or the covenant
defeasance, as the case may be, have been complied with.
(c) Notwithstanding defeasance or covenant defeasance in
accordance with this Section 8.02, the obligations of the Trustee under Sections
8.03 and 8.04 shall survive.
SECTION 8.03. Application of Trust Money.
--------------------------
Subject to Section 8.04, the Trustee shall hold in trust all money or
United States Government Obligations deposited with it pursuant to Sections 8.01
or 8.02, and shall apply the deposited money and the money from United States
Government
55
<PAGE>
Obligations in accordance with this Indenture to the payment of principal of and
interest on the Securities.
SECTION 8.04. Repayment to Company.
--------------------
Subject to Sections 7.07, 8.01 and 8.02, the Trustee shall promptly pay
to the Company upon written request any excess money and/or United States
Government Obligations held by it at any time. The Trustee shall pay to the
Company or the Guarantor, as appropriate, upon written request any money held by
it for the payment of principal, premium or interest that remains unclaimed for
two years; provided that the Trustee before being required to make any payment
--------
may at the expense of the Company cause to be published once in a newspaper of
general circulation in the City of New York or mail to each Holder entitled to
such money notice that such money remains unclaimed and that, after a date
specified therein which shall be at least 30 days from the date of such
publication or mailing, any unclaimed balance of such money then remaining shall
be repaid to the Company or the Guarantor, as the case may be. After payment to
the Company or the Guarantor, Securityholders entitled to money must look to the
Company or the Guarantor, as the case may be, for payment as general creditors
unless an applicable abandoned property law designates another person and all
liability of the Trustee or Paying Agent with respect to such money shall
thereupon cease.
SECTION 8.05. Reinstatement.
-------------
If the Trustee is unable to apply any money or United States Government
Obligations in accordance with Sections 8.01 or 8.02 by reason of any legal
proceeding or by reason of any order or judgment of any court or governmental
authority enjoining, restraining or otherwise prohibiting such application, the
Company's and the Guarantor's obligations under this Indenture and the
Securities shall be revived and reinstated as though no deposit had occurred
pursuant to Sections 8.01 or 8.02 until such time as the Trustee is permitted to
apply all such money or United States Government Obligations in accordance with
Sections 8.01 or 8.02; provided that if the Company or the Guarantor has made
--------
any payment of interest on or principal of any Securities because of the
reinstatement of its obligations, the Company or the Guarantor, as the case may
be, shall be subrogated to the rights of the Holders of such Securities to
receive such payment from the money or United States Government Obligations held
by the Trustee.
56
<PAGE>
ARTICLE NINE
AMENDMENTS, SUPPLEMENTS AND WAIVERS
SECTION 9.01. Without Consent of Holders.
--------------------------
The Company, when authorized by a Board Resolution, the Guarantor, when
authorized by a Guarantor's Board Resolution, and the Trustee, as applicable,
may amend or supplement this Indenture or the Securities without notice to or
consent of any Securityholder:
(1) to cure any ambiguity, defect or inconsistency;
(2) to evidence the succession of another Person to the Guarantor,
the Company or any Subsidiary of the Company and the assumption by any such
successor of the covenants of the Guarantor, the Company or such
Subsidiary, as the case may be;
(3) to evidence the release and discharge of the obligations of any
Subsidiary of the Company the Capital Stock of which has been sold or
otherwise disposed of in accordance with the applicable provisions of this
Indenture; or
(4) to make any other change that does not have a material adverse
effect on the rights of any Securityholder.
SECTION 9.02. With Consent of Holders.
-----------------------
In addition to the amendments and supplements permitted under
Section 9.01, subject to Section 6.07, the Company, when authorized by a
Board Resolution, the Guarantor, when authorized by a Guarantor's Board
Resolution, and the Trustee, as applicable, may amend or supplement this
Indenture or the Securities with the written consent of the Holders of at
least a majority in principal amount of the outstanding Securities. Subject
to Section 6.07, the Holders of not less than a majority in principal
amount of the outstanding Securities may waive (either generally or as to a
particular circumstance and either retroactively or prospectively)
compliance by the Company or the Guarantor with any provision of this
Indenture or the Securities. However, without the consent of each
Securityholder affected thereby, an amendment, supplement or waiver,
including a waiver pursuant to Section 6.04, may not:
(i) reduce the rate, or change the time or place for payment, of
interest on any Security, or reduce any amount payable on the redemption
thereof or upon a Change of Control;
57
<PAGE>
(ii) reduce the principal, or change the fixed maturity or place of
payment, of any Security;
(iii) change the currency of payment of principal of or interest on
any Security;
(iv) impair the right to institute suit for the enforcement of any
payment on or with respect to any Security;
(v) reduce the principal amount of outstanding Securities necessary
to modify or amend this Indenture;
(vi) modify any of the provisions of Section 4.15;
(vii) modify any of the provisions of Article 10 in any way that
affects adversely the Securities; or
(viii) modify any of the foregoing provisions or reduce the principal
amount of outstanding Securities necessary to waive any covenant or past
Default.
It shall not be necessary for the consent of the Holders under this
Section to approve the particular form of any proposed amendment, supplement or
waiver, but it shall be sufficient if such consent approves the substance
thereof.
SECTION 9.03. Compliance with Trust Indenture Act.
-----------------------------------
Every amendment to or supplement of this Indenture or the Securities
shall comply with the TIA as then in effect.
SECTION 9.04. Revocation and Effect of Consents.
---------------------------------
Until an amendment, supplement or waiver becomes effective, a consent to
it by a Holder is a continuing consent by the Holder and every subsequent Holder
of that Security or portion of that Security that evidences the same debt as the
consenting Holder's Security, even if notation of the consent is not made on any
Security. However, except as provided in the succeeding paragraph, any such
Holder or subsequent Holder may revoke the consent as to his Security or portion
of a Security. Such revocation shall be effective only if the Trustee receives
written notice of such revocation before the date the amendment, supplement or
waiver becomes effective.
The Company may, but shall not be obligated to, fix a record date for
the purpose of determining the Holders entitled to consent to any amendment,
supplement or waiver. If a record date is fixed, then, notwithstanding the last
two sentences of the immediately preceding paragraph, those Persons who were
Holders at such record date (or their duly designated proxies), and only those
Persons, shall be entitled to consent to such
58
<PAGE>
amendment, supplement or waiver or to revoke by written notice received by the
Trustee any consent previously given, whether or not such Persons continue to be
Holders after such record date. No such consent shall be valid or effective for
more than 90 days after such record date, unless the relevant amendment,
supplement or waiver to which such consent relates has become effective, in
which event such Persons who were Holders at such record date shall no longer be
entitled to revoke any consent previously given and such consent shall continue
to be valid and effective.
SECTION 9.05. Notation on or Exchange of Securities.
-------------------------------------
If an amendment, supplement or waiver changes the terms of a Security,
the Trustee may require the Holder of the Security to deliver it to the Trustee.
The Trustee may place an appropriate notation on the Security about the changed
terms and return it to the Holder. Alternatively, if the Company or the Trustee
so determines, the Company in exchange for the Security shall issue and the
Trustee shall authenticate a new Security that reflects the changed terms.
Failure to make the appropriate notation or issue a new Security shall not
affect the validity and effect of such amendment, supplement or waiver.
SECTION 9.06. Trustee To Sign Amendments, etc.
--------------------------------
The Trustee shall be entitled to receive, and shall be fully protected
in relying upon, an Opinion of Counsel stating that the execution of any
amendment, supplement or waiver authorized pursuant to this Article Nine is
authorized or permitted by this Indenture and that such amendment, supplement or
waiver, constitutes the legal, valid and binding obligation of the Company,
enforceable in accordance with its terms (subject to customary exceptions). The
Trustee may, but shall not be obligated to, execute any such amendment,
supplement or waiver which affects the Trustee's own rights, duties or
immunities under this Indenture or otherwise. In signing any amendment,
supplement or waiver, the Trustee shall be entitled to receive an indemnity
satisfactory to it in its sole discretion.
SECTION 9.07. Execution and Effect of Amendments, Waivers and
-----------------------------------------------
Supplemental Indentures.
-----------------------
Upon the request of the Company and/or the Guarantor, accompanied by a
resolution of the Boards of Directors of the Company and the Guarantor,
authorizing the execution of any such supplemental Indenture, and upon receipt
by the Trustee of the documents described in Section 9.06 hereof, the Trustee
shall join with the Company in the execution of any supplemental Indenture
authorized or permitted by the terms of this Indenture and to make any further
appropriate agreements and stipulations which may be therein contained, but the
Trustee shall not be
59
<PAGE>
obligated to enter into any such supplemental Indenture which affects its own
rights, duties or immunities under this Indenture or otherwise, in which case
the Trustee may, in its discretion, but shall not be obligated to, enter into
such supplemental Indenture.
After an amendment, supplement or waiver of this Indenture under this
Article Nine becomes effective, the Company shall mail to the Holders affected
thereby a notice briefly describing the amendment, supplement or waiver. Any
failure of the Company to mail such notice, or any defect therein, shall not,
however, in any way impair or affect the validity of any such amendment,
supplemental indenture or waiver.
After an amendment, supplement or waiver of this Indenture becomes
effective under this Article Nine, it shall form a part of this Indenture for
all purposes and bind every Securityholder, unless it makes a change described
in any of clauses (i) through (viii) of Section 9.02. In that case, the
amendment, supplement or waiver shall form a part of this Indenture for all
purposes and bind each Holder of a Security who has consented to it and every
subsequent Holder of a Security or portion of a Security that evidences the same
debt as the consenting Holder's Security.
ARTICLE TEN
GUARANTEE
SECTION 10.01. Guarantee.
---------
The Guarantor hereby unconditionally guarantees to each Holder of a
Security authenticated and delivered by the Trustee the due and punctual payment
of the principal of, any premium and interest on and any other Obligation with
respect to, such Security, when and as the same shall become due and payable,
whether at maturity, by acceleration, redemption, repayment or otherwise, in
accordance with the terms of such Security and of this Indenture. In case of
the failure of the Company punctually to pay any such principal, premium,
interest or other Obligations, the Guarantor hereby agrees to cause any such
payment to be made punctually when and as the same shall become due and payable,
whether at maturity, upon acceleration, redemption, repayment or otherwise, and
as if such payment were made by the Company.
The Guarantor hereby agrees that its obligations hereunder shall be as
principal and not merely as surety, and shall be absolute, irrevocable and
unconditional, irrespective of, and shall be unaffected by, any invalidity,
irregularity or unenforceability of any Security or this Indenture, any failure
to enforce the provisions of any Security or this Indenture, or
60
<PAGE>
any waiver, modification, consent or indulgence granted with respect thereto by
the Holder of such Security or the Trustee, the recovery of any judgment against
the Company or any action to enforce the same, or any other circumstances which
may otherwise constitute a legal or equitable discharge of a surety or
guarantor. The Guarantor hereby waives diligence, presentment, demand of
payment, filing of claims with a court in the event of merger, insolvency or
bankruptcy of the Company, any right to require a proceeding first against the
Company, protest or notice with respect to any such Security or the indebtedness
evidenced thereby and all demands whatsoever, and covenants that this Guarantee
will not be discharged except by payment in full of the principal of, any
premium and interest on, and any other Obligations with respect to, the
Securities and the complete performance of all other obligations contained in
the Securities.
This Guarantee shall continue to be effective or be reinstated, as the
case may be, if at any time payment on any Security, in whole or in part, is
rescinded or must otherwise be restored to the Company or the Guarantor upon the
bankruptcy, liquidation or reorganization of the Company or otherwise.
The Guarantor shall be subrogated to all rights of the Holder of any
Security against the Company in respect of any amounts paid to such Holder by
the Guarantor pursuant to the provisions of this Guarantee; provided, however,
-------- -------
that the Guarantor shall not be entitled to enforce, or to receive any payments
arising out of or based upon, such right of subrogation until the principal of,
any premium and interest on, and any other Obligations with respect to, all
Securities shall have been paid in full.
ARTICLE ELEVEN
MISCELLANEOUS
SECTION 11.01. Trust Indenture Act Controls.
----------------------------
If any provision of this Indenture limits, qualifies, or conflicts with
another provision which is required to be included in this Indenture by the TIA,
the required provision shall control.
SECTION 11.02. Notices.
-------
Any notice or communication shall be sufficiently given if in writing
and delivered in person, by facsimile and confirmed by overnight courier, or
mailed by first-class mail or by telecopy addressed as follows:
61
<PAGE>
if to the Company or the Guarantor:
Orchard Supply Hardware Corporation
6450 Via Del Oro
San Jose, California 95119
Attention: Chief Financial Officer
Telecopy Number: (408) 629-7174
with copies, in either case, to:
Freeman Spogli & Co.
11100 Santa Monica Boulevard
Suite 1900
Los Angeles, California 90025
Attention: Ronald P. Spogli
Telecopy Number: (310) 444-1870
if to the Trustee:
U.S. Trust Company of California
Suite 2700
555 South Flower Street
Los Angeles, California 90071
Attention: Corporate Trust Division
Telecopy Number: (213) 489-3371
The Company, the Guarantor or the Trustee by notice to the other parties
may designate additional or different addresses for subsequent notices or
communications.
Any notice or communication mailed, first class, postage prepaid, to a
Securityholder, including any notice delivered in connection with TIA (S)
310(b), TIA (S) 313(c), TIA (S) 314(a) and TIA (S) 315(b), shall be mailed to
him or her at his or her address as set forth on the registration books of the
Registrar and shall be sufficiently given to him or her if so mailed within the
time prescribed.
Any notice or other communication to the Company, the Guarantor or to
the Trustee shall be deemed given only when such notice or other communication
is actually received by the Company, the Guarantor or the Trustee, as the case
may be. Any notice or other communication mailed to a Holder in the manner
prescribed above shall be conclusively deemed to have been received by such
Holder, whether or not such Holder actually receives such notice or other
communication. Failure to mail a notice or communication to a Security holder
or any defect in it shall not affect its sufficiency with respect to other
Securityholders.
In the event that, by reason of the suspension of or irregularities in
regular mail service or by reason of any other
62
<PAGE>
cause, it shall be impractical to mail notice of any event to Holders when such
notice is required to be given pursuant to any provision of this Indenture, then
any manner of giving such notice as shall be satisfactory to the Trustee shall
be deemed sufficient giving of such notice for every purpose hereunder.
Where this Indenture provides for notice in any manner, such notice may
be waived in writing by the Person entitled to receive such notice, either
before or after the latest date for the giving of such notice, and such waiver
shall be deemed to constitute such notice. Waivers of notice by Holders shall
be filed with the Trustee, but such filing shall not be a condition precedent to
the validity of any action taken in reliance upon such waiver.
SECTION 11.03. Communications by Holders with Other Holders.
--------------------------------------------
Securityholders may communicate pursuant to TIA (S) 312(b) with other
Securityholders with respect to their rights under this Indenture or the
Securities. The Company, the Guarantor, the Trustee, the Registrar and any
other person shall have the protection of TIA (S) 312(c).
SECTION 11.04. Certificate and Opinion as to Conditions Precedent.
--------------------------------------------------
Upon any request or application by the Company or the Guarantor to the
Trustee to take or refrain from taking any action under this Indenture, the
Company or the Guarantor, as the case may be, shall furnish to the Trustee at
the request of the Trustee:
(1) an Officers' Certificate or a Guarantor's Officers' Certificate,
as the case may be, in form and substance satisfactory to the Trustee
stating that, in the opinion of the signers, all conditions precedent, if
any, provided for in this Indenture relating to the proposed action or
inaction have been complied with; and
(2) an Opinion of Counsel in form and substance satisfactory to the
Trustee stating that, in the opinion of such counsel, all such conditions
precedent, if any, provided for in this Indenture relating to the proposed
action or inaction have been complied with.
SECTION 11.05. Statements Required in Certificate or Opinion.
---------------------------------------------
Each certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture (other than pursuant
to Section 4.12) shall include:
(1) a statement that the person making such certificate or opinion
has read such covenant or condition;
63
<PAGE>
(2) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(3) a statement that, in the opinion of such person, he or she has
made such examination or investigation as is necessary to enable him or her
to express an informed opinion as to whether or not such covenant or
condition has been complied with; and
(4) a statement as to whether or not, in the opinion of such person,
such condition or covenant has been complied with; provided that with
--------
respect to matters of fact an Opinion of Counsel may rely on an Officers'
Certificate or certificates of public officials.
SECTION 11.06. Rules by Trustee, Paying Agent, Registrar.
-----------------------------------------
The Trustee may make reasonable rules for action by or at a meeting of
Securityholders. The Paying Agent or Registrar may make reasonable rules for
its functions.
SECTION 11.07. Governing Law.
-------------
The laws of the State of New York shall govern this Indenture and the
Securities without regard to principles of conflicts of law.
SECTION 11.08. No Recourse Against Others.
--------------------------
No recourse under or upon any obligation, covenant or agreement of this
Indenture, or of any Security, or for any claim based thereon or otherwise in
respect thereof, shall be had against any incorporator, stockholder, officer,
director or employee, as such, past, present or future, of the Company or the
Guarantor; it being expressly understood that this Indenture and the Securities
are solely corporate obligations of the Company and the Guarantor, and that no
such personal liability whatever shall attach to, or is or shall be incurred by,
the incorporators, stockholders, officers, directors or employees, as such, of
the Company or the Guarantor, or any of them, because of the creation of the
indebtedness hereby authorized, or under or by reason of the obligations,
covenants or agreements contained in this Indenture or in the Securities or
implied therefrom; and each Securityholder by its acceptance of a Security, as
consideration for and as a condition of the execution of this Indenture and the
issue of the Securities, hereby expressly waives and releases any and all such
personal liability (either at common law or in equity or by constitution or
statute) of, and any and all such rights and claims against, every such
incorporator, stockholder, officer, director or employee, as such, because of
the creation of the indebtedness hereby
64
<PAGE>
authorized, or under or by reason of the obligations covenants, or agreements
contained in this Indenture or in the Securities or implied therefrom.
SECTION 11.09. Successors.
----------
All agreements of the Company in this Indenture and the Securities shall
bind its successor. All agreements of the Trustee in this Indenture shall bind
its successor.
SECTION 11.10. Counterpart Originals.
---------------------
The parties may sign any number of copies of this Indenture. Each signed
copy shall be an original, but all of them together represent the same
agreement.
SECTION 11.11. Severability.
------------
In case any provision in this Indenture or in the Securities shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby,
and a Holder shall have no claim therefor against any party hereto.
SECTION 11.12. No Adverse Interpretation of Other Agreements.
---------------------------------------------
This Indenture may not be used to interpret another indenture, loan or debt
agreement of the Guarantor, the Company or a Subsidiary of the Company. Any
such indenture, loan or debt agreement may not be used to interpret this
Indenture.
SECTION 11.13. Legal Holidays.
--------------
In any case where any Interest Payment Date, redemption date, Maturity
Date, Stated Maturity, Purchase Date or Repurchase Date shall not be a Business
Day, then (notwithstanding any other provision of this Indenture or the
Securities) payment of principal of and premium, if any, and interest on the
Securities need not be made on such date, but may be made on the next succeeding
Business Day with the same force and effect as if made on the Interest Payment
Date, redemption date, Maturity Date, Stated Maturity, Purchase Date or
Repurchase Date; provided that if such payment is so made, no interest shall
--------
accrue for the period from and after such Interest Payment Date, redemption
date, Maturity Date, Stated Maturity, Purchase Date or Repurchase Date, as the
case may be.
SECTION 11.14. Securities as Specified Senior Indebtedness.
-------------------------------------------
The obligations of the Company hereunder and under the Securities shall be
for all purposes senior in right of payment to the Company's Senior Subordinated
Discount Notes due 1999 and shall constitute, and be entitled to the benefits
of, "Senior
65
<PAGE>
Indebtedness" and "Specified Senior Indebtedness" as defined by the Indenture
under which the same have been issued and for purposes thereof.
66
<PAGE>
SIGNATURES
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be
duly executed, and their respective corporate seals to be hereunto affixed and
attested, all as of the date first written above.
Dated: ___________ __, 1994
ORCHARD SUPPLY HARDWARE CORPORATION
[SEAL]
By: _________________________
Name:
Title:
Attest: ___________________
Dated: __________ __, 1994 ORCHARD SUPPLY HARDWARE STORES
CORPORATION, as Guarantor
[SEAL]
By: __________________________
Name:
Title:
Dated: __________ __, 1994 U.S. TRUST COMPANY OF CALIFORNIA,
N.A., as Trustee
[SEAL]
By: __________________________
Name:
Title:
67
<PAGE>
EXHIBIT A
ORCHARD SUPPLY HARDWARE CORPORATION
No. $
% SENIOR NOTE DUE 2002
Orchard Supply Hardware Corporation promises to pay to or registered
assigns the principal sum of Dollars on the
Maturity Date of ______________, 2002.
Interest Payment Dates: ____________________ and
Record Dates: ____________________ and
IN WITNESS WHEREOF, ORCHARD SUPPLY HARDWARE CORPORATION has caused this
instrument to be executed in its corporate name by a facsimile signature of its
President and its Secretary and has caused the facsimile of its corporate seal
to be affixed hereunto or imprinted hereon.
Dated: ORCHARD SUPPLY HARDWARE CORPORATION
By ___________________________
Title:
[SEAL]
By ___________________________
Title:
Certificate of Authentication:
This is one of the ___________% Senior Notes due 2002 referred to in the
within-mentioned Indenture.
U.S. TRUST COMPANY OF CALIFORNIA, N.A.,
as Trustee
By ________________________ Date:
Authorized Signature
A-1
<PAGE>
(REVERSE OF SECURITY)
ORCHARD SUPPLY HARDWARE CORPORATION
% Senior Note due 2002
1. Interest.
--------
Orchard Supply Hardware Corporation, a Delaware corporation (the
"Company"), promises to pay interest at the rate of _______% per annum on the
principal amount of this Security semiannually in arrears on each ____________
and ____________, commencing on _______________, 1994, until the principal
hereof is paid or made available for payment. Interest on the Securities will
accrue from and including the most recent date to which interest has been paid
or, if no interest has been paid, from and including _______________, 1994,
through but excluding the date on which interest is paid. If an Interest
Payment Date falls on a day that is not a Business Day, the interest payment to
be made on such Interest Payment Date will be made on the next succeeding
Business Day with the same force and effect as if made on such Interest Payment
Date, and no additional interest will accrue as a result of such delayed
payment. Interest will be computed on the basis of a 360-day year of twelve
30-day months.
2. Method of Payment.
-----------------
The interest payable on the Securities, and punctually paid or duly
provided for, on any Interest Payment Date will, as provided in the Indenture,
be paid to the person in whose name this Security is registered at the close of
business on the regular record date, which shall be the ________________ or
___________________ (whether or not a Business Day) next preceding such Interest
Payment Date. Any such interest not so punctually paid or duly provided for,
and any interest payable on such defaulted interest (to the extent lawful), will
forthwith cease to be payable in accordance with the provisions specified in the
Indenture. Payment of the principal of and interest on this Security will be
made at the agency of the Company maintained for that purpose in New York, New
York and at any other office or agency maintained by the Company for such
purpose, in such coin or currency of the United States of America as at the time
of payment is legal tender for payment of public and private debts; provided,
--------
that at the option of the Company payment of interest may be made by check
mailed to the address of the person entitled thereto as such address shall
appear in the Security register.
3. Paying Agent and Registrar.
--------------------------
Initially, U.S. Trust Company of California, N.A., (the "Trustee"), will
act as Paying Agent and Registrar. The Company
A-2
<PAGE>
may change any Paying Agent, Registrar or co-Registrar without notice to the
Holders of Securities. The Company or any of its Subsidiaries may act as
Registrar, co-Registrar or Paying Agent.
4. Indenture.
---------
This Security is one of a duly authorized issue of Securities of the
Company, designated as its _________% Senior Notes due 2002 (the "Securities"),
limited in aggregate principal amount to $100,000,000 (except for Securities
issued in substitution for destroyed, lost or stolen Securities) issuable under
an indenture dated as of [____________], 1994 (the "Indenture"), among the
Company, Orchard Supply Hardware Stores Corporation, as Guarantor, and the
Trustee. The terms of the Securities include those stated in the Indenture and
those made part of the Indenture by the Trust Indenture Act of 1939 (the "Act")
(15 U.S. Code (S)(S) 77aaa-77bbbb) as in effect on the date of the Indenture and
the date the Indenture is qualified under the Act. The Securities are subject
to all such terms, and Holders of Securities are referred to the Indenture and
the Act for a statement of them.
Capitalized terms contained in this Security to the extent not defined
herein shall have the meanings assigned to them in the Indenture.
5. Optional Redemption.
-------------------
The Securities may not be redeemed prior to _____________, 1998, except
as provided below. On or after _____________, 1998, the Company may, at its
option, redeem the Securities in whole or in part, from time to time, at the
following redemption prices (expressed in percentages of the principal amount
thereof), in each case together with accrued interest, if any, to the date of
redemption.
If redeemed during the twelve-month period beginning
____________________,
<TABLE>
<CAPTION>
YEAR PERCENTAGE
<S> <C>
1998 . . . . . . . . . . . . . . . . .
1999 . . . . . . . . . . . . . . . . .
2000 and thereafter . . . . . . . . . 100%
</TABLE>
6. Repurchase Upon Change of Control.
---------------------------------
By the date specified for repurchase, which shall be within 60 days
after giving notice of a Change of Control, each Holder shall have the right, at
its option, to require the Company to purchase all or any part of such Holder's
Securities
A-3
<PAGE>
at 101% of the principal amount thereof plus accrued interest to the
purchase date.
7. Notice of Redemption.
--------------------
Notice of redemption will be mailed by first class mail at least 30 days
but not more than 60 days before the redemption date to each Holder of
Securities to be redeemed at his or her registered address. Securities in
denominations larger than $1,000 may be redeemed in part. On and after the
redemption date, interest ceases to accrue on those Securities or portion of
them called for redemption.
8. Denominations; Transfer; Exchange.
---------------------------------
The Securities are in registered form without coupons in denominations
of $1,000 and integral multiples of $1,000. A Holder may transfer or exchange
Securities in accordance with the Indenture. The Registrar may require a
Holder, among other things, to furnish appropriate endorsements and transfer
documents and to pay any taxes and fees required by law or permitted by the
Indenture. The Registrar need not transfer or exchange any Securities selected
for redemption.
9. Persons Deemed Owners.
---------------------
The registered Holder of a Security shall be treated as its owner for
all purposes.
10. Unclaimed Funds.
---------------
If funds for the payment of principal or interest remain unclaimed for
two years, the Trustee or Paying Agent will repay the funds to the Company or
the Guarantor, as applicable, at its request. After such repayment Holders of
Securities entitled to such funds must look to the Company or the Guarantor, as
applicable, for payment unless an abandoned property law designates another
person.
11. Discharge Prior to Redemption or Maturity.
-----------------------------------------
The Indenture will be discharged and cancelled except for certain
Sections thereof, subject to the terms of the Indenture, upon the payment of all
the Securities or upon the irrevocable deposit with the Trustee of funds or
United States Government Obligations sufficient for such payment or redemption.
12. Defeasance and Covenant Defeasance.
----------------------------------
The Company and the Guarantor may be discharged from their obligations
under the Indenture and the Securities, except
A-4
<PAGE>
for certain provisions thereof ("defeasance"), and may be discharged from its
obligations to comply with certain covenants contained in the Indenture and the
Securities ("Covenant Defeasance"), in each case upon satisfaction of certain
conditions specified in the Indenture.
13. Amendment; Supplement; Waiver.
-----------------------------
Subject to certain exceptions, the Indenture or the Securities may be
amended or supplemented with the consent of the Holders of at least a majority
in principal amount of the outstanding Securities, and any default or compliance
with any provision may be waived (retroactively or prospectively) with the
consent of the Holders of at least a majority in principal amount of the
outstanding Securities. Without the consent of any Holder, the Company, the
Guarantor and the Trustee may amend or supplement the Indenture or the
Securities to cure any ambiguity, defect or inconsistency, to give effect to
specified transactions or to make any change that does not materially and
adversely affect the rights of any Holder of Securities.
14. Restrictive Covenants.
---------------------
The Securities are unsecured obligations of the Company limited to the
aggregate principal amount of $100,000,000. The Indenture restricts the ability
of the Company or any of its Subsidiaries to permit any Liens to be imposed on
their assets other than certain Permitted Liens, restricts the ability of the
Company or any of its Subsidiaries to make certain payments, limits the
Indebtedness which the Company and its Subsidiaries may incur and limits the
terms on which the Company may engage in Asset Dispositions. The Company is
also obligated under certain circumstances to make an offer to purchase
Securities with the net cash proceeds of certain Asset Dispositions. The
Company must report annually to the Trustee on compliance with certain covenants
in the Indenture.
15. Successor Corporation.
---------------------
Pursuant to the Indenture, the ability of the Company to consolidate
with, merge with or into or transfer its assets to another person is conditioned
upon certain requirements, including certain financial requirements applicable
to the surviving Person.
16. Defaults and Remedies.
---------------------
If an Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the outstanding Securities may
declare all the outstanding Securities to be due and payable immediately.
Holders may not enforce the Indenture or the Securities except as provided in
the Indenture. The Trustee may require indemnity satisfactory to it before it
A-5
<PAGE>
enforces the Indenture or the Securities. Subject to certain limitations,
Holders of a majority in principal amount of the outstanding Securities may
direct the Trustee in its exercise of any trust or power. The Trustee may
withhold from Holders notice of a continuing Default (except a Default in
payment of principal or interest) if it determines that withholding notice is in
their interests. The Company is required to file periodic reports with the
Trustee as to the absence of Default and to notify the Trustee promptly after it
becomes aware of any Default.
17. Trustee Dealings with Company.
-----------------------------
The Trustee in its individual or any other capacity, may make loans to,
accept deposits from, and perform services for the Company or its Affiliates,
and may otherwise deal with the Company or its Affiliates, as if it were not
Trustee.
18. No Recourse Against Others.
--------------------------
A director, officer, employee or stockholder, as such, of the Company or
the Guarantor shall not have any liability for any obligations of the Company or
the Guarantor under the Securities or the Indenture or for any claim based on,
in respect of or by reason or such obligations or their creation. Each Holder
of a Security by accepting a Security waives and releases all such liability.
The waiver and release are part of the consideration for the issue of the
Securities.
19. Authentication.
--------------
This Security shall not be valid until the Trustee signs the certificate
of authentication on the other side of this Security.
20. Indenture.
---------
Each Securityholder, by accepting a Security, agrees to be bound to all
of the terms and provisions of the Indenture as the same may be amended from
time to time.
21. Abbreviations.
-------------
Customary abbreviations may be used in the name of Securityholder or an
assignee, such as TEN COM (= tenants in common), TEN ENT (= tenants by the
entireties), JT TEN (= joint tenants with right of survivorship and not as
tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors
Act).
22. CUSIP Numbers.
-------------
Pursuant to a recommendation promulgated by the Committee on Uniform
Security Identification Procedures, the Company has caused CUSIP numbers to be
printed on the Securities
A-6
<PAGE>
and has directed the Trustee to use CUSIP numbers in notices of redemption as a
convenience to Securityholders. No representation is made as to the accuracy of
such numbers either as printed on the Securities or as contained in any notice
of redemption and reliance may be placed only on the other identification
numbers placed thereon.
The Company will furnish to any Holder of record of Securities upon
written request and without charge a copy of the Indenture. Requests should be
made to: Orchard Supply Hardware Corporation, 6450 Via Del Oro, San Jose,
California 95119, Attention: Chief Financial Officer.
A-7
<PAGE>
GUARANTEE
Orchard Supply Hardware Stores Corporation (hereinafter referred to as
the "Guarantor", which term includes any successor person under the Indenture
referred to in the Security upon which this notation is endorsed), has
unconditionally guaranteed to the Holder of this Security the due and punctual
payment of the principal of, premium, if any, and interest on and any other
obligation of the Company with respect to, the Security upon which this notation
is endorsed, when and as the same shall become due and payable, whether at
maturity, by acceleration, redemption, repayment or otherwise, in accordance
with the terms of such Security and of the Indenture. In case of the failure of
the Company punctually to pay any such principal, premium, interest or other
obligations under the Security upon which this notation is endorsed or the
Indenture, the Guarantor hereby agrees to cause any such payment to be made
punctually when and as the same shall become due and payable, whether at
maturity, upon acceleration, redemption, repayment or otherwise, and as if such
payment were made by the Company. The obligations of the Guarantor to the
Holder of the Security upon which this notation is endorsed are also set forth
in the Indenture.
This Guarantee shall not be valid until the Trustee signs the
certificate of authentication on the Security upon which this notation is
endorsed
ORCHARD SUPPLY HARDWARE STORES
CORPORATION
By:___________________________
Title:
By:___________________________
Title:
A-8
<PAGE>
ASSIGNMENT FORM
If you the Holder want to assign this Security, fill in the form below
and have your signature guaranteed:
I or we assign and transfer this Security to:
________________________________________________________________
________________________________________________________________
________________________________________________________________
(Print or type name, address and sip code and social
security or tax ID number of assignee)
and irrevocably appoint _______________________________________, agent to
transfer this Security on the books of the Company. The agent may substitute
another to act for him.
Dated: __________________ Signed: _____________________
(Sign exactly as name
appears on the other
side of this Security)
Signature Guarantee: ________________________________
A-9
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you the Holder want to elect to have this Security purchased by the Company,
check the box: [_]
If you want to elect to have only part of this Security purchased by the
Company, state the amount: $__________
Dated: __________________ Signed: _____________________
(Sign exactly as name
appears on the other
side of this Security)
Signature Guarantee: ________________________________
A-10
<PAGE>
ORCHARD SUPPLY HARDWARE CORPORATION
ORCHARD SUPPLY HARDWARE STORES CORPORATION
6450 Via Del Oro
San Jose, California 95119
January 4, 1994
TO: THE HOLDERS OF THE SENIOR
NOTES DUE 1997 OF ORCHARD SUPPLY
HARDWARE CORPORATION
Re: Proposed Amendment to, and Waiver under, that certain Indenture
dated as of October 15, 1992 (the "Indenture") by and among
Orchard Supply Hardware Corporation (the "Company"), Orchard
Supply Hardware Stores Corporation (formerly, Orchard Holding
Corporation) (the "Guarantor") and U.S. Trust Company of
California, N.A., as Trustee, under which the Company's 9% Senior
Notes due 1997 (the "Notes") have been issued
-----------------------------------------------------------------
Ladies and Gentlemen:
Orchard Supply Hardware Corporation (the "Company") and Orchard Supply
Hardware Stores Corporation (the "Guarantor") are hereby requesting from the
Holders of the Notes consents, as described below, to (i) an amendment to and
(ii) a waiver under the Indenture.
Background and Purpose.
- ----------------------
Amendment to the Indenture. Pursuant to a solicitation of consents
--------------------------
dated November 29, 1993 (the "November 29 Letter"), a copy of which is attached
hereto, the Company has solicited consents to an amendment (the "Amendment") to
the Indenture to facilitate the placement by the Guarantor of a new issue of
preferred stock. Please refer to the attached copy of the November 29 Letter
for a discussion of the reasons for, and the specific language of, the proposed
amendment to the Indenture.
At the time the November 29 Letter was distributed to the Holders, the
Company anticipated that preferred stock producing $25.0 million in gross
proceeds (before placement agent's commission and expenses) would be privately
placed with institutional investors. Accordingly, the November 29 Letter
specified that the Holders' consents to the Amendment would be conditioned upon
the completion of the sale by the Guarantor of preferred stock producing gross
proceeds of $25.0 million. The Company and the Guarantor have subsequently
determined to issue fewer shares of preferred stock yielding $19,400,000 in
proceeds (before expenses) directly to an affiliate of Freeman Spogli & Co. The
terms of the preferred stock will be substantially
<PAGE>
January 4, 1994
Page 2
identical to those that the placement agent had negotiated for the institutional
private placement (except in certain particulars that are more favorable to the
Company and the Guarantor). The Company and the Guarantor determined that the
Company's requirements for new equity capital would be satisfied with the
smaller preferred stock offering and would also have completed the institutional
private placement at the reduced level. The Company and the Guarantor selected
the smaller offering to minimize dilution to the Guarantor's existing common and
common equivalent stockholders.
Because of the reduction in the gross proceeds to be realized from the
preferred stock offering, the Company is soliciting from the Holders of the
Notes a new consent that is conditioned on the completion of the sale of 800,000
shares of preferred stock producing proceeds to the Guarantor of at least
$19,000,000.
Waiver. On December 14, 1993, the Company filed a registration
------
statement with the Securities and Exchange Commission for a public offering (the
"Offering") of $100.0 million of unsecured senior notes. A copy of the
Preliminary Prospectus dated December 29, 1993 covering the proposed Offering is
enclosed for your information. As indicated in the Preliminary Prospectus, the
Company intends to use a portion of the proceeds of the Offering to redeem the
Notes at their stated redemption price of 103% of aggregate principal amount.
The Company anticipates that it will issue a Notice of the complete redemption
of the Notes not later than the date of the closing of the Offering. The Notes
will be redeemed 30 days thereafter in accordance with the terms of the
Indenture. The Company currently anticipates that the Offering will close in
late January so the Notes should be redeemed in late February.
The completion of the Offering would constitute a technical violation of
Section 4.10 (Limitations on Current Debt and Funded Debt) of the Indenture and,
-------------------------------------------
consequently, would trigger an Event of Default under the terms of the Indenture
even though the Notes have been concurrently called for redemption. Accordingly,
the Company is soliciting a waiver from the Holders of the Notes to permit the
Offering to be consummated without violating the Indenture, subject to the
conditions that (i) the Company issues in accordance with the terms of the
Indenture irrevocable notices calling for redemption all of the Notes not later
than the date on which the Offering is consummated (ii) the Company redeems all
of the Notes on the date specified in the notice of redemption.
<PAGE>
January 4, 1994
Page 3
Description of the Amendment.
- ----------------------------
Reference is made to the November 29 Letter for a description of the
Amendment that would permit the Company to make Restricted Payments to the
Guarantor to facilitate the payment of dividends on the preferred stock to be
issued by the Guarantor.
Description of the Waiver.
- -------------------------
Section 8.2 of the Indenture provides that with the consent of 66-2/3%
in aggregate principal amount of the Notes any covenant or provision of the
Indenture may be waived prospectively. The Company is soliciting the consent of
the Holders to a waiver (the "Waiver") of compliance by the Company with Section
4.10 of the Indenture to the extent necessary to permit the Company to
consummate the Offering. Such Waiver shall be expressly subject to the
conditions (i) that the Company shall have mailed, or caused to be mailed, in
accordance with Section 3.03 of the Indenture Notice of Redemption of all of the
Notes not later than the date on which the Offering is consummated and (ii) that
the Company shall have redeemed all of the Notes on redemption date specified in
such Notice in accordance with the terms of the Indenture. In the event either
of these conditions is not satisfied, the Waiver would no longer be effective
and the completion of the Offering would result in an Event of Default under the
Indenture.
Record Date.
- -----------
In accordance with Section 8.06 of the Indenture, the Company has fixed
the close of business on Monday January 3, 1994 (the "Record Date") as the
record date for determining the Holders of the Notes which will be eligible to
consent to the Amendment and the Waiver.
Procedure for Giving Consents.
- -----------------------------
UNDER THE TERMS OF THE INDENTURE, CONSENTS TO THE AMENDMENT AND THE
WAIVER CAN ONLY BE GIVEN BY THE RECORD HOLDERS OF THE NOTES ON THE RECORD DATE.
Accordingly, if you were not the record holder of your Notes on the Record Date,
you must obtain the signature of the record holder of your Notes on the attached
consent in order for your consent to be effective.
The Amendment and the Waiver will be implemented by the execution of a
Supplemental Indenture to the Indenture which the
<PAGE>
January 4, 1994
Page 4
Company intends will become effective concurrently with closing of the Offering
assuming receipt of the requisite consents from the Holders of the Notes. In
the case of the Amendment, however, effectiveness will be further subject to the
receipt by the Trustee under the Indenture of an Officer's Certificate of the
Company and the Guarantor confirming that the Guarantor has closed the preferred
stock transaction producing the minimum gross proceeds as described herein.
If you are agreeable to the Amendment and the Waiver, please signify
your consent by executing and returning to the Company (attention: Stephen M.
Hilberg) a copy of the attached consent at your earliest convenience. In the
interest of time, it would be appreciated if you would fax your executed consent
to the Company at (408) 629-7174 and follow with the hard copy by mail addressed
to: Orchard Supply Hardware Corporation, 6450 Via Del Oro, San Jose, California
95167.
Very truly yours,
ORCHARD SUPPLY HARDWARE
CORPORATION
ORCHARD SUPPLY HARDWARE STORES
CORPORATION
<PAGE>
January 4, 1994
Page 5
CONSENT TO AMENDMENT AND WAIVER
-------------------------------
The undersigned, the owner of $________________ principal amount of 9%
Senior Notes (the "Notes") issued by Orchard Supply Hardware Corporation (the
"Company") under that certain Indenture dated as of October 15, 1992 by and
among the Company, Orchard Supply Hardware Stores Corporation (formerly, Orchard
Holding Corporation) (the "Guarantor") and U.S. Trust Company of California,
N.A., as trustee, hereby consents to (i) the Amendment to Section 4.13 of the
Indenture and (ii) the Waiver of Section 4.10 of the Indenture, each as
described and requested in that certain consent solicitation from the Company
dated January 4, 1994 (the "Solicitation"). This Consent is subject to each of
the conditions to effectiveness specified in the Solicitation.
Name of Owner:
______________________________________ Date: ___________________
(Please Print or Type)
Signature:______________________________________
______________________________________
Title (if applicable)
Telephone Number:_____________________
IF YOU ARE NOT THE RECORD OWNER OF THE NOTES REFERRED TO ABOVE YOU MUST OBTAIN
THE SIGNATURE OF THE RECORD OWNER AND SUBMIT A DUPLICATE OF THIS CONSENT, SO
EXECUTED, TO THE ADDRESS INDICATED FOR YOUR CONSENT TO BE EFFECTIVE.
<PAGE>
January 4, 1994
Page 6
The undersigned, the owner of record of the Notes referenced above,
hereby affirms the consent set forth above, and gives the same as such record
owner.
Name of Record Owner:
______________________________________ Date:______________________
(Please Print or Type)
Signature:__________________________________________
__________________________________________
Title (if applicable)
Telephone Number:_________________________
<PAGE>
CERTIFICATE OF DESIGNATION
OF
RIGHTS AND PREFERENCES
OF THE
6% CUMULATIVE CONVERTIBLE PREFERRED STOCK
OF
ORCHARD SUPPLY HARDWARE STORES CORPORATION
------------------------------
Pursuant to Section 151(g) of
the General Corporation Law
of the State of Delaware
------------------------------
Orchard Supply Hardware Stores Corporation, a corporation organized and
existing under the General Corporation Law of the State of Delaware (the
"Corporation"), DOES HEREBY CERTIFY:
FIRST: The Certificate of Incorporation of the Corporation authorizes the
issuance of 2,000,000 shares of preferred stock, par value $.01 per share, of
the Corporation ("Preferred Stock") in one or more series, and authorizes the
Board of Directors to establish by resolution or resolutions the designation of
each series of Preferred Stock and the powers, preferences and privileges and
relative, participating, optional or other special rights, and qualifications,
limitations or restrictions thereof.
SECOND: The Board of Directors of the Corporation, pursuant to a Unanimous
Written Consent executed as of December 29, 1993, adopted the following
resolutions:
RESOLVED, that the Board of Directors, in accordance with the provisions of
the Certificate of Incorporation of the Corporation, hereby approves the
issuance of two series of Preferred Stock and hereby fixes the designation of
such series and the powers, preferences, privileges, and relative,
participating, optional or other special rights, and qualifications, limitations
and restrictions thereof in addition to those set forth in said Certificate of
Incorporation as follows:
Section 1. Designation and Amount. The designation of such series of
----------------------
Preferred Stock shall be the 6% Cumulative Convertible Preferred Stock, Series 1
(the "Series 1 Preferred Stock") and the 6% Cumulative Convertible Preferred
Stock, Series 2 (the "Series 2 Preferred Stock," and, collectively with the
Series 1 Preferred Stock, the "Convertible Preferred Stock"). The number of
shares of Convertible Preferred Stock shall be 800,000, consisting of 325,000
shares of Series 1 Preferred Stock and 475,000 shares of
<PAGE>
Series 2 Preferred Stock. Each share of Convertible Preferred Stock shall have
identical voting powers, designations, preferences and relative, participating,
optional or other rights, and qualifications, limitations or restrictions
thereof; provided, however, that the Series 2 Preferred Stock may from time to
-------- -------
time as hereinafter provided have a different conversion privilege and dividend
rate from the Series 1 Preferred Stock.
Section 2. Rank. All shares of Convertible Preferred Stock shall rank
----
prior, both as to payment of dividends and as to distributions of assets upon
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary, to all of the Corporation's now or hereafter issued Common Stock.
The term "Common Stock" shall mean the Common Stock, $.01 par value per share,
of the Corporation as the same exists at the date hereof or as such stock may be
constituted from time to time.
Section 3. Dividends. The holders of Convertible Preferred Stock
---------
shall be entitled to receive, when, as and if declared by the Board of Directors
out of funds at the time legally available therefor, dividends at the rate of
$1.50 per annum per share, and no more except as provided below, which shall be
fully cumulative, shall accrue without interest from the date of first issuance
and shall be payable in cash quarterly in arrears on March 15, June 15,
September 15 and December 15 of each year commencing March 15, 1994 (except that
if any such date is a Saturday, Sunday or legal holiday then such dividend shall
be payable on the next succeeding day that is not a Saturday, Sunday or legal
holiday) to holders of record as they appear on the stock transfer books of the
Corporation on such record dates, not more than 60 nor less than 10 days
preceding the payment dates for such dividends, as are fixed by the Board of
Directors. For purposes hereof, the term "legal holiday" shall mean any day on
which banking institutions are authorized to close in New York, New York or in
Los Angeles, California.
If on or before June 15, 1994, the Corporation has not obtained the
approval from its stockholders to increase the number of authorized shares of
the Corporation's Common Stock in an amount sufficient to provide for full
conversion of the Series 2 Preferred Stock, then from and after the date of
first issuance until but not including the date such approval is obtained, the
dividend rate on the Series 2 Preferred Stock shall be $3.00 per annum per
share; provided, however, that the additional $1.50 per annum per share shall be
-------- -------
payable by the Corporation in additional shares of Series 2 Preferred Stock,
valued for this purpose at their liquidation preference of $25.00 per share.
Subject to the next paragraph of this Section 3, dividends on account of
arrears for any past dividend period may be declared and paid at any time,
without reference to any regular dividend payment date. The amount of dividends
payable per share of Convertible Preferred Stock for each quarterly dividend
period shall be computed by dividing the annual amount by four. The amount of
dividends payable for the initial dividend period and any period shorter than a
full quarterly dividend period shall be computed on the basis of a 360-
2.
<PAGE>
day year of twelve 30-day months. Holders of Convertible Preferred Stock shall
not be entitled to any dividend, whether payable in cash, property or stock, in
excess of the full cumulative dividends on such shares of Convertible Preferred
Stock.
On each dividend payment date all dividends which shall have accrued on
each share of Convertible Preferred Stock outstanding on such dividend payment
date shall accumulate and be deemed to become "due" whether or not there shall
be funds legally available for the payment thereof. Any dividend which shall
not be paid on the dividend payment date on which it shall become due shall be
deemed to be "past due" until such dividend shall be paid or until the share of
Convertible Preferred Stock with respect to which such dividend became due shall
no longer be outstanding, whichever is the earlier to occur. No interest, sum
of money in lieu of interest, or other property or securities shall be payable
in respect of any dividend payment or payments which are past due. Dividends
paid on shares of Convertible Preferred Stock in an amount less than the total
amount of such dividends at the time accumulated and payable on such shares
shall be allocated pro rata on a share-by-share basis among all such shares at
the time outstanding.
No dividends or other distributions, other than dividends payable solely
in shares of Common Stock or other capital stock of the Corporation ranking
junior as to dividends and as to liquidation rights to the Convertible Preferred
Stock which is neither convertible into, nor exchangeable or exercisable for,
any securities of the Corporation other than Common Stock or other capital stock
of the Corporation ranking junior as to dividends and as to liquidation rights
to the Convertible Preferred Stock, shall be paid, or declared and set apart for
payment, and no purchase, redemption or other acquisition shall be made by the
Corporation of, any shares of Common Stock or other capital stock of the
Corporation ranking junior as to dividends or as to liquidation rights to the
Convertible Preferred Stock (the "Junior Dividend Stock") unless and until all
accrued and unpaid dividends on the Convertible Preferred Stock, including the
full dividend for the then current dividend period, shall have been paid or
declared and set apart for payment and the Corporation is not in default in
respect of the optional redemption of any shares of Convertible Preferred Stock.
No full dividends shall be paid or declared and set apart for payment on
any class or series of the Corporation's capital stock ranking, as to dividends,
on a parity with the Convertible Preferred Stock (the "Parity Dividend Stock")
for any period unless full cumulative dividends have been, or contemporaneously
are, paid or declared and set apart for such payment on the Convertible
Preferred Stock for all dividend payment periods terminating on or prior to the
date of payment of such full cumulative dividends. No full dividends shall be
paid or declared and set apart for payment on the Convertible Preferred Stock
for any period unless full cumulative dividends have been, or contemporaneously
are, paid or declared and set apart for payment on the Parity Dividend Stock for
all dividend periods terminating on or prior to the date of payment of such full
cumulative dividends. When dividends are not paid in full upon the Convertible
Preferred Stock and the Parity
3.
<PAGE>
Dividend Stock, all dividends paid or declared and set aside for payment upon
shares of Convertible Preferred Stock and the Parity Dividend Stock shall be
paid or declared and set aside for payment pro rata so that the amount of
dividends paid or declared and set aside for payment per share on the
Convertible Preferred Stock and the Parity Dividend Stock shall in all cases
bear to each other the same ratio that accrued and unpaid dividends per share on
the shares of Convertible Preferred Stock and the Parity Dividend Stock bear to
each other.
The Corporation shall not permit any subsidiary of the Corporation to
purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under this Section 3, purchase or
otherwise acquire such shares at such time and in such manner.
Any reference to "distribution" contained in this Section 3 shall not be
deemed to include any distribution made in connection with any liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary.
Section 4. Liquidation Preference. In the event of any liquidation,
----------------------
dissolution or winding up of the Corporation, whether voluntary or involuntary,
the holders of Convertible Preferred Stock shall be entitled to receive out of
the assets of the Corporation, whether such assets are stated capital or surplus
of any nature, an amount equal to the dividends accrued and unpaid thereon to
the date of final distribution to such holders, whether or not declared, without
interest, and a sum equal to $25.00 per share, and no more, before any payment
shall be made or any assets distributed to the holders of Common Stock or any
other class or series of the Corporation's capital stock ranking junior as to
liquidation rights to the Convertible Preferred Stock (the "Junior Liquidation
Stock"). In the event the assets of the Corporation available for distribution
to stockholders upon any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, shall be insufficient to pay in
full the amounts payable with respect to the Convertible Preferred Stock and any
other class or series of the Corporation's capital stock which may hereafter be
created having parity as to liquidation rights with the Convertible Preferred
Stock (the "Parity Liquidation Stock"), the holders of the Convertible Preferred
Stock and the holders of the Parity Liquidation Stock shall share ratably in any
distribution of assets of the Corporation in proportion to the full respective
preferential amounts to which they are entitled (but only to the extent of such
preferential amounts). After payment in full of the liquidation preferences of
the shares of Convertible Preferred Stock, the holders of such shares shall not
be entitled to any further participation in any distribution of assets by the
Corporation. Neither a consolidation, merger or other business combination of
the Corporation with or into another corporation or other entity nor a sale or
transfer of all or part of the Corporation's assets for cash, securities or
other property shall be considered a liquidation, dissolution or winding up of
the Corporation for purposes of this Section 4 (unless in connection therewith
the liquidation of the Corporation is specifically approved).
4.
<PAGE>
Section 5. Redemption at Option of the Corporation. The Corporation
---------------------------------------
may not redeem the Convertible Preferred Stock on or prior to December 15, 1996.
The Corporation, at its option, may at any time after December 15, 1996 redeem
for cash, in whole or from time to time in part, on any date set by the Board of
Directors, at $26.50 per share if redeemed after December 15, 1996 and prior to
December 15, 1997, and at the following redemption prices if redeemed during the
twelve-month period beginning December 15 of the year specified below:
<TABLE>
<CAPTION>
Year Price Per Share
---- ---------------
<S> <C>
1997 $26.25
1998 26.00
1999 25.75
2000 25.50
2001 25.25
</TABLE>
and thereafter at $25.00 per share, plus, in each case, an amount equal to all
dividends on the Convertible Preferred Stock accrued and unpaid thereon, whether
or not declared or due, to the date fixed for redemption, such sum being
hereinafter referred to as the "Redemption Price" (subject to the right of the
holder of record of shares of Convertible Preferred Stock on a record date for
the payment of a dividend on the Convertible Preferred Stock to receive the
dividend due on such shares of Convertible Preferred Stock on the corresponding
dividend payment date).
In case of the redemption of less than all of the then outstanding
Convertible Preferred Stock, the shares of Convertible Preferred Stock to be
redeemed shall be redeemed pro rata or by lot or in such other manner as the
Board of Directors may determine. Notwithstanding the foregoing, the
Corporation shall not redeem less than all of the Convertible Preferred Stock at
any time outstanding until all dividends accrued in arrears upon all Convertible
Preferred Stock then outstanding shall have been paid by all past dividend
periods.
Not more than 60 nor less than 30 days prior to the redemption date,
notice by first class mail, postage prepaid, shall be given to each holder of
record of the Convertible Preferred Stock to be redeemed, at such holder's
address as it shall appear upon the stock transfer books of the Corporation.
Each such notice of redemption shall specify the date fixed for redemption, the
Redemption Price, the place or places of payment, that payment will be made upon
presentation and surrender of the certificate(s) evidencing the shares of
Convertible Preferred Stock to be redeemed, that on and after the redemption
date, dividends will cease to accrue on such shares, the then effective
conversion price pursuant to Section 6
5.
<PAGE>
and that the right of holders to convert shall terminate at the close of
business on the redemption date (unless the Corporation defaults in the payment
of the Redemption Price).
Any notice that is mailed as herein provided shall be conclusively
presumed to have been duly given, whether or not the holder of the Convertible
Preferred Stock receives such notice; and failure to give such notice by mail,
or any defect in such notice, to the holders of any shares designated for
redemption shall not affect the validity of the proceedings for the redemption
of any other shares of Convertible Preferred Stock. On or after the date fixed
for redemption as stated in such notice, each holder of the shares called for
redemption shall surrender the certificate evidencing such shares to the
Corporation at the place designated in such notice and shall thereupon be
entitled to receive payment of the Redemption Price as herein provided. If less
than all the shares represented by any such surrendered certificate are
redeemed, a new certificate shall be issued representing the unredeemed shares.
If, on the date fixed for redemption, funds necessary for the redemption shall
be available therefor and shall have been irrecoverably deposited or set aside,
then, notwithstanding that the certificates evidencing any shares so called for
redemption shall not have been surrendered the dividends with respect to the
shares so called shall cease to accrue after the date fixed for redemption, the
shares shall no longer be deemed outstanding, the holders thereof shall cease to
be holders of Convertible Preferred Stock, and all rights whatsoever with
respect to the shares so called for redemption (except the right of the holders
to receive payment of the Redemption Price as herein provided without interest
upon surrender of their certificates therefor) shall terminate.
The shares of Convertible Preferred Stock shall not be subject to the
operation of any purchase, retirement, mandatory redemption or sinking fund,
except as set forth in Section 7.
In the event that any shares of Convertible Preferred Stock shall be
converted into Common Stock pursuant to Section 6, then (i) the Corporation
shall not have the right to redeem such shares and (ii) any funds which shall
have been deposited for the payment of the Redemption Price for such shares of
Convertible Preferred Stock shall be returned to the Corporation immediately
after such conversion (subject to declared dividends payable to holders of
shares of Convertible Preferred Stock on the record date for such dividends
being so payable, to the extent set forth in Section 6 hereof, regardless of
whether such shares are converted subsequent to such record date and prior to
the related dividend payment date).
Section 6. Conversion Privilege.
--------------------
(a) Right of Conversion of Series 1 Preferred Stock. Subject to and
-----------------------------------------------
upon compliance with the provisions of this Section 6, each share of Series 1
Preferred Stock shall, at the option of the holder thereof, be convertible at
any time (unless such share is called for redemption, then to and including but
not after the close of business on the
6.
<PAGE>
Business Day (as defined below) prior to the date fixed for such redemption,
unless the Corporation shall default in payment due upon redemption thereof),
into that number of fully paid and non-assessable shares of Common Stock
(calculated as to each conversion to the nearest 1/100th of a share) obtained by
dividing $25.00 by the Conversion Price (as defined in Section 6(e) in effect at
such time) and by surrender of such share so to be converted in the manner
provided in Section 6(c).
(b) Right of Conversion of Series 2 Preferred Stock. Subject to and
-----------------------------------------------
upon compliance with the provisions of this Section 6, each share of Series 2
Preferred Stock shall, at the option of the holder thereof, be convertible at
any time following the approval by the Corporation's stockholders of an increase
in the authorized shares of the Corporation's Common Stock in an amount
sufficient to provide for full conversion of the Series 2 Preferred Stock
(unless such share is called for redemption, then to and including but not after
the close of business on the Business Day (as defined below) prior to the date
fixed for such redemption, unless the Corporation shall default in payment due
upon redemption thereof), into that number of fully paid and non-assessable
shares of Common Stock (calculated as to each conversation to the nearest
1/100th of a share) obtained by dividing $25.00 by the Conversion Price (as
defined in Section 6(e) in effect at such time) and by surrender of such share
so to be converted in the manner provided in Section 6(c).
(c) Manner of Exercise of Conversion Privilege. In order to
------------------------------------------
exercise the conversion privilege, the holder of one or more shares of
Convertible Preferred Stock to be converted shall surrender such shares at any
of the offices or agencies to be maintained for such purpose by the Corporation
accompanied by the funds, if any, required by the last paragraph of this Section
6(c) and shall give written notice of conversion in the form provided on such
shares of Convertible Preferred Stock (or such other notice as is acceptable to
the Corporation) to the Corporation at such office or agency that the holder
elects to convert the shares of Convertible Preferred Stock specified in said
notice. Such notice shall also state the name or names, together with address
or addresses, in which the certificate or certificates for shares of Common
Stock which shall be issuable in such conversion shall be issued. Each share of
Convertible Preferred Stock surrendered for conversion shall, unless the shares
issuable on conversion are to be issued in the same name as the name in which
such share is registered, be accompanied by instruments of transfer, in form
satisfactory to the Corporation, duly executed by the holder of his duly
authorized attorney and an amount sufficient to pay any transfer of similar tax.
As promptly as practicable after the surrender of such shares of Convertible
Preferred Stock and the receipt of such notice, instruments of transfer and
funds, if any, as aforesaid, the Corporation shall issue and shall deliver at
such office or agency to such holder, or on his written order, a certificate or
certificates for the number of full shares of Common Stock issuable upon the
conversion of such share of Convertible Preferred Stock in accordance with the
provisions of this Section 6 and a check or cash in respect of any fractional
interest in a share of Common Stock arising upon such conversion, as provided in
Section 6(d).
7.
<PAGE>
Each conversion shall be deemed to have been effected immediately prior
to the close of business on the date on which such shares of Convertible
Preferred Stock shall have been surrendered and such notice (and any applicable
instruments of transfer and any required taxes) shall have been received by the
Corporation as aforesaid, and the person or persons in whose name or names any
certificate or certificates for shares of Common Stock shall be issuable upon
such conversion shall be deemed to have become the holder or holders of record
of the shares represented thereby at such time on such date, and such conversion
shall be at the Conversion Price in effect at such time on such date, unless the
stock transfer books to the Corporation shall be closed on that date, in which
event such person or persons shall be deemed to have become such holder or
holders of record at the close of business on the next succeeding day on which
such stock transfer books are open, but such conversion shall be at the
Conversion Price in effect on the date upon which such shares of Convertible
Preferred Stock shall have been surrendered and such notice received by the
Corporation.
Any shares of Convertible Preferred Stock surrendered for conversion
during the period from the close of business on the record date for any dividend
payment to the opening of business on the related dividend payment date shall
(unless such shares of Convertible Preferred Stock shall have been called for
redemption on a date in such period) be accompanied by payment, in funds
acceptable to the Corporation, of an amount equal to the dividend otherwise
payable on such dividend payment date; provided, however, that no such payment
-------- -------
need be made if there shall exist at the time of conversion a default in the
payment of dividends on the shares of Convertible Preferred Stock. An amount
equal to such payment shall be paid by the Corporation on such dividend payment
date to the holder of such shares of Convertible Preferred Stock at the close of
business on such record date; provided, however, that if the Corporation shall
-------- -------
default in the payment of dividends on such dividend payment date, such amount
shall be paid to the person who made such required payment. Except as provided
for above in this Section, no adjustment shall be made for dividends accrued on
any shares of Convertible Preferred Stock converted or for dividends on any
shares issued upon the conversion of such shares as provided in this Section.
(d) Cash Payments in Lieu of Fractional Shares. No fractional shares
------------------------------------------
or scrip representing fractions of shares of Common Stock shall be issued upon
conversion of Convertible Preferred Stock. If more than one share of
Convertible Preferred Stock shall be surrendered for conversion at one time by
the same holder, the number of full shares of Common Stock issuable upon
conversion thereof shall be computed on the basis of the aggregate of $25.00 for
each such share so surrendered. In lieu of any fractional interest in a share
of Common Stock which would otherwise be deliverable upon the conversion of any
share of Convertible Preferred Stock, the Corporation shall pay to the holder of
such shares an amount in cash (computed to the nearest cent) equal to the
closing price (as defined below) on the Business Day next preceding the day of
conversion multiplied by the fractional interest that otherwise would have been
deliverable upon conversion of such share. The "closing price" for any day
shall be the last sale price regular way for the Common Stock as
8.
<PAGE>
published by the National Association of Securities Dealers Automated Quotation
System ("Nasdaq"), or if such last sale price is not so published by Nasdaq or
if no such sale takes place on such day, the mean between the closing bid and
asked prices for the Common Stock as published by Nasdaq. If the Common Stock
is listed or admitted to trading on a national securities exchange, then the
"closing price" for any day shall be the last reported sales price regular way
or, in case no such reported sales take place on such day, the average of the
closing bid and asked prices regular way for such day on the principal national
securities exchange on which the shares of Common Stock are listed or admitted
for trading. If the shares of Common Stock are not quoted by Nasdaq or listed
or admitted to trading on a national securities exchange, the "closing price"
shall be determined in good faith by the Board of Directors of the Corporation.
"Business Day" is a day that is not a Saturday, Sunday or legal holiday.
(e) Adjustment of Conversion Price. The Conversion Price shall mean
------------------------------
and be $15.625, subject to adjustment from time to time by the Corporation as
follows:
(i) In case the Corporation shall (a) pay a dividend or make a
distribution on its Common Stock in shares of Common Stock, (b) subdivide
its outstanding shares of Common Stock into a greater number of shares, (c)
combine its outstanding shares of Common Stock into a smaller number of
shares, or (d) issue by reclassification of its Common Stock any shares of
capital stock of the Corporation, then in each such case the Conversion
Price in effect immediately prior to such action shall be adjusted so that
the holder of any share of Convertible Preferred Stock thereafter
surrendered for conversion shall be entitled to receive the number of
shares of Common Stock or other capital stock of the Corporation which he
would have owned or been entitled to receive immediately following such
event had such share been converted immediately prior to the occurrence of
such event. An adjustment made pursuant to this subsection (i) shall
become effective immediately after the record date, in the case of a
dividend or distribution, or immediately after the effective date, in the
case of a subdivision, combination or reclassification. If, as a result of
an adjustment made pursuant to this subsection (i), the holder of any share
of Convertible Preferred Stock thereafter surrendered for conversion shall
become entitled to receive shares of two or more classes of capital stock
or shares of Common Stock and other capital stock of the Corporation, the
Board of Directors (whose determination shall be conclusive and shall be
described in a statement filed by the Corporation with the stock transfer
or conversion agent, as appropriate) shall determine the allocation of the
adjusted Conversion Price between or among shares of such classes of
capital stock or shares of Common Stock and other capital stock.
(ii) In case the Corporation shall issue rights or warrants to all
holders of its outstanding shares of Common Stock entitling them (for a
period expiring within 45 days after the record date mentioned below) to
subscribe for or purchase shares of
9.
<PAGE>
Common Stock at a price per share less than the current market price per
share (as determined pursuant to subsection (iv) of this Section 6(e)) of
the Common Stock (other than pursuant to any stock option, restricted stock
or other incentive or benefit plan or stock ownership or purchase plan for
the benefit of employees, directors or officers or any dividend
reinvestment plan of the Corporation in effect at the time hereof or any
other similar plan adopted or implemented hereafter), then the Conversion
Price in effect immediately prior thereto shall be adjusted so that it
shall equal the price determined by multiplying the Conversion Price in
effect immediately prior to the date of issuance of such rights or warrants
by a fraction of which the numerator shall be the number of shares of
Common Stock outstanding on the date of issuance of such rights or warrants
(immediately prior to such issuance) plus the number of shares which the
aggregate offering price of the total number of shares so offered would
purchase at such current market price, and of which the denominator shall
be the numbers of shares of Common Stock outstanding on the date of
issuance of such rights or warrants (immediately prior to such issuance)
plus the number of additional shares of Common Stock offered for
subscription or purchase. Such adjustment shall be made successively
whenever any rights or warrants are issued, and shall become effective
immediately after the record date for the determination of stockholders
entitled to receive such rights or warrants; provided, however, in the
-------- -------
event that all the shares of Common Stock offered for subscription or
purchase are not delivered upon the exercise of such rights or warrants,
upon the expiration of such rights or warrants the Conversion Price shall
be readjusted to the Conversion Price which would have been in effect had
the numerator and the denominator of the foregoing fraction and the
resulting adjustment been made based upon the number of shares of Common
Stock actually delivered upon the exercise of such rights or warrants
rather than upon the number of shares of Common Stock offered for
subscription or purchase. In determining whether any rights or warrants
entitle the holders to subscribe for or purchase shares of Common Stock at
less than such current market price, and in determining the aggregate
offering price of such shares of Common Stock, there shall be taken into
account any consideration received by the Corporation for such rights or
warrants, the value of such consideration, if other than cash, to be
determined by the Board of Directors (whose determination shall be
conclusive and shall be described in a statement filed by the Corporation
with the stock transfer or conversion agent, as appropriate).
(iii) In case the Corporation shall, by dividend or otherwise,
distribute to all holders of its outstanding Common Stock or capital stock
(other than Common Stock), evidences of its indebtedness or assets
(including securities and cash, but excluding any regular periodic cash
dividend of the Corporation and dividends or distributions payable in stock
for which adjustment is made pursuant to subsection (i) of this Section
6(e)) or rights or warrants to subscribe for or purchase securities of the
Corporation (excluding those referred to in subsection (ii) of this Section
6(e)), then
10.
<PAGE>
in each such case the Conversion Price shall be adjusted so that the same
shall equal the price determined by multiplying the Conversion Price in
effect immediately prior to the record date of such distribution by a
fraction of which the numerator shall be the current market price per share
as determined pursuant to subsection (iv) of this Section 6(e) of the
Common Stock less the fair market value on such record date (as determined
by the Board of Directors, whose determination shall be conclusive and
shall be described in a statement filed by the Corporation with the stock
transfer or conversion agent, as appropriate) of the portion of the capital
stock or assets or the evidences of indebtedness or assets so distributed
to the holder of one share of Common Stock or of such subscription rights
or warrants applicable to one share of Common Stock, and of which the
denominator shall be such current market price per share of Common Stock.
Such adjustment shall become effective immediately after the record date
for the determination of stockholders entitled to receive such
distribution.
(iv) For the purpose of any computation under subsections (ii) and
(iii) of this Section 6(e), the current market price per share of Common
Stock on any date shall be deemed to be the average of the closing price
(as defined in Section 6(d)) for the shorter of (a) 30 consecutive trading
days (as defined below) ending on the last full trading day prior to the
Time of Determination (as defined below) or (b) the period commencing on
the date next succeeding the first public announcement of the issuance of
such rights or warrants or such distribution through such last full trading
day prior to the Time of Determination. For purposes of the foregoing, the
term "trading day" shall mean a day with respect to which quotations on
Nasdaq of the character referred to in the definition of closing price are
made if the Common Stock is then quoted on Nasdaq or, if the shares of
Common Stock are then listed or admitted for trading on a national
securities exchange, then a day on which the principal national securities
exchange on which the shares of Common Stock are listed or admitted for
trading is open for business; and the term "Time of Determination" shall
mean the time and date of the earlier of (i) the record date for
determining stockholders entitled to receive the rights, warrants or
distributions referred to in Section 6(e)(ii) and (iii) or (ii) the
commencement of "ex-dividend" trading on the exchange or market referred to
in the definition of "closing price."
(v) In any case in which this Section 6(e) shall require that an
adjustment be made immediately following a record date or an effective
date, the Corporation may elect to defer (but only until the filing by the
Corporation with the stock transfer or conversion agent, as the case may
be, of the certificate required by subsection (vii) of this Section 6(e))
issuing to the holder of any share of Convertible Preferred Stock converted
after such record date or effective date the shares of Common Stock
issuable upon such conversion over and above the shares of Common Stock
issuable
11.
<PAGE>
upon such conversion on the basis of the Conversion Price prior to
adjustment, and paying to such holder any amount of cash in lieu of a
fractional share.
(vi) No adjustment in the Conversion Price shall be required to be
made unless such adjustment would require an increase or decrease of at
least 1% of such price; provided, however, that any adjustments which by
-------- -------
reason of this subsection (vi) are not required to be made shall be carried
forward and taken into account in any subsequent adjustment. All
calculations under this Section 6(e) shall be made to the nearest cent or
to the nearest 1/1000th of a share, as the case may be. Anything in this
Section 6(e) to the contrary notwithstanding, the Corporation shall be
entitled to make such reduction in the Conversion Price, in addition to
those required by this Section 6(e), as it in its discretion shall
determine to be advisable in order that any stock dividend, subdivision of
shares, distribution of rights to purchase stock or securities, or
distribution of securities convertible into or exchangeable for stock
hereafter made by the Corporation to its stockholders shall not be taxable
to the recipients. Except as set forth in subsections (i), (ii) and (iii)
above, the Conversion Price shall not be adjusted for the issuance of
Common Stock, or any securities convertible into or exchangeable for Common
Stock or carrying the right to purchase any of the foregoing, in exchange
for cash, property or services.
(vii) Whenever the Conversion Price is adjusted as herein provided,
(a) the Corporation shall promptly file with the stock transfer or
conversion agent, as appropriate, a certificate setting forth the
Conversion Price after such adjustment and a brief statement of the facts
requiring such adjustment and the manner of computing the same, which
certificate shall be conclusive evidence of the correctness of such
adjustment, and (b) the Corporation shall also mail or cause to be mailed
by first class mail, postage prepaid, as soon as practicable to each holder
of record of shares of Convertible Preferred Stock a notice stating that
the Conversion Price has been adjusted and setting forth the adjusted
Conversion Price. The stock transfer or conversion agent, as the case may
be, shall not be under any duty or responsibility with respect to the
certificate required by this subsection (vii) except to exhibit the same to
any holder of shares of Convertible Preferred Stock who requests to inspect
it.
(viii) In the event that at any time, as a result of an adjustment
made pursuant to subsection (i) of this Section 6(e), the holder of any
share of Convertible Preferred Stock thereafter surrendered for conversion
shall become entitled to receive any shares of the Corporation other than
shares of Common Stock, thereafter the Conversion Price of such other
shares so receivable upon conversion of any share of Convertible Preferred
Stock shall be subject to adjustment from time to time in a manner and on
terms as nearly equivalent as practicable to the provisions with respect to
Common Stock contained in this Section.
12.
<PAGE>
(ix) The Corporation from time to time may decrease the Conversion
Price by any amount for any period of time if the period is at least 20
days and if the decrease is irrevocable during the period. Whenever the
Conversion Price is so decreased, the Corporation shall mail to holders of
record of shares of Convertible Preferred Stock a notice of the decrease at
least 15 days before the date the decreased Conversion Price takes effect,
and such notice shall state the decreased Conversion Price and the period
it will be in effect.
(f) Notice to Holders Prior to Certain Corporate Actions. In case:
----------------------------------------------------
(i) the Corporation shall take any action which would require an
adjustment in the Conversion Price pursuant to Section 6(e)(iii); or
(ii) the Corporation shall authorize the granting to the holders of
its Common Stock generally of rights or warrants to subscribe for or
purchase any shares of stock of any class or of any other rights; or
(iii) there shall be any reorganization or reclassification of the
Common Stock (other than a subdivision or combination of the outstanding
Common Stock and other than a change in the par value of the Common Stock),
or any consolidation or merger to which the Corporation is a party or any
statutory exchange of securities with another corporation and for which
approval of any stockholders of the Corporation is required, or any sale or
transfer of all or substantially all of the assets of the Corporation; or
(iv) there shall be a voluntary or involuntary dissolution,
liquidation or winding-up of the Corporation;
then in each such case the Corporation shall cause to be given to the holders of
shares of Convertible Preferred Stock and the stock transfer or conversion
agent, as appropriate, as promptly as possible, but in any event at least 20
days prior to the applicable date hereinafter specified, a notice stating (i)
the date on which a record is to be taken for the purpose of such action or
granting of rights or warrants, or, if a record is not to be taken, the date as
of which the holders of Common Stock of record to be entitled to such
distribution, rights or warrants are to be determined, or (ii) the date on which
such reorganization, reclassification, consolidation, merger, statutory
exchange, sale, transfer, dissolution, liquidation or winding-up is expected to
become effective or occur, and the date as of which it is expected that holders
of Common Stock of record shall be entitled to exchange their shares of Common
Stock for securities, cash or other property deliverable upon such
reorganization, reclassification, consolidation, merger, statutory exchange,
sale, transfer, dissolution, liquidation or winding-up. Failure to give such
notice or any defect therein shall not affect
13.
<PAGE>
the legality or validity of the proceedings described in subsection (i), (ii),
(iii) or (iv) of this Section 6(f).
(g) Reservation of Shares of Common Stock. The Corporation covenants
-------------------------------------
that it will, at all times in respect of the Series 1 Preferred Stock and
following the approval of the Corporation's stockholders to increase the number
of authorized shares of the Corporation's Common Stock in an amount sufficient
to provide for full conversion of the Series 2 Preferred Stock in respect of the
Series 2 Preferred Stock, reserve and keep available, free from preemptive
rights, out of the aggregate of its authorized but unissued shares of Common
Stock or its issued shares of Common Stock held in its treasury, or both, for
the purpose of effecting conversions of shares of Convertible Preferred Stock,
the full number of shares of Common Stock deliverable upon the conversion of all
outstanding shares of Convertible Preferred Stock not theretofore converted and
on or before (and as a condition of) taking any action that would cause an
adjustment of the Conversion Price resulting in an increase in the number of
shares of Common Stock deliverable upon conversion above the number thereof
previously reserved and available therefor, the Corporation shall take all such
action so required. For purposes of this Section 6(g), the number of shares of
Common Stock which shall be deliverable upon the conversion of all outstanding
shares of Convertible Preferred Stock shall be computed as if at the time of
computation all outstanding shares of Convertible Preferred Stock were held by a
single holder.
Before taking any action which would cause an adjustment reducing the
Conversion Price below the then par value (if any) of the shares of Common Stock
deliverable upon conversion of the shares of Convertible Preferred Stock, the
Corporation shall take any corporate action which may, in the opinion of its
counsel, be necessary in order that the Corporation may validly and legally
issue fully paid and non-assessable shares of Common Stock at such adjusted
Conversion Price.
(h) Transfer Taxes, Etc. The Corporation shall pay any and all
--------------------
documentary stamp, issue or transfer taxes, and any other similar taxes payable
in respect of the issue or delivery of shares of Common Stock upon conversions
of shares of Convertible Preferred Stock pursuant hereto; provided, however,
-------- -------
that the Corporation shall not be required to pay any tax which may be payable
in respect of any transfer involved in the issue or delivery of shares of Common
Stock in a name other than that of the holder of the shares of Convertible
Preferred Stock to be converted and no such issue or delivery shall be made
unless and until the person requesting such issue or delivery has paid to the
Corporation the amount of any such tax or has established, to the satisfaction
of the Corporation, that such tax has been paid.
(i) Consolidation or Merger or Sale of Assets. Notwithstanding any
-----------------------------------------
other provision herein to the contrary, in case of any consolidation or merger
to which the Corporation is a party (other than a merger or consolidation in
which the Corporation is the
14.
<PAGE>
continuing corporation and in which the Common Stock outstanding immediately
prior to the merger or consolidation is not exchanged for cash, or the
securities or other property of another corporation), or in case of any sale or
transfer to another corporation of the property of the Corporation as an
entirety or substantially as an entirety, or in the case of any statutory
exchange of securities with another corporation (other than in connection with a
merger or acquisition), then lawful provision shall be made by the corporation
formed by such consolidation or the corporation whose securities, cash or other
property will immediately after the merger or consolidation be owned, by virtue
of the merger or consolidation, by the holders of Common Stock immediately prior
to the merger or consolidation, or the corporation which shall have acquired
such assets or securities of the Corporation (collectively the "Formed,
Surviving or Acquiring Corporation"), as the case may be, providing that the
holder of each share of Convertible Preferred Stock then outstanding shall have
the right thereafter to convert such share into the kind and amount of
securities, cash or other property receivable upon such consolidation, merger,
statutory exchange, sale or transfer by a holder of the number of shares of
Common Stock into which such share of Convertible Preferred Stock might have
been converted immediately prior to such consolidation, statutory exchange, sale
or transfer assuming such holder of Common Stock did not exercise his right of
election, if any, as to the kind or amount of securities, cash or other property
receivable upon such consolidation, merger, statutory exchange, sale or transfer
(provided that, if the kind of amount of securities, cash or other property
receivable upon such consolidation, merger, statutory exchange, sale or transfer
is not the same for each share of Common Stock in respect of which such rights
of election shall not have been exercised ("non-electing share"), then for the
purposes of this Section 6(i) the kind and amount of securities, cash or other
property receivable upon such consolidation, merger, statutory exchange, sale or
transfer for each non-electing share shall be deemed to be the kind and amount
so receivable per share by a plurality of the non-electing shares). The Formed,
Surviving or Acquiring Corporation, as the case may be, shall make provision in
its certificate or articles of incorporation or other constituent documents to
the end that the provisions set forth in this Section 6(i) shall thereafter
correspondingly be made applicable, as nearly as may reasonably be, in relation
to any shares of stock or other securities or property thereafter deliverable on
the conversion of the Convertible Preferred Stock.
The above provisions of this Section 6(i) shall similarly apply to
successive consolidations, mergers, statutory exchanges, sales or transfers.
(j) Covenant as to Common Stock. The Corporation covenants that all
---------------------------
shares of Common Stock which may be delivered upon conversions of shares of
Convertible Preferred Stock will, upon delivery, be duly and validly issued and
fully paid and non-assessable, free of all liens and charges and not subject to
any preemptive rights.
The Corporation covenants that if any shares of Common Stock to be
provided for the purpose of conversion of shares of Convertible Preferred Stock
hereunder require
15.
<PAGE>
registration with or approval of any governmental authority under any Federal or
State law before such shares may be validly issued upon conversion, the
Corporation will in good faith and as expeditiously as possible endeavor to
secure such registration or approval, as the case may be.
The Corporation further covenants that if at any time the Common Stock
shall be quoted on Nasdaq or listed on any national securities exchange, the
Corporation will, if permitted by the rules of Nasdaq or such exchange, cause to
be quoted or list and keep listed, as the case may be, so long as the Common
Stock shall be so quoted or listed, all Common Stock issuable upon conversion of
the shares of Convertible Preferred Stock.
Section 7. Contingent Redemption at Holders' Option. Upon the
----------------------------------------
occurrence of a "Change of Control" (as defined below), each holder of shares of
Convertible Preferred Stock shall have the right, as such holder's option, to
the extent permitted under applicable law, to require the Corporation to redeem
for cash all or part of such holder's shares of Convertible Preferred Stock (the
"Redemption Right") at a redemption price of $25.00 per share in cash plus an
amount equal to all dividends on the Convertible Preferred Stock accrued and
unpaid thereon, whether or not declared or due, to the date fixed for redemption
(the "Change of Control Redemption Price").
On or before the 30th day after the Change of Control, notice by first
class mail, postage prepaid, shall be given to each holder of record of the
Convertible Preferred Stock, at such holder's address as it shall appear upon
the stock transfer books of the Corporation. Such notice shall specify: (i)
that a Change of Control has occurred and that the holders have the right to
require the Company to redeem all or any part of such holder's shares of
Convertible Preferred Stock at the Change of Control Redemption Price; (ii) the
circumstances and relevant facts regarding such Change of Control (including
information with respect to pro forma historical income, cash flow and
capitalization after giving effect to such Change of Control); (iii) the
Redemption Date, which shall be a date not earlier than 30 days nor later than
60 days after the date such notice is mailed; and (iv) the instructions that
holders of shares of Convertible Preferred Stock must follow in order to have
their shares redeemed. Any notice that is mailed as herein provided shall be
conclusively presumed to have been given, whether or not the holder of
Convertible Preferred Stock receives such notice.
All capitalized terms used in this paragraph shall, unless otherwise
defined herein, have those meanings give to them in that certain Indenture by
and among the Corporation, Orchard Supply Hardware Corporation, a Delaware
corporation ("Orchard Supply"), and U.S. Trust Company of California, N.A., as
Trustee (the "Indenture"), regarding the Senior Notes due 2002 of Orchard
Supply. For purposes of this Section 7, a "Change of Control" means any of the
following: (i) any sale, lease or other transfer (in one transaction or a
series of transactions) of all or substantially all of the assets of Orchard
16.
<PAGE>
Supply to any Person (other than a Wholly Owned Subsidiary of Orchard Supply);
(ii) the Corporation fails to own, beneficially and of record, 100% of the
Capital Stock of Orchard Supply; (iii) a "person" or "group" (within the meaning
of Sections 13(d) and 14(d)(2) of the Exchange Act (other than FS&Co. or its
Affiliates)) becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act) of Capital Stock of the Corporation representing 50% or more of
the voting power of such Capital Stock; (iv) the Common Stock of the Corporation
is no longer registered under Section 12 of the Exchange Act; (v) Continuing
Directors of the Corporation or Orchard Supply cease to constitute at least a
majority of the Board of Directors of the Corporation or Orchard Supply,
respectively; or (vi) the stockholders of the Corporation approve any plan or
proposal for the liquidation or dissolution of Orchard Supply or the
Corporation; provided, however, that in the event the Corporation is merged into
-------- -------
Orchard Supply and the beneficial owners of the Capital Stock of the Corporation
immediately prior to such transaction beneficially own all the Capital Stock of
Orchard Supply immediately after such transaction, the provisions of clause (vi)
above shall not apply to such transaction and thereafter clause (ii) above shall
no longer be applicable and all references in this definition to the Corporation
shall be deemed to refer to Orchard Supply.
To exercise the Redemption Right, the holder of shares of Convertible
Preferred Stock must deliver to the place designated in such notice prior to the
close of business on the Business Day prior to the Redemption Date, a written
notice of such holder's exercise of its Redemption Right, together with the
certificate or certificates representing shares of Convertible Preferred Stock
with respect to which such Redemption Right is being exercised, duly endorsed
for transfer. In the event a Redemption Right shall be exercised in accordance
with the terms hereof, the Corporation shall pay the Change of Control
Redemption Price with respect to the shares of Convertible Preferred Stock to
which the Redemption Right has been exercised, on the Redemption Date to the
maximum extent permitted by applicable law. If the Corporation is not permitted
by applicable law to redeem all of the shares of Convertible Preferred Stock as
to which the Redemption Right has been exercised, then the Corporation shall
redeem such shares of Convertible Preferred Stock on a pro rata basis.
--- ----
In the event that a Redemption Right is exercised with respect to less
than all the shares of Convertible Preferred Stock evidenced by certificates
surrendered for redemption or less than all the shares of Convertible Preferred
Stock surrendered for redemption are redeemed, a new certificate shall be issued
representing the unredeemed shares.
The Corporation shall comply with all applicable tender offer rules and
regulations, including Section 14(e) of the Exchange Act, if the Corporation is
required to give a notice of a Redemption Right as a result of a Change of
Control. To the extent that the provisions of any applicable securities laws or
regulations conflict with the provisions of
17.
<PAGE>
this Section 7, the Corporation shall comply with the applicable securities laws
and regulations and shall not be deemed to have breached its obligations under
this Section 7 by virtue thereof.
Section 8. Voting Rights.
-------------
(a) General. The holders of Convertible Preferred Stock shall not
-------
have any voting rights except as set forth below or as otherwise from time to
time required by law. In connection with any right to vote, each holder of
Convertible Preferred Stock will have one vote for each share held. Any shares
of Convertible Preferred Stock held by the Corporation or any entity controlled
by the Corporation shall not have voting rights hereunder and shall not be
counted in determining the presence of a quorum.
(b) Default Voting Rights. Whenever dividends on the Convertible
---------------------
Preferred Stock shall be in arrears in an amount equal to at least six quarterly
dividends (whether or not consecutive), (i) the number of members of the Board
of Directors of the Corporation shall be increased by two, effective as of the
time of election of such directors as hereinafter provided, and (ii) the holders
of the Convertible Preferred Stock (voting separately as a class with all other
affected classes or series of the Parity Dividend Stock upon which like voting
rights have been conferred and are exercisable) will have the exclusive right to
vote for and elect such two additional directors of the Corporation at any
meeting of stockholders of the Corporation at which directors are to be elected
held during the period such dividends remain in arrears. The right of the
holders of the Convertible Preferred Stock to vote for such two additional
directors shall terminate when all accrued and unpaid dividends on the
Convertible Preferred Stock have been declared and paid or set apart for
payment. The terms of office of all directors so elected shall terminate
immediately upon the termination of the right of the holders of the Convertible
Preferred Stock and such Parity Dividend Stock to vote for such two additional
directors.
The foregoing right of the holders of the Convertible Preferred Stock
with respect to the election of two directors may be exercised at any annual
meeting of stockholders or at any special meeting of stockholders held for such
purpose. If the right to elect directors shall have accrued to the holders of
the Convertible Preferred Stock more than 90 days preceding the date established
for the next annual meeting of stockholders, the President of the Corporation
shall, within 20 days after the delivery to the Corporation at its principal
office of a written request for a special meeting signed by the holders of at
least ten percent (10%) of the Convertible Preferred Stock then outstanding,
call a special meeting of the holders of the Convertible Preferred Stock to be
held within 60 days after the delivery of such request for the purpose of
electing such additional directors.
18.
<PAGE>
The holders of the Convertible Preferred Stock and any Parity Dividend
Stock referred to above voting as a class shall have the right to remove without
cause at any time and replace any directors such holders have elected pursuant
to this Section 8.
(c) Class Voting Rights. So long as the Convertible Preferred Stock
-------------------
is outstanding, the Corporation shall not, without the affirmative vote or
consent of the holders of at least 66-2/3% of all outstanding Convertible
Preferred Stock (unless the vote or consent of a greater percentage is required
by applicable law or the Certificate of Incorporation of the Corporation),
voting separately as a class, (i) amend, alter or repeal (by merger,
consolidation or otherwise) any provision of the Certificate of Incorporation or
the Bylaws of the Corporation so as to affect adversely the relative rights,
preferences, qualifications, limitations or restrictions of the Convertible
Preferred Stock, (ii) authorize or issue, or increase the authorized amount of,
any additional class or series of stock, or any security convertible into stock
of such class or series, ranking prior to the Convertible Preferred Stock in
respect of the payment of dividends or upon liquidation, dissolution or winding
up of the Corporation or (iii) effect any reclassification of the Convertible
Preferred Stock.
Section 9. Outstanding Shares. For purposes hereof, all shares of
------------------
Convertible Preferred Stock shall be deemed outstanding except (i) from the date
fixed for redemption pursuant to Section 5, all shares of Convertible Preferred
Stock that have been so called for redemption under Section 5 if funds necessary
for payment of the redemption price have been irrevocably set apart; (ii) from
the date of surrender of certificates representing shares of Convertible
Preferred Stock, all shares of Convertible Preferred Stock converted into Common
Stock; and (iii) from the date of registration of transfer, all shares of
Convertible Preferred Stock held of record by the Corporation or any subsidiary
of the Corporation.
Section 10. Status of Acquired Shares. Shares of Convertible Preferred
-------------------------
Stock redeemed by the Corporation, received upon conversion pursuant to Section
6, or otherwise acquired by the Corporation will be restored to the status of
authorized and unissued shares of Preferred Stock, without designation as to
series, and may thereafter be issued, but not as shares of Convertible Preferred
Stock.
Section 11. Preemptive Rights. The Convertible Preferred Stock is not
-----------------
entitled to any preemptive or subscription rights in respect of any securities
of the Corporation.
Section 12. Severability of Provisions. Whenever possible, each
--------------------------
provision hereof shall be interpreted in a manner as to be effective and valid
under applicable law, but if any provision hereof is held to be prohibited by or
invalid under applicable law, such provision shall be ineffective only to the
extent of such prohibition or invalidity, without invalidating or otherwise
adversely affecting the remaining provisions hereof. If a court of competent
jurisdiction should determine that a provision hereof would be valid or
enforceable
19.
<PAGE>
if a period of time were extended or shortened or a particular percentage were
increased or decreased, then such court may make such change as shall be
necessary to render the provision in question effective and valid under
applicable law.
FURTHER RESOLVED, that the President or any Vice President is, and each
of them is hereby, authorized and directed, in the name and on behalf of the
Corporation, to execute and file a copy of this Certificate of Designation in
accordance with the provisions of Sections 103 and 151(g) of the General
Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, ORCHARD SUPPLY HARDWARE STORES CORPORATION has
caused this Certificate of Designation to be signed by Maynard Jenkins, its
President, and Michael Seda, its Secretary, and its Corporate Seal to be
hereunder affixed this _____ day of ______________, 1994.
ORCHARD SUPPLY HARDWARE STORES
CORPORATION
[SEAL]
By:_____________________________________
Maynard Jenkins, President
Attest:
_______________________________
Michael Seda, Secretary
20.
<PAGE>
RIORDAN & McKINZIE
300 South Grand Avenue
Twenty-Ninth Floor
Los Angeles, California 90071
January 18, 1994
Orchard Supply Hardware Stores Corporation
Orchard Supply Hardware Corporation
6450 Via Del Oro
San Jose, California 95119
Re: % Senior Notes Due 2002
----------------------------------
Ladies and Gentlemen:
This opinion is rendered in connection with the filing by Orchard Supply
Hardware Corporation, a Delaware corporation (the "Company"), and Orchard Supply
Hardware Stores Corporation, a Delaware corporation and sole stockholder of the
Company (the "Guarantor"), of a Registration Statement on Form S-1 (the
"Registration Statement") with the Securities and Exchange Commission under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
registration under the Securities Act of the Company's _____% Senior Notes due
2002 (the "Securities") which are guaranteed on a senior basis by the
Guarantor. Capitalized terms used herein without definition shall have the
meanings given to them in the Registration Statement.
In rendering this opinion, we have examined copies identified to our
satisfaction as being copies of the form of the Securities and the form of the
Indenture, each as attached as an exhibit to the Registration Statement, and
originals, counterparts or copies identified to our satisfaction as being true
copies of such other documents as we have deemed necessary or appropriate to
render the opinions given below. We have assumed the authenticity of all
documents submitted to us as originals and the conformity to authentic original
documents of all documents submitted to us as certified, conformed or
photostatic copies.
We have investigated such questions of law for the purpose of rendering
this opinion as we have deemed necessary. We are opining herein only as to the
effect on the
<PAGE>
Orchard Supply Hardware Stores Corporation
Orchard Supply Hardware Corporation
January 18, 1993
Page 2
subject transaction of United States Federal law, the law of the State of New
York and the General Corporation Law of the State of Delaware. We express no
opinion with respect to compliance with state securities laws or with respect to
any state or federal fraudulent conveyance statutes.
In rendering opinions regarding the laws of the State of New York, we
have with your consent relied exclusively upon the opinion of O'Melveny & Myers.
Based upon the foregoing and subject to the qualifications, exceptions
and limitations set forth herein, we are of the opinion that when the
Registration Statement shall become effective under the Securities Act, when the
Indenture shall become qualified under the Trust Indenture Act of 1939, as
amended, when the Indenture shall have been executed by the parties thereto, and
when the Securities shall have been executed and authenticated as specified in
the Indenture:
1. The Indenture will constitute a valid and binding agreement of the
Company and the Guarantor enforceable against the Company and the Guarantor in
accordance with its terms, except as may be limited by bankruptcy, insolvency,
reorganization, moratorium and other similar laws relating to or affecting
creditors' rights generally or by general equitable principles (regardless of
whether such enforceability is considered in a proceeding in equity or at law);
and the Securities and the Guarantees, when duly authenticated as provided in
the Indenture and delivered to and paid for by the Underwriters pursuant to the
Underwriting Agreement, will constitute valid and binding obligations of the
Company and the Guarantor, respectively, entitled to the benefits of the
Indenture and enforceable in accordance with their terms, except as may be
limited by bankruptcy, insolvency, reorganization, moratorium and other similar
laws relating to or affecting creditors' rights generally or by general
equitable principles (regardless of whether such enforceability is considered in
a proceeding in equity or at law).
To the extent that the obligations of the Company or the Guarantor
under the Indenture may be dependent upon such matters, we assume for purposes
of this opinion that the Trustee is duly organized, validly existing and in good
standing under the laws of its jurisdiction of organization; that the Trustee is
duly qualified to engage in the activities contemplated by the Indenture; that
the Indenture has been duly authorized, executed and delivered by the Trustee
and constitutes the valid, binding and enforceable obligation of the Trustee;
that the Trustee is in compliance, generally and with respect to acting as a
trustee
<PAGE>
Orchard Supply Hardware Stores Corporation
Orchard Supply Hardware Corporation
January 18, 1993
Page 3
under the Indenture, with all applicable laws and regulations; and that the
Trustee has the requisite corporate and legal power and authority to perform its
obligations under the Indenture.
We advise you that certain principals and other persons associated with
Riordan & McKinzie own interests, directly or indirectly, in FSEP II, which owns
equity securities of the Company.
We consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our name under the heading "Legal
Matters" in the prospectus contained therein.
Very truly yours,
/s/ RIORDAN & McKINZIE
<PAGE>
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (the "Agreement") is made and entered
into as of __________, 1994 by and between Orchard Supply Hardware Stores
Corporation, a Delaware corporation (the "Company"), and FS Equity Partners III,
L.P., a California limited partnership (the "Purchaser").
This Agreement is made pursuant to the Purchase Agreement, dated as of
December 29, 1993 (the "Purchase Agreement"), between the Company and the
Purchaser. In order to induce the Purchaser to enter into the Purchase
Agreement, the Company has agreed to provide the registration rights set forth
in this Agreement. This Agreement shall be effective as of the Closing Date (as
defined in the Purchase Agreement).
The parties hereby agree as follows:
1. Definitions
-----------
Capitalized terms used herein without definition shall have their
respective meanings set forth in the Purchase Agreement. As used in this
Agreement, the following terms shall have the following meanings:
Advice: See the last paragraph of Section 4 hereof.
------
Common Stock: The common stock, par value $.01 per share, of the
------------
Company.
Exchange Act: The Securities Exchange Act of 1934, as amended, and
------------
the rules and regulations of the SEC promulgated thereunder.
Preferred Shares: The 800,000 shares of the Company's 6% Cumulative
----------------
Convertible Preferred Stock being issued and sold pursuant to the Purchase
Agreement.
Prospectus: The prospectus included in any Registration Statement
----------
(including, without limitation, a prospectus that discloses information
previously omitted from a prospectus filed as part of an effective
registration statement in reliance upon Rule 430A under the Securities Act)
in the form contained in such Registration Statement at the time it became
effective, except that if the final prospectus for use in connection with
an offering of Restricted Securities differs from the form of prospectus
included as part of the Registration Statement at the time it was declared
effective, then such final prospectus, as amended or supplemented by any
prospectus supplement, with respect to the terms of the offering of any
portion of the Restricted Securities covered by such Registration Statement
and all other amendments and supplements to the Prospectus, including
post-effective amendments and all material
<PAGE>
incorporated by reference or deemed to be incorporated by reference in
such Prospectus.
Registration Expenses: See Section 5 hereof.
---------------------
Registration Statement: Any registration statement of the Company
----------------------
which covers any of the Restricted Securities pursuant to the provisions of
this Agreement, including the Prospectus, any amendments and supplements to
such registration statement, including post-effective amendments, all
exhibits, and all material incorporated by reference or deemed to be
incorporated by reference in such registration statement.
Restricted Securities: Any and all Preferred Shares and any and all
---------------------
shares of Common Stock (including any and all shares issued or issuable
upon the conversion of the Preferred Shares), upon original issuance
thereof and at all times subsequent thereto, owned by the Purchaser or its
affiliates or their successors and assigns, until, as to each such
Preferred Share and share of Common Stock, (i) it has been effectively
registered under the Securities Act and disposed of in accordance with the
Registration Statement covering it or (ii) it is distributed pursuant to
Rule 144 (or any similar provisions then in force) under the Securities
Act.
SEC: The Securities and Exchange Commission.
---
Securities Act: The Securities Act of 1933, as amended, and the rules
--------------
and regulations promulgated by the SEC thereunder.
Shelf Registration: See Section 3 hereof.
------------------
Special Counsel: Such law firm, if any, as may be designated by the
---------------
holders of the majority of the Restricted Securities.
2. Securities Subject to this Agreement
------------------------------------
(a) Restricted Securities. The securities entitled to the
---------------------
benefits of this Agreement are the Restricted Securities.
3. Demand Registration
-------------------
(a) Upon the written request of a holder of Restricted Securities,
the Company shall be obligated to effect the registration under the Act of the
Restricted Securities, all in accordance with the following provisions of this
Agreement; provided, however, that the obligation of the Company to effect
2.
<PAGE>
such registration shall not be deemed to have been satisfied until the
registration statement with respect thereto has become effective under the Act
and only so long as no stop order suspending the effectiveness of the
registration statement or the qualification or registration of any of the
Restricted Securities for sale in any jurisdiction in which the Company shall be
required pursuant to Section 5(i) to register or qualify such Restricted
Securities shall not have been issued and no proceedings for that purpose shall
have been initiated or threatened by the Commission or any similar state agency.
(b) Whenever the Company shall be requested pursuant to Section 3(a)
to effect the registration of Restricted Securities under the Act, the Company
shall, as provided in Section 5, effect the registration under the Act of the
Restricted Securities which the Company has been requested to register pursuant
to Section 3(a), all to the extent requisite to permit the disposition by
Purchaser of the Restricted Securities so registered.
(c) If the holder of Restricted Securities, requesting registration
of Restricted Securities pursuant to Section 3(a), advises the Company that it
intends to publicly offer or distribute Restricted Securities to be covered by
the Registration Statement pursuant to a firm commitment underwriting with an
investment banking firm or firms selected by such holder and approved by the
Company, such approval not to be unreasonably withheld, the Company shall enter
into the same underwriting agreement with such underwriter or underwriters as
shall such holder, containing representations, warranties and agreements not
substantially different from those customarily made by an issuer in underwriting
agreements with respect to secondary distributions.
(d) The Company shall not be obligated to effect a registration under
Section 3(a): (i) during the period starting with the date 30 days prior to the
Company's good faith estimated date of filing of, and ending on a date 180 days
following the effective date of, a Registration Statement pertaining to an
underwritten public offering of securities for the account of the Company;
provided, however, that the Company is actively endeavoring in good faith to
- -------- -------
cause such Registration Statement to become effective and that the Company's
estimate of the date of filing such Registration Statement is made in good
faith; or (ii) if the Company is engaged in or contemplating a material
financing or acquisition which, in the good faith opinion of the Company's Board
of Directors as set forth in a resolution, would be materially adversely
affected by the exercise of the rights set forth in Section 3(a); provided,
--------
however, that the Company shall not be entitled to delay the registration for
- -------
more than 120 days in reliance on this clause (d)(ii) and that the Company is
actively endeavoring in good faith to consummate such material
3.
<PAGE>
financing or acquisition. The Company shall be not entitled to claim the
benefits of this Section 3(d) if the Company had previously invoked it within
the prior 60 days.
4. "Piggyback" Registrations
-------------------------
(a) If the Company at any time, from time to time, proposes to file
with the Commission a Registration Statement under the Act (other than a
registration statement on Form S-4 or S-8, or any form substituting therefore,
or filed in connection with an exchange offer) relating to any of its equity
securities, it will at each such time give written notice to each holder of
Restricted Securities of its intention so to do. Upon the written request of a
holder, the Company will use its best efforts to cause each Registrable Security
which the Company has been requested to register by such holder to be included
in such Registration Statement under the Act, all to the extent required to
permit the sale or other disposition by such holder of the Restricted Securities
so registered. Notwithstanding the foregoing, if the managing underwriter or
underwriters, if any, of the offering to be effected pursuant to such
Registration Statement delivers a written opinion to such holder that the total
number of shares of Common Stock which it and any other persons or entities
intend to include in such offering would adversely affect the success of such
offering, then the number of Restricted Securities to be offered for the account
of such holder shall be reduced to the extent necessary to reduce the total
number of shares of Common Stock to be included in such offering to the number
recommended by such managing underwriter or excluded in their entirety, as the
case may be; provided, however, that if the number of Restricted Securities to
-------- -------
be offered for the account of such holder shall be reduced in accordance with
this sentence, the Company shall not be permitted to include in such
registration securities of the Company other than (i) securities to be issued by
the Company but only if such registration is an underwritten primary
registration on behalf of the Company, (ii) up to the full number of Restricted
Securities and securities of any other persons or entities exercising similar
registration rights requested to be included in such registration in excess of
the number of securities the Company proposes to sell which, in the opinion of
such managing underwriter, can be sold (allocated pro rata between the holders
--- ----
of Restricted Securities and such other persons or entities on the basis of the
total amount of Restricted Securities and such other securities requested or
intended to be included in such registration, and pro rata among such holders of
--- ----
Restricted Securities and other persons or entities, respectively, on the basis
of the number of securities requested to be included therein by each such
holder); provided, however, that if the other persons requested to be included
-------- -------
in such registration are exercising rights granted pursuant to a Warrant to
Purchase Shares of Common Stock of Orchard Holding Corporation (the
4.
<PAGE>
"Warrant") issued pursuant to the Note Purchase Agreement dated as of October
15, 1992, then all such shares requested to be included by such person must be
included prior to including any Restricted Securities, so long as the requesting
holder is part of the "Control Group" (as defined in the Warrant) and (iii)
shares of Common Stock held by holders exercising the first demand registration
right granted to them by the Company with respect to such shares. In the event
that the contemplated distribution does not involve an underwritten public
offering, such determination that the inclusion of such Restricted Securities
shall adversely affect the success of the offering shall be made by the Company
in its reasonable discretion.
(b) If all or substantially all of the securities (other than the
Restricted Securities) to be registered for sale pursuant to a Registration
Statement, the intention to file which caused a notice to be given pursuant to
Section 4(a), are to be offered for sale for the account of the Company and are
to be distributed by or through an underwriter or underwriters of recognized
standing pursuant to underwriting terms appropriate for such transactions, then
each holder of Restricted Securities agrees that if such holder has made a
request to register Restricted Securities pursuant to Section 4(a), such holder
shall forbear from selling Restricted Securities to the public (except as part
of such underwritten registration) for a period of 5 business days prior to and
90 days following the effective date of the registration statement to which
reference is made in Section 4(a).
5. Registration Procedures
-----------------------
In connection with the registration obligations of the Company pursuant
to and in accordance with the provisions of Sections 3 and 4 of this Agreement,
the Company shall effect such registrations to permit the sale of such
Restricted Securities in accordance with the intended method or methods of
disposition thereof, and pursuant thereto the Company shall as expeditiously as
possible:
(a) prepare and file with the SEC, as soon as practicable, a
Registration Statement or Registration Statements on any appropriate form under
the Securities Act, which form shall be available for the sale of the Restricted
Securities by the holders thereof in accordance with the intended method or
methods of distribution thereof, and use its best efforts to cause each such
Registration Statement to become effective and remain effective as provided
herein; provided, however, that before filing a Registration Statement or
-------- -------
Prospectus or any amendments or supplements thereto, including documents
incorporated or deemed to be incorporated therein by reference, the Company
shall furnish to Special Counsel and to any holder which has requested a copy of
the same, copies of all such
5.
<PAGE>
documents proposed to be filed (excluding exhibits unless otherwise requested),
which documents will be subject to the review of Special Counsel and any such
holders, and the Company shall not file any such Registration Statement or
amendment thereto or any Prospectus or any supplement thereto (including such
documents which, upon filing, would be incorporated or deemed to be incorporated
by reference therein) to which the holders of a majority of the Restricted
Securities covered by such Registration Statement shall reasonably object on a
timely basis; provided, however, that the Company shall be entitled in all
-------- -------
events to take such actions which, in the opinion of counsel for the Company are
required to comply with applicable law;
(b) prepare and file with the SEC such amendments and
post-effective amendments to each Registration Statement as may be necessary to
keep such Registration Statement effective for the applicable period; cause the
related Prospectus to be supplemented by any required Prospectus supplement, and
as so supplemented to be filed pursuant to Rule 424 (or any similar provisions
then in force) under the Securities Act; and comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by such
Registration Statement during the applicable period in accordance with the
intended methods of disposition by the sellers thereof set forth in such
Registration Statement as so amended or to such Prospectus as so supplemented;
(c) notify the selling holders of Restricted Securities and
their Special Counsel, promptly, and (if requested by any such Person) confirm
such notice in writing, (i) when a Prospectus or any Prospectus supplement or
post-effective amendment related to such Restricted Securities has been filed,
and, with respect to a Registration Statement or any post-effective amendment
related to such Restricted Securities, when the same has become effective, (ii)
of any request by the SEC for amendments or supplements to a Registration
Statement or related Prospectus or for additional information, (iii) of the
issuance by the SEC of any stop order suspending the effectiveness of a
Registration Statement or the initiation of any proceedings for that purpose,
(iv) of the receipt by the Company of any notification with respect to the
suspension of the qualification or exemption from qualification of any of the
Restricted Securities for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose, (v) of the happening of any
event which makes any statement made in such Registration Statement or related
Prospectus or any document incorporated or deemed to be incorporated therein by
reference untrue or which requires the making of any changes in a Registration
Statement or related Prospectus so that such documents will not contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or, in the case of a Prospectus, necessary to make the
6.
<PAGE>
statements therein, in light of the circumstances under which they were made,
not misleading, and (vi) of the Company's reasonable determination that a
post-effective amendment to a Registration Statement would be appropriate;
(d) use every reasonable effort to obtain the withdrawal of any
order suspending the effectiveness of a Registration Statement, or the lifting
of any suspension of the qualification (or exemption from qualification) of any
of the Restricted Securities for sale in any jurisdiction, at the earliest
possible moment;
(e) if requested by the holders of a majority of the Restricted
Securities, as promptly as practicable (i) incorporate in a Prospectus
supplement or post-effective amendment such information as such holders agree
should be included therein as may be required by applicable law, (ii) make all
required filings of such Prospectus supplement or such post-effective amendment
as promptly as is reasonably practicable after the Company has received
notification of the matters to be incorporated in such Prospectus supplement or
post-effective amendment, and (iii) supplement or make amendments to any
Registration Statement if requested by the holders of a majority of the
Restricted Securities covered by such Registration Statement; provided, however,
-------- -------
that the Company shall not be required to take any actions in this Section 5(e)
which are not, in the opinion of counsel for the Company, in compliance with
applicable law;
(f) upon request of a selling holder of Restricted Securities,
furnish to such selling holder of Restricted Securities, without charge, a copy
of the Registration Statement or Registration Statements and any post-effective
amendment thereto, including financial statements and schedules, all documents
incorporated therein by reference and all exhibits (including those incorporated
by reference), at the earliest practicable time under the circumstances before
the filing of such documents with the SEC;
(g) furnish to each selling holder of Restricted Securities and
Special Counsel, without charge, at least one conformed copy of the Registration
Statement or Registration Statements and any post-effective amendment thereto,
including financial statements and schedules, all documents incorporated therein
by reference or deemed incorporated therein by reference and all exhibits, if
requested (including those previously furnished or incorporated by reference),
at the earliest practicable time under the circumstances after the filing of
such documents with the SEC;
(h) deliver to each selling holder of Restricted Securities and
its Special Counsel, without charge, as many
7.
<PAGE>
copies of the Prospectus or Prospectuses (including each preliminary prospectus)
and any amendment or supplement thereto as such holder may reasonably request;
the Company consents to the use of such Prospectus or any amendment or
supplement thereto by each of the selling holders of Restricted Securities in
connection with the offering and sale of the Restricted Securities covered by
such Prospectus or any amendment or supplement thereto;
(i) prior to any public offering of Restricted Securities, to
register or qualify or cooperate with the selling holders of Restricted
Securities, the underwriters, if any, and their respective counsel in connection
with the registration or qualification (or exemption from such registration or
qualification) of such Restricted Securities for offer and sale under the
securities or Blue Sky laws of such jurisdictions as any seller or underwriter
reasonably requests in writing; keep each such registration or qualification (or
exemption therefrom) effective during the period such Registration Statement is
required to be kept effective and do any and all other acts or things necessary
or advisable to enable the disposition in such jurisdictions of the Restricted
Securities covered by the applicable Registration Statement; provided, however,
-------- -------
that the Company will not be required to (a) qualify generally to do business in
any jurisdiction where it is not then so qualified or (b) take any action which
would subject it to general service of process in any such jurisdiction where it
is not then so subject;
(j) cooperate with the selling holders of Restricted Securities
to facilitate the timely preparation and delivery of certificates representing
Restricted Securities after the same have been sold pursuant to a Registration
Statement, which certificates shall not bear any restrictive legends;
(k) use its best efforts to cause the Restricted Securities
covered by the applicable Registration Statement to be registered with or
approved by such other governmental agencies or authorities as may be reasonably
necessary to enable the seller or sellers thereof to consummate the disposition
of such Restricted Securities;
(l) upon the occurrence of any event contemplated by paragraph
5(c)(v) or 5(c)(vi) above, prepare a supplement or post-effective amendment to
the applicable Registration Statement or a supplement to the related Prospectus
or any document incorporated therein by reference or file any other required
document so that, as thereafter delivered to the purchasers of the Restricted
Securities being sold thereunder, such Prospectus will not contain an untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading;
8.
<PAGE>
(m) use its best efforts to cause all Restricted Securities
covered by such Registration Statement to be (i) listed on each securities
exchange, if any, on which similar securities issued by the Company are then
listed, or (ii) authorized to be quoted on the National Association of
Securities Dealers Automated Quotation System ("Nasdaq") or the National Market
of Nasdaq if the securities so qualify;
(n) provide a CUSIP number for each of the Restricted Securities
not later than the effective date of the Initial Shelf Registration; and
(o) use its best efforts to comply with all applicable rules and
regulations of the SEC and make generally available to its securityholders
earning statements satisfying the provisions of Section 11(a) of the Securities
Act and Rule 158 thereunder no later than 45 days after the end of any 12-month
period (or 90 days after the end of any 12-month period if such period is a
fiscal year) commencing on the first day of the first fiscal quarter of the
Company after the effective date of a Registration Statement, which statements
shall cover said 12-month periods.
The Company may require each seller of Restricted Securities as to which
any registration is being effected to furnish to the Company such information
regarding the distribution of such Restricted Securities as the Company may from
time to time reasonably request in writing and the Company may exclude from such
registration the Restricted Securities if any holder fails to furnish such
information within a reasonable time after receiving such request.
Each holder of Restricted Securities agrees by acquisition of such
Restricted Securities that, upon receipt of any notice from the Company of the
happening of any event of the kind described in Section 5(c)(ii)-(vi) hereof,
such holder will forthwith discontinue disposition of such Restricted Securities
covered by such Registration Statement or Prospectus until such holder's receipt
of the copies of the supplemented or amended Prospectus contemplated by Section
5(l) hereof, or until it is advised in writing (the "Advice") by the Company
that the use of the applicable Prospectus may be resumed, and has received
copies of any additional or supplemental filings which are incorporated or
deemed to be incorporated by reference in such Prospectus.
6. Registration Expenses
---------------------
(a) All fees and expenses incident to the performance of or
compliance with this Agreement by the Company including, without limitation, (i)
all registration and filing fees, including fees and expenses incurred in
connection with compliance with securities or Blue Sky laws and determination of
9.
<PAGE>
the eligibility of the Restricted Securities for investment under the laws of
such jurisdictions, in each case, as the holders of a majority of the Restricted
Securities may designate, subject to the limitations set forth herein, (ii)
printing expenses (including expenses of printing certificates for the
Restricted Securities and of printing prospectuses), (iii) messenger, telephone
and delivery expenses, (iv) fees and disbursements of counsel for the Company
and Special Counsel for the sellers of the Restricted Securities, and (v) fees
and expenses of all other Persons retained by the Company (all such expenses
being herein called "Registration Expenses"), shall be borne by the Company
whether or not any of the Registration Statements becomes effective. The
Company shall, in any event, pay the expense of any annual audit, the fees and
expenses incurred in connection with the listing of the Restricted Securities
pursuant to Section 5(m) hereof and the fees and expenses of any Person,
including special experts, retained by the Company.
7. Indemnification
---------------
(a) Indemnification by the Company. The Company agrees to
------------------------------
indemnify and hold harmless each holder of Restricted Securities and each
Person who controls such holder (within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act) against any losses, claims,
damages, liabilities or expenses, joint or several, to which such holder or such
controlling person may become subject under the Securities Act, the Exchange Act
or other federal or state statutory law or regulation, or at common law or
otherwise (including in settlement of any litigation, if such settlement is
effected with the written consent of the Company), insofar as such losses,
claims, damages, liabilities or expenses (or actions in respect thereof as
contemplated below) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in the Registration
Statement, any preliminary prospectus, the Prospectus or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state in any of them a material fact required to be stated therein
or necessary to make the statements in any of them not misleading, or arise out
of or are based in whole or in part on any failure of the Company to perform its
obligations hereunder or under law; and will reimburse, to the extent and
subject to the limitations and conditions set forth below, each holder and each
such controlling person for any legal and other expenses as such expenses are
reasonably incurred by such holder or such controlling person in connection with
investigating, defending, settling, compromising or paying any such loss, claim,
damage, liability, expense or action; provided, however, that the Company will
-------- -------
not be liable in any such case (i) to the extent that any such loss, claim,
damage, liability or expense arises out of or is based upon an untrue statement
or alleged untrue statement or omission or alleged omission made in the
10.
<PAGE>
Registration Statement, any preliminary prospectus, the Prospectus or any
amendment or supplement thereto in reliance upon and in conformity with the
information furnished to the Company in writing by such holder expressly for use
therein, or (ii) if the Company has advised such holder of an event described in
Section 5(c)(v) or (vi) and such loss, claim, damage, liability or expense is
caused solely by such holder having sold Restricted Securities notwithstanding
such notice prior to receipt of a supplement or amended prospectus pursuant to
Section 5(1) and the omission or misstatement was caused by such event and
corrected in the supplement or amended prospectus; provided further, however,
-------- ------- -------
that the Company shall not be liable in any such case to the extent that any
such losses, claims, damages, liabilities or expenses arise out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in any preliminary prospectus if (i) such holder failed to send or
deliver a copy of the Prospectus with or prior to the delivery of written
confirmation of the sale of Restricted Securities to the person asserting such
Loss who purchased such Restricted Securities which are the subject thereof and
(ii) the Prospectus would have corrected such untrue statement or omission or
alleged untrue statement or alleged omission. In addition to its other
obligations under this Section 7(a), the Company agrees that, as an interim
measure during the pendency of any claim, action, investigation, inquiry or
other proceeding arising out of or based upon any statement or omission, or any
alleged statement or omission, or failure to perform its obligations hereunder,
all as described in this Section 7(a), they will reimburse each holder (and, to
the extent applicable, each controlling person) on a quarterly basis for all
reasonable legal or other expenses incurred in connection with investigating or
defending any such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of the Company's obligation to reimburse each holder (and, to the
extent applicable, each controlling person) for such expenses and the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, each holder (and, to the
extent applicable, each controlling person) shall promptly return it to the
Company together with interest, compounded daily, determined on the basis of the
prime rate (or other commercial lending rate for borrowers of the highest credit
standing) announced from time to time by Bank of America NT&SA, San Francisco,
California (the "Prime Rate"). Any such interim reimbursement payments which
are not made to a holder (and, to the extent applicable, each controlling
person) within 30 days of a request for reimbursement, shall bear interest at
the Prime Rate from the date of such request. This indemnity agreement will be
in addition to any liability which the Company may otherwise have. The Company
shall also indemnify underwriters, dealer managers and similar securities
industry
11.
<PAGE>
professionals participating in the distribution and each Person who controls
such Persons (within the meaning of Section 15 of the Securities Act or Section
20 of the Exchange Act) to the same extent as provided above, and subject to the
same obligation to repay the Company as provided above, with respect to the
indemnification of the holders of Restricted Securities. The Company shall in
no event be liable for any losses, damages, costs or expenses relating to or
arising out of any settlement effected without the Company's written consent
(which shall not be unreasonably withheld).
(b) Indemnification by Holders of Restricted Securities. In
---------------------------------------------------
connection with any Registration Statement in which any holder of Restricted
Securities is participating, such holder of Restricted Securities shall furnish
to the Company in writing such information as the Company reasonably requests
for use in connection with any Registration Statement or Prospectus and agrees
to indemnify the Company, each of its directors, each of its officers who signed
the Registration Statement and each Person who controls the Company (within the
meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act),
against any losses, claims, damages, liabilities or expenses to which the
Company or any such director, officer or controlling person may become subject
under the Securities Act, the Exchange Act or other federal or state statutory
law or regulation, or at common law or otherwise (including in settlement of any
litigation, if such settlement is effected with the written consent of such
holder), insofar as such losses, claims, damages, liabilities or expenses (or
actions in respect thereof as contemplated below) arise out of or are based upon
any untrue or alleged untrue statement of any material fact contained in the
Registration Statement, any preliminary prospectus, the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was made in the Registration
Statement, any preliminary prospectus, the Prospectus, or any amendment or
supplement thereto, in reliance upon and in conformity with the information
furnished to the Company in writing by such holder expressly for use therein;
and will reimburse the Company, or any such director, officer or controlling
person for any legal and other expense reasonably incurred by the Company or any
such director, officer or controlling person in connection with investigating,
defending, settling, compromising or paying any such loss, claim, damage,
liability, expense or action. In addition to its other obligations under this
Section 7(b), each holder severally agrees that, as an interim measure during
the pendency of any claim, action, investigation, inquiry or other proceeding
arising out of or based upon any statement or omission, or any alleged statement
12.
<PAGE>
or omission, described in this Section 7(b) which relates to information
furnished to the Company in writing by such holder expressly for use therein, it
will reimburse the Company (and, to the extent applicable, each officer,
director or controlling person) on a quarterly basis for all reasonable legal or
other expenses incurred in connection with investigating or defending any such
claim, action, investigation, inquiry or other proceeding, notwithstanding the
absence of a judicial determination as to the propriety and enforceability of
the holder's obligation to reimburse the Company (and, to the extent applicable,
each officer, director or controlling person) for such expenses and the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Company (and, to the
extent applicable, each officer, director or controlling person) shall promptly
return it to the holder together with interest, compounded daily, determined on
the basis of the Prime Rate. Any such interim reimbursement payments which are
not made to the Company (and, to the extent applicable, each officer, director
or controlling person) within 30 days of a request for reimbursement, shall bear
interest at the Prime Rate from the date of such request. This indemnity
agreement will be in addition to any liability which such holder may otherwise
have. In no event shall the liability of any selling holder of Restricted
Securities hereunder be greater in amount than the dollar amount of the proceeds
(net of payment of all expenses) received by such holder upon the sale of the
Restricted Securities giving rise to such indemnification obligation. The
Company (and, to the extent applicable, each officer, director or controlling
person) shall be entitled to receive indemnities from underwriters, dealer
managers and similar securities industry professionals participating in the
distribution to the same extent as provided above with respect to information so
furnished in writing by such Persons expressly for use in any Prospectus or
Registration Statement.
(c) Conduct of Indemnification Proceedings. Promptly after
--------------------------------------
receipt by an indemnified party under this Section of notice of the
commencement of any action, such indemnified party will, if a claim in respect
thereof is to be made against an indemnifying party under this Section, notify
the indemnifying party in writing of the commencement thereof; but the omission
so to notify the indemnifying party will not relieve it from any liability which
it may have to any indemnified party for contribution or otherwise than under
the indemnity agreement contained in this Section or to the extent it is not
prejudiced as a proximate result of such failure. In case any such action is
brought against any indemnified party and such indemnified party seeks or
intends to seek indemnity from an indemnifying party, the indemnifying party
will be entitled to participate in, and, to the extent that it may wish, jointly
with all other
13.
<PAGE>
indemnifying parties similarly notified, to assume the defense thereof with
counsel reasonably satisfactory to such indemnified party; provided, however,
-------- -------
if the defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have been advised by legal
counsel that there may be a conflict between the positions of the indemnifying
party and the indemnified party in conducting the defense of any such action or
that there may be legal defenses available to it and/or other indemnified
parties which are different from or additional to those available to the
indemnifying party, the indemnified party or parties shall have the right to
select separate counsel to assume such legal defenses and to otherwise
participate in the defense of such action on behalf of such indemnified party or
parties. Upon receipt of notice from the indemnifying party to such indemnified
party of its election so to assume the defense of such action and approval by
the indemnified party of counsel, the indemnifying party will not be liable to
such indemnified party under this Section for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof unless (i) the indemnified party shall have employed such counsel in
connection with the assumption of legal defenses in accordance with the proviso
to the next preceding sentence (it being understood, however, that the
indemnifying party shall not be liable for the expenses of more than one
separate counsel representing the indemnified parties who are parties to such
action) or (ii) the indemnifying party shall not have employed counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party within a reasonable time after notice of commencement of the action, in
each of which cases the fees and expenses of counsel shall be at the expense of
the indemnifying party.
(d) Contribution. If the indemnification provided for in this
------------
Section 7 is required by its terms but is for any reason (other than as provided
above) held to be unavailable to or otherwise insufficient to hold harmless an
indemnified party under subsections (a), (b) or (c) in respect of any losses,
claims, damages, liabilities or expenses referred to herein, then each
applicable indemnifying party shall contribute to the amount paid or payable by
such indemnified party as a result of any losses, claims, damages, liabilities
or expenses referred to herein in such proportion as is appropriate to reflect
the relative fault of the Company and the holders in connection with the
statements or omissions or inaccuracies in the representations and warranties
herein which resulted in such losses, claims, damages, liabilities or expenses,
as well as any other relevant equitable considerations. The relative fault of
the Company and the holders shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the
14.
<PAGE>
Company or the holders and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The amount paid or payable by a party as a result of the losses, claims,
damages, liabilities and expenses referred to above shall be deemed to include,
subject to the limitations set forth in subsection (c) of this Section 7, any
legal or other fees or expenses reasonably incurred by such party in connection
with investigating or defending any action or claim. The provisions set forth
in subsection (c) of this Section 7 with respect to notice of commencement of
any action shall apply if a claim for contribution is to be made under this
subsection (d); provided, however, that no additional notice shall be required
-------- -------
with respect to any action for which notice has been given under subsection (c)
for purposes of indemnification. The Company and the holders agree that it
would not be just and equitable if contribution pursuant to this Section 7 were
determined solely by pro rata allocation (even if the holders were treated as
one entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to in this subsection.
Notwithstanding the provisions of this subsection (d), an indemnifying party
which is a selling holder of Restricted Securities shall not be required to
contribute any amount in excess of the amount by which the total price at which
the Restricted Securities sold by such indemnifying party and distributed to the
public were offered to the public exceeds the amount of any damages which such
indemnifying party has otherwise been required to pay by reason of such untrue
or alleged untrue statement or omission or alleged omission. No person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any Person who was not
guilty of such fraudulent misrepresentation.
8. Miscellaneous
-------------
(a) Remedies. In the event of a breach by the Company of any of
--------
its obligations under this Agreement, each holder of Restricted Securities, in
addition to being entitled to exercise all rights granted by law, will be
entitled to specific performance of its rights under this Agreement. The Company
agrees that monetary damages would not be adequate compensation for any loss
incurred by reason of a breach by it of any of the provisions of this Agreement
and hereby further agrees that, in the event of any action for specific
performance in respect of such breach, it shall waive the defense that a remedy
at law would be adequate.
(b) Actions Affecting Restricted Securities. The Company agrees
---------------------------------------
to act in good faith with respect to its obligations hereunder and the Company
shall not take any action, or fail to take such action which has the primary
effect of
15.
<PAGE>
materially adversely affecting the rights of holders of Restricted Securities
hereunder.
(c) Amendments and Waivers. The provisions of this Agreement,
----------------------
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given, unless the Company has obtained the written consent of holders
of a majority of the Restricted Securities. Whenever a waiver, modification,
supplement or amendment hereof is sought, with respect to the Restricted
Securities, only the person legally entitled to vote with respect to a
Restricted Security shall be entitled to vote thereon.
(d) Notices. All notices and other communications provided for
-------
or permitted hereunder shall be made in writing by hand-delivery, registered
first-class mail, telex, telecopier, or overnight air courier guaranteeing next
day delivery:
If to Company: Orchard Supply Hardware Stores
Corporation
6450 Via Del Oro
San Jose, California 95119
Attention: President
If to Purchaser: FS Equity Partners III, L.P.
c/o Freeman Spogli & Co.
11100 Santa Monica Boulevard
Suite 1900
Los Angeles, California 90025
Attention: J. Frederick Simmons
All such notices and communications shall be deemed to have been duly
given: when delivered by hand, if personally delivered; five business days
after being deposited in the mail, postage prepaid, if mailed; when answered
back if telexed; when receipt acknowledged, if telecopied; and the next business
day after timely delivery to the courier, if sent by overnight air courier
guaranteeing next day delivery.
(e) Successors and Assigns. This Agreement shall inure to the
----------------------
benefit of and be binding upon the successors and assigns of each of the
parties, including without limitation, subsequent holders of Restricted
Securities; provided that each successor shall have signed a supplement hereto
agreeing to be bound by the provisions hereof.
(f) Counterparts. This Agreement may be executed in any number
------------
of counterparts and by the parties hereto in separate counterparts, each of
which when so executed shall be
16.
<PAGE>
deemed to be an original and all of which taken together shall constitute one
and the same agreement.
(g) Headings. The headings in this Agreement are for
--------
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
(h) Governing Law and Submission to Jurisdiction. THIS
--------------------------------------------
AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (AND NOT THE LAWS PERTAINING TO
CONFLICTS OF LAWS) OF THE STATE OF CALIFORNIA.
(i) Severability. If any term, provision, covenant or
------------
restriction of this Agreement is held by a court of competent jurisdiction to be
invalid, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their best efforts to find and employ an alternative means to
achieve the same or substantially the same result as that contemplated by such
term, provision, covenant or restriction. It is hereby stipulated and declared
to be the intention of the parties that they would have executed the remaining
terms, provisions, covenants and restrictions without including any of such
which may be hereafter declared invalid, void or unenforceable.
(j) Entire Agreement. This Agreement, together with the other
----------------
documents to which the parties hereto are parties, is intended by the parties as
a final expression of their agreement and is intended to be a complete and
exclusive statement of the agreement and understanding of the parties hereto in
respect of the subject matter contained herein. There are no restrictions,
promises, warranties or undertakings, other than those set forth or referred to
herein, with respect to the registration rights granted by the Company with
respect to the securities sold pursuant to the Purchase Agreement. This
Agreement supersedes all prior agreements and understandings between the parties
with respect to such subject matter.
(k) Attorneys' Fees. In any action or proceeding brought to
---------------
enforce any provision of this Agreement, or where any provision hereof is
validly asserted as a defense, the successful party shall be entitled to recover
reasonable attorneys' fees in addition to its costs and expenses and any other
available remedy.
(l) Securities Held by the Company or Its Affiliates. Whenever
------------------------------------------------
the consent or approval of holders of a specified percentage of Restricted
Securities is required hereunder, Restricted Securities held by the Company or
any of
17.
<PAGE>
its affiliates (as such term is defined in Rule 405 under the Securities
Act) shall not be counted in determining whether such consent or approval was
given by the holders of such required percentage.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
COMPANY:
ORCHARD SUPPLY HARDWARE STORES
CORPORATION
By: _________________________________
Name:
Title:
PURCHASER:
FS EQUITY PARTNERS III, L.P.
By: FS CAPITAL PARTNERS, L.P.,
General Partner
By: FS HOLDINGS, INC.
General Partner
By: ____________________________
Name:
Title:
18.
<PAGE>
SECURITIES PURCHASE AGREEMENT
-----------------------------
THIS SECURITIES PURCHASE AGREEMENT is entered into as of December 29,
1993, by and among ORCHARD SUPPLY HARDWARE STORES CORPORATION, a Delaware
corporation ("Company"), and FS EQUITY PARTNERS III, L.P., a California limited
partnership (the "Purchaser").
In consideration of the mutual promises, covenants and conditions set
forth below, the parties hereby agree as follows:
1. DEFINITIONS.
-----------
1.1 "Agreement" and the words "herein," "hereof," "hereunder" and
words of similar import shall mean this Securities Purchase Agreement as it may
be amended, supplemented or otherwise modified from time to time.
1.2 "Closing Date" shall mean such date as shall be mutually agreed
upon by the parties hereto, but which in no event shall be any later than May
30, 1994.
1.3 "Common Stock" shall mean any and all common stock, $.01 par
value, of Company issued and issuable to Purchaser upon conversion of the
Preferred Stock.
1.4 "Governmental Actions" shall mean authorizations, approvals,
consents, waivers, exceptions, licenses, filings, registrations, permits,
notarizations, special leases and other requirements of any Governmental Person.
1.5 "Governmental Person" shall mean any national, state or local
government, any political subdivision or any governmental, quasi-governmental,
judicial, public or statutory instrumentality, authority, body or entity,
including the Federal Deposit Insurance Corporation, any central bank or any
comparable authority.
1.6 "Governmental Rule" shall mean any law, rule, regulation,
ordinance, order, code, interpretation, judgment, decree, directive, guideline,
policy or similar form of decision of any Governmental Person.
1.7 "Lien" shall mean (a) any lien, charge, mortgage, deed of
trust, security interest, pledge, equity, claim, easement, right of way,
covenant, condition or restriction, assignment of revenues or rights or
encumbrance of any kind; (b) the interest of a vendor or lessor under a
conditional sale agreement, capital lease or other title retention agreement; or
(c) any agreement to give, or any notice reflecting, any of the foregoing.
<PAGE>
1.8 "Material Adverse Effect" shall mean a material adverse effect
on the business or financial condition of Company and its subsidiaries, taken as
a whole.
1.9 "Operative Documents" shall mean this Agreement and the
Registration Rights Agreement.
1.10 "Orchard Supply" shall mean Orchard Supply Hardware
Corporation, a Delaware corporation and Subsidiary of the Company.
1.11 "Person" shall mean any corporation, trust, partnership,
individual, association, or other entity.
1.12 "Preferred Stock" shall mean the Series 1 Stock and the Series
2 Stock.
1.13 "Purchase Price" shall mean $19,400,000.
1.14 "Securities" shall mean the Common Stock and the Preferred
Stock.
1.15 "Registration Rights Agreement" shall mean that certain
Registration Rights Agreement by and between Company and Purchaser.
1.16 "Series 1 Stock" shall mean the 325,000 shares of 6% Cumulative
Convertible Preferred Stock, Series 1, $.01 par value, of Company to be issued
to the Purchaser pursuant to this Agreement.
1.17 "Series 2 Stock" shall mean the 475,000 shares of 6% Cumulative
Convertible Preferred Stock, Series 2, $.01 par value, of Company to be issued
to the Purchaser pursuant to this Agreement.
2. AUTHORIZATION AND ISSUANCE OF THE SECURITIES.
--------------------------------------------
2.1 Authorization. Subject to the terms and conditions contained
-------------
herein, Company has authorized the filing with the Delaware Secretary of State
of a Certificate of Designation substantially in the form of the draft attached
hereto as Exhibit A (the "Certificate of Designation"), has reserved 520,000
---------
shares of Common Stock for issuance upon the conversion of the Series 1 Stock
and will, upon obtaining the stockholder approval to increase the number of
authorized shares of Common Stock as set forth in Section 7.1 hereof, reserve
760,000 shares of Common Stock for issuance upon the conversion of the Series 2
Stock. Prior to the Closing Date, Company will file the Certificate of
Designation with the Delaware Secretary of State.
2.
<PAGE>
2.2 Purchase and Sale. Subject to the terms and conditions
-----------------
contained herein, Company agrees to sell to Purchaser, and Purchaser agrees to
purchase from Company, the Preferred Stock. The execution and delivery of the
Registration Rights Agreement and the closing of the sale and purchase of the
Preferred Stock (the "Closing") will take place at the offices of Riordan &
McKinzie, 300 South Grand Ave., Suite 2900, Los Angeles, California 90071 at
10:00 a.m. on the Closing Date, or at such time and place as the parties may
agree. At the Closing, Company will deliver to Purchaser the Preferred Stock,
registered in Purchaser's name, against payment of the Purchase Price by
certified check, by wire transfer of immediately available funds, or by any
combination of the foregoing.
3. CONDITIONS OF PURCHASER'S OBLIGATIONS.
-------------------------------------
The obligation of Purchaser to purchase from Company the Preferred Stock
and to consummate the transactions contemplated on the Closing Date is subject
to the satisfaction on or before the Closing Date of the following conditions,
all or any of which may be waived in writing by Purchaser; provided, however,
-------- -------
that satisfaction of Article 3 shall not be a condition precedent to the
Purchaser's obligation to purchase the Preferred Stock after the consummation by
Orchard Supply of the sale of Senior Notes pursuant to that certain Registration
Statement No. 33-51437 (the "Senior Note Offering").
3.1 Representations and Warranties. The representations and
------------------------------
warranties in Article 5 shall be true and correct in all material respects at
and as of the Closing Date as though then made, except to the extent of changes
caused by the transactions expressly contemplated herein.
3.2 No Material Adverse Effect. There shall have been no Material
--------------------------
Adverse Effect since the date of this Agreement in respect of the business,
condition or prospects, financial or otherwise, or assets of the Company, and
the Company shall not have suffered any loss (whether or not insured) as a
result of any legislative or regulatory change, revocation of any license or
rights to do business, fire, explosion, accident, casualty, labor trouble,
flood, drought, riot, storm, condemnation or act of God or other public force or
otherwise, which has a Material Adverse Effect.
4. CONDITIONS OF COMPANY'S OBLIGATIONS.
-----------------------------------
The obligation of Company to issue the Preferred Stock to Purchaser and
to enter into this Agreement is subject to the satisfaction on or before the
Closing Date of the following conditions, all or any of which may be waived in
writing by Company:
3.
<PAGE>
4.1 Representations and Warranties. The representations and
------------------------------
warranties in Article 6 shall be true and correct at and as of the Closing Date
as though then made, except to the extent of changes caused by the transactions
expressly contemplated herein.
4.2 Delivery of Purchase Price. Purchaser shall have tendered to
--------------------------
Company the Purchase Price.
5. REPRESENTATIONS AND WARRANTIES OF COMPANY.
-----------------------------------------
Company represents and warrants that:
5.1 Corporate Existence and Power. Company is a corporation duly
-----------------------------
incorporated, validly existing and in good standing under the laws of the
jurisdiction of its incorporation, has full corporate power and authority
required to carry on its business as now conducted and proposed to be conducted
and is in good standing and duly licensed or qualified to transact business in
each other jurisdiction necessary to carry on its present business and
operations except where the failure to be so licensed or qualified would not
have a Material Adverse Effect.
5.2 New Issue Shares. The Preferred Stock has been duly authorized
----------------
and, when issued as contemplated hereby at the Closing, will be validly issued,
fully paid and non-assessable. There are no preemptive rights or other rights
to subscribe for or to purchase any shares of Preferred Stock pursuant to the
Company's certificate of incorporation, bylaws or other governing documents or
any agreement or other instrument to which the Company or Orchard Supply is a
party or by which either of them may be bound (collectively, "Preemptive
Rights"). Upon issuance, the Preferred Stock will have the rights, preferences
and limitations set forth in the Certificate of Designation. Upon conversion of
the Preferred Stock into shares of Common Stock, such shares of Common Stock
will have been duly authorized, validly issued and fully paid and non-assessable
and not subject to any Preemptive Rights.
5.3 Corporate and Governmental Action; No Contravention. The
---------------------------------------------------
execution, delivery and performance by Company of the Operative Documents and
the consummation of the transactions contemplated by such documents are within
the corporate power and authority of Company and have been duly authorized by
all necessary corporate action on the part of Company and do not and will not
require any Governmental Actions other than any that have already been
undertaken and do not contravene, or constitute a default under, any provision
of any applicable Governmental Rule or of the Certificate of Incorporation or
bylaws of Company or of any agreement, judgment, injunction, order, decree or
other
4.
<PAGE>
instrument binding upon Company or result in the creation or imposition of any
Lien on any assets of Company.
6. REPRESENTATIONS AND WARRANTIES OF PURCHASER.
-------------------------------------------
Purchaser represents and warrants to and agrees with Company that:
6.1 Investor Representations.
------------------------
The Purchaser is purchasing the Preferred Stock pursuant to this
Agreement not with a view to or in connection with a distribution or resale of
any of such securities in violation of any applicable securities laws.
Purchaser acknowledges that such securities may bear appropriate legends.
Purchaser (i) is familiar with the business of the Company; (ii) has had an
opportunity to discuss with representatives of the Company the condition of and
prospects for the continued operation and financing of the Company and such
other matters as Purchaser has deemed appropriate in considering whether to
invest in the Preferred Stock; and (iii) has been provided access to all
available information about the Company requested by Purchaser.
6.2 Partnership and Governmental Action; No Contravention. The
-----------------------------------------------------
execution, delivery and performance of this Agreement and the consummation of
the transactions contemplated herein: (i) are within Purchaser's partnership
power and authority; (ii) have been duly authorized by all necessary action on
its part; (iii) do not and will not require any Governmental Actions other than
any that have already been undertaken; and (iv) do not contravene, or constitute
a default under, any provision of any applicable Governmental Rule or of the
Agreement of Limited Partnership of Purchaser or of any agreement, judgment,
injunction, order, decree or other instrument binding upon Purchaser.
7. MISCELLANEOUS.
-------------
7.1 Use of Proceeds. The Company shall, unless Purchaser consents
---------------
in writing prior to any other use, invest the Purchase Price as common equity in
Orchard Supply, which shall use such proceeds to redeem all of its outstanding
14.5% Senior Subordinated Discount Notes. Pending such redemption, Orchard
Supply may use the invested funds for general corporate purposes.
7.2 Stockholder Approval. The Company agrees to (i) seek, and use
--------------------
its best efforts to obtain, approval of its stockholders at its 1994 Annual
Meeting of Stockholders to amend the Company's charter to authorize the issuance
of additional shares of Common Stock in an amount at least sufficient to allow
the conversion of all outstanding shares of Series 2 Stock and
5.
<PAGE>
(ii) use its best efforts to cause such meeting to be held on or before June 14,
1994. Freeman Spogli & Co., as general partner of FS Equity Partners II, L.P.
("FSEP II"), agrees to cause all shares of Common Stock which it has the power
to vote to be voted in favor of such amendment and further agrees not to permit
the transfer of any shares of Common Stock held by FSEP II without obtaining the
agreement, reasonably acceptable to Company, of the transferee or transferees to
vote in favor of such amendment. Promptly upon receipt of such approval, the
Company will file a listing application with the Nasdaq National Market with
respect to shares of Common Stock issuable upon such conversion and will file a
Notification Form for Listing of Additional Shares with the National Association
of Securities Dealers, Inc. with respect to such shares.
7.3 Registration Rights Agreement. On or prior to the consummation
-----------------------------
of the Senior Note Offering, the Company shall have executed and delivered to
Purchaser or its counsel the Registration Rights Agreement, which agreement
shall be effective as of the Closing Date.
7.4 Consent to Amendments. Except as otherwise expressly provided
---------------------
herein, the provisions of this Agreement may be amended and Company may take any
action herein prohibited, or omit to perform any act herein required to be
performed by it, only if it has obtained the written consent of Purchaser;
provided, however, that any amendment after the consummation of the Senior Note
- -------- -------
Offering but prior to the Closing Date shall also require the written consent of
Lehman Brothers Inc. No course of dealing between Company and the holder of any
Security issued pursuant to this Agreement or any delay in exercising any rights
hereunder or under Company's certificate of incorporation will operate as a
waiver of any rights of any such holder.
7.5 Survival of Representations and Warranties. All
------------------------------------------
representations and warranties contained herein or made in writing by any party
in connection herewith will survive the execution and delivery of this
Agreement, regardless of any investigation made by Purchaser or on behalf of
Purchaser.
7.6 Successors and Assigns. Except as otherwise expressly provided
----------------------
herein, all covenants and agreements contained in this Agreement by or on behalf
of any of the parties hereto shall bind and inure to the benefit of the
respective successors and assigns of the parties hereto whether so expressed or
not.
7.7 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed to be an original, any one of which
need not contain the signatures of more than one party, but all such
counterparts when taken together shall constitute a single instrument.
6.
<PAGE>
7.8 Notices. Except as otherwise provided herein, any notice or
-------
demand which, by the provisions hereof, is required or which may be given to or
served upon the parties hereto shall be in writing and, if by telegram, telecopy
or telex, shall be deemed to have been validly served, given or delivered when
sent, if by personal delivery, shall be deemed to have been validly served,
given or delivered upon actual delivery and, if mailed, shall be deemed to have
been validly served, given or delivered three business days after deposit in the
United States mails, as registered or certified mail, with proper postage
prepaid and addressed to the party or parties to be notified, at the following
addresses (or such other address(es) as a party may designate for itself by like
notice):
If to Company: Orchard Supply Hardware Stores
Corporation
6450 Via Del Oro
San Jose, California 95119
Attention: President
If to Purchaser: FS Equity Partners III, L.P.
c/o Freeman Spogli & Co.
11100 Santa Monica Boulevard
Suite 1900
Los Angeles, California 90025
Attention: J. Frederick Simmons
7.9 Governing Law. This Agreement shall be governed by the laws of
-------------
California, without regard to conflicts of laws principles.
7.10 Specific Performance. Each party's obligation under this
--------------------
Agreement is unique. If any party should default in its obligations under this
Agreement, the parties each acknowledge that it would be extremely impracticable
to measure the resulting damages; accordingly, the nondefaulting party, in
addition to any other available rights or remedies, may sue in equity for
specific performance and the parties each expressly waive the defense that a
remedy in damages will be adequate.
7.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their proper and duly authorized officers or
representatives as of the date first written above.
COMPANY:
ORCHARD SUPPLY HARDWARE
STORES CORPORATION,
a Delaware corporation
By: /s/ STEPHEN M. HILBERG
-------------------------------
Name: Stephen M. Hilberg
Title: Vice President--Finance
and Chief Financial
Officer
PURCHASER:
FS EQUITY PARTNERS III, L.P.
By: FS CAPITAL PARTNERS, L.P.,
General Partner
By: FS HOLDINGS, INC.
General Partner
By: /s/ J. FREDERICK SIMMONS
------------------------------
Name: J. Frederick Simmons
Title: Vice President
and Treasurer
Acknowledged and accepted as to Section 7.2 of this Agreement imposing
obligations on Freeman Spogli & Co.
FREEMAN SPOGLI & CO.
By: /s/ J. FREDERICK SIMMONS
------------------------------
Name: J. Frederick Simmons
Title: General Partner
8.
<PAGE>
The CIT Group/Business Credit
3rd Floor
300 South Grand Avenue
Los Angeles, CA 90071
213 621-8300
January 14, 1994
Orchard Supply Hardware Corporation
6450 Via Del Oro
San Jose, California 95161
Gentlemen:
Reference is made to the Financing Agreement between us dated October 29,1992,
as amended (the "Agreement"). Capitalized terms used herein and defined in the
Financing Agreement shall have the same meanings as set forth therein unless
otherwise specifically defined herein.
Pursuant to mutual understanding, the Agreement is hereby amended, effective
upon the payment in full of the Senior Unsecured Debt with the proceeds from
the borrowings evidenced by the New Senior Unsecured Debt as follows:
1. The definition of "Effective Net Worth" as set forth in Section 1 of
the Agreement is hereby deleted in its entirety and the following is hereby
inserted in lieu thereof:
"Effective Net Worth shall mean, wherever used throughout this Financing
--------------------
Agreement, as at any date of determination, the sum of (i) Net Worth plus
--- ----
(ii) to the extent that the consolidated Net Worth has been reduced
----
thereby, indebtedness evidenced by the Management Notes, plus (iii) the
---- -----
principal amount of Subordinated Debt outstanding on such date of
determination, plus (iv) the amount of LIFO reserve, plus (v) to the
---- ---- ---- ---
extent aggregate net income (or loss) has been reduced (or such loss has
been increased) thereby, the amount of any write-up in the book value of
any inventory as a result of purchase accounting adjustments as set forth
in APB Opinion No. 16, in each case for Company on a consolidated basis as
determined in conformity with GAAP, plus (vi) to the extent that
---- ----
consolidated Net Worth has been reduced thereby, any write-down on or
after July 30, 1993 of the carrying value of the Company's former
warehouse building and underlying land in San Jose, California which is
currently recognized as assets held for disposal on the Company's balance
sheet."
<PAGE>
2. Section 1 of the Financing Agreement is hereby amended by the addition
thereto of the following definition:
"New Senior Unsecured Debt shall mean the debt, and the senior notes and
--------------------------
the indenture dated as of January 15, 1994 among the Company, the Parent
and U.S. Trust Company of California, N.A., as trustee, evidencing such,
in an amount not less than $100,000,000 due 2002."
3. The definition of "Permitted Indebtedness" as set forth in Section 1 of
the Agreement is hereby amended by deleting the period at the end of the
definition and adding the following:
"and viii) New Senior Unsecured Debt."
4. Paragraph 9 of Section 6 of the Agreement is hereby amended by deleting
it in its entirety and substituting the following in lieu thereof:
"9. The Company shall have on the last day of each fiscal quarter of the
Company an Effective Net Worth of at least:
<TABLE>
<CAPTION>
Fiscal Period Ending Amount
-------------------- ------
<S> <C>
January 30, 1994 $80,000,000
May 1, 1994 $80,000,000
July 31, 1994 and each fiscal
quarter thereafter $85,000,000"
</TABLE>
5. Paragraph 11 of Section 6 of the Agreement is hereby amended by deleting
it in its entirety and substituting the following in lieu thereof:
"11. Without the prior written consent of CITBC, the Company will not: a)
enter into an Operating Lease if after giving effect thereto the aggregate
obligations with respect to Operating Leases of the Company during the
fiscal years set forth below would exceed the percentages set forth below
of the Company's net sales for the fiscal year immediately preceding the
year in which such Operating Lease is entered into:
<TABLE>
<CAPTION>
Fiscal Year Ending Ratio
------------------ -----
<S> <C>
January 31, 1993 4.50%
January 30, 1994 4.65%
January 29, 1995 5.00%
January 28, 1996 and each
fiscal year thereafter 5.10%
</TABLE>
2
<PAGE>
or b) contract for, purchase, make expenditures for, lease pursuant to a
Capital Lease or otherwise incur obligations with respect to Capital
Expenditures (whether subject to a security interest or otherwise) during
any fiscal year in the aggregate amount in excess of:
a) $5,500,000 for the fiscal year ending January 31, 1993; b) $40,000,000
for the fiscal year ending January 30, 1994; c) $20,000,000 for the fiscal
year ending January 29, 1995; d) $15,000,000 for the fiscal year ending
January 28, 1996, and for each fiscal year thereafter, provided, however,
if no Default and/or Event of Default has occurred, and has not been cured
or waived by CITBC, any permitted amounts not expended during any fiscal
year may be carried forward and spent in the subsequent fiscal year without
being applied toward the maximum permitted amount for that fiscal year;
provided further that such permitted amounts carried over shall be deemed
to be expended first in any such subsequent fiscal year and may not in any
event be carried forward beyond such subsequent year."
6. Paragraph 13 of Section 6 of the Agreement is hereby amended by deleting
it in its entirety and substituting the following in lieu thereof:
"13. The Company shall have at the end of the fiscal quarter of the Company
a Fixed Charge Coverage Ratio of not less than 1.25 to 1 for the four
quarters then ending."
7. Paragraph 14 of Section 6 of the Agreement is hereby amended by deleting
it in its entirety and substituting the following in lieu thereof:
"14. The Company shall have on the last day of each fiscal quarter of the
Company a Leverage Ratio of not more than:
<TABLE>
<CAPTION>
Fiscal Period Ending Ratio
-------------------- -----
<S> <C>
January 31, 1994 1.75 to 1
May 1, 1994 1.75 to 1
July 31, 1994 1.75 to 1
October 30, 1994 1.75 to 1
January 29, 1995 1.75 to 1
April 30, 1995 and each fiscal
quarter thereafter 1.60 to 1"
</TABLE>
3
<PAGE>
Except as set forth above, no other change in the terms or provisions of the
Agreement is intended or implied. If the foregoing is in accordance with your
understanding of our agreement, kindly so indicate by signing and returning the
enclosed copy of this letter.
Very truly yours,
THE CIT GROUP\BUSINESS CREDIT, INC.
By
-------------------------------
Title:
Read and Agreed to:
ORCHARD SUPPLY HARDWARE CORPORATION
By
-------------------------------
Title:
Consent Confirmed and
Parent Guaranty reaffirmed as set forth above
ORCHARD SUPPLY HARDWARE STORES CORPORATION
F/K/A ORCHARD HOLDING CORPORATION
By
-------------------------------
Title:
4
<PAGE>
FOURTH AMENDMENT
TO
NOTE AGREEMENT
--------------
This Fourth Amendment to the Note Agreement (the "Amendment") is
entered into as of January __, 1994 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 and Third Amendment to
Note Agreement dated as of November 30, 1993 (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 in order
to permit the Company to redeem the remaining outstanding principal amount of
its Subordinated Notes and to make certain other changes as provided herein.
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, waivers and modifications 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. Compliance by the Company with Section 11.5(c) of the Agreement is
waived to the extent necessary to permit the Company to redeem the $19.3 million
remaining outstanding principal amount of the Subordinated Notes at their stated
redemption price of 107% of principal (an aggregate call price of $20.7
million); provided that the Company shall have received from Holding in
--------
conjunction therewith an additional equity investment of $19.4 million
representing the proceeds received by Holding from the sale of the Holding
Preferred Stock.
<PAGE>
2. Section 11.18 of the Agreement (as specified in Paragraph 4 of the
Second Amendment to Note Agreement) is hereby deleted in its entirety and a new
Section 11.19 replacing the same is added to the Agreement as follows:
"11.19 Redemption of Subordinated Notes. Holding shall invest as
--------------------------------
equity (common or preferred) in the Company the proceeds of the sale of
the Holding Preferred Stock; and the Company shall call for redemption,
and thereafter redeem, all of the outstanding Subordinated Notes as
promptly as is reasonable but in no event more than 60 days following the
receipt by the Company of such equity investment."
3. The amendment to and waiver under the Agreement specified herein
shall become effective when executed by all of the parties hereto.
4. All terms used herein without definition shall have the meanings
ascribed to them in the Agreement.
5. 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.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first written above.
ORCHARD SUPPLY HARDWARE CORPORATION,
a Delaware corporation
-------------------------------------------
Stephen M. Hilberg, Chief Financial Officer
ATTEST:
By:
--------------------------
Michael Seda, Secretary
-2-
<PAGE>
ORCHARD SUPPLY HARDWARE STORES
CORPORATION (formerly, ORCHARD HOLDING
CORPORATION), a Delaware corporation
-------------------------------------------
Stephen M. Hilberg, Chief Financial Officer
ATTEST:
By:
----------------------------
Michael Seda, Secretary
TEACHERS INSURANCE AND ANNUITY
ASSOCIATION OF AMERICA
By:
--------------------------------------
Its:
--------------------------------------
Principal Amount of Notes
ATTEST:
By:
----------------------------
-3-
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use in this
registration statement of our reports dated March 5, 1993 included herein, and
to all references to our Firm included in this registration statement.
/s/ Arthur Andersen & Co.
ARTHUR ANDERSEN & CO.
San Jose, California
January 14, 1994
