ORCHARD SUPPLY HARDWARE STORES CORP, 10-K, 1994-04-13

ORCHARD SUPPLY HARDWARE STORES CORP
10-K, 1994-04-13
BUILDING MATERIALS, HARDWARE, GARDEN SUPPLY

Previous: ORCHARD SUPPLY HARDWARE STORES CORP, DEF 14A, 1994-04-13

Next: KEMPER TAX EXEMPT INSURED INCOME TRUST SERIES A-88, 24F-2NT, 1994-04-13

<PAGE>

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

----------------------------

FORM 10-K

(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
[FEE REQUIRED]
For the fiscal year ended January 30, 1994

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[NO FEE REQUIRED]
For the transition period from to

Commission file number 0-21182

ORCHARD SUPPLY HARDWARE
STORES CORPORATION

(Exact name of registrant as specified in its charter)

Delaware 95-4214109
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

6450 Via Del Oro
San Jose, California 95119
(Address of principal executive offices)

Registrant's telephone number, including area code: (408) 281-3500

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock
par value $.01 per share
(Title of class)

Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

YES X NO
------- ------

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/

The aggregate market value of the Common Stock of the registrant held
by non-affiliates of the registrant on March 31, 1994, based on the closing
price of the Common Stock on the Nasdaq National Market on such date, was
$53,258,790.

The number of shares of the registrant's Common Stock outstanding at
March 31, 1994 was 6,982,981 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement to be filed with the Securities and
Exchange Commission in connection with the Annual Meeting of Stockholders to be
held May 20, 1994 are incorporated by reference into Part III hereof.

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

<PAGE>

ORCHARD SUPPLY HARDWARE STORES CORPORATION

INDEX TO ANNUAL REPORT ON FORM 10-K

For the fiscal year ended January 30, 1994

Page

PART I

Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 9
Item 4. Submission of Matters to a Vote of
Security Holders. . . . . . . . . . . . . . . . . . . 9

PART II

Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters . . . . . . . . . . . 10
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . 11
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations. . . . . . . . . . . . . . . . . . . . . . 13
Item 8. Financial Statements and Supplementary Data . . . . . . . . . 19
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure. . . . . . . . 19

PART III

Item 10. Directors and Executive Officers of the Registrant. . . . . . 19
Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . . . 19
Item 12. Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . . . . . 19
Item 13. Certain Relationships and Related Transactions. . . . . . . . 19

PART IV

Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K. . . . . . . . . . 20

<PAGE>

PART I

ITEM 1. BUSINESS.

AS USED IN THIS ANNUAL REPORT ON FORM 10-K ("FORM 10-K"), 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 FORM 10-K 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).

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. 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 (as defined below), the Company has grown to 43 stores.

Consistent with the Company's expansion strategy to increase market share
in existing markets and to open stores in attractive new markets, the Company
completed the acquisition of six former Builders Emporium store 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 three other sites
(South Pasadena and West Los Angeles in metropolitan Los Angeles and Goleta in
the Santa Barbara area) on December 22, 1993 (the "Expansion"). All nine
Expansion stores will be converted into the Orchard format and are expected to
open by the end of 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 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 Freeman
Spogli & Co. ("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 order to improve the Company's capital structure and to enhance its
financial flexibility, on January 20, 1994, Orchard Supply sold $100.0 million
principal amount of 9 3/8% Senior Notes due 2002 (the "Notes") in a public
offering (the "Notes Offering"). The Notes are unconditionally guaranteed on
a senior unsecured basis by Orchard Holding. Orchard Supply used the net
proceeds from the issuance of the Notes as follows: (i) $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 principal amount thereof,
(ii) $20.0 million to repay additional borrowings under its revolving credit
facility (the "Financing Agreement") used to finance the Expansion,
(iii) $35.0 million to fund

<PAGE>

additional investments required to open the nine Expansion stores and (iv) the
remainder for general corporate purposes. In addition, on February 25, 1994,
Orchard Holding sold 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 FS&Co. The aggregate net proceeds of $19.3 million were 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. After giving effect to the Preferred Stock Offering, FS&Co. through its
affiliates owns approximately 48.2% of the outstanding Common Stock (assuming
full conversion of the Preferred Stock).

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 $105.8
billion in 1992 to $115.4 billion in 1993. 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 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.

The following table sets forth the Company's percentage of sales by
product category for fiscal 1993:

<TABLE>
<CAPTION>
<S> <C>
Hardware. . . . . . . . . . . . . . . . . . . . . . . . 22.8%
Plumbing. . . . . . . . . . . . . . . . . . . . . . . . 14.8
Electrical. . . . . . . . . . . . . . . . . . . . . . . 10.9
Garden and Nursery. . . . . . . . . . . . . . . . . . . 26.9
Other . . . . . . . . . . . . . . . . . . . . . . . . . 24.6
-----
Total Sales. . . . . . . . . . . . . . . . . . . . 100.0%
</TABLE>
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,

<PAGE>

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 specification. 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. As of
January 30, 1994, the Company employed 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 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 37,200 active accounts in fiscal 1993, which comprised
approximately 14.6% of the Company's sales in that year. Approximately 83.7%
of those credit card sales were attributable to commercial customers. The
Company also offers its commercial customers added services such as

<PAGE>

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 do-it-yourself ("DIY") information through
vendor booths and specialized classes. Management estimates that its Santa
Clara County "how-to" fair in February 1994, 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 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

<PAGE>

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 the Santa Barbara
area) on December 22, 1993. All nine Expansion stores will be converted into
the Orchard format and are expected to open by the end of 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. A
portion of the proceeds of the sale of the Notes was used to refinance the
additional borrowings under the Financing Agreement and to finance the $35.0
million additional investment required to open the Expansion stores.

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.

1994 STORE OPENING SCHEDULE*

INTERIOR AND
ANTICIPATED FISCAL 1994 EXTERIOR SELLING
STORE LOCATIONS OPENING SQ. FOOTAGE
------------------------------- ----------------------- ----------------
<S> <C> <C>
Pismo Beach++ . . . . . . . . . First Quarter 33,675
Van Nuys+ . . . . . . . . . . . Second Quarter 37,772
Burbank+. . . . . . . . . . . . Second Quarter 47,530
Hollywood+. . . . . . . . . . . Second Quarter 30,834
Pasadena+ . . . . . . . . . . . Second Quarter 44,595
West Los Angeles+ . . . . . . . Second Quarter 30,607
South Pasadena+ . . . . . . . . Second Quarter 37,018
Goleta++. . . . . . . . . . . . Second Quarter 34,359
Redding++ . . . . . . . . . . . Second Quarter 34,052

<PAGE>

<S> <C> <C>
Sonora. . . . . . . . . . . . . Second Quarter 44,575
Merced. . . . . . . . . . . . . Second Quarter 40,277
Petaluma. . . . . . . . . . . . Second Quarter 40,797
Foster City . . . . . . . . . . Third or Fourth Quarter 39,414
Hanford . . . . . . . . . . . . Third or Fourth Quarter 40,542

<FN>
______________
* 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.
+ Metropolitan Los Angeles Expansion store location.
++ Expansion store location.
</TABLE>

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 13 and 21 stores, respectively, in the
Company's Northern and Central California markets. As of January 30, 1994,
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 $21.7 million in
fiscal 1993. 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 38 stores in the Company's Northern
and Central California markets and 34 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, 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,
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 cooperative advertising program, to offset the costs of these
campaigns, particularly television advertising expenses. Cooperative
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
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 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

<PAGE>

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.

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 warehouse facility stocks
approximately 25,000 SKUs, accounting for approximately 70% of the total
dollar sales. 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 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
and deliver 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 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.

<PAGE>

As of January 30, 1994, Orchard operated a fleet of 29 tractors and 128
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 six district managers, five 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 an average of approximately 108 clerical and
17 management workers to staff each Expansion store. 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 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 currently has bar code scanning capabilities in all of its stores
and plans to install a new UNIX based point-of-sale 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

<PAGE>

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 January 30, 1994, Orchard had 3,878 total employees of whom 2,009
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.

ITEM 2. 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).

The Company owns its 350,000 square foot warehouse which 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.

ITEM 3. LEGAL PROCEEDINGS.

There are no material legal proceedings pending or, to the knowledge of
management of the Company, threatened against the Company.

ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS.

Not applicable.

<PAGE>

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.

Orchard Holding's Common Stock began trading in the over-the-counter
market on March 31, 1993 upon completion of the Initial Public Offering and is
quoted on the National Association of Securities Dealers Automated Quotations
System ("Nasdaq") National Market under the symbol OSHC. The quarterly high
and low closing sale prices for the Common Stock as reported on the Nasdaq
National Market during fiscal 1993 and the first quarter of fiscal 1994 are as
follows:

1993
High Low
------- -------
<S> <C> <C>
First quarter (from March 31, 1993) . . . . . . $14 1/4 $12 1/2
Second quarter. . . . . . . . . . . . . . . . . $13 3/4 $11 1/2
Third quarter . . . . . . . . . . . . . . . . . $16 $12 3/4
Fourth quarter. . . . . . . . . . . . . . . . . $17 1/2 $12

1994

First quarter (through March 15, 1994). . . . . $15 1/2 $13 3/4
</TABLE>

As of March 31, 1994, the number of stockholders of record of the
Company's Common Stock was 293.

Orchard Holding has not declared or paid cash dividends to its holders
of Common Stock. Orchard Holding anticipates that all earnings in the near
future will be retained for the development and expansion of its business and,
therefore, does not anticipate paying dividends on its Common Stock in the
foreseeable future. Declaration of dividends on the Common Stock will depend,
among other things, upon levels of indebtedness, future earnings, the
operating and financial condition of the Company, its capital requirements and
general business conditions. The agreements governing Orchard Supply's
indebtedness contain provisions which prohibit Orchard Holding from paying
dividends on its Common Stock. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations-Liquidity and
Capital Resources."

<PAGE>

ITEM 6. SELECTED 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 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, January 31, 1993 and January 30, 1994 have been derived from
financial statements which were audited by Arthur Andersen & Co., independent
public accountants.

The selected financial information and other data presented below should
be read in conjunction with the "Consolidated Financial Statements," "Notes to
Consolidated Financial Statements," and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in this
Form 10-K.

Predecessor
Company The Company(1)
----------- -----------------------------------------------------------------------

Four Eight
Months Months Year Ended
Ended Ended --------------------------------------------------------
May 27, January 28, January 27, January 26, January 31, January 30,
1989 1990 1991 1992 1993 1994
(17 weeks) (35 weeks) (52 weeks) (52 weeks) (53 weeks) (52 weeks)
----------- ---------- ----------- ----------- ----------- -----------
(In thousands, except per share and store data)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales. . . . . . . . . . . . . . . $91,757 $194,759 $299,924 $308,562 $346,158 $365,077
Cost of goods sold(2)(3) . . . . . 60,311 141,925 191,815 199,052 224,599 234,326
----------- ---------- ----------- ----------- ----------- -----------
Gross margin . . . . . . . . . . 31,446 52,834 108,109 109,510 121,559 130,751
Operating expenses(2). . . . . . . 25,261 57,411 88,444 91,296 99,944 106,802
Pre-opening expenses . . . . . . . 177 869 579 1,192 924 2,221
----------- ---------- ----------- ----------- ----------- -----------
Operating income (loss). . . . . 6,008 (5,446) 19,086 17,022 20,691 21,728
Write-down in carrying amount of
asset held for disposal. . . . . -- -- -- -- 2,007 --
Interest expense(4). . . . . . . . 99 10,658 15,160 14,773 16,725 11,563
Write-off of deferred financing
charges. . . . . . . . . . . . . -- 2,157 -- -- -- --
----------- ---------- ----------- ----------- ----------- -----------
Income (loss) before provision
for income taxes . . . . . . . 5,909 (18,261) 3,926 2,249 1,959 10,165
Provision for income taxes . . . . 2,447 -- 1,667 971 866 --
----------- ---------- ----------- ----------- ----------- -----------
Income (loss) before
extraordinary items(5) . . . . 3,462 (18,261) 2,259 1,278 1,093 10,165
Extraordinary items(5) . . . . . . -- -- 1,667 971 (200) (9,318)
----------- ---------- ----------- ----------- ----------- -----------
Net income (loss). . . . . . . . $3,462 (18,261) 3,926 2,249 893 847
-----------
-----------
Preferred stock dividends(6) . . . 1,780 3,046 3,446 4,208 814
---------- ----------- ----------- ----------- -----------
Net income (loss) available to
common stock . . . . . . . . . $(20,041) $880 $(1,197) $(3,315) $33
---------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- -----------

Net income (loss) per common and
equivalent share(7). . . . . . . $(16.16) $0.71 $(0.96) $(2.68) $0.01
Weighted average number of common and
equivalent shares(7) . . . . . . 1,240 1,242 1,242 1,238 5,951

OTHER DATA:
Comparable store sales growth. . . 5.2% 8.8% 1.9% (1.3)% 5.3% 2.0%
Number of stores (at end of period) 31 33 34 37 39 43
BALANCE SHEET DATA:
Working capital. . . . . . . . . . $35,082 $32,227 $34,090 $44,649 $52,274 $94,996
Total assets . . . . . . . . . . . 153,242 165,215 175,549 198,463 197,996 309,735
Long-term debt and capital leases. 2,684 109,056 111,648 125,892 130,374 156,273
Stockholders' equity . . . . . . . 112,940 7,499 11,432 13,628 14,848 61,827

SEE NOTES ON FOLLOWING PAGE.

<PAGE>

<FN>
_______________
(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 losses on the extinguishment of debt of $0.6
million and $9.3 million in the years ended January 31, 1993 and January
30, 1994, respectively, and benefits from the realization of net operating
loss carryforwards of $1.7 million, $1.0 million and $0.4 million in the
years ended January 29, 1991, January 26, 1992 and January 31, 1993,
respectively.
(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
are applicable as a result of the Preferred Stock Offering.
(7) See Note 2 to Consolidated Financial Statements for information regarding
the calculation of per share data.

</TABLE>

<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.

The following discussion should be read in conjunction with the
"Consolidated Financial Statements," "Notes to Consolidated Financial
Statements" and "Selected Consolidated Financial Data" included elsewhere in
this Form 10-K.

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. The Company completed the acquisition of six former Builders Emporium
store 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 three
other sites (South Pasadena and West Los Angeles in metropolitan Los Angeles
and Goleta in the Santa Barbara area) on December 22, 1993.

The Company has incurred substantial pre-opening expenses in connection
with opening the nine Expansion store sites and is expected to incur
additional pre-opening expenses of approximately $6.3 million in fiscal 1994.
The Company anticipates these new stores will be opened by the end of 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, commenced in the fourth quarter of fiscal 1993 and will 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 applied 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 used the net
proceeds of the Notes 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 gave rise to
extraordinary charges of $1.9 million, $2.0 million and $0.2 million,
respectively, during the fourth quarter of fiscal 1993.

The Company's results of operations exhibit some measure of seasonality.
During the three years ended January 30, 1994, 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 30, 1994, 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.

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 expenses such as
interest expense have resulted and will continue to result in substantial
percentage decreases in net income.

<PAGE>

The following table sets forth selected results of operations as
percentages of sales for the periods indicated:

Year Ended(1)
---------------------------------------------------------
January 27, January 26, January 31, January 30,
1991 1992 1993 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales. . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0%
Gross Margin . . . . . . . . . . . . . . 36.0 35.5 35.1 35.8
Selling general and
administrative expenses. . . . . . . . 29.5 29.6 28.9 29.3
Pre-opening expenses . . . . . . . . . . 0.2 0.4 0.3 0.6
----- ----- ----- -----
Operating income . . . . . . . . . . . . 6.4 5.5 6.0 6.0

Write-down of asset
held for disposal . . . . . . . . . . -- -- 0.6 --
Interest expense . . . . . . . . . . . . 5.1 4.8 4.8 3.2
----- ----- ----- -----
Income (loss) before provision
for income taxes and
extraordinary items. . . . . . . . . . 1.3 0.7 0.6 2.8
Income tax provision . . . . . . . . . . 0.6 0.3 0.3 --
----- ----- ----- -----
Income before extraordinary
items. . . . . . . . . . . . . . . . . 0.8 0.4 0.3 2.8
Extraordinary items. . . . . . . . . . . 0.6 0.3 (0.1) (2.6)
----- ----- ----- -----
Net income (loss). . . . . . . . . . . . 1.3% 0.7% 0.3% 0.2%
----- ----- ----- -----
----- ----- ----- -----

<FN>
__________________
(1) Amounts may not total due to rounding.

</TABLE>

RESULTS OF OPERATIONS

52 WEEKS ENDED JANUARY 30, 1994 (FISCAL 1993) COMPARED TO 53 WEEKS ENDED
JANUARY 31, 1993 (FISCAL 1992).

Sales for the 52 weeks ended January 30, 1994 increased to $365.1
million from $346.2 million for the 53 weeks ended January 31, 1993. The
increase of 5.5% would have been 7.1% if calculated on a comparable 52-week
period. This sales increase is due in part to the opening of four new stores
during fiscal 1993. Fiscal 1993 comparable store sales increased by 2.0% for
an equivalent 52-week period. Sales of fiscal 1993 were negatively impacted
by continued sluggishness of the California economy as well as the opening
during the year of seven new warehouse home center stores by the Company's
competitors which impacted nine Orchard stores.

Gross margin increased from $121.6 million in fiscal 1992 to $130.8
million in fiscal 1993. As a percentage of sales, gross margin increased from
35.1% for fiscal 1992 to 35.8% for fiscal 1993. The increase in gross margin
percentage resulted primarily from an increase in purchase markup of 0.7%, due
mainly to a reduction in the cost of merchandise 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 permanent
markdowns of 0.1% were offset by higher promotional markdowns of 0.3%.

Selling, general and administrative expenses for fiscal 1993 were 29.3%
of sales compare with 28.9% of sales for fiscal 1992, an increase of 0.4%.
This increase was attributable mainly to the impact on payroll and occupancy
costs of the four new stores opened during the past year.

Pre-opening expenses are expensed as incurred. For fiscal 1993, pre-
opening expenses included $1.7 million related to the fiscal 1993 store
openings and $0.5 million for the stores to be opened in fiscal 1994.

14
<PAGE>

Operating income for fiscal 1993 increased by $1.0 million to $21.7 million
from $20.7 million in fiscal 1992, despite the impact of an additional $1.3
million of pre-opening costs in fiscal 1993 and a benefit of approximately $0.6
million resulting from the additional week in fiscal 1992.

Interest expense decreased from $16.7 million for fiscal 1992 to $11.6
million for fiscal 1993, or a decrease of $5.1 million. This decrease is due
primarily to the redemption of $44.7 million in aggregate principal amount of
the 14.5% Subordinated Notes on April 30, 1993.

The Company did not record a tax provision for fiscal 1993 as a result of
the benefit of net operating loss carryforwards against which a valuation
allowance has previously been provided. In prior years, the benefit of the net
operating loss carryforwards was treated as an extraordinary item in accordance
with APB Opinion No. 11. The Company's effective income tax rate for fiscal
1992 was 44.2%. See Note 8 to the Consolidated Financial Statements.

The results of operations for fiscal 1993 include extraordinary charges of
$9.3 million resulting from the early extinguishment of $44.7 million in
aggregate principal amount of the 14.5% Subordinated Notes in April 1993 and the
remaining $19.3 million of 14.5% Subordinated Notes and $30 million of the Old
Senior Notes in February 1994. Fiscal 1992 had a write-off of $1.1 million for
the early extinguishment of debt and an extraordinary credit of $0.9 million
representing the income tax benefit from the realization of net operating loss
carryforwards. Fiscal 1992 also included a 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 net realizable value.

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. Management
believes that the increase in inventory shrinkage was caused in part by the
recession experienced in the Company's 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.

<PAGE>

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 8 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."

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.

<PAGE>

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 $20.0 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
$5.8 million of guarantees of letters of credit were outstanding as of January
30, 1994, (ii) $21.3 million outstanding under a store mortgage facility, (iii)
$13.7 million aggregate principal amount of warehouse mortgage notes, (iv) $1.0
million of store mortgages assumed in connection with the acquisition of a
former Builders Emporium store site and (v) $100.0 million aggregate principal
amount of 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 January 30, 1994, the Company
and Orchard Supply were in compliance with all covenants contained in such debt
instruments.

On February 25, 1994, the Company used the net proceeds of the Preferred
Stock Offering to redeem the remaining 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 was paid with available cash from operations. The
net proceeds from the Notes Offering were applied 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 and
(iv) the remainder for general corporate purposes.

The Company estimates that cash interest expense for borrowings for the
fiscal years 1994, 1995 and 1996 will be approximately $13.9 million, $13.3
million and $13.1 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 9.375%, 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 are $0.7
million, $1.7 million and $2.0 million, respectively. The Company's dividend
requirements on the Preferred Stock are $1.2 million per year. 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 1993
of $11.3 million. The Company will fund its working capital needs

<PAGE>

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 January
30, 1994, Orchard Supply had no outstanding borrowings and $5.8 million in
letter of credit guarantees and had additional borrowing capacity under the
Financing Agreement of $14.2 million. The Financing Agreement remains effective
through October 29, 1995.

Orchard Supply has historically financed its store capital expenditures
(with the exception of the nine Expansion stores) through cash flow from
operations and through operating leases. Total capital expenditures for fiscal
years 1991, 1992 and 1993 were $19.7 million, $4.3 million and $36.0 million,
respectively, which amounts include capital expenditures for the new warehouse
facility for fiscal 1991 of $14.3 million and the purchase price of leasehold
rights for the Expansion store sites of $6.5 million in fiscal 1993. 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. Net proceeds of $35.0 million from the Notes Offering
were applied to fund additional investments required to open the nine Expansion
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 1994 through
1996 provides for annual capital expenditures of $19.4 million, $10.9 million to
$12.8 million (depending on the actual number of stores opened during the
period) and $13.5 million, respectively. The 1994 plan includes approximately
$2.2 million for furniture, fixtures and equipment and $7.4 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. The Company has historically
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.

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 may be limited.
Accordingly, the income taxes currently payable by the Company may increase.
See Note 8 to Consolidated Financial Statements.

<PAGE>

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 adopted the provisions of Statement of Financial Accounting
Standard No. 109 "Accounting for Income Taxes" in its fiscal year beginning
February 1, 1993. The effect of the adoption was not material. See Note 8 to
Consolidated Financial Statements.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See the Index included at "Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K."

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item will be contained in the Company's
Proxy Statement for its Annual Stockholders Meeting to be held May 20, 1994 to
be filed with the Securities and Exchange Commission within 120 days after
January 30, 1994 and is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

<PAGE>

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

PAGE
NUMBER
(a)(1) INDEX TO FINANCIAL STATEMENTS: -------

Report of Independent Public Accountants. . . . . . . . F-1

Consolidated Balance Sheets as of January 31, 1993
and January 30, 1994. . . . . . . . . . . . . . . . . . F-2

Consolidated Statements of Operations - For the
Fiscal years ended January 26, 1992, January 31,
1993 and January 30, 1994 . . . . . . . . . . . . . . . F-4

Consolidated Statements of Stockholders' Equity -
For the Fiscal years ended January 26, 1992,
January 31, 1993 and January 30, 1994 . . . . . . . . . F-5

Consolidated Statements of Cash Flows - For the
Fiscal years ended January 26, 1992, January 31,
1993 and January 30, 1994 . . . . . . . . . . . . . . . F-6

Notes to Consolidated Financial Statements. . . . . . . F-7

(a)(2) INDEX TO FINANCIAL STATEMENT SCHEDULES:

Report of Independent Public Accountants. . . . . . . . S-1

Schedule III - Condensed Financial Information of
Orchard Supply Hardware Corporation . . . . . . . . . . S-2

Schedule V - Property, Plant and Equipment. . . . . . . S-5

Schedule VI - Accumulated Depreciation and
Amortization of Property, Plant and Equipment . . . . . S-6

Schedule VIII - Valuation and Qualifying Accounts . . . S-7

Schedule X - Supplementary Income Statement
Information . . . . . . . . . . . . . . . . . . . . . . S-8

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.

<PAGE>

(a)(3) EXHIBITS

The exhibits listed on the accompanying Index to Exhibits are filed as part
of this Form 10-K. In addition, following is a list of each executive
compensation plan and arrangement required to be filed as an exhibit.

EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS

*(A) Orchard Holding Corporation Amended 1989 Employee Stock Subscription
Plan dated May 23, 1989, as amended on August 7, 1989.

*(B) 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.

*(C) 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.

*(D) Orchard Holding Corporation Amended 1989 Nonqualified Stock Option
Plan dated May 24, 1989, as amended on August 7, 1989.

*(E) Form of Nonqualified Stock Option Agreement by and between Orchard
Holding Corporation and certain members of management.

*(F) Orchard Holding Corporation 1989 Nonqualified Performance Stock
Option Plan dated May 24, 1989.

*(G) Form of Nonqualified Performance Stock Option Agreement by and
between Orchard Holding Corporation and certain members of
management.

*(H) Employment Agreement between Maynard Jenkins and Wickes Companies,
Inc. dated January 1, 1989 (assumed by Orchard Supply Hardware
Corporation).

*(I) Orchard Holding Corporation Second Amended and Restated 1989
Employee Stock Subscription Plan dated May 23, 1989, as amended and
restated on June 11, 1991.

*(J) First Amendment to Employment Agreement dated January 1, 1989
between Orchard Supply Hardware Corporation and Maynard Jenkins.

*(K) Form of Nonqualified Stock Option Agreement between Orchard Holding
Corporation and Maynard Jenkins.

***(L) Orchard Supply Hardware Stores Corporation 1993 Non-Employee
Directors Stock Option Plan dated July 26, 1993.

**(M) 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.).

**(N) Orchard Supply Hardware Stores Corporation 1993 Stock Option Plan
dated November 19, 1993.

**(O) Form of Incentive Stock Option Agreement by and between Orchard
Supply Hardware Stores Corporation and certain officers and key
employees.

_______________
* 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.
33-51437) on December 14, 1993.
*** Filed with Amendment No. 1 to Registration Statement on Form S-1
(Registration No. 33-51437) on December 29, 1993.

<PAGE>

(b) REPORTS ON FORM 8-K

None.

The Exhibits listed on the accompanying Index to Exhibits are filed as part
of this Form 10-K.

<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

Date: April 13, 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 Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

SIGNATURE TITLE DATE
--------- ----- ----

/s/ Maynard Jenkins President, Chief Executive April 13, 1994
- ------------------------- Officer and Director (Principal
Maynard Jenkins Executive Officer)

/s/ Stephen M. Hilberg Vice President-Finance, Chief April 13, 1994
- ------------------------- Financial Officer and Director
Stephen M. Hilberg (Principal Financial Officer)

/s/ Michael Seda Controller (Principal Accounting April 13,1994
- ------------------------- Officer)
Michael Seda

/s/ Bradford M. Freeman Director April 13, 1994
- -------------------------
Bradford M. Freeman

/s/ J. Frederick Simmons Director April 13, 1994
- -------------------------
J. Frederick Simmon

s/s/ Ronald P. Spogli Director April 13, 1994
- -------------------------
Ronald P. Spogli

/s/ William M. Wardlaw Director April 13, 1994
- -------------------------
William M. Wardlaw

/s/ Morton Godlas Director April 13, 1994
- -------------------------
Morton Godlas

/s/ William E. Walsh Director April 13, 1994
- -------------------------
William E. Walsh

<PAGE>

ORCHARD SUPPLY HARDWARE STORES
CORPORATION AND SUBSIDIARY

FINANCIAL STATEMENTS
AS OF JANUARY 30, 1994 AND JANUARY 31, 1993
TOGETHER WITH AUDITORS' REPORT

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of Orchard Supply Hardware Stores Corporation:

We have audited the accompanying consolidated balance sheets of Orchard Supply
Hardware Stores Corporation (a Delaware corporation) and subsidiary as of
January 30, 1994 and January 31, 1993 and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended January 30, 1994. 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 30, 1994 and January 31, 1993 and the
results of their operations and their cash flows for each of the three years in
the period ended January 30, 1994 in conformity with generally accepted
accounting principles.

As discussed in Note 8 to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" effective February 1, 1993.

/s/ ARTHUR ANDERSEN & CO.

San Jose, California
March 4, 1994

F-1

<PAGE>

ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
(In thousands)

ASSETS

<TABLE>
<CAPTION>
January 31, January 30,
1993 1994
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 4,475 $ 75,588
Accounts receivable, less allowance of $1,267 and
$1,176 at January 31, 1993 and January 30, 1994,
respectively 13,209 13,686
Inventory 73,858 82,494
Prepaid expenses and other 4,777 6,134
Assets held for disposal 6,133 6,133
-------- --------
Total current assets 102,452 184,035

PROPERTY AND EQUIPMENT, net 80,779 105,874

LEASEHOLD RIGHTS, net of accumulated amortization
of $2,161 and $2,766 at January 31, 1993 and
January 30, 1994, respectively 4,965 10,871

DEFERRED FINANCING COSTS, net of accumulated
amortization of $1,726 and $5,155 at January 31,
1993 and January 30, 1994, respectively 4,116 3,428

GOODWILL, net of accumulated amortization of $573
and $730 at January 31, 1993 and January 30, 1994,
respectively 5,684 5,527
-------- --------
Total assets $197,996 $309,735
-------- --------
-------- --------

</TABLE>

The accompanying notes are an integral part of these consolidated statements.

F-2

<PAGE>

ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
January 31, January 30,
1993 1994
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES:
Outstanding checks, not cleared by the bank $ 1,730 $ 3,774
Accounts payable 27,086 30,491
Accrued payroll and related items 6,481 7,294
Accrued advertising 2,436 2,114
Accrued sales taxes 5,420 4,933
Other accrued expenses 3,861 8,212
Notes payable 2,649 1,494
Current portion of capital leases and long-term
debt 515 30,727
-------- --------
Total current liabilities 50,178 89,039

OTHER LIABILITIES 2,596 2,596

CAPITAL LEASES AND LONG-TERM DEBT, net of current
portion 130,374 156,273
-------- --------

Total liabilities 183,148 247,908
-------- --------

COMMITMENTS AND CONTINGENCIES (see Note 3) - -

STOCKHOLDERS' EQUITY:
Series A Preferred Stock, $.01 par value
Authorized--2,000,000 shares;
issued--1,616,483 shares;
outstanding--1,602,486 and -0- shares at
January 31, 1993 and January 30, 1994, 16 -
respectively
Common Stock, $.01 par value
Authorized--8,000,000 shares; issued--
6,933,973 shares; outstanding--1,207,598
and 6,930,253 shares at January 31, 1993
and January 30, 1994, respectively 12 69
Additional paid-in capital 26,392 72,275
Less- Notes receivable from sale of common stock (379) (171)
Accumulated deficit (11,193) (10,346)
-------- --------
Total stockholders' equity 14,848 61,827
-------- --------
Total liabilities and stockholders' equity $197,996 $309,735
-------- --------
-------- --------

</TABLE>

The accompanying notes are an integral part of these consolidated statements.

F-3

<PAGE>

ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)

Year Ended
-----------------------------------------

January 26, January 31, January 30,
1992 1993 1994
----------- ----------- -----------

<S> <C> <C> <C>
SALES $308,562 $346,158 $365,077

COST OF GOODS SOLD 199,052 224,599 234,326
-------- -------- --------

Gross margin 109,510 121,559 130,751

SELLING AND OTHER EXPENSES 77,638 85,240 91,302

GENERAL AND ADMINISTRATIVE EXPENSES 13,658 14,704 15,500

PRE-OPENING EXPENSES 1,192 924 2,221
-------- -------- --------

Operating income 17,022 20,691 21,728

WRITE-DOWN IN CARRYING AMOUNT OF ASSET HELD FOR DISPOSAL - 2,007 -

INTEREST EXPENSE 14,773 16,725 11,563
-------- -------- --------

Income before provision for income taxes and
extraordinary items 2,249 1,959 10,165

PROVISION FOR INCOME TAXES 971 866 -
-------- -------- --------

Income before extraordinary items 1,278 1,093 10,165

EXTRAORDINARY ITEMS:
Realization of net operating loss carryforwards 971 438 -
Loss on extinguishment of debt, net of
tax benefit of $428 at January 31, 1993 - (638) (9,318)
-------- -------- --------

Net income 2,249 893 847

PREFERRED STOCK DIVIDENDS EARNED 3,446 4,208 814
-------- -------- --------

Net income (loss) available to common stock $ (1,197) $ (3,315) $ 33
-------- -------- --------
-------- -------- --------

INCOME PER COMMON AND EQUIVALENT SHARE:
Income (loss) before extraordinary items $(1.74) $(2.52) $ 1.57
Extraordinary items 0.78 (0.16) (1.57)
-------- -------- --------

Net income (loss) per common and equivalent share $(0.96) $(2.68) $ 0.01
-------- -------- --------
-------- -------- --------

WEIGHTED AVERAGE NUMBER OF COMMON AND EQUIVALENT SHARES 1,242 1,238 5,951
-------- -------- --------
-------- -------- --------
</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 STOCKHOLDERS' EQUITY
(In thousands, except share data)

Series A
Preferred Stock Common Stock
------------------ ------------------ Paid-in
Shares Amount Shares Amount Capital

<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 27, 1991 1,615,817 $16 1,209,520 $12 $26,209

Payment of notes receivable from sale of capital stock - - - - -
Repurchase of common stock - - (7,002) - (58)
Repurchase of Series A preferred stock (11,665) - - - (117)
Reissuance of common stock - - 2,640 - 22
Net income - - - - -
--------- --- --------- --- -------
BALANCE, JANUARY 26, 1992 1,604,152 16 1,205,158 12 26,056

Repurchase of common stock - - (1,279) - (10)
Repurchase of Series A preferred stock (1,666) - - - (17)
Reissuance of common stock - - 3,719 - 31
Issuance of warrants - - - - 332
Net income - - - - -
--------- --- --------- --- -------

BALANCE, JANUARY 31, 1993 1,602,486 16 1,207,598 12 26,392

Payment of notes receivable from sale of common
stock - - - - -
Repurchase of common stock - - (200) - (3)
Repurchase of Series A redeemable preferred stock (333) - - - (3)
Issuance of common stock, net of transaction costs - - 3,800,000 38 48,333
Issuance of common stock resulting from exercise of
options - - 7,225 - 60
Reclassification of Series A preferred stock (1,602,153) (16) 1,915,630 19 (3)
Payment of cash dividend on Series A preferred stock - - - - (2,500)
Payment of fractional shares - - - - (1)
Net income - - - - -
--------- --- --------- --- -------

BALANCE, JANUARY 30, 1994 - $ - 6,930,253 $69 $72,275

--------- --- --------- --- -------
--------- --- --------- --- -------
<CAPTION>

Retained
Notes Earnings
Receivable (Accumulated Total
of Capital Stock Deficit) Equity

<S> <C> <C> <C>
BALANCE, JANUARY 27, 1991 $(470) $(14,335) $11,432

Payment of notes receivable from sale of capital stock 20 - 20
Repurchase of common stock 28 - (30)
Repurchase of Series A preferred stock 57 - (60)
Reissuance of common stock (5) - 17
Net income - 2,249 (2,249)
----- -------- -------
BALANCE, JANUARY 26, 1992 (370) (12,086) 13,628

Repurchase of common stock 1 - (9)
Repurchase of Series A preferred stock 1 - (16)
Reissuance of common stock (11) - 20
Issuance of warrants - - 332
Net income - 893 893
----- -------- -------

BALANCE, JANUARY 31, 1993 (379) (11,193) 14,848

Payment of notes receivable from sale of common
stock 208 - 208
Repurchase of common stock - - (3)
Repurchase of Series A redeemable preferred stock - - (3)
Issuance of common stock, net of transaction costs - - 48,333
Issuance of common stock resulting from exercise of
options - - 60
Reclassification of Series A preferred stock - - -
Payment of cash dividend on Series A preferred stock - - (2,500)
Payment of fractional shares - - (1)
Net income - 847 847
----- -------- -------

BALANCE, JANUARY 30, 1994 $(171) $(10,346) $61,827

----- -------- -------
----- -------- -------
</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 CASH FLOWS
(In thousands)

January 26, January 31, January 30,
1992 1993 1994
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,249 $893 $847
Non-cash adjustments to net income-
Depreciation and amortization 6,998 7,080 6,845
Prepayment premium on senior and subordinated senior
debentures - - 6,335
Write-off of deferred financing costs - 1,066 2,745
Accretion of debt discounts 3,156 1,682 313
Loss on asset disposals 108 115 65
Write-down in carrying amount of asset held for disposal - 2,007 -
Changes in assets and liabilities-
Increase in accounts receivable (480) (216) (477)
Increase in inventories (8,468) (3,131) (8,636)
Increase in prepaid expenses and other (789) (925) (2,430)
Increase in accounts payable and other current liabilities 348 1,524 7,517
Decrease in other liabilities (685) (577) -
------- ------- --------
Net cash provided by operating activities 2,437 9,518 13,124
------- ------- --------

CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (19,675) (4,318) (29,491)
Purchase of leasehold rights (131) - (6,511)
------- ------- --------
Net cash used in investing activities (19,806) (4,318) (36,002)
------- ------- --------

CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from public stock offering - - 48,370
Proceeds from issuance of long-term debt 20,643 46,110 103,079
Principal payments on capital leases and long-term debt (168) (48,324) (50,757)
Deferred financing costs paid - (2,076) (2,736)
Payment of preferred stock dividend - - (2,500)
Repayment of notes payable, net (2,576) (1,770) (1,727)
Repurchase of capital stock (175) (27) (6)
Proceeds from reissuance of capital stock 22 31 60
Payment (issuance) of notes receivable from sale of
capital stock 100 (9) 208
------- ------- --------
Net cash provided by (used in) financing activities 17,846 (6,065) 93,991
------- ------- --------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 477 (865) 71,113

CASH AND CASH EQUIVALENTS, beginning of period 4,863 5,340 4,475
------- ------- --------

CASH AND CASH EQUIVALENTS, end of period $ 5,340 $ 4,475 $ 75,588
------- ------- --------
------- ------- --------
</TABLE>

The accompanying notes are an integral part of these consolidated statements.

F-6

<PAGE>

ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JANUARY 30, 1994

1. SIGNIFICANT ACCOUNTING POLICIES:

CONSOLIDATION

The consolidated financial statements include the accounts of Orchard Supply
Hardware Stores Corporation ("Company") and its wholly-owned subsidiary, Orchard
Supply Hardware Corporation ("Orchard Supply") which operates 43 hardware
super stores located in California.

CASH AND CASH EQUIVALENTS

All highly liquid instruments with an original maturity of three months or less
are included in cash and cash equivalents. "Outstanding checks, not cleared by
bank" which are included in current liabilities consists of checks outstanding
against zero balance accounts.

INVENTORY

Inventory is stated at the lower of cost or market using the retail first-in,
first-out ("FIFO") method.

ASSETS HELD FOR DISPOSAL

Assets held for disposal represent the Company's former warehouse building and a
parcel of land adjacent to the new warehouse site which had previously been
included in property 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.

PROPERTY AND EQUIPMENT

Property 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 amortized over the lesser of the lease term or the estimated
useful life of the improvements. The range of estimated useful lives is as
follows:

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

F-7

<PAGE>

The Company capitalized interest costs of $1,013,000 and $28,000 in the years
ended January 26, 1992 and January 31, 1993 during the construction period of a
new warehouse. During the year ended January 30, 1994, the Company capitalized
interest costs of $448,000 related to the construction of new stores.

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 related to the preparation and opening of new stores are expensed as
incurred.

DEFERRED FINANCING COSTS

Deferred financing costs are amortized over the lives of the respective debt
instruments.

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 less shares assumed repurchased with the
proceeds from the management notes (using the treasury stock method), unless
antidulitive. Options outstanding pursuant to the Performance Stock Option Plan
(now terminated) and the options granted to the president of the Company 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.

The number of common and equivalent shares has been restated for the years ended
January 26, 1992 and January 31, 1993 to reflect the 1.2 for 1 stock split which
was effected on January 28, 1993.

F-8

<PAGE>

2. PROPERTY AND EQUIPMENT:

Property and equipment are summarized below (in thousands):

January 31, January 30,
1993 1994
---------- -----------

<S> <C> <C>
Property and Equipment:
Land $16,723 $ 16,723
Land improvements 1,060 1,073
Buildings 29,534 29,881
Machinery and equipment 23,923 26,596
Leasehold improvements 24,122 29,574
Construction in progress 1,590 23,370
Assets under capital lease 1,867 1,867
------- --------
98,819 129,084
Accumulated depreciation and
amortization (18,040) (23,210)
------- --------
Net property and equipment $80,779 $105,874
------- --------
------- --------
</TABLE>

Accumulated amortization on assets under capital lease was approximately $0.8
million and $0.9 million at January 31, 1993 and January 30, 1994, respectively.

During the year ended January 30, 1994, the Company acquired the fee interest in
three former Builder's Emporium ("BE") sites for $13.7 million and leases on six
other BE sites for $6.0 million. The sites are being renovated prior to the
planned opening of the stores in April and May 1994.

3. OPERATING LEASE COMMITMENTS:

Orchard Supply 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 30, 1994 are as follows (in
thousands):

Future Minimum
Rentals
Year Ended
January
--------------

<S> <C>
1995 $ 15,000
1996 14,176
1997 13,500
1998 12,186
1999 11,770
Thereafter 130,513
--------
Total minimum lease payments $197,145
--------
--------
</TABLE>

F-9

<PAGE>

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 was as follows (in thousands):

Total Contingent
Year Ended Rentals Rentals
---------------- ------- ----------

<S> <C> <C>
January 30, 1994 $12,486 $ 486
January 31, 1993 10,971 510
January 26, 1992 8,904 394

</TABLE>

4. BENEFIT PLANS:

Orchard Supply maintains a profit-sharing benefit plan and a 401(k) plan
covering substantially all employees. Orchard Supply matches 50% of employee
contributions to the 401(k) plan up to a maximum of 3% of an individual's
compensation. Orchard Supply 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):

401(k) Profit
Year Ended Contributions Sharing
---------- ------------- -------

<S> <C> <C>
January 30, 1994 $468 $990
January 31, 1993 459 763
January 26, 1992 409 858

</TABLE>

5. LONG-TERM DEBT AND CREDIT ARRANGEMENTS:

Long-term debt as of January 31, 1993 and January 30, 1994 consists of the
following (in thousands):

January 31, January 30,
1993 1994
----------- -----------

<S> <C> <C>
9-3/8% Senior notes $ - $100,000
Store and warehouse mortgages 35,480 36,043
Obligations under capital leases 1,722 1,635
Debt redeemed subsequent to January 30, 1994:
9.0% Senior notes 29,687 30,000
14.5% Senior subordinated discount notes 64,000 19,322
-------- --------

Total debt 130,889 187,000

Less- Current maturities 515 30,727
-------- --------
$130,374 $156,273
-------- --------
-------- --------
</TABLE>

The Company and Orchard Supply 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.

F-10

<PAGE>

9-3/8% SENIOR NOTES

On January 20, 1994, the Company, as guarantor, and Orchard Supply, as issuer,
issued $100 million of unsecured 9-3/8% senior notes. The notes mature on
February 15, 2002 and may be redeemed at Orchard's option at various redemption
dates as specified in the agreement. The terms of the notes limit the ability
of Orchard Supply and the Company to incur indebtedness, issue stock, transfer
funds to affiliates and dispose of assets.

9.0% SENIOR NOTES

On January 26, 1994, Orchard Supply notified the holders of the 9.0% senior
notes of its intention to redeem the notes prior to their stated maturity date
of July 1, 1997. On February 25, 1994, the notes were redeemed using the
proceeds from the 9-3/8% senior notes. The notes are included in the current
portion of long-term debt at January 30, 1994 since the notes were repaid from
cash on hand at January 30, 1994.

SENIOR SUBORDINATED DISCOUNT NOTES

In July 1989, Orchard Supply completed the sale of its senior subordinated
discount notes for $55.2 million which are general unsecured obligations and
which 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 was payable
at a rate of 14.5%.

On April 30, 1993, the Company used the net proceeds of the initial public
offering to retire approximately $44.7 million of the senior subordinated
discount notes. Additionally, on January 26, 1994, Orchard Supply notified the
holders of the remaining approximately $19.3 million of senior subordinated
discount notes of its intention to redeem the notes. On February 25, 1994, the
notes were redeemed using the proceeds from a preferred stock offering (see Note
7). The subordinated notes are included in long-term debt at January 30, 1994
due to the long-term nature of the replacement securities issued.

STORE AND WAREHOUSE MORTGAGES

The store mortgage notes currently bear interest at 10.1%. Beginning in May
1995, the store mortgage notes bear interest 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
began in May 1993 and a final balloon payment is due at the end of twelve years.
Payments are based on a twenty-year amortization schedule.

In May 1992, a life insurance company loaned Orchard Supply 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 of $0.9 million due
May 31, 1995. Further principal payments are due each anniversary date though
2002, increasing by $0.2 million each year.

In November 1993, Orchard Supply assumed a mortgage note of approximately
$1 million pursuant to the purchase of the former BE sites discussed in Note 2.
The note bears interest at 12% with principal and interest payments monthly
through 2005.

The net book value of the assets mortgaged pursuant to the above mortgage loans
was approximately $51.3 million at January 30, 1994.

F-11

<PAGE>

REVOLVING CREDIT FACILITY

Borrowings under Orchard Supply's revolving credit facility are included in
Notes Payable in the accompanying balance sheets. The revolving credit facility
is guaranteed by the Company and is 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 Orchard
Supply or the lender's election.

The following summarizes activity applicable to the revolving credit facility
(dollar amounts in thousands):

January 31, January 30,
1993 1994
----------- -----------

<S> <C> <C>
Balance outstanding at end of year $1,514 $ -
Weighted average balance outstanding
during the year 2,468 1,152
Maximum amount outstanding during the year 7,500 11,448
Weighted average interest rate 7.00% 7.00%
Interest rate at end of period 7.00% 7.00%

</TABLE>

Letters of credit outstanding as of January 31, 1993 and January 30, 1994
totalled $4.8 and $5.8 million, respectively.

In November 1993, in connection the acquisition of the nine new former BE store
sites, Orchard Supply increased the borrowings available under the revolving
credit facility from $20.0 million to $40.0 million. The additional available
borrowings bore substantially the same terms and conditions as the original
facility. On January 28, 1994, all outstanding borrowings of approximately $28
million were repaid with a portion of the proceeds of the 9-3/8% senior notes
and the borrowings available under the facility were reduced to the original
$20.0 million.

CAPITAL LEASES

Orchard leases two stores and certain equipment under capital lease agreements.
The leases bear interest at an implicit rate of approximately 10%.

FINANCING COSTS

In connection with the early extinguishments of debt during the years ended
January 31, 1993 and January 30, 1994, the Company recorded extraordinary
charges of $0.6 million and $9.3 million, respectively. The charges during the
year ended January 30, 1994 consist of prepayment premiums of $6.3 million, the
write-off of deferred financing charges of $2.7 million and the accelerated
accretion of debt discounts of $0.3 million.

F-12

<PAGE>

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):

Future Minimum
Principal Rental Payments
Payments on Pursuant to
Year Ending January Long-Term Debt Capital Leases
------------------- -------------- ---------------

<S> <C> <C>
1995 $ 635 $ 253
1996 1,617 253
1997 1,971 253
1998 2,289 252
1999 2,715 252
Thereafter 126,805 1,377
-------- ------
136,032 2,640
Less- Amount representing interest 1,005
------

Present value of future commitments 1,635
Less- Current portion 635 94
-------- ------
Long-term portion $135,397 $1,541
-------- ------
-------- ------
</TABLE>

Total cash paid by the Company for interest was as follows (in thousands):

Year Ended
----------------

<S> <C>
January 30, 1994 $10,905
January 31, 1993 13,285
January 26, 1992 10,928
</TABLE>

6. PREFERRED STOCK:

In connection with the Company's initial public offering of common stock, the
Company declared dividends on the Series A 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 remainder was paid through the issuance of 1,915,630 additional
shares of preferred stock. The Company also converted all outstanding shares of
preferred stock, including those issued pursuant to the dividends discussed
above, into 3,128,028 shares of common stock at the market price pursuant to a
statutory reclassification.

On February 25, 1994, the Company issued to an affiliate 325,000 shares of
Series 1 and 475,000 shares of Series 2 6% Cumulative Convertible Preferred
Stock, $.01 par value per share, at a price of $24.25 per share. The preferred
stock has an aggregate liquidation preference of $20 million, is convertible at
the option of the holder into common stock at an initial conversion rate of 1.6
shares of common stock for each share of preferred stock subject to adjustment
upon certain circumstances, and may be redeemed by the Company at any time after
December 15, 1996 at an initial redemption price of $26.50 per share, and
thereafter at prices decreasing ratably to $25.00 per share on December 15,
2002. Dividends on the shares of Series 2 preferred stock will increase,
retroactive to the original issue date, to 12% per annum (with the additional 6%
mandatorily payable in preferred shares) if an increase in the authorized shares
of common stock is not approved by the shareholders before June 15, 1994.

F-13

<PAGE>

7. COMMON STOCK:

On April 6, 1993, the Company completed its initial public offering. The
Company sold 3.8 million shares of common stock at a price of $14 per share.

COMMON STOCK WARRANTS

In connection with the issuance of the 9% Senior Notes, the Company issued
warrants to purchase 79,669 shares of common stock at $8.33 per share. At
January 30, 1994, all warrants were outstanding.

STOCK SUBSCRIPTION AGREEMENTS

Under 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 date of May 27, 1989 to the end of the quarter preceding the
repurchase of shares.

STOCK OPTIONS

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 no later than five years from the date of grant.

In November of 1993, the Company added the 1993 Stock Option Plan, reserving
350,000 shares for issuance to the officers, certain employees and directors of
the Company. The provisions of the plan are the same as the 1989 plan with the
following exceptions: the options vest 25% upon grant and 25% over the next 3
anniversary dates and the options cannot be granted to those possessing greater
than 10% of the total combined voting power of all classes of common stock.

At January 30, 1994, options covering 137,890 shares of common stock were
outstanding, of which 31,358 shares were vested under the plans. The Board of
Directors may accelerate the vesting at its discretion. Options expire ten
years after the date of grant. The Company has reserved 402,775 shares of
common stock for issuance under the plans.

F-14

<PAGE>

Following is a detail of total activity for the stock option plans:

Options Options Price
Available Outstanding Per Share
--------- ----------- ---------

<S> <C> <C> <C>
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

Authorized 350,000 - -
Granted (95,000) 95,000 $17.10
Cancelled 2,324 (2,324) $8.33 - 17.10
Exercised - (7,225) $8.33
------- -------
January 30, 1994 264,885 137,890
------- -------
------- -------
</TABLE>

In April 1992, the Company granted nonqualified stock options 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, consolidations, 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.

8. 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
Standards (SFAS) No. 109, "Accounting for Income Taxes." Upon adoption, the
Company elected not to restate prior periods. The effect of the cumulative
catch-up entry on the current period's balance sheet and statement of operations
was 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 the years ended January 26, 1992 and January 31, 1993, the Company
recorded extraordinary items due to the realization of operating loss
carryforwards.

F-15

<PAGE>

The major components of deferred tax assets and liabilities are as follows (in
thousands):

February 1, January 30,
1993 1994
----------- -----------

<S> <C> <C>
Deferred tax assets-
Net operating losses $3,498 $3,814
AMT payments made 787 1,951
Other 1,841 1,548
------ ------
Total assets 6,126 7,313

Valuation allowance (3,859) (3,248)
------ ------

Net assets 2,267 4,065
------ ------
Deferred tax liabilities-
Depreciation 1,480 2,114
------ ------
Total liabilities 1,480 2,114
------ ------
Total net deferred tax asset $ 787 $1,951
------ ------
------ ------
</TABLE>

During the year ended January 30, 1994, the valuation allowance was reduced by
$0.6 million.

The $ -0- provision for the year ended January 30, 1994 resulted from the
realization of net operating loss carryforwards against which a valuation
allowance had previously been provided. The provision for income taxes for the
years ended January 26, 1992 and January 31, 1993 differs from the amount
computed by applying the statutory Federal income tax rate to income before
taxes as follows:

Year Ended
--------------------------
January 26, January 31,
1992 1993
----------- -----------

<S> <C> <C>
Statutory Federal income
tax rate 34.0% 34.0%
State income taxes, net
of Federal benefit 6.1 6.1
Goodwill amortization 2.8 3.2
Other 0.3 0.9
----- -----
43.2% 44.2%
----- -----
----- -----
</TABLE>

As of January 30, 1994, for tax purposes, the Company has net operating loss
carryforwards of approximately $9.9 million and $4.5 million available to offset
Federal and California taxable income, respectively. These net operating loss
carryforwards expire at various dates through the fiscal year ending 2008. As a
result of the initial public offering, the Internal Revenue Code, as amended,
may limit the Company's ability to utilize its Federal income tax net operating
loss carryforwards. Any annual limitation amount 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 the 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 $0.3 million, $0.4
million and $1.2 million in the years ended January 26, 1992, January 31, 1993,
and January 30, 1994, respectively, primarily for 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.

F-16

<PAGE>

9. DISCLOSURES ABOUT FAIR VALUES FINANCIAL INSTRUMENTS:

WORKING CAPITAL ACCOUNTS

The carrying amounts of cash and cash equivalents, accounts receivable and
accounts payable approximate fair value due to 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 $162.2 million versus the carrying amount of approximately $156.3
million at January 30, 1994.

10. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):

Income (Loss)
Per Common and
Income Equivalent
(Loss) Before Share Before
Extraordinary Net Income Extraordinary
Sales Gross Margin Items (Loss) Items
-------- ------------ ------------- ---------- --------------

<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) (3) 86,793 31,525 (152) (1,286) (1.07)
-------- -------- ------ ------ ------
Year $346,158 $121,559 $1,093 $ 893 $(2.52)
-------- -------- ------ ------ ------
-------- -------- ------ ------ ------

YEAR ENDED JANUARY 30,
1994

First quarter (3) $ 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
Fourth quarter (3) 84,622 30,925 170 (3,785) 0.02
-------- -------- ------- ------ -----
Year $365,077 $130,751 $10,165 $ 847 $1.57
-------- -------- ------ ------ ------
-------- -------- ------ ------ ------

The following events impacts the results above:

<FN>

(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 1993 and 1994 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 $0.6 million.

(3) As discussed in Note 5, the Company recorded extraordinary charges in
connection with the early extinguishment of debt during the fourth quarter
of the year ended January 31, 1993, as well as the first and fourth
quarters of the year ended January 30, 1994.

</TABLE>

F-17

<PAGE>

11. SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARY:

All operations of the Company are conducted through its wholly-owned subsidiary,
Orchard Supply. The following summarizes the financial position and results of
operations for the subsidiary:

January 31, January 30,
1993 1994
----------- -----------

<S> <C> <C>
Current assets $102,433 $184,028
Non-current assets 95,544 125,700
-------- --------
$197,977 $309,728
-------- --------
-------- --------

Current liabilities $ 50,178 $ 89,030
Non-current liabilities 132,970 158,869
-------- --------
183,148 247,899
-------- --------
Redeemable preferred stock - -
Other equity 14,829 61,829
-------- --------

14,829 61,829
-------- --------
$197,977 $309,728
-------- --------
-------- --------
</TABLE>

Year Ended
-------------------------------------------
January 26, January 31, January 30,
1992 1993 1994
------------ ----------- -----------

<S> <C> <C> <C>
Sales $308,562 $346,158 $365,077
Gross profit 109,510 121,559 130,751
Income (loss) before provision
for taxes and extraordinary
credit 2,253 1,944 10,170
Net income (loss) 2,253 878 852

</TABLE>

The various debt instruments of Orchard Supply restrict the payment of dividends
to the parent as Orchard Supply is the primary obligor for all debt outstanding.

F-18

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES

To the Shareholders of Orchard Supply Hardware Stores Corporation:

We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements included in Orchard Supply Hardware Stores
Corporation's Annual Report to Stockholders included in this Form 10-K, and have
issued our report thereon dated March 4, 1994. Our audits were made for the
purpose of forming an opinion on those statements taken as a whole. The
schedules listed under Item 14 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.

/s/ ARTHUR ANDERSEN & CO.

San Jose, California
March 4, 1994

S-1
<PAGE>

ORCHARD SUPPLY HARDWARE STORES CORPORATION

SCHEDULE III--CONDENSED FINANCIAL INFORMATION OF SUBSIDIARY

CONDENSED BALANCE SHEETS

FOR THE FISCAL YEARS ENDED

(IN THOUSANDS)

<TABLE>
<CAPTION>
January 31, January 30,
1993 1994
----------- -----------
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 4,475 $ 75,583
Accounts receivable 13,208 13,684
Inventory 73,858 82,494
Prepaid expenses and other 4,759 6,134
Assets held for disposal 6,133 6,133
-------- --------
Total current assets 102,433 184,028

PROPERTY AND EQUIPMENT, net 80,779 105,874
OTHER ASSETS, net 14,765 19,826
-------- --------
Total assets $197,997 $309,728
-------- --------
-------- --------

LIABILITIES AND STOCKHOLDER'S EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued liabilities 47,014 56,809
Notes payable 2,649 1,494
Current portion of capital leases and long-term
debt 515 30,727
-------- --------

Total current liabilities 50,178 89,030

OTHER LIABILITIES 2,596 2,596

CAPITAL LEASES AND LONG-TERM DEBT, net of current
portion 130,374 156,273
-------- --------

Total liabilities 183,148 247,899
-------- --------

STOCKHOLDER'S EQUITY:
Additional paid-in capital 13,951 60,977
Retained earnings 878 852

Total stockholder's equity 14,829 61,829
-------- --------

Total liabilities and stockholder's equity $197,977 $309,728
-------- --------
-------- --------
</TABLE>

S-2
<PAGE>

ORCHARD SUPPLY HARDWARE STORES CORPORATION

SCHEDULE III--CONDENSED FINANCIAL INFORMATION OF SUBSIDIARY

CONDENSED STATEMENTS OF OPERATIONS

FOR THE FISCAL YEARS ENDED

(IN THOUSANDS)

<TABLE>
<CAPTION>
Year Ended
-----------------------------------------
January 26, January 31, January 30,
1992 1993 1994
----------- ----------- -----------
<S> <C> <C> <C>
SALES $308,562 $346,158 $365,077

COST OF GOODS SOLD 199,052 224,599 234,326
-------- -------- --------
Gross margin 109,510 121,559 130,751

SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 92,447 100,859 108,998
-------- -------- --------
Operating income 17,063 20,700 21,753

WRITE-DOWN IN CARRYING AMOUNT OF ASSET HELD
FOR DISPOSAL - 2,007 -

INTEREST EXPENSE 14,810 16,749 11,583
-------- -------- --------
Income before provision for
income taxes and
extraordinary items 2,253 1,944 10,170

PROVISION FOR INCOME TAXES 971 866 -
-------- -------- --------
Income before extraordinary items 1,282 1,078 10,170

EXTRAORDINARY ITEMS 971 (200) (9,318)
-------- -------- --------
Net income $2,253 $878 $852
-------- -------- --------
-------- -------- --------
</TABLE>

S-3
<PAGE>

ORCHARD SUPPLY HARDWARE STORES CORPORATION

SCHEDULE III--CONDENSED FINANCIAL INFORMATION OF SUBSIDIARY

CONDENSED STATEMENTS OF CASH FLOWS

FOR THE FISCAL YEARS ENDED

(IN THOUSANDS)

<TABLE>
<CAPTION>
January 26, January 31, January 30,
1992 1993 1994
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,253 $ 878 $ 852
Non-cash adjustments to net income-
Depreciation and amortization 6,998 7,080 6,845
Prepayment premium on senior and subordinated senior
debentures - - 6,335
Write-off of deferred financing costs - 1,066 2,745
Accretion of debt discounts 3,156 1,682 313
Loss on asset disposals 108 115 65
Write-down in carrying amount of asset held for disposal - 2,007 -
Changes in assets and liabilities-
Increase in accounts receivable (498) (218) (477)
Increase in inventories (8,468) (3,131) (8,636)
Increase in prepaid expenses and other (920) (925) (2,429)
Increase in accounts payable and other current liabilities 366 1,524 7,506
Decrease in other liabilities (685) (577) -
-------- -------- --------
Net cash provided by operating activities 2,310 9,501 13,119
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (19,675) (4,318) (29,491)
Purchase of leasehold rights - - (6,511)
-------- -------- --------
Net cash used in investing activities (19,675) (4,318) (36,002)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 20,643 46,110 103,079
Principal payments on capital leases and long-term debt (168) (48,324) (50,757)
Deferred financing costs paid - (2,076) (2,736)
Repayment of notes payable, net (2,576) (1,770) (1,727)
Contributions from (distributions to) parent Company (57) 12 46,132
-------- -------- --------
Net cash provided by (used in) financing activities 17,842 (6,048) 93,991
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 477 (865) 71,108

CASH AND CASH EQUIVALENTS, beginning of period 4,863 5,340 4,475
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of period $ 5,340 $ 4,475 $ 75,583
-------- -------- --------
-------- -------- --------
</TABLE>

S-4
<PAGE>

ORCHARD SUPPLY HARDWARE STORES CORPORATION

SCHEDULE V--PROPERTIES AND EQUIPMENT

FOR THE FISCAL YEARS ENDED

(IN THOUSANDS)

<TABLE>
<CAPTION>
Balance at Balance
Beginning Additions Other Changes at End
Classification of Period at Cost Retirements Add(Deduct)(1) of Period
-------------- ---------- --------- ----------- -------------- ---------
<S> <C> <C> <C> <C> <C>
JANUARY 26, 1992
Land...................... $21,744 $ 358 $ - $(4,737) $ 17,365
Land Improvements......... 700 - - 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
Assets under Capital Lease 1,867 - - - 1,867
------- ------- ----- ------- --------
Total............. $83,983 $19,675 $(433) $(7,831) $ 95,394
------- ------- ----- ------- --------
------- ------- ----- ------- --------
JANUARY 31, 1993
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 - (120) 24,122
Construction in Progress.. 1,030 564 - (40) 1,590
Assets under Capital Lease 1,867 - - - 1,867
------- ------- ----- ------- --------
Total.............. $95,394 $ 4,318 $(260) $ (633) $ 98,819
------- ------- ----- ------- --------
------- ------- ----- ------- --------
JANUARY 30, 1994
Land...................... $16,723 $ - $ - $ - $ 16,723
Land Improvements......... 1,060 - - 13 1,073
Buildings................. 29,534 55 - 292 29,881
Machinery & Equipment..... 23,923 391 (300) 2,582 26,596
Leasehold Improvements.... 24,122 276 - 5,176 29,574
Construction in Progress.. 1,590 29,843 - (8063) 23,370
Assets under Capital Lease 1,867 - - - 1,867
------- ------- ----- ------- --------
Total............. $98,819 $30,565 $(300) $ - $129,084
------- ------- ----- ------- --------
------- ------- ----- ------- --------

<FN>
(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.
</TABLE>

S-5
<PAGE>

ORCHARD SUPPLY HARDWARE STORES CORPORATION

SCHEDULE VI--ACCUMULATED DEPRECIATION AND AMORTIZATION
OF PROPERTIES AND EQUIPMENT

FOR THE FISCAL YEARS ENDED

(IN THOUSANDS)

<TABLE>
<CAPTION>
Balance at (1) Balance
Beginning Additions Other Changes at End
Classification of Period at Cost Retirements Add(Deduct) of Period
-------------- ---------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C>

JANUARY 26, 1992
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.... - - - - -
Assets under Capital Lease.. 477 190 - - 667
------- ------ ----- ----- -------
Total............... $ 8,661 $5,011 $(325) $(324) $13,023
------- ------ ----- ----- -------
------- ------ ----- ----- -------
JANUARY 31, 1993
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.... - - - - -
Assets under Capital Lease.. 667 152 - - 819
------- ------ ----- ----- -------
Total............... $13,023 $5,162 $(145) $ - $18,040
------- ------ ----- ----- -------
------- ------ ----- ----- -------
JANUARY 30, 1994
Land........................ $ - $ - $ - $ - $ -
Land Improvements........... 206 66 - - 272
Buildings................... 2,114 908 - - 3,022
Machinery & Equipment....... 9,596 2,461 (235) - 11,828
Leasehold Improvements...... 5,305 1,871 - - 7,176
Construction in Progress.... - - - - -
Assets under Capital Lease.. 819 93 - - 912
------- ------ ----- ----- -------
Total............... $18,040 $5,399 $(235) $ - $23,210
------- ------ ----- ----- -------
------- ------ ----- ----- -------

<FN>
(1) Represents reclassification to assets held for disposal.
</TABLE>

S-6
<PAGE>

ORCHARD SUPPLY HARDWARE STORES CORPORATION

SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS

FOR THE FISCAL YEARS ENDED

(IN THOUSANDS)

<TABLE>
<CAPTION>
Additions
------------------------
Balance at Charged to Charged Balance
Beginning Costs/ to Other at End
Description of Period Expenses Accounts(1) Deductions(1) of Period
----------- ---------- ---------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C>

JANUARY 26, 1992
Accounts receivable reserves $ 894 $1,202 $290 $(1,498) $ 888

JANUARY 31, 1993
Accounts receivable reserves $ 888 $1,180 $484 $(1,285) $1,267

JANUARY 30, 1994
Accounts receivable reserves $1,267 $1,215 $214 $(1,520) $1,176

<FN>
(1) Represents collections of accounts written off.

</TABLE>

S-7
<PAGE>

ORCHARD SUPPLY HARDWARE STORES CORPORATION

SCHEDULE X--SUPPLEMENTARY INCOME STATEMENT INFORMATION

FOR THE FISCAL YEARS ENDED

(IN THOUSANDS)

January 26 January 31 January 30
1992 1993 1994
------ ------ ------
<S> <C> <C> <C>
Maintenance and repairs............................. $4,143 $4,812 $5,149

Depreciation and amortization of intangible assets
preoperating costs and similar deferrals.......... $6,998 $8,119 $6,813

Taxes, other than payroll and income taxes.......... $ 532 $ 720 $ 614

Property Taxes...................................... $1,522 $2,329 $2,156

Advertising Costs................................... $7,132 $7,699 $7,909

</TABLE>

S-8

<PAGE>

EXHIBIT INDEX

EXHIBIT
NUMBER DESCRIPTION
------- -----------

+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.

*4.1 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.

*4.2 Common Stock Registration Rights Agreement dated as of July 26,
1989 among Orchard Holding Corporation and the purchasers who are
signatories thereto.

*4.3 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.

**4.4 Stockholder Agreement dated May 30, 1989 by and among FS Equity
Partners II, L.P. and the investors named therein.

***4.5 Form of Amendment to the Warrant to Purchase Shares of Common
Stock of Orchard Supply Hardware Corporation (formerly Orchard
Holding Corporation).

++++4.6 Indenture dated as of January 15, 1994 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 9-3/8% Senior Notes due 2002, with
form of note attached thereto as Exhibit A.

+++4.7 Certificate of Designation of Rights and Preferences of the 6%
Cumulative Convertible Preferred Stock of Orchard Supply Hardware
Stores Corporation.

**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 Second Amendment to Loan Agreement dated as of December 1, 1993
between Orchard Supply Hardware Corporation and Metropolitan Life
Insurance Company.

++++10.7 Third Amendment to Loan Agreement dated as of January 27, 1994
between Orchard Supply Hardware Corporation and Metropolitan Life
Insurance Company.

++++10.8 Fourth Amendment to Loan Agreement dated as of January 29, 1994
between Orchard Supply Hardware Corporation and Metropolitan Life
Insurance Company.

*10.9 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.

***10.10 First Amendment to Note Agreement dated as of February 8, 1993
among Orchard Supply Hardware Corporation, Orchard Supply
Hardware Stores Corporation (formerly Orchard Holding
Corporation) and Teachers Insurance and Annuity Association of
America, with respect to the 10.64% Senior Secured Notes due
2002.

++++10.11 Second Amendment to Note Agreement dated as of November 24, 1993
by and among Orchard Supply Hardware Corporation, Orchard Supply
Hardware Stores Corporation (formerly Orchard Holding
Corporation) and Teachers Insurance and Annuity Association of
America, with respect to the 10.64% Senior Secured Notes due
2002.

<PAGE>

EXHIBIT
NUMBER DESCRIPTION
------- -----------

++++10.12 Third Amendment to Note Agreement dated as of November 30, 1993
by and among Orchard Supply Hardware Corporation, Orchard Supply
Hardware Stores Corporation (formerly Orchard Holding
Corporation) and Teachers Insurance and Annuity Association of
America, with respect to the 10.64% Senior Secured Notes due
2002.

++++10.13 Fourth Amendment to Note Agreement dated as of January 19, 1994
by and among Orchard Supply Hardware Corporation, Orchard Supply
Hardware Stores Corporation (formerly Orchard Holding
Corporation) and Teachers Insurance and Annuity Association of
America, with respect to the 10.64% Senior Secured Notes due
2002.

++++10.14 Fifth Amendment to Note Agreement dated as of January 29, 1994 by
and among Orchard Supply Hardware Corporation, Orchard Supply
Hardware Stores Corporation (formerly Orchard Holding
Corporation) and Teachers Insurance and Annuity Association of
America, with respect to the 10.64% Senior Secured Notes due
2002.

*10.15 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.

*10.16 Financing Agreement dated as of October 29, 1992 between Orchard
Supply Hardware Corporation and The CIT Group/Business Credit,
Inc.

***10.17 Amendment to Financing Agreement dated as of February 23, 1993
between Orchard Supply Hardware Corporation and The CIT
Group/Business Credit, Inc.

++++10.18 Amendment to Financing Agreement dated as of July 30, 1993 by and
between Orchard Supply Hardware Corporation and The CIT
Group/Business Credit, Inc.

++++10.19 Amendment to Financing Agreement dated as of November 12, 1993 by
and between Orchard Supply Hardware Corporation and The CIT
Group/Business Credit, Inc.

++++10.20 Amendment to Financing Agreement dated as of November 24, 1993 by
and between Orchard Supply Hardware Corporation and The CIT
Group/Business Credit, Inc.

++++10.21 Amendment to Financing Agreement dated as of January 14, 1994 by
and between Orchard Supply Hardware Corporation and The CIT
Group/Business Credit, Inc.

++++10.22 Amendment to Financing Agreement dated as of January 29, 1994 by
and between Orchard Supply Hardware Corporation and The CIT
Group/Business Credit, Inc.

*10.23 Orchard Holding Corporation Amended 1989 Employee Stock
Subscription Plan dated May 23, 1989, as amended on August 7,
1989.

*10.24 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.

*10.25 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.

*10.26 Orchard Holding Corporation Amended 1989 Nonqualified Stock
Option Plan dated May 24, 1989, as amended on August 7, 1989.

*10.27 Form of Nonqualified Stock Option Agreement by and between
Orchard Holding Corporation and certain members of management.

*10.28 Orchard Holding Corporation 1989 Nonqualified Performance Stock
Option Plan dated May 24, 1989.

*10.29 Form of Nonqualified Performance Stock Option Agreement by and
between Orchard Holding Corporation and certain members of
management.

*10.30 Supplemental Letter Agreement dated April 11, 1989 between FS
Equity Partners II, L.P. and Bankers Trust Company.

*10.31 Employment Agreement between Maynard Jenkins and Wickes
Companies, Inc. dated January 1, 1989 (assumed by Orchard Supply
Hardware Corporation).

*10.32 Orchard Holding Corporation Second Amended and Restated 1989
Employee Stock Subscription Plan dated May 23, 1989, as amended
and restated on June 11, 1991.

*10.33 Form of Indemnity Agreement by and among Orchard Holding
Corporation, Orchard Supply Hardware Corporation and each
director.

*10.34 First Amendment to Employment Agreement dated January 1, 1989
between Orchard Supply Hardware Corporation and Maynard Jenkins.

<PAGE>

Exhibit
Number Description
- ------- -----------
*10.35 Form of Nonqualified Stock Option Agreement between Orchard
Holding Corporation and Maynard Jenkins.

****10.36 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.

****10.37 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.

****10.38 Form of Waiver regarding the Loan Agreement dated as of March 19,
1990 between Orchard Supply Hardware Corporation and Metropolitan
Life Insurance Company.

++10.39 Orchard Supply Hardware Stores Corporation 1993 Non-Employee
Directors Stock Option Plan dated July 26, 1993.

+10.40 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.).

++++10.41 Orchard Supply Hardware Stores Corporation 1993 Stock Option Plan
dated November 19, 1993 as amended on March 29, 1994.

+10.42 Form of Incentive Stock Option Agreement by and between Orchard
Supply Hardware Stores Corporation and certain officers and key
employees.

++++10.43 Registration Rights Agreement dated as of December 29, 1993 by
and between Orchard Supply Hardware Stores Corporation and FS
Equity Partners III, L.P.

+++10.44 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.

***18.1 Preferability Letter dated March 5, 1993 from Arthur Andersen &
Co. regarding change in accounting principle.

++++23.1 Consent of Arthur Andersen & Co. for Orchard Supply Hardware
Stores Corporation.

_______________
* Filed as an exhibit to Registration Statement on Form S-4
(Registration No. 33-55190) on November 30, 1992.
** Filed with Registration Statement of 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 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 with Amendment No. 2 to Registration Statement on Form S-1
(Registration No. 33-51437) on January 18, 1994.
++++ Filed herewith.

<PAGE>
Exhibit 4.6

ORCHARD SUPPLY HARDWARE CORPORATION, the Company

and

ORCHARD SUPPLY HARDWARE STORES CORPORATION, the Guarantor

$100,000,000

9-3/8% Senior Notes due 2002

___________________

INDENTURE

Dated as of January 15, 1994

___________________

U.S. Trust Company of California, N.A., as Trustee

<PAGE>

TABLE OF CONTENTS

PAGE
----

ARTICLE ONE

DEFINITIONS AND INCORPORATION BY REFERENCE

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

ARTICLE TWO

THE SECURITIES

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

ARTICLE THREE

REDEMPTION

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

i
<PAGE>

ARTICLE FOUR

COVENANTS

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.............................. 29
SECTION 4.05. Limitation on Liens..................................... 29
SECTION 4.06. Limitation on Asset Dispositions, Etc................... 29
SECTION 4.07 Limitation on Restricted Payments....................... 33
SECTION 4.08. Corporate Existence..................................... 34
SECTION 4.09. Payment of Taxes and Other Claims....................... 34
SECTION 4.10. Notice of Defaults...................................... 35
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............................................ 37
SECTION 4.16. Limitation on Sale and Leaseback
Transactions.......................................... 38
SECTION 4.17. Limitation on Dividends and Other Payment
Restrictions Affecting Subsidiaries................... 39
SECTION 4.18. Limitation on Issuance of Preferred
Stock by Subsidiaries................................ 39

ARTICLE FIVE

MERGERS; SUCCESSOR CORPORATION

SECTION 5.01. Restriction on Mergers and Consolidations
and Sales of Assets................................... 40
SECTION 5.02. Successor Corporation Substituted....................... 41

ARTICLE SIX

DEFAULT AND REMEDIES

SECTION 6.01. Events of Default....................................... 41
SECTION 6.02. Acceleration............................................ 43
SECTION 6.03. Other Remedies.......................................... 43
SECTION 6.04. Waiver of Past Default.................................. 43
SECTION 6.05. Control by Majority..................................... 44
SECTION 6.06. Limitation on Suits..................................... 44
SECTION 6.07. Rights of Holders To Receive Payment.................... 44
SECTION 6.08. Collection Suit by Trustee.............................. 45
SECTION 6.09. Trustee May File Proofs of Claim........................ 45
SECTION 6.10. Priorities.............................................. 45
SECTION 6.11. Undertaking for Costs................................... 46

ii
<PAGE>

ARTICLE SEVEN

TRUSTEE

SECTION 7.01. Duties of Trustee....................................... 46
SECTION 7.02. Rights of Trustee....................................... 48
SECTION 7.03. Individual Rights of Trustee............................ 48
SECTION 7.04. Trustee's Disclaimer.................................... 48
SECTION 7.05. Notice of Defaults...................................... 49
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
SECTION 7.10. Eligibility; Disqualification........................... 52
SECTION 7.11. Preferential Collection of Claims....................... 52

ARTICLE EIGHT

DISCHARGE OF INDENTURE; DEFEASANCE

SECTION 8.01. Satisfaction and Discharge.............................. 52
SECTION 8.02. Defeasance and Covenant Defeasance...................... 53
SECTION 8.03. Application of Trust Money.............................. 56
SECTION 8.04. Repayment to Company.................................... 56
SECTION 8.05. Reinstatement........................................... 56

ARTICLE NINE

AMENDMENTS, SUPPLEMENTS AND WAIVERS

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........................... 60

ARTICLE TEN

GUARANTEE

SECTION 10.01. Guarantee............................................... 60

iii
<PAGE>

ARTICLE ELEVEN

MISCELLANEOUS

SECTION 11.01. Trust Indenture Act Controls............................ 61
SECTION 11.02. Notices................................................. 62
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............................................... 64
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............. 66

SIGNATURES..................................................................67

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

Trust Indenture Act Section Indenture Section

Section 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.
Section 311(a).............................................. 7.11
(b)................................................... 7.11
(c)................................................... N.A.
Section 312(a).............................................. 2.05
(b)................................................... 11.03
(c)................................................... 11.03
Section 313(a).............................................. 7.06
(b)(1)................................................ N.A.
(b)(2)................................................ 7.06
(c)................................................... 7.06; 11.02
(d)................................................... 7.06
Section 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.
Section 315(a).............................................. 7.01(b)
(b)................................................... 7.05; 11.02
(c)................................................... 7.01(a)
(d)................................................... 7.01(c)
(e)................................................... 6.11
Section 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.
Section 317(a)(1)........................................... 6.08
(a)(2)................................................ 6.09
(b)................................................... 2.04
Section 318(a).............................................. 11.01

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 January 15, 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 9-3/8% 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

<PAGE>

Company, or (ii) with respect to any Subsidiary of the Company, the Company or
any other Subsidiary of the Company.

"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 obliga-

2
<PAGE>

tion shall be the capitalized amount thereof determined in accordance with GAAP.

"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.

3
<PAGE>

"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 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

4
<PAGE>

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 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,

5
<PAGE>

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 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.

6
<PAGE>

"DEFAULT" means any event which is, or after notice or passage
of time or both would be, an Event of Default.

"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.

7
<PAGE>

"GUARANTOR'S OFFICERS' CERTIFICATE" means a certificate signed
by the President or a Vice President and by the Treasurer, 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

8
<PAGE>

(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 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

9
<PAGE>

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 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

10
<PAGE>

proceeds therefrom in the manner set forth under the caption "Use of Proceeds"
in the prospectus relating to the offering of the 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 between the Company and its Subsidiaries 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, (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 9-3/8% 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 Sections
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.

TERM DEFINED IN SECTION

"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

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 after the date of deposit, 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
Division 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

27
<PAGE>

rescission and of any change in the location of any such other office or
agency.

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 fair and
reasonable to the Company or such Subsidiary, as the case may be, and 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.

28
<PAGE>

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 "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

29
<PAGE>

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 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.

30
<PAGE>

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;

(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

31
<PAGE>

(ix) the instructions that Holders must follow in order to tender
their Securities.

On or before 10:00 A.M., New York time, on 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 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.

32
<PAGE>

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 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

33
<PAGE>

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 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

34
<PAGE>

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.

(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

35
<PAGE>

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 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 within
15 days after each Required Filing Date mail to the Trustee and each Holder
copies of the annual reports, quarterly reports and other documents which the
Guarantor or the Company was required to file with the SEC pursuant to Section
13(a) or 15(d) of the Exchange Act or the Guarantor would have been required
to file with the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act if
the Guarantor were subject to such Sections. 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,

36
<PAGE>

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 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.

37
<PAGE>

(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. Such payment shall be made in accordance with the provisions
of the second paragraph of Section 4.06. 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.

(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.

38
<PAGE>

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 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.

39
<PAGE>

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 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.

40
<PAGE>

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.

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;

41
<PAGE>

(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,

(B) consents to the entry of an order for relief against
it in an involuntary case or proceeding,

(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

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.

42
<PAGE>

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 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.

43
<PAGE>

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 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

44
<PAGE>

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 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:

45
<PAGE>

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.

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.

46
<PAGE>

(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
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.

47
<PAGE>

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.

(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

48
<PAGE>

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 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 Section 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 Section 313(a). The Trustee also shall comply with TIA
Section 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

49
<PAGE>

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
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;

50
<PAGE>

(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 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

51
<PAGE>

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 Sections 310(a)(1) and 310(a)(2). The Trustee shall
have (or in the case of a corporation included in a bank holding company
system, 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 Section 310(b), the Trustee
and the Company shall comply with the provisions of TIA Section 310(b). If at
any time the Trustee shall cease to be eligible in accordance with the
provisions of this Section, the 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 Section 311(a), excluding any creditor relationship listed in TIA
Section 311(b). A Trustee who has resigned or been removed shall be subject to
TIA Section 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,

52
<PAGE>

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 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),

53
<PAGE>

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 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

54
<PAGE>

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
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

55
<PAGE>

(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 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

56
<PAGE>

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.

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

57
<PAGE>

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;

(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

58
<PAGE>

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
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.

59
<PAGE>

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 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

60
<PAGE>

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 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

61
<PAGE>

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:

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) 488-4029

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
Section 310(b), TIA Section 313(c), TIA Section 314(a) and TIA Section 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

62
<PAGE>

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 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 Section 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 Section 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.

63
<PAGE>

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;

(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

64
<PAGE>

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 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

65
<PAGE>

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 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.

ORCHARD SUPPLY HARDWARE CORPORATION

[SEAL]
By: /S/ STEPHEN HILBERG
--------------------------
Name: Stephen Hilberg
Title: Vice President Finance

Attest: /S/ MICHAEL SEDA
-------------------

ORCHARD SUPPLY HARDWARE STORES
CORPORATION, as Guarantor

[SEAL]
By: /S/ STEPHEN HILBERG
--------------------------
Name: Stephen Hilberg
Title: Vice President Finance

U.S. TRUST COMPANY OF CALIFORNIA,
N.A., as Trustee

[SEAL]
By: /S/ SANDRA H. LEES
--------------------------
Name: Sandra H. Lees
Title: Senior Vice President

/s/ Albert J. Edwards

67
<PAGE>

EXHIBIT A

ORCHARD SUPPLY HARDWARE CORPORATION

No. $

9-3/8% 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

February 15, 2002.

Interest Payment Dates: February 15 and August 15

Record Dates: February 1 and August 1

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 9-3/8% 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

9-3/8% Senior Note due 2002

1. INTEREST.

Orchard Supply Hardware Corporation, a Delaware corporation (the
"Company"), promises to pay interest at the rate of 9-3/8% per annum on the
principal amount of this Security semiannually in arrears on each February 15
and August 15, commencing on August 15, 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 January 27, 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 February
1 or August 1 (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 may change
any Paying Agent, Registrar or co-Registrar without

A-2
<PAGE>

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 9-3/8% 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 January 15, 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 Sections 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 February 15, 1998,
except as provided below. On or after February 15, 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 February 15,

YEAR PERCENTAGE

1998.......................................... 103.125%
1999.......................................... 101.563%
2000 and thereafter........................... 100.000%

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 at 101% of the principal amount thereof plus accrued
interest to the purchase date.

A-3
<PAGE>

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 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.

A-4
<PAGE>

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
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

A-5
<PAGE>

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 of 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 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.

A-6
<PAGE>

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 zip 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>

Exhibit 10.6

SECOND AMENDMENT TO LOAN AGREEMENT

THIS SECOND AMENDMENT TO LOAN AGREEMENT (this "Amendment") is
made and entered into as of this 1st day of December, 1993, by and between
ORCHARD SUPPLY HARDWARE CORPORATION, a Delaware corporation ("Borrower"), and
METROPOLITAN LIFE INSURANCE COMPANY, a New York corporation ("Lender").

R E C I T A L S

B. Orchard Supply Hardware Stores Corporation (formerly Orchard
Holding Corporation), Borrower's parent, proposes to issue and sell up to $25
million of new convertible preferred stock (the "OHC Preferred Stock") and, in
connection with such offering, Borrower has requested that the Lender agree to
certain amendments to this Agreement in order to facilitate such offering and
to modify certain definitions set forth therein to reflect changed
circumstances.

C. Borrower and Lender now desire to further amend the
Agreement in certain respects as more specifically provided herein.

AGREEMENT

NOW, THEREFORE, for good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, Borrower and Lender agree as
follows:

1. RECITALS. The foregoing recitals are true and correct and
by this reference are incorporated herein.

2. DEFINITIONS. All words and phrases having their initial
letters capitalized in this Amendment, and not specifically defined in this
Amendment, shall have the meanings set forth in the Agreement.

3. Section 1.01(a) of the Agreement is amended to read in its
entirety as follows:

"(a) The term "Credit Agreement" shall mean that certain
Financing Agreement dated October 29, 1992 by and between the
Borrower and The CIT Group/Business Credit, Inc. ("CIT"), as
heretofore amended and as may be further amended from time to
time."

<PAGE>

4. Section 1.01 of the Agreement is further amended by adding
the following as clauses (e) and (f) at the end thereof:

"(e) The term "OHC" shall mean Orchard Supply Hardware
Stores Corporation (formerly Orchard Holding Corporation), a
Delaware corporation."

"(f) The term "OHC Preferred Stock" shall mean up to $25
million in preferred stock as may be issued and sold by OHC."

5. Section 3.07 of the Agreement is hereby amended by deleting
the first paragraph thereof in its entirety and inserting in lieu thereof the
following:

"3.07. Borrower covenants and agrees that Borrower's net
worth (as determined in accordance with generally accepted
accounting principles as in effect on each date of determination)
("Adjusted Net Worth") at the end of each fiscal quarter of
Borrower commencing with the fiscal quarter ending on January 30,
1994 shall be at least $65,000,000."

6. Section 3.10 of the Agreement is hereby amended by deleting
therefrom the words "Bankers Trust Company, as agent, or any of the other
lenders party to" and inserting in lieu thereof the words "CIT under."

7. Section 3.13 of the Agreement is amended by adding at the
end of clause (i)(a) thereof the following:

"; provided, however, that OHC shall in all events be
entitled to pay dividends on preferred stock issued by it up to an
aggregate amount of $2,500,000 per year,"

8. Section 3.16 of the Agreement is amended by deleting the
period following clause (ii) at the end of the first paragraph thereof and
inserting in place thereof a comma and the word "and" and adding the following
as clause (iii) immediately following said clause (ii):

"(iii) Borrower may declare and pay cash dividends on its
capital stock (common or preferred) owned by OHC for the purpose
of funding OHC's payment of regular cash dividends on the OHC
Preferred Stock; provided that the aggregate amount of dividends
that may be paid to OHC by Borrower in any fiscal year of Borrower
shall not exceed the lesser of (i) $2,500,000 or (ii) an amount
equal to the annual

-2-
<PAGE>

aggregate amount of dividends payable on the OHC Preferred Stock
at its stated coupon rate;"

9. The amendments to the Agreement specified herein shall
become effective concurrently with the closing of the issuance and sale by
Holding of the Holding Preferred Stock.

10. COUNTERPARTS. This Amendment may be executed in one or
more counterparts, each of which shall be deemed an original, and which
together shall constitute one and the same instrument.

IN WITNESS WHEREOF, the parties have executed this Amendment as of
the day and year first above written.

ORCHARD SUPPLY HARDWARE
CORPORATION, a Delaware
corporation

By:/S/MAYNARD JENKINS
----------------------------
Maynard Jenkins, President

By:/S/STEPHEN M. HILBERG
----------------------------
Stephen M. Hilberg,
Chief Financial Officer
"Borrower"

METROPOLITAN LIFE INSURANCE
COMPANY, a New York corporation

By:/S/WILLIAM F. COVINGTON
----------------------------
Its: Assistant Vice-President
"Lender"

-3-
<PAGE>

ORCHARD SUPPLY HARDWARE STORES CORPORATION (formerly, ORCHARD
HOLDING CORPORATION), a Delaware corporation, hereby acknowledges and approves
of all of the foregoing terms and confirms its obligations and agreements
pursuant to the terms of SECTIONS 3.02, 3.05, 3.13 AND 5.02 of the Loan
Agreement, as modified by this Amendment.

ORCHARD SUPPLY HARDWARE
STORES CORPORATION, a Delaware
corporation

By:/S/STEPHEN M. HILBERG
-------------------------
Its: Vice President

By:/S/MAYNARD JENKINS
-------------------------
Its: President
"OHC"

- 4 -

<PAGE>

Exhibit 10.7

THIRD AMENDMENT TO LOAN AGREEMENT

THIS THIRD AMENDMENT TO LOAN AGREEMENT (this "Amendment") is made
and entered into as of this 27th day of January, 1994 by and between ORCHARD
SUPPLY HARDWARE CORPORATION, a Delaware corporation ("Borrower"), and
METROPOLITAN LIFE INSURANCE COMPANY, a New York corporation ("Lender").

R E C I T A L S

A. Borrower and Lender entered into that certain Loan Agreement
("Agreement") dated as of March 19, 1990, as amended by the certain First
Amendment to Loan Agreement dated as of September 8, 1990 and the certain
Second Amendment to Loan Agreement dated as of December 1, 1993 (collectively,
the "Agreement").

B. Borrower proposes to issue and sell up to $100 million of
senior unsecured notes due 2002 (the "New Notes") and, in connection with such
offering, Borrower has requested that the Lender agree to certain amendments
to the Agreement in order to modify the debt incurrence covenant contained
therein to be comparable to the covenant contained in the Indenture pursuant
to which the New Notes will be issued.

C. Borrower and Lender now desire to further amend the
Agreement in certain respects as more specifically provided herein.

AGREEMENT

NOW, THEREFORE, for good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, Borrower and Lender agree as
follows:

1. RECITALS. The foregoing recitals are true and correct and
by this reference are incorporated herein.

2. DEFINITIONS. All words and phrases having their initial
letters capitalized in this Amendment, and not specifically defined in this
Amendment, shall have the meanings set forth in the Agreement.

3. Section 1.01 of the Agreement is amended by adding the
following as clause (g) at the end thereof:

"(g) The term "New Notes Indenture" shall mean that certain
Indenture dated as of January 15, 1994 among the Borrower, OHC and
U.S. Trust Company of California, N.A., as trustee, as the same
may be amended from time to time."

<PAGE>

4. Section 3.08 of the Agreement is hereby amended to read in
its entirety as follows:

"In addition to any and all other conditions, restrictions
and limitations upon Borrower's incurrence of any loans,
indebtedness or obligations provided in this Agreement or in the
other Loan Documents, Borrower hereby covenants and agrees in that
Borrower shall not, and shall not permit any of its subsidiaries
to, directly or indirectly (whether through one or more
subsidiaries), create, incur, assume, become liable for or
guarantee the payment of contingently or otherwise (collectively
defined as an "incurrence" in the New Notes Indenture), any
Indebtedness (as defined in the New Notes Indenture), except as
expressly permitted pursuant to the terms of Section 4.04 of the
New Notes Indenture, and subject to the following conditions and
limitations, which conditions and limitations, as between Lender
and Borrower, shall supersede and prevail over any inconsistent
provisions contained in Section 4.04 of the New Notes Indenture:

(a) In the event of, and concurrently with, the incurrence
of any such Indebtedness by any subsidiary of Borrower
pursuant to and in compliance with Section 4.04 of the
New Notes Indenture, Borrower shall, and shall cause
each subsidiary so incurring such Indebtedness to,
comply with each of the requirements of SECTION 3.19
below; and

(b) For purposes of the incorporation herein of Section
4.04 of the New Notes Indenture, the terms "Default"
and "Event of Default" as used therein shall include
an Event of Default hereunder or under any of the
other Loan Documents and any event or condition that
with the giving of notice or passage of time, or both,
would constitute an Event of Default hereunder or
under any of the other Loan Documents."

5. EFFECTIVENESS. The amendments to the Agreement specified
herein shall become effective concurrently with the closing of the issuance
and sale by the Borrower of the New Notes.

-2-
<PAGE>

6. COUNTERPARTS. This Amendment may be executed in one or
more counterparts, each of which shall be deemed an original, and which
together shall constitute one and the same instrument.

IN WITNESS WHEREOF, the parties have executed this Amendment as of
the day and year first above written.

ORCHARD SUPPLY HARDWARE
CORPORATION, a Delaware
corporation

By:/s/Maynard Jenkins
--------------------------
Maynard Jenkins, President

By:/s/Stephen M. Hilberg
--------------------------
Stephen M. Hilberg,
Chief Financial Officer
"Borrower"

METROPOLITAN LIFE INSURANCE
COMPANY, a New York corporation

By:/s/William F. Covington
--------------------------
Its: Assistant Vice President
"Lender"

-3-
<PAGE>

ORCHARD SUPPLY HARDWARE STORES
CORPORATION, a Delaware corporation

By:/s/Stephen M. Hilberg
---------------------------------
Its:Vice President

By: /s/Maynard Jenkins
---------------------------------
Its:President
"OHC"

- 4 -

<PAGE>

Exhibit 10.8

FOURTH AMENDMENT TO LOAN AGREEMENT

THIS FOURTH AMENDMENT TO LOAN AGREEMENT (this "Amendment") is
made and entered into as of this 29th day of January, 1994 by and between
ORCHARD SUPPLY HARDWARE CORPORATION, a Delaware corporation ("Borrower"), and
METROPOLITAN LIFE INSURANCE COMPANY, a New York corporation ("Lender").

R E C I T A L S
- - - - - - - -

A. Borrower and Lender entered into that certain Loan Agreement
("Agreement") dated as of March 19, 1990, as amended by the certain First
Amendment to Loan Agreement dated as of September 8, 1990, the certain Second
Amendment to Loan Agreement dated as of December 1, 1993 and the certain Third
Amendment to Loan Agreement dated as of January 27, 1994 (collectively, the
"Agreement").

B. Borrower and Lender now desire to further amend the
Agreement in certain respects as more specifically provided herein.

AGREEMENT

NOW, THEREFORE, for good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, Borrower and Lender agree as
follows:

1. RECITALS. The foregoing recitals are true and correct and
by this reference are incorporated herein.

2. DEFINITIONS. All words and phrases having their initial
letters capitalized in this Amendment, and not specifically defined in this
Amendment, shall have the meanings set forth in the Agreement.

3. AMENDMENT. Section 3.07 of the Agreement is hereby
amended by deleting the phrase "commencing with the fiscal quarter ending on
January 30, 1994" contained therein and replacing the same with the phrase
"commencing with the fiscal quarter ending on May 1, 1994".

4. EFFECTIVENESS. The amendment to the Agreement specified
herein shall be deemed to be effective as of the date first above written.

<PAGE>

5. COUNTERPARTS. This Amendment may be executed in one or
more counterparts, each of which shall be deemed an original, and which
together shall constitute one and the same instrument.

IN WITNESS WHEREOF, the parties have executed this Amendment as of
the day and year first above written.

ORCHARD SUPPLY HARDWARE CORPORATION,
a Delaware corporation

By:/s/Maynard Jenkins
-------------------------------------
Maynard Jenkins, President

By:/s/Stephen M. Hilberg
-------------------------------------
Stephen M. Hilberg,
Chief Financial Officer
"Borrower"

METROPOLITAN LIFE INSURANCE COMPANY,
a New York corporation

By:/s/William F. Covington
-------------------------------------
Its: Assistant Vice President
"Lender"

-2-
<PAGE>

ORCHARD SUPPLY HARDWARE STORES
CORPORATION, a Delaware corporation

By:/s/Stephen M. Hilberg
-------------------------------------
Its: Vice President

By:/s/Maynard Jenkins
-------------------------------------
Its: President
"OHC"

-3-

<PAGE>

Exhibit 10.11

SECOND AMENDMENT
TO
NOTE AGREEMENT

This Second Amendment to the Note Agreement (the "Amendment") is
entered into as of November 24, 1993, 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
(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 to allow (i) the Company to pay certain dividends to
Holding to fund Holding's payment of dividends on up to $25 million in
convertible preferred stock (the "Holding Preferred Stock") that Holding
proposes to issue and (ii) to allow Holding to pay cash dividends on the
Holding Preferred Stock, all in accordance with the provisions hereof.

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 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. Section 11.3 of the Agreement is amended by deleting the
period following clause (e) thereof and inserting in place thereof a
semi-colon and adding the following as clause (f) immediately following clause
(e) thereof:

"(f) Holding may invest proceeds from the Holding Preferred
Stock in the capital stock (common or preferred) of the Company."

2. Section 11.5 of the Agreement is amended by adding thereto
the following clauses (f) and (g) immediately following the existing clause
(e) of said Section 11.5 and preceding the final PROVISO appearing at the
end thereof:

<PAGE>

"(f) Holding may declare and pay, or set aside for payment,
regular stated dividends on shares of Holding Preferred Stock to
be issued by Holding in an aggregate amount not to exceed
$2,500,000 per year; and

(g) the Company may declare and pay cash dividends on its
capital stock (common or preferred) owned by Holding for the
purpose providing funds for Holding's payment of regular stated
dividends on the Holding Preferred Stock; provided that each such
dividend (i) must be paid not earlier than five business days
prior to the date on which Holding is required to pay, or set
aside for payment, a regular stated dividend on the Holding
Preferred Stock and (ii) must be in an amount not greater than the
amount payable by Holding as the regular stated dividend on the
Holding Preferred Stock being funded by such dividend paid by the
Company;"

3. Subsection 11.7 (b) of the Agreement is amended by deleting
the period following clause (v) thereof and inserting in place thereof
semicolon followed by the word "and" and adding the following as clause (vi)
immediately following said clause (v):

"(vi) Holding may make the Investment in the Company
permitted by clause (f) of Section 11.3 of this Agreement."

4. The amendments to the Agreement specified herein shall
become effective concurrently with the closing of the issuance and sale by
Holding of the Holding Preferred Stock.

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.

-2-
<PAGE>

IN WITNESS WHEREOF, the parties hereto have executed this
Amendment as of the date first written above.

ORCHARD SUPPLY HARDWARE CORPORATION,
a Delaware corporation

/s/Stephen M. Hilberg
--------------------------------------------
Stephen M. Hilberg, Chief Financial Officer

ATTEST:

By:/s/Michael Seda
--------------------------
Michael Seda, Secretary

ORCHARD SUPPLY HARDWARE STORES
CORPORATION (formerly, ORCHARD HOLDING
CORPORATION), a Delaware corporation

/s/Stephen M. Hilberg
--------------------------------------------
Stephen M. Hilberg, Chief Financial Officer

ATTEST:

By:/s/Michael Seda
--------------------------
Michael Seda, Secretary

TEACHERS INSURANCE AND ANNUITY
ASSOCIATION OF AMERICA

By:/s/Michael T. O'Kane
-----------------------------------------
Its: Managing Director-Private Placements
$13,721,000.00
-----------------------------------------
Principal Amount of Notes

ATTEST:

By:/s/M.E. Brennan
--------------------------

-3-

<PAGE>

Exhibit 10.12

THIRD AMENDMENT
TO
NOTE AGREEMENT

This Third Amendment to the Note Agreement (the "Amendment") is
entered into as of November 30, 1993, 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
and Second Amendment to Note Agreement dated as of November 23, 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 to allow Holding to redeem shares of convertible
preferred stock (the "Holding Preferred Stock") that Holding proposes to issue
to the extent such shares are put to Holding following a "change of control"
of Holding (as defined in the instrument governing the Holding Preferred
Stock).

NOW, THEREFORE, based upon the foregoing and in consideration of
the covenants, agreements and undertakings contained in this Amendment, the
parties hereto agree as follows:

1. Section 11.5 of the Agreement is amended by adding thereto
the following clause (h) immediately following the existing clause (g) of said
Section 11.5 and preceding the final PROVISO appearing at the end thereof:

"(h) Holding may repurchase and redeem shares of Holding
Preferred Stock put to it for redemption by holders thereof
following a "change of control" (as defined in the instrument
governing the Holding Preferred Stock), provided that nothing in
this clause (h) shall be deemed to permit the Company to make any
Restricted Junior Payment in furtherance of any such redemption by
Holding;"

<PAGE>

2. Attached hereto as Exhibit A is the proposed definition of
"Change of Control" to be applicable for the Holding Preferred Stock. Holding
and the Company agree that the percentage specifying the threshold ownership
of equity voting power that will constitute a Change of Control under said
definition shall not be reduced below 50% without the consent of at least
66-2/3% in aggregate principal amount of the Notes.

3. The amendments to the Agreement specified herein shall
become effective concurrently with the closing of the issuance and sale by
Holding of the Holding Preferred Stock.

4. 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

/s/Stephen M. Hilberg
---------------------------------------------
Stephen M. Hilberg, Chief Financial Officer

ATTEST:

By:/s/Michael Seda
--------------------------
Michael Seda, Secretary

-2-
<PAGE>

ORCHARD SUPPLY HARDWARE STORES
CORPORATION (formerly, ORCHARD HOLDING
CORPORATION), a Delaware corporation

/s/Stephen M. Hilberg
---------------------------------------------
Stephen M. Hilberg, Chief Financial Officer

ATTEST:

By:/s/Michael Seda
- -----------------------------
Michael Seda, Secretary
TEACHERS INSURANCE AND ANNUITY
ASSOCIATION OF AMERICA

By:/s/Edward L. Toy
------------------------------------------
Its: Director-Private Placements
$13,721,000
------------------------------------------
Principal Amount of Notes

ATTEST:

By:/s/M.E. Brennan
- -----------------------------

-3-

<PAGE>

Exhibit 10.13

FOURTH AMENDMENT
TO
NOTE AGREEMENT

This Fourth Amendment to the Note Agreement (the "Amendment") is
entered into as of January 19, 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.

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 added in Paragraph 4 of
the Second Amendment to Note Agreement) is hereby deleted in its entirety and
a new Section 11.20 replacing the same is added to the Agreement as follows:

"11.20 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

/s/Stephen M. Hilberg
-------------------------------------------
Stephen M. Hilberg, Chief Financial Officer

ATTEST:

By:/s/Michael Seda
-----------------------
Michael Seda, Secretary

-2-
<PAGE>

ORCHARD SUPPLY HARDWARE STORES
CORPORATION (formerly, ORCHARD HOLDING
CORPORATION), a Delaware corporation

/s/Stephen M. Hilberg
-------------------------------------------
Stephen M. Hilberg, Chief Financial Officer

ATTEST:

By:/s/Michael Seda
-----------------------
Michael Seda, Secretary
TEACHERS INSURANCE AND ANNUITY
ASSOCIATION OF AMERICA

By:/s/Edward L. Toy
----------------------------------------
Its: Director-Private Placements
----------------------------------------
Principal Amount of Notes

ATTEST:

By:/s/M.E. Brennan
-----------------------

-3-

<PAGE>

Exhibit 10.14

FIFTH AMENDMENT
TO
NOTE AGREEMENT

This Fifth Amendment to the Note Agreement (the "Amendment") is
entered into as of January 29, 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 and the Fourth
Amendment to Note Agreement dated as of January 19, 1994 (collectively, the
"Agreement") by and among the Company, Holding and Teachers pursuant to which
the Company's 10.64% Senior Secured Notes due May 31, 2002 (the "Notes") were
issued.

B. The purpose of this Amendment is to set forth the
understandings and agreements of the Company, Holding and Teachers with
respect to the following amendment of the provisions of the Agreement on the
conditions stated herein.

NOW, THEREFORE, based upon the foregoing and in consideration of
the covenants, agreements and undertakings contained in this Amendment, the
parties hereto agree as follows:

1. Section 11.06(a) of the Agreement is hereby amended by
deleting the following line appearing in the table set forth in said section
"Fourth Quarter Ending 01/94 1.10:1.00" and substituting therefor the
following:

"Fourth Quarter Ending 01/94 1.80:1.00".

2. The amendment to the Agreement specified herein shall become
effective as of the date specified above when executed by all of the parties
hereto.

3. All terms used herein without definition shall have the
meanings ascribed to them in the Agreement.

4. 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

<PAGE>

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

/s/Stephen M. Hilberg
---------------------------------------------
Stephen M. Hilberg, Chief Financial Officer
ATTEST:

By:/s/Michael Seda
-------------------------
Michael Seda, Secretary
ORCHARD SUPPLY HARDWARE STORES
CORPORATION (formerly, ORCHARD HOLDING
CORPORATION), a Delaware corporation

/s/Stephen M. Hilberg
---------------------------------------------
Stephen M. Hilberg, Chief Financial Officer
ATTEST:

By:/s/Michael Seda
-------------------------
Michael Seda, Secretary
TEACHERS INSURANCE AND ANNUITY
ASSOCIATION OF AMERICA

By:/s/Edward L. Toy
------------------------------------------
Its: Director-Private Placements
$13,721,000.00
------------------------------------------
Principal Amount of Notes
ATTEST:

By:
-------------------------

-2-

<PAGE>

Exhibit 10.18

The CIT Group/
Business Credit
3rd Floor
300 South Grand Avenue
Los Angeles, CA 90071
213 621-8300

July 30, 1993

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 as follows:

1. 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 not less than
$85,000,000.00 less the amount of any write-down on or after July
29, 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."

2. Subparagraph H in paragraph 10 of Section 6 of the Agreement
is hereby amended by deleting it in its entirety and substituting the
following in lieu thereof:

"H. Make any advance or loan to, or any investment in, any firm,
entity, person or corporation, except for (a) loans to employees
for costs and expenses relating to relocation of such employees
not to exceed $750,000.00 in the aggregate at any given time, and
(b) loans to employees to finance their purchase of stock in the
Company in an amount not to exceed x) fifty percent of the amount
of the stock so purchased by any individual employee, and y)
$250,000.00 in the aggregate in any fiscal year."

<PAGE>

3. The figure "$11,000,000.00" appearing in subparagraph b) of
paragraph 11 in Section 6 of the Agreement and the figure "$9,000,000.00"
appearing in subparagraph c) of paragraph 11 of Section 6 of the Agreement are
hereby deleted, and the figure "$15,000,000.00" is substituted in lieu
thereof.

4. Paragraph 12 of Section 6 of the Agreement is hereby amended
by deleting it in its entirety and substituting the following in lieu thereof:

"12. The Company shall have on the last day of each fiscal
quarter of the Company, Working Capital of not less than
$35,000,000.00."

5. 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 0.9 to 1."

6. The percentage "three and one-quarter percent (3-1/4%)"
appearing in subparagraph b) in paragraph 1 of Section 7 of the Agreement
relating to the LIBO Rate is hereby deleted and the following is substituted
in lieu thereof:

"two and three-quarters percent (2-3/4%)"

In consideration of the preparation by our in-house legal counsel of this
document you hereby agree to pay us a Documentation Fee of $390.00 and you
authorize us to charge your loan account with that sum effective immediately.

Except as set forth above, no other change is the terms or provisions of the
Agreement is intended or implied. If the

2.
<PAGE>

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 /s/ Edward R. Burns
------------------------------------------
Title: Assistant Secretary

Read and Agreed to:

ORCHARD SUPPLY HARDWARE CORPORATION

By /s/ Stephen M. Hilberg
----------------------------------
Title: Vice President-Finance

<PAGE>

Exhibit 10.19

The CIT Group/
Business Credit, Inc.
3000 South Grand Avenue
3rd Floor
Los Angeles, CA 90071
Tel: 213 621-8303
Fax: 213 621-8309

November 12, 1993

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 "Financing 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.

The Company has requested that CITBC amend the Financing Agreement to provide
for an additional revolving credit facility to be used by the Company to
purchase certain real property and operating leases from Builders Emporium,
and CITBC has agreed to provide such facility subject to, and in accordance
with, the provisions of this letter agreement.

Effective immediately upon fulfillment of the Amendment Condition Precedent
(as defined below) the Financing Agreement shall be, and hereby is, amended as
follows:

1. Section 1 of the Financing Agreement shall be, and hereby
is, amended as follows:

(a) the following definitions shall be, and each hereby
is, added to said Section in the proper alphabetical order:

"REVOLVING LOAN A shall mean the loans and advances made,
from time to time, to or for the account of the Company by
CITBC pursuant to Section 3, Paragraph 1(a) of this
Financing Agreement."

"REVOLVING LOAN B shall mean the loans and advances made,
from time to time, to or for the account of the Company by
CITBC pursuant to

<PAGE>

Section 3, Paragraph 1(b) of this Financing Agreement."

"REVOLVING LINE OF CREDIT A shall mean the commitment of
CITBC to make loans and advances pursuant to Section 3,
Paragraph 1(a) of this Financing Agreement to the Company in
the amount of $20,000,000."

"REVOLVING LINE OF CREDIT B shall mean the commitment of
CITBC to make loans and advances pursuant to Section 3,
Paragraph (b) of this Financing Agreement to the Company in
the amount of $20,000,000."

"CONDITION PRECEDENT TO REVOLVING LOAN B shall mean
CITBC's receipt of an opinion of counsel to the Company in
the form annexed hereto as Exhibit B prior to the extension
of any Revolving Loan B under Revolving Line of Credit B."

(b) the definitions of "Availability", "Interest Expense",
"Parent", "Permitted Encumbrances", "Permitted
Indebtedness", "Revolving Loans" and "Revolving Line of
Credit" shall be, and each hereby is, deleted in its
entirety and the following shall be, and hereby is, inserted
in lieu thereof:

"AVAILABILITY shall mean at any time the excess of the sum
of a) Eligible Accounts Receivable multiplied by the
percentage provided for in clause (i) of paragraph 1 (a) and
(b) of Section 3 of this Financing Agreement and b) Eligible
Inventory multiplied by the percentage provided for in
clause (ii) of paragraph 1 (a) and (b) of Section 3 of this
Financing Agreement less the sum of x) the outstanding
aggregate amount of all Obligations of the Company
(including, without limitation, all Obligations relating to
Revolving Loan A, Revolving Loan B and Letters of Credit),
y) the Availability Reserve, and z) at the sole discretion
of CITBC all payments of the Company to CITBC coming due
within sixty (60) days from the date of computation."

"INTEREST EXPENSE shall mean, for any period, interest
expense with respect to all outstanding Indebtedness, net of
any interest income, of Company for such period determined
on a consolidated basis in conformity with GAAP,

2.
<PAGE>

PROVIDED that Interest Expense shall not include any
closing costs associated with (x) this Financing Agreement
or Revolving Line of Credit B or (y) the closing of the
Senior Unsecured Debt and all prior deferred financing costs
and the amortization thereof."

"PARENT shall mean Orchard Supply Hardware Stores
Corporation."

"PERMITTED ENCUMBRANCES shall mean: i) liens expressly
permitted, or consented to, by CITBC, including but not
limited to the lien of General Electric Credit Corporation
on the Company's inventory of General Electric light bulbs;
ii) Purchase Money Liens; iii) Customarily Permitted Liens;
iv) liens granted CITBC by the Company; v) liens of judgment
creditors provided such liens do not exceed, in the
aggregate, at any time, $100,000.00 (other than liens bonded
or insured within 30 days after the attachment thereof to
the reasonable satisfaction of CITBC); vi) liens for taxes
not yet due and payable or which are being diligently
contested in good faith by the Company by appropriate
proceedings and which liens are not x) with respect to the
Collateral, senior to the liens of CITBC or y) for taxes due
the United States of America, vii) liens listed and
described on Exhibit C attached hereto, and viii) other than
with respect to the Collateral, liens in existence on the
date of execution of this Financing Agreement."

"PERMITTED INDEBTEDNESS shall mean: i) current
indebtedness maturing in less than one year and incurred in
the ordinary course of business for raw materials, supplies,
equipment, services, taxes or labor; ii) the indebtedness
secured by the Purchase Money Liens; iii) Subordinated Debt;
iv) indebtedness arising under the Letters of Credit and
this Financing Agreement; v) deferred taxes and other
expenses incurred in the ordinary course of business; vi)
other indebtedness existing on the date of execution of this
Financing Agreement and listed in the most recent financial
statement delivered to CITBC or otherwise disclosed to CITBC
in writing including but not limited to Senior Unsecured
Debt and Senior Secured Debt and the Subordinated Notes; and
vii) indebtedness not to exceed $1,100,000 in the aggregate
incurred in connection with the

3.
<PAGE>

acquisition of three (3) parcels of Real Estate and six (6)
Operating Leases from Builders Emporium."

"REVOLVING LOANS shall mean Revolving Loan A and Revolving
Loan B."

"REVOLVING LINE OF CREDIT shall mean the combined
commitments of CITBC with respect to Revolving Line of
Credit A and Revolving Line of Credit B."

A copy of Exhibit C referred to in the above definition of
"Permitted Encumbrances" shall be annexed hereto and attached to
the Financing Agreement as Exhibit C thereto.

2. Section 3, Paragraph 1 of the Financing Agreement shall be,
and hereby is, deleted and the following shall be, and hereby
is, inserted in lieu thereof:

"1. (a) CITBC agrees, subject to the terms and conditions of
this Financing Agreement from time to time, and within x)
the Availability and y) Revolving Line of Credit A, but
subject to CITBC's right to make "overadvances", to make
loans and advances to the Company on a revolving basis (i.e.
subject to the limitations set forth herein, the Company may
borrow, repay and re-borrow such Revolving Loans). Such
loans and advances shall be in amounts up to the sum of: i)
seventy-five percent (75%) of the outstanding Eligible
Accounts Receivable of the Company, and ii) fifty percent
(50%) of the aggregate value of Eligible Inventory of the
Company as determined at the lower of cost or market using a
valuation on a first in, first out basis in accordance with
GAAP less the outstanding balance of Revolving Loan B.

(b) CITBC agrees, subject to the terms and conditions of
this Financing Agreement from time to time, and within x)
the Availability and y) Revolving Line of Credit B, but
subject to the fulfillment to CITBC's satisfaction of the
Condition Precedent to Revolving Loan B, and CITBC's right
to make "overadvances", to make loans and advances to the
Company on a revolving basis (i.e. subject to the
limitations set forth herein, the Company may borrow, repay
and re-borrow such Revolving Loans). Such loans and
advances shall be in amounts up to the sum of: i)
seventy-five percent (75%) of the outstanding

4.
<PAGE>

Eligible Accounts Receivable of the Company, and ii) fifty
percent (50%) of the aggregate value of Eligible Inventory
of the Company as determined at the lower of cost or market
using a valuation on a first in, first out basis in
accordance with GAAP less the outstanding balance of
Revolving Loan A.

(c) All requests for loans and advances under
subparagraphs (a) and (b) above must (i) specify whether a
request is being made under Revolving Line of Credit A or
Revolving Line of Credit B, (ii) be received by an officer
of CITBC no later than 10:00 a.m., California time, of the
day on which such loans and advances are required. Should
CITBC for any reason honor requests for advances in excess
of the limitations set forth herein, such advances shall be
considered "overadvances" and shall be made in CITBC's sole
discretion, subject to any additional terms CITBC deems
necessary."

3. Section 3, Paragraph 6 of the Financing Agreement shall be,
and hereby is, deleted and the following shall be, and
hereby is inserted in lieu thereof.

6(a) CITBC shall maintain a separate account on its books in
the Company's name in which the Company will be charged with
loans and advances made by CITBC to it or for its account
under Revolving Line of Credit A (herein "Revolving Loan
Account A").

(b) CITBC shall maintain a separate account on its books
in the Company's name in which the Company will be charged
with loans and advances made by CITBC to it or for its
account under Revolving Line of Credit B (herein "Revolving
Loan Account B").

(c) In addition, CITBC may, in its sole discretion charge
Revolving Loan Account A and/or Revolving Loan Account B (in
any order or proportion as CITBC may determine) with any
other Obligations, including any and all costs, expenses and
reasonable attorney's fees which CITBC may incur in
connection with the exercise by or for CITBC of any of the
rights or powers herein conferred upon CITBC, or in the
prosecution or defense of any action or proceeding to
enforce or protect any rights of CITBC in connection with
this Financing Agreement or the Collateral

5.
<PAGE>

assigned hereunder, or any Obligations owing to CITBC by the
Company. Notwithstanding the foregoing, prior to the
occurrence of any Default or Event of Default hereunder
CITBC shall make all such charges to Revolving Loan Account
A unless x) CITBC is requested by the Company, in writing,
to make charges to Revolving Loan Account B or y) there is
insufficient availability under Revolving Loan Account A,
provided that CITBC's failure to make such charges to
Revolving Loan Account A shall not effect the Company's
obligations to CITBC with respect to any amount charged to
Revolving Loan Account B. The Company will be credited with
all amounts received by CITBC from the Company or from
others for the Company's account, including, as above set
forth, all amounts received by CITBC in payment of assigned
Accounts (herein collectively "Payments") and, subject to
the provisions of subparagraph (d) below, such Payments may
be applied to payment of the Obligations by CITBC in any
order or proportion as between Revolving Loan Accounts A and
B as CITBC in its sole discretion may determine. In no event
shall prior recourse to any Accounts or other security
granted to or by the Company be a prerequisite to CITBC's
right to demand payment of any Obligation. Further, it is
understood that CITBC shall have no obligation whatsoever to
perform in any respect any of the Company's contracts or
obligations relating to the Accounts.

(d) Notwithstanding any provision to the contrary
contained herein, prior to the occurrence of a Default
and/or Event of Default hereunder all such Payments shall be
applied first to Revolving Loan Account A unless the Company
requests CITBC, in writing, to apply such payment to
Revolving Loan B. In addition, in the event that such
Payments received prior to the occurrence of a Default
and/or Event of Default exceed the outstanding balance of
Revolving Loan Account A, and clause (e) hereof does not
then apply, such Payments will not be applied against any of
the Company's other Obligations and will be disbursed to the
Company in accordance with the Company's instructions to
CITBC.

(e) In the event that the sum of (i) the outstanding
balance of Revolving Loan A, (ii) the outstanding balance of
Revolving Loan B and (iii)

6.
<PAGE>

the outstanding aggregate amount of all Letters of Credit
exceeds the sum computed pursuant to clauses "a)" and "b)"
of the definition of Availability hereunder, the Company
shall be required to immediately make a mandatory prepayment
of the outstanding Obligations under this Financing
Agreement in the amount of such excess, and until CITBC's
receipt of payment in the amount of such excess CITBC may,
at its option, apply Payments to the Company's Obligations
in the following order:

(A) First, to Revolving Loan Account A;
(B) Second, to Revolving Loan Account B;
(C) Finally, to any other Obligations hereunder until such
time as the credit facilities hereunder are back into
formula.

4. The first sentence of Section 4, Paragraph 1 of the
Financing Agreement shall be, and hereby is, deleted and the
following shall be, and hereby is, inserted in lieu thereof:

"1. Within Revolving Line of Credit A, CITBC shall assist
the Company in obtaining documentary and standby Letters of
Credit in an amount not to exceed $8,000,000 in the
aggregate outstanding at any one time."

5. Section 6, Paragraph 11 of the Financing Agreement shall be,
and hereby is, deleted and following shall be, and hereby
is, inserted in lieu thereof:

"11. Without the prior written consent of CITBC, the
Company will not: a) enter into Operating Lease if after
giving effect thereto the aggregate obligations with respect
to Operating Leases of the Company during any fiscal year
would exceed four and one-half percent (4-1/2%) of the
company's net sales for the fiscal year immediately
preceding the year in which such Operating Lease is entered
into, 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) $5,500,000.00 for the fiscal year ending January 31,
1993;

7.
<PAGE>

b) $40,000,000.00 for the fiscal year ending January 30,
1994;
c) $20,000,000.00 for the fiscal year ending January 29,
1995;
d) $9,000,000.00 for the fiscal year ending January 29,
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. Section 7, Paragraph 1 of this Financing Agreement shall be,
and hereby is, deleted and the following shall be, and
hereby is, inserted in lieu thereof:

"1. (a) Interest on Revolving Loan A shall be payable
monthly as of the end of each month and shall be an amount
equal to, at the election of the Company, as set forth
below, i) seven percent (7%) per annum or ii) at a rate
equal to two and three-quarters percent (2-3/4%) above the
applicable LIBO Rate, in each instance on the average of the
net balances owing by the Company to CITBC in the Company's
Revolving Loan Account A at the close of each day during
such month. The rate of interest under i) above is based on
the six percent (6%) per annum Chemical Bank Rate as of
November 1, 1993. In the event of any change in said
Chemical Bank Rate, the rate hereunder shall change, as of
the first of the month following any change, so as to remain
one percent (l%) above the Chemical Bank Rate.

(b) Interest on Revolving Loan B shall be payable monthly
as of the end of each month and shall be an amount equal to,
at the election of the Company, as set forth below, i) seven
percent (7%) per annum or ii) at a rate equal to two and
three-quarters percent (2-3/4%) above the applicable LIBO
Rate, in each instance on the average of the net balances
owing by the Company to CITBC in the Company's Revolving
Loan Account B at the close of each day during such month.
The rate of interest under i) above is based on the

8.
<PAGE>

six percent (6%) per annum Chemical Bank Rate as of November
1, 1993. In the event of any change in said Chemical Bank
Rate, the rate hereunder shall change, as of the first of
the month following any change, so as to remain one percent
(1%) above the Chemical Bank Rate.

(c) The rates hereunder shall be calculated based on a
365-day year. CITBC shall be entitled to charge the
Company's accounts at the rates provided for herein when due
until all Obligations have been paid in full."

7. The computation of the Revolving Line of Credit Fee and any
Early Termination Fee shall be made based upon both
Revolving Line of Credit A and B and Revolving Loan A and B.
CITBC is entitled to charge the Company the Early
Termination Fee in the Event the Company terminates
Revolving Line of Credit A or this Financing Agreement prior
to the second year from the date of the Financing Agreement.

8. The effectiveness of the foregoing amendments shall be
subject to CITBC's receipt of an opinion of the Company's
counsel in the form annexed hereto (herein the "Amendment
Condition Precedent"), a copy of which opinion shall be
attached to the Financing Agreement as Exhibit B thereto.

9. It is further agreed that:

(a) The term "Obligation" as used in the Financing
Agreement shall also include without limitation all present
and future indebtedness, liabilities and obligations of the
Company to CITBC arising under Revolving Line of Credit B
and/or in connection with Revolving Loan B (herein the
"Revolving Loan B Obligations").

(b) All of said Revolving Loan B Obligations shall be, and
hereby are, secured by all Collateral under the Financing
Agreement.

(c) All Revolving Loan B Obligations are senior in right
of payment to the Subordinated Notes issued pursuant to the
Subordinated Note Indenture and shall constitute Senior
Indebtedness and Specified Senior Indebtedness under the
Subordinated Note Indenture.

9.
<PAGE>

(d) You shall pay us (i) an Amendment Fee equal to $97,660
to induce us to enter into this letter agreement and (ii) a
Documentation Fee equal to $2,340 to compensate us for the
use of our in-house legal department in the preparation of
this letter agreement and all documents contemplated hereby.
Such fees may, at our option, be charged to your accounts on
the date hereof.

(e) The Parent by signing below hereby confirms its
consent to the foregoing and its agreement that the term
"Obligations" as used in the Guaranty executed by the Parent
dated October 29, 1992, as amended (the "Parent Guaranty")
shall also include, without limitation, the Revolving Loan B
Obligations (as defined above).

Except as set forth herein no other change in the terms or provisions of the
Financing 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.

THE CIT GROUP/BUSINESS CREDIT, INC.

By:/s/ Jeffrey Simon
------------------------------------------
Title: Vice President

Read and Agreed to:

ORCHARD SUPPLY HARDWARE CORPORATION

By:/s/ Stephen M. Hilberg
-------------------------------------
Title: Vice President-Finance

Consent Confirmed and
Parent Guaranty reaffirmed as set forth above
ORCHARD SUPPLY HARDWARE STORES CORPORATION
F/K/A ORCHARD HOLDING CORPORATION

By:/s/ Stephen M. Hilberg
-------------------------------------
Title: Vice President-Finance

10.
<PAGE>

EXHIBIT C

1. Deed of Trust dated November 10, 1993, by and between
American Property Investors IX, a limited partnership, Trustor, and American
United Life Insurance Company, an Indiana corporation, Beneficiary, and
Chicago Title Insurance Company, Trustee. Said Deed of Trust recorded
November 12, 1980, as Instrument Number 80-1132729.

2. Deed of Trust dated November 24, 1981, by and between Ram
Realty Associates, a New York partnership, Trustor, and American Property
Investors IX, a California limited partnership, Beneficiary, and Daniel N.
Davis, Trustee. Said Deed of Trust recorded November 30, 1981, as Instrument
No. 80-1132720. There is no current indebtedness outstanding on this
obligation.

11.

<PAGE>

Exhibit 10.20

The CIT Group/
Business Credit
3rd Floor
300 South Grand Avenue
Los Angeles, CA 90071
213 621-8300

November 24, 1993

Orchard Supply Hardware Corporation
6450 Via Del Oro
San Jose, California 95161

Gentlemen:

You have advised us that Orchard Supply Hardware Stores Corporation intends to
issue approximately $25,000,000 in preferred stock ("Preferred Stock") with
the proceeds of such issue to be used to retire the $19,322,000 existing
balance outstanding under the Subordinated Note Indenture (herein the
"Subordinated Debt Paydown").

Pursuant to mutual understanding, effective upon the Subordinated Debt
Paydown, the Agreement is hereby amended as follows:

1. Section 1 of the Financing Agreement shall be, and hereby is,
amended by the addition thereto of the following definition:

"PREFERRED STOCK shall mean the preferred stock issued by the
Parent for approximately $25,000,000 cash."

2. Subparagraph G of Paragraph 10 of Section 6 of the Agreement
is hereby amended by inserting at the end thereof the following
clause c):

"c) pay dividends to the holders of the Preferred Stock in an
aggregate amount for each fiscal year not to exceed the lesser of
i) $2,000,000, or ii) the amount calculated at the per annum
Preferred Stock coupon rate provided that x) the Company is not
then in breach or violation of this Financing Agreement, or y)
after giving effect to such payment, no Event of Default has
occurred hereunder; or"

Except as set forth above, no other change in the terms or provisions of the
Agreement is intended or implied. If the

<PAGE>

foregoing is in accordance with your understanding of our agreement, kindly so
indicate by signing and returning the enclose copy of this letter.

Very truly yours,

THE CIT GROUP/BUSINESS CREDIT, INC.

By /s/ Edward R. Burns
------------------------------------------
Title: Assistant Secretary

Read and Agreed to:

ORCHARD SUPPLY HARDWARE CORPORATION

By /s/ Stephen M. Hilberg
--------------------------------
Title: Vice President

Consent Confirmed and
Parent Guaranty reaffirmed as set forth above
ORCHARD SUPPLY HARDWARE STORES CORPORATION
F/K/A ORCHARD HOLDING CORPORATION

By /s/ Stephen M. Hilberg
--------------------------------
Title: Vice President

<PAGE>

Exhibit 10.21

The CIT Group/Business Credit
3rd Floor
300 South Grand Avenue
Los Angeles, CA 90071
Tel: (213) 613-2575
Fax: (213) 613-2588

January 14, 1994

Orchard Supply Hardware Corporation
6450 Via Del Oro
San Jose, California 95161

Gentlemen:

Pursuant to mutual understanding, the Agreement is hereby amended 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:

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:

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; c) $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 each 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:

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 /s/ Edward R. Burns
------------------------------------------
Title: Assistant Secretary

Read and Agreed to:

ORCHARD SUPPLY HARDWARE CORPORATION

By /s/ Stephen M. Hilberg
--------------------------------
Title: Vice President

Consent Confirmed and
Parent Guaranty reaffirmed as set forth above
ORCHARD SUPPLY HARDWARE STORES CORPORATION
F/K/A ORCHARD HOLDING CORPORATION

By /s/ Stephen M. Hilberg
--------------------------------
Title: Vice President

<PAGE>

Exhibit 10.22
The CIT Group/
Business Credit
3rd Floor
300 South Grand Avenue
Los Angeles, CA 90071
213 621-8300

As of January 29, 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 as follows:

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:

Fiscal Period Ending Ratio
-------------------- -----

January 31, 1994 1.85 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"

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

<PAGE>

agreement, kindly so indicate by signing and returning the enclosed copy of this
letter.

Very truly yours,

THE CIT GROUP/BUSINESS CREDIT, INC.

By /s/ Edward R. Burns
--------------------------------
Title: Assistant Secretary

Read and Agreed to:

ORCHARD SUPPLY HARDWARE CORPORATION

By /s/ Stephen M. Hilberg
--------------------------------
Title: Vice President-Finance

<PAGE>
Exhibit 10.41

ORCHARD SUPPLY HARDWARE STORES CORPORATION

1993 STOCK OPTION PLAN

SECTION 1. DESCRIPTION OF PLAN. This is the 1993 Stock Option Plan,
dated November 19, 1993 (the "Plan"), of Orchard Supply Hardware Stores
Corporation, a Delaware corporation (the "Company"). Under the Plan, officers
and key employees of the Company or any of the directly or indirectly owned
subsidiaries of the Company (individually, a "Subsidiary," and collectively, the
"Subsidiaries"), to be selected as set forth below, may be granted options
("Options") to purchase shares of the common stock of the Company ("Common
Stock"). The Plan permits the granting of both Options that qualify for treat-
ment as incentive stock options ("Incentive Stock Options") under Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code") and Options that do
not qualify as Incentive Stock Options ("Nonqualified Stock Options").

SECTION 2. PURPOSE OF PLAN. The purpose of the Plan and of granting
Options to specified persons is to further the growth, development and financial
success of the Company and its Subsidiaries by providing additional incentives
to certain officers and key employees. By assisting such persons in acquiring
shares of the Company's Common Stock, the Company can ensure that such persons
will themselves benefit directly from the Company's and the Subsidiaries'
growth, development and financial success.

SECTION 3. ELIGIBILITY. The persons who shall be eligible to receive
grants of Options under the Plan shall be, at the time of the grant, the
officers and key employees of the Company and the Subsidiaries, including those
Directors of the Company and the Subsidiaries who are also officers and key
employees. Notwithstanding the foregoing in this Section 3, only officers and
key employees who do not own capital stock possessing more than ten percent
(10%) of the total combined voting power or value of all classes of capital
stock of the Company or any Subsidiary shall be eligible to receive grants of
Options. A person who holds an Option is herein referred to as a "Participant."
More than one Option may be granted to any Participant, grants of Options may be
made on more than one occasion to any Participant and any individual Participant
may receive grants of Options up to the maximum number of shares of Common Stock
in respect of which Options may be granted under Section 5 hereof. Such grants
of Options under the Plan may include an Incentive Stock Option, Nonqualified
Stock Option, or any combination thereof. Notwithstanding the foregoing, the
Board of Directors of the Company (the "Board") may at any time or from time to
time designate one or more Directors as

<PAGE>

ineligible for selection as a Participant under the Plan for any period or
periods of time. The designation by the Board of a Director as ineligible for
selection as a Participant under the Plan shall not affect Options previously
granted to such Director under the Plan.

SECTION 4. ADMINISTRATION. The Plan shall be administered by the
Compensation Committee (the "Committee") established by the Board and composed
of not less than two (2) members of the Board, none of whom shall be eligible
for selection as Participants under the Plan. The Committee shall be
constituted so as to permit the Plan to comply with the provisions of Rule 16b-3
("Rule 16b-3") under the Securities Exchange Act of 1934 (the "Exchange Act").
The Committee shall meet at such times and places as it determines and may meet
through a telephone conference call. A majority of its members shall constitute
a quorum, and the decision of a majority of those present at any meeting at
which a quorum is present shall constitute the decision of the Committee. A
memorandum signed by all the members of the Committee shall constitute the deci-
sion of the Committee without necessity, in such event, for holding an actual
meeting. The Committee is authorized and empowered to administer the Plan and,
subject to the Plan (a) to select the Participants, to specify the number of
shares of Common Stock with respect to which Options are granted to each
Participant, to specify the terms of the Options and whether such Options shall
be Incentive Stock Options or Nonqualified Stock Options, and in general to
grant Options; (b) to determine the dates upon which Options shall be granted
and the terms and conditions thereof in a manner consistent with the Plan, which
terms and conditions need not be identical as to the various Options granted;
(c) to interpret the Plan; (d) to prescribe, amend and rescind rules relating to
the Plan; (e) to authorize any person to execute on behalf of the Company any
instrument required to effectuate the grant of an Option previously granted by
the Committee; (f) to determine the rights and obligations of Participants under
the Plan; (g) to specify the Option Price (as hereinafter defined); (h) to
accelerate the time during which an Option may be exercised, including, but not
limited to, upon a change of control of the Company, and to otherwise accelerate
the time during which an Option may be exercised, in each case notwithstanding
the provisions in the Option Agreement (as defined in Section 13) stating the
time during which it may be exercised; and (i) to make all other determinations
deemed necessary or advisable for the administration of the Plan. The
interpretation and construction by the Committee of any provision of the Plan or
of any Option granted under it shall be final, conclusive and binding. No
member of the Committee shall be liable for any action or determination made in
good faith with respect to the Plan or any Option granted under it.

2.
<PAGE>

SECTION 5. SHARES SUBJECT TO THE PLAN. The number of shares of Common
Stock in respect of which Options may be granted under the Plan shall not
initially exceed 350,000 shares. This amount shall increase by one percent (1%)
of the total issued and outstanding shares of Common Stock on the first day of
each subsequent calendar year commencing January 1, 1995. All of the amounts
stated in this Section 5 are subject to adjustment as provided in Section 12
hereof. Upon the expiration or termination, in whole or in part, for any reason
of an outstanding Option or any portion thereof which shall not have vested or
shall not have been exercised in full, any shares of Common Stock then remaining
unissued which shall have been reserved for issuance upon such exercise shall
again become available for the granting of additional Options under the Plan.

SECTION 6. OPTION PRICE. The purchase price per share (the "Option
Price") of the shares of Common Stock underlying each Option shall be determined
by the Committee, and shall be subject to adjustment as provided in Section 12
hereof.

SECTION 7. RESTRICTIONS ON GRANTS; VESTING OF OPTIONS. Notwithstanding
any other provisions set forth herein or in any Option Agreement, no Options may
be granted under the Plan subsequent to ten (10) years from November 19, 1993.
All Options granted pursuant to the Plan shall be granted pursuant to Option
Agreements, as described in Section 13 hereof. Vesting shall be determined by
the Committee.

SECTION 8. SPECIAL LIMITATIONS ON INCENTIVE STOCK OPTIONS. To the
extent that the aggregate fair market value (determined at the time the
respective Incentive Stock Option is granted) of Common Stock with respect to
which Incentive Stock Options are exercisable for the first time by a
Participant during any calendar year under all incentive stock option plans of
the Company and its Subsidiaries exceeds $100,000, or such other limit as may be
required by the Code, such excess Incentive Stock Options shall be treated as
Nonqualified Stock Options. The Committee shall determine, in accordance with
applicable provisions of the Code, Treasury Regulations and other administrative
pronouncements, which of a Participant's Incentive Stock Options will not
constitute Incentive Stock Options because of such limitation and shall notify
the Participant of such determination as soon as practicable after such
determination. In no event shall the Option Price of the shares underlying each
Incentive Stock Option be less than the fair market value of such shares at the
time the Incentive Stock Option is granted. The fair market value of such
shares shall be determined in good faith by the Committee.

<PAGE>

SECTION 9. EXERCISE OF OPTIONS. Once vested, an Option may be exer-
cised by the Participant by giving written notice to the Company specifying the
number of full shares to be purchased and accompanied by payment of the full
purchase price therefor in cash, by check or in such other form of lawful
consideration as the Committee may approve from time to time, including, without
limitation and in the sole discretion of the Committee, the assignment and
transfer by the Participant to the Company of outstanding shares of Common Stock
theretofore held by the Participant in a manner intended to comply with the
provisions of Rule 16b-3. In connection with such assignment and transfer, the
Company shall have the right to deduct any fractional shares to be paid to the
Participant. Once vested, an Option may only be exercised by the Participant or
in the event of death of the Participant, by the person or persons (including
the deceased Participant's estate) to whom the deceased Participant's rights
under such Option shall have passed by will or the laws of descent and
distribution. Notwithstanding the foregoing in the immediately preceding
sentence, in the event of disability (within the meaning of Section 22(e)(3) of
the Code) of a Participant, a designee, or if the Participant has no designee,
the legal representative, of such Participant may exercise the Option on behalf
of such Participant (provided such Option would have been exercisable by such
Participant) until the right to exercise such Option expires, as set forth in
each particular Option Agreement. No Option granted to a person subject to
Section 16 of the Exchange Act shall be exercisable during the first
six (6) months after the date such Option is granted.

SECTION 10. ISSUANCE OF COMMON STOCK. The Company's obligation to issue
shares of its Common Stock upon exercise of an Option is expressly conditioned
upon the compliance by the Company with any registration or other qualification
obligations with respect to such shares under any state or federal law or
rulings and regulations of any government regulatory body and the making of such
investment representations or other representations and undertakings by the
Participant (or the Participant's legal representative, heir or legatee, as the
case may be) in order to comply with the requirements of any exemption from any
such registration or other qualification obligations with respect to such shares
which the Company in its sole discretion shall deem necessary or advisable.
Such required representations and undertakings may include representations and
agreements that such Participant (or the Participant's legal representative,
heir or legatee): (a) is purchasing such shares for investment and not with any
present intention of selling or otherwise disposing of such shares; and
(b) agrees to have a legend placed upon the face and reverse of any certificates
evidencing such shares (or, if applicable, an appropriate data entry made in the
ownership records of the Company) setting forth

<PAGE>

(i) any representations and undertakings which such Participant has given to the
Company or a reference thereto, and (ii) that, prior to effecting any sale or
other disposition of any such shares, the Participant must furnish to the
Company an opinion of counsel, satisfactory to the Company and its counsel, to
the effect that such sale or disposition will not violate the applicable
requirements of state and federal laws and regulatory agencies; provided,
however, that any such legend or data entry shall be removed when no longer
applicable. The Company, during the term of the Plan, will at all times reserve
and keep available, and will use its reasonable efforts to obtain from any
regulatory body having jurisdiction any requisite authority in order to issue
and sell such number of shares of Common Stock as shall be sufficient to satisfy
the requirements of the Plan. Inability of the Company to obtain, from any
regulatory body having jurisdiction, authority reasonably deemed by the
Company's counsel to be necessary for the lawful issuance and sale of any shares
hereunder shall relieve the Company of any liability in respect of the
nonissuance or sale of such shares as to which such requisite authority shall
not have been obtained.

SECTION 11. NONTRANSFERABILITY. An Option may not be sold, pledged,
assigned, hypothecated, transferred or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised during the
lifetime of the Participant only by such Participant, subject to the provisions
of Section 9 hereof.

SECTION 12. ADJUSTMENTS UPON CAPITALIZATION AND CORPORATE CHANGES.
Subject to Section 15(b) hereof, if the outstanding shares of the Common Stock
of the Company are changed into, or exchanged for, a different number or kind of
shares or securities of the Company through reorganization, merger,
recapitalization or reclassification, or if the number of outstanding shares is
changed through a stock split, stock dividend, stock consolidation or like
capital adjustment, or if the Company makes a distribution in partial
liquidation or any other comparable extraordinary distribution with respect to
its Common Stock, an appropriate adjustment shall be made by the Committee in
the number, kind or Option Price of shares as to which Options may be granted.
A corresponding adjustment shall likewise be made in the number, kind or Option
Price of shares with respect to which unexercised Options have theretofore been
granted. Any such adjustment in an outstanding Option, however, shall be made
without change in the total price applicable to the unexercised portion of the
Option but with a corresponding adjustment in the price for each share covered
by the Option. In making such adjustments, or in determining that no such
adjustments are necessary, the Committee may rely upon the advice of counsel and
accountants to the Company, and the good faith determination of

<PAGE>

the Committee shall be final, conclusive and binding. No fractional shares of
stock shall be issued under the Plan on account of any such adjustment.

SECTION 13. OPTION AGREEMENT. Each Option granted under the Plan shall
be evidenced by a written stock option agreement ("Option Agreement") executed
by the Company and the Participant which (a) shall contain each of the
provisions and agreements herein specifically required to be contained therein;
and (b) may contain such other terms and conditions as the Committee deems
desirable and which are not inconsistent with the Plan.

SECTION 14. RIGHTS AS A STOCKHOLDER. A Participant shall have no rights
as a stockholder with respect to any shares covered by an Option until the date
of the issuance of a stock certificate to the Participant for such shares. No
adjustment shall be made for dividends (ordinary or extraordinary, whether in
cash, securities or other property) or distributions or other rights for which
the record date is prior to the date such stock certificate is issued, except as
expressly provided in Section 12 hereof.

SECTION 15. TERMINATION OF OPTIONS.

(a) Each Option granted under the Plan shall set forth a termination date
thereof, which shall be not later than ten (10) years from the date such Option
is granted subject to earlier termination or forfeiture as set forth in
Section 27 hereof, Section 15(b) below, or as otherwise set forth in each
particular Option Agreement.

(b) Upon the dissolution, liquidation or sale of all or substantially all
of the business, properties and assets of the Company, or upon any
reorganization, merger or consolidation in which the Company does not survive,
or upon any reorganization, merger or consolidation in which the Company does
survive and the Company's stockholders have the opportunity to receive cash,
securities of another corporation or other property in exchange for their
capital stock of the Company, the Plan and each outstanding Option shall
terminate; provided that in such event (i) each Participant who is not tendered
an option by the surviving corporation in accordance with all of the terms of
clause (ii) immediately below or who does not accept any such substituted option
which is so tendered, shall have the right until ten (10) days before the
effective date of such dissolution, liquidation, reorganization, merger or
consolidation to exercise, in whole or in part, any unexpired Option or Options
issued to the Participant to the extent that said Option is then vested and
exercisable pursuant to the provisions of said Option or Options and of
Section 9 of the Plan; or (ii) in its sole and

<PAGE>

absolute discretion, the surviving corporation in any reorganization, merger or
consolidation may, but shall not be so obligated to, tender to any Participant
an option or options to purchase shares of the surviving corporation, and such
new option or options shall contain such terms and provisions as shall be
required to substantially preserve the rights and benefits of any Option then
outstanding under the Plan and, if accepted by such Participant, such new option
shall replace the Option under the Plan.

SECTION 16. WITHHOLDING OF TAXES. The Company, or a Subsidiary, as the
case may be, may deduct and withhold from the wages, salary, bonus and other
income paid by the Company or such Subsidiary to the Participant the requisite
tax upon the amount of taxable income, if any, recognized by the Participant in
connection with the exercise in whole or in part of any Option, or the sale of
Common Stock issued to the Participant upon the exercise of an Option, as may be
required from time to time under any federal or state tax laws and regulations.
This withholding of tax shall be made from the Company's (or such Subsidiary's)
concurrent or next payment of wages, salary, bonus or other income to the
Participant or by payment to the Company (or such Subsidiary) by the Participant
of the required withholding tax, as the Committee may determine. The Company
may permit the Participant to elect to surrender, or authorize the Company to
withhold, shares of Common Stock (valued at their fair market value on the date
of surrender or withholding of such shares) in satisfaction of the Company's
withholding obligation, subject to such restrictions as the Committee deems
necessary to satisfy the requirements of Rule 16b-3. However, no fractional
shares of Common Stock shall be delivered, nor shall any cash in lieu of
fractional shares be paid, by the Company. The Company shall have the right to
deduct fractional shares to be paid to the Participant as a result of such
surrender or withholding of shares.

SECTION 17. EFFECTIVENESS AND TERMINATION OF PLAN. The Plan shall be
effective on the date on which it is adopted by the Board, provided the Plan is
approved by the stockholders of the Company within twelve (12) months of
November 19, 1993 and on or prior to the date of the first annual meeting of
stockholders of the Company held subsequent to the acquisition of an equity
security by a Participant hereunder for which exemption is claimed under
Rule 16b-3. Notwithstanding any provision of the Plan or in any Option
Agreement, no Option shall be exercisable prior to such stockholder approval.
The Plan shall terminate at the earliest of the time when all shares of Common
Stock which may be issued hereunder have been so issued, or at such time as set
forth in Section 15(b) hereof; provided, however, that the Board may in its sole
discretion terminate the Plan at any other

<PAGE>

time. Unless earlier terminated by the Board, the Plan shall terminate on
November 19, 2003. Subject to Section 15(b) hereof, no such termination shall
in any way affect any Option then outstanding.

SECTION 18. TIME OF GRANTING OPTIONS. The date of grant of an Option
shall, for all purposes, be the date on which the Committee makes the deter-
mination granting such Option. Notice of the determination shall be given to
each Participant to whom an Option is so granted within a reasonable time after
the date of such grant.

SECTION 19. AMENDMENT OF PLAN. The Committee may make such amendments
to the Plan as it shall deem advisable. However, to the extent restricted by
Rule 16b-3, the Committee may not, without approval of the stockholders, make
any amendment that would (a) increase the aggregate number of shares of Common
Stock that may be issued under the Plan (except for adjustments pursuant to
Section 12 hereof), (b) materially modify the requirements as to eligibility for
participation in the Plan, or (c) materially increase the benefits accruing to
Participants under the Plan.

SECTION 20. TRANSFERS AND LEAVES OF ABSENCE. For purposes of the Plan,
(a) a transfer of a Participant's employment, without an intervening period,
between the Company and a Subsidiary shall not be deemed a termination of em-
ployment and (b) a Participant who is granted in writing a leave of absence
shall be deemed to have remained in the employ of the Company (or a Subsidiary,
whichever is applicable) during such leave of absence.

SECTION 21. NO OBLIGATION TO EXERCISE OPTION. The granting of an Option
shall impose no obligation on the Participant to exercise such Option.

SECTION 22. INDEMNIFICATION. In addition to such other rights of
indemnification as they may have as Directors, the members of the Board or
Committee shall be indemnified by the Company to the fullest extent permitted by
law against the reasonable expenses, including attorneys' fees, actually and
necessarily incurred in connection with the defense of any action, suit or
proceeding, or in connection with any appeal therein, to which they or any of
them may be a party by reason of any action taken or failure to act under or in
connection with the Plan or any Option granted thereunder, and against all
amounts paid by them in satisfaction of a judgment in any such action, suit or
proceeding, except in relation to matters as to which it shall be adjudged in
such action, suit or proceeding that such Board or Committee member is liable
for negligence or

<PAGE>

misconduct in the performance of his or her duties; provided that within
sixty (60) days after institution of any such action, suit or proceeding such
Board or Committee member shall in writing offer the Company the opportunity, at
the Company's expense, to handle and defend the same.

SECTION 23. GOVERNING LAW. The Plan and any Option granted pursuant to
the Plan shall be construed under and governed by the laws of the State of
California without regard to conflict of law provisions thereof except to the
extent that it implicates matters which are the subject of the General
Corporation Law of the State of Delaware which matters shall be governed by the
latter law.

SECTION 24. FINANCIAL INFORMATION. The Company shall provide
Participants whose duties in connection with the Company would not assure access
to financial information of the Company with annual financial information
pertaining to the Company subject to the ability of the Company to exclude line
items, such as research and development expenses, that the Committee determines
the disclosure of which to third parties may have material adverse consequences
to the Company.

SECTION 25. NOT AN EMPLOYMENT AGREEMENT. Nothing contained in the Plan
or in any Option Agreement shall confer, intend to confer or imply any rights of
employment or rights to continued employment by the Company or any Subsidiary in
favor of any Participant or limit the ability of the Company or any Subsidiary
to terminate, with or without cause, in its sole and absolute discretion, the
employment of any Participant, subject to the terms of any written employment
agreement to which a Participant is a party.

SECTION 26. RULE 16b-3. It is intended that the Plan and any grant of
an Option made to a person subject to Section 16 of the Exchange Act meet all of
the requirements of Rule 16b-3. If any provision of the Plan or any such grant
would disqualify the Plan or such grant under, or would not otherwise comply
with, Rule 16b-3, such provision or grant shall be construed or deemed amended
to conform to Rule 16b-3.

SECTION 27. TERMINATION OF EMPLOYMENT. The terms and conditions under
which an Option may be exercised after a Participant's termination of employment
shall be determined by the Committee and shall be specified in the Option
Agreement, except that in the event a Participant's employment with the Company
or a Subsidiary terminates for any reason within six (6) months of the date of
grant of any Option held by the Participant, the Option shall expire as of the
date of such termination of employment and the Participant and the

<PAGE>

Participant's designee, legal representative or beneficiary shall forfeit any
and all rights pertaining to such Option. The conditions under which such post-
termination exercises shall be permitted with respect to Incentive Stock Options
shall be determined in accordance with the provisions of Section 422 of the
Code.

<PAGE>
Exhibit 10.43

REGISTRATION RIGHTS AGREEMENT

This Registration Rights Agreement (the "Agreement") is made and
entered into as of December 29, 1993, 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

<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

<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

<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

<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

<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

<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;

<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

<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: /s/ Brad R. Tukey
-----------------------------------
Name: Brad R. Tukey
Title: Executive Vice President

PURCHASER:

FS EQUITY PARTNERS III, L.P.

By: FS CAPITAL PARTNERS, L.P.,
General Partner

By: FS HOLDINGS, INC.
General Partner

By: /s/ William M. Wardlaw
-----------------------------------
Name: William M. Wardlaw
Title: Vice President and Secretary

18.

<PAGE>

Exhibit 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the
incorporation of our reports included in this Form 10-K, into the Company's
previously filed Registration Statement Nos. 33-72146 and 33-67902.

/s/ ARTHUR ANDERSON & CO.

San Jose, California
April 20, 1994