ORCHARD SUPPLY HARDWARE STORES CORP, 10-K, 1995-04-12

ORCHARD SUPPLY HARDWARE STORES CORP
10-K, 1995-04-12
BUILDING MATERIALS, HARDWARE, GARDEN SUPPLY

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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 29, 1995

/ / 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 Identification No.)
incorporation or organization)

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. / /

The aggregate market value of the Common Stock of the registrant held
by non-affiliates of the registrant on March 31, 1995, based on the closing
price of the Common Stock on the Nasdaq National Market on such date, was
$40,721,645.

The number of shares of the registrant's Common Stock outstanding at
March 31, 1995 was 6,983,400 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 19, 1995 are incorporated by reference into Part III hereof.

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ORCHARD SUPPLY HARDWARE STORES CORPORATION
INDEX TO ANNUAL REPORT ON FORM 10-K
For the fiscal year ended January 29, 1995

<TABLE>
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Page
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<S> <C> <C>
PART I

Item 1. Business ........................................... 5
Item 2. Properties ......................................... 12
Item 3 Legal Proceedings .................................. 13
Item 4. Submission of Matters to a Vote of
Security Holders ............................... 13

PART II

Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters ................ 13
Item 6. Selected Financial Data ............................ 14
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations ..................................... 15
Item 8. Financial Statements and Supplementary Data ........ 20
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure ......... 20

PART III

Item 10. Directors and Executive Officers of the Registrant .. 21
Item 11. Executive Compensation .............................. 21
Item 12. Security Ownership of Certain Beneficial
Owners and Management ........................... 21
Item 13. Certain Relationships and Related Transactions ...... 21

PART IV

Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K .............. 22
</TABLE>
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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 31, 1994 and ending January 29, 1995
is referred to herein as fiscal 1994).

GENERAL

As of March 1995, Orchard operates 57 hardware superstores which
average approximately 40,000 square feet of interior and exterior selling space.
All of the Company's stores are located in 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.

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 were converted into the Orchard format and opened by May 1994. In
addition, the Company opened five stores in Northern California through the end
of fiscal 1994 to complete its fiscal 1994 program of 14 store openings.

In order to improve the Company's capital structure and to enhance its
financial flexibility, 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 Freeman Spogli & Co.
Incorporated ("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, $.01 par value per share (the "Common Stock"), of the Company
(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 $116.9 billion in 1993
to approximately $125.8 billion in 1994. 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.

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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 the last three fiscal years:

<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
PRODUCT CATEGORY 1992 1993 1994
--------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Hardware .................................... 22.2% 22.8% 23.0%
Plumbing .................................... 15.3 14.8 14.2
Electrical .................................. 11.4 10.9 10.8
Garden and Nursery .......................... 26.7 26.9 27.1
Other ....................................... 24.4 24.6 24.9
----- ----- ----
Total Sales ................................. 100.0% 100.0% 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, 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 many of 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

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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, work gear and seasonal
items, 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 29,
1995, the Company employed 50 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 37,520 active accounts in fiscal 1994, which comprised approximately 12.4% of
the Company's sales in that year. Approximately 83.6% of those credit card sales
were attributable to commercial customers. The Company also offers its
commercial customers added services such as the ability to selectively restrict
their employee purchases and detailed descriptions of all purchases on a monthly
basis.

"How-To" Fairs. The Company conducts two annual "how-to" fairs in its
existing market areas in Northern and Central California. These fairs are
designed to provide customers with do-it-yourself ("DIY") information through
vendor booths and specialized classes. Management estimates that its Santa Clara
County "how-to" fair in February 1995, which featured Norm Abrams from the
television programs "This Old House" and "The New Yankee Workshop," Dean Johnson
and Robin Hartle from "Hometime" and Orchard's spokesman Richard Karn from "Home
Improvement", 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.

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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 and together with the Company's marketing
campaign, its growing name identification in its Southern California market. The
average customer purchase is approximately $18.

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
base, the Company opened 14 stores in fiscal 1994, including the nine Expansion
stores, six of which are located in metropolitan Los Angeles. The remaining five
new stores opened in fiscal 1994 are 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 new stores, the majority of which are expected to
be in metropolitan Los Angeles. The Company believes it has the potential to
expand to a total of 70 stores in Northern and Central California and 45 stores
in metropolitan Los Angeles and Orange County. The Company also plans to
relocate one store in Northern California.

The $19.7 million purchase price for the nine Expansion store sites was
financed through $18.7 million in additional borrowings under Orchard Supply's
revolving credit facility (the "Financing Agreement") and the assumption of $1.0
million in outstanding mortgage debt. A portion of the proceeds of the sale of
$100.0 million principal amount of 93/8% Senior Notes due 2002 (the "Notes") on
January 20, 1994 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 six Expansion store sites in metropolitan Los Angeles have
permitted the Company an immediate presence in that market. However, because the
Los Angeles media market is more expensive than the Northern and Central
California markets and Orchard initially lacks the store concentration it enjoys
in its existing markets, the Company's advertising and marketing expenses have
increased as a percent of sales. The Company executed its standard print
advertising campaign in metropolitan Los Angeles, with only limited use of
electronic media.

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The Company services all the acquired Expansion stores in metropolitan
Los Angeles, Goleta, Pismo Beach and Santa Maria 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, transportation expenses as a percent of sales for these
Expansion stores were higher than its other stores. The Company expects to open
an additional warehouse to service the metropolitan Los Angeles stores after
approximately 25 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. The Company expects that the majority of new stores opened
over the next several years will be in metropolitan Los Angeles. Three of the
five planned openings in 1995 will be in this market. Entering into a new market
area, particularly one as large and complex as Los Angeles, presents significant
risks to the Company.

1995 STORE OPENING SCHEDULE*

<TABLE>
<CAPTION>
ANTICIPATED INTERIOR AND
FISCAL 1995 EXTERIOR SELLING
STORE LOCATIONS OPENING SQ. FOOTAGE
------------------------------------------- -------------- ----------------
<S> <C> <C>
Mountain View ............................. First Quarter 41,193
La Crescenta+ ............................. First Quarter 40,660
Whittier+ ................................. Fourth Quarter 41,178
Torrance+ ................................. Fourth Quarter 40,600
Woodland .................................. Fourth Quarter 40,600
Livermore (relocation) .................... Fourth Quarter 40,811
</TABLE>

----------
* This schedule represents management's current estimate with respect
to anticipated store openings; however, there is no assurance that the
Company will be able to achieve its expansion plan, or that the new
stores will be profitable.
+ Metropolitan Los Angeles Expansion store location.

COMPETITION

The Company competes with warehouse home center chains, traditional
home improvement centers and local independent retailers, including neighborhood
hardware stores and garden and nursery centers. Management believes that the
Company's "fix-it" orientation, broad merchandise selection, convenient
locations, value-added services and high name recognition in Northern and
Central California distinguish it from its competitors, including larger
warehouse home center chains and independent hardware stores.

Management believes that two warehouse home center chains, Home Depot
and HomeBase, are its primary competitors. Since 1984 when the first warehouse
home center was opened in Orchard's markets, Home Depot and HomeBase have opened
and currently operate 27 and 13 stores, respectively, in the Company's markets.
As of January 29, 1995, the Company estimates that 45 Orchard stores faced
competition from warehouse operators. Despite this warehouse competition, the
Company's operating income before pre-opening expenses has increased from $17.3
million in fiscal 1989 to $22.4 million in fiscal 1994. The Company believes
Home Depot will open one store in fiscal 1995 in the Company's markets. HomeBase
closed three stores in Orchard's markets in fiscal 1994 and closed one
additional store in early fiscal 1995. If the anticipated Home Depot store
openings occur and the Company's fiscal 1995 expansion plan takes place on
schedule, then following fiscal 1995, Home Depot and HomeBase will operate 40
stores in the Company's markets and 48 Orchard stores will face competition from
warehouse competitors in these markets.

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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 360 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 initially lacks the store concentration it
enjoys in its existing markets. Accordingly, the Company has experienced an
increase in marketing costs as a percentage of sales as a result of its fiscal
1994 openings in metropolitan Los Angeles. The Company executed its standard
print advertising campaign in the Los Angeles market, but with only limited use
of electronic media. As an emerging 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 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 17% of its total purchases, with no single supplier
accounting for more than 5% of the total. As its expansion rate increased in
fiscal 1994, the Company benefited from greater volume discounts created by
growing sales volume generated by new stores.

DISTRIBUTION

Orchard's 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 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

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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 has resulted in significantly higher transportation
costs than in its current Northern and Central California markets. Management
has outsourced the delivery of merchandise to the Pismo Beach store and stores
south by use of an independent common carrier. As a result, transportation
expenses as a percent of sales have been approximately 1.3% higher for the
metropolitan Los Angeles stores. The Company has been able to process orders
from its metropolitan Los Angeles stores within 24 hours. Orchard expects to
open an additional warehouse to service the metropolitan Los Angeles stores
after approximately 25 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 are expected to be reduced as more stores are opened in
the metropolitan Los Angeles and Orange County markets.

As of January 29, 1995, Orchard operated a fleet of 32 tractors and 132
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 for metropolitan Los Angeles. Orchard's
store managers, who average in excess of ten years of service with the Company,
are responsible for day-to-day store operations, subject to operating procedures
established at headquarters.

The Company added an average of approximately 70 clerical and 17
management workers to staff each Expansion store. All management employees
underwent a 12 week training program and all other employees underwent 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.

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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 and a new UNIX based
point-of-sale system in all of its stores.

Financial management is addressed by the retail stock ledger, accounts
payable, general ledger, fixed assets, bank card transmission, accounts
receivable and credit systems. These systems are traditional retail financial
control and operational systems with the exception of having on-line capability
wherever feasible in order to enhance productivity.

Management believes its systems are excellent and a key component to
the Company's ability to evaluate and respond to its markets and customers.

EMPLOYEES

As of January 29, 1995, Orchard had 4,590 total employees of whom 2,463
were full-time employees.

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 57 stores, 11 are owned and 46 are leased under
long-term ground or building arrangements with various renewal options. All but
one of these 46 leases are scheduled to expire after 2000 (including options to
renew). See Note 3 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.
The Company entered into long-term leases for portions of the building in 1994
and is actively seeking to enter into long-term leases for the remainder. The
intent of securing tenants for this property is to facilitate its future
purchase by a developer. 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 in south San Jose. The Company recently exercised its right of first
refusal on the remaining 23,581 square feet of this building in order to
accommodate further expansion. The current lease term expires in November 2000
unless extended by the Company.

12
<PAGE> 11
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.

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 its 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 fiscal 1994 as follows:

<TABLE>
<CAPTION>
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 ........................................ $13-1/4 $13-1/4
Second quarter ....................................... $13 $12
Third quarter ........................................ $ 9-7/8 $ 9-1/2
Fourth quarter ....................................... $ 7-3/4 $ 7
</TABLE>

As of March 31, 1995, the number of stockholders of record of the
Company's Common Stock was 329.

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."

13
<PAGE> 12
ITEM 6. SELECTED FINANCIAL DATA.

The selected consolidated financial data presented below, except store
data, has been derived from the historical consolidated financial statements of
the Company. The selected consolidated financial data for the years ended
January 27, 1991, January 26, 1992, January 31, 1993, January 30, 1994 and
January 29, 1995 have been derived from financial statements which were audited
by Arthur Andersen LLP, 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.

<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------------------------------
JANUARY 27, JANUARY 26, JANUARY 31, JANUARY 30, JANUARY 29,
1991 1992 1993 1994 1995
(52 WEEKS) (52 WEEKS) (53 WEEKS) (52 WEEKS) (52 WEEKS)
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AND STORE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales ................................................ $299,924 $308,562 $346,158 $365,077 $441,646
Cost of goods sold ................................... 191,815 199,052 224,599 234,326 281,379
-------- -------- -------- -------- --------
Gross margin ....................................... 108,109 109,510 121,559 130,751 160,267
Operating expenses ................................... 88,444 91,296 99,944 106,802 137,858
Pre-opening expenses ................................. 579 1,192 924 2,221 7,525
-------- -------- -------- -------- --------
Operating income ................................... 19,086 17,022 20,691 21,728 14,884
Write-down in carrying amount of asset
held for disposal .................................. -- -- 2,007 -- --
Interest expense(1) .................................. 15,160 14,773 16,725 11,563 12,587
-------- -------- -------- -------- --------
Income before provision for income taxes ........... 3,926 2,249 1,959 10,165 2,297
Provision for income taxes ........................... 1,667 971 866 -- --
-------- -------- -------- -------- --------
Income before extraordinary items(2) ............... 2,259 1,278 1,093 10,165 2,297
Extraordinary items(2) ............................... 1,667 971 (200) (9,318) --
-------- -------- -------- -------- --------
Net income ......................................... 3,926 2,249 893 847 2,297
Preferred stock dividends(3)(4) ...................... 3,046 3,446 4,208 814 1,115
-------- -------- -------- -------- --------
Net income (loss) available to common stock ........ $ 880 $ (1,197) $ (3,315) $ 33 $ 1,182
======= ======== ======== ======== ========
Net income (loss) per common and equivalent share(5).. $ 0.71 $ (0.96) $ (2.68) $ 0.01 $ 0.17
Weighted average number of common and equivalent
shares(5) .......................................... 1,242 1,242 1,238 5,951 6,984
OTHER DATA:
Comparable store sales growth ........................ 1.9% (1.3)% 5.3% 2.0% (1.1)%
Number of stores (at end of period) .................. 34 37 39 43 56
BALANCE SHEET DATA:
Working capital ...................................... $ 34,090 $ 44,649 $ 52,274 $ 94,996 $ 71,049
Total assets ......................................... 175,549 198,463 197,996 309,735 292,659
Long-term debt and capital leases .................... 111,648 125,892 130,374 156,273 135,232
Stockholders' equity ................................. 11,432 13,628 14,848 61,827 82,578
</TABLE>
- -----------
(1) Data includes non-cash amortization of deferred financing costs and original
issue discount related to debt incurred in various refinancings.
(2) 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,
as accounted for under APB No. 11 (See Note 8 to the financial statements).
(3) Preferred stock dividends for the years ended January 27, 1991, January 26,
1992, January 31, 1993 and January 30, 1994 reflect dividends earned on the
Series A Preferred Stock, $.01 par value per share (the "Series A Preferred
Stock"), prior to its reclassification into Common Stock (the
"Reclassification") 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.
(4) Preferred stock dividends for the year ended January 29, 1995 reflect
dividends earned as a result of the Preferred Stock Offering issued on
February 25, 1994.
(5) See Note 2 to Consolidated Financial Statements for information regarding
the calculation of per share data.

14
<PAGE> 13
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 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 three other
sites (South Pasadena and West Los Angeles in metropolitan Los Angeles and
Goleta in the Santa Barbara area) on December 22, 1993. All of the Expansion
stores were opened for business by May 1994. In addition, the Company opened
five stores in Northern California through the end of fiscal 1994 to complete
its fiscal 1994 program of 14 store openings.

The Company has incurred substantial pre-opening expenses in connection
with opening stores amounting to $7.5 million for fiscal 1994. These pre-opening
expenses consist principally of store merchandising and stocking expenses,
personnel recruitment and training costs and grand-opening advertising and
promotional expenses.

As the Company implements its new store opening program, operating
expenses as a percent of sales for the new stores will initially be higher,
adversely affecting overall operating margins until these new stores achieve
sales maturity. In addition, the Company expects that it will generally
experience higher marketing, distribution and occupancy costs in its new stores
in the metropolitan Los Angeles market. 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. These
factors reduced operating margins in fiscal 1994 and will reduce future
operating margins so long as the Company continues to open a large number of
stores relative to its existing store base.

The Company's results of operations exhibit some measure of
seasonality. During the three fiscal years ended January 29, 1995, approximately
28.0% of the Company's annual sales and approximately 37.0% to 40.0% of its
annual operating income before pre-opening expenses were generated in the second
fiscal quarter. This is due primarily to increased sales of garden, nursery and
related products during the first and second quarters, which is the beginning of
the spring/summer gardening season. Weather conditions have the most impact on
sales of these outdoor related products during this period. Conversely, during
the three years ended January 29, 1995, approximately 24.0% of the Company's
annual sales and approximately 13.0% to 19.0% of its annual operating income
before pre-opening expenses were generated in the fourth fiscal quarter, due
primarily to decreased sales of garden, nursery and related products during this
quarter.

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.

15
<PAGE> 14
The following table sets forth selected results of operation as
percentages of sales for the periods indicated:

<TABLE>
<CAPTION>
YEAR ENDED(1)
-----------------------------------------------------------
JANUARY 26, JANUARY 31, JANUARY 30, JANUARY 29,
1992 1993 1994 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales .............................. 100.0% 100.0% 100.0% 100.0%
Gross Margin ....................... 35.5 35.1 35.8 36.3
Selling general and
administrative expenses .......... 29.6 28.9 29.3 31.2
Pre-opening expenses ............... 0.4 0.3 0.6 1.7
----- ----- ----- -----
Operating income ................... 5.5 6.0 6.0 3.4
Write-down of asset held for
disposal ......................... -- 0.6 -- --
Interest expense ................... 4.8 4.8 3.2 2.9
----- ----- ----- -----
Income before provision
for income taxes and
extraordinary items .............. 0.7 0.6 2.8 0.5
Income tax provision ............... 0.3 0.3 -- --
----- ----- ----- -----
Income before extraordinary
items ............................ 0.4 0.3 2.8 0.5
Extraordinary items ................ 0.3 (0.1) (2.6) --
----- ----- ----- -----
Net income ......................... 0.7% 0.3% 0.2% 0.5%
===== ===== ===== =====
</TABLE>
- -----------
(1) Amounts may not total due to rounding.

RESULTS OF OPERATIONS

52 Weeks ended January 29, 1995 (fiscal 1994) compared to 52 Weeks
ended January 30, 1994 (fiscal 1993).

Sales for the 52 weeks ended January 29, 1995 increased by 21.0% to
$441.6 million from $365.1 million for the 52 weeks ended January 30, 1994.
Increased sales as a result of 14 new stores opened in fiscal 1994 were
partially offset by a 1.1% decrease in comparable store sales. Comparable store
sales were impacted by the eight competing warehouse home centers that opened in
Orchard markets, principally in the second half of fiscal 1993 and unseasonably
rainy weather conditions in Northern California during a five week period in
April and May 1994.

Gross margin increased by $29.5 million from $130.8 million in fiscal
1993 to $160.3 million in fiscal 1994. As a percent of sales, gross margin
increased from 35.8% for fiscal 1993 to 36.3% for fiscal 1994. The increase in
gross margin percentage resulted primarily from an increase in the purchase
markup due to a reduction in the cost of merchandise achieved through improved
buying. Lower inventory shrinkage and reduced permanent markdowns also
contributed to the favorable gross margin performance.

Selling, general and administrative expenses for fiscal 1994 were 31.2%
of sales compared with 29.3% of sales for fiscal 1993, an increase of 1.9% of
sales. The increase is partially attributable to higher advertising, rent and
payroll costs as a percent of sales for the 14 new stores opened in fiscal 1994
which have not yet achieved sales maturity. The negative impact of the
comparable store sales decline on the sales base also contributed to higher
selling, general and administrative expenses as a percent of sales.

16
<PAGE> 15
Operating income decreased by $6.8 million from $21.7 million for
fiscal 1993 to $14.9 million for fiscal 1994, primarily due to a $5.3 million
increase in pre-opening expenses and increased corporate expenses associated
with the Company's increased expansion program.

Interest expense increased from $11.6 million for fiscal 1993 to $12.6
million for fiscal 1994. The increase is due primarily to additional interest
resulting from the issuance by the Company in January 1994 of $100.0 mil-lion
aggregate principal amount of 93/8% Senior Notes due 2002 (the "Notes"), which
was partially offset by reduced interest due to the retirement of $19.3 million
of the 14.5% Senior Subordinated Discount Notes (the "14.5% Subordinated Notes")
and $30.0 million of 9% Senior Notes due 1997 (the "Old Senior Notes") on
February 25, 1994.

The Company did not record a tax provision or tax benefit as a result
of net operating loss carry forwards against which a valuation allowance has
previously been provided.

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 was 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 the 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 compared 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 as
a percent of sales 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 opened in fiscal 1994.

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.

17
<PAGE> 16
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 $30.0 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 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 workers' compensation and medical claims
experience.

Operating income increased $3.7 million from $17.0 million in fiscal
1991 to $20.7 million in fiscal 1992. Operating income as a percentage of sales
increased from 5.5% in fiscal 1991 to 6.0% in fiscal 1992. The higher operating
income percentage in fiscal 1992 compared to fiscal 1991 principally reflects
the decrease in selling, general and administrative percentage of sales and
pre-opening expenses percentage of sales which was partially offset by the
decrease in the Company's gross margin percentage. The 53rd week in fiscal 1992
is estimated to have contributed an additional $0.6 million to the Company's
operating income.

18
<PAGE> 17

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 fiscal 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.

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.

Orchard Supply's funded debt obligations include (i) up to $20.0
million of revolving credit availability under Orchard Supply's senior revolving
credit facility (the "Financing Agreement") (with an $8.0 million sublimit for
guarantees of letters of credit) of which no borrowings and $5.2 million of
guarantees of letters of credit were outstanding as of January 29, 1995, (ii)
$20.7 million outstanding under a store mortgage facility, (iii) $13.7 million
aggregate principal amount of warehouse mortgage notes, (iv) $1.0 million store
mortgage assumed in connection with the acquisition of a former Builders
Emporium store site and (v) $100.0 million aggregate principal amount of the
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 29, 1995, the Company and Orchard Supply
were in compliance with all covenants contained in such debt instruments.

On February 25, 1994, the Company used the 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 issuance of $100.0 million of the Notes 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.
Aggregate scheduled principal repayments on the Company's long-term debt
instruments, including capital leases, for fiscal 1995, 1996 and 1997 are $1.9
million, $2.2 million and $2.5 million, respectively.

The Company's business strategy requires that it maintain broad product
lines and large inventories, however, the effect of this strategy on working
capital is somewhat minimized through the receipt of trade credit. The Company's
working capital is also affected by accounts receivable arising from its
proprietary credit card which had an average monthly balance for fiscal 1994 of
$11.1 million. The Company will fund its working capital needs through a
combination of funds from operations and borrowings under the Financing
Agreement. The Financing Agreement permits borrowings based on percentages of
the Company's eligible inventory and accounts receivable and is to be used for
working capital and general corporate purposes. The Financing Agreement remains
effective through October 29, 1995.

19
<PAGE> 18

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. Pre-opening expenses for the nine Expansion stores ($5.1
million in the aggregate) averaged $645,000 for the six metropolitan Los Angeles
stores and $410,000 for the remaining stores. The Company expects that for its
subsequent metropolitan Los Angeles stores, pre-opening expenses will range from
approximately $600,000 to $700,000 (compared to $450,000 in its Northern and
Central California markets). The initial inventory requirement for new stores
net of trade credit is estimated at $900,000 per store. In the event that the
Company is responsible for the renovation or remodeling of the existing space to
be leased, the Company anticipates incurring additional capital expenditures of
approximately $800,000 to $1,500,000 per store. If the Company elects to
purchase the real estate, the capital expenditure would range from approximately
$2,500,000 for owned store improvements constructed on leased land to $4,000,000
to $6,000,000 if the entire property were to be owned by the Company. During
fiscal 1994 the Company opened three owned stores, nine leased stores and two
stores that were constructed on ground leases.

The Company's three-year capital expenditure plan for fiscal 1995, 1996
and 1997 provides for annual capital expenditures of $10.8 million, $16.2
million and $17.0 million, respectively. This capital expenditure plan includes
the expenditures of approximately $4.0 million to $5.0 million annually for the
maintenance of existing facilities. The remainder of the annual budgeted amounts
will be used primarily for the opening of new stores, including fixtures and
leasehold improvements with respect to the new stores, and computer equipment.
The Company has historically obtained some of its equipment through operating
leases, and expects to be able to procure such arrangements in the future. The
inability of the Company to procure such arrangements for its capital
expenditure program may have a negative impact on the ability of the company to
make capital expenditures.

The Company believes that funds from operations, together with
borrowings under the Financing Agreement and financing through operating leases,
will be adequate to fund the Company's operating requirements and capital
expenditure program and meet its debt and dividend obligations for the next
several years. Any material shortfalls of operating cash flow could require the
Company to reduce its expansion plans.

EFFECT OF INFLATION

The effect of inflation on the Company's 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.

Effective January 31, 1994 the Company adopted Statement of Financial
Accounting Standards No. 115 "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS No. 115"). SFAS No. 115 addresses the accounting and
reporting of investments in equity securities that have readily determinable
fair values and all debt securities and requires that all such investments be
classified as held-to-maturity securities, trading securities or
available-for-sale securities. The impact of SFAS No. 115 was not material to
the Company.

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.

20
<PAGE> 19

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 19,
1995 to be filed with the Securities and Exchange Commission within 120 days
after January 29, 1995 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

21
<PAGE> 20

PART IV

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

The financial statements referred to below are attached as pages F-1
to F-18 and the financial statement schedules referred to below are
attached as pages S-1 to S-5, and all are incorporated herein by this
reference.

<TABLE>
<CAPTION>
PAGE
(A)(1) INDEX TO FINANCIAL STATEMENTS: NUMBER
------
<S> <C>
Report of Independent Public Accountants .................................. F-1

Consolidated Balance Sheets as of January 30, 1994 and January 29, 1995 ... F-2

Consolidated Statements of Operations -- For the Fiscal years ended
January 31, 1993, January 30, 1994 and January 29, 1995 ................... F-4

Consolidated Statements of Stockholders' Equity -- For the Fiscal years
ended January 31, 1993, January 30, 1994 and January 29, 1995 ............. F-5

Consolidated Statements of Cash Flows -- For the Fiscal years ended
January 31, 1993, January 30, 1994 and January 29, 1995 ................... F-6

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

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

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

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

Schedule II -- Valuation and Qualifying Accounts .......................... S-5
</TABLE>

All other schedules are omitted since the required information is
not present in amounts sufficient to require submission of the schedule, or
because the information required is included in the financial statements
and notes hereto.

22
<PAGE> 21

(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.
+(P) Second Amendment to Employment Agreement dated January 1, 1989
between Orchard Supply Hardware Corporation and Maynard Jenkins.
+(Q) Orchard Supply Hardware Corporation Performance Bonus Plan dated
February 1, 1994.

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

* 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.
+ Filed herewith.

23
<PAGE> 22

(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.

24
<PAGE> 23

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 12, 1995

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.
<TABLE>
<CAPTION>

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

<S> <C> <C>
/s/ Maynard Jenkins President, Chief Executive Officer and April 12, 1995
- ---------------------------------- Director (Principal Executive Officer)
Maynard Jenkins

/s/ Stephen M. Hilberg Vice President-Finance, Chief Financial April 12, 1995
- ---------------------------------- Officer and Director (Principal Financial Officer)
Stephen M. Hilberg

/s/ Michael Seda Controller (Principal Accounting Officer) April 12, 1995
- ----------------------------------
Michael Seda

/s/ Bradford M. Freeman Director April 12, 1995
- ----------------------------------
Bradford M. Freeman

/s/ J. Frederick Simmons Director April 12, 1995
- ----------------------------------
J. Frederick Simmons

/s/ Ronald P. Spogli Director April 12, 1995
- ----------------------------------
Ronald P. Spogli

/s/ William M. Wardlaw Director April 12, 1995
- ----------------------------------
William M. Wardlaw

/s/ Morton Godlas Director April 12, 1995
- ----------------------------------
Morton Godlas

/s/ William E. Walsh Director April 12, 1995
- ----------------------------------
William E. Walsh

</TABLE>

25
<PAGE> 24

<TABLE>
<CAPTION>
EXHIBIT INDEX

EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
+3.1 Certificate of Incorporation of the Orchard Supply Hardware
Stores Corporation (formerly Orchard Holding Corporation) as
amended to date.
*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 93/8%
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.

</TABLE>
26

<PAGE> 25

EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>

++++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.

</TABLE>
27
<PAGE> 26
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
*10.34 First Amendment to Employment Agreement dated January 1, 1989
between Orchard Supply Hardware Corporation and Maynard
Jenkins.
*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 HardwareCorporation, 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.
++10.45 Second Amendment to Employment Agreement dated January 1,
1989 between Orchard Supply Hardware Corporation and Maynard
Jenkins.
+10.46 Sixth Amendment to Note Agreement dated as of April 27, 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.
+10.47 Seventh Amendment to Note Agreement dated as of May 31, 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.
++10.48 Orchard Supply Hardware Corporation Performance Bonus Plan
dated February 1, 1994.
***18.1 Preferability Letter dated March 5, 1993 from Arthur Andersen
LLP regarding change in accounting principle.
++23.1 Consent of Arthur Andersen LLP for Orchard Supply Hardware
Stores Corporation.
++27.1 Financial Data Schedule for the fiscal year ended January 29,
1995.
</TABLE>
- ------------------

* 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 with Annual Report on Form 10-K (File No. 0-21182) on April 13,
1994.
+ Filed with Quarterly Report on Form 10-Q (File No. 0-21182) on June 14,
1994.
++ Filed herewith.

28
<PAGE> 27

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders 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 29, 1995 and January 30, 1994 and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended January 29, 1995. 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 29, 1995 and January
30, 1994 and the results of its operations and its cash flows for each of the
three years in the period ended January 29, 1995 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 LLP

ARTHUR ANDERSEN LLP

San Jose, California
March 3, 1995

F-1
<PAGE> 28

ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>

JANUARY 30, JANUARY 29,
1994 1995
----------- -----------
ASSETS

CURRENT ASSETS:

<S> <C> <C>
Cash and cash equivalents ..................................................... $ 75,588 $ 9,240
Investments ................................................................... -- 3,000
Accounts receivable, less allowance of $1,176 and $1,201 at January 30, 1994
and January 29, 1995, respectively ......................................... 13,245 14,417
Inventory ..................................................................... 82,494 103,438
Prepaid expenses and other .................................................... 6,575 8,221
Assets held for disposal ...................................................... 6,133 6,145
-------- --------
Total current assets .................................................... 184,035 144,461

PROPERTY AND EQUIPMENT, net ............................................................ 105,874 129,840

LEASEHOLD RIGHTS, net of accumulated amortization of $2,766 and $3,775 at
January 30, 1994 and January 29, 1995, respectively .................................. 10,871 9,751

DEFERRED FINANCING COSTS, net of accumulated amortization of $5,155 and
$5,781 at January 30, 1994 and January 29, 1995, respectively ........................ 3,428 3,236

GOODWILL, net of accumulated amortization of $730 and $886 at January 30, 1994
and January 29, 1995, respectively ................................................... 5,527 5,371
-------- --------
Total assets ............................................................ $309,735 $292,659
======== ========

</TABLE>

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

F-2

<PAGE> 29

ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>

JANUARY 30, JANUARY 29,
1994 1995
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:

<S> <C> <C>
Outstanding checks, not cleared by the bank .................................. $ 3,774 $ 7,168
Accounts payable ............................................................. 30,491 36,476
Accrued payroll and related items ............................................ 7,294 8,715
Accrued advertising .......................................................... 2,114 3,448
Accrued sales taxes .......................................................... 4,933 7,158
Other accrued expenses ....................................................... 8,212 7,954
Notes payable ................................................................ 1,494 773
Current portion of capital leases and long-term debt ......................... 30,727 1,720
-------- --------
Total current liabilities .............................................. 89,039 73,412

OTHER LIABILITIES ..................................................................... 2,596 1,437

CAPITAL LEASES AND LONG-TERM DEBT, net of current portion ............................. 156,273 135,232
-------- --------
Total liabilities ...................................................... 247,908 210,081
-------- --------

COMMITMENTS AND CONTINGENCIES (see Note 3) ............................................ -- --

STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value
Authorized--2,000,000 shares; issued--800,000 shares;
outstanding--0 and 800,000 shares at January 30, 1994
and January 29, 1995, respectively; liquidation preference of $20,000 ..... -- 8
Common Stock, $.01 par value
Authorized--16,000,000 shares; issued--6,987,120 shares;
outstanding--6,930,253 and 6,983,400 shares at January 30, 1994
and January 29, 1995, respectively ........................................ 69 70
Additional paid-in capital ................................................... 72,275 90,700
Less--Notes receivable from sale of common stock ............................. (171) (151)
Accumulated deficit .......................................................... (10,346) (8,049)
-------- --------
Total stockholders' equity ............................................. 61,827 82,578
-------- --------
Total liabilities and stockholders' equity ............................. $309,735 $292,659
======== ========
</TABLE>

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

F-3
<PAGE> 30

ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>

YEAR ENDED
--------------------------------------
JANUARY 31, JANUARY 30, JANUARY 29,
1993 1994 1995
----------- ----------- -----------

<S> <C> <C> <C>
SALES ...................................................................... $346,158 $365,077 $441,646
COST OF GOODS SOLD ......................................................... 224,599 234,326 281,379
-------- -------- --------
Gross margin ...................................................... 121,559 130,751 160,267
SELLING AND OTHER EXPENSES ................................................. 85,240 91,302 120,323
GENERAL AND ADMINISTRATIVE EXPENSES ........................................ 14,704 15,500 17,535
PRE-OPENING EXPENSES ....................................................... 924 2,221 7,525
-------- -------- --------
Operating income .................................................. 20,691 21,728 14,884
WRITE-DOWN IN CARRYING AMOUNT OF ASSET HELD
FOR DISPOSAL ............................................................. 2,007 -- --
INTEREST EXPENSE, net ...................................................... 16,725 11,563 12,587
-------- -------- --------
Income before provision for income taxes and extraordinary items .. 1,959 10,165 2,297
PROVISION FOR INCOME TAXES ................................................. 866 -- --
-------- -------- --------
Income before extraordinary items ................................. 1,093 10,165 2,297
EXTRAORDINARY ITEMS:
REALIZATION OF NET OPERATING LOSS CARRYFORWARDS ............................ 438 -- --
LOSS ON EXTINGUISHMENT OF DEBT, NET OF TAX BENEFIT
OF $428 AT JANUARY 31, 1993 .............................................. (638) (9,318) --
-------- -------- --------
Net income ........................................................ 893 847 2,297
PREFERRED STOCK DIVIDENDS EARNED ........................................... 4,208 814 1,115
-------- -------- --------
Net income (loss) available to common stock ....................... $ (3,315) $ 33 $ 1,182
======== ======== ========

INCOME PER COMMON AND EQUIVALENT SHARE:
INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS ................................... $ (2.52) $ 1.57 $ 0.17
EXTRAORDINARY ITEMS ........................................................ (0.16) (1.57) 0.00
-------- -------- --------
Net income (loss) per common and equivalent share ................. $ (2.68) $ 0.01 $ 0.17
======== ======== ========
WEIGHTED AVERAGE NUMBER OF COMMON AND
EQUIVALENT SHARES ......................................................... 1,238 5,951 6,984
======== ======== ========
</TABLE>

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

F-4
<PAGE> 31

ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>

ADDI- NOTES
PREFERRED STOCK COMMON STOCK TIONAL RECEIVABLE
---------------- --------------- PAID-IN FOR CAPITAL ACCUMULATED TOTAL
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCK DEFICIT EQUITY
--------- ------ ------ ------ ------- ----------- ----------- ------

<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 26, 1992 ................... 1,604,152 $16 1,205,158 $12 $26,056 $(370) $(12,086) $13,628
Repurchase of common stock ......... -- -- (1,279) -- (10) 1 -- (9)
Repurchase of Series A
preferred stock ................. (1,666) -- -- -- (17) 1 -- (16)
Reissuance of common stock ......... -- -- 3,719 -- 31 (11) -- 20
Issuance of warrants ............... -- -- -- -- 332 -- -- 332
Net income ......................... -- -- -- -- -- -- 893 893
--------- --- --------- --- ------- ----- -------- -------
BALANCE, JANUARY 31, 1993 ................... 1,602,486 16 1,207,598 12 26,392 (379) (11,193) 14,848
Payments of notes receivable from
sale of common stock ............ -- -- -- -- -- 208 -- 208
Repurchase of common stock ......... -- -- (200) -- (3) -- -- (3)
Repurchase of Series A
preferred stock ................. (333) -- -- -- (3) -- -- (3)
Issuance of common stock, net of
transaction costs ............... -- -- 3,800,000 38 48,333 -- -- 48,371
Issuance of common stock resulting
from exercise of options ........ -- -- 7,225 -- 60 -- -- 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) -- -- (2,500)
Payment of fractional shares ....... -- -- -- -- (1) -- -- (1)
Net income ......................... -- -- -- -- -- -- 847 847
--------- --- --------- --- ------- ----- -------- -------
BALANCE, JANUARY 30, 1994 ................... -- -- 6,930,253 69 72,275 (171) (10,346) 61,827
Payments of notes receivable from
sale of common stock ............ -- -- -- -- -- 20 -- 20
Issuance of convertible preferred
stock, net of transaction costs . 800,000 8 -- -- 19,099 -- -- 19,107
Issuance of common stock resulting
from exercise of warrants ....... -- -- 52,448 1 436 -- -- 437
Issuance of common stock resulting
from exercise of options ........ -- -- 699 -- 5 -- -- 5
Dividend on convertible
preferred stock ................. -- -- -- -- (1,115) -- -- (1,115)
Net income ......................... -- -- -- -- -- -- 2,297 2,297
--------- --- --------- --- ------- ----- -------- -------
BALANCE, JANUARY 29, 1995 ................... 800,000 $ 8 6,983,400 $70 $90,700 $(151) $ (8,049) $82,578
========= === ========= === ======= ===== ======== =======

</TABLE>

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

F-5
<PAGE> 32

ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>

YEAR ENDED
-------------------------------------
JANUARY 31, JANUARY 30, JANUARY 29,
1993 1994 1995
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:

<S> <C> <C> <C>
Net income ....................................................... $ 893 $ 847 $ 2,297
Non-cash adjustments to net income--
Depreciation and amortization ................................. 7,080 6,845 8,682
Prepayment premium on senior and subordinated
senior debentures .......................................... -- 6,335 --
Write-off of deferred financing costs ......................... 1,066 2,745 --
Accretion of debt discounts ................................... 1,682 313 --
Loss on asset disposals ....................................... 115 65 803
Write-down in carrying amount of asset held for disposal ...... 2,007 -- --
Changes in assets and liabilities --
Increase in accounts receivable ............................... (216) (477) (1,172)
Increase in inventory ......................................... (3,131) (8,636) (20,944)
Increase in prepaid expenses and other ........................ (925) (2,430) (2,631)
Increase in accounts payable and other current liabilities .... 1,524 7,517 16,228
Decrease in other liabilities ................................. (577) -- (999)
------- ------- -------
Net cash provided by operating activities ............... 9,518 13,124 2,264
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:

Additions to property and equipment .............................. (4,318) (29,491) (30,577)
Purchase of investments .......................................... -- -- (3,000)
Purchase of leasehold rights ..................................... -- (6,511) --
------- ------- -------
Net cash used in investing activities ................... (4,318) (36,002) (33,577)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from public stock offering .......................... -- 48,370 --
Net proceeds from issuance of preferred stock .................... -- -- 19,107
Proceeds from issuance of long-term debt ......................... 46,110 103,079 1,752
Principal payments on capital leases and long-term debt .......... (48,324) (50,757) (52,335)
Deferred financing costs paid .................................... (2,076) (2,736) (433)
Payment of preferred stock dividends ............................. -- (2,500) (1,115)
Repayment of notes payable, net .................................. (1,770) (1,727) (2,473)
Repurchase of capital stock ...................................... (27) (6) --
Proceeds from issuance of capital stock .......................... 31 60 442
Payment (Issuance) of notes receivable from sale of capital stock (9) 208 20
------- ------- -------
Net cash provided by (used in) financing activities ........ (6,065) 93,991 (35,035)
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ...................... (865) 71,113 (66,348)
CASH AND CASH EQUIVALENTS, beginning of period ............................ 5,340 4,475 75,588
------- ------- -------
CASH AND CASH EQUIVALENTS, end of period .................................. $ 4,475 $75,588 $ 9,240
======= ======= =======

</TABLE>

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

F-6
<PAGE> 33
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JANUARY 29, 1995

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, as of January 29,
1995, operates 56 hardware superstores 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.

Investments

Short-term investments consist of investment grade securities with a
maturity date of February 22, 1995. The investments are carried at cost, which
approximates fair market value. Effective January 31, 1994 the Company adopted
Statement of Financial Accounting Standards No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS No. 115"). SFAS No. 115
addresses the accounting and reporting of investments in equity securities that
have readily determinable fair values and all debt securities and requires that
all such investments be classified as held-to-maturity securities, trading
securities or available-for-sale securities. The impact of SFAS No. 115 was not
material to the Company.

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. 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. Assets held for disposal 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:

<TABLE>
<S> <C>
Buildings .................................... 25-40 years
Leasehold improvements ....................... 14-25 years or life of lease
Land improvements ............................ 15 years or life of lease
Machinery and equipment ...................... 3-10 years
</TABLE>

F-7
<PAGE> 34

Betterment and extraordinary repairs that extend the life of the asset
are capitalized; normal repairs and maintenance are expensed.

The Company capitalized interest costs of $28,000 in the year ended
January 31, 1993 during

the construction period of a new warehouse. During the years ended January 30,
1994 and January 29, 1995, the Company capitalized interest costs of $448,000
and $870,000, respectively, 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 five to 35 years.

Pre-Opening Expenses

Costs related to the preparation and opening of new stores are expensed
as incurred. These expenses consist principally of store merchandising and
stocking expenses, personnel recruitment and training costs and grand-opening
advertising and promotional expenses.

Deferred Financing Costs

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

Goodwill

Goodwill is amortized over a 40 year period.

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
antidilutive). 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.

F-8
<PAGE> 35

2. PROPERTY AND EQUIPMENT:

Property and equipment are summarized below (in thousands):

<TABLE>
<CAPTION>
JANUARY 30, JANUARY 29,
1994 1995
----------- -----------
<S> <C> <C>
Land ................................................................... $ 16,723 $ 26,980
Land improvements ...................................................... 1,073 1,652
Buildings .............................................................. 29,881 37,394
Machinery and equipment ................................................ 26,596 37,703
Leasehold improvements ................................................. 29,574 49,249
Construction in progress ............................................... 23,370 4,382
Assets under capital leases ............................................ 1,867 1,849
-------- --------
129,084 159,209
Accumulated depreciation and amortization .............................. (23,210) (29,369)
-------- --------
Net property and equipment ....................................... $105,874 $129,840
======== ========
</TABLE>

Accumulated amortization on assets under capital leases was
approximately $0.9 million and $1.0 million for the years ended January 30, 1994
and January 29, 1995, respectively.

During the year ended January 30, 1994, the Company acquired the fee
interest in three former Builders Emporium ("BE") sites for $13.7 million and
leases on six other BE sites for $6.0 million. The sites were renovated prior to
the opening of the stores in April and May 1994 at which time the carrying
amounts were reclassified from construction in progress.

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 29, 1995 are as follows (in
thousands):

<TABLE>
<CAPTION>
FUTURE MINIMUM
RENTALS
YEAR ENDING
JANUARY
--------------
<S> <C>
1996 ................................................................... $ 17,476
1997 ................................................................... 17,181
1998 ................................................................... 15,769
1999 ................................................................... 15,153
2000 ................................................................... 13,531
Thereafter ............................................................. 140,747
--------
Total minimum lease payments ........................................ $219,857
========
</TABLE>

F-9
<PAGE> 36

Store leases contain certain provisions for contingent rents based upon
defined percentages of the dollar value of sales at individual stores. Total net
rent expense is as follows (in thousands):

<TABLE>
<CAPTION>
TOTAL CONTINGENT
YEAR ENDED RENTALS RENTALS
---------------- ------- ----------
<S> <C> <C>
January 29, 1995 ....................................................... $16,867 $573
January 30, 1994 ....................................................... 12,486 486
January 31, 1993 ....................................................... 10,971 510
</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 employee contribution
of 3% of the employee'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):

<TABLE>
<CAPTION>
401(K) PROFIT-
YEAR ENDED CONTRIBUTIONS SHARING
---------------- ------------- -------
<S> <C> <C>
January 29, 1995 ....................................................... $624 $671
January 30, 1994 ....................................................... 468 990
January 31, 1993 ....................................................... 459 763
</TABLE>

5. LONG-TERM DEBT AND CREDIT ARRANGEMENTS:

Long-term debt as of January 30, 1994 and January 29, 1995 consists of
the following (in thousands):

<TABLE>
<CAPTION>
JANUARY 30, JANUARY 29,
1994 1995
----------- -----------
<S> <C> <C>
93/8% Senior notes ..................................................... $100,000 $100,000
Store and warehouse mortgages .......................................... 36,043 35,412
Obligations under capital leases ....................................... 1,635 1,540
9.0% Senior notes ...................................................... 30,000 --
14.5% Senior subordinated discount notes ............................... 19,322 --
-------- --------
Total debt ............................................................. 187,000 136,952
Less--Current maturities ............................................... 30,727 1,720
-------- --------
$156,273 $135,232
======== ========
</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> 37

93/8% SENIOR NOTES

On January 20, 1994, the Company, as guarantor, and Orchard Supply, as
issuer, issued $100.0 million of unsecured 93/8% senior notes. The notes mature
on February 15, 2002 and may be redeemed at Orchard Supply's option at various
redemption dates as specified in the agreement. The terms of the notes limit,
among other things, 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 93/8% 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 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
6). 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
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 12 years.
Payments are based on a 20 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 through 2002, increasing by $0.2 million each year.

In November 1993, Orchard Supply assumed a mortgage note of
approximately $1.0 million pursuant to the purchase of the former BE sites
discussed in Note 2. The note bears interest at 12.0% with principal and
interest payments monthly through 2005.

The net book value of the assets mortgaged pursuant to the above
mortgage loans approximated $52.9 million at January 29, 1995.

F-11
<PAGE> 38

REVOLVING CREDIT FACILITY

The revolving credit facility is guaranteed by the Company and is
secured by inventories, accounts receivable and certain intangible assets,
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 at
Orchard Supply's or the lender's election.

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

<TABLE>
<CAPTION>
JANUARY 30, JANUARY 29,
1994 1995
----------- -----------
<S> <C> <C>
Balance outstanding at end of year ......................................... $ -- $ --
Weighted average balance outstanding during the year ....................... 1,152 120
Maximum amount outstanding during the year ................................. 11,448 4,625
Weighted average interest rate ............................................. 7.00% 8.77%
Interest rate at end of period ............................................. 7.00% 9.50%
</TABLE>

Letters of credit outstanding as of January 30, 1994 and January 29,
1995 totaled $5.8 million and $5.2 million, respectively.

In November 1993, in connection with 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 $28.0 million were repaid with a portion of the proceeds of the
93/8% senior notes and the availability under the facility were reduced to the
original $20.0 million.

CAPITAL LEASES

Orchard Supply leases two stores and certain equipment under capital
lease agreements. The leases bear interest at an implicit rate of approximately
10.0%.

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> 39

PRINCIPAL AND INTEREST PAYMENTS

The following summarizes the required future payments pursuant to the
various long-term debt instruments, including capital leases, discussed above
(in thousands):

<TABLE>
<CAPTION>
FUTURE MINIMUM
PRINCIPAL RENTAL PAYMENTS
PAYMENTS ON PURSUANT TO
YEAR ENDING JANUARY, LONG-TERM DEBT CAPITAL LEASES
-------------------- -------------- ---------------
<S> <C> <C>
1996 .......................................................... $ 1,617 $ 253
1997 .......................................................... 1,918 253
1998 .......................................................... 2,280 252
1999 .......................................................... 2,607 252
2000 .......................................................... 2,943 253
Thereafter .................................................... 124,047 1,133
-------- ------
135,412 2,396
Less--Amount representing interest ............................ 856
------
Present value of future commitments ........................... 1,540
Less--Current portion ......................................... 1,617 103
-------- ------
Long-term portion ............................................. $133,795 $1,437
======== ======
</TABLE>

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

<TABLE>
<CAPTION>
YEAR ENDED
----------
<S> <C>
January 29, 1995 ................................................... $ 9,531
January 30, 1994 ................................................... 10,905
January 31, 1993 ................................................... 13,285
</TABLE>

6. PREFERRED STOCK:

In connection with the Company's initial public offering of common
stock in April 1993, 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 Orchard
Supply'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 800,000 shares
of 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 $20.0 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.

F-13
<PAGE> 40

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 $14.00 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 29, 1995, 27,221 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 to purchase
shares of common stock may be granted to qualified personnel of the Company 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 1993 plan are the same as the
1989 plan with the following exceptions: the options vest 25% upon grant and 25%
over the next three 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 29, 1995, options covering 136,001 shares of common stock
were outstanding, of which 85,751 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 402,076 shares of common
stock for issuance under the plans.

F-14
<PAGE> 41

Following is a detail of activity for the stock option plans:
<TABLE>
<CAPTION>
OPTIONS OPTIONS PRICE
AVAILABLE OUTSTANDING PER SHARE
--------- ----------- ---------
<S> <C> <C> <C>
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 $8.33-17.10
Cancelled 1,190 (1,190) $8.33-17.10
Exercised -- (699) $8.33
------- -------
January 29, 1995 266,075 136,001 $8.33-17.10
======= =======
</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 options are
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 balance sheet at January 31, 1994 and the statement of
operations for the year then ended 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 year ended January 31, 1993, the Company recorded an extraordinary
item due to the realization of operating loss carryforwards.

F-15
<PAGE> 42

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

<TABLE>
<CAPTION>
FEBRUARY 1, JANUARY 30, JANUARY 29,
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Deferred tax assets--
Net operating losses and tax credits ...................... $3,498 $3,814 $4,913
AMT payments made ......................................... 787 1,951 1,951
Other ..................................................... 1,841 1,548 2,285
------ ------ ------
Total assets ........................................... 6,126 7,313 9,149
Valuation allowance ....................................... (3,859) (3,248) (3,661)
------ ------ ------
Net assets ............................................. 2,267 4,065 5,488
------ ------ ------
Deferred tax liabilities--
Depreciation .............................................. 1,480 2,114 2,732
Software costs ............................................ -- -- 805
------ ------ ------
Total liabilities ...................................... 1,480 2,114 3,537
------ ------ ------
Total net deferred tax asset ........................... $ 787 $1,951 $1,951
====== ====== ======
</TABLE>

The $-0- provisions for the years ended January 30, 1994 and January
29, 1995 resulted from the recognition of net operating loss carryforwards
against which a valuation allowance had previously been provided. The provision
for income taxes for the year ended January 31, 1993 differs from the amount
computed by applying the statutory federal income tax rate to income before
taxes as follows:

<TABLE>
<CAPTION>
JANUARY 31,
1993
-----------
<S> <C>
Statutory federal income tax rate .............................................. 34.0%
State income taxes, net of federal benefit ..................................... 6.1
Goodwill amortization .......................................................... 3.2
Other .......................................................................... 0.9
----
44.2%
====
</TABLE>
As of January 29, 1995, for tax purposes, the Company has net operating
loss carryforwards of approximately $11.3 million and $6.4 million available to
offset federal and California taxable income, respectively. These federal net
operating loss carryforwards expire at various dates through the fiscal year
ending 2009 and state loss carryforwards expire at various dates through 1999.
The Company also has net operating loss carryforwards available for alternative
minimum tax purposes and jobs tax credit carryforwards.

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 determined by
this computation that is not used in the current year increases the succeeding
year's annual limitation amount. The Company's ability to utilize net operating
loss carryforwards as computed for California income tax purposes may be
similarly limited. The limitation on the use of net operating loss carryforwards
may have the effect of accelerating a portion of the Company's income tax
liability to an earlier year, and may also result in an overall increase in
income taxes payable by the Company. Whether the Company's liability for taxes
will be accelerated or increased will depend on numerous factors, including
whether and the extent to which future annual taxable income of the Company
exceeds the annual limitation, whether the Company is paying tax based on its
regular taxable income or its alternative minimum taxable income and whether and
the extent to which California permits corporations to deduct net operating loss
carryforwards for California income tax purposes.

F-16
<PAGE> 43

The Company has made income tax payments of approximately $0.4 million,
$1.2 million and $-0- in the years ended January 31, 1993, January 30, 1994 and
January 29, 1995, respectively, primarily toward tax liabilities computed for
alternative minimum tax purposes. Such payments are recorded as prepayments
which will be applied against future liabilities computed for regular tax
purposes.

9. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS:

Working Capital Accounts

The carrying amounts of cash and cash equivalents, accounts receivable
and accounts payable approximate fair value because of the short maturity of
these instruments.

Long-Term Debt

Based on the borrowing rates currently available to the Company for
loans with similar terms and average maturities, the fair value of long-term
debt is estimated by management to be approximately $119.9 million versus the
carrying amount of approximately $137.0 million at January 29, 1995.

10. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):

<TABLE>
<CAPTION>
INCOME (LOSS)
PER COMMON
INCOME AND EQUIVALENT
(LOSS) BEFORE SHARE BEFORE
EXTRAORDINARY NET INCOME EXTRAORDINARY
SALES GROSS MARGIN ITEMS (LOSS) ITEMS
-------- ------------ ------------- ---------- --------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
YEAR ENDED JANUARY 30, 1994
First quarter(1) ................. $ 90,361 $ 31,948 $ 1,986 $(3,377) $ 0.40
Second quarter ................... 101,206 35,741 5,540 5,540 0.80
Third quarter .................... 88,888 32,137 2,469 2,469 0.35
Fourth Quarter(1) ................ 84,622 30,925 170 (3,785) 0.02
-------- -------- ------- ------- ------
Year ............................. $365,077 $130,751 $10,165 $ 847 $ 1.57
======== ======== ======= ======= ======
YEAR ENDED JANUARY 29, 1995
First quarter .................... $ 96,555 $ 34,606 $ (917) $ (917) $(0.16)
Second quarter ................... 125,566 44,970 3,305 3,305 0.43
Third quarter .................... 111,790 41,043 598 598 0.04
Fourth Quarter ................... 107,735 39,648 (689) (689) (0.14)
-------- -------- ------- ------- ------
Year ............................. $441,646 $160,267 $ 2,297 $ 2,297 $ 0.17
======== ======== ======= ======= ======
</TABLE>

The following event impacted the results above:

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

F-17
<PAGE> 44

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:

<TABLE>
<CAPTION>
JANUARY 30, JANUARY 29,
1994 1995
----------- -----------
<S> <C> <C>
Current assets ........................................................ $184,028 $144,453
Non-current assets .................................................... 125,700 148,198
-------- --------
309,728 292,651
======== ========
Current liabilities ................................................... $ 89,030 $ 73,412
Non-current liabilities ............................................... 158,869 136,669
-------- --------
247,899 210,081
-------- --------
Redeemable preferred stock ............................................ -- --
Other equity .......................................................... 61,829 82,570
-------- --------
61,829 82,570
-------- --------
$309,728 $292,651
======== ========
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------
JANUARY 31, JANUARY 30, JANUARY 29,
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Sales ........................................................ $346,158 $365,077 $441,646
Gross profit ................................................. 121,559 130,751 160,267
Income (loss) before provision for taxes
and extraordinary credit .................................. 1,944 10,170 2,339
Net income (loss) ............................................ 878 852 2,339
</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> 45

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES

To the Stockholders 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 3, 1995. Our audits
were made for the purpose of forming an opinion on those statements taken as a
whole. The schedules listed in 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 LLP
ARTHUR ANDERSEN LLP

San Jose, California
March 3, 1995

S-1
<PAGE> 46

ORCHARD SUPPLY HARDWARE STORES CORPORATION

SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF SUBSIDIARY

CONDENSED BALANCE SHEETS

FOR THE FISCAL YEARS ENDED

(IN THOUSANDS)

<TABLE>
<CAPTION>
JANUARY 30, JANUARY 29,
1994 1995
----------- -----------
ASSETS

<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 75,583 $ 9,235
Investments -- 3,000
Accounts receivable 13,684 14,414
Inventory 82,494 103,438
Prepaid expenses and other 6,134 8,221
Assets held for disposal 6,133 6,145
-------- -------
Total current assets 184,028 144,453

PROPERTY AND EQUIPMENT, net 105,874 129,840
OTHER ASSETS, net 19,826 18,358
-------- -------
Total assets $309,728 $292,651
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 56,809 $ 70,919
Notes payable 1,494 773
Current portion of capital leases and long-term debt 30,727 1,720
-------- -------
Total current liabilities 89,030 73,412

OTHER LIABILITIES 2,596 1,437

CAPITAL LEASES AND LONG-TERM DEBT, net of current portion 156,273 135,232
-------- -------
Total liabilities 247,899 210,081
-------- -------

STOCKHOLDERS' EQUITY:
Additional paid-in-capital 60,977 80,231
Retained earnings 852 2,339
-------- -------
Total stockholders' equity 61,829 82,570
-------- -------
Total liabilities and stockholders' equity $309,728 $292,651
======== ========
</TABLE>

S-2
<PAGE> 47

ORCHARD SUPPLY HARDWARE STORES CORPORATION

SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF SUBSIDIARY

CONDENSED STATEMENTS OF INCOME

FOR THE FISCAL YEARS ENDED

(IN THOUSANDS)

COST OF GOODS SOLD ............................................................. 224,599 234,326 281,379
-------- -------- --------
Gross margin .......................................................... 121,559 130,751 160,267

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ................................... 100,859 108,998 145,332
-------- -------- --------
Operating income ...................................................... 20,700 21,753 14,935

WRITE-DOWN IN CARRYING AMOUNT OF ASSET HELD

FOR DISPOSAL .............................................................. 2,007 -- --

INTEREST EXPENSE, net .......................................................... 16,749 11,583 12,596
-------- -------- --------
Income before provision for income taxes and extraordinary items ...... 1,944 10,170 2,339

PROVISION FOR INCOME TAXES ..................................................... 866 -- --
-------- -------- --------
Income before extraordinary items ..................................... 1,078 10,170 2,339

EXTRAORDINARY ITEMS ............................................................ (200) (9,318) --
-------- -------- --------
Net income ............................................................ $ 878 $ 852 $ 2,339
======== ======== ========
</TABLE>

S-3
<PAGE> 48
ORCHARD SUPPLY HARDWARE STORES CORPORATION

SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF SUBSIDIARY

CONDENSED STATEMENTS OF CASH FLOWS

FOR THE FISCAL YEARS ENDED

(IN THOUSANDS)

YEAR ENDED
-------------------------------------
JANUARY 31, JANUARY 30, JANUARY 29,
1993 1994 1995
--------- ---------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:

Net income ........................................................... $ 878 $ 852 $ 2,339
Non-cash adjustments to net income--
Depreciation and amortization ..................................... 7,080 6,845 8,682
Prepayment premium on senior and subordinated senior debentures ... -- 6,335 --
Write-off of deferred financing costs ............................. 1,066 2,745 --
Accretion of debt discount ........................................ 1,682 313 --
Loss on asset disposals ........................................... 115 65 803
Write-down in carrying amount of asset held for disposal .......... 2,007 -- --
Changes in assets and liabilities --

Increase in accounts receivable ................................... (218) (477) (1,171)
Increase in inventory ............................................. (3,131) (8,636) (20,944)
Increase in prepaid expenses and other ............................ (925) (2,429) (2,631)
Increase in accounts payable and other current liabilities ........ 1,524 7,506 16,237
Decrease in other liabilities ..................................... (577) -- (999)
------- ------- -------
Net cash provided by operating activities ...................... 9,501 13,119 2,316
------- ------- -------

CASH FLOWS FROM INVESTING ACTIVITIES:

Additions to property and equipment .................................. (4,318) (29,491) (30,577)
Purchase of investments .............................................. -- -- (3,000)
Purchase of leasehold rights ......................................... -- (6,511) --
------- -------- --------
Net cash used in investing activities .......................... (4,318) (36,002) (33,577)
------- -------- --------

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from issuance of long-term debt ............................. 46,110 103,079 1,752
Principal payments on capital leases and long-term debt .............. (48,324) (50,757) (52,335)
Deferred financing costs paid ........................................ (2,076) (2,736) (433)
Repayment of notes payable, net ...................................... (1,770) (1,727) (2,473)
Contributions from parent Company .................................... 12 46,132 18,402
------ -------- --------
Net cash provided (used in) financing activities ............... (6,048) 93,991 (35,087)
------ -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .......................... (865) 71,108 (66,348)

CASH AND CASH EQUIVALENTS, Beginning of Period ................................ 5,340 4,475 75,583
-------- -------- ---------
CASH AND CASH EQUIVALENTS, End of Period ...................................... $ 4,475 $ 75,583 $ 9,235
======== ======== =========
</TABLE>

S-4
<PAGE> 49

ORCHARD SUPPLY HARDWARE STORES CORPORATION

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

FOR THE FISCAL YEAR ENDED

(IN THOUSANDS)

BALANCE AT CHARGED TO CHARGED BALANCE
BEGINNING COSTS/ TO OTHER AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- ----------- --------- -------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
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

JANUARY 29, 1995
Accounts receivable reserves ............................ $1,176 $1,172 $210 $(1,357) $1,201

</TABLE>

S-5

<PAGE> 50

EXHIBIT INDEX

EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>

+3.1 Certificate of Incorporation of the Orchard Supply Hardware
Stores Corporation (formerly Orchard Holding Corporation) as
amended to date.

*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 93/8% 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.

</TABLE>

<PAGE> 51

EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>

++++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.

</TABLE>

<PAGE> 52

EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>

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

*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.

++10.45 Second Amendment to Employment Agreement dated January 1, 1989
between Orchard Supply Hardware Corporation and Maynard Jenkins.

+10.46 Sixth Amendment to Note Agreement dated as of April 27, 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.

+10.47 Seventh Amendment to Note Agreement dated as of May 31, 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.

++10.48 Orchard Supply Hardware Corporation Performance Bonus Plan
dated February 1, 1994.

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

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

++27.1 Financial Data Schedule for the fiscal year ended January 29,
1995.

* 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 with Annual Report on Form 10-K (File No. 0-21182) on April
13, 1994.

+ Filed with Quarterly Report on Form 10-Q (File No. 0-21182) on
June 14, 1994.

++ Filed herewith.

</TABLE>

<PAGE> 1
EXHIBIT 10.45

SECOND AMENDMENT TO EMPLOYMENT AGREEMENT

This Second Amendment to Employment Agreement (the "Second Amendment")
is made as of the 15th day of September, 1994 by and between Orchard Supply
Hardware Corporation (the "Company") and Maynard Jenkins (the "Executive").

R E C I T A L S

A. Executive is a party to that certain Employment Agreement dated as
of January 1, 1989 by and between Executive and the Orchard Supply Hardware
division of Wickes Companies, Inc. ("OSH"), as amended by the First Amendment
to Employment Agreement dated as of April 15, 1992 by and between Executive and
the Company (as amended, the "Employment Agreement").

B. On May 30, 1989, the Company acquired substantially all of the
assets and assumed certain liabilities of OSH (the "Acquisition").

C. Pursuant to Section 7(d) of the Employment Agreement, the rights
and obligations of OSH under the Employment Agreement have inured to and are
binding upon the Company as a result of the Acquisition.

D. The Company and Executive now desire to amend the Employment
Agreement as hereinafter set forth.

A G R E E M E N T

NOW, THEREFORE, the Company and Executive hereby agree as follows:

1. Section 2(c) of the Employment Agreement shall be deleted and
replaced in its entirety as follows:

(c) In addition to the foregoing, Executive shall be entitled to
receive a bonus of $125,000 per year, effective for the fiscal year
ending January 29, 1995, which shall be paid to the Executive at the
same time as the bonus is paid or, if no bonus is earned, at the same
time such bonus would otherwise be payable to the Executive pursuant
to the Company's Executive Incentive Compensation Plan or such plan
or plans as may succeed the Executive Incentive

<PAGE> 2
Compensation Plan for such year as provided in Section 2(b) hereof.

2. Except to the extent specifically set forth herein, nothing
contained herein shall constitute an amendment or waiver of any other terms,
provisions or requirements of the Employment Agreement.

3. This Second Amendment may be executed in counterparts.

4. This Second Amendment is executed and delivered in the State of
California and shall not be construed and enforced in accordance with the laws
and decisions of said State.

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

THE COMPANY:

ORCHARD SUPPLY HARDWARE CORPORATION

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

EXECUTIVE:

/s/ Maynard Jenkins
-------------------------------------
Maynard Jenkins

<PAGE> 1
EXHIBIT 10.48

ORCHARD SUPPLY HARDWARE
OFFICER'S PERFORMANCE BONUS (THE PLAN)

INTRODUCTION:

The purposes of the annual Officer's Performance Bonus Plan (The Plan)
described herein are as follows:

1. To provide an annual incentive for those key executives who have a
major impact on the Company's financial results.

2. To reinforce the Company's annual financial objectives.

3. To provide competitive rewards to key executives commensurate with
the Company's financial success.

EFFECTIVE DATE:

The original effective date of The Plan is February 1, 1994. The Plan
has no termination date, but the Company reserves the right to change the
provisions of The Plan at any time.

ADMINISTRATION:

The Plan shall be administered by the President of the Company. The
Board of Directors will approve any Plan changes and all compensation actions
proposed for officers of the Company. Approval of all awards, other than his
own, shall be made by the President of the Company before being submitted to
the Board of Directors for final approval.

ELIGIBILITY:

Eligibility for The Plan is to include the president and all vice
presidents of the Company.

OVERVIEW OF THE PLAN:

The Plan will work essentially as follows:

- Each year, Plan participants will be assigned a Target Bonus based
on full achievement of Target Operating Income which may or may not
be the same as the approved budget. The Target Bonus is calculated
as a percent of base annual salary.

- The total of the Target Bonus values for Plan participants will
constitute the Target Bonus Pool.

<PAGE> 2
OFFICER'S PERFORMANCE BONUS PLAN PAGE 2

- Actual bonus payouts will begin at the Threshold Operating Income.

- If the Threshold Operating Income is not achieved, the President of
the Company, with approval of the Compensation Committee of the
Board of Directors, may award bonus dollars for achievement of
management objectives.

- If the amount of actual Operating Income falls between the Threshold
Operating Income and the Target Operating Income, the amount of
bonus to be paid will consist of the Threshold Bonus (40 percent
of the Target Bonus) plus an amount determined by the following
formula:

Excess over Threshold Operating Income X 60% of Target Bonus
--------------------------------------
Range from Threshold to Target Operating
Income

- If the amount of actual Operating Income exceeds Target Operating
Income, then the amount of bonus to be paid will consist of the
Target Bonus plus a Bonus Override determined by the following
formula:

Participant's Target Bonus Value X 10% of excess over Target
--------------------------------
Target Bonus Pool Operating Income

- Each year, the President of the Company will have the opportunity
to Modify the Target Bonus Percentage of any of The Plan
participants.

- The bonus payout will be made on or about March 25, following the
audit of the fiscal year during which the bonus was earned.

SIZE OF TARGET BONUS:

A Target Bonus Percentage will be assigned to each participant by the President
of the Company. Base Salary used in calculating the Target Bonus is defined as
the employee's current annual salary in effect as of the last day of the Fiscal
Year. In the event that an individual joins the plan during the course of the
fiscal year, the assigned Target Bonus will be calculated on a pro rata basis
based on the portion of the Fiscal Year worked as a participant of The Plan.

ILLUSTRATION OF ANNUAL PLAN PAYMENTS:

Examples of how the plan would work in practice are illustrated in Exhibits 1
and 2.

<PAGE> 3
OFFICER'S PERFORMANCE BONUS PLAN PAGE 3

TERMINATION PROVISIONS:

Release, Reduction in Work Force or Resignation
-----------------------------------------------

If a participant in The Plan is not on the payroll at the end of the
Fiscal Year, a bonus will not be paid regardless of length of service
or reason for termination or resignation, except as provided for under
the next section.

Termination Due to Death or Retirement, and Employees on Total and
------------------------------------------------------------------
Permanent Disability or Approved Leaves of Absence
--------------------------------------------------

A pro rata bonus based on active employment is payable under these
circumstances and will be based upon the assigned Target Bonus and
corresponding base salary received while covered under The Plan.

Discharge by the Company for Willful and Deliberate or Gross Misconduct
-----------------------------------------------------------------------

Any right of the employee to a bonus under The Plan shall be forfeited
even if the employee is on the payroll at the end of the fiscal year.

<PAGE> 4
OFFICER'S PERFORMANCE BONUS PLAN PAGE 4

THE PLAN DEFINITIONS

The Plan Orchard Supply Hardware Officer's Performance Bonus
Plan

Operating Income Operating Income is income before making the
following deductions: interest, taxes (Federal and
State taxes on income or capital), extraordinary
items as defined by generally accepted accounting
principles and unusual or infrequently occurring
items such as gain or loss on sale of properties,
loss on discontinued operations, etc.

Target Operating Income Budgeted or such other amount of Operating Income
for the fiscal year as determined by the Board of
Directors at which the Target Bonus is paid.

Pre Tax Income Pre Tax Income is Operating Income less interest
expense.

Threshold Operating Income Represents Target Operating Income less 25% of
Budgeted Pre Tax Income.

Target Bonus Percentage A participant's percent of base salary assigned by
the President of the Company used to calculate the
bonus paid if Target Operating Income is attained.

Target Bonus This is the payout amount available to a
participant upon Orchard Supply Hardware reaching
Target Operating Income as calculated by a
participant's Target Bonus percentage times the
participant's current annual base salary.

Threshold Bonus Represents 40 percent of the Target Bonus

Target Bonus Pool The total of the Target Bonus values for all of
The Plan participants

Bonus Override An amount equal to 10% of the excess of actual Pre
Tax Income over Target Operating Income payable to
the plan participants. This amount is distributed
to participants based on the ratio of their Target
Bonus to the Target Bonus Pool.

<PAGE> 5
OFFICER'S PERFORMANCE BONUS PLAN PAGE 5

EXHIBIT 1

ORCHARD SUPPLY HARDWARE CORP.
OFFICER'S PERFORMANCE BONUS PLAN
TARGET BONUS AWARDS
1994
<TABLE>
<CAPTION>

Current % of Target
Annual Year Bonus Value % of
Name Salary Employed 5% Amount Total
- ---- ------ -------- ------ ------ -----
(A) (B) (C)

<S> <C> <C> <C> <C> <C>
M. Smith ....... $100,000 100% 35% $35,000 40.39%
G. Jones ....... $ 70,000 83% 30% $17,430 20.11%
R. Wright....... $ 60,000 58% 25% $ 8,700 10.04%
J. Anderson..... $ 45,000 100% 20% $ 9,000 10.39%
J. Cunningham... $ 44,000 100% 20% $ 8,800 10.15%
M. Booth........ $ 42,000 92% 20% $ 7,728 8.92%
---------- ------- -------
BONUS POOL $86,658 100.00%
======== ========
</TABLE>
_____________

(A) As of the last day of the fiscal year.
(B) In days as a percent to 365 days.
(C) Used to allocate override above target to participants.

<PAGE> 6
OFFICER'S PERFORMANCE BONUS PLAN PAGE 6

EXHIBIT 2

ORCHARD SUPPLY HARDWARE CORP.
OFFICER'S PERFORMANCE BONUS PLAN
SAMPLE CALCULATIONS FOR
M. SMITH

<TABLE>
<CAPTION> INCOME BONUS
LEVEL EARNED
------ ------
<S> <C> <C>
Budgeted Pre Tax Income............... $ 5,481,000
Budgeted Operating Income............. $18,909,000
Threshold Operating Income............ $17,539,000(A)
Target Operating Income............... $18,909,000
Threshold Bonus....................... $14,000(B)
Target Bonus.......................... $35,000(C)

EXAMPLE 1: OPERATING INCOME BETWEEN
THRESHOLD AND TARGET

Actual Operating Income............... $17,678,000
Bonus at Threshold Pre Tax Income..... $14,000

Excess Pre Tax Income over Threshold
($17,678,000 - $17,539,000)......... $ 139,000

Total Range from Threshold to
Target Operating Income
($18,909,000 - $17,539,000)......... $ 1,370,000

Divide the Excess Actual Pre Tax
Income over Threshold by the Total
Range from Threshold to Target
Pre Tax Income
($139,000 / $1,370,000) = Percent
of Range achieved................... 10.15%
===========
Bonus available between threshold
and target ($35,000 - $14,000)...... $ 21,000

Percentage of Range achieved.......... x10.15%
-----------
+$ 2,131
-------
TOTAL BONUS EARNED.................... $16,131
=======
</TABLE>

(A) Target Operating Income less 25% of Budgeted Pre Tax Income
(B) 40% of Target Bonus
(C) M. Smith Target Bonus Exhibit 1

<PAGE> 7
OFFICER'S PERFORMANCE BONUS PLAN PAGE 7

EXHIBIT 2 (continued)

ORCHARD SUPPLY HARDWARE CORP.
OFFICER'S PERFORMANCE BONUS PLAN
SAMPLE CALCULATIONS FOR
M. SMITH

EXAMPLE 2: OPERATING INCOME ABOVE TARGET - BONUS OVERRIDE CALCULATION

<TABLE>
<S> <C> <C>
Actual Operating Income ................ $19,428,000
Target Operating Income ................ 18,909,000
Target Bonus ........................... $35,000

Bonus Override Calculation:

Actual Operating Income......... $19,428,000
Target Operating Income......... $18,909,000
-----------

Excess over Target.............. $ 519,000

Total Override %................ x10%
----

Bonus to all Participants....... $ 51,900

M. Smith Allocation%(A)......... x40.39%
------
$20,962
-------

TOTAL BONUS EARNED.............. $55,962
=======

</TABLE>

(A) See Exhibit 1

<PAGE> 8
PAGE 8

ORCHARD SUPPLY HARDWARE CORP.
OFFICER'S PERFORMANCE BONUS PLAN
TARGET BONUS AWARDS
1994

<TABLE>
<CAPTION>
Current Target Value
Annual % of Year Bonus Amount/ % of
Name Salary Employed % Threshold Total
---- ------- --------- ------ --------- -----
(A) (B) (C)

<S> <C> <C> <C> <C> <C>
W. Collard ............. $ 83,500 100% 20% $ 16,700/ 7.06%
6,680
J. DiRocco ............. $ 97,504 100% 25% $ 24,376/ 10.31%
9,750
S. Hilberg ............. $ 124,000 100% 25% $ 31,000 13.11%
12,400
M. Jenkins ............. $ 325,000 100% 30% $ 97,500 41.24%
39,000
R. Lewis ............... $ 107,004 100% 25% $ 26,751 11.32%
10,700
C. McInnes ............. $ 86,600 100% 20% $ 17,320 7.33%
6,928
L. Nemechek ............ $ 91,000 100% 25% $ 22,750 9.63%
9,100
BONUS POOL ............. $1,038,608 $236,397 100.00%

Budgeted Pre Tax Income ............. $5,481,000
Budgeted Operating Income ........... $18,909,000
Threshold Operating Income .......... $17,539,000
Target Operating Income ............. $18,909,000

</TABLE>

(A) As of the last day of the fiscal year.
(B) In days as a percent to 365 days.
(C) Used to allocate override above target to participants.

<PAGE> 1
EXHIBIT 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the
incorporation of our reports dated March 3, 1995 included in this Annual Report
on Form 10-K of Orchard Supply Hardware Stores Corporation (the "Company"),
into the Company's previously filed Registration Statements Nos. 33-72146 and
33-67902 on Form S-8.

/s/ ARTHUR ANDERSEN LLP

ARTHUR ANDERSEN LLP

San Jose, California
April 12, 1995

<ARTICLE> 5
<MULTIPLIER> 1000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-29-1995
<PERIOD-START> JAN-31-1994
<PERIOD-END> JAN-29-1995
<CASH> 9240
<SECURITIES> 3000
<RECEIVABLES> 15618
<ALLOWANCES> 1201
<INVENTORY> 103438
<CURRENT-ASSETS> 144461
<PP&E> 159209
<DEPRECIATION> 29369
<TOTAL-ASSETS> 292659
<CURRENT-LIABILITIES> 73412
<BONDS> 135232
<COMMON> 70
0
8
<OTHER-SE> 82500
<TOTAL-LIABILITY-AND-EQUITY> 292659
<SALES> 441646
<TOTAL-REVENUES> 441646
<CGS> 281379
<TOTAL-COSTS> 281379
<OTHER-EXPENSES> 145383
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12587
<INCOME-PRETAX> 2297
<INCOME-TAX> 0
<INCOME-CONTINUING> 2297
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2297
<EPS-PRIMARY> 0.17
<EPS-DILUTED> 0.17

</TABLE>