<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 26, 1996
REGISTRATION NO. 333-
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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ORCHARD SUPPLY HARDWARE
STORES CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4214109
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
6450 VIA DEL ORO, SAN JOSE, CALIFORNIA 95119
(408) 281-3500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
STEPHEN M. HILBERG
CHIEF FINANCIAL OFFICER
ORCHARD SUPPLY HARDWARE STORES CORPORATION
6450 VIA DEL ORO, SAN JOSE, CALIFORNIA 95119
(408) 281-3500
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------
COPIES TO:
ROGER H. LUSTBERG, ESQ. RICHARD A. BOEHMER, ESQ.
ERIC R. HATTLER, ESQ. JOHN A. LACO, ESQ.
RIORDAN & MCKINZIE O'MELVENY & MYERS
300 SOUTH GRAND AVENUE, 29TH FLOOR 400 SOUTH HOPE STREET, 15TH FLOOR
LOS ANGELES, CALIFORNIA 90071 LOS ANGELES, CALIFORNIA 90071
Approximate date of commencement of proposed sale of the securities to the
public: AS SOON AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES
EFFECTIVE.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box: [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER UNIT (1) OFFERING PRICE (1) FEE
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<S> <C> <C> <C> <C>
Common Stock..................... 2,875,000 shares $22.50 $64,687,500 $22,306
</TABLE>
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457, based on the average of the high and low sales
price, $22 3/4 and $22 1/4, respectively, on February 21, 1996 as reported
on the Nasdaq National Market.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED FEBRUARY 26, 1996
PROSPECTUS
2,500,000 SHARES
[LOGO OF ORCHARD SUPPLY HARDWARE]
COMMON STOCK
Of the 2,500,000 shares of Common Stock offered hereby, 500,000 shares are
being sold by the Company and 2,000,000 shares are being sold by the Selling
Stockholder (the "Offering"). See "Principal and Selling Stockholders." The
Company will not receive any of the proceeds from the sale of shares by the
Selling Stockholder.
The Company's Common Stock is quoted on the Nasdaq National Market under the
symbol "OSHC." The Company has applied to have its Common Stock quoted on the
New York Stock Exchange and anticipates trading will commence within 45 days of
the pricing of the Offering. On February 23, 1996, the last reported sale price
for the Common Stock quoted on the Nasdaq National Market was $23.50. See
"Price Range of Common Stock."
SEE "RISK FACTORS" COMMENCING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
Proceeds to
Price to Underwriting Proceeds to Selling
Public Discount (1) Company (2) Stockholder
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<S> <C> <C> <C> <C>
Per Share............... $ $ $ $
Total (3)............... $ $ $ $
</TABLE>
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(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company, estimated to be $275,000.
(3) The Selling Stockholder has granted the Underwriters a 30-day option to
purchase up to 375,000 additional shares of Common Stock solely to cover
over-allotments, if any. If the Underwriters exercise this option in full,
the Price to Public will total $ , Underwriting Discount will total $
and Proceeds to the Selling Stockholder will total $ . See
"Underwriting."
The shares of Common Stock are offered by the several Underwriters named
herein, subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that delivery of the
certificates representing such shares will be made against payment therefor at
the office of Montgomery Securities on or about , 1996.
-----------
MONTGOMERY SECURITIES FURMAN SELZ
, 1996
<PAGE>
[LOGO OF ORCHARD SUPPLY HARDWARE]
[MAP OF CALIFORNIA] [PHOTO 1]
Existing Stores and Distribution Store located in Foster City,
Center California
[PHOTO 2]
Quick and easy check out
[PHOTO 4] [PHOTO 3]
Extensive selection of striking tools A broad range of quality plants
and replacement handles and shrubs
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK
OF THE COMPANY ON NASDAQ IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES
EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements (including the Notes thereto) appearing
elsewhere in this Prospectus. Unless otherwise indicated, as used in this
Prospectus (i) all information assumes that the over-allotment option granted
to the Underwriters has not been exercised and (ii) 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 30, 1995 and ending January
28, 1996 is referred to herein as fiscal 1995). This Prospectus contains
forward-looking statements which involve risks and uncertainties. The Company's
actual results may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in "Risk Factors."
THE COMPANY
Orchard currently operates 60 hardware superstores in California which
average approximately 40,000 square feet of interior and exterior selling space
and carry over 45,000 stock keeping units ("SKUs"). 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 while providing a
greater depth and breadth of "fix-it" products in its core product categories
than the large warehouse home center chains.
Historically, the Company's market has been Northern and Central California,
where the Company currently operates 50 stores. The Company successfully
entered the Southern California market in fiscal 1994 with the opening of six
stores in metropolitan Los Angeles and one store near Santa Barbara. The
Company has subsequently added three stores in metropolitan Los Angeles. The
Company currently expects to open five to seven new stores in fiscal 1996 and
five to ten new stores annually for the next several years thereafter,
substantially all of which will be located in Southern California. Through
these store openings, the Company plans to strengthen its position in
metropolitan Los Angeles and extend its Southern California presence initially
into Orange, Riverside and San Bernardino Counties and then to San Diego and
Ventura Counties.
THE ORCHARD CONCEPT
Orchard's business strategy is to position itself as the primary destination
for customers' "fix-it" needs by providing a broad merchandise selection,
outstanding service, convenient, well organized stores and value pricing.
Broad Selection and Availability. Orchard offers a wide selection of brand
name and private label merchandise, including many products not carried by its
competitors in its core merchandise categories of hardware, plumbing,
electrical and garden and nursery. Management believes that in these core
categories the Company offers more SKUs than its warehouse competitors. The
Company further distinguishes itself by maintaining a high in-stock selection
(98% on average) to ensure availability of merchandise to its customers.
High Levels of Customer Service. The Company is committed to furnishing
outstanding levels of customer service through knowledgeable, well trained
personnel. Additionally, the Company offers value-added services including a
pick-up station at each location, commercial customer services, a proprietary
credit card, custom cutting and "how-to" fairs.
Convenient, Well Organized Stores. Orchard stores have low profile shelving,
descriptive signs and efficient check-out stations which provide customers an
attractive shopping environment and the ability to locate items and check out
of the store quickly. The Company's stores follow a standard merchandise layout
and maintain a consistent appearance. In addition, all Orchard stores are
easily accessible, are conveniently located and have ample parking.
3
<PAGE>
Value Orientation. The Company provides the customer with value through a
combination of broad merchandise selection, outstanding service, convenient,
well organized stores and fair everyday prices. The Company offers competitive
pricing on high visibility, high volume products. The Company also stocks a
wide selection of products not typically carried by its competitors on which
the Company generally achieves higher margins.
GROWTH STRATEGY
Orchard's strategy for growth is to continue to build its market presence in
existing markets and to enter attractive new markets. The Company's primary
strategy is to add new stores in its existing metropolitan Los Angeles market
and to extend its Southern California presence into Orange, Riverside, San
Bernardino, San Diego and Ventura Counties. The Company will also augment its
Northern and Central California base with strategic new store additions. The
Company plans to open five to seven new stores in fiscal 1996 and five to ten
new stores annually for the next several years thereafter, substantially all of
which will be in Southern California.
The Company's expansion into Southern California has been very successful,
with four of the stores in this market already ranking among the Company's top
20 stores in sales. Management believes that the Southern California market,
one of the largest do-it-yourself ("DIY") markets in the United States,
presents an attractive opportunity for the broad-selection, high-service
Orchard concept. By extending its presence in Southern California, the Company
believes it will be able to leverage its advertising and marketing expenses in
this market and attain a critical mass of stores to support a new Southern
California distribution center, which is planned for fiscal 1998.
The Company believes its experience in Southern California has demonstrated
that Orchard's concept is transferrable from its original Northern and Central
California markets to other regions. The Company believes that the Southern
California market has considerably more expansion potential than its Northern
and Central California markets and can support its growth over at least the
next five years.
----------------
Substantially all of the Company's operations are conducted through its
wholly owned subsidiary, Orchard Supply Hardware Corporation ("Orchard
Supply"). The principal executive offices of the Company are located at 6450
Via Del Oro, San Jose, California 95119 and its telephone number is (408) 281-
3500. As used in this Prospectus, unless the context indicates otherwise, the
terms "Company" and "Orchard" refer to the Company and Orchard Supply.
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered by the Company................ 500,000 shares
Common Stock offered by the Selling Stockholder.... 2,000,000 shares
Common Stock to be outstanding after the Offering . 7,515,165 shares (1)
Nasdaq National Market Symbol...................... OSHC
Proposed New York Stock Exchange Symbol ........... ORH
Use of Proceeds.................................... For general corporate
purposes, including
working capital, and new
store expansion.
</TABLE>
- --------
(1) As of January 28, 1996. Does not reflect 1,280,000 shares issuable upon
conversion of the Company's 6% Cumulative Convertible Preferred Stock (the
"Convertible Preferred Stock") or 229,158 shares of Common Stock issuable
upon the exercise of options. A total of 177,201 additional shares of
Common Stock are reserved for issuance under the Company's stock option
plans. See Note 7 to Consolidated Financial Statements.
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND STORE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------------------------------
JANUARY 26, JANUARY 31, JANUARY 30, JANUARY 29, JANUARY 28,
1992 1993 1994 1995 1996
(52 WEEKS) (53 WEEKS) (52 WEEKS) (52 WEEKS) (52 WEEKS)
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales................... $308,562 $346,158 $365,077 $441,646 $532,439
Gross margin............ 109,510 121,559 130,751 160,267 192,675
Operating expenses...... 91,296 99,944 106,802 137,858 161,040
Pre-opening expenses.... 1,192 924 2,221 7,525 2,400
Operating income........ 17,022 20,691 21,728 14,884 29,235
Write-down in carrying
amount of asset held
for disposal........... -- 2,007 -- -- --
Interest expense........ 14,773 16,725 11,563 12,587 13,337
Income before provision
for income taxes....... 2,249 1,959 10,165 2,297 15,898
Income before
extraordinary
items (1).............. 1,278 1,093 10,165 2,297 11,609
Extraordinary items (1). 971 (200) (9,318) -- --
Net income.............. 2,249 893 847 2,297 11,609
Preferred stock
dividends (2).......... 3,446 4,208 814 1,115 1,200
Net income (loss)
available to common
stock.................. $ (1,197) $ (3,315) $ 33 $ 1,182 $ 10,409
PER SHARE DATA:
Primary:
Net income (loss) per
common and equivalent
share before
extraordinary items... $ (1.74) $ (2.52) $ 1.57 $ 0.17 $ 1.48
Net income (loss) per
common and equivalent
share................. (0.96) (2.68) 0.01 0.17 1.48
Fully diluted:
Net income (loss) per
common and equivalent
share before
extraordinary items... (1.74) (2.52) 1.57 0.17 1.38
Net income (loss) per
common and equivalent
share................. (0.96) (2.68) 0.01 0.17 1.38
UNAUDITED PRO FORMA
(FULLY TAXED) DATA (3):
Net income available to
common stock........... $ 9,380
Fully diluted net income
per common and
equivalent share....... $ 1.12
OTHER DATA:
Comparable store sales
growth................. (1.3)% 5.3% 2.0% (1.1)% 8.0%
Number of stores (at end
of period)............. 37 39 43 56 60
</TABLE>
<TABLE>
<CAPTION>
JANUARY 28, 1996
--------------------
ACTUAL AS ADJUSTED
-------- -----------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital............................................ $ 76,155 $87,043
Total assets............................................... 305,536 316,424
Long-term debt and capital leases.......................... 132,242 132,242
Stockholders' equity....................................... 93,257 104,145
</TABLE>
- --------
(1) 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 $1.0 million and $0.4 million in the years ended
January 26, 1992 and January 31, 1993, respectively.
(2) See Note 6 to Consolidated Financial Statements.
(3) Pro forma net income available to common stock reflects an income tax
provision at a 41.0% effective rate, the Company's estimated effective rate
for fiscal 1996. The Company's actual effective tax rate for fiscal 1995
was 27.0%. See Note 8 to Consolidated Financial Statements. Management
believes the presentation of such pro forma data is meaningful to the
reader because it more closely approximates the future tax status of the
Company.
5
<PAGE>
RISK FACTORS
Prospective investors should consider carefully, in addition to other
information contained in this Prospectus, the following factors before
purchasing the shares offered hereby.
COMPETITION
The retail hardware business is highly competitive, and some of the
Company's competitors have substantially greater resources than the Company.
The Company competes with warehouse home center chains, traditional home
improvement centers and local independent retailers. Management believes that
its primary competitors are the warehouse home center chains, HomeBase and The
Home Depot, Inc. ("Home Depot"). The Company estimates that over 70% of
Orchard's stores currently compete directly with warehouse home center stores.
The Company anticipates that Home Depot will open four additional stores in
its markets in 1996. As it executes its growth strategy, Orchard will be
opening stores in proximity to existing warehouse home centers. Orchard
competes largely on the basis of service, selection and convenience, rather
than price, and has been successful thus far in competing with warehouse home
centers. However, due to the competitive nature of the market and the
substantially greater resources possessed by the Company's home center
competition, the Company faces the risk of increased competition in its market
niche. See "Business--Competition."
MANAGING EXPANSION
The Company currently plans to open five to seven new stores in fiscal 1996
and five to ten stores annually for the next several years thereafter,
substantially all of which will be located in Southern California. The
Company's ability to execute its expansion plans will depend to a great extent
on its ability to obtain suitable store sites on acceptable terms and open
stores on a timely basis. The Company may encounter substantial delays,
increased expenses or loss of potential sites due to the complexities
associated with the regulatory and permitting processes involved in opening
retail stores. The Company's expansion will further depend on its ability to
implement its operating controls and systems, to complete tenant improvements
in a timely manner, to hire and train competent store managers and staff and
to integrate these employees and new stores into its overall systems and
operations. The Company's prospects may be adversely affected if it is unable
to execute its store opening program. There can be no assurance that planned
store openings will be accomplished in a timely or profitable manner.
As the Company continues its store opening program, it will incur pre-
opening costs as well as higher labor, occupancy and other operating costs as
a percentage of sales in its new stores, thereby adversely affecting overall
margins until the new stores achieve sales maturity. Orchard's stores
typically have an operating loss in the year in which they commence
operations, due primarily to the stores' pre-opening expenses. In the
subsequent year, a new store generally breaks even before allocation of
overhead expenses not directly related to the store. Consequently, the opening
of new stores has a negative impact on the Company's profitability for that
year. In addition, if the Company accelerates its expansion plans, earnings in
the near term will be adversely affected.
The Company's expansion into the Southern California market involves
increased occupancy, labor, advertising and other costs, reflecting the cost
structure of the Southern California market as compared to the Company's
operations in Northern and Central California, and there can be no assurance
that the Company will be able to reduce these costs over time. In addition,
metropolitan Los Angeles is approximately 350 miles from the Company's Tracy,
California warehouse and distribution facility, which has resulted in gross
margins that are 0.7% to 0.9% lower in Southern California primarily due to
increased transportation costs. This will continue until the Company opens the
Southern California warehouse and distribution facility, which is currently
planned for fiscal 1998 when the Company currently anticipates it will have
developed the necessary store base in this market. Transportation savings are
expected to be initially offset by higher warehouse expenses at this facility.
Successful implementation of the new warehouse and distribution facility is a
key factor in the Company's expansion strategy. If the opening is delayed, or
if the Company is unable to operate its existing warehouse and distribution
facility on a cost efficient basis until fiscal 1998, the Company's expansion
program and results of
6
<PAGE>
operations could be adversely affected. The metropolitan Los Angeles area is
large and complex and there can be no assurance that the Company's Southern
California stores will achieve desired levels of profitability.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations," "Business--Growth Strategy," "--Distribution" and "--
Competition."
SEASONALITY AND SENSITIVITY TO WEATHER
The Company's results of operations exhibit some degree of seasonality.
Generally, the Company's sales and operating income are highest in the second
quarter and lowest in the fourth quarter. This is primarily attributable to
seasonality in sales of garden, nursery and related products which peak at the
beginning of the spring/summer gardening season. The Company has experienced
losses in the fourth quarter in the past and may experience losses in this
quarter in the future. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The Company's business can be negatively impacted by adverse weather
conditions, particularly the sales of garden and nursery products which
comprised approximately 27% of the Company's total sales for fiscal 1995. For
example, the Company's results in the first half of fiscal 1995 were adversely
impacted by unusually wet weather in Northern and Central California, and
nursery and garden sales were also negatively affected during the prolonged
drought in California in the early 1990s. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
QUARTERLY FLUCTUATIONS; COMPARABLE STORE SALES
The Company is subject to quarterly fluctuations in results of operations
due to various factors, including general economic conditions, consumer
confidence, weather conditions, levels of promotional marketing efforts, the
maturation of new stores and competitive activity. In addition, results of
operations can be adversely affected by the number and timing of new store
openings and related pre-opening costs. Future results of operations may
fluctuate as a result of these and other factors. Sales in an existing store
may also be adversely affected by the opening of a new Orchard store within
the same market; however, these new stores are intended to increase overall
market penetration and customer convenience.
Several of these factors also impact comparable sales comparisons. The
Company experienced a strong comparable store sales increase in fiscal 1995,
especially in the second half of the year. The Company does not expect to
sustain its rate of comparable store sales growth in fiscal 1996, particularly
in the second half of the year. The Company has recorded comparable store
sales decreases in certain quarters and fiscal years, and there can be no
assurance that comparable store sales for any particular quarter or fiscal
year will not decrease in the future. A decrease in comparable store sales in
any future period could have an adverse effect on earnings for that period.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
Because of these fluctuations in quarterly results, the results achieved in
any quarter should not be viewed as necessarily indicative of the results that
will be achieved for a full fiscal year or any future quarter.
GEOGRAPHIC CONCENTRATION
As its operations are entirely within California, the Company is subject to
regional risks, such as the economy, weather conditions, natural disasters and
regulation. Areas of California have recently begun to emerge from a prolonged
recession. If the economic recovery falters, California suffers another
drought, or other adverse regional events occur, there may be an adverse
impact on the Company's sales and profitability and its ability to implement
its expansion program at the planned rate.
7
<PAGE>
LEVERAGE AND CERTAIN RESTRICTIONS IMPOSED BY LENDERS
The Company is, and after the completion of the Offering will continue to
be, leveraged. After giving effect to the Offering and the application of the
estimated net proceeds therefrom, as of January 28, 1996, the Company's ratio
of long-term debt to stockholders' equity would have been approximately 1.3 to
1 and the Company's long-term debt as a percentage of total capitalization
would have been 56.3%. The Company's operating results have been and will
continue to be impacted by significant fixed charges related to its
indebtedness and dividends with respect to its preferred stock. The Company'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. If the Company fails to comply with the various covenants, the
lenders will be able to either accelerate the maturity of or cause the Company
to repurchase the applicable indebtedness.
The degree to which the Company is leveraged and the terms governing
Orchard's indebtedness, including restrictive covenants and events of default,
could have important consequences to stockholders including the following: (i)
a significant portion of the Company's cash flow from operations must be
dedicated to service its indebtedness; (ii) the Company may be more leveraged
than other providers of similar products and services, which may place the
Company at a competitive disadvantage; and (iii) the Company's leverage could
make it more vulnerable to changes in general economic conditions. Unexpected
declines in the Company's future business, increases in interest rates, or the
inability to borrow additional funds for its operations if and when required
could impair the Company's ability to meet its debt service obligations and,
therefore, could have a material adverse effect on the Company's business and
future prospects. No assurance can be given that additional debt or equity
funds would be available if needed or, if available, on terms which are
favorable to the Company. See "Capitalization," "Selected Consolidated
Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
CONTROL OF THE COMPANY
Presently, six of the eight members of the Company's Board of Directors are
affiliated with Freeman Spogli & Co. ("FS&Co.") or management. FS&Co.
currently controls through affiliates the power to vote 38.5% (48.0% if the
Convertible Preferred Stock is fully converted) of the outstanding shares of
Common Stock of the Company. Although FS&Co.'s voting power will be reduced to
9.3% (22.5% if the Convertible Preferred Stock is fully converted) after the
Offering, FS&Co. may effectively control or strongly influence the Company's
management policy and financing decisions and may have the power to strongly
influence the election of the Board of Directors; however, all major corporate
transactions including certain mergers and acquisitions, sales of
substantially all assets of the Company or going private transactions require
approval of a majority of the Company's outstanding stock entitled to vote
thereon (other than transactions subject to Section 203 of the Delaware
General Corporation Law). See "Management" and "Principal and Selling
Stockholders."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of the Company's Common Stock in the public market after the Offering
could adversely affect its market price. The Selling Stockholder and the
Company's directors and officers have agreed, subject to certain limitations,
not to sell any shares of Common Stock for a period of 90 days after the
closing of the Offering. Following the expiration of this 90-day period, these
shares may be resold subject to certain restrictions under Rule 144. However,
two unaffiliated stockholders known to the Company to own greater than 5% of
the Company's shares are not subject to any limitations on resale, and their
shares, as well as the approximately 5,854,518 additional shares (as of
February 14, 1996) that are publicly held (including the shares offered
hereby), may be sold at any time. See "Principal and Selling Stockholders."
8
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of 500,000 shares of Common
Stock offered by the Company hereby are estimated to be approximately $10.9
million, assuming a public offering price of $23.50 per share and after
deducting the underwriting discount and estimated offering expenses. The
Company intends to use the estimated net proceeds of the Offering for general
corporate purposes, including working capital, and to fund its continuing new
store expansion. Pending such uses, the Company may invest the proceeds in
short-term, investment grade securities. The Company will not receive any
proceeds from the sale of Common Stock by the Selling Stockholder.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is currently traded on the Nasdaq National
Market. The Company has applied to have its Common Stock listed on the New
York Stock Exchange and anticipates that trading will commence within 45 days
of the pricing of the Offering. The following table sets forth, for the fiscal
periods indicated, the high and low sales prices for the Common Stock as
reported by Nasdaq.
<TABLE>
<CAPTION>
HIGH LOW
---- ----
<S> <C> <C>
FISCAL 1994
First Quarter............................................ $15 1/2 $11 3/4
Second Quarter........................................... $15 1/2 $12
Third Quarter............................................ $13 1/4 $ 9
Fourth Quarter........................................... $10 $ 6 1/4
FISCAL 1995
First Quarter............................................ $ 9 3/4 $ 7
Second Quarter........................................... $14 1/4 $ 8 9/16
Third Quarter............................................ $16 3/4 $13 1/4
Fourth Quarter........................................... $26 1/2 $14
FISCAL 1996
First Quarter (through February 23, 1996)................ $24 3/4 $21 1/4
</TABLE>
The last reported sale price of the Common Stock on the Nasdaq National
Market on February 23, 1996 was $23.50 per share. As of January 28, 1996,
there were 311 holders of record of the Company's Common Stock.
DIVIDEND POLICY
The Company has not declared or paid cash dividends to its holders of Common
Stock. The Company currently anticipates that all earnings 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. The
agreements governing the Company's indebtedness contain provisions which
prohibit the Company from paying dividends on its Common Stock. See Note 5 to
Consolidated Financial Statements. Dividends on the Convertible Preferred
Stock accrue at 6% per annum from the date of original issuance, February 25,
1994, and are payable quarterly, when, as and if declared by the Board of
Directors. No dividends can be declared or paid on the Company's Common Stock
unless all accrued and unpaid dividends on the Preferred Stock have been paid
in full. As of January 28, 1996, the Company was current in the payment of the
preferred dividends. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Description of Capital Stock."
9
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
January 28, 1996 and as adjusted to give effect to the issuance and sale by
the Company of 500,000 shares of Common Stock offered hereby at an assumed
public offering price of $23.50 per share, and the application of the
estimated net proceeds therefrom. See "Use of Proceeds."
<TABLE>
<CAPTION>
JANUARY 28, 1996
---------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt:
9 3/8% senior notes due 2002........................... $100,000 $100,000
Mortgage financings.................................... 32,829 32,829
Obligations under capitalized leases................... 1,437 1,437
-------- --------
Total long-term debt (1)............................. 134,266 134,266
-------- --------
Stockholders' equity:
Preferred Stock, $.01 par value; liquidation preference
of $25.00 per share: 2,000,000 shares authorized,
800,000 shares issued and outstanding................. 8 8
Common Stock, $.01 par value; 16,000,000 shares
authorized, 7,018,885 shares issued, 7,015,165 shares
outstanding, actual, and 7,518,885 shares issued and
7,515,165 outstanding, as adjusted (2)................ 70 75
Additional paid-in capital............................. 90,612 101,495
Less: notes receivable from sale of capital stock...... (93) (93)
Retained earnings...................................... 2,660 2,660
-------- --------
Total stockholders' equity........................... 93,257 104,145
-------- --------
Total capitalization................................ $227,523 $238,411
======== ========
</TABLE>
- --------
(1) Includes current portion of long-term debt of $2,036,000.
(2) Amounts do not include 229,158 shares issuable upon the exercise of stock
options as of January 28, 1996, and 1,280,000 shares which may be issuable
upon conversion of the Convertible Preferred Stock. See "Description of
Capital Stock--Preferred Stock." A total of 177,201 additional shares are
reserved for issuance under the Company's stock option plans. See Note 7
to Consolidated Financial Statements.
10
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND STORE DATA)
The selected consolidated financial data for the years presented, except
store and pro forma data, have been derived from consolidated financial
statements of the Company which were audited by Arthur Andersen LLP,
independent public accountants. The information presented below should be read
in conjunction with the Consolidated Financial Statements and the Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------------------------------
JANUARY 26, JANUARY 31, JANUARY 30, JANUARY 29, JANUARY 28,
1992 1993 1994 1995 1996
(52 WEEKS) (53 WEEKS) (52 WEEKS) (52 WEEKS) (52 WEEKS)
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales................... $308,562 $346,158 $365,077 $441,646 $532,439
Cost of goods sold...... 199,052 224,599 234,326 281,379 339,764
-------- -------- -------- -------- --------
Gross margin........... 109,510 121,559 130,751 160,267 192,675
Operating expenses...... 91,296 99,944 106,802 137,858 161,040
Pre-opening expenses.... 1,192 924 2,221 7,525 2,400
-------- -------- -------- -------- --------
Operating income....... 17,022 20,691 21,728 14,884 29,235
Write-down in carrying
amount of asset held
for disposal........... -- 2,007 -- -- --
Interest expense........ 14,773 16,725 11,563 12,587 13,337
-------- -------- -------- -------- --------
Income before provision
for income taxes...... 2,249 1,959 10,165 2,297 15,898
Provision for income
taxes.................. 971 866 -- -- 4,289
-------- -------- -------- -------- --------
Income before
extraordinary items
(1)................... 1,278 1,093 10,165 2,297 11,609
Extraordinary items (1). 971 (200) (9,318) -- --
-------- -------- -------- -------- --------
Net income............. 2,249 893 847 2,297 11,609
Preferred stock
dividends (2).......... 3,446 4,208 814 1,115 1,200
-------- -------- -------- -------- --------
Net income (loss)
available to common
stock................. $ (1,197) $ (3,315) $ 33 $ 1,182 $ 10,409
======== ======== ======== ======== ========
PER SHARE DATA:
Primary:
Net income (loss) per
common and equivalent
share before
extraordinary items... $ (1.74) $ (2.52) $ 1.57 $ 0.17 $ 1.48
Net income (loss) per
common and equivalent
share................. (0.96) (2.68) 0.01 0.17 1.48
Fully diluted:
Net income (loss) per
common and equivalent
share before
extraordinary items... (1.74) (2.52) 1.57 0.17 1.38
Net income (loss) per
common and equivalent
share................. (0.96) (2.68) 0.01 0.17 1.38
UNAUDITED PRO FORMA
(FULLY TAXED) DATA (3):
Net income available to
common stock........... $ 9,380
Fully diluted net income
per common and
equivalent share....... $ 1.12
OTHER DATA:
Comparable store sales
growth................. (1.3)% 5.3% 2.0% (1.1)% 8.0%
Number of stores (at end
of period)............. 37 39 43 56 60
BALANCE SHEET DATA (END
OF PERIOD):
Working capital......... $ 44,649 $ 52,274 $ 94,996 $ 71,049 $ 76,155
Total assets............ 198,463 197,996 309,735 292,659 305,536
Long-term debt and
capital leases......... 125,892 130,374 156,273 135,232 132,242
Stockholders' equity.... 13,628 14,848 61,827 82,578 93,257
</TABLE>
- -------
(1) 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 $1.0 million and $0.4 million in the years ended
January 26, 1992 and January 31, 1993, respectively.
(2) See Note 6 to Consolidated Financial Statements.
(3) Pro forma net income available to common stock reflects an income tax
provision at a 41.0% effective rate, the Company's estimated effective
rate for fiscal 1996. The Company's actual effective tax rate for fiscal
1995 was 27.0%. See Note 8 to Consolidated Financial Statements.
Management believes the presentation of such pro forma data is meaningful
to the reader because it more closely approximates the future tax status
of the Company.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements, Notes to Consolidated Financial Statements
and Selected Consolidated Financial Data included elsewhere in this
Prospectus. This Prospectus contains forward-looking statements which involve
risks and uncertainties. The Company's actual results may differ significantly
from the results discussed in the forward-looking statements. Factors that
might cause such a difference include, but are not limited to, those discussed
in "Risk Factors."
GENERAL
The Company opened 14 stores in fiscal 1994 and five stores in fiscal 1995.
The Company plans to open five to seven stores in fiscal 1996. As a result of
the Company's accelerated expansion and entry into Southern California, the
Company incurred substantial store pre-opening expenses amounting to $7.5
million for fiscal 1994 and $2.4 million for fiscal 1995. These pre-opening
expenses consist principally of store merchandising and stocking expenses,
personnel recruitment and training costs and grand-opening advertising and
promotional expenses. In fiscal 1996, the Company expects pre-opening expenses
to be approximately $0.4 million to $0.5 million per store.
As the Company has implemented its new store opening program, operating
expenses as a percent of sales for the new stores are higher on average,
adversely affecting overall operating margins until these new stores achieve
sales maturity. The Company's average store achieves maturity after
approximately four years. In addition, the Company has generally experienced
higher marketing, distribution and occupancy costs in its new stores in the
Southern California market. The Company believes, however, that these higher
expenses should be offset by higher sales at these stores (when these stores
achieve maturity), bringing margins for Southern California stores in line
with those for Northern and Central California stores. See "Risk Factors--
Managing Expansion."
The Company experienced a strong comparable store sales increase in fiscal
1995, especially in the second half of the year. The Company does not expect
to sustain its rate of comparable store sales growth in fiscal 1996,
particularly in the second half of the year. See "Risk Factors--Quarterly
Fluctuations, Comparable Store Sales."
The following table sets forth selected results of operations as percentages
of sales for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED (1)
-----------------------------------
JANUARY 30, JANUARY 29, JANUARY 28,
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Sales...................................... 100.0% 100.0% 100.0%
Gross margin............................... 35.8 36.3 36.2
Operating expenses......................... 29.3 31.2 30.2
Pre-opening expenses....................... 0.6 1.7 0.5
----- ----- -----
Operating income........................... 6.0 3.4 5.5
Interest expense........................... 3.2 2.9 2.5
----- ----- -----
Income before provision for income taxes
and extraordinary items................... 2.8 0.5 3.0
Income tax provision....................... -- -- 0.8
----- ----- -----
Income before extraordinary items.......... 2.8 0.5 2.2
Extraordinary items........................ (2.6) -- --
----- ----- -----
Net income................................. 0.2% 0.5% 2.2%
===== ===== =====
</TABLE>
- --------
(1) Amounts may not total due to rounding.
12
<PAGE>
RESULTS OF OPERATIONS
52 Weeks ended January 28, 1996 (fiscal 1995) compared to 52 Weeks ended
January 29, 1995 (fiscal 1994).
Sales for fiscal 1995 increased by 20.6% to $532.4 million from $441.6
million in fiscal 1994. The increase is attributable to an 8.0% gain in
comparable store sales and the sales contributed by the 19 stores opened since
the beginning of 1994 before they were included in the comparable store base.
The comparable store sales increase reflects the diminishing effect of eight
competing warehouse home centers that opened primarily in late 1993, the
recent closing of four competing warehouse home centers, and sales gains
achieved by 14 Orchard stores opened in the prior fiscal year which are now
part of the comparable store base. Improving economic conditions in California
also were a contributing factor.
Gross margin increased $32.4 million from $160.3 million for fiscal 1994 to
$192.7 million for fiscal 1995. As a percentage of sales, gross margin
decreased from 36.3% for fiscal 1994 to 36.2% for fiscal 1995. A decline in
purchase markup was offset partially by reduced inventory shrinkage and
leveraging of warehouse operating costs.
Operating expenses increased by $23.2 million from $137.9 million for fiscal
1994 to $161.0 million for fiscal 1995. As a percentage of sales, these
expenses decreased from 31.2% for fiscal 1994 to 30.2% for fiscal 1995.
Decreased payroll costs as a percentage of sales were offset partially by an
increase in occupancy costs as a percentage of sales in the Southern
California stores.
Pre-opening expenses decreased to $2.4 million for fiscal 1995 from $7.5
million for fiscal 1994. The decrease in pre-opening expenses is due to five
new store openings in 1995 versus 14 stores in the prior year, in addition to
lower average pre-opening costs per store. Operating income before pre-opening
expenses for fiscal 1995 increased by $9.2 million or 41.1% from fiscal 1994.
Operating income increased by $14.4 million from $14.9 million in fiscal
1994 to $29.2 million in fiscal 1995. As a percent of sales, operating income
increased from 3.4% to 5.5%. Sales increases, the leveraging of expenses and
reduced pre-opening expenses were the main contributors to the increase in
operating income.
Interest expense increased by $0.7 million from $12.6 million in fiscal 1994
to $13.3 million for fiscal 1995. In fiscal 1994 the Company capitalized an
additional $0.8 million of construction period interest on new store
construction projects and realized $0.4 million more in interest income than
in fiscal 1995. The increase in interest expense was partially offset by a
$0.5 million expense reduction due to a decrease in long-term debt.
The Company recorded an income tax provision for fiscal 1995 at an effective
tax rate of 27.0%, reflecting the reversal of a previously established
valuation allowance. Future effective income tax rates should approximate the
combined federal and state statutory rate and are estimated to be
approximately 41.0% in fiscal 1996. See Note 8 to Consolidated Financial
Statements.
52 Weeks ended January 29, 1995 (fiscal 1994) compared to 52 Weeks ended
January 30, 1994 (fiscal 1993).
Sales for fiscal 1994 increased by 21.0% to $441.6 million from $365.1
million for fiscal 1993. 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 unfavorable weather conditions in Northern California during
a five week period in April and May, 1994.
Gross margin increased $29.5 million from $130.8 million in fiscal 1993 to
$160.3 million in fiscal 1994. As a percentage 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.
13
<PAGE>
Operating 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 as described above also contributed to higher
selling, general and administrative expenses as a percent of sales.
Pre-opening expenses increased to $7.5 million for fiscal 1994 from $2.2
million for fiscal 1993. The increase in pre-opening expenses is due to 14 new
store openings in fiscal 1994 versus four new store openings in the prior
year. Operating income before pre-opening expense for fiscal 1994 decreased by
$1.5 million from fiscal 1993.
Operating income decreased by $6.8 million from $21.7 million for fiscal
1993 to $14.9 million for fiscal 1994. As a percentage of sales, operating
income decreased to 3.4% for fiscal 1994 from 6.0% for fiscal 1993. Higher
pre-opening costs and increased corporate expenses associated with the
Company's expansion program were the main contributors to the decrease in
operating income.
Interest expense increased from $11.6 million for fiscal 1993 to $12.6
million for fiscal 1994. The increase was due primarily to additional interest
resulting from the issuance by the Company in January 1994 of$100 million
aggregate principal amount of 9 3/8% Notes which was partially offset by
reduced interest due to the retirement of $19.3 million of 14.5% Senior
Subordinated Discount Notes and $30.0 million of 9% Senior Notes on February
25, 1994.
The Company did not record a tax provision as a result of the reversal of a
previously established valuation allowance. See Note 8 to Consolidated
Financial Statements.
The results of operations for fiscal 1993 included extraordinary charges of
$9.3 million resulting from the early extinguishment of $44.7 million in
aggregate principal amount of the 14.5% Subordinated Notes in April 1993 and
the remaining $19.3 million of 14.5% Subordinated Notes and $30 million of the
9% Senior Notes in February 1994.
QUARTERLY RESULTS OF OPERATIONS
The following table presents certain unaudited quarterly consolidated
financial information for each of the Company's last eight fiscal quarters. In
the opinion of the Company's management, this quarterly information has been
prepared on the same basis as the audited consolidated financial statements
appearing elsewhere in this Prospectus and includes all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the unaudited quarterly results set forth herein. The Company's quarterly
results have in the past been subject to fluctuations, and thus, the operating
results for any quarter are not necessarily indicative of results for any
future period.
14
<PAGE>
<TABLE>
<CAPTION>
FISCAL 1994 FISCAL 1995
-------------------------------- -------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales................... $96.6 $125.6 $111.8 $107.7 $125.4 $145.5 $131.5 $130.1
Gross margin............ 34.4 45.0 41.0 39.6 45.6 52.3 47.5 47.2
Operating expenses...... 28.8 35.9 36.7 36.4 37.5 41.6 40.3 41.7
Pre-opening expenses.... 3.8 2.6 0.6 0.6 1.0 -- 1.2 0.2
Operating income........ 2.0 6.4 3.8 2.7 7.2 10.7 6.0 5.4
Net income (loss)....... (0.9) 3.3 0.6 (0.7) 2.9 5.6 1.8 1.3
Comparable store sales
growth................. (1.5) (3.0) 0.4 0.2 1.8 6.5 10.1 13.0
Stores open at end of
period................. 47 54 55 56 58 58 59 60
</TABLE>
The Company's results of operations exhibit some measure of seasonality.
Generally, the Company's sales and operating income are highest in the second
quarter and lowest in the fourth quarter. This is due primarily to seasonality
in sales of garden, nursery and related products, which peak at the beginning
of the spring/summer gardening season. The Company has experienced losses in
the fourth quarter in the past and may experience losses in this quarter in
the future. See " Risk Factors--Seasonality and Sensitivity to Weather."
The Company's quarterly results and comparable store sales comparisons are
subject to various factors including consumer confidence, promotional
marketing efforts, maturation of new stores, weather conditions and
competitive store changes. See "Risk Factors--Quarterly Fluctuations;
Comparable Store Sales."
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity needs arise primarily from the funding of the
Company's capital expenditures, working capital requirements, ongoing
expansion program, and service on indebtedness.
The Company's wholly-owned subsidiary, Orchard Supply, had long-term debt
and capital lease obligations as of January 28, 1996 of $134.3 million,
including (i) $100.0 million of 9 3/8% senior notes due February 15, 2002,
(ii) $20.0 million of store mortgage notes, and (iii) $12.8 million of
warehouse mortgage notes. In addition, the Company has up to $40.0 million of
revolving credit availability under Orchard Supply's senior revolving credit
facility (the "Financing Agreement") (with a $10.0 million sublimit for
letters of credit) of which no borrowings and $8.5 million of letters of
credit were outstanding at January 28, 1996. Orchard Supply's debt instruments
contain financial and operating covenants including, among other things,
requirements that Orchard Supply maintain certain financial ratios and satisfy
certain financial tests and limitations on Orchard Supply's ability to make
capital expenditures, to incur other indebtedness, and to pay dividends. At
January 28, 1996, the Company and Orchard Supply were in compliance with all
covenants contained in such debt instruments.
The Company's business strategy requires that it maintain broad product
lines and large inventories, however, the effect of this strategy on working
capital is somewhat minimized through the receipt of trade credit. The
Company's working capital is also affected by accounts receivable arising from
its proprietary credit card which had an average monthly balance for fiscal
1995 of $12.5 million. The Company will fund its working capital needs through
a combination of funds from operations and borrowings under the Financing
Agreement. The Financing Agreement permits borrowings based on percentages of
the Company's eligible inventory and accounts receivable and remains effective
through May 1999.
15
<PAGE>
In connection with Orchard's expansion plans, the Company anticipates
capital additions of approximately $0.9 million for furniture, fixtures and
equipment for each new store opened, a portion of which may be acquired under
operating leases. The Company expects that pre-opening expenses will range
from approximately $0.4 million to $0.5 million. The initial inventory
requirement for new stores, net of trade credit, is estimated at $1.0 million
per store. In the event that the Company is responsible for the renovation or
remodeling of the existing space to be leased, the Company anticipates
incurring additional capital expenditures of approximately $1.0 million to
$1.8 million per store. If the Company elects to purchase the real estate, the
capital expenditure would range from approximately $2.5 million for owned
store improvements constructed on leased land to $4.0 million to $7.0 million
if the entire property were to be owned by the Company.
The Company's capital expenditure plan for fiscal 1996 and 1997 provides for
annual capital expenditures of $19.8 million and $17.0 million, respectively.
This capital expenditure plan includes the expenditures of approximately $4.0
million to $5.0 million annually for the maintenance of existing facilities.
The remainder of the annual budgeted amounts will be used primarily for the
opening of new stores, including fixtures and leasehold improvements with
respect to the new stores, and computer equipment. The Company has
historically obtained some of its equipment through operating leases, and
expects to be able to procure such arrangements in the future. The inability
of the Company to procure such arrangements for its capital expenditure
program may have a negative impact on the ability of the Company to make
capital expenditures.
The Company believes that funds from operations, together with the proceeds
of the Offering, borrowing availability under the Financing Agreement and
financing through operating leases, will be adequate to fund the Company's
operating requirements and capital expenditure program and meet its debt and
dividend obligations for at least the next 18 months. See "Risk Factors--
Managing Expansion" and "--Leverage and Certain Restrictions Imposed by
Lenders."
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
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 121 "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed of." This
pronouncement requires that long-lived assets and certain identifiable
intangible assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. An impairment loss is to be recognized when the sum of
undiscounted cash flows is less than the carrying amount of the asset.
Measurement of the loss for assets that the entity expects to hold and use are
to be based on the fair value of the asset. Although management does not
expect this pronouncement to have a material impact on the Company's financial
condition or results of operations at adoption, its provisions, when adopted,
will be applicable to any future assessments of its long-lived assets. SFAS
No. 121 will be adopted in fiscal 1996.
16
<PAGE>
BUSINESS
GENERAL
Orchard currently operates 60 hardware superstores in California which
average approximately 40,000 square feet of interior and exterior selling
space and carry over 45,000 SKUs. 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 while providing a greater depth
and breadth of "fix-it" products in its core product categories than the large
warehouse home center chains.
Historically, the Company's market has been Northern and Central California,
where the Company currently operates 50 stores. The Company successfully
entered the Southern California market in fiscal 1994 with the opening of six
stores in metropolitan Los Angeles and one store near Santa Barbara. The
Company has subsequently added three stores in metropolitan Los Angeles. The
Company currently expects to open five to seven new stores in fiscal 1996 and
five to ten new stores annually for the next several years thereafter,
substantially all of which will be located in Southern California. Through
these store openings, the Company plans to strengthen its position in
metropolitan Los Angeles and extend its Southern California presence first
into Orange, Riverside and San Bernardino Counties and then into San Diego and
Ventura Counties.
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 $125 billion in 1994
to approximately $130 billion in 1995. The industry is highly fragmented and
competitive and is comprised primarily of local independent retailers 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, limited product offerings and
relatively high prices. While home centers (which include warehouse home
center chains with average store sizes in excess of 100,000 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 (on average)
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; less than 5% of
Orchard's sales are attributable to these products.
THE ORCHARD CONCEPT
Orchard's business strategy is to position itself as the primary destination
for customers' "fix-it" needs by providing a broad merchandise selection,
outstanding service, convenient, well organized stores and value pricing.
BROAD SELECTION AND AVAILABILITY
Orchard offers a wide selection of brand name and private label merchandise,
including many products not carried by its competitors in its core merchandise
categories of hardware, plumbing, electrical and garden and nursery.
Management believes that in these core categories the Company offers more SKUs
than its warehouse competitors. Orchard further distinguishes itself by
maintaining a high in-stock selection (98% on average) to ensure availability
of merchandise to its customers.
17
<PAGE>
The following table sets forth the Company's percentage of sales by product
category for fiscal 1995:
<TABLE>
<S> <C>
Hardware........................................................... 23.5%
Plumbing........................................................... 13.5
Electrical......................................................... 10.8
Garden and Nursery................................................. 26.6
Other.............................................................. 25.6
-----
Total Sales...................................................... 100.0%
=====
</TABLE>
Hardware. Orchard carries a wide line of hardware products, including
fasteners, power tools, hand tools and accessories. The Company stocks over
3,000 SKUs of nuts, bolts, screws and other fasteners, many of which are not
carried by its competitors. Orchard offers these fasteners for sale in a
variety of quantities, repackaging bulk shipments from its vendors at the
Tracy, California distribution center for sale in smaller, more profitable
unit counts. The Company also carries over 150 brand name power tools,
including Black & Decker, Skil, Makita, Freud, Porter Cable, Milwaukee, Bosch,
Delta, DeWalt, Dremel, Wissota, Campbell Hausfeld, Homelite, McCulloch, Echo
and Coleman Power Mate. Orchard offers over 1,200 different power tool
accessories, such as drill bits and saw blades, which generate high gross
margins and increase shopping frequency due to their consumable nature.
Orchard further stocks an extensive selection of handtools, including 30 and
150 SKUs of pipe wrenches and hammers, respectively, and also offers
replacement products for these tools, including handles.
Plumbing. Orchard distinguishes itself from its competitors by carrying a
broad selection of repair and maintenance plumbing parts. The Company stocks
over 1,300 different PVC, ABS, galvanized, copper, brass, polystyrene and cast
iron fittings, as well as over 1,250 faucet, toilet and sink repair parts
including hard-to-find parts for discontinued faucets and toilets. Orchard
also offers a variety of faucets, toilets and sinks. In addition, Orchard's
selection of nearly 400 sprinkler and drip irrigation SKUs appeals to both
homeowners and commercial landscapers.
Electrical. Orchard stocks nearly 300 different light bulbs and 150 types of
extension cords. With over 350 different lamp parts, repair and maintenance is
emphasized. Orchard is also well equipped in basic electrical components and
stocks a broad selection of electric boxes, wire and circuit breakers commonly
used in residential and commercial construction.
Garden and Nursery. Garden and nursery products are a strong focus of
Orchard's business, reflecting Orchard's heritage as a farmers' cooperative.
Orchard offers both the price and convenience of a mass merchant and the
selection, quality and expertise of an independent nursery. It carries a broad
selection of landscape container and bedding plants, most of which are
contract grown to the Company's specification. Orchard's nurseries carry more
than 30 varieties of ground cover, over twice as many as are offered by its
major competitors. Orchard has the largest display of Ames and Corona garden
tools in the United States. Orchard also offers a wide selection of tank
sprayers, liquid and dry fertilizers, weed killers, insecticides, hoses and
hose-end products. In addition, the Company supplies a variety of organic bag
goods, including bark, mulch, soil conditioners, potting soils, planting mixes
and peat moss.
Other. In addition to the "fix-it" items above, the Company carries an
extensive selection of housewares, paint, paint supplies and automotive
supplies, as well as certain destination items such as bottled water. The
Company also offers a 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
18
<PAGE>
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 28, 1996, the Company
employed 48 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 a convenient pick-up station
for heavy, large or 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 59,627 active
accounts at January 28, 1996. The Company's credit card sales comprised
approximately 12.3% of total sales in fiscal 1995. Approximately 78.5% 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.
Commercial Services. Orchard offers added convenience and fast pick-up for
commercial customers who can place orders over the phone which will be
prepared for immediate pick-up at no additional charge. Management believes
that the majority of its commercial customers are industrial concerns, real
estate property managers and municipalities with maintenance and repair needs,
as opposed to contractors and other construction related businesses. The
Company is currently targeting growth in its commercial business by expanding
the services offered to commercial customers and enhancing its marketing
activities. The Company recently added a Director of Commercial Sales to lead
this effort.
Custom Cutting. Orchard will custom cut to a customer's specifications
products such as pipe, electrical wire, shade cloth, rope, chain, tubing,
screening and glass.
"How-To" Fairs. The Company conducts three annual "how-to" fairs designed to
provide customers with do-it-yourself information through vendor booths and
specialized classes. In addition, these fairs feature celebrities, such as
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." Two fairs are held in Northern
California and the Company's first Southern California fair is scheduled for
May 1996. Management estimates that the Company's largest "how-to" fair
attracted approximately 150,000 people.
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 warehouse
and distribution facility. Customers can drop off the equipment to be repaired
at their local Orchard store and pick it up typically within seven days.
CONVENIENT, WELL ORGANIZED STORES
To encourage ease of shopping, Orchard's stores are designed in a
conventional supermarket format with low profile shelving as opposed to
warehouse racking and wide aisles for easy mobility. Customers can view the
entire store upon entering, helping them to easily and quickly find the items
they need. Related departments are located adjacent to one another, and most
merchandise is 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 waiting time. The Company's stores follow a
standard merchandise layout and maintain a consistent appearance. In addition,
all stores are easily accessible, are conveniently located and have ample
parking. These features provide customers with an attractive shopping
environment and the ability to locate items and check out of the store
quickly.
19
<PAGE>
VALUE ORIENTATION
The Company provides the customer with value through a combination of broad
merchandise selection, outstanding service, convenient, well organized stores
and fair everyday prices. The Company offers competitive pricing on high
visibility, high volume products. The Company also stocks a wide selection of
products not typically carried by its competitors on which the Company
generally achieves higher margins. The Company also 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.
GROWTH STRATEGY
Orchard's strategy for growth is to continue to build its market presence in
existing markets and to enter attractive new markets. The Company's primary
strategy is to add new stores in its existing metropolitanLos Angeles market
and to extend its Southern California presence into Orange, Riverside, San
Bernardino,San Diego and Ventura Counties. The Company will also augment its
Northern and Central California base with strategic new store additions. The
Company plans to open five to seven new stores in fiscal 1996 and five to ten
new stores annually for the next several years thereafter, substantially all
of which will be in Southern California. By extending its presence in Southern
California, the Company believes it will be able to leverage its advertising
and marketing expenses in this market and attain a critical mass of stores to
support a new Southern California warehouse and distribution facility, which
is planned for fiscal 1998.
The Company successfully entered the Southern California market in fiscal
1994 with the acquisition of six former hardware store sites in metropolitan
Los Angeles and one near Santa Barbara which were converted to the Orchard
format. The Company has since opened three additional stores in metropolitan
Los Angeles and plans to open five to seven more Southern California stores in
fiscal 1996. Leases have been signed for three new stores in metropolitan Los
Angeles and Orange County and the Company is currently negotiating leases for
additional locations in Southern California. The Company's expansion into
Southern California has been very successful, with four of the stores in this
market already ranking among the Company's top 20 stores in sales. Management
believes that the Southern California market, one of the largest DIY markets
in the United States, presents an attractive opportunity for the broad-
selection, high-service Orchard concept.
Until 1994, the Company's growth capacity had been significantly constrained
by debt service requirements. Recently, through equity offerings and debt
refinancings, the Company has been able to build its liquidity and capital
resources which has allowed it to accelerate its expansion program and should
enhance its ability to react quickly to site acquisition opportunities.
The Company believes its experience in Southern California has demonstrated
that Orchard's concept is transferrable from its Northern and Central
California markets to other regions. The Company believes that the Southern
California market has considerably more expansion potential than Northern and
Central California and can support aggressive growth over at least the next
five years. The Company believes it has the potential to expand to 60-80
stores in Southern California and to add approximately 10 stores (for a total
of 60) to its base in Northern and Central California.
See "Risk Factors--Managing Expansion" and "--Leverage and Certain
Restrictions Imposed by Lenders."
ADVERTISING AND MARKETING
Achieving and maintaining high levels of consumer awareness is an important
element of the Company's business strategy. In its Northern and Central
California markets, where the Company has been in business since 1931 and now
operates more stores than any of its competitors, the Company's surveys
indicate a name recognition of 99% among DIY customers within the trade areas
around the Company's stores. In Southern California the Company's aggressive
marketing campaigns have produced growing consumer awareness of the Company's
presence. Recent surveys by the Company indicate a name recognition of 82%
among DIY customers within trade areas around the Company's stores.
20
<PAGE>
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. Major campaigns are
currently centered around Easter, Memorial Day, July 4th, Labor Day and
Christmas. The Company offsets a significant portion of the costs of its
advertising, particularly television advertising, with allowances obtained
from vendors that participate in the Company's cooperative advertising
program. These vendors provide allowances to the Company in return for
featuring their products in the Company's advertising media.
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 annual "how-to" fairs. Two annual fairs
are held in Northern California and the Company's first Southern California
fair is scheduled for May 1996. Vendors participating at the Company's "how-
to" fairs perform product demonstrations, offer advice and distribute discount
coupons which are redeemable only at Orchard stores. Management estimates that
the largest "how-to" fair attracted approximately 150,000 people and more than
400 vendors.
In Northern and Central California, the Company is able to maximize 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.
The Los Angeles media market, which covers most of Southern California, is
more expensive than Northern and Central California, and Orchard currently
lacks the store concentration it enjoys in its historical markets.
Accordingly, the Company's marketing costs as a percentage of sales have
increased as a result of its expansion into metropolitan Los Angeles. As more
stores are added in this market, the Company expects these costs to decline as
a percentage of sales, although no assurance can be given that this will
occur. See "Risk Factors--Managing Expansion."
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 store
base has grown due to the expansion program, the Company has been able to
realize greater volume discounts in some of its purchasing.
DISTRIBUTION
Orchard's distribution is currently handled through a 350,000 square foot
warehouse and distribution facility situated on approximately 28.5 acres of
land in Tracy, California. The Company is currently utilizing temporary on-
site storage units to supplement its storage capacity at this facility. The
Company anticipates that the Tracy facility will be able to support, with
additional shifts, if necessary, the Company's anticipated growth through
early fiscal 1998 when a second warehouse and distribution facility is planned
for the Southern California area. The central location of the warehouse and
distribution facility allows the Company to process and deliver orders within
24 hours to all of its Northern and Central California stores and 48 hours for
its Southern California stores, thereby ensuring high in-stock levels. By
eliminating the need for in-store storage space, Orchard maximizes the selling
space available in its stores and reduces overall inventory requirements,
without sacrificing the high in-stock position (98% on average) in the retail
stores.
21
<PAGE>
Metropolitan Los Angeles is approximately 350 miles from the Tracy facility,
which has resulted in transportation costs for Southern California that are
greater than in the Company's current Northern and Central California markets.
The Company has outsourced the delivery of merchandise to stores south of
Santa Maria, California to an independent common carrier. The Company
processes orders and delivers goods to its Southern California stores within
48 hours. The Company expects to open a second warehouse and distribution
facility to service the Southern California stores after approximately 25
stores are open in that area, which the Company currently anticipates will
occur in fiscal 1998. The Company is currently in the process of enhancing its
management information systems in anticipation of a second warehouse and
distribution facility. While the additional facility will reduce
transportation costs for the Southern California stores, it will initially
have higher operating costs as a percentage of sales than the existing
facility. This ratio is expected to decline as more stores are opened in the
Southern California market area.
As of January 28, 1996, Orchard operated a fleet of 33 tractors and 137
trailers, which are driven and maintained by a non-union work force and which
service the Northern and Central California stores.
CREDIT CARD OPERATIONS
Orchard offers a private label revolving charge plan to both its commercial
and retail customers. This credit card operation is maintained by Orchard
employees and provides customized services such as customer defined card usage
restrictions, purchase order identification and descriptive billing which are
geared to the commercial customer.
To promote its credit card and increase charge business, Orchard began
implementing a new credit card program in fiscal 1995 known as Club OSH. Club
OSH provides the cardholder with a 10% discount the first time the card is
used, an ongoing 2% discount if the customer's statement balance is paid in
full by the monthly due date and a senior citizen discount of 3% when
merchandise is purchased on Wednesday using the Club OSH card. All charge
accounts from the Southern California and San Joaquin Valley stores were
converted to Club OSH in fiscal 1995 and all remaining accounts will be
converted by March 1996.
At January 28, 1996, the Company had 59,627 active accounts. For fiscal
1995, approximately 78.5% of the credit card sales were from commercial
customers. For fiscal 1995, bad debt losses approximated 1.0% of total Company
credit card sales.
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. Orchard's store
managers are responsible for day-to-day store operations, subject to operating
procedures established at headquarters.
Orchard stores are open seven days a week. Depending on the size and sales
volume of the store, the total number of personnel 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. Because of the Company's strong focus on customer
service, all employees participate in an initial training program and
subsequent ongoing training.
MANAGEMENT INFORMATION SYSTEMS
Management has sought to design and develop the Company's information
systems 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
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. The Company
has projects underway to increase the capabilities of its credit function and
to implement the system enhancements that will be necessary to support its
plan to add a second warehouse and distribution facility in early fiscal 1998.
22
<PAGE>
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
suggested order quantities for warehouse inventory replenishment. Purchase
orders are reviewed or created on-line and are electronically transmitted to
suppliers that participate in the hardware industry's "Eagle" Electronic Data
Interchange ("EDI") system. Price change control is an integral part of the
POM system.
The Store Order system is 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 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 a key component to the Company's ability
to evaluate and respond to its markets and customers.
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. See "Risk
Factors--Competition."
Management believes that two warehouse home center chains, Home Depot and
HomeBase, are its primary competitors. Home Depot and HomeBase currently
operate 32 and 11 stores, respectively, in the Company's markets. As of
January 28, 1996, the Company estimates that over 70% of Orchard's stores
faced competition from warehouse operators. Home Depot opened three stores in
1995 in the Company's markets and HomeBase closed three stores in Orchard's
markets in 1994 and closed one additional store in early 1995. The Company
believes that Home Depot will open four stores in fiscal 1996 in the Company's
markets. As the Company continues its expansion, new stores are frequently
opened in proximity with existing Home Depot or HomeBase stores.
In addition to offering a broader selection on its core merchandise
categories than its warehouse competitors, the Company and the warehouse
chains do not compete in a number of merchandise areas. For example, the
Company does not carry significant amounts of lumber and building materials
and the warehouse home centers do not carry product lines in housewares, work
clothes and patio furniture.
23
<PAGE>
Although Orchard competes largely on the basis of service, selection and
convenience, rather than on price, and has been successful thus far in
competing with warehouse home centers, given the highly competitive nature of
the market and the substantially greater resources of some of its competitors,
the Company faces the risk of increased competition in its market niche.
EMPLOYEES
As of January 28, 1996, Orchard had 4,980 total employees of whom 2,564 were
full time. Management believes that its relationship with its employees is
good. The Company has never experienced a material interruption of business
caused by labor disputes. All of Orchard's employees are non-union.
PROPERTIES
Of the Company's 60 stores, 11 are owned and 49 are leased under long-term
ground or building arrangements with various renewal options. All of these 49
leases are scheduled to expire after 2000 (including options to renew). See
Note 3 to Consolidated Financial Statements.
The Company owns its 350,000 square foot warehouse and distribution facility
which is located on 28.5 acres in Tracy, California. See "Distribution." The
Company also owns its former warehouse in San Jose 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
has leased approximately 70% of the space in this property with the intention
of making it more attractive to a developer. The Company has also listed for
sale 11 acres it owns adjacent to its warehouse and distribution facility 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 current lease term expires in November of 2000, with an
option for the Company to extend for five additional years.
LEGAL PROCEEDINGS
There are no material legal proceedings pending or, to the knowledge of
management of the Company, threatened against the Company.
24
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning each person
who is an executive officer, Director or significant employee of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Maynard Jenkins..................... 53 President, Chief Executive Officer
and Director
Robert J. Wittman................... 51 Executive Vice President and Chief
Operating Officer
Stephen M. Hilberg.................. 52 Vice President-Finance, Chief
Financial Officer and Director
William G. Collard.................. 58 Vice President-Distribution
Joseph A. DiRocco................... 45 Vice President-Marketing
Robert A. Lewis..................... 50 Vice President-Purchasing and General
Merchandise Manager
Carolyn J. McInnes.................. 51 Vice President-Human Resources
Lee Nemechek........................ 62 Vice President-Stores
Ronald R. Stahl..................... 36 Vice President-Store Planning/Real
Estate
Matt L. Figel....................... 36 Director
Morton Godlas*+..................... 72 Director
William A. Hall+.................... 64 Director
J. Frederick Simmons*............... 41 Director
Ronald P. Spogli*................... 47 Director
William M. Wardlaw.................. 49 Director
</TABLE>
- --------
*Member of the Compensation Committee.
+Member of the Audit Committee.
Mr. Jenkins has served as President of the Company and a Director since May
1989 and as Chief Executive Officer since 1986. Mr. Jenkins has over twenty-
five years of retail experience. Before joining the Company, Mr. Jenkins
served as the President and Chief Operating Officer of Pay 'n Save drug
stores, where he was responsible for operations, merchandising and advertising
of the 108-store chain with sales in excess of $500 million. Mr. Jenkins
serves on the advisory board of KTEH, a public television station in San Jose,
California.
Mr. Wittman has served as Executive Vice President and Chief Operating
Officer of the Company since January 1995. Mr. Wittman served as Vice
President-Merchandising and Marketing for Aikenhead's Home Improvement
Warehouse, a retail home improvement warehouse chain, from 1991 to 1994 and as
Regional Director of Merchandising for Homequarters Warehouse, a retail home
improvement warehouse chain, from 1989 to 1991. Mr. Wittman has over 20 years
of experience in the retail industry, with particular emphasis in the home
improvement segment.
Mr. Hilberg has served as Chief Financial Officer and Vice President-Finance
of the Company since 1981 and as a Director since May 1989. Until 1978, Mr.
Hilberg worked for Touche Ross & Co. where he advanced to the position of
Audit Manager and specialized in retail and distribution industries. From 1978
to 1981, Mr. Hilberg served as the Corporate Controller of Franklin Stores.
Mr. Collard has served as Vice President-Distribution of the Company since
1986. Mr. Collard joined the Company in 1979 and has over 30 years of
warehousing and distribution experience. Prior to joining the Company, Mr.
Collard served for seven years as the Operations Supervisor for Fleming Foods
and for nine years as the Warehouse Foreman for Louis Stores. Mr. Collard is
currently responsible for the Company's warehouse and distribution activities.
25
<PAGE>
Mr. DiRocco has served as Vice President-Marketing of the Company since
1986. From 1983 to May 1986, Mr. DiRocco worked in the marketing and
advertising departments of the Company. Mr. DiRocco joined the Company in 1983
and has over 15 years of marketing experience in the retail industry.
Mr. Lewis has served as Vice President-Purchasing and General Merchandise
Manager of the Company since 1986. Mr. Lewis began his career at the Company
in 1961 and is responsible for all aspects of the Company's merchandising and
buying program.
Ms. McInnes has served as Vice President-Human Resources of the Company
since 1986. Ms. McInnes joined the Company in 1979 as Director of Training.
She is responsible for all of the Company's training, personnel, wage and
benefits related matters.
Mr. Nemechek joined the Company in March 1987 as a Regional Manager and was
promoted to Vice President-Stores in July 1990. Prior to joining Orchard, Mr.
Nemechek had over 30 years of experience in grocery and general merchandise
retailing. Mr. Nemechek is responsible for all aspects of store operations.
Mr. Stahl joined the company in February 1987 and has served as the Director
of Store Planning since January 1992. Mr. Stahl was promoted to Vice President
Store Planning and Real Estate in February 1996. Mr. Stahl has over 17 years
of retail construction experience and is responsible for all aspects of
construction, real estate and store facilities.
Mr. Figel has been employed by FS&Co. (or its affiliates) since 1986. Mr.
Figel is also a member of the Board of Directors of Buttrey Food and Drug
Stores Company.
Mr. Godlas became a Director of the Company in July 1993 and is a management
consultant with more than 45 years of retail experience. Since 1982, Mr.
Godlas has been President and Chief Executive Officer of M. Godlas, Inc., a
retail consulting firm. From 1978 to 1982, Mr. Godlas was Corporate Senior
Vice President-General Merchandise at Lucky Stores, Inc. and served as
President of GEMCO/MEMCO membership department stores from 1976 to 1978. From
1976 to 1982, Mr. Godlas was a director of the International Mass Retailing
Association.
Mr. Hall founded Sight & Sound Distributing Company, a media and software
and software distribution company, in 1984 and has served as President and
Chief Executive Officer since that time.
Mr. Simmons joined FS&Co. in 1986 and became a general partner in January
1991. Mr. Simmons became a Director of the Company in 1989. Mr. Simmons is
also a member of the Board of Directors of Buttrey Food and Drug Stores
Company and EnviroSource, Inc.
Mr. Spogli is a founding partner of FS&Co. Mr. Spogli became a Director of
the Company in 1989. Mr. Spogli also serves on the Board of Directors of Mac
Frugal's Bargains . Close-Outs Inc., Buttrey Food and Drug Stores Company and
EnviroSource, Inc. and on the Board of Representatives of Brylane, L.P.
Mr. Wardlaw joined FS&Co. in March 1988 and became a general partner in
January 1991. From 1984 to 1988, Mr. Wardlaw was a principal of the law firm
of Riordan & McKinzie. Mr. Wardlaw became a Director of the Company in 1989.
Mr. Wardlaw is also a member of the Board of Directors of Buttrey Food and
Drug Stores Company.
26
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table and accompanying footnotes set forth certain information
regarding beneficial ownership of the Company's Common Stock as of February
14, 1996 by (i) each person who is known by the Company to be the beneficial
owner of more than 5% of any class of the Company's capital stock, and (ii)
all Directors and executive officers as a group.
<TABLE>
<CAPTION>
SHARES OF COMMON SHARES OF COMMON
STOCK STOCK
BENEFICIALLY BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING OFFERING (3)
----------------- -----------------
SHARES TO BE
SOLD IN
NAME OF BENEFICIAL OWNER NUMBER PERCENT OFFERING (3) NUMBER PERCENT
- ------------------------ --------- ------- ------------ --------- -------
<S> <C> <C> <C> <C> <C>
Freeman Spogli &
Co. (1)(2)(3)................ 3,979,043 48.0% 2,000,000 1,979,043 22.5%
RCM General Corporation (4)... 491,000 7.0% -- 491,000 6.5%
Dimensional Fund Advisors,
Inc. (5)..................... 370,000 5.3% -- 370,000 4.9%
Directors and Executive
Officers as a Group
(15 persons) (6)(7).......... 184,943 2.6% -- 184,943 2.4%
</TABLE>
- --------
(1) 2,699,043 shares of Common Stock are owned by FS Equity Partners II, L.P.
("FSEP II"). As general partner of FSEP II, FS&Co. has the sole power to
vote and dispose of such shares. J. Frederick Simmons, Ronald P. Spogli,
William M. Wardlaw, Bradford M. Freeman and John M. Roth are general
partners of FS&Co., and as such may be deemed to be the beneficial owners
of the shares of the Company's capital stock indicated as beneficially
owned by FS&Co. Messrs. Simmons, Spogli and Wardlaw and Matt L. Figel, an
employee of an affiliate of FS&Co., are directors of the Company.
(2) 772,135 shares and 27,865 shares of Convertible Preferred Stock are owned
by FS Equity Partners III, L.P. ("FSEP III") and FS Equity Partners
International, L.P. ("FSEP International"), respectively, and are
convertible into 1,235,416 shares and 44,584 shares of Common Stock,
respectively. Each of FSEP III and FSEP International is an affiliate of
FS&Co. Such shares constitute 100% of the issued Convertible Preferred
Stock. Common share amounts reflect full conversion of the Convertible
Preferred Stock.
(3) Does not give effect to any exercise of the Underwriters' option to
purchase up to 375,000 additional shares from the Selling Stockholder to
cover over-allotments, if any.
(4) As reported in a Schedule 13G dated February 7, 1996 filed jointly with
the Securities and Exchange Commission (the "Commission") by RCM Capital
Management ("RCM Capital"), RCM Limited L.P. ("RCM Limited") and RCM
General Corporation ("RCM General"), each has claimed sole voting power
with respect to 436,000 shares of Common Stock and sole dispositive power
with respect to 491,000 shares. As the general partner of RCM Limited,
which is the general partner of RCM Capital, RCM General may be deemed to
be the beneficial owner of such shares. RCM Capital is an investment
advisor registered under Section 203 of the Investment Advisors Act of
1940.
(5) As reported in a Schedule 13G dated February 7, 1996 filed with the
Commission by Dimensional Fund Advisors Inc. ("Dimensional"). Dimensional
has claimed sole voting power with respect to 258,000 shares of Common
Stock and sole dispositive voting power with respect to 370,000 shares.
Dimensional is an investment advisor registered under Section 203 of the
Investment Advisors Act of 1940.
(6) Includes 83,064 shares of Common Stock covered by options which are
exercisable within 60 days following February 14, 1996 with respect to all
Directors and executive officers as a group.
(7) Does not include the 3,979,043 shares beneficially owned by the investment
funds managed by FS&Co. Messrs. Simmons, Spogli and Wardlaw, directors of
the Company, may be deemed to be beneficial owners of such shares. See
footnotes (1) and (2) above.
27
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 16,000,000 shares of
Common Stock, $.01 par value, and 2,000,000 shares of preferred stock, $.01
par value.
COMMON STOCK
As of January 28, 1996, there were 7,015,165 shares of Common Stock
outstanding held of record by 311 stockholders, excluding shares issuable upon
the exercise of outstanding options to purchase an aggregate of 229,158 shares
of Common Stock held by employees, management and Directors. See "Principal
and Selling Stockholders."
Holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. There is no
cumulative voting for the election of Directors. Subject to preferences that
may be applicable to any outstanding preferred stock, holders of Common Stock
are entitled to receive ratably such dividends as may be declared by the Board
of Directors out of funds legally available therefor. See "Dividend Policy."
In the event of a liquidation, dissolution or winding up of the Company,
holders of Common Stock are entitled to share ratably in all assets remaining
after payment to all creditors and payments required to be made in respect of
any outstanding preferred stock. Holders of Common Stock have no preemptive
rights and have no rights to convert their Common Stock into any other
securities. All of the outstanding shares of Common Stock are, and the shares
being offered hereby will be, upon issuance and sale, fully paid and
nonassessable.
PREFERRED STOCK
The Company's Certificate of Incorporation authorizes the issuance in series
of up to 2,000,000 shares of preferred stock, and permits the Company's Board
of Directors to establish the voting rights, designations, powers, preferences
and relative and other special rights and the qualifications, limitations and
restrictions of each of such series. As of the date hereof, 800,000 shares of
Convertible Preferred Stock are issued and outstanding.
Dividends on the Convertible Preferred Stock accrue at 6% per annum and are
payable quarterly on each March 15, June 15, September 15 and December 15,
when, as and if declared by the Board of Directors. In the event of any
liquidation, dissolution or winding up of the Company, the holders of
Convertible Preferred Stock are entitled to receive an amount equal to $25.00
per share, plus all accrued and unpaid dividends, before any payment to the
holders of Common Stock. Shares of Convertible Preferred Stock are convertible
at any time at the option of the holder, unless previously redeemed, into
Common Stock at an initial conversion rate of 1.6 shares of Common Stock for
each share of Convertible Preferred Stock (equivalent to a conversion price of
$15.625 per share of Common Stock), subject to adjustment upon certain
circumstances. The Company may redeem the outstanding shares of Convertible
Preferred Stock at any time after December 15, 1996, in whole or in part, for
cash initially at a redemption price of $26.50 per share of Convertible
Preferred Stock, and thereafter at prices decreasing ratably annually to
$25.00 per share on and after December 15, 2003, plus accrued and unpaid
dividends to the redemption date. Upon the occurrence of an event deemed to be
a Change of Control (as defined in the Certificate of Designation of Rights
and Preferences), each holder of Convertible Preferred Stock has the option to
require the Company to redeem all or any part of the Convertible Preferred
Stock owned by such holder at $25.00 per share, plus accrued and unpaid
dividends to the redemption date. Holders of the Convertible Preferred Stock
are not entitled to elect any directors unless dividends on the Convertible
Preferred Stock are in arrears for at least six consecutive full quarterly
dividends, in which case holders of the Convertible Preferred Stock are
entitled (voting separately as a class together with holders of shares of any
one or more other series of capital stock of the Company ranking on a parity
with the Convertible Preferred Stock as to dividends and having like voting
rights) to elect two additional directors who shall serve until such dividend
arrearage is eliminated.
The Board of Directors has the authority without stockholder approval to
issue the remaining authorized preferred stock in one or more series and to
fix the rights, preferences, privileges and restrictions thereof,
28
<PAGE>
including the dividend rights, dividend rate, conversion rights, voting
rights, rights and terms of redemption (including sinking fund provisions),
the redemption price or prices, the liquidation and preferences imposed on any
unissued series of preferred stock, and the number of shares constituting any
series or the designation of such series. The Company presently has no plans
or arrangements for the issuance of any additional preferred stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Chemical Mellon
Shareholder Services, LLC.
29
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters") have severally agreed,
subject to the terms and conditions contained in the underwriting agreement
(the "Underwriting Agreement"), by and among the Company, the Selling
Stockholder and the Underwriters, to purchase from the Company and the Selling
Stockholder the number of shares of Common Stock indicated below opposite
their respective names, at the public offering price less the underwriting
discount set forth on the cover page of this Prospectus. The Underwriting
Agreement provides that the obligations of the Underwriters are subject to
certain conditions precedent and that the Underwriters are committed to
purchase all of the shares of Common Stock if they purchase any.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- ----------- ---------
<S> <C>
Montgomery Securities.................................................
Furman Selz LLC.......................................................
---------
Total............................................................. 2,500,000
=========
</TABLE>
The Underwriters have advised the Company and the Selling Stockholder that
the Underwriters propose initially to offer the shares of Common Stock to the
public on the terms set forth on the cover page of this Prospectus. The
Underwriters may allow to selected dealers a concession of not more than $
per share; and the Underwriters may allow, and such dealers may reallow, a
concession of not more than $ per share to certain other dealers. After the
Offering, the public offering price and other selling terms may be changed by
the Underwriters. The Common Stock is offered subject to receipt and
acceptance by the Underwriters, and to certain other conditions, including the
right to reject orders in whole or in part.
The Selling Stockholder has granted an option to the Underwriters,
exercisable during the 30-day period after the date of this Prospectus, to
purchase up to a maximum of 375,000 additional shares of Common Stock to cover
over-allotments, if any, at the same price per share as the initial shares to
be purchased by the Underwriters. To the extent that the Underwriters exercise
this option, the Underwriters will be committed, subject to certain
conditions, to purchase such additional shares in approximately the same
proportion as set forth in the above table. The Underwriters may purchase such
shares only to cover over-allotments made in connection with the Offering.
The Underwriting Agreement provides that the Company and the Selling
Stockholder will indemnify the Underwriters against certain liabilities,
including civil liabilities under the Securities Act of 1933, or will
contribute to payments the Underwriter may be required to make in respect
thereof.
The Selling Stockholder, FSEP III, FSEP International and the Company's
officers and directors have agreed that, for a period of 90 days from the date
of this Prospectus, they will not directly or indirectly, sell, offer,
contract or grant any option to sell, pledge, transfer or otherwise dispose of
any shares of Common Stock, options, or warrants to acquire Common Stock or
securities convertible into or exchangeable or exercisable for
30
<PAGE>
any shares of Common Stock without the prior written consent of either
Montgomery Securities or each of the Representatives. The Company has agreed
that, for a period of 90 days after the date of this Prospectus, it will not
issue, offer, sell, grant options to purchase or otherwise dispose of any of
the Company's equity securities or any other securities convertible into or
exchangeable for its Common Stock or other equity security, other than
pursuant to outstanding options disclosed in this Prospectus, without the
prior written consent of either Montgomery Securities or each of the
Representatives.
In connection with the Offering, the Underwriters and certain selling group
members or their respective affiliates may engage in passive market making
transactions in the Common Stock on the Nasdaq National Market immediately
prior to the commencement of sales in the Offering in accordance with Rule
10b-6A under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Passive market making consists of displaying bids on the Nasdaq
National Market limited by the bid prices of independent market makers and
purchases limited by such prices and effected in response to order flow. Net
purchases by a passive market maker on each day are limited to a specified
percentage of the passive market maker's average daily trading volume in the
Common Stock during a specified prior period and must be discontinued when
such limit is reached. Passive market making may stabilize the market price of
the Common Stock at a level above that which might otherwise prevail and, if
commenced, may be discontinued at any time.
LEGAL MATTERS
Certain legal matters in connection with the securities offered hereby will
be passed upon for the Company by Riordan & McKinzie, a Professional
Corporation, Los Angeles, California. Certain legal matters will be passed
upon for the Underwriters by O'Melveny & Myers, Los Angeles, California.
Principals and employees of Riordan & McKinzie are limited partners in
partnerships which are limited partners of FSEP II and FSEP III, the Company's
principal stockholders. See "Principal and Selling Stockholders."
EXPERTS
The consolidated financial statements and schedules of the Company as of
January 29, 1995 and January 28, 1996 and for each of the three years in the
period ended January 28, 1996 included in this Prospectus have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
31
<PAGE>
ADDITIONAL INFORMATION
The Company has filed a Registration Statement on Form S-3 under the
Securities Act of 1933, as amended, with the Commission with respect to the
shares offered by this Prospectus. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. Statements contained herein concerning the provisions of
any documents are not necessarily complete and, in each instance, reference is
made to the copy of such documents filed as an exhibit to the Registration
Statement, and each such statement shall be deemed qualified in its entirety
by such reference.
The Company is subject to the informational requirements of the Exchange Act
and, in accordance therewith, files reports and other information with the
Commission. A copy of the reports and other information filed by the Company
in accordance with the Exchange Act may be inspected without charge at the
offices of the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and will also be available for inspection and copying at the
regional offices of the Commission located at 7 World Trade Center, Suite
1300, New York, New York 10048 and at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material may
also be obtained from the Public Reference Section of the Commission,
Washington, D.C. 20549, upon payment of the fees prescribed by the Commission.
Such reports, proxy statements and other information concerning the Company
are also available for inspection at the offices of the Nasdaq National
Market, Reports Section, 1735 K Street, Washington, D.C. 20006.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents which have been filed with the Commission by the
Company are hereby incorporated by reference in this Prospectus.
(1) Annual Report on Form 10-K for the fiscal year ended January 29,
1995.
(2) Quarterly Report on Form 10-Q for the fiscal quarter ended April 30,
1995.
(3) Quarterly Report on Form 10-Q for the fiscal quarter ended July 30,
1995.
(4) Quarterly Report on Form 10-Q for the fiscal quarter ended October
29, 1995.
(5) Current Report on Form 8-K dated February 26, 1996.
(6) Description of the Company's Common Stock contained in the
Registration Statement on Form 8-A dated February 3, 1993.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 and
15(d) of the Exchange Act, subsequent to the date of this Prospectus and prior
to the termination of the offerings made hereby, shall be deemed incorporated
by reference herein and to be a part hereof from the date of filing such
reports and documents. Any statement contained in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified
or superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document which also is or
is deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of the Prospectus.
Copies of all documents which are incorporated herein by reference (not
including the exhibits to such information, unless such exhibits are
specifically incorporated by reference in such information) will be provided
without charge to each person, including any beneficial owner, to whom this
Prospectus is delivered, upon written or oral request. Copies of this
Prospectus, as amended or supplemented from time to time, and any other
documents (or parts of documents) that constitute part of the Prospectus under
Section 10(a) of the Securities Act will also be provided without charge to
each such person, upon written or oral request. Requests should be directed to
Orchard Supply Hardware Stores Corporation, Attention: Kris McMullen, 6450 Via
Del Oro, San Jose, California 95119, telephone number (408) 281-3500.
32
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................................. F-3
Consolidated Balance Sheets as of January 29, 1995 and January 28, 1996... F-4
Consolidated Statements of Income for the years ended January 30, 1994,
January 29, 1995 and January 28, 1996.................................... F-6
Consolidated Statements of Stockholders' Equity for the years ended
January 30, 1994, January 29, 1995 and January 28, 1996.................. F-7
Consolidated Statements of Cash Flows for the years ended January 30,
1994, January 29, 1995 and January 28, 1996.............................. F-8
Notes to Consolidated Financial Statements................................ F-9
</TABLE>
F-1
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
F-2
<PAGE>
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 28, 1996 and January 29, 1995, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the
three years in the period ended January 28, 1996. 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 28, 1996 and January 29, 1995
and the results of its operations and its cash flows for each of the three
years in the period ended January 28, 1996 in conformity with generally
accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
San Jose, California
February 23, 1996
F-3
<PAGE>
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 29, JANUARY 28,
1995 1996
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................ $ 9,240 $ 7,930
Investments.......................................... 3,000 --
Accounts receivable, less allowance of $1,201 and
$1,543 at January 29, 1995
and January 28, 1996, respectively.................. 14,417 16,597
Inventory............................................ 103,438 116,761
Prepaid expenses and other........................... 8,221 8,391
Assets held for disposal............................. 6,145 6,513
-------- --------
Total current assets............................... 144,461 156,192
PROPERTY AND EQUIPMENT, net............................ 129,840 132,645
LEASEHOLD RIGHTS, net of accumulated amortization of
$3,775 and $4,885
at January 29, 1995 and January 28, 1996,
respectively.......................................... 9,751 8,636
DEFERRED FINANCING COSTS, net of accumulated
amortization of $1,249 and
$1,873 at January 29, 1995 and January 28, 1996,
respectively.......................................... 3,236 2,848
GOODWILL, net of accumulated amortization of $886 and
$1,042 at January 29, 1995 and January 28, 1996,
respectively.......................................... 5,371 5,215
-------- --------
Total assets....................................... $292,659 $305,536
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JANUARY 29, JANUARY 28,
1995 1996
----------- -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Outstanding checks, not cleared by the bank.......... $ 7,168 $ --
Accounts payable..................................... 36,476 42,032
Accrued payroll and related items.................... 8,715 11,612
Accrued advertising.................................. 3,448 3,622
Accrued sales taxes.................................. 7,158 8,325
Accrued interest payable............................. 4,478 4,535
Other accrued expenses............................... 3,476 7,203
Notes payable........................................ 773 684
Current portion of capital leases and long-term debt. 1,720 2,024
-------- --------
Total current liabilities.......................... 73,412 80,037
OTHER LIABILITIES...................................... 1,437 --
CAPITAL LEASES AND LONG-TERM DEBT, net of current
portion............................................... 135,232 132,242
-------- --------
Total liabilities.................................. 210,081 212,279
-------- --------
COMMITMENTS AND CONTINGENCIES (see Note 3)
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value
Authorized--2,000,000 shares; issued--800,000
shares; outstanding--800,000 shares; liquidation
preference of $20,000............................... 8 8
Common Stock, $.01 par value
Authorized--16,000,000 shares; issued--7,018,885
shares; outstanding--6,983,400 and 7,015,165 shares
at January 29, 1995 and January 28, 1996,
respectively........................................ 70 70
Additional paid-in capital........................... 90,700 90,612
Less--Notes receivable from sale of common stock..... (151) (93)
Retained earnings (accumulated deficit).............. (8,049) 2,660
-------- --------
Total stockholders' equity......................... 82,578 93,257
-------- --------
Total liabilities and stockholders' equity......... $292,659 $305,536
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------
JANUARY 30, JANUARY 29, JANUARY 28,
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
SALES...................................... $365,077 $441,646 $532,439
COST OF GOODS SOLD......................... 234,326 281,379 339,764
-------- -------- --------
Gross margin............................. 130,751 160,267 192,675
SELLING AND OTHER EXPENSES................. 91,302 120,323 140,997
GENERAL AND ADMINISTRATIVE EXPENSES........ 15,500 17,535 20,043
PRE-OPENING EXPENSES....................... 2,221 7,525 2,400
-------- -------- --------
Operating income......................... 21,728 14,884 29,235
INTEREST EXPENSE, net...................... 11,563 12,587 13,337
-------- -------- --------
Income before provision for income taxes
and
extraordinary items..................... 10,165 2,297 15,898
PROVISION FOR INCOME TAXES................. -- -- 4,289
-------- -------- --------
Income before extraordinary items........ 10,165 2,297 11,609
EXTRAORDINARY ITEMS:
Loss on extinguishment of debt........... (9,318) -- --
-------- -------- --------
Net income............................... 847 2,297 11,609
PREFERRED STOCK DIVIDENDS EARNED........... 814 1,115 1,200
-------- -------- --------
Net income available to common stock..... $ 33 $ 1,182 $ 10,409
======== ======== ========
INCOME PER COMMON AND EQUIVALENT SHARE:
Income before extraordinary items........ $ 1.57 $ 0.17 $ 1.48
Extraordinary items...................... (1.57) -- --
-------- -------- --------
Net income per common and equivalent
share................................... $ 0.01 $ 0.17 $ 1.48
======== ======== ========
WEIGHTED AVERAGE NUMBER OF COMMON AND
EQUIVALENT SHARES......................... 5,951 6,984 7,039
======== ======== ========
FULLY DILUTED INCOME PER COMMON AND
EQUIVALENT SHARE:
Income before extraordinary items........ $ 1.57 $ 0.17 $ 1.38
Extraordinary items...................... (1.57) -- --
-------- -------- --------
Net income per common and equivalent
share................................... $ 0.01 $ 0.17 $ 1.38
======== ======== ========
FULLY DILUTED WEIGHTED AVERAGE NUMBER OF
COMMON AND EQUIVALENT SHARES.............. 5,951 6,984 8,401
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NOTES RETAINED
PREFERRED STOCK COMMON STOCK RECEIVABLE EARNINGS
------------------ ----------------- PAID-IN FOR CAPITAL (ACCUMULATED TOTAL
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCK DEFICIT) EQUITY
---------- ------ --------- ------ ------- ----------- ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 31,
1993................... 1,602,486 $16 1,207,598 $12 $26,392 $(379) $(11,193) $14,848
Payment of notes
receivable from sale
of common stock....... -- -- -- -- -- 208 -- 208
Repurchase of common
stock................. -- -- (200) -- (3) -- -- (3)
Repurchase of Series A
redeemable 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
Payment 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 options
and warrants.......... -- -- 53,147 1 441 -- -- 442
Dividends 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
Payment of notes
receivable from sale
of common stock....... -- -- -- -- -- 58 -- 58
Issuance of common
stock resulting from
exercise of options
and warrants.......... -- -- 31,765 -- 212 -- -- 212
Dividends on
convertible preferred
stock................. -- -- -- -- (300) -- (900) (1,200)
Net income............. -- -- -- -- -- -- 11,609 11,609
---------- --- --------- --- ------- ----- -------- -------
BALANCE, JANUARY 28,
1996................... 800,000 $ 8 7,015,165 $70 $90,612 $ (93) $ 2,660 $93,257
========== === ========= === ======= ===== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE>
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------
JANUARY 30, JANUARY 29, JANUARY 28,
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................ $ 847 $ 2,297 $ 11,609
Non-cash adjustments to net income--
Depreciation and amortization............ 6,845 8,682 10,715
Prepayment premium on senior and
subordinated senior debentures.......... 6,335 -- --
Write-off of deferred financing costs.... 2,745 -- --
Accretion of debt discounts.............. 313 -- --
Loss on asset disposals.................. 65 55 15
Changes in assets and liabilities--
Increase in accounts receivable.......... (477) (1,172) (2,180)
Increase in inventories.................. (8,636) (20,944) (13,323)
(Increase) decrease in prepaid expenses
and other............................... (2,430) (2,631) (355)
Increase in accounts payable and other
liabilities............................. 7,517 15,977 5,465
-------- -------- --------
Net cash provided by operating
activities............................ 13,124 2,264 11,946
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment....... (29,491) (30,577) (12,500)
(Purchase) redemption of investments...... -- (3,000) 3,000
Purchase of leasehold rights.............. (6,511) -- --
-------- -------- --------
Net cash used in investing activities.. (36,002) (33,577) (9,500)
-------- -------- --------
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.. 103,079 1,752 --
Principal payments on capital leases and
long-term debt........................... (50,757) (52,335) (2,686)
Deferred financing costs paid............. (2,736) (433) (51)
Preferred stock dividends................. (2,500) (1,115) (1,200)
Repayment of notes payable, net........... (1,727) (2,473) (89)
Repurchase of capital stock............... (6) -- --
Proceeds from issuance of capital stock... 60 442 212
Payment of notes receivable from sale of
capital stock............................ 208 20 58
-------- -------- --------
Net cash provided by (used in)
financing activities.................. 93,991 (35,035) (3,756)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................... 71,113 (66,348) (1,310)
CASH AND CASH EQUIVALENTS, beginning of
period.................................... 4,475 75,588 9,240
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of period... $ 75,588 $ 9,240 $ 7,930
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-8
<PAGE>
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 28, 1996
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES:
Consolidation and Nature of Operations
The consolidated financial statements include the accounts of Orchard Supply
Hardware Stores Corporation ("Company") and its wholly-owned subsidiary,
Orchard Supply Hardware Corporation ("Orchard Supply") which operates 60
hardware super stores located in California. As of January 28, 1996, 50 of the
stores were located in Northern and Central California, Orchard Supply's
historical market, and 10 stores were located in Southern California, a
geographical market entered during the year ended January 30, 1994. The
majority of the Company's merchandise is handled through a single warehouse
and distribution facility in Northern California.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from the estimates.
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
Effective January 31, 1994 the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 115 "Accounting for Certain Investments in
Debt and Equity Securities". 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 Company's securities, classified as available for
sale, are carried at fair market value. 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 which had previously
been included in property and equipment, and are currently being held for
sale. The Company carries these assets at amounts not to exceed net realizable
value.
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-9
<PAGE>
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During the years ended January 30, 1994, January 29, 1995 and January 28,
1996, the Company capitalized interest costs of $448,000, $870,000 and $57,000
related to the construction of new stores.
Leasehold Rights
Leasehold rights represent the difference between the fair market value of
the Company's lease rentals and the stated rental rates at the time of
acquisition. Leasehold rights are amortized over the lives of the lease terms
ranging from 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 per common and equivalent share is computed by dividing net
income available to common stock (net income less preferred stock dividend
requirements) by the weighted average number of common and equivalent shares.
Common and equivalent shares include common stock issuable upon exercise of
stock options and warrants less shares assumed repurchased with the proceeds
from notes receivable from sale of common stock (using the treasury stock
method, unless antidilutive). Options outstanding pursuant to the Performance
Stock Option Plan (now terminated) and the options granted to the President of
the Company are excluded from the calculation due to their contingent nature.
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No.
83, common stock issued by the Company during the 12-month period prior to the
initial public offering and stock options and warrants granted during the same
period for which a measurement date has been established have been included in
the calculation of common and common equivalent shares using the treasury
stock method and the public offering price as if they were outstanding for all
applicable periods.
Net income per common and equivalent share on a fully diluted basis reflects
the assumed conversion of preferred stock to common stock, if dilutive.
F-10
<PAGE>
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. PROPERTY AND EQUIPMENT:
Property and equipment are summarized below (in thousands):
<TABLE>
<CAPTION>
JANUARY 29, JANUARY 28,
1995 1996
----------- -----------
<S> <C> <C>
Property and Equipment
Land............................................... $ 26,980 $ 26,980
Land improvements.................................. 1,652 2,074
Buildings.......................................... 37,394 37,782
Machinery and equipment............................ 37,703 43,540
Leasehold improvements............................. 49,249 53,910
Construction in progress........................... 4,382 3,807
Assets under capital leases........................ 1,849 1,834
-------- --------
159,209 169,927
Accumulated depreciation and amortization.......... (29,369) (37,282)
-------- --------
Net property and equipment....................... $129,840 $132,645
======== ========
</TABLE>
Accumulated amortization on assets under capital lease was approximately
$1.0 million and $1.1 million for the years ended January 29, 1995 and January
28, 1996, respectively.
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 28, 1996 are as follows (in
thousands):
<TABLE>
<CAPTION>
FUTURE MINIMUM
YEAR ENDING JANUARY, RENTALS
-------------------- --------------
<S> <C>
1997..................................................... $ 21,199
1998..................................................... 20,007
1999..................................................... 19,480
2000..................................................... 17,573
2001..................................................... 15,707
Thereafter............................................... 217,524
--------
Total minimum lease payments........................... $311,490
========
</TABLE>
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 28, 1996......................................... $20,656 $689
January 29, 1995......................................... 17,067 573
January 30, 1994......................................... 12,532 486
</TABLE>
F-11
<PAGE>
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 28, 1996...................................... $762 $1,219
January 29, 1995...................................... 624 671
January 30, 1994...................................... 468 990
</TABLE>
5. LONG-TERM DEBT AND CREDIT ARRANGEMENTS:
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
JANUARY 29, JANUARY 28,
1995 1996
----------- -----------
<S> <C> <C>
9 3/8% senior notes.................................. $100,000 $100,000
Store and warehouse mortgages........................ 35,412 32,829
Obligations under capital leases..................... 1,540 1,437
-------- --------
Total debt........................................... 136,952 134,266
Less--Current maturities............................. 1,720 2,024
-------- --------
$135,232 $132,242
======== ========
</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.
9 3/8% Senior Notes
On January 20, 1994, the Company, as guarantor, and Orchard Supply, as
issuer, issued $100 million of unsecured 9 3/8% senior notes. The notes mature
on February 15, 2002 and may be redeemed at Orchard Supply's option at various
redemption dates as specified in the indenture. The terms of the notes limit
the ability of Orchard Supply and the Company to pay dividends, incur
indebtedness, issue stock, transfer funds to affiliates and dispose of assets.
Store and Warehouse Mortgages
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% (10.1% and 9.1% at January 29, 1995 and January 28, 1996,
respectively). Principal payments began in May 1993 and a final balloon
payment is due in 2002. Payments are based on a twenty-year amortization
schedule.
In May 1992, a life insurance company loaned Orchard Supply approximately
$13.7 million through a first mortgage loan on the new warehouse facility
located in Tracy, California. The mortgage note bears interest of 10.64%
payable monthly on the outstanding loan balance. The first principal payment
of $0.9 million was paid on May 31, 1995. Further principal payments are due
each anniversary date through 2002, increasing by $0.2 million each year.
F-12
<PAGE>
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The net book value of the assets mortgaged pursuant to the above mortgage
loans approximated $50.4 million at January 28, 1996.
Revolving Credit Facility
As of August 8, 1995, a new revolving credit facility was put in place by
Orchard Supply, which is guaranteed by the Company and is secured by inventory
and accounts receivable. Borrowings are limited to an amount equal to 75% of
eligible accounts receivable, as defined, plus up to 50% of eligible
inventory, as defined. The maximum available borrowings under the revolving
credit facility are $40.0 million. In addition, there is a $10.0 million
sublimit for letters of credit under the revolving credit facility. Letters of
credit outstanding as of January 29, 1995 and January 28, 1996 totaled $5.2
million and $8.5 million, respectively.
The revolving credit facility remains effective through May 31, 1999 and
bears interest payable monthly at either the bank reference rate, as defined,
or LIBOR plus 1.375% per annum, as elected by the Company.
The following summarizes activity applicable to the revolving credit
facilities (dollar amounts in thousands):
<TABLE>
<CAPTION>
JANUARY 29, JANUARY 28,
1995 1996
----------- -----------
<S> <C> <C>
Balance outstanding at end of year.................. $ -- $ --
Weighted average balance outstanding during the
year............................................... 120 889
Maximum amount outstanding during the year.......... 4,625 11,290
Weighted average interest rate...................... 8.77% 9.79%
Interest rate at end of period...................... 9.50% 8.50%
</TABLE>
Capital Leases
Orchard Supply leases two stores and certain equipment under capital lease
agreements. The leases bear interest at implicit rates approximating 10%.
Financing Costs
In connection with the early extinguishments of debt during the year ended
January 30, 1994, the Company recorded extraordinary charges of $9.3 million.
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-13
<PAGE>
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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>
1997........................................ $ 1,910 $ 253
1998........................................ 2,216 252
1999........................................ 2,534 252
2000........................................ 2,861 253
2001........................................ 3,198 253
Thereafter.................................. 120,110 866
-------- ------
132,829 2,129
Less--Amount representing interest.......... 692
------
Present value of future commitments......... 1,437
Less--Current portion....................... 1,910 114
-------- ------
Long-term portion........................... $130,919 $1,323
======== ======
</TABLE>
Total cash paid by the Company for interest was as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
----------
<S> <C>
January 28, 1996................................................. $13,050
January 29, 1995................................................. 9,531
January 30, 1994................................................. 10,905
</TABLE>
6. PREFERRED STOCK:
In connection with the Company's initial public offering of common stock,
the Company declared dividends on the Series A preferred stock of $13.3
million equal to all earned but undeclared dividends. Of this amount, $2.5
million was paid in cash and funded by borrowings under 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 325,000 shares of
Series 1 and 475,000 shares of Series 2 6% Cumulative Convertible Preferred
Stock, $.01 par value per share, at a price of $24.25 per share. The preferred
stock has an aggregate liquidation preference of $20.0 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-14
<PAGE>
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. COMMON STOCK:
On April 6, 1993, the Company completed its initial public offering. The
Company sold 3.8 million shares of common stock at a price of $14 per share.
Common Stock Warrants
In connection with the issuance of notes since redeemed, the Company issued
warrants to purchase 79,669 shares of common stock at $8.33 per share. All of
the warrants have been exercised as of January 28, 1996.
Stock Options
Under the 1989 Nonqualified Stock Option Plan, options may be granted to
qualified personnel of the Company to purchase shares of common stock at a
price no less than the fair market value of such shares 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 July of 1993, the 1993 Non-Employee Directors Stock Option Plan of the
Company was added which resulted in the grant of 10,000 shares to non-employee
directors. The provisions of the 1993 plan are the same as the 1989 plan.
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 28, 1996, options covering 217,113 shares of common stock were
outstanding, of which 111,888 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 394,314 shares of
common stock for issuance under the plans.
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 31, 1993............................. 7,561 52,439 $ 8.33
Authorized................................. 360,000 -- --
Granted.................................... (105,000) 105,000 12.83-17.10
Cancelled.................................. 2,784 (2,784) 8.33-17.10
Exercised.................................. -- (7,225) 8.33
-------- -------
January 30, 1994............................. 265,345 147,430 8.33-17.10
Cancelled.................................. 13,105 (13,105) 8.33-17.10
Exercised.................................. -- (699) 8.33
-------- -------
January 29, 1995............................. 278,450 133,626 8.33-17.10
Granted.................................... (111,200) 111,200 7.75
Cancelled.................................. 9,951 (9,951) 7.75-17.10
Exercised.................................. -- (17,762) 7.75-17.10
-------- -------
January 28, 1996............................. 177,201 217,113 7.75-17.10
======== =======
</TABLE>
F-15
<PAGE>
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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:
In accordance with SFAS No. 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.
The major components of deferred tax assets and liabilities are as follows
(in thousands):
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 29, JANUARY 28,
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Deferred tax assets--
Net operating losses...................... $ 3,814 $ 4,913 $1,476
AMT payments made......................... 1,951 1,951 4,028
Other..................................... 2,383 1,531 3,217
------- ------- ------
Total assets............................ 8,148 8,395 8,721
Valuation allowance....................... (4,083) (2,907) --
------- ------- ------
Net assets.............................. 4,065 5,488 8,721
------- ------- ------
Deferred tax liabilities--
Depreciation.............................. 2,114 2,732 4,743
Software costs............................ -- 805 1,294
------- ------- ------
Total liabilities....................... 2,114 3,537 6,037
------- ------- ------
Total net deferred tax asset............ $ 1,951 $ 1,951 $2,684
======= ======= ======
</TABLE>
The significant components of income tax expense follow:
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 29, JANUARY 28,
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Current tax expense--
Federal.................................. $ 275 $ 191 $ 5,946
State.................................... 12 2 1,983
Deferred tax expense--
Federal.................................. 240 610 (796)
State.................................... 68 373 63
Adjustments to beginning valuation
allowance................................. (595) (1,176) (2,907)
----- ------- -------
$ -- $ -- $ 4,289
===== ======= =======
</TABLE>
F-16
<PAGE>
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following is a reconciliation of the effective tax rate to the statutory
federal rate:
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 29, JANUARY 28,
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Statutory federal income tax rate.......... 34.0% 34.0% 34.0%
State income taxes net of federal benefit.. 6.1 6.1 6.1
Adjustments to valuation allowance......... (70.3) (51.2) (18.2)
Goodwill amortization and other permanent
differences............................... 30.2 11.1 5.1
----- ----- -----
0% 0% 27.0%
===== ===== =====
</TABLE>
As of January 28, 1996, for tax purposes, the Company has net operating loss
carryforwards of approximately $4.0 million and $1.1 million available to
offset federal and California taxable income, respectively. These net
operating loss carryforwards expire at various dates through the fiscal year
ending January 2010 and state loss carryforwards expire at various dates
through the fiscal year ending January 2000. As a result of the initial public
offering and other ownership changes, 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.
The Company has made income tax payments of approximately $1.2 million, $-0-
and $2.8 million in the years ended January 30, 1994, January 29, 1995 and
January 28, 1996 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
approximately $135.6 million versus the carrying amount of approximately
$134.3 million at January 28, 1996.
F-17
<PAGE>
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
<TABLE>
<CAPTION>
INCOME (LOSS)
PER COMMON AND
EQUIVALENT SHARE
NET INCOME ON A FULLY
SALES GROSS MARGIN (LOSS) DILUTED BASIS
-------- ------------ ---------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
YEAR ENDED JANUARY 29, 1995
First quarter.............. $ 96,555 $ 34,606 $ (917) $(0.16)
Second quarter............. 125,566 44,970 3,305 0.40
Third quarter.............. 111,790 41,043 598 0.04
Fourth quarter............. 107,735 39,648 (689) (0.14)
-------- -------- ------- ------
Year....................... $441,646 $160,267 $ 2,297 $ 0.17
======== ======== ======= ======
YEAR ENDED JANUARY 28, 1996
First quarter.............. $125,352 $ 45,644 $ 2,922 $ 0.35
Second quarter............. 145,465 52,323 5,601 0.67
Third quarter.............. 131,497 47,516 1,820 0.22
Fourth quarter............. 130,125 47,192 1,266 0.14
-------- -------- ------- ------
Year....................... $532,439 $192,675 $11,609 $ 1.38
======== ======== ======= ======
</TABLE>
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 29, JANUARY 28,
1995 1996
----------- -----------
<S> <C> <C>
Current assets....................................... $144,453 $156,193
Non-current assets................................... 148,198 149,344
-------- --------
$292,651 $305,537
======== ========
Current liabilities.................................. $ 73,412 $ 80,037
Non-current liabilities.............................. 136,669 132,242
-------- --------
210,081 212,279
-------- --------
Redeemable preferred stock........................... -- --
Other equity......................................... 82,570 93,258
-------- --------
82,570 93,258
-------- --------
$292,651 $305,537
======== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------
JANUARY 30, JANUARY 29, JANUARY 28,
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Sales...................................... $365,077 $441,646 $532,439
Gross margin............................... 130,751 160,267 192,675
Income before provisions for taxes and
extraordinary items....................... 10,170 2,339 15,938
Net income................................. 852 2,339 11,649
</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>
SELECTION
- ------------------------------------------------------------------------------
[PHOTO 1] [PHOTO 2] [PHOTO 3]
[PHOTO 4] [PHOTO 5] [PHOTO 6]
[COMPANY LOGO]
[PHOTO 7]
New warehouse and distribution facility
CONVENIENT, WELL
SERVICE ORGANIZED STORES
- ------------------------------------------------------ ------------------
[PHOTO 8] [PHOTO 9] [PHOTO 10] [PHOTO 11]
Custom cutting Commercial services Drive through
pick-up station
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, representative or any other person has been authorized to give
information or to make any representations other than those contained in this
Prospectus, and, if given or made, such information or representation must not
be relied upon as having been authorized by the Company, the Selling
Stockholder or by the Underwriters. Neither the delivery of this Prospectus nor
any sale made hereunder shall under any circumstances create any implication
that there has been no change in the affairs of the Company since the date
hereof. This Prospectus does not constitute an offer to sell or a solicitation
of an offer to buy any securities offered hereby by anyone in any jurisdiction
in which such offer or solicitation is not authorized or in which the person
making such offer or solicitation is not qualified to do so or to anyone to
whom it is unlawful to make such offer or solicitation.
-------------------
TABLE OF CONTENTS
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<TABLE>
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Page
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<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 9
Price Range of Common Stock............................................... 9
Dividend Policy........................................................... 9
Capitalization............................................................ 10
Selected Consolidated Financial Data...................................... 11
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 12
Business.................................................................. 17
Management................................................................ 25
Principal and Selling Stockholders........................................ 27
Description of Capital Stock.............................................. 28
Underwriting.............................................................. 30
Legal Matters............................................................. 31
Experts................................................................... 31
Additional Information.................................................... 32
Incorporation of Certain Documents by Reference........................... 32
Index to Consolidated Financial Statements................................ F-1
</TABLE>
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2,500,000 SHARES
[LOGO OF ORCHARD SUPPLY HARDWARE]
COMMON STOCK
----------------
PROSPECTUS
----------------
MONTGOMERY SECURITIES
FURMAN SELZ
, 1996
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<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses and costs (other than
underwriting discounts and commissions) expected to be incurred in connection
with the sale and distribution of the securities being registered. All of the
amounts shown are estimated except the registration fee of the Securities and
Exchange Commission and the NASD filing fee.
<TABLE>
<CAPTION>
ITEM AMOUNT
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<S> <C>
Securities and Exchange Commission registration fee................... $ 22,306
NASD filing fee....................................................... 6,969
Blue Sky fees and expenses ........................................... 10,000
Printing expenses..................................................... 75,000
Legal fees and expenses............................................... 75,000
Accounting fees and expenses ......................................... 75,000
Transfer Agent fees................................................... 1,000
Miscellaneous......................................................... 9,725
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Total .............................................................. $275,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Orchard Supply Hardware Stores Corporation (the "Company") is a Delaware
corporation. Article VI of the Company's Bylaws provides that the Company may
indemnify its officers and Directors to the full extent permitted by law.
Section 145 of the General Corporation Law of the State of Delaware ("GCL")
provides that a Delaware corporation has the power to indemnify its officers
and directors in certain circumstances.
Subsection (a) of Section 145 of the GCL empowers a corporation to indemnify
any director or officer, or former director or officer, who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation),
against expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred in connection with such
action, suit or proceeding provided that such director or officer acted in
good faith and in a manner reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal action or
proceeding, provided that such director or officer had no cause to believe his
or her conduct was unlawful.
Subsection (b) of Section 145 of the GCL empowers a corporation to indemnify
any director or officer, or former director or officer, who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a judgment in
its favor by reason of the fact that such person acted in any of the
capacities set forth above, against expenses actually and reasonably incurred
in connection with the defense or settlement of such action or suit provided
that such director or officer acted in good faith and in a manner reasonably
believed to be in or not opposed to the best interests of the corporation,
except that no indemnification may be made in respect of any claim, issue or
matter as to which such director or officer shall have been adjudged to be
liable to the corporation unless and only to the extent that the Court of
Chancery or the court in which such action was brought shall determine that
despite the adjudication of liability such director or officer is fairly and
reasonably entitled to indemnity for such expenses which the court shall deem
proper.
Section 145 of the GCL further provides that to the extent a director or
officer of a corporation has been successful in the defense of any action,
suit or proceeding referred to in subsections (a) and (b) or in the defense of
any claim, issue or matter therein, he or she shall be indemnified against
expenses (including attorneys' fees)
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<PAGE>
actually and reasonably incurred by him or her in connection therewith; that
indemnification provided for by Section 145 shall not be deemed exclusive of
any other rights to which the indemnified party may be entitled; and that the
corporation shall have power to purchase and maintain insurance on behalf of a
director or officer of the corporation against any liability asserted against
him or her or incurred by him or her in any such capacity or arising out of
his or her status as such whether or not the corporation would have the power
to indemnify him or her against such liabilities under Section 145.
Article Ninth of the Company's Certificate of Incorporation currently
provides that each Director shall not be personally liable to the Company or
its stockholders for monetary damages for breach of fiduciary duty as a
Director, except for liability (i) for any breach of the Director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the GCL, or (iv) for any transaction from
which the Director derived an improper benefit.
The Company has entered into indemnity agreements with each of its
Directors. The indemnity agreements generally indemnify such persons against
liabilities arising out of their service in their capacities as Directors,
officers, employees or agents of the Company, including their service as
Directors of Orchard Supply Hardware Corporation. Each of the Company may from
time to time enter into indemnity agreements with additional individuals who
become officers or Directors of the Company.
The form of Underwriting Agreement, filed as Exhibit 1 hereto, provides for
the indemnification of the Company, its controlling persons, its directors and
certain of its officers by the Underwriters against certain liabilities,
including liabilities under the Securities Act.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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<S> <C>
1 Form of Underwriting Agreement.
5 Opinion of Riordan & McKinzie, a Professional Corporation.
11 Computation of earnings per share.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Riordan & McKinzie (included in Exhibit 5).
24 Powers of Attorney with respect to the Company (included on the
signature page).
</TABLE>
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<PAGE>
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) That for purposes of determining any liability under the Securities Act
of 1933, each filing of the registrant's annual report pursuant to section
13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report pursuant
to section 15(d) of the Securities Exchange Act of 1934) that is incorporated
by reference in the registration statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof;
(2) That insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue;
(3) That for purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective; and
(4) That for the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of San Jose, State of California, on this 26th day of
February 1996.
Orchard Supply Hardware Stores
Corporation
By /s/ Maynard Jenkins
_____________________________________
Maynard Jenkins
President and Chief Executive
Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Maynard Jenkins, Stephen M. Hilberg, William M.
Wardlaw and J. Frederick Simmons and each of them, his true and lawful
attorneys-in-fact and agents with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this Registration Statement, and
to file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming our signatures as they may
be signed by our said attorneys to any and all amendments to said Registration
Statement, or any related registration statement that is to be effective upon
filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended,
and all that said attorneys-in-fact and agents or any of them, or their or his
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
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<S> <C> <C>
/s/ Maynard Jenkins President, Chief Executive February 26, 1996
____________________________________ Officer and Director
Maynard Jenkins (Principal Executive
Officer)
/s/ Stephen M. Hilberg Vice President-Finance, February 26, 1996
____________________________________ Chief Financial Officer and
Stephen M. Hilberg Director (Principal
Financial Officer)
/s/ Michael Seda Controller (Principal February 26, 1996
____________________________________ Accounting Officer)
Michael Seda
/s/ Matt L. Figel Director February 26, 1996
____________________________________
Matt L. Figel
/s/ Morton Godlas Director February 26, 1996
____________________________________
Morton Godlas
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
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<S> <C> <C>
/s/ William A. Hall Director February 26, 1996
____________________________________
William A. Hall
/s/ J. Frederick Simmons Director February 26, 1996
____________________________________
J. Frederick Simmons
/s/ Ronald P. Spogli Director February 26, 1996
____________________________________
Ronald P. Spogli
/s/ William M. Wardlaw Director February 26, 1996
____________________________________
William M. Wardlaw
</TABLE>
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GRAPHICS APPENDIX LIST
<TABLE>
<CAPTION>
INSIDE FRONT COVER
<C> <S>
Map Map of California with symbols indicating the locations of existing
stores and the distribution center
Photo 1 Photograph of exterior of store and parking lot in Foster City,
California
Photo 2 Photograph of check-out lines inside store
Photo 3 Photograph of plant nursery section of store
Photo 4 Photograph of store aisle containing rows of hammers
<CAPTION>
INSIDE BACK COVER
<C> <S>
Photo 1 Photograph of store aisle containing rows of garden hoses
Photo 2 Photograph of store aisle of miscellaneous screws
Photo 3 Photograph of store aisle of shovels
Photo 4 Photograph of store tool corral
Photo 5 Close-up photograph of store aisle of miscellaneous screws
Photo 6 Photograph of store aisle of miscellaneous faucets
Photo 7 Photograph of exterior of distribution facility and trucks in parking
lot
Photo 8 Photograph of employee cutting hose
Photo 9 Photograph of Commercial Services center
Photo 10 Photograph of employee loading cement onto the back of a customer's
truck
Photo 11 Photograph of store interior showing how aisles are arranged
</TABLE>
<PAGE>
EXHIBIT 1
2,500,000 SHARES
ORCHARD SUPPLY HARDWARE STORES CORPORATION
COMMON STOCK
UNDERWRITING AGREEMENT
March __, 1996
MONTGOMERY SECURITIES
FURMAN SELZ LLC
As Representatives of the several Underwriters
c/o MONTGOMERY SECURITIES
600 Montgomery Street
San Francisco, California 94111
Dear Sirs:
SECTION 1. Introductory. Orchard Supply Hardware Stores Corporation, a
------------
Delaware corporation (the "Company"), proposes to issue and sell 500,000 shares
of its authorized but unissued Common Stock (the "Common Stock") and the
stockholder of the Company named in Schedule B annexed hereto (the "Selling
Stockholder") proposes to sell an aggregate of 2,000,000 shares of the Company's
issued and outstanding Common Stock to the several underwriters named in
Schedule A annexed hereto (the "Underwriters"), for whom you are acting as
Representatives. Said aggregate of 2,500,000 shares are herein called the "Firm
Common Shares." In addition, the Selling Stockholder proposes to grant to the
Underwriters an option to purchase up to 375,000 additional shares of Common
Stock (the "Optional Common Shares"), as provided in Section 5 hereof. The Firm
Common Shares and, to the extent such option is exercised, the Optional Common
Shares are hereinafter collectively referred to as the "Common Shares."
You have advised the Company and the Selling Stockholder that the
Underwriters propose to make a public offering of their respective portions of
the Common Shares on the effective date of the registration statement
hereinafter referred to, or as soon thereafter as in your judgment is advisable.
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<PAGE>
The Company and the Selling Stockholder hereby confirm their respective
agreements with respect to the purchase of the Common Shares by the Underwriters
as follows:
SECTION 2. Representations and Warranties of the Company and the Selling
-------------------------------------------------------------
Stockholder. The Company and the Selling Stockholder represent and warrant to
- -----------
the several Underwriters that:
(a) A registration statement on Form S-3 (File No. 333-___) with
respect to the Common Shares has been prepared by the Company in conformity
with the requirements of the Securities Act of 1933, as amended (the
"Act"), and the rules and regulations (the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission") thereunder, and has
been filed with the Commission. The Company has prepared and has filed or
proposes to file prior to the effective date of such registration statement
an amendment or amendments to such registration statement, which amendment
or amendments have been or will be similarly prepared. There have been
delivered to you two signed copies of such registration statement and
amendments, together with two copies of each exhibit filed therewith.
Conformed copies of such registration statement and amendments (but without
exhibits) and of the related preliminary prospectus have been delivered to
you in such reasonable quantities as you have requested for each of the
Underwriters. The Company will next file with the Commission one of the
following: (i) prior to effectiveness of such registration statement, a
further amendment thereto, including the form of final prospectus, (ii) a
final prospectus in accordance with Rules 430A and 424(b) of the Rules and
Regulations or (iii) a term sheet (the "Term Sheet") as described in and in
accordance with Rules 434 and 424(b) of the Rules and Regulations. As
filed, the final prospectus. if one is used, or the Term Sheet and
Preliminary Prospectus, if a final prospectus is not used, shall include
all Rule 430A Information and, except to the extent that you shall agree in
writing to a modification, shall be in all substantive respects in the form
furnished to you prior to the date and time that this Agreement was
executed and delivered by the parties hereto, or, to the extent not
completed at such date and time, shall contain only such specific
additional information and other changes (beyond that contained in the
latest Preliminary Prospectus) as the Company shall have previously advised
you in writing would be included or made therein.
The term "Registration Statement" as used in this Agreement shall mean such
registration statement at the time such registration statement becomes
effective and, in the event any post-effective amendment thereto becomes
effective prior to the First Closing Date (as hereinafter defined), shall
also mean such registration statement as so amended; provided, however,
that such term shall also include (i) all Rule 430A Information deemed to
be included in such registration statement at the time such registration
statement becomes effective as provided by Rule 430A of the Rules and
Regulations and (ii) any registration statement filed pursuant to 462(b) of
the Rules and Regulations relating to the Common Shares. The term
"Preliminary Prospectus" shall mean any preliminary prospectus referred to
in the preceding
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<PAGE>
paragraph and any preliminary prospectus included in the Registration
Statement at the time it becomes effective that omits Rule 430A
Information. The term "Prospectus" as used in this Agreement shall mean
either (i) the prospectus relating to the Common Shares in the form in
which it is first filed with the Commission pursuant to Rule 424(b) of the
Rules and Regulations or, (ii) if a Term Sheet is not used and no filing
pursuant to Rule 424(b) of the Rules and Regulations is required, shall
mean the form of final prospectus included in the Registration Statement at
the time such registration statement becomes effective or (iii) if a Term
Sheet is used, the Term Sheet in the form in which it is first filed with
the Commission pursuant to Rule 424(b) of the Rules and Regulations,
together with the Preliminary Prospectus included in the Registration
Statement at the time it becomes effective. The term "Rule 430A
Information" means information with respect to the Common Shares and the
offering thereof permitted to be omitted from the Registration Statement
when it becomes effective pursuant to Rule 430A of the Rules and
Regulations. Any reference herein to any Preliminary Prospectus or the
Prospectus shall be deemed to refer to and include the documents
incorporated by reference therein pursuant to Form S-3 under the Act, as of
the date of such Preliminary Prospectus or Prospectus, as the case may be.
(b) The Commission has not issued any order preventing or suspending
the use of any Preliminary Prospectus, and each Preliminary Prospectus has
conformed in all material respects to the requirements of the Act and the
Rules and Regulations and, as of its date, has not included any untrue
statement of a material fact or omitted to state a material fact necessary
to make the statements therein, in the light of the circumstances under
which they were made, not misleading; and at the time the Registration
Statement becomes effective, and at all times subsequent thereto up to and
including each Closing Date hereinafter mentioned, the Registration
Statement and the Prospectus, and any amendments or supplements thereto,
will contain all material statements and information required to be
included therein by the Act and the Rules and Regulations and will in all
material respects conform to the requirements of the Act and the Rules and
Regulations, and neither the Registration Statement nor the Prospectus, nor
any amendment or supplement thereto, will include any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading;
provided, however, no representation or warranty contained in this
subsection 2(b) shall be applicable to information contained in or omitted
from any Preliminary Prospectus, the Registration Statement, the Prospectus
or any such amendment or supplement in reliance upon and in conformity with
written information furnished to the Company by or on behalf of any
Underwriter, directly or through the Representatives, specifically for use
in the preparation thereof. The documents incorporated by reference in the
Prospectus, when they were filed with the Commission, conformed in all
material respects to the requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act") and the rules and regulations of the
Commission thereunder, and none of such documents contained an untrue
statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading.
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<PAGE>
(c) The Company does not own or control, directly or indirectly, any
corporation, association or other entity other than the subsidiaries listed
in Exhibit 22 to the Annual Report on Form 10-K for the Company's most
recent fiscal year. The Company and each of its subsidiaries have been
duly incorporated and are validly existing as corporations in good standing
under the laws of their respective jurisdictions of incorporation, with
full power and authority (corporate and other) to own and lease their
properties and conduct their respective businesses as described in the
Prospectus; the Company owns all of the outstanding capital stock of its
subsidiaries free and clear of all claims, liens, charges and encumbrances;
the Company and each of its subsidiaries are in possession of and operating
in compliance with all authorizations, licenses, permits, consents,
certificates and orders material to the conduct of their respective
businesses, all of which are valid and in full force and effect; the
Company and each of its subsidiaries are duly qualified to do business and
in good standing as foreign corporations in each jurisdiction in which the
ownership or leasing of properties or the conduct of their respective
businesses requires such qualification, except for jurisdictions in which
the failure to so qualify would not have a material adverse effect upon the
Company or the subsidiary; and no proceeding has been instituted in any
such jurisdiction, revoking, limiting or curtailing, or seeking to revoke,
limit or curtail, such power and authority or qualification.
(d) The Company has an authorized and outstanding capital stock as set
forth under the heading "Capitalization" in the Prospectus; the issued and
outstanding shares of Common Stock (including the Firm Common Shares to be
sold by the Selling Stockholder and the Optional Common Shares to be sold
by the Selling Stockholder) have been duly authorized and validly issued,
are fully paid and nonassessable, are duly listed on the Nasdaq National
Market, have been issued in compliance with all federal and state
securities laws, were not issued in violation of or subject to any
preemptive rights or other rights to subscribe for or purchase securities,
and conform to the description thereof contained in the Prospectus. All
issued and outstanding shares of capital stock of each subsidiary of the
Company have been duly authorized and validly issued and are fully paid and
nonassessable. Except as disclosed in or contemplated by the Prospectus
and the financial statements of the Company, and the related notes thereto,
included in the Prospectus, neither the Company nor any subsidiary has
outstanding any options to purchase, or any preemptive rights or other
rights to subscribe for or to purchase, any securities or obligations
convertible into, or any contracts or commitments to issue or sell, shares
of its capital stock or any such options, rights, convertible securities or
obligations. The description of the Company's stock option, stock bonus
and other stock plans or arrangements, and the options or other rights
granted and exercised thereunder, set forth in the Prospectus accurately
and fairly presents the information required to be shown with respect to
such plans, arrangements, options and rights.
(e) The Common Shares to be sold by the Company have been duly
authorized and, when issued, delivered and paid for in the manner set forth
in this Agreement, will be duly authorized, validly issued, fully paid and
nonassessable, and
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<PAGE>
will conform to the description thereof contained in the Prospectus. No
preemptive rights or other rights to subscribe for or purchase exist with
respect to the issuance and sale of the Common Shares by the Company
pursuant to this Agreement. No stockholder of the Company has any right
which has not been waived to require the Company to register the sale of
any shares owned by such stockholder under the Act in the public offering
contemplated by this Agreement. No further approval or authority of the
stockholders or the Board of Directors of the Company will be required for
the transfer and sale of the Common Shares to be sold by the Selling
Stockholder or the issuance and sale of the Common Shares to be sold by the
Company as contemplated herein.
(f) The Company has full legal right, power and authority to enter
into this Agreement and perform the transactions contemplated hereby. This
Agreement has been duly authorized, executed and delivered by the Company
and constitutes a valid and binding obligation of the Company in accordance
with its terms. The making and performance of this Agreement by the
Company and the consummation of the transactions herein contemplated will
not violate any provisions of the certificate of incorporation or bylaws,
or other organizational documents, of the Company or any of its
subsidiaries, and will not conflict with, result in the breach or violation
of, or constitute, either by itself or upon notice or the passage of time
or both, a default under any agreement, mortgage, deed of trust, lease,
franchise, license, indenture, permit or other instrument to which the
Company or any of its subsidiaries is a party or by which the Company or
any of its subsidiaries or any of its respective properties may be bound or
affected, any statute or any authorization, judgment, decree, order, rule
or regulation of any court or any regulatory body, administrative agency or
other governmental body applicable to the Company or any of its
subsidiaries or any of its respective properties. No consent, approval,
authorization or other order of any court, regulatory body, administrative
agency or other governmental body is required for the execution and
delivery of this Agreement or the consummation of the transactions
contemplated by this Agreement, except for compliance with the Act, the
Blue Sky laws applicable to the public offering of the Common Shares by the
several Underwriters and the clearance of such offering with the National
Association of Securities Dealers, Inc. (the "NASD").
(g) Arthur Andersen LLP, who have expressed their opinion with respect
to the financial statements filed with the Commission as a part of the
Registration Statement and included in the Prospectus and in the
Registration Statement, are independent accountants as required by the Act
and the Rules and Regulations.
(h) The financial statements of the Company, and the related notes
thereto, included in the Registration Statement and the Prospectus present
fairly the financial position of the Company as of the respective dates of
such financial statements, and the results of operations and changes in
financial position of the Company for the respective periods covered
thereby. Such statements and related notes have been prepared in
accordance with generally accepted accounting principles applied on a
consistent basis as certified by the independent accountants
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<PAGE>
named in subsection 2(g). No other financial statements or schedules are
required to be included in the Registration Statement. The selected
financial data set forth in the Prospectus under the captions
"Capitalization" and "Selected Consolidated Financial Data" fairly present
the information set forth therein on the basis stated in the Registration
Statement.
(i) Except as disclosed in the Prospectus, and except as to defaults
which individually or in the aggregate would not be material to the
Company, neither the Company nor any of its subsidiaries is in violation or
default of any provision of its certificate of incorporation or bylaws, or
other organizational documents, or is in breach of or default with respect
to any provision of any agreement, judgment, decree, order, mortgage, deed
of trust, lease, franchise, license, indenture, permit or other instrument
to which it is a party or by which it or any of its properties are bound;
and there does not exist any state of facts which constitutes an event of
default on the part of the Company or any such subsidiary as defined in
such documents or which, with notice or lapse of time or both, would
constitute such an event of default.
(j) There are no contracts or other documents required to be described
in the Registration Statement or to be filed as exhibits to the
Registration Statement by the Act or by the Rules and Regulations which
have not been described or filed as required. The contracts so described
in the Prospectus are accurate and complete; all such contracts are in full
force and effect on the date hereof; and neither the Company nor any of its
subsidiaries, nor to the best of the Company's knowledge, any other party
is in breach of or default under any of such contracts.
(k) Except as disclosed in the Prospectus, there are no legal or
governmental actions, suits or proceedings pending or, to the best of the
Company's knowledge, threatened to which the Company or any of its
subsidiaries is or may be a party or of which property owned or leased by
the Company or any of its subsidiaries is or may be the subject, or related
to environmental or discrimination matters, which actions, suits or
proceedings might, individually or in the aggregate, prevent or adversely
affect the transactions contemplated by this Agreement or result in a
material adverse change in the condition (financial or otherwise),
properties, business, results of operations or prospects of the Company and
its subsidiaries; and no labor disturbance by the employees of the Company
or any of its subsidiaries exists or is imminent which might be expected to
affect adversely such condition, properties, business, results of
operations or prospects. Neither the Company nor any of its subsidiaries
is a party or subject to the provisions of any material injunction,
judgment, decree or order of any court, regulatory body, administrative
agency or other governmental body.
(l) The Company or the applicable subsidiary has good and marketable
title to all the properties and assets reflected as owned in the financial
statements hereinabove described (or elsewhere in the Prospectus), subject
to no lien, mortgage, pledge, charge or encumbrance of any kind except (i)
those, if any, reflected in such
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<PAGE>
financial statements (or elsewhere in the Prospectus), or (ii) those which
are not material in amount and do not adversely affect the use made and
proposed to be made of such property by the Company and its subsidiaries.
The Company or the applicable subsidiary holds its leased properties under
valid and binding leases, with such exceptions as are not materially
significant in relation to the business of the Company. Except as
disclosed in the Prospectus, the Company owns or leases all such properties
as are necessary to its operations as now conducted or as proposed to be
conducted.
(m) Since the respective dates as of which information is given in the
Registration Statement and Prospectus, and except as described in or
specifically contemplated by the Prospectus: (i) the Company and its
subsidiaries have not incurred any material liabilities or obligations,
indirect, direct or contingent, or entered into any material verbal or
written agreement or other transaction which is not in the ordinary course
of business or which could result in a material reduction in the future
earnings of the Company and its subsidiaries; (ii) the Company and its
subsidiaries have not sustained any material loss or interference with
their respective businesses or properties from fire, flood, windstorm,
accident or other calamity, whether or not covered by insurance; (iii) the
Company has not paid or declared any dividends or other distributions with
respect to its capital stock and the Company and its subsidiaries are not
in default in the payment of principal or interest on any outstanding debt
obligations; (iv) there has not been any change in the capital stock (other
than upon the sale of the Common Shares hereunder or indebtedness material
to the Company and its subsidiaries (other than in the ordinary course of
business); and (v) there has not been any material adverse change in the
condition (financial or otherwise), business, properties, results of
operations or prospects of the Company and its subsidiaries.
(n) Except as disclosed in or specifically contemplated by the
Prospectus, the Company and its subsidiaries have sufficient trademarks,
trade names, patent rights, mask works, copyrights, licenses, approvals and
governmental authorizations to conduct their businesses as now conducted;
the expiration of any trademarks, trade names, patent rights, mask works,
copyrights, licenses, approvals or governmental authorizations would not
have a material adverse effect on the condition (financial or otherwise),
business, results of operations or prospects of the Company or its
subsidiaries; and the Company has no knowledge of any material infringement
by it or its subsidiaries of trademark, trade name rights, patent rights,
mask works, copyrights, licenses, trade secret or other similar rights of
others, and there is no claim being made against the Company or its
subsidiaries regarding trademark, trade name, patent, mask work, copyright,
license, trade secret or other infringement which could have a material
adverse effect on the condition (financial or otherwise), business, results
of operations or prospects of the Company and its subsidiaries.
(o) The Company has not been advised, and has no reason to believe,
that either it or any of its subsidiaries is not conducting business in
compliance with all applicable laws, rules and regulations of the
jurisdictions in which it is conducting
-7-
<PAGE>
business, including, without limitation, all applicable local, state and
federal environmental laws and regulations; except where failure to be so
in compliance would not materially adversely affect the condition
(financial or otherwise), business, results of operations or prospects of
the Company and its subsidiaries.
(p) The Company and its subsidiaries have filed all necessary federal,
state and foreign income and franchise tax returns and have paid all taxes
shown as due thereon; and the Company has no knowledge of any tax
deficiency which has been or might be asserted or threatened against the
Company or its subsidiaries which could materially and adversely affect the
business, operations or properties of the Company and its subsidiaries.
(q) The Company is not an "investment company" within the meaning of
the Investment Company Act of 1940, as amended.
(r) The Company has not distributed and will not distribute prior to
the First Closing Date any offering material in connection with the
offering and sale of the Common Shares other than the Prospectus, the
Registration Statement and the other materials permitted by the Act.
(s) Each of the Company and its subsidiaries maintain insurance of the
types and in the amounts generally deemed adequate for its business,
including, but not limited to, insurance covering real and personal
property owned or leased by the Company and its subsidiaries against theft,
damage, destruction, acts of vandalism and all other risks customarily
insured against, all of which insurance is in full force and effect.
(t) Neither the Company nor any of its subsidiaries has at any time
during the last five years (i) made any unlawful contribution to any
candidate for foreign office, or failed to disclose fully any contribution
in violation of law, or (ii) made any payment to any federal or state
governmental officer or official, or other person charged with similar
public or quasi-public duties, other than payments required or permitted by
the laws of the United States or any jurisdiction thereof.
(u) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might be reasonably expected to
cause or result in stabilization or manipulation of the price of the Common
Stock to facilitate the sale or resale of the Common Shares.
SECTION 3. Representations, Warranties and Covenants of the Selling
--------------------------------------------------------
Stockholder.
- -----------
(a) The Selling Stockholder represents and warrants to, and agrees
with, the several Underwriters that:
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<PAGE>
(i) The Selling Stockholder has, and on the First Closing Date
and the Second Closing Date hereinafter mentioned will have, good and
marketable title to the Common Shares proposed to be sold by the
Selling Stockholder hereunder on such Closing Date and full right,
power and authority to enter into this Agreement and to sell, assign,
transfer and deliver such Common Shares hereunder, free and clear of
all voting trust arrangements, liens, encumbrances, equities, security
interests, restrictions and claims whatsoever; and upon delivery of
and payment for such Common Shares hereunder, the Underwriters will
acquire good and marketable title thereto, free and clear of all
liens, encumbrances, equities, claims, restrictions, security
interests, voting trusts or other defects of title whatsoever.
(ii) The Selling Stockholder has executed and delivered a Power
of Attorney and caused to be executed and delivered on its behalf a
Custody Agreement (hereinafter collectively referred to as the
"Stockholders Agreement") and in connection herewith the Selling
Stockholder further represents, warrants and agrees that the Selling
Stockholder has deposited in custody, under the Stockholders
Agreement, with the agent named therein (the "Agent") as custodian,
certificates in negotiable form for the Common Shares to be sold
hereunder by the Selling Stockholder, for the purpose of further
delivery pursuant to this Agreement. The Selling Stockholder agrees
that the Common Shares to be sold by the Selling Stockholder on
deposit with the Agent are subject to the interests of the Company and
the Underwriters, that the arrangements made for such custody are to
that extent irrevocable, and that the obligations of the Selling
Stockholder hereunder shall not be terminated, except as provided in
this Agreement or in the Stockholders Agreement, by any act of the
Selling Stockholder, by operation of law or by the occurrence of any
other event. If the Selling Stockholder should dissolve or otherwise
terminate its corporate existence, or if any other event should occur,
before the delivery of the Common Shares hereunder, the documents
evidencing Common Shares then on deposit with the Agent shall be
delivered by the Agent in accordance with the terms and conditions of
this Agreement as if such dissolution, termination or other event had
not occurred, regardless of whether or not the Agent shall have
received notice thereof. This Agreement and the Stockholders
Agreement have been duly executed and delivered by or on behalf of the
Selling Stockholder and the form of such Stockholders Agreement has
been delivered to you.
(iii) The performance of this Agreement and the Stockholders
Agreement and the consummation of the transactions contemplated hereby
and by the Stockholders Agreement will not result in a breach or
violation by the Selling Stockholder of any of the terms or provisions
of, or constitute a default by the Selling Stockholder under, any
indenture, mortgage, deed of trust, trust (constructive or other),
loan agreement, lease, franchise, license or other agreement or
instrument to which the Selling Stockholder is a party or by which the
Selling Stockholder or any of its properties is bound, any statute,
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<PAGE>
or any judgment, decree, order, rule or regulation of any court or
governmental agency or body applicable to the Selling Stockholder or
any of its properties.
(iv) The Selling Stockholder has not taken and will not take,
directly or indirectly, any action designed to or which has
constituted or which might reasonably be expected to cause or result
in stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Common Shares.
(v) Each Preliminary Prospectus and the Prospectus, insofar as it
has related to the Selling Stockholder has conformed in all material
respects to the requirements of the Act and the Rules and Regulations
and has not included any untrue statement of a material fact or
omitted to state a material fact necessary to make the statements
therein not misleading in light of the circumstances under which they
were made; and neither the Registration Statement nor the Prospectus,
nor any amendment or supplement thereto, as it relates to the Selling
Stockholder, will include any untrue statement of a material fact or
omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading.
(vi) The Selling Stockholder is not aware that any of the
representations or warranties set forth in Section 2 above is untrue
or inaccurate in any material respect.
(b) The Selling Stockholder agrees with the Company and the
Underwriters not to, directly or indirectly, sell, offer, contract or grant
any option to sell (including without limitation any short sale), pledge,
transfer, establish an open "put equivalent position" (within the meaning
of Rule 16a-1(h) under the Exchange Act), or otherwise dispose of any
shares of Common Stock, options or warrants to acquire Common Stock or
securities convertible into or exchangeable or exercisable for any shares
of Common Stock, currently or hereafter owned either of record or
beneficially (as defined in Rule 13d-3 under the Exchange Act), or publicly
announce an intention to do any of the foregoing, for a period of 90 days
after the first date that any of the Common Shares are released by you for
sale to the public, without the prior written consent of either Montgomery
Securities or each of the Representatives, which consent may be withheld at
the sole discretion of Montgomery Securities or each of the
Representatives, as the case may be. The Selling Stockholder also agrees
and consents to the entry of stop transfer instructions with the Company's
transfer agent and registrar against the transfer of shares of Common Stock
or securities convertible into or exchangeable or exercisable for Common
Stock held by the Selling Stockholder with the foregoing restrictions.
SECTION 4. Representations and Warranties of the Underwriters. The
--------------------------------------------------
Representatives, on behalf of the several Underwriters, represent and warrant to
the Company and to the Selling Stockholder that the information set forth (i) on
the cover page
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<PAGE>
of the Prospectus with respect to price, underwriting discounts and commissions
and terms of offering and (ii) under "Underwriting" in the Prospectus was
furnished to the Company by and on behalf of the Underwriters for use in
connection with the preparation of the Registration Statement and the Prospectus
and is correct in all material respects. The Representatives represent and
warrant that they have been authorized by each of the other Underwriters as the
Representatives to enter into this Agreement on its behalf and to act for it in
the manner herein provided.
SECTION 5. Purchase, Sale and Delivery of Common Shares. The
--------------------------------------------
purchase price per share to be paid by the several Underwriters to the Company
and to the Selling Stockholder, respectively, shall be equal to the initial
price to the public per share less an amount per share equal to the per share
underwriting discount. The initial price to the public, which shall be a fixed
price, and the underwriting discount will be determined by separate agreement
among the Company, the Selling Stockholder and the Representatives in
substantially the form set forth as Schedule C hereto on the basis of the
reported prices or quotations of the Common Stock on the Nasdaq National Market
immediately prior to the determination. Such initial public offering price
shall not be higher than the last sale price of the Common Stock of the Company
on the Nasdaq National Market immediately prior to such determination of the
initial public offering price.
The obligation of each Underwriter to the Company shall be to purchase
from the Company that number of full shares which (as nearly as practicable, as
determined by you) bears to 500,000 the same proportion as the number of shares
set forth opposite the name of such Underwriter in Schedule A hereto bears to
the total number of Firm Common Shares. The obligation of each Underwriter to
the Selling Stockholder shall be to purchase from the Selling Stockholder that
number of full shares which (as nearly as practicable, as determined by you)
bears to 2,000,000 the same proportion as the number of shares set forth
opposite the name of such Underwriter in Schedule A hereto bears to the total
number of Firm Common Shares.
Delivery of certificates for the Firm Common Shares to be purchased by
the Underwriters and payment therefor shall be made at the offices of Montgomery
Securities, 600 Montgomery Street, San Francisco, California (or such other
place as may be agreed upon by the Company and the Representatives) at such time
and date, not later than the third (or if the Firm Common Shares are priced, as
contemplated by Rule 15c6-1(c) under the Securities Exchange Act of 1934, after
4:30 P.M. Washington D.C. time, the fourth) full business day following the
first date that any of the Common Shares are released by you for sale to the
public, as you shall designate by at least 48 hours prior notice to the Company
(or at such other time and date, not later than one week after such fifth full
business day as may be agreed upon by the Company and the Representatives) (the
"First Closing Date"); provided, however, that if the Prospectus is at any time
prior to the First Closing Date recirculated to the public, the First Closing
Date shall occur upon the later of the third or fourth, as the case may be, full
business day following the first date that any of the Common Shares are released
by you for sale to the public or the date that is 48 hours after the date that
the Prospectus has been so recirculated.
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<PAGE>
Delivery of certificates for the Firm Common Shares shall be made by
or on behalf of the Company and the Selling Stockholder to you, for the
respective accounts of the Underwriters with respect to the Firm Common Shares
to be sold by the Company and by the Selling Stockholder against payment by you,
for the accounts of the several Underwriters, of the purchase price therefor by
certified or official bank checks payable in next day funds to the order of the
Company and of the Agent in proportion to the number of Firm Common Shares to be
sold by the Company and the Selling Stockholder, respectively. The certificates
for the Firm Common Shares shall be registered in such names and denominations
as you shall have requested at least two full business days prior to the First
Closing Date, and shall be made available for checking and packaging on the
business day preceding the First Closing Date at a location in New York, New
York, as may be designated by you. Time shall be of the essence, and delivery
at the time and place specified in this Agreement is a further condition to the
obligations of the Underwriters.
In addition, on the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Selling Stockholder hereby grants an option to the several
Underwriters to purchase, severally and not jointly, up to an aggregate of
375,000 Optional Common Shares at the purchase price per share to be paid for
the Firm Common Shares, for use solely in covering any over-allotments made by
you for the account of the Underwriters in the sale and distribution of the Firm
Common Shares. The option granted hereunder may be exercised at any time (but
not more than once) within 30 days after the first date that any of the Common
Shares are released by you for sale to the public, upon notice by you to the
Selling Stockholder setting forth the aggregate number of Optional Common Shares
as to which the Underwriters are exercising the option, the names and
denominations in which the certificates for such shares are to be registered and
the time and place at which such certificates will be delivered. Such time of
delivery (which may not be earlier than the First Closing Date), being herein
referred to as the "Second Closing Date," shall be determined by you, but if at
any time other than the First Closing Date shall not be earlier than three nor
later than five full business days after delivery of such notice of exercise.
The number of Optional Common Shares to be purchased by each Underwriter shall
be determined by multiplying the number of Optional Common Shares to be sold by
the Selling Stockholder pursuant to such notice of exercise by a fraction, the
numerator of which is the number of Firm Common Shares to be purchased by such
Underwriter as set forth opposite its name in Schedule A and the denominator of
which is 375,000 (subject to such adjustments to eliminate any fractional share
purchases as you in your discretion may make). Certificates for the Optional
Common Shares will be made available for checking and packaging on the business
day preceding the Second Closing Date at a location in New York, New York, as
may be designated by you. The manner of payment for and delivery of the
Optional Common Shares shall be the same as for the Firm Common Shares purchased
from the Selling Stockholder as specified in the two preceding paragraphs. At
any time before lapse of the option, you may cancel such option by giving
written notice of such cancellation to the Selling Stockholder. If the option
is cancelled or expires unexercised in whole or in part, the Company will
deregister under the Act the number of Option Shares as to which the option has
not been exercised.
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<PAGE>
You have advised the Company and the Selling Stockholder that each
Underwriter has authorized you to accept delivery of its Common Shares, to make
payment and to receipt therefor. You, individually and not as the
Representatives of the Underwriters, may (but shall not be obligated to) make
payment for any Common Shares to be purchased by any Underwriter whose funds
shall not have been received by you by the First Closing Date or the Second
Closing Date, as the case may be, for the account of such Underwriter, but any
such payment shall not relieve such Underwriter from any of its obligations
under this Agreement.
Subject to the terms and conditions hereof, the Underwriters propose
to make a public offering of their respective portions of the Common Shares as
soon after the effective date of the Registration Statement as in the judgment
of the Representatives is advisable and at the public offering price set forth
on the cover page of and on the terms set forth in the final prospectus, if one
is used, or on the first page of the Term Sheet, if one is used.
SECTION 6. Covenants of the Company. The Company covenants and
------------------------
agrees that:
(a) The Company will use its best efforts to cause the Registration
Statement and any amendment thereof, if not effective at the time and date
that this Agreement is executed and delivered by the parties hereto, to
become effective. If the Registration Statement has become or becomes
effective pursuant to Rule 430A of the Rules and Regulations, or the filing
of the Prospectus is otherwise required under Rule 424(b) of the Rules and
Regulations, the Company will file the Prospectus, properly completed,
pursuant to the applicable paragraph of Rule 424(b) of the Rules and
Regulations within the time period prescribed and will provide evidence
satisfactory to you of such timely filing. The Company will promptly
advise you in writing (i) of the receipt of any comments of the Commission,
(ii) of any request of the Commission for amendment of or supplement to the
Registration Statement (either before or after it becomes effective), any
Preliminary Prospectus or the Prospectus or for additional information,
(iii) when the Registration Statement shall have become effective, and (iv)
of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or of the institution of any
proceedings for that purpose. If the Commission shall enter any such stop
order at any time, the Company will use its best efforts to obtain the
lifting of such order at the earliest possible moment. The Company will
not file any amendment or supplement to the Registration Statement (either
before or after it becomes effective), any Preliminary Prospectus or the
Prospectus of which you have not been furnished with a copy a reasonable
time prior to such filing or to which you reasonably object or which is not
in compliance with the Act and the Rules and Regulations.
(b) The Company will prepare and file with the Commission, promptly
upon your request, any amendments or supplements to the Registration
Statement or the Prospectus which in your judgment may be necessary or
advisable to enable
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<PAGE>
the several Underwriters to continue the distribution of the Common Shares
and will use its best efforts to cause the same to become effective as
promptly as possible. The Company will fully and completely comply with
the provisions of Rule 430A of the Rules and Regulations with respect to
information omitted from the Registration Statement in reliance upon such
Rule.
(c) If at any time within the nine-month period referred to in Section
10(a)(3) of the Act during which a prospectus relating to the Common Shares
is required to be delivered under the Act any event occurs, as a result of
which the Prospectus, including any amendments or supplements, would
include an untrue statement of a material fact, or omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading, or if it is necessary at any time to
amend the Prospectus, including any amendments or supplements, to comply
with the Act or the Rules and Regulations, the Company will promptly advise
you thereof and will promptly prepare and file with the Commission, at its
own expense, an amendment or supplement which will correct such statement
or omission or an amendment or supplement which will effect such compliance
and will use its best efforts to cause the same to become effective as soon
as possible; and, in case any Underwriter is required to deliver a
prospectus after such nine-month period, the Company upon request, but at
the expense of such Underwriter, will promptly prepare such amendment or
amendments to the Registration Statement and such Prospectus or
Prospectuses as may be necessary to permit compliance with the requirements
of Section 10(a)(3) of the Act.
(d) As soon as practicable, but not later than 45 days after the end
of the first quarter ending after one year following the "effective date of
the Registration Statement" (as defined in Rule 158(c) of the Rules and
Regulations), the Company will make generally available to its security
holders an earnings statement (which need not be audited) covering a period
of 12 consecutive months beginning after the effective date of the
Registration Statement which will satisfy the provisions of the last
paragraph of Section 11(a) of the Act.
(e) During such period as a prospectus is required by law to be
delivered in connection with sales by an Underwriter or dealer, the
Company, at its expense, but only for the nine-month period referred to in
Section 10(a)(3) of the Act, will furnish to you and the Selling
Stockholder or mail to your order copies of the Registration Statement, the
Prospectus, the Preliminary Prospectus and all amendments and supplements
to any such documents in each case as soon as available and in such
quantities as you and the Selling Stockholder may request, for the purposes
contemplated by the Act.
(f) The Company shall cooperate with you and your counsel in order to
qualify or register the Common Shares for sale under (or obtain exemptions
from the application of) the Blue Sky laws of such jurisdictions as you
designate, will comply with such laws and will continue such
qualifications, registrations and exemptions in effect so long as
reasonably required for the distribution of the Common Shares.
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<PAGE>
The Company shall not be required to qualify as a foreign corporation or to
file a general consent to service of process in any such jurisdiction where
it is not presently qualified or where it would be subject to taxation as a
foreign corporation. The Company will advise you promptly of the
suspension of the qualification or registration of (or any such exemption
relating to) the Common Shares for offering, sale or trading in any
jurisdiction or any initiation or threat of any proceeding for any such
purpose, and in the event of the issuance of any order suspending such
qualification, registration or exemption, the Company, with your
cooperation, will use its best efforts to obtain the withdrawal thereof.
(g) During the period of five years hereafter, the Company will
furnish to the Representatives and, upon request of the Representatives, to
each of the other Underwriters: (i) as soon as practicable after the end
of each fiscal year, copies of the Annual Report of the Company containing
the balance sheet of the Company as of the close of such fiscal year and
statements of income, stockholders' equity and cash flows for the year then
ended and the opinion thereon of the Company's independent public
accountants; (ii) as soon as practicable after the filing thereof, copies
of each proxy statement, Annual Report on Form 10-K, Quarterly Report on
Form 10-Q, Report on Form 8-K or other report filed by the Company with the
Commission, the NASD or any securities exchange; and (iii) as soon as
available, copies of any report or communication of the Company mailed
generally to holders of its Common Stock.
(h) During the period of 90 days after the first date that any of the
Common Shares are released by you for sale to the public, without the prior
written consent of either Montgomery Securities or each of the
Representatives (which consent may be withheld at the sole discretion of
the Montgomery Securities or the Representatives, as the case may be), the
Company will not other than pursuant to outstanding stock options and
warrants disclosed in the Prospectus issue, offer, sell, grant options to
purchase or otherwise dispose of any of the Company's equity securities or
any other securities convertible into or exchangeable with its Common Stock
or other equity security.
(i) The Company will apply the net proceeds of the sale of the Common
Shares sold by it substantially in accordance with its statements under the
caption "Use of Proceeds" in the Prospectus.
(j) The Company will use its best efforts to qualify or register its
Common Stock for sale in non-issuer transactions under (or obtain
exemptions from the application of) the Blue Sky laws of the State of
California (and thereby permit market making transactions and secondary
trading in the Company's Common Stock in California), will comply with such
Blue Sky laws and will continue such qualifications, registrations and
exemptions in effect for a period of five years after the date hereof.
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<PAGE>
(k) The Company will use its best efforts to list, subject to official
notice of issuance, on the Nasdaq National Market and subsequently on the
New York Stock Exchange, the Common Stock to be issued and sold by the
Company.
You, on behalf of the Underwriters, may, in your sole discretion,
waive in writing the performance by the Company of any one or more of the
foregoing covenants or extend the time for their performance.
SECTION 7. Payment of Expenses. Whether or not the transactions
-------------------
contemplated hereunder are consummated or this Agreement becomes effective or is
terminated, the Company and, unless otherwise paid by the Company, the Selling
Stockholder agrees to pay in such proportions as they may agree upon among
themselves all costs, fees and expenses incurred in connection with the
performance of their obligations hereunder and in connection with the
transactions contemplated hereby, including without limiting the generality of
the foregoing, (i) all expenses incident to the issuance and delivery of the
Common Shares (including all printing and engraving costs), (ii) all fees and
expenses of the registrar and transfer agent of the Common Stock, (iii) all
necessary issue, transfer and other stamp taxes in connection with the issuance
and sale of the Common Shares to the Underwriters, (iv) all fees and expenses of
the Company's counsel and the Company's independent accountants, (v) all costs
and expenses incurred in connection with the preparation, printing, filing,
shipping and distribution of the Registration Statement, each Preliminary
Prospectus and the Prospectus (including all exhibits and financial statements)
and all amendments and supplements provided for herein, this Agreement, the
Agreement Among Underwriters, the Selected Dealers Agreement, the Underwriters'
Questionnaire, the Underwriters' Power of Attorney and the Blue Sky memorandum,
(vi) all filing fees, attorneys' fees and expenses incurred by the Company or
the Underwriters in connection with qualifying or registering (or obtaining
exemptions from the qualification or registration of) all or any part of the
Common Shares for offer and sale under the Blue Sky laws, (vii) the filing fee
of the National Association of Securities Dealers, Inc., and (viii) all other
fees, costs and expenses referred to in Item 14 of the Registration Statement.
The Underwriters may deem the Company to be the primary obligor with respect to
all costs, fees and expenses to be paid by the Company and by the Selling
Stockholder. Except as provided in this Section 7, Section 9 and Section 11
hereof, the Underwriters shall pay all of their own expenses, including the fees
and disbursements of their counsel (excluding those relating to qualification,
registration or exemption under the Blue Sky laws and the Blue Sky memorandum
referred to above). This Section 7 shall not affect any agreements relating to
the payment of expenses between the Company and the Selling Stockholder.
The Selling Stockholder will pay (directly or by reimbursement) all
fees and expenses incident to the performance of their obligations under this
Agreement which are not otherwise specifically provided for herein, including
but not limited to (i) any fees and expenses of counsel for the Selling
Stockholder; (ii) any fees and expenses of the Agent; and (iii) all expenses and
taxes incident to the sale and delivery of the Common Shares to be sold by the
Selling Stockholder to the Underwriters hereunder.
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<PAGE>
The Company and the Selling Stockholder will pay the premium or
premiums on the policy of insurance referred to in Section 11(f) below.
SECTION 8. Conditions of the Obligations of the Underwriters. The
-------------------------------------------------
obligations of the several Underwriters to purchase and pay for the Firm Common
Shares on the First Closing Date and the Optional Common Shares on the Second
Closing Date shall be subject to the accuracy of the representations and
warranties on the part of the Company and the Selling Stockholder herein set
forth as of the date hereof and as of the First Closing Date or the Second
Closing Date, as the case may be, to the accuracy of the statements of Company
officers and the Selling Stockholder made pursuant to the provisions hereof, to
the performance by the Company and the Selling Stockholder of their respective
obligations hereunder, and to the following additional conditions:
(a) The Registration Statement shall have become effective not later
than 5:00 P.M. (or, in the case of a registration statement filed pursuant
to Rule 462(b) of the Rules and Regulations relating to the Common Shares,
not later than 10 P.M.), Washington, D.C. time, on the date of this
Agreement, or at such later time as shall have been consented to by you; if
the filing of the Prospectus, or any supplement thereto, is required
pursuant to Rule 424(b) of the Rules and Regulations, the Prospectus shall
have been filed in the manner and within the time period required by Rule
424(b) of the Rules and Regulations; and prior to such Closing Date, no
stop order suspending the effectiveness of the Registration Statement shall
have been issued and no proceedings for that purpose shall have been
instituted or shall be pending or, to the knowledge of the Company, the
Selling Stockholder or you, shall be contemplated by the Commission; and
any request of the Commission for inclusion of additional information in
the Registration Statement, or otherwise, shall have been complied with to
your satisfaction.
(b) You shall be satisfied that since the respective dates as of which
information is given in the Registration Statement and Prospectus, (i)
there shall not have been any change in the capital stock other than
pursuant to the exercise of outstanding options and warrants disclosed in
the Prospectus of the Company or any of its subsidiaries or any material
change in the indebtedness (other than in the ordinary course of business)
of the Company or any of its subsidiaries, (ii) except as set forth or
contemplated by the Registration Statement or the Prospectus, no material
verbal or written agreement or other transaction shall have been entered
into by the Company or any of its subsidiaries, which is not in the
ordinary course of business or which could result in a material reduction
in the future earnings of the Company and its subsidiaries, (iii) no loss
or damage (whether or not insured) to the property of the Company or any of
its subsidiaries shall have been sustained which materially and adversely
affects the condition (financial or otherwise), business, results of
operations or prospects of the Company and its subsidiaries, (iv) no legal
or governmental action, suit or proceeding affecting the Company or any of
its subsidiaries which is material to the Company and its subsidiaries or
which affects or may affect the transactions contemplated by this Agreement
shall have been instituted or threatened, and (v) there shall not have been
any material change in the
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condition (financial or otherwise), business, management, results of
operations or prospects of the Company and its subsidiaries which makes it
impractical or inadvisable in the judgment of the Representatives to
proceed with the public offering or purchase the Common Shares as
contemplated hereby.
(c) There shall have been furnished to you, as Representatives of the
Underwriters, on each Closing Date, in form and substance satisfactory to
you, except as otherwise expressly provided below:
(i) An opinion of Riordan & McKinzie, counsel for the Company
and the Selling Stockholder, addressed to the Underwriters and dated
the First Closing Date, or the Second Closing Date (in the latter case
with respect to the Selling Stockholder only), as the case may be, to
the effect that:
(1) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good
standing under the laws of its jurisdiction of incorporation, is
duly qualified to do business as a foreign corporation and is in
good standing as a foreign corporation in each jurisdiction in
which its ownership or lease of property or the conduct of its
business requires such qualification, except to the extent that
the failure to be so qualified or be in good standing would not
have a material adverse effect on the Company and its
subsidiaries, taken as a whole, and each has all the corporate
power and authority necessary to own or hold its properties and
conduct the businesses as described in the Prospectus;
(2) The Company's authorized capital stock is as set forth
under the heading "Capitalization" in the Prospectus and all
outstanding shares of such capital stock (including the Firm
Common Shares to be sold by the Selling Stockholder and the
Optional Common Shares to be sold by the Selling Stockholder)
have been duly and validly issued, are fully paid and
nonassessable, were not issued in violation of or subject to any
preemptive rights or other rights to subscribe for or purchase
any securities and conform in all material respects to the
description thereof contained in the Prospectus;
(3) All of the issued and outstanding shares of the
Company's subsidiaries have been duly and validly authorized and
issued, are fully paid, nonassessable and owned of record by the
Company, to the best of such counsel's knowledge, free and clear
of all liens, encumbrances, equities or claims;
(4) The certificates evidencing the Common Shares to be sold
and delivered by the Company hereunder are in due and proper form
under Delaware law, and when duly countersigned by the Company's
transfer agent and registrar, and delivered to you or upon
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your order against payment of the agreed consideration therefor
in accordance with the provisions of this Agreement, the Common
Shares represented thereby will be duly authorized and validly
issued, fully paid and nonassessable, will not have been issued
in violation of or subject to any preemptive rights or other
rights to subscribe for or purchase securities and will conform
in all respects to the description thereof contained in the
Prospectus;
(5) Except as disclosed in or specifically contemplated by
the Prospectus, to the best of such counsel's knowledge, there
are no outstanding options, warrants or other rights calling for
the issuance of, and no commitments, plans or arrangements to
issue, any shares of capital stock of the Company or any security
convertible into or exchangeable for capital stock of the
Company;
(6)
(A) The Registration Statement has been declared
effective under the Act, and, to the knowledge of such
counsel, no stop order suspending the effectiveness of the
Registration Statement has been issued and, to the knowledge
of such counsel, no proceeding for that purpose is pending
or threatened by the Commission; any required filing of the
Prospectus and any supplement thereto pursuant to Rule
424(b) of the Rules and Regulations has been made in the
manner and within the time period required by such Rule
424(b);
(B) The Registration Statement, the Prospectus and any
amendments or supplements thereto (other than the financial
statements, schedules and other financial and statistical
information included therein, as to which such counsel need
express no opinion) comply as to form in all material
respects with the requirements of the Act and the Rules and
Regulations;
(C) To the best of such counsel's knowledge there are
no legal or governmental proceedings pending to which the
Company or any of its subsidiaries is a party or of which
any property of the Company or any of its subsidiaries is
subject which, if determined adversely to the Company or any
of its subsidiaries, would have a material adverse effect on
the consolidated financial position, stockholders' equity,
results of operations or business of the Company and its
subsidiaries, taken as a whole. To the best of such
counsel's knowledge, no such proceedings are threatened or
contemplated by any governmental authority or threatened by
others. To the best of such counsel's knowledge, there is
no franchise, contract or
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other document of a character required to be described in
the Registration Statement or the Prospectus, or to be filed
as an exhibit to the Registration Statement, which is not
described or filed as required, and the statements included
in the Prospectus describing any legal proceedings or
material contracts or agreements relating to the Company
fairly summarize such matters.
(D) The documents incorporated by reference in the
Prospectus (other than any financial statements, schedules
and other financial and statistical information included in
such documents, as to which such counsel need express no
opinion), when they were filed with the Commission, complied
as to form in all material respects with the requirements of
the Exchange Act and the rules and regulations of the
Commission thereunder; and such counsel has no reason to
believe that any of such documents (other than any financial
statements, schedules and other financial and statistical
information included in such documents, as to which such
counsel need express no opinion), when they were so filed,
contained an untrue statement of a material fact or omitted
to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under
which they were made when such documents were so filed, not
misleading;
(7) The Company has corporate power and corporate authority
to enter into this Agreement, to issue, sell and deliver the
Common Shares to be sold by it to the several Underwriters, and
to carry out all of the terms and provisions of this Agreement to
be carried out by it; the execution and delivery of this
Agreement has been duly authorized by all necessary corporate
action of the Company and this Agreement has been duly executed
and delivered by the Company; this Agreement is a valid and
binding agreement of the Company in accordance with its terms,
except as enforceability may be limited by general equitable
principles, bankruptcy, insolvency, reorganization, moratorium or
other laws affecting creditors' rights generally and except as to
those provisions relating to indemnity or contribution for
liabilities arising under the Act as to which no opinion need be
expressed;
(8) Neither the issue and sale of the Common Shares to be
sold by the Company, nor the consummation of any other of the
transactions contemplated by this Agreement will conflict with or
result in a breach or violation of any of the terms or provisions
of, or constitute a default (or an event that with notice or
lapse of time or both would become a default) under, any
indenture, mortgage, deed
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of trust, loan agreement or other agreement or instrument to
which the Company or any of its subsidiaries is a party or by
which the Company or any of its subsidiaries is bound or to which
any of the property or assets of the Company or any of its
subsidiaries is subject, which conflict, breach or violation
would have a material adverse effect on the properties, business,
results of operations or conditions (financial or otherwise) of
the Company and its subsidiaries, taken as a whole, nor will such
actions result in any violation of the provisions of the charter
or bylaws of the Company or any of its subsidiaries or any
statute or any order, rule or regulation of any court or
governmental agency or body having jurisdiction over the Company
or any of its subsidiaries or any of their respective properties,
which violation would have a material adverse effect on the
business, properties, conditions or results of operations of the
Company and its subsidiaries, taken as a whole. Except for the
registration of the Common Shares to be sold by the Company under
the Securities Act, such consents, approvals, authorizations,
registrations or qualifications as may be required under the
Exchange Act and applicable state securities laws in connection
with the purchase and distribution of the Common Shares to be
sold by the Company by the Underwriters and the approval of the
underwriting arrangements by the NASD, no consent (other than
consents which have been waived or satisfied), approval,
authorization or order of, or filing or registration with, any
such court or governmental agency or body is required for the
execution, delivery and performance of this Agreement or such
Common Shares by the Company and the consummation of the
transactions contemplated thereby;
(9) To the best of such counsel's knowledge, no holders of
securities of the Company have rights which have not been waived
to the registration of shares of Common Stock or other
securities, because of the filing of the Registration Statement
by the Company or the offering contemplated hereby;
(10) The execution and delivery of this Agreement and the
Stockholders Agreement have been duly authorized by all necessary
partnership action of the Selling Stockholder and this Agreement
and the Stockholders Agreement have been duly executed and
delivered by the Selling Stockholder; the Agent has been duly and
validly authorized to act as the custodian of the Common Shares
to be sold by the Selling Stockholder; and neither the sale of
the Common Shares to be sold by the Selling Stockholder, nor the
consummation of any other of the transactions contemplated by
this Agreement will conflict with or result in a breach or
violation of any of the terms or provisions of, or constitute a
default (or an event that with notice or lapse of time or both
would become a default) under, any indenture, mortgage, deed
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of trust, loan agreement or other agreement or instrument to
which the Selling Stockholder is a party or by which the Selling
Stockholder is bound or to which any of the property or assets of
the Selling Stockholder is subject, nor will such actions result
in any violation of the provisions of the partnership agreement
or similar documents of the Selling Stockholder or any statute or
any order, rule or regulation of any court or governmental agency
or body having jurisdiction over the Selling Stockholder or any
of its properties. Except for the registration of the Common
Shares to be sold by the Selling Stockholder under the Act, such
consents, approvals, authorizations, registrations or
qualifications as may be required under the Exchange Act and
applicable state securities laws in connection with the purchase
and distribution of the Common Shares to be sold by the Selling
Stockholder by the Underwriters and the approval of the
underwriting arrangements by the NASD, no consent (other than
consents which have been waived or satisfied), approval,
authorization or order of, or filing or registration with, any
such court or governmental agency or body is required for the
execution, delivery and performance of this Agreement or such
Common Shares by the Selling Stockholder and the consummation of
the transaction contemplated thereby;
(11) The Selling Stockholder has partnership power and
partnership authority to enter into this Agreement and the
Stockholders Agreement, to sell, transfer and deliver the Common
Shares to be sold by the Selling Stockholder hereunder, to carry
out all of the terms and provisions of this Agreement to be
carried out by it, and good and marketable title to such Common
Shares so sold, free and clear of all liens, encumbrances,
equities, claims, restrictions, security interests, voting
trusts, or other defects of title whatsoever, has been
transferred to the Underwriters (whom counsel may assume to be
bona fide purchasers) who have purchased such Common Shares
hereunder;
(12) To the best of such counsel's knowledge, this Agreement
and the Stockholders Agreement are valid and binding agreements
of the Selling Stockholder in accordance with their terms except
as enforceability may be limited by general equitable principles,
bankruptcy, insolvency, reorganization, moratorium or other laws
affecting creditors' rights generally and except with respect to
those provisions relating to indemnities or contributions for
liabilities under the Act, as to which no opinion need be
expressed; and
(13) No transfer taxes are required to be paid in connection
with the sale and delivery of the Common Shares to the
Underwriters hereunder.
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In rendering such opinion, such counsel may rely as to the matters set
forth in paragraphs (10), (11) and (12), on opinions of other counsel
retained by the Selling Stockholder, as to matters of local law, on
opinions of local counsel, and as to matters of fact, on certificates of
the Selling Stockholder and of officers of the Company and of governmental
officials, in which case their opinion is to state that they are so doing
and that the Underwriters are justified in relying on such opinions or
certificates and copies of said opinions or certificates are to be attached
to the opinion. Such counsel shall also include a statement to the effect
that such counsel does not believe that (A) the Registration Statement
(other than financial statements, schedules and other financial and
statistical information included therein, as to which such counsel need
express any belief), at the time such Registration Statement became
effective, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make
the statements therein not misleading; and (B) the Prospectus (except for
the financial statements, schedules and other financial and statistical
information included therein, as to which such counsel need not express any
belief) as of its date and as of the date of the opinion, contained or
contains an untrue statement of a material fact or omitted or omits to
state a material fact necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading;
(iii) Such opinion or opinions of O'Melveny & Myers, counsel for
the Underwriters dated the First Closing Date or the Second Closing
Date, as the case may be, with respect to the incorporation of the
Company, the sufficiency of all corporate proceedings and other legal
matters relating to this Agreement, the validity of the Common Shares,
the Registration Statement and the Prospectus and other related
matters as you may reasonably require, and the Company and the Selling
Stockholder shall have furnished to such counsel such documents and
shall have exhibited to them such papers and records as they may
reasonably request for the purpose of enabling them to pass upon such
matters. In connection with such opinions, such counsel may rely on
representations or certificates of officers of the Company and
governmental officials.
(iv) A certificate of the Company executed by the President and
the Chief Financial Officer of the Company, dated the First Closing
Date or the Second Closing Date, as the case may be, to the effect
that:
(1) The representations and warranties of the Company set
forth in Section 2 of this Agreement are true and correct as of
the date of this Agreement and as of the First Closing Date or
the Second Closing Date, as the case may be, and the Company has
complied with all the agreements and satisfied all the conditions
on its part to be performed or satisfied on or prior to such
Closing Date;
(2) The Commission has not issued any order preventing or
suspending the use of the Prospectus or any Preliminary
Prospectus
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filed as a part of the Registration Statement or any amendment
thereto; no stop order suspending the effectiveness of the
Registration Statement has been issued; and to the best of the
knowledge of the respective signers, no proceedings for that
purpose have been instituted or are pending or contemplated under
the Act;
(3) Each of the respective signers of the certificate has
carefully examined the Registration Statement and the Prospectus;
in his opinion and to the best of his knowledge, the Registration
Statement and the Prospectus and any amendments or supplements
thereto contain all statements required to be stated therein
regarding the Company and its subsidiaries; and neither the
Registration Statement nor the Prospectus nor any amendment or
supplement thereto includes any untrue statement of a material
fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein not
misleading;
(4) Since the initial date on which the Registration
Statement was filed, no agreement, written or oral, transaction
or event has occurred which should have been set forth in an
amendment to the Registration Statement or in a supplement to or
amendment of any prospectus which has not been disclosed in such
a supplement or amendment;
(5) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, and
except as disclosed in or contemplated by the Prospectus, there
has not been any material adverse change or a development
involving a material adverse change in the condition (financial
or otherwise), business, properties, results of operations,
management or prospects of the Company and its subsidiaries; and
no legal or governmental action, suit or proceeding is pending or
threatened against the Company or any of its subsidiaries which
is material to the Company and its subsidiaries, whether or not
arising from transactions in the ordinary course of business, or
which may adversely affect the transactions contemplated by this
Agreement; since such dates and except as so disclosed, neither
the Company nor any of its subsidiaries has entered into any
verbal or written agreement or other transaction which is not in
the ordinary course of business or which could result in a
material reduction in the future earnings of the Company or
incurred any material liability or obligation, direct, contingent
or indirect, made any change in its capital stock, made any
material change in its short-term debt or funded debt or
repurchased or otherwise acquired any of the Company's capital
stock; and the Company has not declared or paid any dividend, or
made any other distribution, upon its outstanding capital stock
payable to stockholders
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of record on a date prior to the First Closing Date or Second
Closing Date; and
(6) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus and except
as disclosed in or contemplated by the Prospectus, the Company
and its subsidiaries have not sustained a material loss or damage
by strike, fire, flood, windstorm, accident or other calamity
(whether or not insured).
(v) On the First Closing Date or the Second Closing Date, as the
case may be, a certificate, dated such Closing Date and addressed to
you, signed by or on behalf of the Selling Stockholder to the effect
that the representations and warranties of the Selling Stockholder in
this Agreement are true and correct, as if made at and as of the First
Closing Date or the Second Closing Date, as the case may be, and the
Selling Stockholder has complied with all the agreements and satisfied
all the conditions on his part to be performed or satisfied prior to
the First Closing Date or the Second Closing Date, as the case may be.
(vi) On the date before this Agreement is executed and also on
the First Closing Date and the Second Closing Date a letter addressed
to you, as Representatives of the Underwriters, from Arthur Andersen &
Co., independent accountants, the first one to be dated the day before
the date of this Agreement, the second one to be dated the First
Closing Date and the third one (in the event of a Second Closing) to
be dated the Second Closing Date, in form and substance satisfactory
to you.
(vii) On or before the First Closing Date, letters from FS
Equity Partners III, L.P., FS Equity Partners International, L.P. and
each director and officer of the Company, in form and substance
satisfactory to you, confirming that for a period of 90 days after the
first date that any of the Common Shares are released by you for sale
to the public, such person will not, directly or indirectly, sell,
offer, contract or grant any option to sell (including without
limitation any short sale), pledge, transfer, establish an open "put
equivalent position" (within the meaning of Rule 16a-1(h) under the
Exchange Act), or otherwise dispose of any shares of Common Stock,
options or warrants to acquire Common Stock or securities convertible
into or exchangeable or exercisable for any shares of Common Stock,
currently or hereafter owned either of record or beneficially (as
defined in Rule 13d-3 under the Exchange Act), or publicly announce an
intention to do any of the foregoing, without the prior written
consent of either Montgomery Securities or each of the
Representatives, which consent may be withheld at the sole discretion
of Montgomery Securities or each of the Representatives, as the case
may be, and containing the agreement and consent of such person to the
entry of stop transfer instructions with the Company's transfer agent
and registrar against
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the transfer of shares of Common Stock or securities convertible into
or exchangeable or exercisable for Common Stock held by such person
with the foregoing restrictions.
All such opinions, certificates, letters and documents shall be in compliance
with the provisions hereof only if they are satisfactory to you and to O'Melveny
& Myers, counsel for the Underwriters. The Company shall furnish you with such
manually signed or conformed copies of such opinions, certificates, letters and
documents as you request. Any certificate signed by any officer of the Company
and delivered to the Representatives or to counsel for the Underwriters shall be
deemed to be a representation and warranty by the Company to the Underwriters as
to the statements made therein.
If any condition to the Underwriters' obligations hereunder to be
satisfied prior to or at the First Closing Date is not so satisfied, this
Agreement at your election will terminate upon notification by you as
Representatives to the Company and the Selling Stockholder without liability on
the part of any Underwriter, the Company or the Selling Stockholder except for
the expenses to be paid or reimbursed by the Company and by the Selling
Stockholder pursuant to Sections 7 and 9 hereof and except to the extent
provided in Section 11 hereof.
SECTION 9. Reimbursement of Underwriters' Expenses. Notwithstanding
---------------------------------------
any other provisions hereof, if this Agreement shall be terminated by you
pursuant to Section 8, or if the sale to the Underwriters of the Common Shares
at the First Closing is not consummated because of any refusal, inability or
failure on the part of the Company or the Selling Stockholder to perform any
agreement herein or to comply with any provision hereof, the Company agrees to
reimburse you and the other Underwriters upon demand for all out-of-pocket
expenses that shall have been reasonably incurred by you and them in connection
with the proposed purchase and the sale of the Common Shares, including but not
limited to fees and disbursements of counsel, printing expenses, travel
expenses, postage, telegraph charges and telephone charges relating directly to
the offering contemplated by the Prospectus. Any such termination shall be
without liability of any party to any other party except that the provisions of
this Section, Section 7 and Section 11 shall at all times be effective and shall
apply.
SECTION 10. Effectiveness of Registration Statement. You and the
---------------------------------------
Company and the Selling Stockholder will use your and its best efforts to cause
the Registration Statement to become effective, to prevent the issuance of any
stop order suspending the effectiveness of the Registration Statement and, if
such stop order be issued, to obtain as soon as possible the lifting thereof.
SECTION 11. Indemnification.
---------------
(a) The Company and the Selling Stockholder, jointly and severally,
agree to indemnify and hold harmless each Underwriter and each person, if
any, who controls any Underwriter within the meaning of the Act against any
losses, claims, damages, liabilities or expenses, joint or several, to
which such Underwriter or such
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controlling person may become subject, under the Act, the Exchange Act, or
other federal or state statutory law or regulation, or at common law or
otherwise (including in settlement of any litigation, if such settlement is
effected with the written consent of the Company), insofar as such losses,
claims, damages, liabilities or expenses (or actions in respect thereof as
contemplated below) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or
alleged omission to state in any of them a material fact required to be
stated therein or necessary to make the statements in any of them not
misleading, or arise out of or are based in whole or in part on any
inaccuracy in the representations and warranties of the Company or the
Selling Stockholder contained herein or any failure of the Company or the
Selling Stockholder to perform their respective obligations hereunder or
under law; and will reimburse each Underwriter and each such controlling
person for any legal and other expenses as such expenses are reasonably
incurred by such Underwriter or such controlling person in connection with
investigating, defending, settling, compromising or paying any such loss,
claim, damage, liability, expense or action; provided, however, that
neither the Company nor the Selling Stockholder will be liable in any such
case to the extent that any such loss, claim, damage, liability or expense
arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in the Registration
Statement, any Preliminary Prospectus, the Prospectus or any amendment or
supplement thereto in reliance upon and in conformity with the information
furnished to the Company pursuant to Section 4 hereof. The Company and the
Selling Stockholder may agree, as among themselves and without limiting the
rights of the Underwriters under this Agreement, as to the respective
amounts of such liability for which they each shall be responsible. In
addition to its other obligations under this Section 11(a), the Company and
the Selling Stockholder agree that, as an interim measure during the
pendency of any claim, action, investigation, inquiry or other proceeding
arising out of or based upon any statement or omission, or any alleged
statement or omission, or any inaccuracy in the representations and
warranties of the Company or the Selling Stockholder herein or failure to
perform its obligations hereunder, all as described in this Section 11(a),
it will reimburse each Underwriter on a quarterly basis for all reasonable
legal or other expenses incurred in connection with investigating or
defending any such claim, action, investigation, inquiry or other
proceeding, notwithstanding the absence of a judicial determination as to
the propriety and enforceability of the Company's or the Selling
Stockholder's obligation to reimburse each Underwriter for such expenses
and the possibility that such payments might later be held to have been
improper by a court of competent jurisdiction. To the extent that any such
interim reimbursement payment is so held to have been improper, each
Underwriter shall promptly return it to the Company together with interest,
compounded daily, determined on the basis of the prime rate (or other
commercial lending rate for borrowers of the highest credit standing)
announced from time to time by Bank of America NT&SA, San Francisco,
California (the "Prime Rate"). Any such interim reimbursement payments
which are not made to an Underwriter within 30 days of a request for
reimbursement, shall bear interest
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at the Prime Rate from the date of such request. This indemnity agreement
will be in addition to any liability which the Company or the Selling
Stockholder may otherwise have.
(b) Each Underwriter will severally indemnify and hold harmless the
Company, the Selling Stockholder and each of the Company's directors, each
of the Company's officers who signed the Registration Statement and each
person, if any, who controls the Company within the meaning of the Act,
against any losses, claims, damages, liabilities or expenses to which the
Company, the Selling Stockholder or any such director, officer or
controlling person may become subject, under the Act, the Exchange Act, or
other federal or state statutory law or regulation, or at common law or
otherwise (including in settlement of any litigation, if such settlement is
effected with the written consent of such Underwriter), insofar as such
losses, claims, damages, liabilities or expenses (or actions in respect
thereof as contemplated below) arise out of or are based upon any untrue or
alleged untrue statement of any material fact contained in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each
case to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was made in the
Registration Statement, any Preliminary Prospectus, the Prospectus, or any
amendment or supplement thereto, in reliance upon and in conformity with
the information furnished to the Company pursuant to Section 4 hereof; and
will reimburse the Company, the Selling Stockholder or any such director,
officer or controlling person for any legal and other expense reasonably
incurred by the Company, the Selling Stockholder or any such director,
officer or controlling person in connection with investigating, defending,
settling, compromising or paying any such loss, claim, damage, liability,
expense or action. In addition to its other obligations under this Section
11(b), each Underwriter severally agrees that, as an interim measure during
the pendency of any claim, action, investigation, inquiry or other
proceeding arising out of or based upon any statement or omission, or any
alleged statement or omission, described in this Section 11(b) which
relates to information furnished to the Company pursuant to Section 4
hereof, it will reimburse the Company (and, to the extent applicable, the
Selling Stockholder and each officer, director or controlling person) on a
quarterly basis for all reasonable legal or other expenses incurred in
connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of
a judicial determination as to the propriety and enforceability of the
Underwriters' obligation to reimburse the Company (and, to the extent
applicable, the Selling Stockholder and each officer, director or
controlling person) for such expenses and the possibility that such
payments might later be held to have been improper by a court of competent
jurisdiction. To the extent that any such interim reimbursement payment is
so held to have been improper, the Company (and, to the extent applicable,
the Selling Stockholder and each officer, director or controlling person)
shall promptly return it to the Underwriters together with interest,
compounded daily, determined on the
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basis of the Prime Rate. Any such interim reimbursement payments which are
not made to the Company within 30 days of a request for reimbursement,
shall bear interest at the Prime Rate from the date of such request. This
indemnity agreement will be in addition to any liability which such
Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section
of notice of the commencement of any action, such indemnified party will,
if a claim in respect thereof is to be made against an indemnifying party
under this Section, notify the indemnifying party in writing of the
commencement thereof; but the omission so to notify the indemnifying party
will not relieve it from any liability which it may have to any indemnified
party for contribution or otherwise than under the indemnity agreement
contained in this Section or to the extent it is not prejudiced as a
proximate result of such failure. In case any such action is brought
against any indemnified party and such indemnified party seeks or intends
to seek indemnity from an indemnifying party, the indemnifying party will
be entitled to participate in, and, to the extent that it may wish, jointly
with all other indemnifying parties similarly notified, to assume the
defense thereof with counsel reasonably satisfactory to such indemnified
party; provided, however, if the defendants in any such action include both
the indemnified party and the indemnifying party and the indemnified party
shall have reasonably concluded that there may be a conflict between the
positions of the indemnifying party and the indemnified party in conducting
the defense of any such action or that there may be legal defenses
available to it and/or other indemnified parties which are different from
or additional to those available to the indemnifying party, the indemnified
party or parties shall have the right to select separate counsel to assume
such legal defenses and to otherwise participate in the defense of such
action on behalf of such indemnified party or parties. Upon receipt of
notice from the indemnifying party to such indemnified party of its
election so to assume the defense of such action and approval by the
indemnified party of counsel, the indemnifying party will not be liable to
such indemnified party under this Section for any legal or other expenses
subsequently incurred by such indemnified party in connection with the
defense thereof unless (i) the indemnified party shall have employed such
counsel in connection with the assumption of legal defenses in accordance
with the proviso to the next preceding sentence (it being understood,
however, that the indemnifying party shall not be liable for the expenses
of more than one separate counsel, approved by the Representatives in the
case of paragraph (a), representing the indemnified parties who are parties
to such action) or (ii) the indemnifying party shall not have employed
counsel reasonably satisfactory to the indemnified party to represent the
indemnified party within a reasonable time after notice of commencement of
the action, in each of which cases the fees and expenses of counsel shall
be at the expense of the indemnifying party.
(d) If the indemnification provided for in this Section 11 is required
by its terms but is for any reason held to be unavailable to or otherwise
insufficient to hold harmless an indemnified party under paragraphs (a),
(b) or (c) in respect of any losses, claims, damages, liabilities or
expenses referred to herein, then each applicable indemnifying party shall
contribute to the amount paid or payable by such
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<PAGE>
indemnified party as a result of any losses, claims, damages, liabilities
or expenses referred to herein (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company, the Selling
Stockholder and the Underwriters from the offering of the Common Shares or
(ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only
the relative benefits referred to in clause (i) above but also the relative
fault of the Company, the Selling Stockholder and the Underwriters in
connection with the statements or omissions or inaccuracies in the
representations and warranties herein which resulted in such losses,
claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The respective relative benefits received by the
Company, the Selling Stockholder and the Underwriters shall be deemed to be
in the same proportion, in the case of the Company and the Selling
Stockholder as the total price paid to the Company and to the Selling
Stockholder, respectively, for the Common Shares sold by them to the
Underwriters (net of underwriting commissions but before deducting
expenses) bears to the total price to the public set forth on the cover of
the Prospectus, and in the case of the Underwriters as the underwriting
commissions received by them bears to the total price to the public set
forth on the cover of the Prospectus. The relative fault of the Company,
the Selling Stockholder and the Underwriters shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact or the inaccurate or the alleged inaccurate representation
and/or warranty relates to information supplied by the Company, the Selling
Stockholder or the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The amount paid or payable by a party as a result
of the losses, claims, damages, liabilities and expenses referred to above
shall be deemed to include, subject to the limitations set forth in
subparagraph (c) of this Section 11, any legal or other fees or expenses
reasonably incurred by such party in connection with investigating or
defending any action or claim. The provisions set forth in subparagraph
(c) of this Section 11 with respect to notice of commencement of any action
shall apply if a claim for contribution is to be made under this
subparagraph (d); provided, however, that no additional notice shall be
required with respect to any action for which notice has been given under
subparagraph (c) for purposes of indemnification. The Company, the Selling
Stockholder and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 11 were determined
solely by pro rata allocation (even if the Underwriters were treated as one
entity for such purpose) or by any other method of allocation which does
not take account of the equitable considerations referred to in the
immediately preceding paragraph. Notwithstanding the provisions of this
Section 11, no Underwriter shall be required to contribute any amount in
excess of the amount of the total underwriting commissions received by such
Underwriter in connection with the Common Shares underwritten by it and
distributed to the public. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters'
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<PAGE>
obligations to contribute pursuant to this Section 11 are several in
proportion to their respective underwriting commitments and not joint.
(e) It is agreed that any controversy arising out of the operation of
the interim reimbursement arrangements set forth in Sections 11(a) and
11(b) hereof, including the amounts of any requested reimbursement payments
and the method of determining such amounts, shall be settled by arbitration
conducted under the provisions of the Constitution and Rules of the Board
of Governors of the New York Stock Exchange, Inc. or pursuant to the Code
of Arbitration Procedure of the NASD. Any such arbitration must be
commenced by service of a written demand for arbitration or written notice
of intention to arbitrate, therein electing the arbitration tribunal. In
the event the party demanding arbitration does not make such designation of
an arbitration tribunal in such demand or notice, then the party responding
to said demand or notice is authorized to do so. Such an arbitration would
be limited to the operation of the interim reimbursement provisions
contained in Sections 11(a) and 11(b) hereof and would not resolve the
ultimate propriety or enforceability of the obligation to reimburse
expenses which is created by the provisions of such Sections 11(a) and
11(b) hereof.
SECTION 12. Default of Underwriters. It shall be a condition to this
-----------------------
Agreement and the obligation of the Company and the Selling Stockholder to sell
and deliver the Common Shares hereunder, and of each Underwriter to purchase the
Common Shares in the manner as described herein, that, except as hereinafter in
this paragraph provided, each of the Underwriters shall purchase and pay for all
the Common Shares agreed to be purchased by such Underwriter hereunder upon
tender to the Representatives of all such shares in accordance with the terms
hereof. If any Underwriter or Underwriters default in their obligations to
purchase Common Shares hereunder on either the First or Second Closing Date and
the aggregate number of Common Shares which such defaulting Underwriter or
Underwriters agreed but failed to purchase on such Closing Date does not exceed
10% of the total number of Common Shares which the Underwriters are obligated to
purchase on such Closing Date, the non-defaulting Underwriters shall be
obligated severally, in proportion to their respective commitments hereunder, to
purchase the Common Shares which such defaulting Underwriters agreed but failed
to purchase on such Closing Date. If any Underwriter or Underwriters so default
and the aggregate number of Common Shares with respect to which such default
occurs is more than the above percentage and arrangements satisfactory to the
Representatives and the Company for the purchase of such Common Shares by other
persons are not made within 48 hours after such default, this Agreement will
terminate without liability on the part of any non-defaulting Underwriter or the
Company or the Selling Stockholder except for the expenses to be paid by the
Company and the Selling Stockholder pursuant to Section 7 hereof and except to
the extent provided in Section 11 hereof.
In the event that Common Shares to which a default relates are to be
purchased by the non-defaulting Underwriters or by another party or parties, the
Representatives or the Company shall have the right to postpone the First or
Second Closing Date, as the case may be, for not more than five business days in
order that the
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<PAGE>
necessary changes in the Registration Statement, Prospectus and any other
documents, as well as any other arrangements, may be effected. As used in this
Agreement, the term "Underwriter" includes any person substituted for an
Underwriter under this Section. Nothing herein will relieve a defaulting
Underwriter from liability for its default.
SECTION 13. Effective Date. This Agreement shall become effective
--------------
immediately as to Sections 7, 9, 11, 14 and 16 and, as to all other provisions,
(i) if at the time of execution of this Agreement the Registration Statement has
not become effective, at 2:00 P.M., California time, on the first full business
day following the effectiveness of the Registration Statement, or (ii) if at the
time of execution of this Agreement the Registration Statement has been declared
effective, at 2:00 P.M., California time, on the first full business day
following the date of execution of this Agreement; but this Agreement shall
nevertheless become effective at such earlier time after the Registration
Statement becomes effective as you may determine on and by notice to the Company
or by release of any of the Common Shares for sale to the public. For the
purposes of this Section 13, the Common Shares shall be deemed to have been so
released upon the release for publication of any newspaper advertisement
relating to the Common Shares or upon the release by you of telegrams (I)
advising Underwriters that the Common Shares are released for public offering,
or (II) offering the Common Shares for sale to securities dealers, whichever may
occur first.
SECTION 14. Termination. Without limiting the right to terminate
-----------
this Agreement pursuant to any other provision hereof:
(a) This Agreement may be terminated by the Company by notice to you
and the Selling Stockholder or by you by notice to the Company and the
Selling Stockholder at any time prior to the time this Agreement shall
become effective as to all its provisions, and any such termination shall
be without liability on the part of the Company or the Selling Stockholder
to any Underwriter (except for the expenses to be paid or reimbursed by the
Company and the Selling Stockholder pursuant to Sections 7 and 9 hereof and
except to the extent provided in Section 11 hereof) or of any Underwriter
to the Company or the Selling Stockholder (except to the extent provided in
Section 11 hereof).
(b) This Agreement may also be terminated by you prior to the First
Closing Date by notice to the Company (i) if additional material
governmental restrictions, not in force and effect on the date hereof,
shall have been imposed upon trading in securities generally or minimum or
maximum prices shall have been generally established on the New York Stock
Exchange or on the American Stock Exchange or in the over the counter
market by the NASD, or trading in securities generally shall have been
suspended on either such Exchange or in the over the counter market by the
NASD, or a general banking moratorium shall have been established by
federal, New York or California authorities, (ii) if an outbreak of major
hostilities or other national or international calamity or any substantial
change in political, financial or economic conditions shall have occurred
or shall have accelerated or escalated to such an extent, as, in the
judgment of the
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<PAGE>
Representatives, to affect adversely the marketability of the Common
Shares, (iii) if any adverse event shall have occurred or shall exist which
makes untrue or incorrect in any material respect any statement or
information contained in the Registration Statement or Prospectus or which
is not reflected in the Registration Statement or Prospectus but should be
reflected therein in order to make the statements or information contained
therein not misleading in any material respect, or (iv) if there shall be
any action, suit or proceeding pending or threatened, or there shall have
been any development or prospective development involving particularly the
business or properties or securities of the Company or any of its
subsidiaries or the transactions contemplated by this Agreement, which, in
the reasonable judgment of the Representatives, may materially and
adversely affect the Company's business or earnings and makes it
impracticable or inadvisable to offer or sell the Common Shares. Any
termination pursuant to this subsection (b) shall without liability on the
part of any Underwriter to the Company or the Selling Stockholder or on the
part of the Company or the Selling Stockholder to any Underwriter (except
for expenses to be paid or reimbursed by the Company and the Selling
Stockholder pursuant to Sections 7 and 9 hereof and except to the extent
provided in Section 11 hereof.
(c) This Agreement shall also terminate at 5:00 P.M., California time,
on the tenth full business day after the Registration Statement shall have
become effective if the initial public offering price of the Common Shares
shall not then as yet have been determined as provided in Section 5 hereof.
Any termination pursuant to this subsection (c) shall without liability on
the part of any Underwriter to the Company or the Selling Stockholder or on
the part of the Company or the Selling Stockholder to any Underwriter
(except for expenses to be paid or reimbursed by the Company and the
Selling Stockholder pursuant to Sections 7 and 9 hereof and except to the
extent provided in Section 11 hereof.
SECTION 15. Failure of the Selling Stockholder to Sell and Deliver.
------------------------------------------------------
If the Selling Stockholder shall fail to sell and deliver to the Underwriters
any of the Common Shares to be sold and delivered by the Selling Stockholder at
the First Closing Date under the terms of this Agreement, then the Underwriters
may at their option, by written notice from you to the Company and the Selling
Stockholder, either (i) terminate this Agreement without any liability on the
part of any Underwriter or, except as provided in Sections 7, 9 and 11 hereof,
the Company or the Selling Stockholder, or (ii) purchase the shares which the
Company and the Selling Stockholder have agreed to sell and deliver in
accordance with the terms hereof. In the event of a failure by the Selling
Stockholder to sell and deliver as referred to in this Section, either you or
the Company shall have the right to postpone the Closing Date for a period not
exceeding seven business days in order that the necessary changes in the
Registration Statement, Prospectus and any other documents, as well as any other
arrangements, may be effected.
SECTION 16. Representations and Indemnities to Survive Delivery. The
---------------------------------------------------
respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers, of the Selling Stockholder and of
the several Underwriters set forth in or made pursuant to this Agreement will
remain in full force and effect, regardless of any
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<PAGE>
investigation made by or on behalf of any Underwriter or the Company or any of
its or their partners, officers or directors or any controlling person, or the
Selling Stockholder, as the case may be, and will survive delivery of and
payment for the Common Shares sold hereunder and any termination of this
Agreement.
SECTION 17. Notices. All communications hereunder shall be in
-------
writing and, if sent to the Representatives shall be mailed, delivered or
telegraphed and confirmed to you at 600 Montgomery Street, San Francisco,
California 94111, Attention: __________, with a copy to O'Melveny & Myers, 400
South Hope Street, Los Angeles, California 90071, Attention Richard A. Boehmer,
Esq.; and if sent to the Company or the Selling Stockholder shall be mailed,
delivered or telegraphed and confirmed to the Company at Orchard Supply Hardware
Stores Corporation, 6450 Via Del Oro, San Jose, California 95119, Attention:
Stephen M. Hilberg, with a copy to Riordan & McKinzie, 300 South Grand Avenue,
29th Floor, Los Angeles, California 90071, Attention: Roger H. Lustberg, Esq.
The Company, the Selling Stockholder or you may change the address for receipt
of communications hereunder by giving notice to the others.
SECTION 18. Successors. This Agreement will inure to the benefit of
----------
and be binding upon the parties hereto, including any substitute Underwriters
pursuant to Section 12 hereof, and to the benefit of the officers and directors
and controlling persons referred to in Section 11, and in each case their
respective successors, personal representatives and assigns, and no other person
will have any right or obligation hereunder. No such assignment shall relieve
any party of its obligations hereunder. The term "successors" shall not include
any purchaser of the Common Shares as such from any of the Underwriters merely
by reason of such purchase.
SECTION 19. Representation of Underwriters. You will act as
------------------------------
Representatives for the several Underwriters in connection with all dealings
hereunder, and any action under or in respect of this Agreement taken by you
jointly or by Montgomery Securities, as Representatives, will be binding upon
all the Underwriters.
SECTION 20. Partial Unenforceability. The invalidity or
------------------------
unenforceability of any Section, paragraph or provision of this Agreement shall
not affect the validity or enforceability of any other Section, paragraph or
provision hereof. If any Section, paragraph or provision of this Agreement is
for any reason determined to be invalid or unenforceable, there shall be deemed
to be made such minor changes (and only such minor changes) as are necessary to
make it valid and enforceable.
SECTION 21. Applicable Law. This Agreement shall be governed by and
--------------
construed in accordance with the internal laws (and not the laws pertaining to
conflicts of laws) of the State of California.
SECTION 22. General. This Agreement constitutes the entire agreement
-------
of the parties to this Agreement and supersedes all prior written or oral and
all contemporaneous oral agreements, understandings and negotiations with
respect to the
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<PAGE>
subject matter hereof. This Agreement may be executed in several counterparts,
each one of which shall be an original, and all of which shall constitute one
and the same document.
In this Agreement, the masculine, feminine and neuter genders and the
singular and the plural include one another. The section headings in this
Agreement are for the convenience of the parties only and will not affect the
construction or interpretation of this Agreement. This Agreement may be amended
or modified, and the observance of any term of this Agreement may be waived,
only by a writing signed by the Company, the Selling Stockholder and you.
Any person executing and delivering this Agreement as Attorney-in-fact
for the Selling Stockholder represents by so doing that he has been duly
appointed as Attorney-in-fact by the Selling Stockholder pursuant to a validly
existing and binding Power of Attorney which authorizes such Attorney-in-fact to
take such action. Any action taken under this Agreement by any of the
Attorneys-in-fact will be binding on the Selling Stockholder.
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to us the enclosed copies hereof, whereupon it
will become a binding agreement among the Company, the Selling Stockholder and
the several Underwriters including you, all in accordance with its terms.
Very truly yours,
ORCHARD SUPPLY HARDWARE STORES
CORPORATION
By:__________________________
Name:
Title:
FS EQUITY PARTNERS II, L.P.
By: FREEMAN, SPOGLI & CO.
(General Partner)
By:__________________________
Name:
Title:
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<PAGE>
The foregoing Underwriting Agreement
is hereby confirmed and accepted by
us in San Francisco, California as of
the date first above written.
MONTGOMERY SECURITIES
FURMAN SELZ LLC
Acting as Representatives of the
several Underwriters named in
the attached Schedule A.
By: MONTGOMERY SECURITIES
By:__________________________
Name:
Title: Partner
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<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Number of Firm
Common Shares
Name of Underwriter to be Purchased
- ------------------- ---------------
<S> <C>
Montgomery Securities...
Furman Selz LLC.........
---------
TOTAL......... 2,500,000
=========
</TABLE>
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<PAGE>
SCHEDULE B
<TABLE>
<CAPTION>
Number of Firm
Common Shares to
be Sold by
Name of Selling Stockholder Selling Stockholder
- --------------------------- -------------------
<S> <C>
FS Equity Partners II, L.P. 2,000,000
---------
TOTAL............... 2,000,000
=========
</TABLE>
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<PAGE>
SCHEDULE C
March __, 1996
PRICE DETERMINATION AGREEMENT
Referring to Section 5 of the Underwriting Agreement dated March __,
1996, among the Company, the Selling Stockholder and the Underwriters as therein
defined with respect to the purchase and sale of the Common Shares, we hereby
confirm our agreement that the initial public offering price of the Common
Shares shall be $_____ per share; that the underwriting discount shall be $_____
per share; and that the purchase price to be paid by the several Underwriters
for the Common Shares to be purchased from the Company and the Selling
Stockholder shall be $_____ per share.
This Agreement may be executed in various counterparts which together
shall constitute one and the same Agreement.
MONTGOMERY SECURITIES
FURMAN SELZ LLC
By: MONTGOMERY SECURITIES
By:________________________________
Name:
Title: Partner
ORCHARD SUPPLY HARDWARE STORES
CORPORATION
By:__________________________
Name:
Title:
FS EQUITY PARTNERS II, L.P.
By: FREEMAN, SPOGLI & CO.
(General Partner)
By:__________________________
Name:
Title:
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<PAGE>
EXHIBIT 5
[LETTERHEAD OF RIORDAN & MCKINZIE]
FEBRUARY 23, 1996
Orchard Supply Hardware Stores Corporation
6450 Via Del Oro
San Jose, California 95119
Ladies and Gentlemen:
We have acted as counsel to Orchard Supply Hardware Stores Corporation, a
Delaware corporation (the "Company"), in connection with the registration
under the Securities Act of 1933, as amended (the "1933 Act"), of the sale in
an underwritten public offering of up to 500,000 authorized but unissued
shares of the Common Stock, $.01 par value per share (the "Common Stock"), of
the Company (the "Company Shares"). This opinion is delivered to you in
connection with that certain Registration Statement on Form S-3 (the
"Registration Statement"), for the aforementioned sale, to be filed with the
Securities and Exchange Commission (the "Commission") under the 1933 Act.
In rendering the opinion set forth herein, we have made such investigations
of fact and law, and examined such documents and instruments, or copies
thereof established to our satisfaction to be true and correct copies thereof,
as we deemed necessary under the circumstances.
Based upon the foregoing and such other examination of law and fact as we
have deemed necessary, and in reliance thereon, we are of the opinion that the
Company Shares have been duly authorized and will, upon sale and delivery
thereof and receipt by the Company of full payment therefor as contemplated in
the Registration Statement, be validly issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the Prospectus which is a part of the Registration
Statement.
Very truly yours,
/s/ Riordan & McKinzie
<PAGE>
EXHIBIT 11
ORCHARD SUPPLY HARDWARE STORES CORPORATION
COMPUTATION OF EARNINGS PER SHARE
FOR THE YEAR ENDED JANUARY 28, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FULLY
PRIMARY DILUTED
------- -------
<S> <C> <C>
Net income................................................... $11,609 $11,609
Preferred stock dividends.................................... 1,200 N/A
------- -------
Net income available to common stock......................... $10,409 $11,609
======= =======
Weighted average number of shares outstanding................ 6,987 6,987
Dilutive effect of common stock equivalents.................. 63 138
Assumed repurchase of shares with proceeds from stockholder
notes receivables........................................... (11) (4)
Assumed conversion of preferred stock........................ N/A 1,280
------- -------
Weighted average common and equivalent shares................ 7,039 8,401
======= =======
Earnings per share........................................... $ 1.48 $ 1.38
======= =======
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report (and to all references to our Firm) included in or made a part of this
registration statement and to the incorporation by reference in this
registration statement of our reports dated March 3, 1995 included in the
Company's Form 10-K for the year ended January 29, 1995 and our reports dated
February 23, 1996 included in the Company's Form 8-K, event date February 23,
1996.
/s/ ARTHUR ANDERSEN LLP
San Jose, California
February 23, 1996
