ORCHARD SUPPLY HARDWARE STORES CORP, 424B4, 1996-03-13

ORCHARD SUPPLY HARDWARE STORES CORP
424B4, 1996-03-13
BUILDING MATERIALS, HARDWARE, GARDEN SUPPLY

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<PAGE>

FILED PURSUANT TO RULE 424(b)(4)
REGISTRATION NO. 333-01199

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 March 12, 1996, the last reported sale
price for the Common Stock quoted on the Nasdaq National Market was $24.75.
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.

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Proceeds to
Price to Underwriting Proceeds to Selling
Public Discount (1) Company (2) Stockholder
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share............... $24.25 $1.21 $23.04 $23.04
Total (3)............... $60,625,000 $3,025,000 $11,520,000 $46,080,000
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(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 $69,718,750, Underwriting Discount will
total $3,478,750 and Proceeds to the Selling Stockholder will total
$54,720,000. 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 March 18, 1996.

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

MONTGOMERY SECURITIES FURMAN SELZ

March 12, 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, San Bernardino and Ventura Counties and then to Riverside and San
Diego 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

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>
JANUARY 28, 1996
--------------------
ACTUAL AS ADJUSTED
-------- -----------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital............................................ $ 76,155 $ 87,400
Total assets............................................... 305,536 316,781
Long-term debt and capital leases.......................... 132,242 132,242
Stockholders' equity....................................... 93,257 104,502
</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 0.9% 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 56.2%. 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,
three 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 5,470,518 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 $11.2
million, 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 March 12, 1996)................... $27 1/4 $21 1/4
</TABLE>

The last reported sale price of the Common Stock on the Nasdaq National
Market on March 12, 1996 was $24.75 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 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............................. 90,612 101,852
Less: notes receivable from sale of capital stock...... (93) (93)
Retained earnings...................................... 2,660 2,660
-------- --------
Total stockholders' equity........................... 93,257 104,502
-------- --------
Total capitalization................................ $227,523 $238,768
======== ========
</TABLE>
- --------
(1) Includes current portion of long-term debt of $2,024,000.

(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............ 34.6 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, San Bernardino and Ventura Counties and then into Riverside and
San Diego 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 approximately $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

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
6,900 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 210 brand name power tools,
including Black & Decker, Skil, Makita, Freud, Porter Cable, Milwaukee, Bosch,
Delta, DeWalt, Wissota, Campbell Hausfeld, Homelite, Panasonic, Versapak,
Chamberlin, ShopVac, 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 40 and 120 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 1,580 different PVC, ABS, galvanized, copper, brass, flare, compression,
polystyrene and cast iron fittings, as well as over 1,485 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 475 sprinkler and drip irrigation SKUs
appeals to both homeowners and commercial landscapers.

Electrical. Orchard stocks nearly 370 different light bulbs and 155 types of
extension cords. With over 315 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 one of the largest displays 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 50,627 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 purchases over
25,000 SKUs, accounting for approximately 73% of the total dollar sales. The
remaining 27% of the total dollar sales of the stores 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 50,627 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
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. 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.

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.

25
<PAGE>

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 as Chairman of the Board of
Directors of EnviroSource, Inc., on the Board of Directors of Mac Frugal's
Bargains . Close-Outs Inc. and Buttrey Food and Drug Stores Company 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%
FMR Corp. (5)................. 384,000 5.5% -- 384,000 5.1%
Dimensional Fund Advisors
Inc. (6)..................... 370,000 5.3% -- 370,000 4.9%
Directors and Executive
Officers as a Group
(15 persons) (7)(8).......... 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 14, 1996 filed jointly with
the Commission by FMR Corp. ("FMR"), Edward C. Johnson 3d ("E. Johnson")
and Abigail P. Johnson ("A. Johnson"). FMR has claimed sole voting power
with respect to 35,000 shares and sole dispositive power with respect to
384,000 shares. Each of E. Johnson and A. Johnson has claimed sole
dispositive power with respect to 384,000 shares.

(6) 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.

(7) 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.

(8) 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................................................. 1,250,000
Furman Selz LLC....................................................... 1,250,000
---------
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 $0.67
per share; and the Underwriters may allow, and such dealers may reallow, a
concession of not more than $0.10 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 any shares of
Common Stock without the prior written consent of Montgomery Securities. 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 Montgomery Securities.

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

30
<PAGE>

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.

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.

31
<PAGE>

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 23, 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.

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 (in thousands):

<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 (in thousands):

<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

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

<TABLE>
<CAPTION>
Page
----
<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.................................................... 31
Incorporation of Certain Documents by Reference........................... 32
Index to Consolidated Financial Statements................................ F-1
</TABLE>

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

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2,500,000 SHARES

[LOGO OF ORCHARD SUPPLY HARDWARE]

COMMON STOCK

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

PROSPECTUS

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

MONTGOMERY SECURITIES

FURMAN SELZ

March 12, 1996

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>

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>