FAMILY BARGAIN CORP, S-2/A, 1996-10-10

FAMILY BARGAIN CORP
S-2/A, 1996-10-10
FAMILY CLOTHING STORES

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As filed with the Securities and Exchange Commission on October 10, 1996
Registration No. 333-10877
======================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

-------------------
Amendment No. 1 to
FORM S-2
REGISTRATION STATEMENT
Under
The Securities Act of 1933
-------------------

FAMILY BARGAIN CORPORATION
(Exact name of registrant as specified in its charter)

Delaware 5651 50-0299573
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification No.)
incorporation or
organization)

315 East 62nd Street
New York, New York 10021
(212) 980-9670
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)

-------------------
JOHN A. SELZER
Chief Executive Officer
Family Bargain Corporation
315 East 62nd Street
New York, New York 10021
(212) 980-9670
(Name, address, including zip code, and telephone number,
including area code, of registrant's agent for service)
-------------------

Copies to:

JOEL M. HANDEL, ESQ.
Baer Marks & Upham
805 Third Avenue
New York, New York 10022
(212) 702-5700

Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. [ ]

If the registrant elects to deliver its latest annual report to
securityholders, or a complete and legible facsimile thereof, pursuant to
Item 11(a)(1) of this form, check the following box. [ ]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.

<PAGE>

FAMILY BARGAIN CORPORATION
Cross-Reference Sheet Showing Location in Prospectus of Information
Required by Form S-2

Item Number
In Form S-2 Item Caption in Form S-2 Location in Prospectus
- ---------------------------------------------------------------------------------------------

<S> <C> <C>
1 Forepart of the Registration Statement
and Outside Front Cover Page . . . . Facing Page; Outside Front Cover Page

2 Inside Front and Outside Back Cover
Pages of Prospectus . . . . . . . . . Available Information; Inside Front
Cover Page; Outside Back Cover Page
3 Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges . Summary; Summary Consolidated
Financial and Other Data; Risk
Factors; Selected Consolidated
Historical and Pro Forma Financial
Data

4 Use of Proceeds . . . . . . . . . . . Outside Front Cover Page; Selling
Shareholders
5 Determination of Offering Price . . . Front Cover Page; Plan of
Distribution

6 Dilution . . . . . . . . . . . . . . Inapplicable

7 Selling Security Holders . . . . . . Selling Shareholders
8 Plan of Distribution . . . . . . . . Front Cover Page; Plan of
Distribution

9 Description of Securities to be Dividend Policy; Description of
Registered . . . . . . . . . . . . . Capital Stock; Price Range of Common
Stock
10 Interests of Named Experts and Counsel
Inapplicable

11 Information With Respect to the
Registrant . . . . . . . . . . . . . Front Cover Page; Summary;
Capitalization; Dividend Policy;
Selected Consolidated Historical and
Pro Forma Financial Data;
Management's Discussion and Analysis
of Financial Condition and Results of
Operations; Business; Management;
Description of Capital Stock; Index
to Consolidated Financial Statements;
Consolidated Financial Statements

12 Incorporation of Certain Information
by Reference . . . . . . . . . . . . Incorporation of Certain Documents by
Reference
13 Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities . . . . . . . . . . . . . Inapplicable

</TABLE>

<PAGE>
Subject to Completion, Dated October 10, 1996

PROSPECTUS 153,846 Shares
- ----------
Dated ______ __, 1996
FAMILY BARGAIN CORPORATION
Series A 9 1/2% Cumulative Convertible Preferred Stock

This Prospectus relates to the public offering (this "Offering") by certain
selling shareholders (the "Selling Shareholders") of 153,846 shares (the
"Selling Shareholder Shares") of Series A 9 1/2% Cumulative Convertible
Preferred Stock, $.01 par value per share ("Series A Preferred Stock") of Family
Bargain Corporation, a Delaware corporation (together with its subsidiaries, the
"Company"). The Series A Preferred Stock and the Common Stock of the Company
are quoted on the NASDAQ SmallCap Market under the symbols "FBARP" and "FBAR"
and the Common Stock is also listed on the Chicago Stock Exchange. On October
4, 1996, the closing sale prices of the Series A Preferred Stock and the Common
Stock, as reported on the NASDAQ SmallCap Market, were $6.75 and $1.78 per
share, respectively. See "Price Range of Common Stock." The Selling Shareholder
Shares were issued to an escrow agent to secure the recovery of an award in
connection with the settlement of a lawsuit (the "Mandel-Kahn Settlement").
Pursuant to the Mandel-Kahn Settlement, the Company is required to use its best
efforts to register the Selling Shareholder Shares for resale to the public and
is permitted to sell such shares. The Company has entered into a Stock Purchase
Agreement, dated as of June 28, 1996, pursuant to which the Selling Shareholder
Shares are being sold to the Selling Shareholders. The Company will not receive
any proceeds from the sale of the Selling Shareholders Shares. See "Plan of
Distribution."

See "RISK FACTORS" on page 11 for a discussion of certain matters that should be
considered by prospective purchasers of the Selling Shareholder Shares.

The Company has informed the Selling Shareholders that the anti-manipulative
rules under the Securities and Exchange Act of 1934, Rules 10b-6 and 10b-7, may
apply to their sales in the market and has furnished the Selling Shareholders
with a copy of these Rules. The Company has also informed the Selling
Shareholders of the need for delivery of copies of this Prospectus under certain
circumstances.

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.

THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, THE SECURITIES OF THE COMPANY IN ANY STATE TO ANY PERSON TO WHOM
IT IS UNLAWFUL FOR THE COMPANY TO MAKE SUCH OFFER OR SOLICITATION.

The Selling Shareholder Shares may be offered and sold from time to time
pursuant to Rule 415 under the Securities Act of 1933, as amended (the
"Securities Act") by the Selling Shareholders in transactions in the
over-the-counter market, in negotiated transactions, or a combination of such
methods of sale, at fixed prices which may be changed, at market prices
prevailing at the time of sale or at negotiated prices. The Selling
Shareholders may effect such transactions by selling the Selling Shareholder
Shares directly to purchasers or to or through underwriters or broker-dealers
who may act as agents or principals. Such underwriters or broker-dealers may
receive compensation in the form of discounts, concessions or commissions from
the Selling Shareholders and or the purchasers of the Selling Shareholder Shares
for whom such underwriters or broker-dealers may act as agent or to whom they
sell as principal, or both (which compensation as to a particular underwriters
or broker-dealer might be in excess of customary commissions). To the extent
required, the specific amount of Selling Shareholder Shares to be sold, the
names of the Selling Shareholders, the respective purchase price and public
offering price, the names of any such agent, broker-dealer, or underwriter, and
any applicable commission or discount with respect to a particular offer will be
set forth in an accompanying Prospectus Supplement.

The aggregate proceeds to the Selling Shareholders from the Shares will be the
purchase price of the Shares sold less the aggregate agents' or brokerage
commission and underwriters' discount, if any. The Company has agreed to pay
substantially all of the expenses of this offering. See "Selling Shareholders"
and "Plan of Distribution." The Selling Shareholders and any broker-dealers,
agents or underwriters that participate with the Selling Shareholders in the
distribution of the Shares may be deemed to be "underwriters" within the meaning
of the Securities Act, and any commissions received by them and any profit on
the resale of the Shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act.

<PAGE>

Information contained herein is subject to completion or amendment. A
Registration Statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the Registration Statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.

<PAGE>

The Company intends to furnish to its stockholders annual reports containing
financial statements audited and reported on by independent auditors and
quarterly reports containing unaudited financial information for each of the
first three quarters of each fiscal year, and such other periodic reports as it
may determine to furnish or as may be required by law, including pursuant to
Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act").

CONCURRENT REGISTRATION STATEMENT

On September 30, 1996, the Company filed Amendment No. 1 to a Registration
Statement (No. 333-09853) on Form S-2 (the "Debentures Registration Statement")
covering an aggregate of up to $46,000,000 principal amount of __% Convertible
Subordinated Debentures due 2006 (the "Debentures") in an underwritten offering
(the "Debenture Offering").

AVAILABLE INFORMATION

The Company is subject to the information requirements of the Exchange Act,
and, in accordance therewith, files reports, proxy and information statements
and other information with the Securities and Exchange Commission (the
"Commission"). Such reports, statements and other information may be inspected
and copied at the public reference facilities maintained by the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, and at the following Regional
Offices of the Commission: New York Regional Office, 7 World Trade Center, 13th
Floor, New York, New York 10048; and Chicago Regional Office, CitiCorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60621-2511. Copies of
such material may be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. In addition, the Company's Common Stock, Class C Warrants, and Class D
Warrants are currently quoted on the NASDAQ SmallCap Market. Reports and other
information concerning the Company may also be inspected at the Records
Department of the NASDAQ Stock Market, 1735 K Street, N.W., Washington, D.C.
20006.

The Company has filed with the Commission in Washington D.C., a Registration
Statement on Form S-2 under the Securities Act with respect to the securities
offered hereby (the "Registration Statement"). This Prospectus, filed as a part
of the Registration Statement, does not contain certain information set forth in
or annexed as exhibits to the Registration Statement. For further information
regarding the Company and the securities offered hereby, reference is made to
the Registration Statement and to the exhibits filed as a part thereof, which
may be inspected at the office of the Commission without charge or copies of
which may be obtained therefrom upon request to the Commission and payment of
the prescribed fee. Statements contained in this Prospectus and the contents of
any contract or other document are not necessarily complete, and in each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement, each such statement being qualified
in all respects by such reference.

No dealer, salesman or other person has been authorized in connection with
this Offering to give any information or to make any representation 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
or any broker, dealer, agent or underwriter. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any of these
securities in any jurisdiction to any person to whom it is unlawful to make such
offer or solicitation. Except where otherwise indicated, this Prospectus speaks
as of the effective date of the Registration Statement. Neither the delivery of
this Prospectus nor any sale hereunder shall under any circumstances create any
implication that there have been no changes in the affairs of the Company since
the date hereof.

-2-
<PAGE>

SUMMARY

The following is a summary of certain information contained in this
Prospectus. This summary is not intended to be complete and is qualified in its
entirety by, and should be read in conjunction with, the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Certain statements under this caption "Prospectus
Summary" constitute forward-looking statements under the Private Securities
Litigation Reform Act (the "Reform Act") See "Risk Factors -- Forward-Looking
Statements."

Family Bargain Corporation (the "Company") operates 138 off-price retail
apparel and housewares stores under the names "Family Bargain Center" and
"Factory 2-U" in California, Arizona, Washington, New Mexico, Oregon, Nevada and
Texas. The Company purchased Factory 2-U, Inc. ("Factory 2-U") in November
1995.

Typical customers of the Company's stores are low-income families, including
agricultural, service and other blue collar workers, a significant portion of
whom are of Hispanic origin or are members of other ethnic groups. The
Company's store merchandising selection, everyday low price strategy and store
format are designed to reinforce the concept of value and enhance the customers'
shopping experience, while maximizing inventory turns.

Family Bargain Center stores, which average 11,000 square feet, and Factory
2-U stores, which average 19,000 square feet, are designed in a self-service
format that affords easy access to merchandise displayed on bargain tables,
hanger racks and open shelves. Stores are stocked with new merchandise at least
weekly. Prices are clearly marked, often with a comparable full retail price.
Most stores display signs in English and Spanish and are staffed with bilingual
personnel. Store atmosphere is enhanced by the playing of locally popular
music, the use of brightly colored pennants and occasional festive outdoor
promotions.

The Company plans to continue to open new stores in the seven western states
in which it currently operates. During the fiscal year ended January 27, 1996
(fiscal 1996), the Company opened eight new Family Bargain Center stores and,
through the acquisition of Factory 2-U, acquired an additional 29 stores. The
Company plans to open up to 19 new stores (which may increase to as many as 25
new stores if the Debenture Offering is completed) in fiscal 1997, of which 13
have been opened as of September 1, 1996, and up to 20 new stores (which may
increase to as many as 45 new stores if the Debenture Offering is completed) in
fiscal 1998. The Company closed one store during its current fiscal year.

The Company also is continuing a program under which it renovates existing
stores or relocates them as superior sites become available in their markets.
During fiscal 1996, the Company renovated 21 stores and relocated one store. In
fiscal 1997, the Company plans to renovate and/or relocate up to five stores.
As of September 1, 1996, four stores had been relocated in fiscal 1997. Some of
the new or relocated Family Bargain Center stores will adopt the Factory 2-U
store format by increasing store size and expanding the selection of housewares
and domestic items. The Company also intends to purchase new store fixtures for
all of its stores to improve the appearance, accessibility and quantity of
merchandise displayed to its customers.

-3-
<PAGE>

Recent Unaudited Results

The Company historically has realized seasonally low sales in its first two
quarters (February through July), resulting in losses. Net sales (gross sales
less sales tax and sales returns) for the six months ended July 27, 1996
increased to $107.3 million from $68.4 million for the corresponding period in
the prior year, representing a 57.0% increase. Net losses (prior to payment of
dividends on the Company's Series A 9 1/2% Cumulative Convertible Preferred
Stock ("Series A Preferred Stock")) for the six months ended July 27, 1996
decreased to $929,000 million from $3.8 million for the corresponding period in
the prior year, representing a 75.5% reduction. The substantial improvement in
net sales was attributable to sales at Factory 2-U stores, which were acquired
in November 1995, as well as to increases in comparable store sales (sales at
stores open throughout both periods) and sales at newly opened stores. The
substantial reduction in net losses was attributable, in addition to increased
sales, to improved gross margins resulting from reduced markdown activity and a
decrease in selling and administrative expenses as a percentage of sales due to
improved economies of scale. Comparable store sales increased by 6.4% for
August 1996, and by 9.8% for the year to date through the end of August 1996.

Net sales for the three months ended July 27, 1996 increased to $57.5 million
from $37.3 million for the corresponding period in the prior year, representing
a 54.1% increase. The Company had net income before payment of dividends on
Series A Preferred Stock of $629,000 for the three months ended July 27, 1996
compared to a net loss of $236,000 for the corresponding period in the prior
year.

For the twelve months ended July 27, 1996, the Company had net sales of
$218.8 million, compared to net sales of $154.8 million for the twelve months
ended July 29, 1995, representing a 41.3% increase. Income from continuing
operations before extraordinary items, loss on disposal of discontinued
operations and payment of dividends on Series A Preferred Stock for the twelve
months ended July 27, 1996 increased to $4.3 million from a net loss of $2.2
million for the twelve months ended July 29, 1995. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."

For the twelve months ended July 27, 1996, the Company had EBITDA (earnings
before interest, taxes, depreciation, amortization, extraordinary items and
results of discontinued operations) of $12.9 million compared to EBITDA of $3.1
million for the twelve months ended July 29, 1995, an increase of $9.8 million
or 309%. This increase resulted from sales at Factory 2-U stores, increases in
comparable store sales, sales at newly opened stores, reduced markdown activity
and a decrease in selling and administrative expenses as a percentage of sales
due to the improved economies of scale achieved as a result of the growth in the
Company's sales.

The Company's principal executive office is located at 315 East 62nd Street,
New York, New York 10021 and its telephone number is (212) 980-9670. The
principal executive office of the Company's operating subsidiaries, General
Textiles and Factory 2-U, Inc. (the "Operating Subsidiaries"), is located at
4000 Ruffin Road, San Diego, California 92123 and its telephone number is (619)
627-1800.

The Offering

This Prospectus relates to the public offering of 153,846 shares of Series A
Preferred Stock (the "Selling Shareholder Shares") by certain holders of
securities of the Company, whose shares may be offered and sold from time to
time pursuant to Rule 415 under the Securities Act. The Selling Shareholder
shares being offered hereby may be offered by the Selling Shareholders in
transactions in the over-the-counter market, in negotiated transactions or a
combination of such methods of sale. The Company will not receive any proceeds
from the sales of the Selling Shareholder Shares. See "SELLING SHAREHOLDERS"
and "PLAN OF DISTRIBUTION."

The Company's Common Stock and Series A Preferred Stock are traded in the
over-the-counter market and quoted on the NASDAQ SmallCap Market under the
symbols "FBAR" and "FBARP," respectively. In addition, the

-4-
<PAGE>

Common Stock is currently traded on the Chicago Stock Exchange under the symbol
"FBA." The Company has applied to have the Debentures quoted on the Nasdaq
SmallCap Market under the symbol "FBARG."

Prospective investors in the Series A Preferred Stock should carefully review
and consider the factors described under "RISK FACTORS."

-5-
<PAGE>

SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA

Set forth below is (i) summary consolidated historical financial data for the
twelve months ended January 28, 1995 and January 27, 1996 and the twelve and six
months ended July 29, 1995 and July 27, 1996 and (ii) summary consolidated pro
forma financial data for the twelve months ended January 27, 1996 and six months
ended July 27, 1996. The summary consolidated financial data includes the
Company and General Textiles for all periods and Factory 2-U commencing November
11, 1995. All of the summary consolidated historical financial data are derived
from audited financial information except for operating data and the summary
consolidated historical financial data for the twelve and six months ended July
29, 1995 and July 27, 1996. The audited financial information for the twelve
month periods ended January 28, 1995 and January 27, 1996 is included elsewhere
in this Prospectus. The summary consolidated historical and pro forma financial
data should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Consolidated Financial
Statements."

-6-
<PAGE>

SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
(in thousands, except per share data)

Historical Results
-------------------------------------------------------------------------------
Most Recent Twelve Most Recent Six
Most Recent Fiscal Month Period Month Period
Year End Results Unaudited Results Unaudited Results
------------------------ ---------------------- --------------------
Twelve Twelve Twelve Twelve Six Six
Months Months Months Months Months Months
Ended Ended Ended Ended Ended Ended
January 28, January 27, July 29, July 27, July 29, July 27,

1995 1996(1) 1995 1996(1) 1995 1996
---- ------- ---- ---- ---- ----
Income Statement Data
---------------------

<S> <C> <C> <C> <C> <C> <C>
Net Sales $146,520 $179,820 154,848 218,804 68,350 107,334

Gross Profit 49,435 62,632 51,660 78,801 22,565 38,734

Operating Income (Loss) 2,608 5,153 533 8,874 (2,340) 1,381

Income (Loss) from Continuing
Operations (354) 1,478 (2,245) 4,339 (3,790) (929)

Loss from Discontinued Operations (2,241) (500) (1,984) (500) -- --

Extraordinary Gain 5,251 -- -- -- -- --

Net Income (Loss) 2,656 978 (4,229) 3,839 (3,790) (929)

Dividends on Preferred Stock 2,030 3,040 3,137 3,259 1,520 1,739

Net Income (Loss) Applicable to Common
Stock 626 (2,062) (7,366) 580 (5,310) (2,668)

Net Income (Loss) from Continuing
Operations Applicable to Common Stock
per Common Share (0.59) (0.39) (1.34) 0.25 (1.32) (0.62)

Net Income (Loss) Applicable to Common
Stock Per Common Share:(3)

Primary 0.16 (0.51) (1.84) 0.13 (1.32) (0.62)

Fully Diluted 0.16 (0.51) (1.84) 0.13 (1.32) (0.62)

Operating Data
--------------

EBITDA(4) 4,837 8,438 3,144 12,861 (915) 3,508

No. of Stores at End of Period 97 131 102 140 102 140

Gross Profit Percentage 33.7% 34.8% 33.4% 36.0% 33.0% 36.1%

Ratio of EBITDA to Combined
Cash Fixed Charges and Preferred
Stock Dividends (5) 1.3x 1.6x -- 2.1x -- --

Ratio of Earnings to Combined Fixed
Charges and Preferred Stock
Dividends(6) -- -- -- 1.1x -- --

Pro Forma
Unaudited Results
-------------------------
Twelve Six
Months Months
Ended Ended
January 27, July 27,

1996(2) 1996(2)
---- -------
Income Statement Data
---------------------

<S> <C> <C>
Net Sales 179,820 107,334

Gross Profit 62,632 38,734

Operating Income (Loss) 5,153 1,381

Income (Loss) from Continuing
Operations (607) (1,555)

Loss from Discontinued Operations -- --

Extraordinary Gain -- --

Net Income (Loss) (607) (1,555)

Dividends on Preferred Stock 3,040 1,739

Net Income (Loss) Applicable to Common
Stock (3,647) (3,294)

Net Income (Loss) from Continuing
Operations Applicable to Common Stock
per Common Share (0.91) (0.76)

Net Income (Loss) Applicable to Common
Stock Per Common Share:(3)
Primary (0.91) (0.76)
Fully Diluted (0.91) (0.76)

Operating Data
--------------
EBITDA(4) 8,438 3,508
No. of Stores at End of Period 131 140
Gross Profit Percentage 34.8% 36.1%

Ratio of EBITDA to Combined
Cash Fixed Charges and Preferred
Stock Dividends (5) 1.2x --

Ratio of Earnings to Combined Fixed
Charges and Preferred Stock
Dividends(6) -- --

</TABLE>

-7-
<PAGE>

Pro Forma
--------------------------

January 27, July 27, January 27, July 27,
1996 1996 1996(8) 1996(8)
---- ---- ---- ----
Balance Sheet Data
------------------

<S> <C> <C> <C> <C>
Working Capital (Deficiency) $ (186) 16,203 21,449 26,250

Total Assets 87,152 99,241 111,993 112,494

Long-Term Debt, Less Current Portion 25,023 39,621 49,864 52,874

Preferred Stock 26,981 28,238 26,981 29,238

Common Stockholders' Equity 736 26 736 26

Common Stockholders' Equity
per Share (6) 0.18 0.01 0.18 0.01

</TABLE>

-8-
<PAGE>
Notes to Summary Consolidated Financial and Other Data

(1) The results of Factory 2-U have been consolidated with the
Company's results since the acquisition of Factory 2-U on
November 11, 1995. Therefore, the Company's consolidated
results for the twelve months ended January 27, 1996 and
July 27, 1996 include Factory 2-U's results for 2.5 months
and 8.5 months, respectively. See Note 3 to the Notes to
the "Consolidated Financial Statements."

(2) The pro forma results give effect to the sale of $40.0
million of Debentures offered in the Debenture Offering and
the application of the net proceeds by the Company. The pro
forma adjustments reflect those adjustments necessary to (i)
eliminate the loss on discontinued operations, (ii)
eliminate interest on the Company's revolving credit notes
(in the amounts of $1.7 million and $1.3 million for the
twelve months ended January 27, 1996 and the six months
ended July 27, 1996, respectively), which are assumed to be
unused during such periods because of the availability of
the Debenture Offering proceeds, and (iii) give effect to
the increase in interest expense arising from the Debentures
(in the amounts of $3.4 million and $1.7 million for the
twelve months ended January 27, 1996 and the six months
ended July 27, 1996, respectively) and the amortization of
the debt issuance costs related thereto (in the amounts of
$356,000 and $178,000 for the twelve months ended January
27, 1996 and the six months ended July 27, 1996,
respectively), with all transactions treated as though the
Debenture Offering occurred on January 29, 1995 and
January 28, 1996, respectively. See Note 8 to the Notes to
Summary Consolidated Financial and Other Data.

(3) Net income (loss) per common share on both a primary and
fully diluted basis is calculated by dividing net income
(loss) applicable to Common Stock by the weighted average
number of shares outstanding for each respective period.
See Note 1 to the Notes to the "Consolidated Financial
Statements."

Weighted average shares and earnings per share amounts have
been restated for 1995 to give retroactive effect to the
cancellation of contingent shares during 1996. See Note 2
to the Notes to the "Consolidated Financial Statements."

(4) EBITDA (earnings before interest, taxes, depreciation and
amortization, extraordinary items and results of
discontinued operations) data is presented to reflect
operating income from continuing operations before non-cash
items, and approximates the cash available from continuing
operations to cover interest expense and other debt service.
Such data is not an alternative to operating income as an
indication of operating performance or liquidity under
generally accepted accounting principles.

(5) EBITDA was insufficient to cover combined cash fixed charges
and preferred stock dividends by $1.8 million, $3.4 million
and $23,000 for the twelve months ended July 29, 1995, the
six months ended July 29, 1995, and the six months ended
July 27, 1996, respectively. On a pro forma basis, EBITDA
was insufficient to cover combined cash fixed charges and
preferred stock dividends by $649,000 for the six months
ended July 29, 1995. Cash fixed charges represent interest
expense and financing fees less debt discount amortization
and includes Debenture interest for pro forma periods
presented. Debt discount amortization was $1.2 million,
$1.6 million, $809,000, and $1.6 million for the 12 months
ended January 28, 1995, January 27, 1996, July 29, 1995 and
July 27, 1996, respectively. Debt discount amortization was
$502,000 and $518,000 for the six months ended July 29, 195
and July 27, 1996, respectively. On a pro forma basis, debt
discount amortization was $1.6 million for the twelve months
ended January 27, 1996 and $518,000 for the six months ended
July 27, 1996.

(6) Earnings for the twelve months ended January 28, 1995 and
January 27, 1996, for the twelve and six months ended July
29, 1995 and for the six months ended July 27, 1996

-9-

<PAGE>
were insufficient to cover fixed charges and preferred stock
dividends by $2.2 million, $1.6 million, $5.4 million, $5.3
million and $2.7 million, respectively. However, earnings
for the twelve months ended July 27, 1996 were sufficient to
cover fixed charges and preferred stock dividend payments.
Pro forma earnings for the twelve months ended January 27,
1996 and the six months ended July 27, 1996 were
insufficient to cover fixed charges and preferred stock
dividends by $3.6 million and $2.4 million, respectively.

(7) Common Stockholders' equity per common share is determined
by dividing stockholders' equity, net of equity related to
preferred stock, by the common shares outstanding at the
date presented.

(8) The pro forma balance sheet data gives effect to the sale of
$40.0 million of Debentures offered in the Debenture
Offering and the application of the net proceeds by the
Company as if the same had occurred on January 27, 1996 and
July 27, 1996, respectively. The pro forma adjustments give
effect to the estimated current portion of debt issuance
costs added to current assets ($356,000 at both January 27,
1996 and July 27, 1996), the net increase in cash following
the payment of the revolving credit facilities ($21.3
million and $9.7 million at January 27, 1996 and July 27,
1996, respectively), the estimated long-term portion of debt
issuance costs added to noncurrent assets ($3.2 million at
both January 27, 1996 and July 27, 1996), the principal
amount of the Debentures ($40,000,000 at both January 27,
1996 and July 27, 1996) and the use of the Debenture
Offering proceeds to repay the outstanding indebtedness
under the revolving credit facilities ($15.2 million and
$26.7 million at January 27, 1996 and July 27, 1996,
respectively).

-10-
<PAGE>
RISK FACTORS

An investment in the Selling Shareholder Shares offered hereby
involves substantial risks. Prospective investors should carefully consider the
following risk factors, as well as all the other information set forth in this
Prospectus, before purchasing any Selling Shareholder Shares: Certain
statements under this caption "Risk Factors" constitute "forward-looking
statements" under the Reform Act. See "-- Forward-Looking Statements."

Uncertain Future Operating Results; Uncertain Ability to Make Dividend
Payments and Cover Fixed Charges. The Company generated $1.5 million of net
income from continuing operations for its fiscal year ended January 27, 1996
(which includes two and one-half months of Factory 2-U operating results), but
incurred a net loss from continuing operations of $354,000 for its fiscal year
ended January 28, 1995. There can be no assurance that the Company will operate
profitably in the future. As of July 27, 1996, the Company had accumulated
deficit of $21.7 million. Earnings for the fiscal year ended January 27, 1996
were insufficient to cover fixed charges and preferred stock dividends by $1.6
million (a ratio of earnings to fixed charges of 0.8 to 1) and on a pro forma
basis, after giving effect to the issuance of the Debentures and the application
of the Debenture Offering proceeds, by $3.6 million (a ratio of earnings to
fixed charges of 0.6 to 1). However, EBITDA was $8.4 million for the fiscal
year ended January 27, 1996 and exceeded combined cash fixed charges and
preferred stock dividends by $3.3 million (a ratio of 1.6 to 1). On a pro forma
basis for the same period, EBITDA exceeded combined cash fixed charges and
preferred stock dividends by $1.2 million (a ratio of 1.2 to 1). In addition,
the Operating Subsidiaries may reborrow under the Revolving Credit Facilities,
resulting in additional interest expense. To the extent dividends on the then
outstanding shares of Series A Preferred Stock were paid out of cash flow in
excess of earnings, the dividends reduced the Company's additional paid-in
capital. It is possible that a portion of future interest and dividends also
will be paid out of cash flow in excess of earnings and therefore will further
reduce additional paid-in capital. See "Dividend Policy", "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Description of Capital
Stock."

Restrictions on Payments by Operating Subsidiaries to the Company. The
Company is a holding company and relies on its cash reserves and payments from
General Textiles and Factory 2-U to finance its ongoing operating expenses, to
pay its outstanding indebtedness, to pay dividends on the Series A Preferred
Stock and, in the future, to pay its principal and interest obligations on the
Debentures. The Company receives payments from General Textiles pursuant to a
tax sharing agreement, a management agreement and from subordinated debt and
secured term debt of General Textiles held by the Company. The Company receives
payments from Factory 2-U pursuant to a management agreement and a guaranty fee
agreement. The General Textiles Plan of Reorganization (the "GT Reorganization
Plan") and certain of General Textiles' outstanding debt instruments (including
the GT Revolving Credit Facility (as defined)) restrict General Textiles from
paying dividends or making other distributions to the Company without the
consent of certain holders of indebtedness. In addition, payments by Factory
2-U to the Company are limited under the Factory 2-U Revolving Credit Facility
(as defined) to payments pursuant to a management agreement, a guarantee fee
agreement and payments with regard to a loan of a portion of the proceeds of the
sale of the Debentures. The Company will lend at least $10.0 million of the
proceeds of the sale of the Debentures to General Textiles and at least
$10.0 million of the proceeds to Factory 2-U. The Company will be entitled to
receive interest and principal under these loans with interest rates and payment
dates substantially similar to those under the Debentures. The Company
anticipates that, despite the restrictions on payments from General Textiles and
Factory 2-U, the funds it is entitled to receive from the Operating Subsidiaries
will be sufficient to enable it to meet its expenses and debt service (including
required payments of interest and principal with regard to the Debentures) and
to pay the dividends on its Series A Preferred Stock, although there can be no
assurance of this. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."

Rights of Certain Creditors to Elect General Textiles' Board in Event of Non-
Payment. In connection with the GT Reorganization Plan, General Textiles issued
Subordinated Notes. The Subordinated Notes provide that if General Textiles
fails to make certain minimum payments thereunder the holders of certain of the
notes and the official creditors' committee appointed in connection with the
Chapter 11 Reorganization (the "Creditors Committee") will be entitled to elect
a minority of General Textiles' directors in certain circumstances and all of
General Textiles' directors in other circumstances. The Company currently owns
$15.0 million of the $19.1 million principal amount of outstanding Subordinated
Notes. This

-11-

<PAGE>
should reduce the possibility of default which would entitle the Creditors
Committee to elect directors of General Textiles. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."

Bankruptcy Filings of Companies Controlled by Three Senior
Officers/Directors. Benson A. Selzer and Joseph Eiger, senior executive
officers, directors and through various ownership interests principal
stockholders of the Company (together with entities which they own or control or
of which members of their families are beneficiaries, "Selzer/Eiger") have been
active in acquiring and restructuring financially and operationally troubled
companies since 1973. Companies controlled by Selzer/Eiger have sometimes
commenced Chapter 11 proceedings pursuant to U.S. bankruptcy laws, under which
holders of subordinated debt of the companies involved were required to
renegotiate their debt, sometimes resulting in the full or partial loss of their
investment. Since 1991, five companies affiliated with Selzer/Eiger have filed
for bankruptcy (the most recent being in February 1996) or have been liquidated,
including General Textiles, Mandel-Kahn Industries and C-B Murray Corporation,
Inc., which are former subsidiaries of the Company. Selzer/Eiger controls less
than 30% of the fully-diluted equity of the Company and does not control a
majority of the Board of Directors of the Company. However, Benson A. Selzer,
Joseph Eiger and John A. Selzer are the sole members of the executive committee
of the Company's Board of Directors. See "Management."

Credit and Continued Financing. Since emerging from bankruptcy in 1993,
General Textiles has been granted normal credit availability by most vendors and
other material sources of supply. However, if cash flow problems arise in the
future, General Textiles' history of a prior bankruptcy reorganization might
cause lenders and vendors to withdraw credit availability more quickly than they
otherwise might have done. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

Competition. The Company's stores compete with large discount retail chains
(such as Wal-Mart, K-Mart, Mervyn's and Target) and regional off-price chains
(such as MacFrugal's), many of which have substantially greater resources than
those of the Company. While the Company's off-price marketing strategy differs
from the strategy of many of its competitors, if such competitors were to adopt
an off-price approach that targeted Family Bargain Center's and Factory 2-U's
typical customers, the Company's business could be adversely affected. See
"Business -- Operations -- Competition."

Expansion. The Company may accelerate its store opening plan following
completion of the Debenture Offering. Expansion involves increased risks and
costs and may cause the quarterly results of the Company to fluctuate. See "Use
of Proceeds" and "Business - Expansion Plans."

Seasonality. The Company's business is seasonal in nature and historically
has realized its highest level of sales in the "Back-to-School" (August and
September) and Christmas (November and December) seasons. In addition, working
capital requirements fluctuate during the year and are highest between mid-
summer and the beginning of the Christmas season because significantly higher
inventory levels are necessary at those times. Such seasonality may make
interim period results of operations not necessarily indicative of full-year
results. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Quarterly Results of Operations and Seasonality."

Part-time Status of Certain Executive Officers. While William Mowbray,
President and Chief Operating Officer of the Company and President and Chief
Executive Officer of the Operating Subsidiaries and Jeffrey C. Gerstel,
Executive Vice President, Finance of the Company and Senior Vice President of
the Operating Subsidiaries, serve on a full-time basis, the other executive
officers of the Company also serve as officers and directors of other companies
and devote to the Company's affairs such portion of their business time and
attention as they and its Board of Directors deem necessary to fulfill their
obligations. Depending upon the demands of the other companies with which they
are involved, conflicts of interest could arise relating to the allocation of
their time or with respect to their fiduciary obligations to the Company and
such other businesses.

Potential Anti-takeover Effects of Rights Plan, Classified Board of Directors
and Delaware Law; Possible Issuances of Preferred Stock. The Company has
adopted a Shareholders' Rights Plan. If (i) a public announcement is made that
any person (other than the Company), together with all affiliates and associates
of such person, is the beneficial owner of 15%

-12-
<PAGE>
or more of the shares of the Common Stock outstanding or (ii) any person (other
than the Company) makes a tender or exchange offer, if upon consummation of such
offer such person would beneficially own 15% or more of the shares of the
Company's Common Stock, certain rights will be triggered under the Company's
Shareholders' Rights Plan which may have the effect of deterring or delaying
mergers, tender offers, or other possible takeover attempts, even if they are
favored by some or a majority of the Company's stockholders. Any shares of its
Common Stock issued by the Company during the term of the plan (10 years),
including the Common Stock issuable on conversion of the Debentures under the
Debentures Registration Statement, will be subject to the Shareholders' Rights
Plan. See "Description of Capital Stock -- Shareholders' Rights Plan."

Certain provisions of Delaware law could delay or impede the removal of
incumbent directors and could make more difficult a merger, tender offer or
proxy contest involving the Company, even if such events could be beneficial to
the interests of stockholders. Such provisions could limit the price that
investors might be willing to pay in the future for securities of the Company,
including the Common Stock. In addition, the Company's Board of Directors is a
"classified board," with only one-third of its directors coming up for election
each year. The existence of a classified board may in certain circumstances
deter or delay mergers, tender offers or other possible takeover attempts which
may be favored by some or a majority of the holders of the Common Stock.

Forward-Looking Statements. Certain statements contained in this Prospectus,
including without limitation statements containing the words "believes,"
anticipates," "may," "intends" "expects" and words of similar import, constitute
"forward-looking statements" within the meaning of the Reform Act. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company or industry results to be materially different from any future
results, performance or achievements expressed or implied by such forward-
looking statements. Such factors include, among others, the following: general
economic and business conditions, both nationally and in the regions in which
the Company operates; industry capacity; demographic changes; existing
government regulations and changes in, or the failure to comply with, government
regulations; liability and other claims asserted against the Company;
competition; changes in business strategy or development plans; the ability to
attract and retain qualified personnel, and other factors referenced in this
Prospectus. Certain of these factors are discussed in more detail elsewhere in
this Prospectus, including without limitation under the captions "Summary,"
"Risk Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and "Business." Given these uncertainties, prospective
investors are cautioned not to place undue reliance on such forward-looking
statements. The Company disclaims any obligation to update any such factors or
to publicly announce the result of any revisions to any of the forward-looking
statements contained herein to reflect future events or developments.

Dividends; Voting Rights of Preferred Holders if Dividends Not Paid. The
Company has never paid cash dividends on the Common Stock and does not
anticipate paying cash dividends on the Common Stock in the foreseeable future.
The declaration and payment of any cash dividends on the Common Stock in the
future will be determined by the Board of Directors in light of conditions then
existing, including the Company's earnings and its financial condition and
requirements. Dividends on the Common Stock do not accrue. See "DIVIDEND
POLICY."

Cumulative dividends accrue on the Series A Convertible Preferred
Stock from the date of original issue and will be payable quarterly when, as and
if declared by the Board of Directors out of funds legally available therefor.
There can be no assurance that the Company will be able to pay or that the Board
of Directors will declare or pay such dividends. Failure to declare and pay any
quarterly dividend within 90 days after the dividend payment date will result in
a reduction of the Conversion Price by $.50 per share in each instance (but not
below the par value of the Common Stock), and failure to declare and pay the
accumulated dividends for any four quarterly periods will result in the holders
of Series A Convertible Preferred Stock being entitled to certain voting rights.
See "DESCRIPTION OF SECURITIES -- Series A Convertible Preferred Stock."

Shares of Series A Convertible Preferred Stock are convertible, at the
option of the holders thereof, at a conversion price of $3.6396 per share of
Common Stock (so that each share of Series A Convertible Preferred Stock is
convertible into 2.748 shares of Common Stock). However, if the conversion
price of the Debentures is less than $3.6396,

-13-

<PAGE>
the conversion price of the Series A Convertible Preferred Stock will be reduced
and, accordingly, the number of shares of Common Stock issuable upon conversion
of Series A Convertible Preferred Stock will increase. In addition, the Company
may redeem the shares of Series A Convertible Preferred Stock under certain
circumstances. If the Company elects to redeem the shares of Series A
Convertible Preferred Stock, the holders thereof will have the option of
converting their shares of Series A Convertible Preferred Stock into shares of
Common Stock prior to the redemption date.

-14-

<PAGE>
PRICE RANGE OF COMMON STOCK

The Company's Common Stock is traded over-the-counter and is quoted on the
Nasdaq SmallCap Market. The Common Stock is also listed on the Chicago Stock
Exchange. The table below sets forth certain information with respect to the
high and low closing bid prices (rounded to the nearest hundredth) of the
Company's Common Stock during the twelve months ended January 28, 1995 and
January 27, 1996 and the subsequent interim periods, as quoted by Nasdaq. These
quotations represent inter-dealer prices without retail markups, markdowns or
commissions and may not represent actual transactions. They are also adjusted
for a reverse stock split of the Common Stock which occurred in fiscal 1995.

High Low
---- ---
Year Ended January 28, 1995
---------------------------

First Quarter $6.94 $3.75

Second Quarter $5.50 $3.50

Third Quarter $3.50 $2.25

Fourth Quarter $3.50 $1.43

Year Ended January 27, 1996
---------------------------

First Quarter $1.75 $1.19

Second Quarter $1.25 $ .63

Third Quarter $1.63 $.88

Fourth Quarter $2.00 $.75

Year Ended February 1, 1997
---------------------------

First Quarter $3.22 $1.56

Second Quarter $3.13 $1.81

Third Quarter (through October 4, 1996) $2.44 $1.75

The closing sale prices of the Series A Preferred Stock and the Common
Stock on October 4, 1996 as reported on the Nasdaq SmallCap Market were $6.75
and $1.78 per share.

Other than the Common Stock and the Series A Preferred Stock, none of the
Company's securities is publicly traded on any established securities market.

As of August 29, 1996, there were approximately 336 record holders of
Common Stock. This number does not include an indeterminate number of
beneficial holders of these securities whose shares are held by financial
institutions in "street name."

-15-
<PAGE>

CAPITALIZATION

The following table sets forth the capitalization of the Company (as well
as indebtedness of the Operating Subsidiaries) as of July 27, 1996, and as
adjusted to give effect to the sale by the Company of $40.0 million principal
amount of Debentures offered in the Debenture Offering and the application of a
portion of the estimated net proceeds thereof to repay the indebtedness under
the Revolving Credit Facilities as described under "Use of Proceeds." This
table should be read in conjunction with "Management's Discussion and Analysis
of Financial Conditions and Results of Operations" and the "Consolidated
Financial Statements" and the notes thereto included elsewhere in this
Prospectus.

As
Actual Adjusted(1)
------ --------
(in thousands)
Company Debt(2):
Current portion of Company long-term debt . . . . . . $1,147 $1,147
Installment notes payable . . . . . . . . . . . . . . 873 873
------ ------
Convertible Subordinated Debentures . . . . . . . . . 0 40,000
Total . . . . . . . . . . . . . . . . . . . . . . . 2,020 42,020
------ -------

Operating Subsidiary Debt(2):
Current portion of Operating Subsidiary long-term debt
2,124 2,124
Operating Subsidiary long-term debt, net of
current portion:
General Textiles revolving credit facility . . . . 19,012 0
Factory 2-U revolving credit facility . . . . . . . 7,735 0
Installment notes payable . . . . . . . . . . . . . 3,452 3,452
Subordinated notes . . . . . . . . . . . . . . . . 8,547 8,547
----- -----
Total Operating Subsidiary debt . . . . . . . . . 40,870 14,123
------ ------
Total consolidated long-term debt $42,890 $56,143
------- -------

Stockholders' Equity:
Series A convertible preferred stock, $.01 par value;
4,500,000 shares authorized, 3,727,415 shares
issued and outstanding, aggregate liquidation
preference of $37,270,000(3) . . . . . . . . . . . 28,838 28,838
Common stock, $.01 par value; 80,000,000 shares
authorized, 4,693,337 shares issued and outstanding 14 14
Additional paid-in capital . . . . . . . . . . . . . 21,714 21,714
Accumulated deficit . . . . . . . . . . . . . . . . . (21,702) (21,702)
------- --------
Total stockholders' equity . . . . . . . . . . 28,264 28,264
------ ------
Total consolidated capitalization $71,154 $84,407
Total debt to consolidated capitalization 60% 67%

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

(1) As adjusted for the sale of $40.0 million of Debentures in
the Debenture Offering (assuming no exercise of the over- allotment
option by the Underwriters) and the use of a portion of the net
proceeds to repay borrowings under the Revolving Credit Facilities.
See "Use of Proceeds."

(2) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" and Note 11
to the Notes to "Consolidated Financial Statements" of the Company for
a detailed description of the debt instruments outstanding.

(3) Includes additional paid-in capital attributable to the Series A
Preferred Stock.

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<PAGE>

DIVIDEND POLICY

The Company has never paid cash dividends on its Common Stock and does not
anticipate paying cash dividends on its Common Stock in the foreseeable future.
The declaration and payment of any cash dividends on its Common Stock in the
future will be determined by the Board of Directors in light of conditions then
existing, including the Company's earnings and its financial condition and
requirements. The Company paid $3.0 million and $2.0 million in dividends on
its Series A Preferred Stock during the fiscal years ended January 27, 1996 and
January 28, 1995, respectively. The payment of dividends and cash distributions
from the Company's Operating Subsidiaries to the Company are subject to certain
restrictions. See "Risk Factors -- Restrictions on Payments by Operating
Subsidiaries to the Company."

-17-
<PAGE>

SELECTED CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL DATA

Set forth below is (i) selected consolidated historical financial data for
the Company for the twelve months ended December 31, 1991, the four months ended
April 30, 1992, the twelve months ended April 30, 1993, the nine months ended
January 29, 1994, each of the twelve months ended January 28, 1995 and January
27, 1996 and the twelve and six months ended July 29, 1995 and July 27, 1996 and
(ii) selected consolidated pro forma financial data for the twelve months ended
January 27, 1996 and six months ended July 27, 1996. All of the selected
consolidated historical financial data are derived from audited financial
information except for operating data and the selected consolidated historical
financial data for the twelve and six months ended July 29, 1995 and July 27,
1996. The audited financial information for the nine months ended January 29,
1994 and each of the twelve months ended January 28, 1995 and January 27, 1996
is included elsewhere in this Prospectus. The results of General Textiles have
been consolidated with the Company's results since May 30, 1993. The results of
Factory 2-U have been consolidated with the Company's results since November 11,
1995. The selected consolidated historical and pro forma financial data should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Consolidated Financial Statements."

-18-
<PAGE>

Selected Consolidated Historical and Pro Forma Financial Data
(in thousands, except per share data)

Most Recent
Twelve Month Period
Historical Results Unaudited Results
----------------------------------------------------------------------------- -----------------

Twelve Four Twelve Nine Twelve Twelve Twelve Twelve
Months Months Months Months Months Months Months Months
Ended Ended Ended Ended Ended Ended Ended Ended
December 31, April 30, April 30, January 29, January 28, January 27, July 29, July 27,

1991 1992 1993 1994(1) 1995 1996(1) 1995 1996(1)
---- ---- ---- ------- ---- ---- ---- ----
Income Statement Data
---------------------

<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales $-- $-- $ -- $96,496 $146,520 179,820 154,848 218,804

Gross Profit -- -- -- 32,582 49,435 62,632 51,660 78,801

Operating Income (Loss) -- (55) (2,139) 4,547 2,608 5,153 533 8,874

Income (Loss) from
Continuing Operations -- (111) (3,239) 1,113 (354) 1,478 (2,245) 4,339

Income (Loss) from
Discontinued Operations (294) 242 (16,147) 87 (2,241) (500) (1,984) (500)

Extraordinary Gain -- -- -- 682 5,251 -- -- --

Net Income (Loss) (294) 131 (19,386) 1,882 2,656 978 (4,229) 3,839

Dividends on Preferred Stock -- -- 25 200 2,030 3,040 3,137 3,259

Net Income (Loss)
Applicable to Common
Stock (294) 131 (19,411) 1,682 626 (2,062) (7,366) 580

Net Income (Loss) from
Continuing Operations
Applicable to Common
Stock per Common
Share -- (0.12) (2.03) 0.30 (0.59) (0.39) (1.34) 0.25

Net Income (Loss) Applicable
to Common Stock per Common
Share(3)

Primary (0.53) 0.14 (12.07) 0.55 0.16 (0.51) (1.84) 0.13
Fully Diluted (0.53) 0.14 (12.07) 0.55 0.16 (0.51) (1.84) 0.13

Operating Data
--------------
EBITDA(4) -- (55) (2,519) 5,732 4,837 8,438 3,144 12,861
No. of Stores at
End of Period -- -- -- 81 97 131 102 140
Gross Profit Percentage -- -- -- 33.8% 33.7% 34.8% 33.4% 36.0%

Ratio of EBITDA to Combined
Cash Fixed Changes and
Preferred Stock
Dividends(5) -- -- -- 2.4x 1.3x 1.6x -- 2.1x

Ratio of Earnings to
Combined Fixed
Charges and Preferred
Stock Dividends(6) -- -- -- 1.3x -- -- -- 1.0x

<CAPTION>
Most Recent
Six Month Period Pro Forma
Unaudited Results Unaudited Results
----------------- -----------------

Three Three Twelve Six
Months Months Months Months
Ended Ended Ended Ended
July 29, July 27, January 27, July 27,

1995 1996 1996(2) 1996(2)
Income Statement Data ---- ---- ---- ----
---------------------

<S> <C> <C> <C> <C>
Net Sales 68,350 107,334 179,820 107,334

Gross Profit 22,565 38,734 62,632 38,734

Operating Income (Loss) (2,340) 1,381 5,153 1,381

Income (Loss) from

Continuing Operations (3,790) (929) (607) (1,555)

Income (Loss) from
Discontinued Operations -- -- -- --

Extraordinary Gain -- -- -- --

Net Income (Loss) (3,790) (929) (607) (1,555)

Dividends on Preferred Stock 1,520 1,739 3,040 1,739

Net Income (Loss)
Applicable to Common
Stock (5,310) (2,668) (3,647) (3,294)

Net Income (Loss) from
Continuing Operations
Applicable to Common
Stock per Common
Share (1.32) (0.62) (0.91) (0.76)

Net Income (Loss) Applicable
to Common Stock per Common
Share(3)

Primary (1.32) (0.62) (0.91) (0.76)
Fully Diluted (1.32) (0.62) (0.91) (0.76)
Operating Data
--------------
EBITDA(4) (915) 3,508 8,438 3,508
No. of Stores at
End of Period 102 140 131 140
Gross Profit Percentage 33.0% 36.1% 34.8% 36.1%

Ratio of EBITDA to Combined
Cash Fixed Changes and
Preferred Stock
Dividends(5) -- -- 1.2x --

Ratio of Earnings to
Combined Fixed
Charges and Preferred
Stock Dividends(6) -- -- -- --

</TABLE>

-19-
<PAGE>

Pro Forma
---------------------------
January 27, July 27, January 27, July 27,
1996 1996 1996(8) 1996(8)
---- ---- ---- -------
Balance Sheet Data
------------------

<S> <C> <C> <C> <C>
Working Capital (Deficiency) $ (186) 16,203 21,449 26,250

Total Assets 87,152 99,241 111,993 112,494

Long-Term Debt, Less Current

Portion 25,023 39,621 49,864 52,874

Preferred Stock 26,981 28,238 26,981 29,238

Common Stockholders' Equity 736 26 736 26

Common Stockholders' Equity
per Share(7) 0.18 0.01 0.18 0.01

</TABLE>

-20-

<PAGE>
Notes to Selected Consolidated Historical and Pro Forma Financial Data

(1) The results of General Textiles have been consolidated with the
Company's results since May 30, 1993. Therefore, the Company's
consolidated results for the nine months ended January 29, 1994
include General Textiles' results for eight months ended January 29,
1994. The results of Factory 2-U have been consolidated with the
Company's results since November 11, 1995. Therefore, the Company's
consolidated results for the twelve months ended January 27, 1996 and
July 27, 1996 include Factory 2-U's results for 2.5 months and 8.5
months, respectively. See Note 3 to the Notes to the "Consolidated
Financial Statements."

(2) The pro forma results give effect to the sale of $40.0 million of
Debentures offered in the Debenture Offering and the application of
the net proceeds by the Company. The pro forma adjustments reflect
those adjustments necessary to (i) eliminate the loss on discontinued
operations, (ii) eliminate interest on the Company's revolving credit
notes (in the amounts of $1.7 million and $1.3 million for the twelve
months ended January 27, 1996 and the six months ended July 27, 1996,
respectively), which are assumed to be unused during such periods
because of the availability of the Debenture Offering proceeds, and
(iii) give effect to the increase in interest expense arising from
the Debentures (in the amounts of $3.4 million and $1.7 million for
the twelve months ended January 27, 1996 and the six months ended
July 27, 1996, respectively), and the amortization of the debt
issuance costs related thereto (in the amounts of $356,000 and
$178,000 for the twelve months ended January 27, 1996 and the six
months ended July 27, 1996, respectively), with all transactions
treated as though the Debenture Offering occurred on January 29, 1995
and January 28, 1996, respectively. See Note 8 to the Notes to
Selected Consolidated Historical and Pro Forma Financial Data.

(3) Net income (loss) per common share on both a primary and fully
diluted basis is calculated by dividing net income (loss) applicable
to Common Stock by the weighted average number of shares outstanding
for each respective period. See Note 1 to the Notes to the
"Consolidated Financial Statements."

Weighted average shares and earnings per share amounts have been
restated for 1994 and 1995 to give retroactive effect to the
cancellation of contingent shares during 1995 and 1996. See Note 2
to the Notes to the "Consolidated Financial Statements."

(4) EBITDA (earnings before interest, taxes, depreciation and
amortization, extraordinary items and results of discontinued
operations) data is presented to reflect operating income from
continuing operations before non-cash items, and approximates the
cash available from continuing operations to cover interest expense
and other debt service. Such data is not an alternative to operating
income as an indication of operating performance or liquidity under
generally accepted accounting principles.

(5) EBITDA was insufficient to cover combined cash fixed charges and
preferred stock dividends by $111,000, $3.3 million, $1.8 million,
$3.4 million and $23,000 for the four months ended April 30, 1992,
the twelve months ended April 30, 1993, the twelve months ended July
29, 1995, the six months ended July 29, 1995 and the six months ended
July 27, 1996, respectively. On a pro forma basis, EBITDA was
insufficient to cover combined cash fixed charges and preferred stock
dividends by $649,000 for the six months ended July 27, 1996. All
activity related to the twelve months ended December 31, 1991 related
to discontinued operations. Cash fixed charges represent interest
expense and financing fees less debt discount amortization and
includes Debenture interest for pro forma periods presented. There
was no debt discount amortization for the twelve months ended
December 31, 1991, the four months ended April 30, 1992 or the twelve
months ended April 30, 1993. Debt discount amortization was $1.3
million, $1.2 million, $1.6 million, $809,000, and $1.6 million for
the nine months ended January 29, 1994, and for each of the twelve
months ended January 28, 1995, January 27, 1996, July 29, 1995, and
July 27, 1996, respectively. Debt discount amortization was $502,000
and $518,000 for the six months ended July 29, 1995 and July 27,
1996, respectively. On a pro forma basis, debt discount amortization
was $1.6 million for the twelve months ended January 27, 1996 and
$518,000 for the six months ended July 27, 1996.

(6) Earnings for the twelve months ended January 28, 1995 and January 27,
1996, for the twelve and six months ended July 29, 1995 and for the
six months ended July 27, 1996 were insufficient to cover fixed
charges and preferred stock dividends by $2.2 million, $1.6 million,
$5.4 million, $5.3 million and $2.7 million, respectively. However,
earnings for the twelve months ended July 27, 1996 were sufficient to
cover fixed charges and preferred stock dividend payments. Pro forma
earnings for the twelve months ended January 27, 1996 and the six
months ended July 27, 1996 were insufficient to cover fixed charges
and preferred stock dividends by $3.6 million and $2.4 million,
respectively.

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<PAGE>

(7) Common Stockholders' equity per common share is determined by
dividing stockholders' equity, net of equity related to preferred
stock, by the common shares outstanding at the end of the date
presented.

(8) The pro forma balance sheet data gives effect to the sale of $40.0
million of Debentures offered in the Debenture Offering and the
application of the net proceeds by the Company as if the same had
occurred on January 27, 1996 and July 29, 1996, respectively. The
pro forma adjustments give effect to the estimated current portion of
debt issuance costs added to current assets ($356,000 at both January
27, 1996 and July 27, 1996), the net increase in cash following the
payment of the revolving credit facilities ($21.3 million and $9.7
million at January 27, 1996 and July 27, 1996, respectively), the
estimated long-term portion of debt issuance costs added to
noncurrent assets ($3.2 million at both January 27, 1996 and July 27,
1996), the principal amount of the Debentures ($40,000,000 at both
January 27, 1996 and July 27, 1996) and the use of the Debenture
Offering proceeds to repay the outstanding indebtedness under the
revolving credit facilities ($15.2 million and $26.7 million at
January 27, 1996 and July 27, 1996, respectively).

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<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 information set forth under "Selected Consolidated Historical and Pro Forma
Financial Data" and "Consolidated Financial Statements."

General

Family Bargain Corporation (the "Company") operates 143 off-price retail
apparel and housewares stores (140 at July 27, 1996) under the names "Family
Bargain Center" and "Factory 2-U" in California, Arizona, Washington, New
Mexico, Oregon, Nevada and Texas. The Company is a holding company and relies
on its cash reserves and payments from its Operating Subsidiaries (General
Textiles and Factory 2-U) to finance its ongoing operating expenses, to pay its
outstanding indebtedness, to pay the dividends on its Series A Preferred Stock
and, in the future, to meet its principal and interest obligations on the
Debentures. In July 1992, affiliates of the Company acquired General Textiles
and immediately caused it to commence Chapter 11 Reorganization proceedings. In
December 1992, the Company purchased a majority interest in General Textiles.
Since May 1993, when the GT Reorganization Plan was declared effective and the
Company's equity ownership of General Textiles increased to 100%, the assets,
liabilities and results of operations of General Textiles have been consolidated
with those of the Company. In November 1995, the Company acquired Factory 2-U,
whose results have been consolidated with those of the Company since then.

In January 1994, the Company changed its fiscal year end to the Saturday
closest to January 31.

The Company's 113 Family Bargain Center stores and 30 Factory 2-U stores
sell primarily first quality, in-season clothing for men, women and children,
including nationally recognized brand name products, at prices which generally
are lower than the prices of competing discount and regional off-price stores.
Factory 2-U stores sell, in addition to clothing and apparel, housewares and
domestic items. The average selling price per item is approximately $6.00 and
the price of the most expensive item rarely exceeds $35.00. The Company's
stores sell merchandise at bargain prices by purchasing in-season, excess
inventory and close-out merchandise at substantially discounted wholesale prices
and set retail prices at mark-ups which pass along the savings to its customers.
Family Bargain Center stores average 11,000 square feet and Factory 2-U stores
average 19,000 square feet. The Company plans to continue to open new stores in
the seven western states in which it currently operates. During the fiscal year
ended January 27, 1996, the Company opened eight new Family Bargain Center
stores and, through the acquisition of Factory 2-U, acquired an additional 29
stores. In fiscal 1997, the Company plans to open up to 20 new stores, of which
13 have been opened as of September 1, 1996. The Company has closed one store
during its current fiscal year.

The Company is also continuing a program under which it renovates existing
stores or relocates them as superior sites become available in their markets.
During fiscal 1996, the Company renovated 21 stores and relocated one store. In
fiscal 1997, the Company plans to renovate and/or relocate up to five stores.
As of September 1, 1996, four stores had been relocated in fiscal 1997. Some of
the new or relocated Family Bargain Center stores will adopt the Factory 2-U
store format by increasing store size and expanding the selection of housewares
and domestic items.

Results of Operations

Six Months Ended July 27, 1996
Compared to the Six Months Ended July 29, 1995

Net sales (gross sales less sales tax and sales returns) were $107.3
million for the six months ended July 27, 1996 compared to $68.4 million for the
six months ended July 29, 1995, an increase of $38.9 million. Of the

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<PAGE>
total increase, $25.4 million was attributable to sales at Factory 2-U stores,
which were acquired in November 1995, $6.7 million was attributable to a 10.3%
increase in comparable store sales (sales at stores open throughout both
periods) and the remaining $6.8 million increase in sales was attributable to
sales at newly opened stores. As of July 27, 1996, there were 140 stores in
operation compared to 102 stores as of July 29, 1995.

Inventory levels increased by 57.7% during the six months ended July 27,
1996 compared to an increase of 33.2% during the six months ended July 29, 1995.
The higher rate of increase in the current period is primarily attributable to
particularly low stock levels at Factory 2-U stores at the beginning of the
current fiscal year (as a result of Factory 2-U's cash flow problems prior to
its acquisition by the Company) and increased stock levels at General Textiles
stores in response to higher comparable store sale levels.

Gross profit was $38.7 million for the six months ended July 27, 1996
compared to $22.6 million for the six months ended July 29, 1995, an increase of
$16.1 million. As a percentage of sales, gross profit was 36.1% for the six
months ended July 27, 1996 compared to 33.0% for the six months ended July 29,
1995. The increase in gross profit as a percentage of sales resulted from
reduced markdown activity purchases of inventory at generally lower wholesale
prices as compared to the prior comparable period (resulting in part from the
company's ability to receive trade credit from new vendors and the gradually
enhanced creditworthiness of the Company or Operating Subsidiaries) and low
markdown activity related to Factory 2-U inventory purchased since November
1995.

Selling and administrative expenses were $36.4 million for the six months
ended July 27, 1996 compared to $24.3 million for the six months ended July 29,
1995, an increase of $12.1 million. Of the total increase, $8.9 million was
attributable to increased overhead resulting from the acquisition of Factory 2-U
stores and $3.2 million was due to increased overhead related to new store
openings and the upgrading of equipment in existing stores since July 29, 1995.
As a percentage of sales, selling and administrative expenses decreased to 33.9%
for the six months ended July 27, 1996 from 35.5% for the six months ended July
29, 1995.

Amortization of goodwill was $939,000 for the six months ended July 27,
1996 compared to $629,000 for the six months ended July 29, 1995. The increase
of $310,000 was attributable to increased goodwill arising from the acquisition
of Factory 2-U.

Interest expense and financing fees were $2.3 million for the six months
ended July 27, 1996 compared to $1.5 million for the six months ended July 29,
1995. The increase of $860,000 was primarily attributable to the increased
interest related to the additional working capital needs as a result of the
expansion of the Company and debt assumed in the acquisition of Factory 2-U.

Net loss was $929,000 million for the six months ended July 27, 1996
compared to $3.8 million for the six months ended July 29, 1995. The net loss
applicable to Common Stock was $2.7 million for the six months ended July 27,
1996 compared to $5.3 million for the six months ended July 29, 1995.

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<PAGE>
Twelve Months Ended January 27, 1996
Compared to the Twelve Months Ended January 28, 1995

Net sales were $179.8 million for the twelve months ended January 27, 1996
compared to $146.5 million for the twelve months ended January 28, 1995, an
increase of $33.3 million. Of the total increase, $13.3 million was
attributable to the acquisition of Factory 2-U, $3.6 million was due to a 2.8%
increase in comparable Family Bargain Center store sales, and the remaining
$16.4 million increase in sales was due to the opening of new Family Bargain
Center stores. As of January 27, 1996, the Company operated 102 Family Bargain
Center stores (compared to 97 stores as of January 28, 1995) and 29 Factory 2-U
stores.
Gross profit was $62.6 million for the twelve months ended January 27,
1996 compared to $49.4 million for the twelve months ended January 28, 1995, an
increase of $13.2 million. Of the total increase, $4.6 million was attributable
to the acquisition of Factory 2-U. The remaining increase in gross profit was
due to the opening of new Family Bargain Center stores, an increase in
comparable Family Bargain Center store sales and improved gross profit as a
percentage of sales. As a percentage of sales, the gross profit was 34.8% for
the twelve months ended January 27, 1996 compared to 33.7% for the twelve months
ended January 28, 1995.

Selling and administrative expenses were $56.1 million for the twelve
months ended January 27, 1996 compared to $45.6 million for the twelve months
ended January 28, 1995, an increase of $10.5 million. Of the total increase,
$4.4 million was attributable to the acquisition of Factory 2-U. As a
percentage of sales, selling and administrative expenses were 31.2% for both the
twelve months ended January 27, 1996 and 31.1% for the twelve months ended
January 28, 1995.

Amortization of goodwill was $1,4 million for the twelve months ended
January 27, 1996 compared to $1.2 million for the twelve months ended January
28, 1995. The increase of $194,000 was attributable to the acquisition of
Factory 2-U.

Interest expense and financing fees were $3.7 million for the twelve
months ended January 27, 1996 compared to $2.8 million for the twelve months
ended January 28, 1995, an increase of $900,000. Of the total increase,
$100,000 was attributable to the acquisition of Factory 2-U. Of the remaining
increase, $500,000 was due to an adjustment to increase amortization of debt
discount associated with the subordinated notes issued in connection with the
GT Reorganization Plan, which resulted from the settlement of additional claims
and further acceleration of excess cash flow payments, as defined, during the
twelve months ended January 27, 1996.

Net income was $1.0 million for the twelve months ended January 27, 1996
compared to $2.7 million for the twelve months ended January 28, 1995. The net
loss applicable to Common Stock was $2.1 million for the twelve months ended
January 27, 1996 compared to net income applicable to Common Stock of $626,000
for the twelve months ended January 28, 1995. However, net income and net loss
applicable to Common Stock for the twelve months ended January 28, 1995 were
impacted by an extraordinary gain of $5.3 million partly offset by a loss from
discontinued operations of $2.2 million. There was no extraordinary gain in the
twelve months ended January 27, 1996, but the loss from discontinued operations
was $500,000. The Company and its Operating Subsidiaries had consolidated
income from continuing operations of $1.5 million in the twelve months ended
January 27, 1996 compared with a loss from continuing operations of $354,000 for
the twelve months ended January 28, 1995.

Twelve Months Ended January 28, 1995
Compared to Nine Months Ended January 29, 1994

Net sales for the twelve months ended January 28, 1995 were $146.5 million
compared to $96.5 million for the nine months ended January 29, 1994.
Comparable store sales increased approximately 2%.

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<PAGE>

Gross profit was $49.4 million for the twelve months ended January 28,
1995 compared to $32.6 million for the nine months ended January 29, 1994. As a
percentage of sales, gross profit for the twelve months ended January 28, 1995
was 33.7%, virtually the same as for the nine months ended January 29, 1994 of
33.8%.

Selling and administrative expenses were $45.6 million for the twelve
months ended January 28, 1995 compared to $27.2 million for the nine months
ended January 29, 1994. As a percentage of sales, selling and administrative
expenses were 31.1% for the twelve months ended January 28, 1995 compared to
28.2% for the nine months ended January 29, 1994. The increase in selling and
administrative expense as a percentage of sales was due primarily to the
accelerated store expansion, renovation and relocation program. During the
twelve months ended January 28, 1995, 21 new stores were opened, 18 stores were
renovated and 6 stores were relocated.

Amortization of goodwill was $1.2 million for the twelve months ended
January 28, 1995 compared to $796,000 for the twelve months ended January 29,
1994. The increase of $392,000 was attributable to the consolidation of General
Textiles due to the acquisition of control of General Textiles by the Company
upon General Textiles' emergence from reorganization in May 1993.

Interest expense was $2.8 million for the twelve months ended January 28,
1995 compared to $3.4 million for the nine months ended January 29, 1994. The
decrease in interest expense resulted from i) the Company's purchase of certain
General Textiles' indebtedness during the twelve months ended January 28, 1995
with a portion of the proceeds of the 1994 Offering and ii) the fact that the
interest expenses incurred during the nine months ended January 29, 1994 in
connection with debt securities sold in private placements between May through
September 1993 was not incurred during the twelve months ended January 28, 1995
(see "Liquidity and Capital Resources" below).

Loss from discontinued operations was $2.2 million for the twelve months
ended January 28, 1995 compared to income of $87,000 for the nine months ended
January 29, 1994. The increase in disposal costs resulted from increased legal
expenses and other costs related to discontinued operations.

There was an extraordinary gain of $5.3 million for the twelve months
ended January 28, 1995 compared to an extraordinary gain of $682,000 for the
nine months ended January 29, 1994.

Net income was approximately $2.7 million for the twelve months ended
January 28, 1995 compared to $1.9 million for the twelve months ended January
29, 1994. The net income applicable to Common Stock was $626,000 for the twelve
months ended January 28, 1995 compared to $1.7 million for the nine months ended
January 29, 1994.

Quarterly Results of Operations and Seasonality

The Company historically has realized its highest level of sales and
income during the third and fourth quarters of the fiscal year (the quarters
ending in October and January) as a result of the "Back to School" (August and
September) and Christmas (November and December) seasons. The Company incurred
a net loss in the quarter ended April 27, 1996, and based on historical second
quarter results, management believes the Company may incur a net loss for the
quarter ending July 27, 1996, but had net income for the quarter ended July 27,
1996.

The following table sets forth selected unaudited quarterly results of
operations of the Company. The operating results for any quarter are not
necessarily indicative of results of operations for any subsequent period.

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Quarter Ended
-------------

July Oct. Jan. April July Oct. Jan. April July
1994 1994 1995 1995 1995 1995 1996 1996 1996
---- ---- ---- ---- ---- ---- ---- ---- ----
(in thousands)

Consolidated Statement of Operations Data:

<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales 31,295 39,370 47,128 31,038 37,312 47,322 64,148 49,825 57,509

Cost of sales 20,841 25,915 31,488 21,501 24,284 30,393 41,010 32,342 36,258
------ ------ ------ ------ ------ ------ ------ ------ ------
Gross profit 10,454 13,455 15,640 9,537 13,028 16,929 23,138 17,483 21,251

Selling and administrative expenses 10,271 11,446 14,182 12,112 12,163 14,024 17,798 17,540 18,874
Amortization of goodwill 297 297 297 315 315 314 438 462 477
----- ----- ----- ----- ----- ----- ----- ----- ------

Operating income (loss) (114) 1,712 1,161 (2,890) 550 2,591 4,902 (519) 1,900
Interest expense and financing fees (871) (553) (626) (664) (786) (852) (1,373) (1,039) (1,271)
------ ------ ------ ------ ------ ------ ------- -------
Income (loss) from continuing operations
before income taxes, discontinued
operations and extraordinary gain (loss) (985) 1,159 535 (3,554) (236) 1,739 3,529 (1,558) 629

Income taxes -- -- (149) -- -- -- -- -- --
----- ----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from continuing operations (985) 1,159 386 (3,554) (236) 1,739 3,529 (1,558) 629

</TABLE>

Liquidity and Capital Resources

The Company

The Company itself has relatively little debt. However, each of the
Operating Subsidiaries has a secured revolving credit facility and other
indebtedness. In particular, General Textiles has a substantial amount of debt
which was issued in connection with the GT Reorganization Plan and in order to
provide funds at the time it emerged from reorganization in 1993.

At July 27, 1996, the Company itself had outstanding indebtedness of $2.0
million, comprised of $1.1 million related to the acquisition of Factory 2-U and
approximately $966,000 incurred in connection with the settlement of a lawsuit
arising from a previously discontinued distribution business (the "Mandel-Kahn
Settlement"). The Company issued 153,846 shares of Series A Preferred Stock to
an escrow account to secure this settlement. As permitted under this
settlement, the Company entered into an agreement to sell these shares for
$808,000 (before deduction of sales expenses) by November 30, 1996. The Company
also has annual dividend obligations of $3.5 million on its Series A Preferred
Stock (based on the shares outstanding on July 27, 1996).

Because the Company does not operate any business itself, it must rely on
payments from its Operating Subsidiaries and cash reserves to service its
indebtedness, pay the dividends on its Series A Preferred Stock and meet its
operating expenses. The GT Reorganization Plan and certain of General Textiles'
outstanding debt instruments (including the GT Revolving Credit Facility)
restrict General Textiles from paying dividends or making other distributions to
the Company without the approval of certain holders of indebtedness. In
addition, payments by Factory 2-U to the Company are limited under the Factory
2-U Revolving Credit Facility to payments pursuant to a management agreement and
a guarantee fee agreement. The Company receives payments from General Textiles
under a tax sharing agreement, a management agreement and under $15.0 million of
subordinated debt and $3.0 million of secured term debt. The Company also
receives payments from Factory 2-U under a management agreement (providing for a
fee of $46,667 per month, plus expenses, and additional amounts to the extent
Factory 2-U's EBITDA exceeds certain levels) and a guarantee fee agreement
(providing for a fee of $26,000 per month during fiscal 1997, $24,000 per month
during fiscal 1998 and, thereafter, monthly amounts declining over time to

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<PAGE>
$5,000 in fiscal 2009). During the quarter ended April 27, 1996, payments to
the Company from these sources totalled $1.1 million. The Company believes the
funds it is entitled to receive from the Operating Subsidiaries will be
sufficient to enable the Company to meet its expenses and debt service and pay
the dividends on the Series A Preferred Stock. See
"Risk Factors -- Restrictions on Payments by Operating Subsidiaries to the
Company.

General Textiles has a $25.0 million revolving credit facility (the "GT
Revolving Credit Facility"), under which it may borrow up to 65% of the value of
its eligible inventory (calculated at the lower of cost or market value) until
December 31, 1996 and, thereafter, up to 50%, 55% or 60%, based on the season,
of eligible inventory, plus a special purchase overadvance of up to $1.0
million. The GT Revolving Credit Facility expires in November 1998, bears
interest at prime plus 2% with regard to borrowings based on inventory and prime
plus 3% with regard to special purpose overadvances, and is secured by all the
assets of General Textiles. At January 27, 1996 and July 27, 1996, borrowings
under this facility were $9.9 million and $19.0 million, respectively. The
GT Revolving Credit Facility is secured by a lien on all the assets of General
Textiles and is guaranteed by the Company.

The Company will lend at least $10.0 million of the proceeds of the
Debenture Offering to General Textiles to be used by General Textiles as working
capital, including the repayment of the GT Revolving Credit Facility. General
Textiles may reborrow funds under this facility. See "Use of Proceeds."

General Textiles also has a total of $2.7 million of equipment borrowing
facilities, under which borrowings of $2.0 million were outstanding at July 27,
1996. On July 27, 1996, General Textiles also had $19.1 million of outstanding
Subordinated Notes, of which $15.0 million was owned by the Company, a $3.0
million secured term note, which was owned by the Company, and $4.9 million of
Subordinated Reorganization Notes and $17.3 million of Junior Subordinated
Reorganization Notes, both of which had been issued to creditors under the GT
Plan of Reorganization or to a lender at the time the GT Reorganization Plan was
consummated. The equipment facilities and the Secured Term Note (which is held
by the Company) are payable in installments and bear interest at prime plus 2%.
The Subordinated Notes (of which $15.0 million are owned by the Company and $4.1
million are held by third persons) and the Subordinated Reorganization Notes
mature in 2003 and do not bear interest. A portion of the Subordinated Notes
are amortized through annual contingent payments based on a percentage of excess
cash flow (as defined). The Junior Subordinated Reorganization Notes mature in
2005 and bear interest at the lesser of 6% per annum or 80% of General Textiles'
yearly EBITDA in excess of $10 million. No principal or interest payments on
the Junior Subordinated Reorganization Notes may be made until the Subordinated
Notes and the Secured Term Note are paid in full. Under certain circumstances,
General Textiles may be required to redeem the Junior Subordinated
Reorganization Notes for the lesser of their principal balance or 19% of the
market equity value (as defined) of General Textiles, payable at the option of
General Textiles in cash or General Textiles common shares. The carrying value
of the Subordinated Notes, the Subordinated Reorganization Notes and the Junior
Subordinated Reorganization Notes is less than their face value since the
carrying value reflects discounts due to the non-interest bearing character of
the Subordinated Notes and the Subordinated Reorganization Notes and the
currently non-interest bearing character of the Junior Subordinated
Reorganization Notes. The discounts on these instruments are amortized to
interest expense over their respective terms. On a quarterly basis, the Company
evaluates the carrying values of the Subordinated Notes, the Subordinated
Reorganization Notes and the Senior Subordinated Reorganization Notes based on
projected amortization schedules. These preliminary amortization schedules were
prepared in conjunction with the reorganization of General Textiles and included
an assumed growth factor. To the extent that the Company's growth exceeds such
estimates the discount on such debt will be adjusted thereby increasing the
related interest expense and carrying values.

In addition, in July 1996, General Textiles borrowed $2.0 million under a
term loan requiring monthly principal payments of $33,333 bearing interest at
prime plus 3% and maturing in July 2001.

Factory 2-U finances its operations through credit provided by its
suppliers (usually net 30 days) and a $10.0 million revolving credit facility
(the "Factory 2-U Revolving Credit Facility," together with the GT Revolving
Credit Facility, the "Revolving Credit Facilities"). Factory 2-U may borrow up
to the same varying percentages

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<PAGE>
of the value of its eligible inventory under this facility as General Textiles
may borrow under the GT Revolving Credit Facility. The facility expires in
November 1998, bears interest at prime plus 2%, is secured by all the assets of
Factory 2-U, and is guaranteed by the Company. At January 27, 1996 and July 27,
1996, borrowings under this facility were $5.2 million and $7.7 million,
respectfully.

The Company will lend at least $10.0 million of the proceeds of the
Debenture Offering to Factory 2-U to be used by Factory 2-U as working capital,
including the repayment of the Factory 2-U Revolving Credit Facility. Factory
2-U may reborrow funds under this facility. See "Use of Proceeds."

On July 9, 1996, Factory 2-U sold its former office and warehouse facility
in Nogales, Arizona and repaid in full a $2.3 million mortgage note which was
secured by the property. In connection with the Company's acquisition of
Factory 2-U in November 1995, approximately $5.0 million of trade debt was
rescheduled to be payable in 24 monthly installments, without interest. Of
this, approximately $2.9 million was outstanding at July 27, 1996.

The Company believes the Revolving Credit Facilities, together with cash
from operations, are sufficient to enable the Operating Subsidiaries to operate
at current levels and meet their debt service obligations (including those with
regard to debt held by the Company). Proceeds of the Debenture Offering,
together with cash from operations and borrowing availability under the
Revolving Credit Facilities, will provide funds with which to finance expansion
of, the Family Bargain Center and Factory 2-U retail store chains, and the
Company believes such funds therefore will satisfy the Company's and its
subsidiaries' currently anticipated long term needs.

The Debenture Offering

Pursuant to the Debentures Registration Statement, the Company is
conducting a public offering of $40.0 million aggregate principal amount ($46.0
million if the Underwriters' over-allotment option is exercised in full) of ___%
Convertible Subordinated Debentures due ________________,2006 (the "Debentures")
with estimated net proceeds to the Company, if completed, of $36.4 million
($41.9 million if the over-allotment is exercised in full). The net proceeds of
the Debenture Offering will be used as follows: (i) approximately $28.0 million
will be provided by the Company to the Operating Subsidiaries and used by them
as working capital, including repayment of the outstanding indebtedness ($26.7
million as of July 27, 1996 and $28.0 million as of September 4, 1996) under the
Revolving Credit Facilities (consisting of the GT Revolving Credit Facility and
the Factory 2-U Revolving Credit Facility, each as defined), (ii) up to $4.0
million will be used to purchase new fixtures for existing stores, and (iii) the
balance of approximately $8.5 million will be used by the Company and the
Operating Subsidiaries for general working capital purposes. The Operating
Subsidiaries may reborrow funds under the Revolving Credit Facilities. Uses of
additional working capital may include the purchase of existing indebtedness of
the Operating Subsidiaries or shares of outstanding Series A Preferred Stock in
the open market from time to time. In addition, the Company may use at least
part of the additional working capital and additional borrowing availability
under the Revolving Credit Facilities to accelerate its store opening schedule,
obtain lower prices from certain suppliers, obtain credit from a greater number
of suppliers, and obtain overseas merchandise at lower prices by using letters
of credit to purchase directly from overseas vendors. The Company believes that
these latter steps, if implemented, will result in either higher gross margins
or increased pricing flexibility, or both.

The Debentures will be convertible, at the option of the holders, at any
time on or prior to maturity, unless previously redeemed, into shares of the
Company's Common Stock, par value $.01 per share (the "Common Stock"), at a
conversion price of $__.__ per share (equivalent to a conversion rate of ___
shares per $1,000 principal amount of Debentures), subject to adjustment to
prevent dilution. The Company has applied to have the Debentures quoted on the
Nasdaq SmallCap Market under the symbol "FBARG."

Interest on the Debentures is payable semi-annually in arrears on
February 15 and August 15 of each year, commencing on February 15, 1997. The
Debentures will be redeemable at the Company's option, in whole at any

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<PAGE>
time on or after October__, 1998 if the closing price of the Common Stock on 20
out of 30 consecutive trading days ending not more than 10 days prior to the
date of the notice of redemption is at least 137.5% of the conversion price then
in effect, and in whole or in part at any time after October __, 1999, at the
following redemption prices:

Twelve Months
Beginning October , Percentage
-------------------- ----------

1999 107%
2000 105%
2001 103%
2002-thereafter 100%

The Debentures will be unsecured obligations of the Company, and will be
subordinated to all existing and future Senior Indebtedness (as defined) of the
Company and may be effectively subordinated to existing and future liabilities
of the Company's subsidiaries. The Indenture (as defined) will not restrict the
incurrence of any other indebtedness or liabilities by the Company or its
subsidiaries. See "Capitalization."

Capital Expenditures

The Company's planned future capital expenditures include costs to open new
Family Bargain Center and Factory 2-U stores, and to renovate and/or relocate
existing stores. Management believes that future expenditures will be financed
from internal cash flow, working capital (possibly including a portion of the
proceeds of the Offering) and the Revolving Credit Facilities. As of
July 27, 1996, the Company had $2.0 million outstanding under the equipment
facilities for capital expenditures related to the acquisition of point-of-sale
systems.

Inflation

In general, the Company believes that it will be able to offset the effects
of inflation by increasing operating efficiency, by monitoring and controlling
expenses and increasing prices to the extent permitted by competitive factors.

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<PAGE>
BUSINESS

Family Bargain Corporation (the "Company") operates 143 off-price retail
apparel and housewares stores under the names " Family Bargain Center" and
"Factory 2-U" in California, Arizona, Washington, New Mexico, Oregon, Nevada and
Texas. The Company purchased Factory 2-U in November 1995.

Typical customers of the Company's stores are low-income families,
including agricultural, service and other blue collar workers, a significant
portion of whom are of Hispanic origin or are members of other ethnic groups.
The Company's store merchandising selection, everyday low price strategy and
store format are designed to reinforce the concept of value and enhance the
customers' shopping experience, while maximizing inventory turns.

Operating Strategy
The Company seeks to be the leading off-price apparel and housewares
retailer to lower income customers in the markets it serves. The major elements
of its operating strategy include:

Provide First Quality Merchandise at Bargain Prices: The Company's
stores sell first quality merchandise at bargain prices by purchasing in-
season, excess inventory and close-out merchandise at substantially
discounted wholesale prices and set retail prices at mark-ups which pass
along the savings to their customers.
Target Underserved Market Segments, including the Hispanic Market:
The Company's stores target customers who are underserved in many markets.
Typical customers are low-income families, including agricultural, service
and other blue collar workers, a significant portion of whom are of
Hispanic origin or members of other ethnic groups. The Company's store
merchandise selection and purchasing and marketing programs are tailored to
the purchasing patterns of customers in each store.

Maximize Inventory Turns: General Textiles and Factory 2-U emphasize
inventory turn in their merchandise and marketing strategies. Merchandise
presentation, an everyday low price strategy, frequent store deliveries,
and advertising programs are designed to maximize inventory turns.

Low Operating Costs: The Company's stores maintain low operating
costs primarily through their self-service formats, use of part-time labor,
selection of locations with low rental expenses and overall focus on cost
controls.

Improve Gross Margins and Pricing Flexibility: Management believes
that the availability of the net proceeds of the Debenture Offering and the
resulting additional borrowing availability under the Revolving Credit
Facilities will enable the Company to obtain lower prices from suppliers,
obtain credit from a greater number of suppliers, and obtain overseas
merchandise at lower prices by using letters of credit to purchase directly
from overseas vendors. The Company believes that these latter steps, if

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<PAGE>
implemented, will result in either higher gross margins or increased
pricing flexibility, or both. See "The Debenture Offering."

Expansion Plans

Opening of New Stores: The Company plans to continue to open new stores in
the seven western states in which General Textiles and Factory 2-U currently
operate. During the fiscal year ended January 27, 1996, General Textiles opened
eight new stores. The November 1995 acquisition of Factory 2-U resulted in the
addition of 29 stores. In fiscal 1997, the Company plans to open up to 19 new
stores (which may increase to as many as 25 stores if the Offering is
completed), of which 13 have been opened as of September 1, 1996. The Company
has closed one store during its current fiscal year. In fiscal 1998, the
Company plans to open up to an additional 20 stores (which may increase to as
many as 45 stores if the Debenture Offering is completed). Average store
opening expenses for fixtures, leasehold improvements and grand opening costs
are approximately $100,000. The Company's cost for the initial inventory in an
average new store is approximately $240,000.

Renovation and Relocation Program: The Company is continuing a program
under which it renovates existing stores or relocates them as superior sites
become available in their markets. Some of the new or relocated Family Bargain
Center stores will adopt the Factory 2-U store format by increasing store size
and expanding the selection of housewares and domestic items. Store renovations
generally include installing new fixtures, redesigning layouts and refurbishing
floors and walls. The average expenditure per store renovation or relocation is
$50,000. During the fiscal year ended January 27, 1996, the Company renovated
21 stores and relocated one store. In fiscal 1997, the Company plans to
renovate and/or relocate up to five stores. As of September 1, 1996, four
stores had been relocated in fiscal 1997. In addition, the Company intends to
purchase new store fixtures for all of its stores to add to the appearance,
accessibility and quantity of merchandise displayed to its customers. See "Use
of Proceeds."

Customers
The Company's primary customers are families with annual household income
of under $25,000, many of whom are employed in the agricultural sector or are
blue collar workers. A significant portion of the Company's customers are of
Hispanic origin or members of other ethnic groups including African-Americans,
Asians and Native Americans. According to the U.S. Bureau of the Census, the
Hispanic population in the states where the Company's stores are located
(California, Oregon, Washington, Arizona, New Mexico, Nevada, and Texas) grew
from 5.7 million in 1980 to 9.4 million in 1990, a 65% increase. The overall
population for these states grew by 24% in the same period. The Hispanic
population in the states where the Company's stores are located is projected to
grow by 25%, from 10.6 million to 13.2 million, in the period from 1993 to 2000
(according to the U.S. Bureau of Census). The overall population for these
states is projected to grow by 12% in the same period. The Census projections
through 2020 reflect the Hispanic population in these states continuing to grow
at approximately twice the rate of the total population.

Purchasing

The Company purchases merchandise from approximately 1,000 domestic
manufacturers, jobbers, importers and other vendors. Payment terms are
typically net 30 days. The 10 largest vendors supply approximately 13% of the
Company's merchandise. The Company continually adds new vendors and does not
maintain long-term or exclusive purchase commitments or agreements with any
vendor. The Company has generally not had difficulty locating and purchasing
appropriate apparel and other merchandise for its stores. The Company's general
merchandise managers, merchandise managers and buyers seek to purchase in-season
goods and first-run and last-run merchandise at substantial discounts to normal
wholesale pricing. Management believes that there are a substantial number of
additional sources of supply of first quality, off-price apparel goods and
expects that it will be able to meet its increased inventory needs as the
Company expands.

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<PAGE>

Following completion of the Debenture Offering, Management believes it will
be able to obtain lower prices from certain suppliers, obtain credit from a
greater number of suppliers, and obtain overseas merchandise at lower prices by
using letters of credit to purchase directly from overseas vendors.

In-Season Goods. Unlike traditional department stores and discount
retailers, which primarily purchase merchandise in advance of the selling season
(for example, back-to-school clothing is purchased by March), the Company
purchases approximately 70% of its merchandise in-season. In-season purchases
generally represent close-outs of vendors' excess inventories remaining after
the traditional wholesale selling season and are often created by other
retailers' order cancellations. Such merchandise is typically available at
prices below wholesale. Management believes that such in-season buying practices
are well suited to the Company's customers, who tend to make purchases on an
as-needed basis later into a season. The Company's in-season buying practice is
facilitated by its ability to process and ship merchandise through its
distribution center to its stores, usually within two or three days of receipt
from the vendor, and to process a large number of relatively small purchase
orders. Management believes that General Textiles and Factory 2-U are desirable
customers for vendors seeking to liquidate inventory because they can take
immediate delivery of large quantities of in-season goods. Furthermore, the
Company rarely requests markdown concessions, advertising allowances or special
shipping and packing procedures, insisting instead on the lowest possible price.

First-run and Last-run Merchandise. Approximately 10% of the Company's
purchases consist of "first-run" and "last-run" merchandise. To ensure product
consistency, manufacturers typically produce a preliminary or "first-run" of an
item. Additionally, manufacturers will produce "last-runs" of certain items to
fill out production schedules, maintain stock for potential customers' reorders,
convert excess fabric to finished goods and keep machinery in use. Manufacturers
occasionally designate such first and last runs as "irregulars" to differentiate
such goods from full price merchandise or to indicate that such merchandise may
contain minor imperfections (which do not affect the wearability of the items),
and typically such merchandise may be purchased at prices below wholesale.

Manufacturers ship goods directly to the Company's San Diego distribution
center or, in the case of east coast vendors, to the Company through its east
coast freight consolidator. Goods received at the Company's distribution center
are generally shipped to its stores using independent trucking companies within
two to three days of their arrival. The Company generally does not store goods
from season to season.

Merchandising and Marketing

The Company's merchandise selection, pricing practices and store formats
are designed to reinforce the concept of value and maximize customer enjoyment
of the shopping experience. The Company's stores offer their customers a
diverse selection of primarily first quality, in-season merchandise at prices
which generally are lower than those of competing discount and regional
off-price stores in their local markets. Nearly all of their merchandise
carries brand name labels, including nationally recognized brands. The Company
uses an everyday low price strategy with an average selling price per item of
approximately $6.00 and with the prices of the most expensive goods rarely
exceeding $35.00. For Family Bargain Center stores, men's, women's and
children's apparel each account for approximately 30% of sales, with the
remainder, approximately 10%, consisting of footwear and domestic items. For
Factory 2-U stores, men's, women's and children's apparel each account for
approximately 20% of sales, domestic items (such as sheets, towels and blankets)
account for approximately 22% of sales, with the remainder, approximately 18% of
sales, consisting of footwear, housewares and toys.

The Company delivers new merchandise to its stores at least once per week
to encourage frequent shopping trips by its customers and to maximize the rate
of inventory turn. As a result of its purchasing practices, store inventory may
not always include a full range of colors, sizes and styles in a particular
item. Management believes, however, that price, quality and product mix are more
important to the Company's customers than the availability of a specific item at
a given time.
The Company emphasizes inventory turn in its merchandising and marketing
strategy. Merchandise presentation, everyday low prices, frequent store
deliveries, staggered vendor shipments, promotional advertising, store-tailored
distribution and prompt price reductions on slower moving items all target rapid
inventory turn. The

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<PAGE>
Company believes that the pace of its inventory turn leads to increased profits,
reduced inventory markdowns and efficient use of capital.
The Company's San Diego administrative headquarters receives daily store
sales and inventory information from point-of-sale computers located at each of
its 143 stores. This data is reported by S.K.U. (stock keeping unit), enabling
management to tailor purchasing and distribution decisions. A chain-wide
computer network also facilitates communications between the administrative
headquarters and stores, enabling management to provide store management with
immediate pricing and distribution information.

The Company's stores are characterized by easily accessible merchandise
displayed on bargain tables, hanger racks and open shelves, brightly colored
pennants and signage and the playing of locally popular music. Prices are
clearly marked, usually displayed in whole dollars. A comparable full retail
price is often noted on price tags. Most stores display signs in Spanish and
English and are staffed with bilingual store personnel. Stores have "gala"
grand openings and, on occasion, feature outdoor sidewalk promotions with live
music and other festive activities. To reach potential customers, in 1995
management initiated a major shift in its advertising program from use of
extensive radio to the development of full-color insert tabs showing actual
photos of its merchandise. These tabs, which are delivered to the consumer as
newspaper inserts and marriage-mail drops, have attracted a new and broader base
of customers into the stores. Other advertising programs include television and
outdoor promotional activities.
The Company's stores emphasize customer satisfaction to develop customer
loyalty and generate repeat sales. If a customer is not completely satisfied
with any purchase, the Company's stores will unconditionally make a full refund
or exchange. Virtually all sales are for cash, although checks and credit cards
are accepted. The Company does not issue its own credit card, but does offer a
no-cost, full-refund layaway program. Upon the acquisition of Factory 2-U, the
Company discontinued the Factory 2-U credit card. During the fiscal year 1997,
management intends to implement the layaway program in the Factory 2-U stores.
The layaway program is an important means for the Company's customers, many of
whom do not possess credit cards, to purchase goods over time. Layaways account
for approximately 10% of the Company's sales.
Approximately 59% of the Company's sales occur in its third and fourth
quarters, during the back-to-school (August and September) and Christmas
(November and December) seasons. See "Management's Discussion and Analysis of
Financial Conditions and Results of Operations -- Quarterly Results of
Operations and Seasonality."

The Stores

The Company currently operates 143 stores located in seven western states.
Stores are primarily located in rural and lower income suburban communities and,
to a lesser extent, in metropolitan areas. Most stores are located in strip
shopping centers, where occupancy costs are most favorable. As of September 1,
1996, store locations were as follows:

Strip
State Center Downtown Other
----- ------ -------- -----
California 78 59 12 7
Arizona 34 30 4 0
Washington 7 3 3 1
New Mexico 9 8 0 1
Nevada 4 4 0 0
Oregon 8 7 0 1
Texas 3 2 1 0
-- --- -- --
143 113 20 10
==== === == ==

Family Bargain Center stores range in size from approximately 2,650 square
feet to approximately 35,000 square feet, with the average being approximately
11,000 square feet. Factory 2-U stores range in size from approximately 11,000
square feet to 41,000 square feet, averaging approximately 19,000 square feet.
Management continually reviews the ability of stores to provide positive
contributions to the Company's operating results and may

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<PAGE>
elect to close stores which do not meet performance criteria. Costs associated
with closing stores, consisting primarily of the recognition of remaining lease
obligations and provisions to reduce assets to net realizable value, are charged
to operations during the fiscal year in which the determination is made to close
a store.

The Company's stores typically employ one store manager, two assistant
store managers, and seven to ten sales associates, most of whom are part-time
employees. New store managers are trained in all aspects of store operations
through a Management Training Program on location at stores. The average annual
compensation for store managers is approximately $25,000, including a bonus of
$2,000. The Company often promotes experienced assistant store managers to fill
open manager positions. Other store personnel are trained on site. Training
films and seminars are also utilized periodically to cover various topics,
including merchandising, loss prevention and customer relations.

The Company's store employees participate in an employee bonus pool under
which they are awarded bonuses upon achieving productivity and efficiency
objectives. For the twelve months ended January 27, 1996, approximately 1,168
eligible employees earned an aggregate of approximately $803,000 under the bonus
program. The Company believes that the employee bonus program is an important
incentive for its employees, helps reduce employee turnover and lowers costs.
Employees become eligible to participate in the bonus pool after 90 days of
employment.

Management believes store opening and operating costs are low compared to
those of similar retailers due to the selection of low rent store locations, a
self-service format, use of basic fixtures and use of part-time employees
whenever possible. The Company generally leases previously occupied sites on
terms which it believes are more favorable than those available for newly
constructed facilities. After signing a store lease, a store opening team
prepares the store for opening by installing fixtures, signs, bargain tables,
racks, dressing rooms, checkout counters, cash register systems and other items.
The district manager and store manager arrange the merchandise according to the
standard store layout and train new personnel before and after the store is
opened. The Company selects store sites based on demographic analysis of the
market area, sales potential, local competition, occupancy expense, operational
fit and proximity to existing store locations. Store opening preparations
generally take up to two weeks. Typical new store opening expenses for
fixtures, leasehold improvements and grand opening are approximately $100,000.
The Company's cost for the initial inventory in an average new store is
approximately $240,000.

The Company has an ongoing program to renovate and relocate stores. A
store is renovated when management believes that an improvement to the store's
physical appearance will enhance sales. Store renovations include installing
new fixtures, redesigning layout and refurbishing floors and walls. Renovated
stores have historically experienced increased sales, enabling the Company to
rapidly recover renovation costs. A store is considered for relocation when a
superior location becomes available in its market area. The average expenditure
for a store renovation or relocation is $50,000.

The Company, General Textiles and Factory 2-U maintain commercial
liability, fire, theft, business interruption and other insurance policies.

Competition

The Company operates in a highly competitive marketplace. The Company's
stores compete with large discount retail chains such as Wal-Mart, K-Mart,
Target and Mervyn's, and with regional off-price chains, such as MacFrugal's,
some of which have substantially greater resources than the Company. They also
compete with independent and small chain retailers and flea markets (also known
as "swap meets") which serve the same low and low-middle income market as the
Company. Management believes that the principal competitive factors in the
Company's markets are price, quality and site location and that the Company is
well positioned to compete on the basis of these factors.

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<PAGE>

Employees

As of September 1, 1996, General Textiles and Factory 2-U employed 2,820
persons, consisting of 2,696 store employees and store field management (1,963
were part-time), 124 executives and administrative employees and 61 warehouse
employees. The Company also employs 12 people in its New York executive offices
who provide strategic and financial planning for the Company and corporate
oversight of General Textiles and Factory 2-U.

None of the Company's employees is subject to any collective bargaining
agreements and management considers its relations with its employees to be good.

Trademarks

Except for the trade names "Family Bargain Center" and "Factory 2-U," which
are federally registered trademarks, the Company, General Textiles and Factory
2-U do not utilize any other material trademarks in their business.

Government Regulation

The Company's operations are subject to various federal, state and local
laws, regulations and administrative practices affecting its business, and the
Company must comply with provisions regulating various matters, including equal
employment and minimum wages. The Company believes that the compliance burdens
and risks relating to such laws and regulations do not materially adversely
affect the Company.

Effective October 1996, federal law requires employees to increase the
minimum wage paid to employees from $4.25 to $4.75 and, effective September
1997, from $4.75 to $5.15. While the Company may be able to raise prices to
offset any increases in the minimum wage, there is no assurance that it will be
able to do so. Nonetheless, the increase in the minimum wage should result in
increased purchasing power for certain customers of the Company.

In addition, in August 1996, federal legislation was passed that restricts
the availability of welfare and certain other benefits to illegal immigrants and
to legal immigrants who are not yet citizens. While states may choose to
continue to provide such benefits, California appears unlikely to do so. A
portion of the Company's customers reside in California and are believed to
receive welfare benefits. A portion of these customers are expected to be
affected by this change in legislation. The Company currently cannot assess the
impact of this legislation.

Discontinued Operations

In January 1992, the Company purchased C-B/Murray Corporation, Inc.
("C-B/Murray") and Mandel-Kahn Industries, Inc. ("Mandel-Kahn"), both wholesale
distribution companies, from Bastian Holdings, Inc. ("Bastian Holdings") and
Kabushi Investments Limited ("Kabushi") in exchange for a controlling interest
in the Company. Bastian Holdings was then owned by Benson A. Selzer, Chairman
and a Director of the Company and Kabushi is owned by a trust whose
beneficiaries include the children of Joseph Eiger, Executive Vice President and
a Director of the Company. As a result of unexpected losses, in November 1992,
C-B/Murray filed for Chapter 11 Reorganization and was liquidated. Mandel-Kahn
was sold to an affiliate in June 1993 and was liquidated. The Company has no
remaining involvement in the distribution business.

From April 1992 until March 1993, the Company, through its wholly-owned
subsidiary, DRS Real Estate, Inc. ("DRE"), was engaged in real estate
development. The Company has no remaining involvement in the real estate
business.

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<PAGE>

Properties

The Company operates 143 retail stores located in California, Arizona,
Washington, New Mexico, Oregon, Nevada and Texas, under various operating leases
with third parties. The leases are separately negotiated and are not uniform.
The store locations include strip centers, downtown business districts, and
stand alone sites. Family Bargain Center store sizes range from approximately
2,650 square feet to approximately 35,000 square feet, averaging 11,000 square
feet, while Factory 2-U store sizes range from approximately 11,000 square feet
to approximately 41,000 square feet, averaging 19,000 square feet. Typical
lease terms are for five years with renewal options. Approximately two-thirds
of the leases are "triple net leases" under which the Company is required to pay
insurance, real estate taxes and maintenance costs. Most stores have a fixed
rent, although certain leases require the Company to pay minimum monthly rents
and a percentage of sales in excess of a certain sales level. The current
annual rent expense for the 143 stores is approximately $12.8 million.

The headquarters of General Textiles and Factory 2-U is located in a
168,000 square foot facility at 4000 Ruffin Road, San Diego, California. This
facility consists of 11,500 square feet of office space, a 6,500 square foot
retail store and a 150,000 square foot warehouse and distribution center. This
facility is leased for a term of 12 years expiring in September 2005. The lease
provides for annual base rent at an average of $606,000 over the lease term.
The 168,000 square feet currently leased includes approximately 59,000 square
feet added during March 1996 and incorporated into the original lease on the
same terms and conditions as the former lease.

The executive offices of the Company are located at 315 East 62nd Street,
New York, New York in space leased by the Company pursuant to a lease which
expires December 31, 1998. The annual base rent under that lease is
approximately $184,000.

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<PAGE>
MANAGEMENT

The following table sets forth the executive officers and directors of the
Company, General Textiles, and Factory 2-U as of September 1, 1996. The Company
has a classified Board of Directors, under which its nine members are divided
into three classes. The term of office of each Director in a given class
expires at the third annual meeting of stockholders following his election. The
classification of the Board of Directors was implemented by the Company in 1994
and, accordingly, the initial terms of six of the nine directors were for less
than three years.

DIRECTOR'S
NAME AGE PRINCIPAL POSITION TERM EXPIRES(1)
---- --- ------------------ ------------

<S> <C> <C> <C>
John A. Selzer 41 Chief Executive Officer, President, 1996
Assistant Secretary and Director

William W. Mowbray 57 Chief Operating Officer and Director; 1997
President and Chief Executive Officer
of General Textiles and Factory 2-U

Benson A. Selzer 75 Chairman and Director 1997

Joseph Eiger 65 Vice Chairman, Executive Vice 1996
President, Secretary and Director
Jeffrey C. Gerstel 32 Executive Vice President, Finance;
Senior Vice President of General
Textiles and Factory 2-U

John J. Borer III 39 Director 1997

Edwin C. Nevis 70 Director 1996(1)

Francis G. Warburton 67 Director 1996

Barton P. Ferris, Jr. 56 Director 1996(1)

Mary McNabb 47 Senior Vice President and General
Merchandising Manager of General
Textiles and Factory 2-U

Richard G. Lange 53 Senior Vice President and Store
Operations of GT and Factory 2-U

William F. Cass 47 Vice President of Planning and
Logistics of General Textiles and
Factory 2-U

James M. Baker 42 Chief Financial Officer
of General Textiles and Factory 2-U

</TABLE>

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

(1) Although the terms of Messrs. J. Selzer, Nevis and Ferris were through
1995, in the absence of an annual meeting and their re-election or
replacement, they have remained as directors until re-elected or replaced
at the 1996 Annual Meeting of Shareholders, which the Company intends to
hold in the Winter of 1996-1997. The Company intends that Messrs. Eiger and
Warburton, whose terms expire in 1996, will be subject to re-election at
the 1997 Annual Meeting and that Messrs. Mowbray, B. Selzer and Borer,
whose terms expire in 1997, will be subject to re-election at the 1998
Annual Meeting.

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<PAGE>
The business experience of each of the directors and executive officers is
as follows:

JOHN A. SELZER, Chief Executive Officer, President and Director. For more
than the past five years, Mr. Selzer has been engaged in merchant and investment
banking and corporate management activities. His activities have concentrated
on situations involving financially and/or operationally troubled companies. He
has been a Director of the Company since January 1992, its Chief Executive
Officer since March 1992, and its President since January 1993. He has been a
Director of General Textiles since its acquisition in July 1992 (at which time
it filed for Chapter 11 Reorganization and emerged from Chapter 11
Reorganization on May 28, 1993). He served as Secretary and a Director of Tyco
Toys, Inc. ("Tyco"), a publicly held company, from December 1988 until July
1991. Mr. Selzer served in various capacities as an officer and director of the
following companies or their affiliates, in addition to General Textiles, which
filed for Chapter 11 Reorganization within the past five years: C-B/Murray
Corporation, Inc. ("C/B Murray"), Mandel-Kahn, American Specialty Equipment
Corp. ("American Specialty"), and Canadian's Corp. John A. Selzer is the son of
Benson A. Selzer.

WILLIAM W. MOWBRAY, Chief Financial Officer and Director of the Company and
President and Chief Executive Officer of General Textiles and Factory 2-U. Mr.
Mowbray has served as Chief Financial Officer of the Company from May 1994 to
September 1996, as Chief Operating Officer since September 1996 and as a
Director since November 1994. Mr. Mowbray has served as President and Chief
Executive Officer of General Textiles since June 1995. Prior to being named
President of General Textiles, he served as Executive Vice President and Chief
Financial Officer of General Textiles since July 1991. General Textiles filed
for Chapter 11 Reorganization in July 1992 and emerged from Chapter 11
Reorganization on May 28, 1993. Prior to joining General Textiles, Mr. Mowbray
was employed from July 1990 to July 1991 as Chief Financial and Operating
Officer for Casfam, Inc., an off-price lingerie retailer. From June 1986
through June 1990, he was an independent management consultant to retail
clients. From November 1981 to June 1986, Mr. Mowbray was Senior Vice President
and Chief Financial Officer of Clothestime, Inc.

BENSON A. SELZER, Chairman and Director. Mr. Selzer has for more than the
past five years been engaged in merchant and investment banking and corporate
management activities. His activities have concentrated on situations involving
financially and/or operationally troubled companies. He has been Chairman and a
Director of the Company since January 1992. He has been a Director of General
Textiles since its acquisition in July 1992 (at which time it filed for Chapter
11 Reorganization and emerged from Chapter 11 Reorganization on May 28, 1993).
He was Chairman of the Board and a Director of Tyco from September 1988 until
July 1991. Mr. Selzer served in various capacities as an officer and director
of the following companies or their affiliates, in addition to General Textiles,
which filed for Chapter 11 Reorganization within the past five years:
C-B/Murray, American Specialty, and Canadian's Corp. Benson A. Selzer is the
father of John A. Selzer. Benson A. Selzer and Joseph Eiger have been business
associates in a number of business ventures during the past 20 years.

JOSEPH EIGER, Vice Chairman, Executive Vice President and Director. Mr.
Eiger has been engaged, for more than the past five years, as a corporate
manager and entrepreneur who has been involved in numerous acquisitions,
divestitures and financings. His activities have concentrated on situations
involving financially and/or operationally troubled companies. He has been Vice
Chairman, Executive Vice President and a Director of the Company since January
1992. He has been a Director of General Textiles since its acquisition in July
1992 (at which time it filed for Chapter 11 Reorganization and emerged from
Chapter 11 Reorganization on May 28, 1993). Mr. Eiger served in various
capacities as an officer and director of the following companies or their
affiliates, in addition to General Textiles, which filed for Chapter 11
Reorganization within the past five years: C-B/Murray, American Specialty and
Canadian's Corp.

JEFFREY C. GERSTEL, Executive Vice President, Finance of the Company and
Senior Vice President of General Textiles and Factory 2-U. Mr. Gerstel jointed
the Company in September 1992 and served as Vice President -- Finance of the
Company from January 1994 until December 1995. In August 1996, Mr. Gerstel
rejoined the Company in his current positions. Mr. Gerstel initially joined
General Textiles in April 1990 and became Senior Vice President in February
1992. Mr. Gerstel served as a director of General Textiles from December 1990
to July 1992. General Textiles filed for Chapter 11 Reorganization in July 1992
and emerged from Chapter 11 Reorganization on May 28, 1993. From 1988 to 1990,
Mr. Gerstel was a corporate finance associate for Elders Finance Inc., an
Australian based merchant bank. From 1986 to 1988, he was a member of the
mergers and acquisitions group of Smith Barney, Harris Upham & Co. From
December 1995 to August 1996, Mr. Gerstel was Chief Financial Officer of
Millbrook Capital Management Inc., a New York-based banking firm.

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JOHN J. BORER III has been a Director of the Company since July 1994.
Since October 1991, Mr. Borer has been a Managing Director of Rodman & Renshaw,
Inc., one of the Representatives of the Underwriters of the Debenture Offering
and the representative of the Underwriters of the 1994 Preferred Stock Offering.
Prior to October 1991, Mr. Borer was a Senior Vice President of Security Pacific
Business Credit Inc.

EDWIN C. NEVIS has been a Director of the Company since July 1994. Since
1991, Dr. Nevis has been the Director of Special Studies, Organizational
Learning Center Systems Dynamics Group, at the Sloan School of Management at the
Massachusetts Institute of Technology. From 1986 to 1991, Dr. Nevis was the
Director of Executive Program Development at the Sloan School of Management.
Since 1969, Dr. Nevis has also been President of Wellfleet House, Inc., a
management education and development and organization development consulting
firm. Dr. Nevis received his Ph.D in Industrial and Organizational Psychology
from Western Reserve University in 1954.

FRANCIS G. WARBURTON, Director. Mr. Warburton has been a Director of the
Company since March 1992 and a Director of General Textiles since February 1994.
He served as a Director of Nasta International Inc. from May 1987 until
September 1990. He has been President of Warburton & Associates, Inc., a
consulting firm specializing in mergers and acquisitions, since December 1985.
Prior to December 1985, Mr. Warburton was a partner in the accounting firm of
KMG Main Hurdman.

BARTON P. FERRIS, JR. has been a Director of the Company since July 1994.
Since October 1995, Mr. Ferris has been a Managing Director of Commonwealth
Associates, an investment banking firm which was the Placement Agent for the
1996 Preferred Stock Offering. From 1990 to October 1995, Mr. Ferris was a
Managing Director of Lepercq, De Neuflize & Co. Incorporated, a merchant banking
firm, and a member of its Board of Directors. Mr. Ferris is presently a
Director of Ronson Corporation.

MARY McNABB, Senior Vice President and General Merchandising Manager of
General Textiles and Factory 2-U, jointed General Textiles in 1990 and before
then was employed by One Price Clothing. Mr.McNabb has over 26 years of
experience in retial buying and merchandising.

RICHARD G. LANGE, has been the Senior Vice President of Store Operations of
General Textiles and Factory 2-U since August 1996. From 1991 to 1996, Mr.
Lange was Regional Vice President of T.J. Maxx. From 1990 to 1991, he was
Divisional Vice President of Northern Automotive Corporation. From 1985 to 1990
Mr. Lange was Regional Vice President of Marshall's.

WILLIAM F. CASS, has been Vice President of Planning & Logistics of General
Textiles and Factory 2-U since March 1996. Prior to joining the Company Mr.
Cass held positions of Managing Director and Director of New Business
Development for Clothestime and also served in the capacity of Senior Vice
President of Merchandising. Mr. Cass has over 25 years of retail experience in
Merchandising, Planning, Distribution and General Management.

JAMES M. BAKER has been the Chief Financial Officer of General Textiles
since November, 1995 and of Factory 2-U since its acquisition by the Company in
November 1995. Mr. Baker joined General Textiles in May 1991 and served as
Director of Budgeting and Planning responsible for budgeting, warehousing, loss
prevention, inventory control and administration. Prior to joining General
Textiles, Mr. Baker was Controller for Oshman's Sporting Goods.

In May, 1996, the Company adopted certain additions and changes to its
management compensation arrangements, including among other things (i) grants of
additional stock options; (ii) changes to the terms of the employment agreements
with senior management; (iii) adoption of a stock appreciation bonus program as
additional incentive to senior management; and (iv) adoption of an executive
split dollar life insurance plan and a supplemental executive retirement plan:

Management Options. The Company granted options to acquire 1,750,000
shares of Common Stock to directors, officers and other management. The
exercise price of the options is $3.64 per share of Common Stock; the options
vest 20% per year over five years commencing May 13, 1997 and are exercisable
until five years after vesting. If a participant retires while employed by the
Company, vesting will accelerate with respect to all unvested options granted to
such participant.

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Employment Agreements and Other Compensation. The employment agreements of
Benson A. Selzer, Joseph Eiger and William W. Mowbray were amended to (i)
increase the automatic annual renewal period to five years, (ii) increase the
eligibility of the bonus provisions for senior officers to 100% of base salary
from 70% and (iii) provide for certain payments upon the death or disability of
the executive. In addition, John A. Selzer's employment agreement was similarly
amended to increase the automatic annual renewal period to five years and to
increase the bonus eligibility to 100% of base salary.

The Company entered into an employment agreement with William W. Mowbray
replacing his previous employment agreement with General Textiles. Under the
agreement, Mr. Mowbray receives an adjusted base salary of $321,000 per year
subject to an annual increase of 5% plus any increase in the Consumer Price
Index.

Upon Benson A. Selzer, Joseph Eiger, or William W. Mowbray reaching the
ages of 78, 70 and 65, respectively, they will be entitled to enter into a
consulting agreement with the Company which will run for five years providing
for compensation based on 50% of the annual average of all compensation received
by the consultant for the three years prior to the consultancy, but not to
exceed $250,000 per annum per participant.

Stock Appreciation Bonus. The stock appreciation bonus plan for senior
management provides for a bonus payable at the conclusion of every two fiscal
years, with the first period commencing January 23, 1996 and concluding on
January 31, 1998. The bonus will be payable in Common Stock based on the
increase in the market value (based on the closing price) of the Common Stock
between the opening day of the period and the last day of the period. Benson A.
Selzer and Joseph Eiger will each receive a bonus equal to 2.2% of the increase
and William W. Mowbray and John A. Selzer will receive a bonus equal to 1.6% and
1%, respectively, of the increase. The bonus will be payable in unregistered
Common Stock. To be eligible for this bonus, the participant must be employed
under an employment agreement with the Company on the last day of the bonus
period (except in the event of a change of control or retirement in which case
the bonus will be calculable and payable as of the consummation or effective
date of such event).

Life Insurance and Retirement Plans. The executive split dollar life
insurance plan and supplemental executive retirement plan provides for $1.5
million split dollar life insurance policies to be purchased on the lives of
Benson A. Selzer, Joseph Eiger, John A. Selzer and William W. Mowbray. The
Company will pay aggregate annual premiums not to exceed $500,000 per year under
these policies for a period of eight years. The Company will recover the
premium payments from the cash value in the policies at the end of 20 years or
at the death of the insured if earlier.

The supplemental executive retirement plan for Benson A. Selzer, Joseph
Eiger and William W. Mowbray provides for an annual retirement income payment of
$200,000 for life plus one year, with the first payment occurring no sooner than
the later of (i) December 31, 2003 and (ii) five years after the retirement of
the beneficiary (except that payments may commence upon the earlier disability
or death of the beneficiary, or upon the Company's termination of the
executive's consulting agreement). Vesting will be at the rate of 20% ($40,000
of the annual benefit) per year commencing on the first anniversary of the
adoption of the plan; however, if the executive is employed under an employment
agreement as of his retirement date, he will become fully vested at that time
and at the time of disability or death.

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DESCRIPTION OF CAPITAL STOCK

Common Stock

The Company is authorized to issue up to 80,000,000 shares of Common Stock,
$.01 par value per share. On September 1, 1996, there were 4,693,337 shares of
Common Stock issued and outstanding. All shares of Common Stock have equal
voting rights and have one vote per share on all matters to be voted upon by
stockholders. The shares of Common Stock have no preemptive, subscription,
conversion or redemption rights and may be issued only as fully paid and
nonassessable shares. Cumulative voting in the election of directors is not
allowed, which means that subject to the limited voting rights of the holders of
the Series A Preferred Stock, the holders of a majority of the outstanding
shares represented at any meeting at which a quorum is present will be able to
elect all the directors then subject to election if they choose to do so and, in
such event, the holders of the remaining shares will not be able to elect any
directors. On liquidation of the Company, each holder of Common Stock is
entitled to receive a pro rata share of the Company's assets, if any, available
for distribution to holders of Common Stock after payment of all liabilities of
the Company and subject to the prior distribution rights of the holders of any
of the Company's Preferred Stock that may be outstanding at that time. All
outstanding shares of Common Stock are, and all shares of Common Stock issued on
conversion of Series A Preferred Stock will be, fully paid and nonassessable.

Preferred Stock

The Company is authorized to issue 7,500,000 shares of Series A Preferred
Stock, $.01 par value per share, and has authorized the issuance of up to
4,500,000 shares of Series A Preferred Stock and 25,000 shares of Series A
Junior Participating Preferred Stock (the "Junior Preferred"). The only
outstanding shares of Preferred Stock of the Company as of September 1, 1996
were 3,727,415 shares of Series A Preferred Stock, not including 153,846 shares
of Series A Preferred Stock which have been pledged by the Company to secure
certain obligations of the Company under the Mandel-Kahn Settlement and which
the Company has agreed to sell to non-affiliates by November 30, 1996 for an
aggregate purchase price of $807,690. The proceeds of this sale will be used to
satisfy the obligation which they secure.

Series A Preferred Stock

In accordance with the Company's Restated Certificate of Incorporation, the
issuance of 4,500,000 shares of Series A Convertible Preferred Stock, par value
$.01 per share, has been authorized by resolutions adopted by the Board of
Directors and set forth in a Certificate of Designations of Series A Convertible
Preferred Stock, which has been filed with the Secretary of State of the State
of Delaware and contains the designations, rights, powers, preferences,
qualifications and limitations of the Series A Convertible Preferred Stock. All
of the outstanding shares of Series A Convertible Preferred Stock are fully paid
and non-assessable and, upon issuance, the shares of Series A Convertible
Preferred Stock offered hereby will be fully paid and non-assessable.

The following is a summary of the terms of the Series A Convertible
Preferred Stock. This summary is not intended to be complete and is subject to,
and qualified in its entirety by reference to, the Certificate of Designations
filed with the Secretary of State of the State of Delaware amending the
Company's Restated Certificate of Incorporation and setting forth the rights,
preferences and limitations of the Series A Convertible Preferred Stock.

Dividends

The holders of the Series A Convertible Preferred Stock are entitled to
receive when, as and if declared by the Board of Directors out of funds legally
available as prescribed by statute, cumulative dividends at the rate of $.95 per
share per year, payable quarterly on July 31, October 31, the last Friday of
January of each year, and April 30 to the holders of record as of a date not
more than 30 days prior to the dividend payment date, as may be fixed by the
Board of Directors. Dividends on the Series A Convertible Preferred Stock will
accrue from the date of original issuance to a stockholder. The Company has paid
each quarterly dividend in full since the original issuance of Series A
Convertible Preferred Stock in July 1994.

No dividends may be paid on any shares of capital stock ranking junior to
the Series A Convertible Preferred Stock as to dividends (including Common
Stock) unless and until all accumulated and unpaid dividends on the Series A
Convertible Preferred Stock have been declared and paid in full.

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Conversion

At the option of the holder thereof, each share of Series A Convertible
Preferred Stock is, by its terms, convertible at any time on or after the date
of issuance and prior to redemption, at the option of the holder thereof, into
that number of shares equal to the adjusted conversion price (currently $3.6396)
divided by the liquidation preference per share of Series A Convertible
Preferred Stock ($10.00). Accordingly, at this time each share of Series A
Convertible Preferred Stock is convertible into 2.748 shares of Common Stock.
The Conversion Price (and, correspondingly, the number of shares of Common Stock
into which shares of the Series A Convertible Preferred Stock can be converted)
is subject to further adjustment from time to time in the event of (i) the
issuance of Common Stock as a dividend or distribution on any class of capital
stock of the Company, (ii) the combination, subdivision or reclassification of
the Common Stock, (iii) the distribution to all holders of Common Stock of
evidences of the Company's indebtedness or assets (including securities, but
excluding cash dividends or distributions paid out of earned surplus), or (iv)
the sale of Common Stock at a price, or the issuance of options, warrants or
convertible securities with an exercise or conversion price per share less than
the higher of the then current Conversion Price or the then current market price
(as defined) of the Common Stock (except in connection with the exercise of
options or warrants outstanding on July 14, 1994 and, subject to the
restrictions on stock option issuances otherwise described herein, options
thereafter granted to employees or officers). If the conversion price of the
Debentures is less than $3.6396, the conversion price of the Series A
Convertible Preferred Stock will be reduced and, accordingly, the number of
shares of Common Stock issuable upon conversion of Series A Convertible
Preferred Stock will increase. No adjustment in the Conversion Price will be
required until cumulative adjustments require an adjustment of at least 3% of
the Conversion Price, as adjusted. In addition, if the Company fails to declare
and pay dividends on the Series A Convertible Preferred Stock within 90 days
after a quarterly dividend payment date, the Conversion Price will be reduced by
$.50 per share in each instance, but shall not be reduced below the par value of
the Common Stock. No fractional shares will be issued upon conversion, but any
fractions will be paid in cash on the basis of the then current market price of
the Common Stock. Payment of accumulated and unpaid dividends will be made upon
conversion to the extent of legally available funds as prescribed by statute.
The right to convert the Series A Convertible Preferred Stock will terminate on
the date fixed for redemption.

Redemption

The Company may, at its option, redeem all, but not less than all, of the
shares of Series A Convertible Preferred Stock upon 30 days written notice at
any time on or after July 21, 1997, at a redemption price of $10.00 per share,
plus accumulated and unpaid dividends, provided the closing sale price of the
Common Stock as quoted by the NASDAQ National Market or NASDAQ SmallCap Market,
as applicable, or, if not traded thereon, the high bid price as reported by
NASDAQ or, if not quoted thereon, the high bid price in the National Quotation
Bureau sheet listing of the Common Stock for 20 consecutive trading days ending
no more than 10 days prior to the date of notice of the call for redemption is
given is at least 137.5% of the Conversion Price then in effect. In addition,
on or after July 21, 1998, the Company may redeem all or any portion of the
shares of Series A Convertible Preferred Stock at the following per share prices
during the 12-month period beginning July 21:

Year Redemption Price
---- ----------------

1998-1999 $10.70
1999-2001 $10.50
2001-2003 $10.30
2003-thereafter $10.00

If fewer than all of the outstanding shares of Series A Convertible
Preferred Stock are to be redeemed, the shares to be redeemed will be determined
pro rata or by lot or in such other manner as prescribed by the Company's Board
of Directors.

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Notice of redemption must be mailed to each holder of Series A Convertible
Preferred Stock to be redeemed at such holder's last address as it appears upon
the Company's registry books at least 30 days prior to the record date of such
redemption. On and after the redemption date, dividends will cease to
accumulate on shares of Series A Convertible Preferred Stock called for
redemption.

On or after the redemption date, holders of shares of Series A Convertible
Preferred Stock which have been redeemed shall surrender their certificates rep-
resenting such shares to the Company at its principal place of business or as
otherwise specified and thereupon the redemption price of such shares shall be
payable to the order of the person whose name appears on such certificate or
certificates as the owner thereof; provided, that a holder of Series A
Convertible Preferred Stock may elect to convert such shares into Common Stock
at any time prior to the date fixed for redemption. If fewer than all of the
shares represented by any such certificates are redeemed, a new certificate
shall be issued representing the unredeemed shares without cost to the holder
thereof.

From and after the redemption date, all rights of the holders of such
shares shall cease with respect to such shares (except the right to receive the
redemption price) and such shares shall not thereafter be transferred on the
books of the Company or be deemed to be outstanding for any purpose whatsoever.

Voting Rights

The holders of the Series A Convertible Preferred Stock are not entitled to
vote, except as set forth below and as provided by applicable law. Holders of
the Series A Convertible Preferred Stock will not have voting rights except (i)
with respect to the creation, authorization or issuance of capital stock ranking
senior or in parity with the Series A Convertible Preferred Stock and with
respect to certain amendments to the Company's Restated Certificate of Incorpo-
ration, (ii) if the Company shall have failed to declare and pay in full the
dividends accumulated on the Series A Convertible Preferred Stock for any four
quarterly dividend payment periods, in which case holders shall have the right
to vote on all matters submitted for vote to stockholders, including the
election of the members of the Board of Directors until such time as accumulated
dividends have been paid in full, (iii) in connection with a consolidation into
or merger with any corporation, firm or entity, unless (a) the Company is the
surviving entity and there is no conversion, exchange or other change of all or
any portion of the Common Stock into cash, securities or other property in
connection therewith or (b) the merger or consolidation is into a subsidiary of
the Company in which there is an exchange of the Common Stock for common stock
of the subsidiary of the Company and no other consideration is received in
connection therewith, (iv) in connection with any sale, lease or other disposi-
tion of all or substantially all of the Company's assets, and (v) as otherwise
required by law. In matters in which they are entitled to vote, the holders of
the Series A Convertible Preferred Stock shall be entitled to one vote per share
and shall vote together as a single class with holders of Common Stock; except
that the holders of the Series A Convertible Preferred shall vote separately as
a single class with respect to votes pursuant to clause (i) above and otherwise
as required by law.

Liquidation

In the event of any voluntary or involuntary liquidation, dissolution or
winding-up of the Company before any payment or distribution of the assets of
the Company (whether capital, surplus or earnings), or the proceeds thereof, may
be made or set apart for the holders of Common Stock or any stock ranking junior
to the Series A Convertible Preferred Stock as to liquidation, the holders of
Series A Convertible Preferred Stock will be entitled to receive, out of the
assets of the Company available for distribution to stockholders, a liquidating
distribution of $10.00 per share, plus any accumulated and unpaid dividends.
After payment of the full amount of the liquidating distributions to which they
are entitled, the holders of Series A Convertible Preferred Stock will have no
right or claim to any of the remaining assets of the Company. If, upon any
voluntary or involuntary liquidation, dissolution or winding-up of the Company,
the assets of the Company are insufficient to make the full payment of $10.00
per share, plus all accumulated and unpaid dividends on the Series A Convertible
Preferred Stock and similar payments on any other class of stock ranking on a
parity with the Series A Convertible Preferred Stock upon liquidation, then the
holders of the Series A Convertible Preferred Stock and such other shares will
share ratably in any such

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distribution of the Company's assets in proportion to the full respective
distribution amounts to which they are entitled. Neither the sale of all or
substantially all the property or business of the Company, nor the merger or
consolidation of the Company into or with any other corporation shall be deemed
to be a dissolution, liquidation, or winding up, voluntary or involuntary, of
the Company.

Miscellaneous

The Company is not subject to any mandatory redemption or sinking fund
provisions with respect to the Series A Convertible Preferred Stock. The
holders of Series A Convertible Preferred Stock are not entitled to preemptive
rights to subscribe for or to purchase any shares or securities of any class
which may at any time be issued, sold or offered for sale by the Company.
Shares of Series A Convertible Preferred Stock redeemed or otherwise reacquired
by the Company shall be retired by the Company and shall be unavailable for
subsequent issuance.

Warrants and Options

As of the date of this Prospectus, there are outstanding 243,717 additional
warrants the "Warrants") of the Company expiring between October 1996 and
December 1998 at exercise prices ranging from $6.37 to $16.20 per share; 15,000
warrants expiring in 1998 may be exercised at the market price of the Company's
Common Stock at the time such warrants are exercised.

The Warrants contain provisions that protect the holders against dilution
by adjustment of the exercise price in certain events, such as stock dividends
and distributions, stock splits and recapitalizations. The holder of a Warrant
will not possess any rights as a stockholder of the Company unless and until
such holder exercises the Warrant.

In addition, as of September 1, 1996, options to purchase up to 844,918
shares of Common Stock have been granted to officers, directors and employees of
the Company and the Operating Subsidiaries and are outstanding and vested (or
will vest within three months of the date of this Prospectus). Options to
purchase an additional 1,764,668 shares of Common Stock have been granted but do
not vest until between May 1997 and May 2001. All but 64,584 of the options
(which have higher exercise prices) have exercise prices of between $1.375 and
$3.64 per share of Common Stock.

Shareholders' Rights Plan

In December 1995, the Company distributed a dividend of one preferred share
purchase right (a "Right") for each outstanding share of Common Stock of the
Company. All shares of Common Stock issued between that date and November 27,
2000 (or an earlier Distribution Date, as defined) (including Shares of Common
Stock issued upon conversion of Debentures) will be accompanied by Rights.
Except as set forth below, each Right, when it becomes exercisable, entitles the
registered holder to purchase from the Company one one-thousandth of a share of
Junior Preferred at a price of $9.00 per one one-thousandth of a Junior
Preferred Share (the "Purchase Price"), subject to adjustment. The description
and terms of the Rights are set forth in a Rights Agreement (the "Rights
Agreement"), as amended, between the Company and American Stock Transfer & Trust
Company (the "Rights Agent").

Currently, the Rights are included in the certificates representing
outstanding shares of Common Stock, and no separate Right Certificates (as
hereinafter defined) have been distributed. The Rights will separate from the
Common Stock on the earliest to occur of (i) the first date of public
announcement that a person or "group" has acquired beneficial ownership of 15%
or more of the outstanding shares of Common Stock (except pursuant to a
Permitted Offer, as hereinafter defined); or (ii) 10 business days (or such
later date as the Board may determine)

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following a person's or group's ("Acquiring Person") commencement of, or
announcement of an intention to commence, a tender offer or exchange offer for
15% or more of the outstanding shares of Common Stock (the earliest of such
dates being called the "Distribution Date"). The first date of public
announcement that a person or group has become an Acquiring Person is the
"Shares Acquisition Date."

The Rights Agreement provides that, until the Distribution Date, the Rights
will be transferred with and only with shares of Common Stock. Until the
Distribution Date (or earlier redemption or expiration of the Rights), new
Common Stock certificates issued after the Record Date upon transfer or new
issuance of Common Stock will contain a notation incorporating the Rights
Agreement by reference. Until the Distribution Date (or earlier redemption or
expiration of the Rights), the surrender for transfer of any certificates for
Common Stock outstanding as of the Record Date, even without such notation or a
copy of a summary of rights being attached thereto, will also constitute the
transfer of the Rights associated with the Common Stock represented by such
certificate. As soon as practicable following the Distribution Date, separate
certificates evidencing the Rights ("Right Certificates") will be mailed to
holders of record of the Common Stock as of the close of business on the
Distribution Date (and to each initial record holder of certain Common Stock
issued after the Distribution Date), and such separate Right Certificates alone
will evidence the Rights.

The Rights are not exercisable until the Distribution Date and will expire
at 5:00 P.M., New York City time, on November 27, 2000, unless earlier redeemed
by the Company as described below.

In the event that any person becomes an Acquiring Person (except pursuant
to a Permitted Offer), each holder of a Right will have (subject to the terms of
the Rights Agreement) the right (the "Flip-in Right") to receive upon exercise
the number of shares of Common Stock, or, in the discretion of the Board of
Directors, one one-thousandths of a Junior Preferred Share (or, in certain
circumstances, other securities of the Company) having a value equal to two
times the exercise price of the Right. Notwithstanding the foregoing, following
the occurrence of the event described above, all Rights that are, or (under
certain circumstances) were, beneficially owned by any Acquiring Person or any
affiliate or associate thereof will be null and void. A "Permitted Offer" is a
tender or exchange offer for all outstanding Common Stock which is at a price
and on terms determined, prior to the purchase of shares under such tender or
exchange offer, by a majority of Disinterested Directors (as defined) to be
adequate and otherwise in the best interests of the Company, its stockholders
and its other relevant constituencies.

In the event that, at any time following the Shares Acquisition Date, (i)
the Company is acquired in a merger or other business combination transaction in
which the holders of all of the outstanding shares of Common Stock immediately
prior to the consummation of the transaction are not the holders of all of the
surviving corporation's voting power, or (ii) more than 50% of the Company's
assets or earning power is sold or transferred, in either case with or to an
Acquiring Person or any affiliate or associate, if in such transaction all
holders of Common Stock are not treated alike, then each holder of a Right
(except for voided Rights) shall have the right (the "Flip-Over Right") to
receive, upon exercise, Common Stock of the acquiring company having a value
equal to two times the exercise price of the Right.

The Purchase Price payable, and the number of one-thousandths of a Junior
Preferred Share or other securities issuable, upon exercise of the Rights are
subject to adjustment from time to time upon the occurrence of certain events to
prevent dilution.

Junior Preferred Shares purchasable upon exercise of the Rights will not be
redeemable. Each Junior Preferred Share will be entitled to a minimum
preferential quarterly dividend payment of $1.00 per share but, if greater, will
be entitled to an aggregate dividend per share of 1000 times the dividend
declared per Common Stock. In the event of liquidation, the holders of Junior
Preferred Shares will be entitled to a minimum preferential liquidation payment
of $1.00 per share; thereafter, and after the holders of the Common Stock
receive a liquidation payment of $0.001 per share, holders of the Junior
Preferred Shares and the holders of the Common Stock will share the remaining
assets in the ratio of one thousand to 1 (as adjusted) for each Junior Preferred
Share and share of Common Stock so held, respectively. Finally, in the event of
any merger, consolidation or other transaction in

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which Common Stock is exchanged, each Junior Preferred Share will be entitled to
receive one thousand times the amount received per share of Common Stock.

The Company has the right to redeem the Rights at any time prior to the
earlier to occur of (i) a person becoming an Acquiring Person or (ii) the
expiration of the Rights, and, in addition, under certain circumstances, after
the triggering of the Flip-in Right.

Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the company, including, without limitation, the right
to vote or to receive dividends . While the distribution of the Rights will not
be taxable to stockholders of the Company, stockholders may, depending upon the
circumstances, recognize taxable income should the Rights become exercisable or
upon the occurrence of certain events thereafter.

Section 203 of the Delaware General Corporation Law

Section 203 of the Delaware General Corporation law prohibits a publicly-
held Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless
(i) prior to such date the business combination or the transaction that resulted
in the stockholder becoming an interested stockholder is approved by the Board
of Directors of the corporation, (ii) upon consummation of the transaction which
resulted in the stockholder becoming an interested stockholder, the interested
stockholder owns at least 85% of the outstanding voting stock, or (iii) on or
after such date the business combination is approved by the Board of Directors
and by the affirmative vote of at least 66-2/3 % of the outstanding voting stock
that is not owned by the interested stockholder. A "business combination"
includes mergers, asset sales and other transactions resulting in a financial
benefit to the stockholder. An "interested stockholder" is a person, who,
together with affiliates and associates, owns (or within three years, did own)
15% or more of the corporation's voting stock.

Transfer Agent, Registrar And Warrant Agent

American Stock Transfer & Trust Company, 40 Wall Street, New York, NY
10005, is transfer agent and registrar for the Common Stock and the Series A
Preferred Stock.

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SELLING SHAREHOLDERS

The following table provides certain information with respect to the shares
of Series A Preferred Stock held by each Selling Shareholder as of July 30, 1996
and assuming the completion of the Debenture Offering. Except as otherwise
noted, none of the Selling Shareholders has held any position, office, or
material relationship with the Company or any of its affiliates within the past
three years other than as a result of his or its ownership of Series A Preferred
Stock. Except as otherwise noted, all of the Selling Shareholder Shares are
registered for sale pursuant to this Prospectus. However, the Selling
Shareholders are under no obligation to sell all or any portion of the Selling
Shareholder Shares. The Selling Shareholders have agreed not to sell, assign,
transfer or otherwise dispose or pledge, hypothecate, grant a security interest
in or otherwise encumber the Selling Shareholder Shares for a period of two
years after their acquisition by the Selling Shareholders, except with the prior
written consent of the Company. The Company will not receive any proceeds from
any sales of the Selling Shareholder Shares. See "Plan of Distribution."

Shares of Common Stock No. Shares of
Owned Common Stock to Shares of Common Stock
Beneficially Prior to be Offered Owned Beneficially After
Selling Shareholder Debenture Offering (1) Pursuant to this Debenture Offering (1)
------------------- Prospectus
Number Percentage ---------- Number Percentage
------- ---------- ------ ----------

<S> <C> <C> <C> <C> <C>
Morgana Holdings Inc.(2) 211,384 1.3% 211,384 211,384 0.8%
L'Ancresse Holdings Ltd.(2) 211,384 1.3% 211,384 211,384 0.8%
Total 422,769 2.7% 422,769 422,769 1.6%
</TABLE>

(1) Figures are post-Debenture Offering completion assuming the sale of $40.0
million of Debentures and assuming a conversion price (which has yet to be
determined) equal to the conversion price of the Series A Preferred Stock.
(2) Assumes the private sale, pursuant to the Stock Purchase Agreement, dated
as of June 28, 1996, as amended, between the Company and Morgana Holdings
Inc. ("Morgana") and L'Ancresse Holdings Ltd. ("L'Ancresse"), of the
Selling Shareholder Shares, which are currently held by Wynne & Maney, as
Trustee for Joel Mandel. See "Plan of Distribution."

-48-

<PAGE>
PLAN OF DISTRIBUTION

The Selling Shareholder Shares offered pursuant to this Prospectus are
being offered on behalf of the Selling Shareholders. The Selling Shareholder
Shares were issued to an escrow agent to secure the recovery of an award in
connection with the settlement of a lawsuit (the "Mandel-Kahn Settlement"). See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." Pursuant to the Mandel-Kahn
Settlement, the Company is required to use its best efforts to register the
Selling Shareholder Shares for resale to the public and is permitted to sell
such shares. The Company has entered into a Stock Purchase Agreement, dated as
of June 28, 1996 (the "Stock Purchase Agreement"), pursuant to which the Selling
Shareholder Shares are being privately sold, on or before November 30, 1996, to
the Selling Shareholders. The proceeds of this sale, totaling $807,691, will be
applied to reduce the remaining obligation of approximately $965,000 which is
currently secured by the Selling Shareholder Shares. The Company will not
receive any proceeds from the sale of the Selling Shareholder Shares.

Pursuant to the Stock Purchase Agreement, the Selling Shareholders have
agreed not to sell, assign, transfer or otherwise dispose or pledge,
hypothecate, grant a security interest in or otherwise encumber the Selling
Shareholder Shares for a period of two years after their acquisition by the
Selling Shareholders, except with the prior written consent of the Company.

The sale of the Selling Shareholder Shares by the Selling Shareholders may
be effected in transactions in the over-the-counter market, in negotiated
transactions, or a combination of such methods of sale. The Selling Shareholder
Shares may be sold at market prices prevailing at the time of sale or at
negotiated prices. The Selling Shareholders may effect such transactions by
selling the Selling Shareholder Shares directly to purchasers or through
underwriters or broker-dealers who may act as agents or principals. Such
underwriters and broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the Selling Shareholders or the
purchasers of the Selling Shareholder Shares for whom such underwriters or
broker-dealers may act as agent or to whom they sell as principal, or both
(which compensation as to a particular underwriter or broker-dealer may be in
excess of customary compensation). Introducing brokers may act as broker-dealer
on behalf of one or more of the Selling Shareholders in connection with the
offering of certain of the Selling Shareholder Shares by Selling Shareholders.
A Selling Shareholder and any underwriter or broker-dealer who acts in
connection with the sale of the Selling Shareholder Shares hereunder may be
deemed to be "underwriters" within the meaning of Section 2(11) of the
Securities Act, and any commissions received by them and any profit on any
resale of the Selling Shareholder Shares as principal might be deemed to be
underwriting discounts and commissions under the Securities Act.

Under applicable rules and regulations under the Exchange Act, any person
engaged in a distribution of the Selling Shareholder Shares may not
simultaneously engage in market making activities with respect to such Selling
Shareholder Shares for a period of nine business days prior to the commencement
of such distribution, except under certain limited circumstances. In addition
to, and without limiting the foregoing, the Selling Shareholders and any other
person participating in such distribution will be subject to applicable
provisions of the Exchange Act and rules and regulations thereunder, including
without limitation, rules 10b-2, 10b-6 and 10b-7 which provisions may limit the
timing of purchases and sales of any of the Selling Shareholder Shares by the
Selling Shareholders and any other such shareholders.

-49-

<PAGE>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS

The following is a brief description of certain federal income tax con-
sequences applicable under current law to purchasers of the Series A Convertible
Preferred Stock. This discussion is only a summary and is not intended as a
substitute for careful tax planning. The discussion is based upon the Internal
Revenue Code of 1986, as amended (the "Code"), regulations promulgated by the
U.S. Department of the Treasury ("Treasury Regulations"), and Internal Revenue
Service ("IRS") rulings and judicial decisions now in effect, all of which are
subject to change at any time by legislative, judicial or administrative action.
Any such changes could be retroactively applied in a manner that could adversely
affect a holder of the Series A Convertible Preferred Stock. The discussion
does not cover all aspects of federal taxation that may be relevant to, or the
actual tax effect that any of the matters described herein will have on,
particular purchasers, and it does not deal with state, local or foreign income
or other tax laws. Certain holders (including financial institutions, tax-
exempt organizations, broker-dealers, insurance companies, and foreign
individuals and entities) may be subject to special rules not discussed below.
The discussion assumes that purchasers of the Series A Convertible Preferred
Stock will hold the Series A Convertible Preferred Stock as a capital asset
within the meaning of Section 1221 of the Code. Persons considering the
purchase of the Series A Convertible Preferred Stock should consult their own
tax advisors with respect to their particular situations as well as any tax
consequences arising under the laws of any state, local or foreign taxing
jurisdiction.

Dividends

Distributions with respect to the Series A Convertible Preferred Stock will
be treated as dividends and taxable as ordinary income to the extent that the
distributions are made out of either the Company's (i) current or (ii)
accumulated earnings and profits. To the extent that a distribution is not made
out of the Company's current or accumulated earnings and profits, the
distribution will first constitute a non-taxable return of capital reducing the
holder's adjusted tax basis in the shares of Series A Convertible Preferred
Stock held and then, to the extent the distribution exceeds such basis, will
result in a gain from the sale or exchange of such stock.

In calculating their taxable income, corporate stockholders will generally
be eligible to claim a dividend received deduction (currently 70% of the amount
of the dividend for most corporate stockholders) with respect to distributions
that are treated as dividends on the Series A Convertible Preferred Stock.
However, complex rules apply which may cause disallowance or limitation of the
dividends received deduction under circumstances described in the Code. In
addition, in computing the alternative minimum tax, corporation stockholders may
be required to make certain adjustments in calculating their alternative minimum
taxable income. Corporate stockholders should consult their own tax advisors as
to the possible application of these provisions.

The basis of stock that has been held by a corporate stockholder for not
more than two years is reduced (but not below zero) by the non-tax portion of
any "extraordinary dividend" received with respect to such stock. Moreover, the
amount of any non-taxed portion of an extraordinary dividend that does not
reduce basis (by reason of the limitation on reducing basis below zero) will be
recognized as gain on any sale or exchange of the stock. In determining whether
a holder satisfies the holding period requirement, the length of the holding
period is determined as of the date that the issuer declares, announces or
agrees to the payment or the amount of a dividend, which ever is the earliest.

Generally, an extraordinary dividend on preferred stock is a dividend that
(i) equals or exceeds 5% of the holder's basis in the stock (treating all
dividends having ex-dividend dates within an 85-day period as a single dividend)
or (ii) exceeds 20% of the holder's basis in the stock (treating all dividends
having ex-dividend dates within a 365-day period as a single dividend). If the
holder is able to establish, to the satisfaction of the IRS, the fair market
value of the preferred stock as of the day before the ex-dividend date, the
holder may elect to substitute such a fair market value for the holder's basis
in applying these tests. In addition, if either (i) the fair market value of
the preferred stock on the issuance date is greater than the liquidation rights
or the stated redemption price or (ii) the preferred stock when issued has a
dividend rate which declines (or can reasonably be expected to decline) in the
future, any dividend distribution with respect to such stock may be treated as
an extraordinary dividend without regard to the period the taxpayer held the
stock.

-50-

<PAGE>

Adjustment of Conversion Price

Section 305 of the Code and applicable Treasury Regulations also provide
that under certain circumstances, adjustments in the conversion price of
convertible stock and other similar transactions (including the failure to
adjust the conversion rate) may be treated as constructive distributions of
stock taxable as a dividend if (i) as a result, the proportionate interest of
the holder of such convertible preferred stock in the assets or earnings and
profits of the issuer is increased and (ii) the adjustment is not made pursuant
to a bona fide, reasonable anti-dilution formula. The operation of the
conversion price adjustment provisions of the Series A Convertible Preferred
Stock may fit within these parameters, and accordingly the holder thereof would
be deemed to have received a constructive distribution that may be taxable as a
dividend, notwithstanding the fact that the holders of the Series A Convertible
Preferred Stock do not actually receive cash or property.

Redemption Premium

Except as otherwise provided, Section 305 of the Code requires a holder of
preferred stock to include a "redemption premium," if any, in income over a
period of years. Redemption premium is the excess of the redemption price of
preferred stock over the stock's issue price. This excess amount is treated as
a constructive distribution of additional stock to the holder of preferred stock
and is deemed to be distributed (and includable in the holder's income under
principles similar to those under Section 1272(a) of the Code) on an economic
accrual basis over the period of time that the stock is not callable by the
issuer. However, if the redemption price is "reasonable," a constructive
distribution is not deemed to occur.

In the case of preferred stock that is callable at the option of the
issuer, but is neither (i) subject to a mandatory redemption or (ii) puttable by
the holder, the reasonableness of the redemption premium is determined pursuant
to Treasury Regulations promulgated under Section 305 of the Code. Pursuant to
those regulations, a redemption premium will be considered reasonable, if it is
in the nature of a penalty for a premature redemption of the Series A
Convertible Preferred Stock and if it does not exceed the amount the issuer
would be required to pay for the right to make such premature redemption under
market conditions existing at the time of issuance. The Treasury Regulations
promulgated under Section 305 of the Code also provide as a safe harbor that a
redemption premium not in excess of 10% of the issue price of preferred stock
which is not redeemable for five years from the date of issuance is considered
reasonable. Because the Series A Convertible Preferred Stock is callable within
five years from the date of issuance, this safe harbor will not be available.
Therefore, if the redemption price of the Series A Convertible Preferred Stock
exceeds its issue price, the Series A Convertible Preferred Stock may be treated
as having been issued with an unreasonable redemption premium. As a result, a
holder may be required to include in gross income on an economic accrual basis
the redemption premium for the period between the date the Series A Convertible
Preferred Stock is issued and the date the Series A Convertible Preferred Stock
is first callable by the Company.

Conversion

Conversion of the Series A Convertible Preferred Stock into Common Stock
generally will not result in the recognition of gain or loss (except with
respect to cash received in lieu of fractional shares). The holder's adjusted
tax basis in the Common Stock received upon conversion would be equal to the
holder's tax basis in the shares of Series A Convertible Preferred Stock
converted, reduced by the portion of such basis allocable to the fractional
share interest exchanged for cash. The holding period for the Common Stock
received upon conversion would include the holding period of the Series A
Convertible Preferred Stock converted.

Sale, Exchange or Redemption

Upon the sale or exchange of the Series A Convertible Preferred Stock or
the Common Stock into which it is converted, the holder will recognize gain or
loss equal to the difference between the amount realized and his or her tax
basis in the Series A Convertible Preferred Stock or the Common Stock into which
it is converted. The resulting gain or loss will be a capital gain or loss and
will be a long-term capital gain or loss if the Series A Convertible Preferred
Stock or the Common Stock into which it is converted was held for more than one
year. A redemption of shares of Series A Convertible Preferred Stock will be
taxable as a sale or exchange if the redemption (i) results in a "complete
termination" of the holder's stock interest in the Company under Section
302(b)(3) of the Code, (ii) is "substantially disproportionate" with respect to
the holder under Section 302(b) of

-51-

<PAGE>
the Code, (iii) is "not essentially equivalent to a dividend" with respect to
the holder under Section 302(b)(1) of the Code, or (iv) is from a non-corporate
holder in partial liquidation of the Company under Section 302(b)(4) of the
Code. In determining whether any of these tests has been met, shares considered
to be owned by the holder by reason of the constructive ownership rules set
forth in Section 318 of the Code (pursuant to which a holder will be deemed to
own shares owned by certain related individuals and entities or shares subject
to an option), as well as the shares actually owned, would generally be taken
into account. If the redemption of shares of Series A Convertible Preferred
Stock for cash satisfies any of the above Section 302 tests with respect to a
holder, such holder will recognize gain or loss based on the difference between
the amount of cash received and the holder's tax basis in the redeemed shares.
If the redemption does not satisfy any of the Section 302 tests, the gross pro-
ceeds will be treated as a distribution taxable as a dividend to the extent of
the Company's current and accumulated earnings and profits and any excess will
be treated first as a return of capital and then as a gain upon a sale or
exchange of the Series A Convertible Preferred Stock.

A holder whose proceeds of a redemption are taxed as a dividend would
transfer the tax basis in the Series A Convertible Preferred Stock redeemed
(reduced for any amounts treated as a non-taxed portion of extraordinary
dividends or a return of capital) to any stock interest retained in the Company.

Back-Up Withholding

Under Section 3406 of the Code and applicable Treasury Regulations, a
holder of Series A Convertible Preferred Stock may be subject to back-up
withholding tax at the rate of 31% with respect to dividends paid or on the
proceeds of a sale, exchange or redemption of the Series A Convertible Preferred
Stock or Common Stock acquired through the exercise of the conversion privilege.
The Company will be required to deduct and withhold the tax if (i) the holder
fails to furnish a taxpayer identification number ("TIN") to the Company, (ii)
the IRS notifies the Company that the TIN furnished by the holder is incorrect,
(ii) there has been a notified holder under- reporting with respect to interest,
dividends or original issue discount described in Section 3406(c) of the Code,
or (iv) there has been a failure of the holder to certify under the penalty of
perjury that the holder is not subject to withholding under Section
3406(a)(1)(C) of the Code. The Company will be required to withhold a tax equal
to 31% from any dividend or redemption payment made with respect to the Series A
Convertible Preferred Stock or Common Stock if any one of the events discussed
above occurs. Holders should consult their tax advisors regarding their
qualification for exemption from back-up withholding and the procedure for
obtaining any applicable exemption.

The foregoing summary is included herein for general information only.
Accordingly, prospective purchasers of the Series A Convertible Preferred Stock
should consult with their own tax advisors as to the specific tax consequences
to them, including the application and effect of state, local and foreign income
and other tax laws.

-52-

<PAGE>

LEGAL MATTERS

The validity of the securities offered hereby will be passed upon for the
Company by Baer Marks & Upham LLP, New York, New York, as counsel to the Company
in connection with this Offering.

EXPERTS

The financial statements of Family Bargain Corporation as of January 28,
1995 and January 27, 1996 and for the nine months ended January 29, 1994 and the
twelve months ended January 28, 1995 and January 27, 1996, have been included or
incorporated by reference herein and in the Registration Statement in reliance
upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.

The financial statements of Capin Mercantile Corporation (the predecessor
of Factory 2-U) as of December 31, 1994, and for the year then ended, included
in this Prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein (which report expresses an
unqualified opinion but includes an explanatory paragraph concerning Capin
Mercantile Corporation's ability to continue as a going concern) and are
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.

The financial statements of Capin Mercantile Corporation as of December 31,
1993, and for each of the years in the two-year period ended December 31, 1993,
have been included herein and in the registration statement in reliance upon the
report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.

-53-

<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

FAMILY BARGAIN CORPORATION

Independent Auditors' Report to the Board of Directors and Stockholders of Family
Bargain Corporation................................................................ F-3

Family Bargain Corporation and Subsidiaries Consolidated Balance Sheets as of
January 28, 1995 and January 27, 1996.............................................. F-4

Family Bargain Corporation and Subsidiaries Consolidated Statements of Operations for
the nine months ended January 29, 1994 and the twelve months ended January 28, 1995
and January 27, 1996............................................................... F-5

Family Bargain Corporation and Subsidiaries Consolidated Statements of Stockholders'
Equity (Deficit) for the nine months ended January 29, 1994 and the twelve months
ended January 28, 1995 and January 27, 1996........................................ F-6

Family Bargain Corporation and Subsidiaries Consolidated Statements of Cash Flows for
the nine months ended January 29, 1994 and the twelve months ended January 28, 1995
and January 27, 1996............................................................... F-9

Family Bargain Corporation and Subsidiaries Notes to Consolidated Financial
Statements......................................................................... F-11

Family Bargain Corporation and Subsidiaries Consolidated Balance Sheets as of
January 27, 1996 and July 27, 1996 (Unaudited)..................................... F-29

Family Bargain Corporation and Subsidiaries Consolidated Statements of Operations for
the six months ended July 29, 1995 and July 27, 1996 (Unaudited)................... F-30

Family Bargain Corporation and Subsidiaries Consolidated Statements of Cash Flows for
the six months ended July 29, 1995 and July 27, 1996 (Unaudited)................... F-32

Family Bargain Corporation and Subsidiaries Notes to Consolidated Financial
Statements (Unaudited)............................................................. F-33
</TABLE>

F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CAPIN MERCANTILE CORPORATION (predecessor to Factory 2-U, Inc.)

Independent Auditors' Report to the Board of Directors of Capin Mercantile
Corporation........................................................................ F-35

Capin Mercantile Corporation Balance Sheet as of December 31, 1994................... F-36

Capin Mercantile Corporation Statement of Operations for the year ended December 31,
1994............................................................................... F-37

Capin Mercantile Corporation Statement of Changes in Stockholders' Equity
(Deficiency) for the year ended December 31, 1994.................................. F-38

Capin Mercantile Corporation Statement of Cash Flows for the year ended December 31,
1994............................................................................... F-39

Capin Mercantile Corporation Notes to Financial Statements for the year ended
December 31, 1994.................................................................. F-40

Independent Auditors' Report to the Board of Directors of Capin Mercantile
Corporation as of December 31, 1992 and 1993....................................... F-48

Capin Mercantile Corporation Balance Sheets as of December 31, 1992 and 1993......... F-49

Capin Mercantile Corporation Statements of Earnings for years ended December 31, 1992
and 1993........................................................................... F-50

Capin Mercantile Corporation Statements of Changes in Stockholders' Equity for years
ended December 31, 1992 and 1993................................................... F-51

Capin Mercantile Corporation Statements of Cash Flows for years ended December 31,
1992 and 1993...................................................................... F-52

Capin Mercantile Corporation Notes to Financial Statements for years ended December
31, 1992 and 1993.................................................................. F-53
</TABLE>

All other schedules are omitted because of the absence of conditions under
which they are required or because the required information is set forth in the
financial statements and notes thereto.

F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Family Bargain Corporation:

We have audited the accompanying consolidated balance sheets of Family
Bargain Corporation and subsidiaries as of January 28, 1995 and January 27,
1996, and the related consolidated statements of operations, stockholders'
equity (deficit), and cash flows for the nine months ended January 29, 1994 and
the twelve months ended January 28, 1995 and January 27, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Family
Bargain Corporation and subsidiaries as of January 28, 1995 and January 27,
1996, and the results of their operations and their cash flows for the nine
months ended January 29, 1994 and the twelve months ended January 28, 1995 and
January 27, 1996, in conformity with generally accepted accounting principles.

KPMG PEAT MARWICK LLP

SAN DIEGO, CALIFORNIA
APRIL 23, 1996

F-3
<PAGE>
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 28, 1995 AND JANUARY 27, 1996

<TABLE>
<CAPTION>
1995 1996
----------- -----------
ASSETS
<S> <C> <C>
Current assets:
Cash........................................................... $ 2,522,000 1,958,000
Accounts receivable--non-trade................................. 742,000 887,000
Layaway receivables............................................ 411,000 695,000
Merchandise inventories (note 11).............................. 19,541,000 25,874,000
Prepaid expenses............................................... 1,124,000 776,000
----------- -----------
Total current assets....................................... 24,340,000 30,190,000
Real property held for sale (notes 8 and 11)..................... -- 4,500,000
Leasehold improvements and equipment, net (notes 7 and 12)....... 4,922,000 9,001,000
Deferred debt issuance costs, less accumulated amortization of
$291,000 in 1995 and $592,000 in 1996............................ 450,000 190,000
Other assets..................................................... 728,000 518,000
Excess of cost over net assets acquired (goodwill), less
accumulated amortization of $1,984,000 in 1995 and $3,366,000
in 1996 (notes 2 and 3)........................................ 29,465,000 42,753,000
----------- -----------
$59,905,000 87,152,000
----------- -----------
----------- -----------

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt and capital leases
(notes 11 and 12)............................................ $ 1,112,000 5,238,000
Current portion of revolving credit note (note 11)............. 2,000,000 --
Accounts payable............................................... 5,544,000 17,866,000
Accrued salaries, wages and bonuses............................ 2,169,000 1,758,000
Other accrued expenses (note 9)................................ 3,417,000 5,514,000
----------- -----------
Total current liabilities.................................. 14,242,000 30,376,000
Revolving credit notes, less current maturities (note 11)........ 5,943,000 15,159,000
Long-term debt, less current portion (note 11)................... 8,212,000 9,864,000
Deferred rent.................................................... 1,444,000 1,646,000
Capital lease and other long-term obligations (notes 3 and 12)... 252,000 2,390,000
----------- -----------
Total liabilities.......................................... 30,093,000 59,435,000
----------- -----------
Stockholders' equity (notes 13, 14, 15, 17 and 18):
Series A convertible preferred stock, $.01 par value, 4,500,000
shares authorized, 3,200,000 shares issued and outstanding,
aggregate liquidation preference of $32,000,000.................. 26,981,000 26,981,000
Common stock, $.01 par value, 80,000,000 shares authorized,
4,506,981 shares and 3,985,393 shares issued and outstanding
in 1995 and 1996, respectively............................... 7,000 7,000
Additional paid-in capital....................................... 19,796,000 19,763,000
Accumulated deficit.............................................. (16,972,000) (19,034,000)
----------- -----------
Net stockholders' equity................................... 29,812,000 27,717,000
----------- -----------
Commitments, contingencies and subsequent events (notes 2, 3, 4,
5, 6, 11, 12, 18 and 21)
Total liabilities and stockholders' equity................. $59,905,000 87,152,000
----------- -----------
----------- -----------
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE>
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED JANUARY 29, 1994 AND
THE TWELVE MONTHS ENDED JANUARY 28, 1995 AND JANUARY 27, 1996

<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net sales........................................... $96,496,000 146,520,000 179,820,000
Cost of sales....................................... 63,914,000 97,085,000 117,188,000
----------- ----------- -----------
Gross profit.................................. 32,582,000 49,435,000 62,632,000
General and administrative expenses................. 26,974,000 45,510,000 56,097,000
Amortization of excess of cost over net assets
acquired (goodwill) (notes 2 and 3)............... 796,000 1,188,000 1,382,000
Management fees to affiliate (note 19).............. 265,000 129,000 --
----------- ----------- -----------
Operating income.............................. 4,547,000 2,608,000 5,153,000
Interest expense and financing fees (note 11)....... (3,113,000) (2,813,000) (3,675,000)
Interest expense and financing fees--related parties
(note 11)........................................... (320,000) -- --
Other expenses, net................................. (1,000) -- --
----------- ----------- -----------
Income (loss) from continuing operations
before income taxes, discontinued operations
and extraordinary gain...................... 1,113,000 (205,000) 1,478,000
Income taxes (note 10).............................. -- (149,000) --
----------- ----------- -----------
Income (loss) from continuing operations
before discontinued operations and
extraordinary gain.................................. 1,113,000 (354,000) 1,478,000
Discontinued operations (notes 4, 5 and 6):
Income (loss) on disposal, net of income tax
benefit............................................. 87,000 (2,241,000) (500,000)
----------- ----------- -----------
Income (loss) before extraordinary gain........... 1,200,000 (2,595,000) 978,000
Extraordinary gain, net of income taxes (note 11)... 682,000 5,251,000 --
----------- ----------- -----------
Net income.................................... 1,882,000 2,656,000 978,000
Preferred stock dividends (note 14)................. (200,000) (2,030,000) (3,040,000)
----------- ----------- -----------
Net income (loss) applicable to common
stock............................................... $ 1,682,000 626,000 (2,062,000)
----------- ----------- -----------
----------- ----------- -----------
Income (loss) applicable to common stock per common
share and common stock equivalents:
Income (loss) from continuing operations...... $0.30 (0.59) (0.39)
Income (loss) before extraordinary gain....... 0.33 (1.15) (0.51)
Net income (loss) applicable to common
stock............................................... 0.55 0.16 (0.51)
Income (loss) applicable to common stock per common
share assuming full dilution:
Income (loss) from continuing operations...... 0.30 (0.59) (0.39)
Income (loss) before extraordinary gain....... 0.33 (1.15) (0.51)
Net income (loss) applicable to common
stock............................................... 0.55 0.16 (0.51)
Weighted average shares outstanding:
Primary........................................... 3,067,464 4,008,311 4,006,420
Fully diluted..................................... 3,069,885 4,008,311 4,006,420
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE>
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE NINE MONTHS ENDED JANUARY 29, 1994 AND THE TWELVE MONTHS ENDED JANUARY
28, 1995 AND JANUARY 27, 1996

<TABLE>
<CAPTION>
PREFERRED STOCK
--------------------------------------
RETAINED
SERIES C SERIES D COMMON STOCK EARNINGS
------------------ ------------------ ----------------- PAID-IN (ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT) TOTAL
------ ---------- ------ ---------- --------- ------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at April
30, 1993.......... -- $ -- -- $ -- 2,939,452 $5,000 $ 9,987,000 $(19,280,000) $(9,288,000)
Conversion of notes
and accrued
interest to common
stock.............. -- -- -- -- 28,857 -- 324,000 -- 324,000
Common stock issued
in connection with
private placement
debt............... -- -- -- -- 13,333 -- 80,000 -- 80,000
Repurchase of
common stock...... -- -- -- -- (13,333) -- (80,000) -- (80,000)
Accrued preferred
stock dividends... -- -- -- -- -- -- -- (8,000) (8,000)
Issuance of common
stock, net......... -- -- -- -- 1,100,995 2,000 6,874,000 -- 6,876,000
Conversion of MKI
guarantee to
preferred stock
(note 4)........... 25,000 2,500,000 -- -- -- -- -- -- 2,500,000
Conversion of notes
to preferred
stock, net......... -- -- 64,987 6,406,000 -- -- -- -- 6,406,000
Common stock issued
for consulting
services (note
15)................ -- -- -- -- 17,833 -- 107,000 -- 107,000
Common stock issued
in exchange for
option to purchase
debt (note 11).... -- -- -- -- 66,667 -- 400,000 -- 400,000
Common stock issued
in connection with
purchase of
subordinated notes
(note 11).......... -- -- -- -- 125,632 -- 971,000 -- 971,000
Other.............. -- -- -- -- -- -- (81,000) -- (81,000)
Net income for the
nine months ended
January 29, 1994... -- -- -- -- -- -- -- 1,882,000 1,882,000
------ ---------- ------ ---------- --------- ------ ----------- ------------ -----------
Balance at January
29, 1994.......... 25,000 $2,500,000 64,987 $6,406,000 4,279,436 $7,000 $18,582,000 $(17,406,000) $10,089,000
------ ---------- ------ ---------- --------- ------ ----------- ------------ -----------
</TABLE>

F-6
<PAGE>
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT), CONTINUED
FOR THE NINE MONTHS ENDED JANUARY 29, 1994 AND THE TWELVE MONTHS ENDED JANUARY
28, 1995 AND JANUARY 27, 1996
<TABLE>
<CAPTION>
PREFERRED STOCK
------------------------------------------------------------------------
SERIES A SERIES C SERIES D COMMON STOCK
----------------------- --------------------- ---------------------- ------------------ PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- ----------- ------- ----------- -------- ----------- --------- ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 29,
1994........ -- $ -- 25,000 $ 2,500,000 64,987 $ 6,406,000 4,279,436 $7,000 $18,582,000
Redemption
of
preferred
stock (note
14)......... -- -- (25,000) (2,500,000) (64,987) (6,406,000) -- -- --
Preferred
stock
dividends
(note
14)......... -- -- -- -- -- -- -- -- --
Issuance of
preferred
stock, net
(note 14)... 3,200,000 26,981,000 -- -- -- -- -- -- --
Cancellation
of
incentive
shares
(note 2).... -- -- -- -- -- -- (249,335) -- --
Issuance of
shares in
lieu of
earnout
shares
related to
the
acquisition
of General
Textiles
(note 2).... -- -- -- -- -- -- 500,000 -- 1,750,000
Repurchase
of warrants
(note
18)......... -- -- -- -- -- -- -- -- (53,000)
Adjustment
to common
stock
issued in
connection
with
purchase of
subordinated
notes (note
11)......... -- -- -- -- -- -- (23,120) -- (483,000)
Net
income...... -- -- -- -- -- -- -- -- --
--------- ----------- ------- ----------- -------- ----------- --------- ------ -----------
Balance at
January 28,
1995........ 3,200,000 $26,981,000 -- $ -- -- $ -- 4,506,981 $7,000 $19,796,000
--------- ----------- ------- ----------- -------- ----------- --------- ------ -----------

RETAINED
EARNINGS
(ACCUMU-
LATED
DEFICIT) TOTAL
------------ -----------
<S> <C> <C>
Balance at
January 29,
1994........ $(17,406,000) $10,089,000
Redemption
of
preferred
stock (note
14)......... -- (8,906,000)
Preferred
stock
dividends
(note
14)......... (2,222,000) (2,222,000)
Issuance of
preferred
stock, net
(note 14)... -- 26,981,000
Cancellation
of
incentive
shares
(note 2).... -- --
Issuance of
shares in
lieu of
earnout
shares
related to
the
acquisition
of General
Textiles
(note 2).... -- 1,750,000
Repurchase
of warrants
(note
18)......... -- (53,000)
Adjustment
to common
stock
issued in
connection
with
purchase of
subordinated
notes (note
11)......... -- (483,000)
Net
income...... 2,656,000 2,656,000
------------ -----------
Balance at
January 28,
1995........ $(16,972,000) $29,812,000
------------ -----------
</TABLE>

F-7
<PAGE>
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT), CONTINUED
FOR THE NINE MONTHS ENDED JANUARY 29, 1994 AND THE TWELVE MONTHS ENDED JANUARY
28, 1995 AND JANUARY 27, 1996

<TABLE>
<CAPTION>
PREFERRED STOCK
-----------------------
RETAINED
SERIES A COMMON STOCK EARNINGS
----------------------- ------------------ PAID-IN (ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT) TOTAL
--------- ----------- --------- ------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 28,
1995.................. 3,200,000 $26,981,000 4,506,981 $7,000 $19,796,000 $(16,972,000) $29,812,000
Preferred stock
dividends (note
14)................... -- -- -- -- -- (3,040,000) (3,040,000)
Purchase of treasury
shares................ -- -- (22,916) -- (33,000) -- (33,000)
Cancellation of
incentive shares
(notes 2 and 13)..... -- -- (498,672) -- -- -- --
Net income............ -- -- -- -- -- 978,000 978,000
--------- ----------- --------- ------ ----------- ------------ -----------
Balance at January 27,
1996.................. 3,200,000 $26,981,000 3,985,393 $7,000 $19,763,000 $(19,034,000) $27,717,000
--------- ----------- --------- ------ ----------- ------------ -----------
--------- ----------- --------- ------ ----------- ------------ -----------
</TABLE>

See accompanying notes to consolidated financial statements.

F-8
<PAGE>
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JANUARY 29, 1994 AND
THE TWELVE MONTHS ENDED JANUARY 28, 1995 AND JANUARY 27, 1996

<TABLE>
<CAPTION>
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Income (loss) from continuing operations....... $ 1,113,000 (354,000) 1,478,000
Adjustments to reconcile income (loss) to net
cash provided by (used in) continuing
operations:
Depreciation and amortization................ 1,186,000 2,229,000 3,285,000
Amortization of debt discount................ 1,281,000 1,167,000 1,555,000
Interest payable converted to preferred
stock............................................ 423,000 -- --
Loss on disposal of equipment................ 5,000 232,000 74,000
Gain on revaluation of subordinated notes.... -- -- (822,000)
Excess of straight-line rent over cash
payments......................................... 243,000 796,000 202,000
Decrease (increase) in merchandise
inventories...................................... (2,766,000) (4,064,000) 124,000
Decrease (increase) in non-trade accounts
receivable, prepaid expenses, other current
assets and other assets.......................... (116,000) (945,000) (7,647,000)
Decrease (increase) in layaway receivables... 178,000 124,000 (284,000)
Increase (decrease) in accounts payable...... 696,000 (690,000) 5,365,000
Increase (decrease) in accrued salaries,
wages and bonuses.......................... (17,000) 463,000 (1,431,000)
Increase (decrease) in other accrued expenses
and other current liabilities.................... (1,229,000) (1,558,000) 2,377,000
------------ ------------ ------------
Net cash provided by (used in) continuing
operations....................................... 997,000 (2,600,000) 4,276,000
------------ ------------ ------------
Income (loss) from discontinued operations..... 87,000 (2,241,000) (500,000)
Adjustments to reconcile income (loss) to net
cash provided by (used in) discontinued
operations:
Income taxes allocated to discontinued
operations....................................... -- (346,000) --
Decrease (increase) in net assets of
distribution business...................... -- 1,775,000 (287,000)
------------ ------------ ------------
Net cash provided by (used in)
discontinued operations.......................... 87,000 (812,000) (787,000)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of leasehold improvements and
equipment........................................ (1,833,000) (2,169,000) (3,889,000)
Investment in and purchase of General Textiles,
net of cash acquired............................. (1,486,000) -- --
Investment in and purchase of Factory 2-U, net
of cash acquired............................. -- -- (520,000)
Purchase of subordinated notes................. (557,000) -- --
Purchase of option to retire debt at a
discount......................................... (400,000) -- --
------------ ------------ ------------
Net cash used in investing activities.... (4,276,000) (2,169,000) (4,409,000)
------------ ------------ ------------
Cash flows from financing activities:
Borrowings on revolving credit notes........... 113,381,000 165,750,000 210,613,000
Payments on revolving credit notes............. (115,825,000) (162,927,000) (207,022,000)
Proceeds from issuance of long-term note....... -- -- 1,500,000
Payments of long-term debt..................... (3,656,000) (11,046,000) (1,455,000)
Proceeds from issuance of notes payable and
debentures....................................... 4,067,000 -- --
Proceeds from issuance of common and preferred
stock, net....................................... 6,783,000 26,981,000 --
</TABLE>

(Continued)

F-9
<PAGE>
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
FOR THE NINE MONTHS ENDED JANUARY 29, 1994 AND
THE TWELVE MONTHS ENDED JANUARY 28, 1995 AND JANUARY 27, 1996

<TABLE>
<CAPTION>
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Purchase of subordinated notes................. $ -- -- (57,000)
Payment of deferred debt issuance costs........ (647,000) (94,000) (40,000)
Purchase of stock and warrants................. (80,000) (8,959,000) (33,000)
Payments of capital lease obligations.......... -- (214,000) (110,000)
Payments of preferred stock dividends.......... -- (2,222,000) (3,040,000)
------------ ------------ ------------
Net cash provided by financing
activities....................................... 4,023,000 7,269,000 356,000
------------ ------------ ------------
Net increase (decrease) in cash.................. 831,000 1,688,000 (564,000)
Cash at the beginning of the period.............. 3,000 834,000 2,522,000
------------ ------------ ------------
Cash at the end of the period.................... $ 834,000 2,522,000 1,958,000
------------ ------------ ------------
------------ ------------ ------------
Supplemental disclosures of cash flow
information:
Cash paid during the period for interest..... $ 1,536,000 1,669,000 1,783,000
Cash paid for income taxes................... -- 502,000 --
Supplemental disclosures of non-cash investing
and financing activities:
Conversion of preferred stock and accrued
dividends to private placement notes............. $ 958,000 -- --
Conversion of notes and accrued interest to
common stock..................................... 324,000 -- --
Conversion of promissory notes to debt....... 1,250,000 -- --
Conversion of Batra note to debt............. 775,000 -- --
Conversion of private placement notes and
accrued interest to preferred stock.............. 6,499,000 -- --
Conversion of subordinated debentures to
private placement notes.......................... 498,000 -- --
Conversion of bank guaranty to note payable
(note 4)......................................... 1,000,000 -- --
Conversion of bank guaranty to preferred
stock (note 4)............................. 2,500,000 -- --
Issuance of common stock for consulting
services (note 15)............................... 107,000 -- --
Issuance of common stock for option to retire
debt at a discount (note 11)..................... 400,000 -- --
Issuance of common stock for General
Textiles' debt (note 11)................... 971,000 -- --
Accrued interest exchanged for preferred
stock............................................ 423,000 -- --
Refinancing of General Textiles' long-term
debt (note 11)............................. 13,604,000 -- --
Investment in General Textiles financed by
issuance of note payable (note 2)................ 554,000 -- --
Acquisition of equipment financed by capital
leases (note 12)................................. -- 547,000 123,000
Common stock issued in lieu of contingent
common stock (note 2)............................ -- 1,750,000 --
Exercise of option to extinguish subordinated
debt and term note (note 11)..................... -- 800,000 --
Issuance of note payable for Mandel-Kahn
settlement (note 21)............................. -- -- 1,000,000
Issuance of note payable to former
shareholders of Factory 2-U (notes 3 and 11) -- -- 625,000
</TABLE>

See accompanying notes to consolidated financial statements.

F-10
<PAGE>
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 29, 1994, JANUARY 28, 1995 AND JANUARY 27, 1996

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Family Bargain Corporation and subsidiaries (the Company) operates off-price
retail apparel and housewares stores in the western and southwestern United
States.

Principles of Consolidation

The accompanying consolidated financial statements as of January 27, 1996
and for the twelve months then ended include the accounts of Family Bargain
Corporation and subsidiaries which include its wholly-owned subsidiaries,
General Textiles, Factory 2-U, Inc. (Factory 2-U) (beginning November 10, 1995)
and DRS Real Estate, Inc. (DRE). As of and for the twelve months ended January
28, 1995, the wholly-owned subsidiaries included General Textiles and DRS Real
Estate, Inc. As of and for the nine months ended January 29, 1994, the
wholly-owned subsidiaries included General Textiles (beginning May 30, 1993),
DRS Real Estate, Inc., Diversified Retail Services, Inc., CB/Camelot Acquisition
Corp. and CB/Murray Corporation, Inc.

All significant intercompany accounts have been eliminated in consolidation.

Fiscal Year

The Company uses a 52/53 week year ending on the Saturday nearest January
31. The Company changed its reporting period from April 30 to the Saturday
nearest January 31, as of January 29, 1994. Accordingly, the Company is
reporting results of operations for the nine months ended January 29, 1994 and
the twelve months ended January 28, 1995 and January 27, 1996.

Merchandise Inventory

Inventory is stated at the lower of cost or market determined using the
retail inventory method on a first-in, first-out flow assumption. In addition,
consistent with industry practice, the Company capitalizes certain warehousing
and warehouse to store distribution costs. At both January 28, 1995 and January
27, 1996, such costs included in inventory were approximately $1,000,000.

Leasehold Improvements and Equipment

Leasehold improvements and equipment are stated at cost. Equipment under
capital leases is stated at the present value of minimum lease payments at the
date of acquisition. Depreciation and amortization are calculated using the
straight-line method over the shorter of the estimated useful lives of the
related asset or the lease term, generally five to seven years.

Deferred Debt Issuance Costs

Deferred debt issuance costs are amortized using the effective interest
method over the terms of the related debt.

Excess of Cost Over Net Assets Acquired (Goodwill)

Excess of cost over net assets acquired (goodwill) is amortized on a
straight-line basis over the expected periods to be benefited, generally 25
years. The Company assesses the recoverability of this intangible asset by
determining whether amortization of the goodwill balance can be recovered
through

(Continued)
F-11
<PAGE>
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 29, 1994, JANUARY 28, 1995 AND JANUARY 27, 1996

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
undiscounted future operating cash flows of the acquired entity over its
remaining life. The amount of goodwill impairment, if any, is measured based on
projected discounted future results using the Company's average cost of funds.
The recoverability of goodwill could be impacted if estimated future operating
cash flows are not achieved.

Other Assets

Other assets consist principally of rental deposits on leased stores.

Store Closing Costs

Costs associated with closing stores, consisting primarily of lease
obligations and provisions to reduce assets to net realizable value, are charged
to operations upon the decision to close a store.

Pre-opening Costs

New stores' opening costs, including promotions, training and other direct
incremental store opening costs, are capitalized and amortized using the
straight-line method over the first twelve months of operation.

Income Taxes

Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating losses and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.

Fair Value of Financial Instruments

The carrying amounts of all receivables, payables and accrued balances
approximate fair value due to the short-term nature of such instruments. The
carrying amount of the revolving credit notes approximates fair value due to the
floating rate on such instruments. Because the remainder of the long-term debt
is evaluated each year based on expected debt repayment (Note 11), it is not
practical to estimate the fair value of such instruments due to the potential
volatility in repayment amounts.

Use of Estimates

Management of the Company made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these consolidated financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.

Income (Loss) per Common Share

Income (loss) per common share is based on the weighted average number of
shares of common stock outstanding. Common stock equivalents, which include
outstanding warrants and options, were

(Continued)
F-12
<PAGE>
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 29, 1994, JANUARY 28, 1995 AND JANUARY 27, 1996

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
not included when their effects would be anti-dilutive. Weighted average shares
and earnings per share amounts for 1994 have been restated to give retroactive
effect to the one-for-six reverse stock split (Note 13). Weighted average shares
and earnings per share amounts have been restated for 1994 and 1995 to give
retroactive effect to the cancellation of contingent shares during fiscal 1995
and 1996 (Note 2).

The following table presents information necessary to calculate earnings per
common share for the nine months ended January 29, 1994 and the twelve months
ended January 28, 1994 and January 27, 1996:

<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Weighted average shares outstanding:
Primary............................................... 3,067,464 4,008,311 4,006,420
Fully diluted......................................... 3,069,885 4,008,311 4,006,420
Income (loss):
Income (loss) from continuing operation............... $1,113,000 (354,000) 1,478,000
Income (loss) from discontinued operations............ 87,000 (2,241,000) (500,000)
Extraordinary gain.................................... 682,000 5,251,000 --
---------- ---------- ----------
Net income.......................................... 1,882,000 2,656,000 978,000
Less preferred stock dividends.......................... (200,000) (2,030,000) (3,040,000)
---------- ---------- ----------
Income (loss) applicable to common stock.............. $1,682,000 626,000 (2,062,000)
---------- ---------- ----------
---------- ---------- ----------
Income (loss) applicable to common stock per common
share:
Continuing operations................................... $ 0.30 (0.59) (0.39)
Discontinued operations................................. 0.03 (0.56) (0.12)
Extraordinary gain...................................... 0.22 1.31 --
---------- ---------- ----------
Net income (loss) applicable to common stock per common
share................................................... $ 0.55 0.16 (0.51)
---------- ---------- ----------
---------- ---------- ----------
Net income (loss) applicable to common stock per common
share, fully diluted.................................... $ 0.55 0.16 (0.51)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>

Advertising Costs

Advertising costs are charged to expense as incurred.

Reclassifications

Certain prior period amounts have been reclassified to conform their
presentation to the 1996 consolidated financial statements.

(2) ACQUISITION OF GENERAL TEXTILES

On December 31, 1992, the Company purchased from Batra, Inc. (Batra), a
company controlled by the principal stockholders of the Company, approximately
79% of the common stock of FBS Holdings Inc. (FBS), the immediate parent of
General Textiles prior to bankruptcy, and 88% of the

(Continued)
F-13
<PAGE>
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 29, 1994, JANUARY 28, 1995 AND JANUARY 27, 1996

(2) ACQUISITION OF GENERAL TEXTILES--(CONTINUED)
Class B preferred stock of FBS, for the following consideration: (i) $775,000
for reimbursement of expenses incurred by Batra and the assumption of all of
Batra's obligations $554,000 in connection with its acquisition of FBS, (ii)
$2,000,000 face amount of the Company's old Series A Preferred Stock, which was
subsequently converted into 193,798 shares of common stock (the FBS Sales
Shares), and (iii) up to a maximum of $10,000,000 of additional consideration,
payable in shares of the Company's common stock, based on an average per share
trading price for 60 days prior to the calculation date, based on the earnings
of General Textiles before interest, taxes, depreciation and amortization, as
defined, during the twelve months ended April 30, 1995. Concurrent with the
offering of new Series A Preferred Stock (Note 14), which was completed in July
1994, the Batra stockholders agreed to waive rights to the additional
consideration payable in common stock in exchange for 500,000 shares of the
Company's common stock. This resolution increased the excess of cost over net
assets acquired (goodwill) and increased paid-in capital by $1,750,000.

Under the original stock purchase agreement, the principal stockholders of
the Company and a member of management received shares of common stock of the
Company which were subject to cancellation if certain earnings levels were not
achieved. Of the 997,342 shares granted, 498,670 shares were surrendered and
canceled as of January 28, 1995. The remaining 498,672 shares were surrendered
and canceled during fiscal 1996.

Because General Textiles was operating under the control of the Bankruptcy
Court, the Company was unable to exercise significant control over the financial
and business operations of General Textiles. Accordingly, the Company's
investment was accounted for using the cost method for the twelve months ended
April 30, 1993. The Company's investment in General Textiles was carried on the
cost basis pending effectiveness of the plan of reorganization (the Plan). On
May 28, 1993, the Plan was declared effective and General Textiles emerged from
Chapter 11. Under the terms of the Plan, the Company contributed $3,000,000 in
equity to General Textiles and the Company's ownership of General Textiles
increased to 100%. As a result, the consolidated financial statements at January
29, 1994 and for the nine months then ended, include the accounts of General
Textiles on a fully consolidated basis commencing on May 29, 1993, the date the
Company achieved control, and for the period from May 30, 1993 through January
29, 1994. For financial statement reporting purposes, the transaction is
considered to have occurred on May 29, 1993, the closest accounting period-end
to the confirmation date.

The acquisition was accounted for under the purchase method of accounting.
All acquired assets and liabilities were recorded at their estimated fair market
values on May 29, 1993, with the excess purchase price over the net fair market
value allocated to goodwill. Major classes of assets acquired included cash,
merchandise inventory, prepaid expenses, deposits, and property and equipment.
Major classes of liabilities assumed included accounts payable, accrued
compensation, accrued expenses, sales tax payable, and debt.

(3) ACQUISITION OF FACTORY 2-U

On November 13, 1995, the Company acquired Capin Mercantile Corporation, an
off-price clothing and housewares retailer operating in the southwestern United
States. The name of Capin Mercantile Corporation was changed to Factory 2-U. The
acquisition was accounted for under the

(Continued)
F-14
<PAGE>
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 29, 1994, JANUARY 28, 1995 AND JANUARY 27, 1996

(3) ACQUISITION OF FACTORY 2-U--(CONTINUED)
purchase method of accounting. The results of operations of Factory 2-U have
been included in these consolidated financial statements from November 11, 1995,
the end of the closest accounting period.

The purchase price consisted of the following:

<TABLE>
<S> <C>
Cash paid to former shareholders at closing.................... $ 625,000
Promissory notes issued to former shareholders................. 625,000
Estimated acquisition expenses................................. 1,050,000
----------
Total cost of acquisition...................................... $2,300,000
----------
----------
</TABLE>

All acquired assets and liabilities of Factory 2-U have been recorded at
their estimated fair market
values on November 10, 1995, with the excess of the purchase price of $2,300,000
over the net tangible book deficit of $12,370,000 allocated to goodwill acquired
of $14,670,000.

The Company issued three promissory notes to the former shareholders of
Factory 2-U, a $125,000 note (the Downpayment Note), a $500,000 note (the
Absolute Note) and a note with a settlement value contingent upon the net
proceeds or appraised value of certain real property acquired in connection with
the acquisition (Note 11). The Absolute Note remains outstanding at January 27,
1996 (Note 11).

In connection with the acquisition of Factory 2-U, trade accounts payable of
Factory 2-U were rescheduled to twenty-four monthly installments. The
rescheduled trade payables are reflected in the accompanying consolidated
balance sheet at net present value. The unpaid balance of the rescheduled trade
accounts payable at January 27, 1996 follows:

<TABLE>
<CAPTION>
<S> <C>
Rescheduled payables, gross................................... $ 4,455,000
Less discount, at 11.5%....................................... (425,000)
------------
4,030,000
Less current portion (included in accounts payable)........... (2,209,000)
------------
Rescheduled payables, long-term (included in other long-term
obligations).................................................. $ 1,821,000
------------
------------
</TABLE>

The following table sets forth the Company's pro forma unaudited
consolidated statement of operations for the twelve-month periods ended January
28, 1995 and January 27, 1996. The pro forma consolidated statements of
operations give effect to the consolidation of Factory 2-U, elimination of sales
and cost of sales related to Factory 2-U stores no longer in operation,
elimination of Factory 2-U general and administrative expenses that have been
eliminated subsequent to acquisition, the adjustment of general and
administrative expenses to reflect additional expenses incurred to support the
Factory 2-U chain, the adjustment of interest expense and financing fees to
reflect the debt structure of the consolidated entity, and the recognition of
the amortization of the excess of cost over the fair value

(Continued)
F-15
<PAGE>
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 29, 1994, JANUARY 28, 1995 AND JANUARY 27, 1996

(3) ACQUISITION OF FACTORY 2-U--(CONTINUED)
of assets acquired with all transactions treated as though the acquisition had
occurred at January 30, 1994.

<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
1995 1996
------------ -----------
<S> <C> <C>
Net sales...................................... $214,583,000 220,084,000
Loss before extraordinary gain................. (3,794,000) (4,020,000)
Net income (loss).............................. 1,457,000 (4,020,000)
Loss applicable to common stock................ (573,000) (7,060,000)
Loss applicable to common stock per
common share................................. $ (0.14) (1.76)
</TABLE>

(4) DISCONTINUED OPERATIONS--DISTRIBUTION BUSINESS

The Company divested its Distribution Business (Distribution Business),
which was comprised of the operations of MKI Acquisition, Mandel-Kahn,
CB/Camelot and CB/Murray, prior to April 30, 1993. Those operations have been
accounted for as discontinued operations in these consolidated financial
statements.

On December 7, 1993, the Company settled a $3,500,000 liability related to
the guaranty of certain Mandel-Kahn debt by issuing a $1,000,000 three-year term
note bearing interest at 8 1/2% per annum, payable quarterly, and $2,500,000 in
Series C Preferred Stock. At January 28, 1995 and January 27, 1996, $750,000 and
$250,000, respectively, was outstanding on the term note.

Since April 30, 1993, all of CB/Murray's remaining assets other than
accounts receivable and preference claims have been liquidated, collection of
unliquidated accounts receivable and pending preference claims have been
pursued. During the nine months ended January 29, 1994, CB/Murray collected
outstanding accounts receivable and preference claims, and reduced senior
secured bank debt by $692,000.

During 1995 and 1996, the Company continued to litigate the cases related to
the Distribution Business. Accordingly, the accompanying consolidated statements
of operations includes a loss on disposal of discontinued operations of
approximately $2,400,000 and $500,000 related to legal expenses and other costs
in 1995 and 1996, respectively (Note 21).

(5) DISCONTINUED OPERATIONS--RETIREMENT COMMUNITIES

The Company has discontinued operations of two retirement communities
projects, White Horse and Oakmont. The Company's only activity relating to these
entities has been the payment of legal expenses, the collection of remaining
receivables and the liquidation of remaining liabilities. The Company was
obligated for $368,000 at January 28, 1995 and $401,000 at January 27, 1996
under a line of credit collateralized by a priority lien on the marketing fee
due from White Horse and the development and marketing fees due from Oakmont.
Principal amounts are payable solely from proceeds of such marketing and
development fees.

(Continued)
F-16
<PAGE>
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 29, 1994, JANUARY 28, 1995 AND JANUARY 27, 1996

(5) DISCONTINUED OPERATIONS--RETIREMENT COMMUNITIES--(CONTINUED)

The net assets of the retirement communities businesses as of January 28,
1995 and January 27, 1996 are as follows:

<TABLE>
<CAPTION>
1995 1996
-------- -------
<S> <C> <C>
Other receivables--fees................................ $368,000 401,000
-------- -------
Long-term debt......................................... 368,000 401,000
Other liabilities...................................... -- --
-------- -------
Total liabilities...................................... 368,000 401,000
-------- -------
Net assets......................................... $ -- --
-------- -------
-------- -------
</TABLE>

Through January 28, 1995 and January 27, 1996, the Company maintained a
reserve for uncollectibility sufficient to reduce the net book value of the
retirement communities to zero.

(6) ERIN RENTALS LIMITED

In March 1993, DRE sold a beneficial interest in the stock of Erin Rentals
Limited (Erin), a British Virgin Islands corporation, back to its original
owner. In consideration, a $3,000,000 promissory note was canceled and DRE
received a secured three-year note for $327,000. The $327,000 note is secured by
a pledge of the beneficial interest in the stock of Erin and has priority over
all other debt obligations of Erin, except Erin's secured bank debt.

The Company is negotiating with Erin to extend repayment terms of the
promissory note. Management expects the note to be collected at the end of three
years with interest payments over that term.

(7) LEASEHOLD IMPROVEMENTS AND EQUIPMENT

Leasehold improvements and equipment consist of the following:

<TABLE>
<CAPTION>
1995 1996
----------- ----------
<S> <C> <C>
Furniture, fixtures and equipment................. $ 3,294,000 7,718,000
Leasehold improvements............................ 1,775,000 2,928,000
Transportation and equipment...................... 140,000 175,000
Equipment under capital leases.................... 547,000 670,000
Construction in progress.......................... 250,000 187,000
----------- ----------
6,006,000 11,678,000
Less accumulated depreciation and amortization.... (1,084,000) (2,677,000)
----------- ----------
$ 4,922,000 9,001,000
----------- ----------
----------- ----------
</TABLE>

(Continued)
F-17
<PAGE>
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 29, 1994, JANUARY 28, 1995 AND JANUARY 27, 1996

(8) LAND AND BUILDING HELD FOR SALE

In connection with the Factory 2-U acquisition, the Company acquired certain
real property. This property is held for sale and is carried at estimated fair
value, net of estimated disposition costs, of $4,500,000.

(9) OTHER ACCRUED EXPENSES

Other accrued expenses as of January 28, 1995 and January 27, 1996 consist
of the following:

<TABLE>
<CAPTION>
1995 1996
---------- ---------
<S> <C> <C>
Sales tax payable................................... $ 430,000 2,402,000
Accrued acquisition expenses........................ -- 378,000
Other--current...................................... 368,000 1,027,000
Accrued advertising................................. 301,000 368,000
Litigation proceeds payable......................... -- 122,000
Deferred rent--current portion...................... 110,000 176,000
Accrued interest.................................... 93,000 163,000
Accrued legal and professional fees................. 2,057,000 765,000
Contingent rent..................................... 58,000 113,000
---------- ---------
$3,417,000 5,514,000
---------- ---------
---------- ---------
</TABLE>

(10) INCOME TAXES

The principal temporary differences that give rise to significant portions
of the consolidated deferred tax assets and liabilities, excluding the amount
attributable to net operating loss carryforwards, are presented below:

<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards..................... $6,090,000 6,090,000
Compensated absences and bonuses, principally due to
accruals for financial reporting purposes.............. 622,000 311,000
Assets held for sale and other purchased assets...... -- 603,000
Excess of deferred straight-line rent over amount
accruable for tax purposes............................. 624,000 729,000
Inventory sold on layaway and other reserves......... 111,000 184,000
Accrual for contingent liabilities related to
discontinued operations............................ 1,013,000 541,000
---------- ----------
Total gross deferred tax assets...................... 8,460,000 8,458,000
Less valuation allowance............................. (8,057,000) (8,121,000)
---------- ----------
Net deferred tax assets............................ $ 403,000 337,000
---------- ----------
---------- ----------
Deferred tax liabilities:
Inventory reserves, prepaid expenses and layaway
receivables............................................ $ 342,000 194,000
Leasehold improvements and equipment, principally due
to differences in depreciation recognized on fixed
assets................................................. 61,000 143,000
---------- ----------
Net deferred tax liabilities....................... $ 403,000 337,000
---------- ----------
---------- ----------
</TABLE>

(Continued)
F-18
<PAGE>
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 29, 1994, JANUARY 28, 1995 AND JANUARY 27, 1996

(10) INCOME TAXES--(CONTINUED)
The Company has established a valuation allowance attributable to lack of
historical earnings and annual limitations on the usage of net operating loss
carryforwards.

During the twelve months ended January 28, 1995 and January 27, 1996, the
valuation allowance, which represents deferred tax assets that may not be
realized by the reversal of future taxable temporary differences, decreased by
$1,424,000 and increased by $64,000, respectively.

Income taxes attributable to income from continuing operations, discontinued
operations and extraordinary item consist of:

<TABLE>
<CAPTION>
CONTINUING DISCONTINUED EXTRAORDINARY
OPERATIONS OPERATIONS ITEM TOTAL
---------- ------------ ------------- -------
<S> <C> <C> <C> <C>
Twelve months ended January 28, 1995:
U.S. Federal................................... $ 101,000 (276,000) 255,000 80,000
State and local................................ 48,000 (70,000) 337,000 315,000
---------- ------------ ------------- -------
$ 149,000 (346,000) 592,000 395,000
---------- ------------ ------------- -------
---------- ------------ ------------- -------
</TABLE>

Due to the full valuation of net deferred tax assets, there are no deferred
taxes allocable to loss from continuing operations, loss on disposal of
discontinued operations or the extraordinary gain for the twelve months ended
January 28, 1995 and January 27, 1996.

The difference between the "expected" income tax expense (benefit) computed
by applying the U.S. federal income tax rate of 34% to net income from
continuing operations for the nine months ended January 29, 1994 and the twelve
months ended January 28, 1995 and January 27, 1996 to actual expense is a result
of the following:

<TABLE>
<CAPTION>
1994 1995 1996
--------- -------- --------
<S> <C> <C> <C>
Computed "expected" tax expense (benefit)................... $ 378,000 (70,000) 503,000
Amortization of goodwill.................................... 271,000 404,000 470,000
Change in valuation allowance............................... -- (273,000) 64,000
Impact of purchase accounting adjustments................... -- -- (603,000)
Debt forgiveness permanent difference....................... -- -- (279,000)
State income taxes, net of federal income tax benefit....... -- 48,000 --
Net operating loss carryforward utilization................. (664,000) -- --
Other, net.................................................. 15,000 40,000 (155,000)
--------- -------- --------
$ -- 149,000 --
--------- -------- --------
--------- -------- --------
</TABLE>

The difference between the "expected" income tax benefit computed by
applying the U.S. federal income tax rate of 34% to loss from discontinued
operations for the nine months ended January 29, 1994 and the twelve months
ended January 28, 1995 and January 27, 1996 to actual is a result of the
following:

(Continued)
F-19
<PAGE>
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 29, 1994, JANUARY 28, 1995 AND JANUARY 27, 1996

(10) INCOME TAXES--(CONTINUED)

<TABLE>
<CAPTION>
1994 1995 1996
------- -------- --------
<S> <C> <C> <C>
Computed "expected" tax benefit............................... $30,000 (880,000) (170,000)
Change in valuation allowance................................. -- 604,000 --
State income taxes, net of federal income tax benefit......... -- (70,000) --
Net operating loss carryforward utilization................... (30,000) -- --
Income from continuing operations............................. -- -- 170,000
------- -------- --------
$ -- (346,000) --
------- -------- --------
------- -------- --------
</TABLE>

At January 27, 1996, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $17.9 million, of which
approximately $3.2 million were available for use at fiscal year-end, and which
begins expiring in 2007.

The difference between the "expected" income tax expense computed by
applying the U.S. federal income tax rate of 34% to extraordinary gain for the
nine months ended January 27, 1994 and the twelve months ended January 28, 1995
to actual is a result of the following:

<TABLE>
<CAPTION>
1994 1995
-------- ----------
<S> <C> <C>
Computed "expected" tax expense...................................... $232,000 1,987,000
Change in valuation allowance........................................ -- (1,755,000)
State income taxes, net of federal income tax benefit................ -- 337,000
Net operating loss carryforward utilization.......................... (232,000) --
Other, net........................................................... -- 23,000
-------- ----------
$ -- 592,000
-------- ----------
-------- ----------
</TABLE>

(11) LONG-TERM DEBT

Long-term debt at January 28, 1995 and January 27, 1996 consists of the
following:

<TABLE>
<CAPTION>
1995 1996
----------- ----------
<S> <C> <C>
Subordinated notes, non-interest bearing, discounted at rates
ranging from 8.5% to 25%, principal payments based on excess
cash flow, as defined........................................... $ 8,574,000 8,782,000
Revolving credit note, interest at prime plus 2% (10.5% at both
January 28, 1995 and January 27, 1996) payable monthly,
principal due in November 1998.................................. 7,943,000 9,948,000
Revolving credit note, interest at prime plus 2% (10.5% at January
27, 1996) payable monthly, principal due in November 1998....... -- 5,211,000
Installment mortgage note payable to a bank, interest at prime
plus 1.5% (10% at January 27, 1996) payable monthly, principal
payable monthly in installments of $11,250 with a balloon
payment of $2,284,000, due in May 1996.......................... -- 2,329,000
Installment note payable to a finance company, interest at prime
plus 2% (10.5% at January 27, 1996) payable monthly, principal
payable monthly in installments of $37,750, final payment due in
April 1998........................................................ -- 1,198,000
</TABLE>

(Continued)
F-20
<PAGE>
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 29, 1994, JANUARY 28, 1995 AND JANUARY 27, 1996

(11) LONG-TERM DEBT--(CONTINUED)

<TABLE>
<CAPTION>
1995 1996
----------- ----------
<S> <C> <C>
Installment note payable in settlement of lawsuit; interest at 10%
payable commencing in February 1996; principal payable in
installments of $41,667 per month from July 1996 to September
1996, $83,333 in October and November 1996, with a balloon
payment of $708,333 payable in December 1996, secured by 153,846
shares of Series A Convertible Preferred Stock issued to and
held in trust subsequent to January 27, 1996.................... $ -- 1,000,000
Installment note payable to the Commerce and Economic Development
Commission of Arizona, interest at 6%, principal and interest
payable in monthly installments of $4,232 with final installment
due in December 1999, secured by certain warehouse equipment.... -- 177,000
Installment note payable to the Economic Development
Administration of Arizona, interest at 5%, principal and
interest payable in monthly installments of $1,992 with final
installment due in March 1999, secured by certain warehouse
equipment......................................................... -- 70,000
Installment note payable to a finance company, interest at 8%,
principal and interest payable in installments of $13,648, final
balloon payment of $304,000, due in December 1998................. -- 655,000
Installment note payable to former shareholders of Factory 2-U,
interest at 8.75%, principal payments of $45,455 plus accrued
interest payable beginning in May 1996 and three months
thereafter until October 1998................................... -- 500,000
Note payable to a bank, interest at 8.5% payable quarterly, final
principal payment of $250,000, due on April 30, 1996.............. 750,000 250,000
----------- ----------
Total long-term debt.............................................. 17,267,000 30,120,000
Less current maturities........................................... (3,112,000) (5,097,000)
----------- ----------
Long-term debt, net of current maturities......................... $14,155,000 25,023,000
----------- ----------
----------- ----------
</TABLE>

Subordinated Notes

General Textiles' pre-bankruptcy unsecured claims were settled through the
issuance of New Subordinated Notes, Subordinated and Junior Subordinated
Reorganization Notes. At January 28, 1995 and January 27, 1996, these notes are
carried at $8,574,000 and $8,782,000, respectively, which are discounted at
$19,092,000 and $17,539,000, respectively, from face value, calculated using
discount rates ranging from 8.5% to 25%, resulting from the notes being
non-interest bearing. The discount to face value is based in part on future
excess cash flow projected in the Plan. The discount is amortized over the
estimated life of the notes and is recorded as a non-cash charge to interest
expense. Annual principal payments are due based on excess cash flow available,
as defined under the Plan, with final payments due on April 30, 2003 for the New
Subordinated Notes, November 28, 2003 for the Subordinated Reorganization Notes,
and May 28, 2005 for the Junior Subordinated Reorganization Notes.

In January 1994, the Company, in return for $400,000 in cash and 66,667
shares of common stock, valued at $400,000, obtained an option to repurchase
General Textiles' term note payable (Senior Note) and certain then outstanding
Subordinated Notes for $9,000,000 in cash.

(Continued)
F-21
<PAGE>
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 29, 1994, JANUARY 28, 1995 AND JANUARY 27, 1996

(11) LONG-TERM DEBT--(CONTINUED)

In July 1994, the Company exercised the option by using a portion of the
proceeds of its Series A Preferred Stock offering (Note 14) and extinguished
$15,544,000 of General Textiles' debt, including a $1,817,000 unamortized
deferred gain arising from a troubled debt restructuring, by paying $9,000,000
in cash and exercising the option, valued at $800,000, to extinguish the debt at
less than face value. The Company realized a pre-tax extraordinary gain on the
extinguishment of $5,744,000.

In January 1994, the Company purchased, for $558,000 in cash and 125,632
shares of common stock, with an estimated value at January 28, 1994 of $971,000,
$2,998,000 face amount of General Textiles' Subordinated Notes from the
pre-petition trade creditors with a carrying value of $2,210,000. $682,000 was
recognized as an extraordinary gain on the consolidated statement of operations
in 1994. Certain creditors subsequently declined their commitments to sell their
notes back to the Company. As a result, a pre-tax extraordinary gain of $99,000
was recognized during 1995, the notes are included as Subordinated Notes and the
23,120 common shares which these creditors had formerly committed to take as
satisfaction for their notes were canceled.

Revolving Credit Notes

Under General Textiles' Plan, pre-bankruptcy secured claims were settled
with the issuance of a revolving credit facility (the Facility) and the Senior
Note. The obligations are secured by the assets and stock of General Textiles.
The Facility currently consists of a $20,000,000 line of credit issued by a
lender. The Company also has established a revolving credit facility (together
with the General Textiles facility, the Facility) with the same lender for
Factory 2-U that consists of a $10,000,000 line of credit and is secured by the
assets of Factory 2-U. Borrowings on the Facilities are based on advances
against an inventory formula. A facility fee of .50% of the unused portion of
the Facilities is payable annually. The balances of the Facilities fluctuate
daily based on inventory levels and working capital requirements. The unused
portion of the Facilities totaled $1,472,000 and $665,000 for General Textiles
and Factory 2-U, respectively, at January 27, 1996.

A $2,000,000 line of credit owed to a lender was paid in March 1995.

(Continued)
F-22
<PAGE>
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 29, 1994, JANUARY 28, 1995 AND JANUARY 27, 1996

(11) LONG-TERM DEBT--(CONTINUED)
The future maturities of long-term debt include estimated principal payments
based on management's estimates of payments, based on future years' excess cash
flows, as defined by the Plan, on the General Textiles' New Subordinated Notes,
Subordinated Reorganization Notes, and Junior Subordinated Reorganization Notes.
The future maturities are:

<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
- ----------- ------------
<S> <C>
1997......................................................... $ 5,097,000
1998......................................................... 2,696,000
1999......................................................... 2,423,000
2000......................................................... 49,000
2001......................................................... --
Thereafter................................................... 22,235,000
------------
32,500,000
Less portion representing interest........................... (17,539,000)
------------
14,961,000
Less current maturities...................................... (5,097,000)
------------
$ 9,864,000
------------
------------
</TABLE>

Interest expense for the nine months ended January 29, 1994 and the twelve
months ended January 28, 1995 and January 27, 1996, respectively, is summarized
as follows:

<TABLE>
<CAPTION>
1994 1995 1996
---------- --------- ---------
<S> <C> <C> <C>
Notes payable to related parties......................... $ 320,000 -- --
Notes payable--private placements........................ 581,000 12,000 --
Revolving credit facilities.............................. 476,000 1,027,000 1,671,000
General Textiles senior term notes....................... 426,000 111,000 --
Debentures............................................... 99,000 -- --
General Textiles subordinated notes...................... 1,281,000 1,362,000 1,555,000
Other debt............................................... 250,000 301,000 449,000
---------- --------- ---------
Total.................................................... $3,433,000 2,813,000 3,675,000
---------- --------- ---------
---------- --------- ---------
</TABLE>

The Company is also obligated under the Contingent Note (Note 3). The amount
payable under the Contingent Note is subject to adjustment consisting of an
increase (decrease) by fifty percent of the degree to which the net proceeds
from the sale, or appraised value at a future date, of the Factory 2-U Real
Property (Note 8) is greater than (less than) $6,700,000. As the Factory 2-U
Real Property is currently valued at $4,500,000, the Contingent Note has been
assigned a settlement value of zero at January 27, 1996.

(12) LEASE COMMITMENTS

The Company operates retail stores, warehouse facilities and executive
offices under various operating leases. Certain leases provide for abatement of
rent during the initial period or escalating rent payments during the term of
the lease. For financial reporting purposes, rent expense is recognized on a

(Continued)
F-23
<PAGE>
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 29, 1994, JANUARY 28, 1995 AND JANUARY 27, 1996

(12) LEASE COMMITMENTS--(CONTINUED)
straight-line basis over the term of the lease. Accordingly, rent expense
recognized in excess of cash rent paid is reflected as deferred rent. Deferred
rent, including current and long-term portions at January 28, 1995 and January
27, 1996 amounted to $1,554,000 and $1,806,000, respectively, and is included as
a component of other accrued expenses and deferred rent on the accompanying
consolidated balance sheet. Some leases provide for contingent rentals which are
recognized as expense. Total contingent rent expense for the nine months ended
January 29, 1994 and the twelve months ended January 28, 1995 and January 27,
1996 was $42,000 and $63,000, respectively. Total rent expense, inclusive of
deferred and contingent rentals, was $4,519,000, $7,771,000 and $10,128,000 for
the nine months ended January 29, 1994 and the twelve months ended January 28,
1995 and January 27, 1996, respectively.

The Company is also obligated under various capital leases for leasehold
improvements and equipment that expire at various dates during the next four
years. At January 28, 1995 and January 27, 1996, leasehold improvements and
equipment and related accumulated amortization recorded under capital leases
were as follows:

<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Leasehold improvements................................ $129,000 129,000
Equipment............................................. 418,000 541,000
-------- --------
547,000 670,000
Less accumulated amortization......................... (50,000) (163,000)
-------- --------
$497,000 507,000
-------- --------
-------- --------
</TABLE>

At January 27, 1996, the future minimum lease payments, excluding executory
costs under noncancelable operating leases follows:

<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- ----------
<S> <C> <C>
1997................................................................ $ 181,000 9,476,000
1998................................................................ 149,000 8,960,000
1999................................................................ 91,000 8,667,000
2000................................................................ -- 6,492,000
2001................................................................ -- 3,436,000
Thereafter.......................................................... -- 9,192,000
--------- ----------
421,000 46,223,000
Less amount representing interest (rates ranging from 9.0% to
14.8%).............................................................. (55,000) --
--------- ----------
Present value of capital lease obligation........................... 366,000 46,223,000
Less current maturities............................................. (141,000) --
--------- ----------
Long-term capital lease obligation.................................. $ 225,000 46,223,000
--------- ----------
--------- ----------
</TABLE>

(13) COMMON STOCK

In May 1994, a one-for-six reverse stock split of the issued and outstanding
shares of the Company's common stock became effective. The par value of the
common shares was increased from

(Continued)
F-24
<PAGE>
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 29, 1994, JANUARY 28, 1995 AND JANUARY 27, 1996

(13) COMMON STOCK--(CONTINUED)
$.0003 per share to $.01 per share and the par value of the preferred shares was
changed from $.001 to $.01. In addition, the Board of Directors also increased
the number of authorized shares of preferred stock from 5,000,000 to 7,500,000.
All common stock share amounts and per share data reflect the reverse stock
split.

During fiscal 1996, the Company canceled 498,672 shares of common stock held
in escrow (the Contingent Shares) upon failure to achieve after-tax earnings of
$5,000,000 for the twelve months ended April 30, 1995. Fully diluted earnings
per share for prior periods have been retroactively restated to reflect the
cancellation of these shares as though the shares were never outstanding.

(14) PREFERRED STOCK

The Company has 7,500,000 shares of preferred stock authorized.

In July 1994, the Company completed an offering (Preferred Offering) of
Series A 9 1/2% Cumulative Convertible Preferred Stock (Series A Preferred). The
Company has 4,500,000 shares of Series A Preferred Stock authorized. The Series
A Preferred ranks senior to the common stock with respect to dividends, upon
liquidation, dissolution or winding up. Cumulative dividends are payable
quarterly at the rate of $.95 per year on July 31, October 31, the last Friday
in January and April 30 when declared by the Board of Directors. Series A
Preferred is convertible, prior to redemption, at the option of the holder, into
shares of common stock at a conversion price of $3.719 per common share (so that
each Series A Preferred share is convertible into 2.69 shares of common stock).
If the Company fails to declare and pay dividends on the Series A Preferred
within 90 days after a quarterly divided date, the conversion price is reduced
by $.50 per share in each instance but not below the par value of the stock. The
Company also has 25,000 shares of Series A Junior Participating Preferred Shares
authorized.

The $32.0 million in gross proceeds of the Preferred Offering were used as
follows:

<TABLE>
<CAPTION>
<S> <C>
Purchase of secured term note and a portion of the
Subordinated Notes.......................................... $ 9,000,000
Redemption of Series D Convertible preferred stock and accrued
dividends..................................................... 6,970,000
Repayment of General Textiles Revolving Credit Facility....... 3,900,000
Redemption of Series C Convertible preferred stock and accrued
dividends..................................................... 2,632,000
Repayment of short-term debt and accrued interest............. 505,000
Cash to fund expansion........................................ 3,974,000
Underwriting discount, commissions and expense allowance...... 2,880,000
Offering expenses............................................. 2,139,000
-----------
Gross proceeds................................................ $32,000,000
-----------
-----------
</TABLE>

(Continued)
F-25
<PAGE>
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 29, 1994, JANUARY 28, 1995 AND JANUARY 27, 1996

(15) EMPLOYMENT AND CONSULTING CONTRACTS

Benson A. Selzer, Chairman of the Company, is employed by the Company
pursuant to an employment agreement for an initial three-year term expiring on
June 1, 1996, that will be automatically extended each year for an additional
year unless either party gives a notice of termination to the other. The
agreement provides, among things, for an annual base salary of $232,000, life
insurance of $1,000,000, an automobile allowance, and incentive compensation
based on pre-tax operating income of the Company.

Joseph Eiger, Vice Chairman and Executive Vice President of the Company, is
employed by the Company pursuant to an employment agreement having substantially
the same terms as those of Mr. Benson A. Selzer's, except that his base salary
is $215,000.

John A. Selzer, Chief Executive Officer and President of the Company. is
employed by the Company pursuant to an employment agreement having substantially
the same terms as those of Benson A. Selzer, except that his base salary is
$193,000.

William Mowbray, Chief Executive Officer and President of GT, is employed by
the Company pursuant to an employment agreement having substantially the same
terms as those of Benson A. Selzer, except that his base salary is $300,000.

Kevin Frabotta, Senior Vice President of GT, is employed by the Company
pursuant to an employment agreement having substantially the same terms as those
of Benson A. Selzer, except that his base salary is $135,000.

In January 1996, the Company entered into a five-year consulting agreement
with Joel Mandel. Under this agreement, the Company will pay Mr. Mandel $125,000
per year for three years and $187,500 for two years. This agreement also
provides for the issuance of 60,000 shares of the Company's Series A Convertible
Preferred Stock. These shares were issued in February 1996 (Note 21).

The Company is also party to consulting and advisory contracts with certain
other parties which require annual payments of approximately $130,000.

On January 19, 1994, the Company entered into a consulting agreement with a
former executive of the Company. The former executive received 17,833 shares of
the Company's common stock and is to provide consulting services through
November 30, 1997.

(16) EMPLOYEE RETIREMENT PLAN

Effective January 1, 1994, by retroactive adoption, the Company initiated
sponsorship of a qualified defined contribution plan, under Internal Revenue
Code Section 401(k), covering employees who have completed twelve months of
service and who work a minimum of 1,000 hours during that twelve month period.
The Company contributes 20% of participants' voluntary contributions.
Participants may contribute from 1% to 15% of their compensation annually. The
Company's contribution expense was $37,000 and $116,000 for 1995 and 1996,
respectively.

(Continued)
F-26
<PAGE>
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 29, 1994, JANUARY 28, 1995 AND JANUARY 27, 1996

(17) STOCK OPTIONS

At January 28, 1995, an aggregate of 558,333 options to purchase common
stock were held by officers, former officers, employees and directors of the
Company at exercise prices ranging from $9.00 to $18.00 per share. During 1996,
the Company retired 264,582 options, repriced 235,417 options to an exercise
price of $1.375 per share and granted 560,833 options at $1.375 per share. At
January 27, 1996, 854,584 options were outstanding at exercise prices ranging
from $1.375 to $18.00 per share. The options become exercisable over a period
from the date of issuance to three years from the date of issuance. All options
were granted at prices equal to or greater than the fair market value of the
related stock on the date of grant. No options have been exercised as of January
27, 1996.

(18) WARRANTS

As of January 27, 1996, there are outstanding 2,571,500 Redeemable Class D
Common Stock Purchase Warrants (assuming the separation of the 4,903 warrants
not yet separated from the Units in which they were originally issued) (Class D
Warrants). Each Class D Warrant entitles the holder to purchase one-sixth of one
share of Common Stock at a price of $15.00 per share of Common Stock at any time
until September 15, 1996 (unless earlier redeemed by the Company).

The Class D Warrants are redeemable by the Company at a redemption price of
$.06 per Warrant, upon 30 days notice given at any time if the last sale price
per share of the Common Stock for 20 consecutive trading days ending not more
than 10 days prior to the date notice of redemption is given equals or exceeds
120% of the exercise purchase price therefor (i.e., $18.00). If the Company
gives a redemption notice, a holder would be forced either to exercise his
Warrant within 30 days of the notice of redemption or accept the redemption
price.

In addition, as of January 27, 1996, there were also outstanding 328,831
additional warrants (collectively with the Class D Warrants, the Warrants) of
the Company expiring between May 1996 and December 1998 at exercise prices
ranging from $6.37 to $16.20 per share; 15,000 warrants expiring between June
and December 1998 may be exercised at the then market price of the Company's
common stock.

The Warrants contain provisions that protect the holders against dilution by
adjustment of the exercise price in certain events, such as stock dividends and
distributions, stock splits and recapitalizations. The holder of a Warrant will
not possess any rights as a stockholder of the Company unless and until such
holder exercises the Warrant.

The Class A Warrants expired in June 1994. The Class C Warrants expired in
September 1995. The Company redeemed 125,000 Put Warrants, for which the option
to put the warrants back to the Company had expired, from a related party for
$53,000 in cash during 1995.

In conjunction with the Series A Preferred Stock offering, the Company
issued warrants to purchase 320,000 shares of its Series A Preferred Stock. The
warrants are exercisable at $16.50 per preferred share.

(Continued)
F-27
<PAGE>
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 29, 1994, JANUARY 28, 1995 AND JANUARY 27, 1996

(19) GENERAL TEXTILES MANAGEMENT AGREEMENT

On May 28, 1993, General Textiles entered into a management agreement with
Transnational Capital Ventures, Inc. (TCV). TCV is a merchant banking and
management consulting company that is affiliated with Joseph Eiger, Vice
Chairman, Executive Vice President and a Director of the Company. Under the
agreement, TCV receives a monthly fee for merchant banking and management
consulting services of $30,000 per month plus reimbursement of up to $5,000 of
expenses per month. Also, to the extent General Textiles' operating income
exceeds an amount specified in the Plan, TCV will receive an amount equal to 10%
of such excess. Amounts payable to TCV would be reduced in the event of a
default under General Textiles' senior loan agreement, due to the subordinated
position of the agreement. On January 28, 1994, the agreement was assigned to
the Company.

(20) RELATED PARTY TRANSACTIONS

At January 27, 1996, accounts receivable of approximately $170,000 was
outstanding from an affiliated group.

(21) COMMITMENTS AND CONTINGENCIES

Mandel-Kahn. In January 1996, the Company settled a lawsuit commenced in
1993 by former owners of Mandel-Kahn Industries, Inc. (Mandel-Kahn), which was
purchased by the Company in 1992. Under the settlement (the Mandel-Kahn
Settlement), a payment of $230,000 has been made, a five-year consulting
agreement entered into with Joel Mandel and an obligation to pay $1.0 million
plus interest during 1996. The latter obligation is secured by 153,846 shares of
the Company's Series A Convertible Preferred Stock. The Company has the
obligation to register these shares with the Securities and Exchange Commission
and may sell such shares, with the proceeds of any such sale being used to
reduce such indebtedness.

The Company is at all times subject to pending and threatened legal actions
which arise out of the normal course of business. In the opinion of management,
based in part on the advice of legal counsel, the ultimate disposition of these
matters will not have a material adverse affect on the financial position or
results of operations of the Company.

(22) SUBSEQUENT EVENTS

Regulation S Offering. During March 1996, the Company sold 726,000 shares of
Series A Preferred Stock for net proceeds of $3,221,000. In connection with this
offering, the Company issued five-year warrants to purchase up to 181,500 shares
of common stock for $1.875 per share. These warrants expire in March 2001.

Equipment Financing. In April 1996, the Company obtained financing for up to
$1,100,000 under an installment note with a financing company.

F-28
<PAGE>
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 27, 1996 AND JULY 27, 1996

<TABLE>
<CAPTION>
JANUARY 27, JULY 27,
1996 1996
----------- -----------
(UNAUDITED)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents...................................... $ 1,958,000 $ 1,146,000
Accounts receivable--non-trade................................. 887,000 747,000
Layaway receivables............................................ 695,000 1,210,000
Merchandise inventories........................................ 25,874,000 40,816,000
Prepaid expenses............................................... 776,000 1,774,000
----------- -----------
Total current assets....................................... 30,190,000 45,693,000
Real property held for sale...................................... 4,500,000 --
Leasehold improvements and equipment, net........................ 9,001,000 10,607,000
Other assets..................................................... 708,000 527,000
Excess of cost over net assets acquired (goodwill), less
accumulated amortization of $3,366,000 and $4,305,000 at
January 27, 1996 and July 27, 1996, respectively............... 42,753,000 42,414,000
----------- -----------
Total assets............................................... $87,152,000 99,241,000
----------- -----------
----------- -----------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued salaries, wages and bonuses............................ $ 1,758,000 $ 966,000
Current maturities of long-term debt and capital leases........ 5,238,000 3,426,000
Accounts payable............................................... 17,866,000 20,175,000
Other accrued expenses......................................... 5,514,000 4,923,000
----------- -----------
Total current liabilities.................................. 30,376,000 29,490,000
Revolving credit notes........................................... 15,159,000 26,747,000
Long-term debt, less current maturities.......................... 9,864,000 12,874,000
Deferred rent.................................................... 1,646,000 1,467,000
Capital lease and other long-term obligations.................... 2,390,000 399,000
----------- -----------
Total liabilities.......................................... 59,435,000 70,977,000
----------- -----------
Stockholders' equity:
Series A convertible preferred stock, $.01 par value, 4,500,000
shares authorized, 3,200,000 and 3,727,415 shares issued and
outstanding, aggregate liquidation preference of $32,000,000
and $37,270,000 at January 27, 1996 and July 27, 1996,
respectively..................................................... 26,981,000 28,238,000
Common stock, $.01 par value, 80,000,000 shares authorized,
3,985,393 and 4,693,337 shares issued and outstanding at
January 27, 1996 and July 27, 1996, respectively................. 7,000 14,000
Additional paid-in capital....................................... 19,763,000 21,714,000
Accumulated deficit.............................................. (19,034,000) (21,702,000)
----------- -----------
Total stockholders' equity................................. 27,717,000 28,264,000
----------- -----------
Commitments, contingencies
Total liabilities and stockholders' equity................. $87,152,000 99,241,000
----------- -----------
----------- -----------
</TABLE>

See accompanying notes to consolidated financial statements.

F-29
<PAGE>
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JULY 29, 1995 AND
JULY 27, 1996 (UNAUDITED)

<TABLE>
<CAPTION>
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
JULY 29, 1995 JULY 27, 1996
-------------- --------------
<S> <C> <C>
Net sales........................................................ $ 37,312,000 57,509,000
Cost of sales.................................................... 24,284,000 36,258,000
-------------- --------------
Gross profit............................................... 13,028,000 21,251,000
General and administrative expenses.............................. 12,163,000 18,874,000
Amortization of goodwill......................................... 315,000 477,000
-------------- --------------
Operating income........................................... 550,000 1,900,000
Interest expense and financing fees.............................. 786,000 1,271,000
-------------- --------------
Net income (loss).......................................... (236,000) 629,000
Preferred stock dividends........................................ 760,000 885,000
-------------- --------------
Net loss applicable to common stock........................ $ (996,000) (256,000)
-------------- --------------
-------------- --------------
Net loss per common share and common stock equivalents:
Primary...................................................... $ (0.25) (0.06)
Assuming full dilution....................................... (0.25) (0.06)
Weighted average shares outstanding:
Primary...................................................... 4,008,311 4,588,345
Fully diluted................................................ 4,008,311 4,588,345
</TABLE>

See accompanying notes to consolidated financial statements.

F-30
<PAGE>
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JULY 29, 1995 AND
JULY 27, 1996 (UNAUDITED)

<TABLE>
<CAPTION>
FOR THE SIX FOR THE SIX
MONTHS ENDED MONTHS ENDED
JULY 29, 1995 JULY 27, 1996
------------- -------------
<S> <C> <C>
Net sales........................................................ $ 68,350,000 107,334,000
Cost of sales.................................................... 45,785,000 68,600,000
------------- -------------
Gross profit............................................... 22,565,000 38,734,000
General and administrative expenses.............................. 24,276,000 36,414,000
Amortization of goodwill......................................... 629,000 939,000
------------- -------------
Operating income (loss).................................... (2,340,000) 1,381,000
Interest expense and financing fees.............................. 1,450,000 2,310,000
------------- -------------
Net loss................................................... (3,790,000) (929,000)
Preferred stock dividends........................................ 1,520,000 1,739,000
------------- -------------
Net loss applicable to common stock........................ $ (5,310,000) (2,668,000)
------------- -------------
------------- -------------
Net loss per common share and common stock equivalents:
Primary...................................................... $ (1.32) (0.62)
Assuming full dilution....................................... (1.32) (0.62)
Weighted average shares outstanding:
Primary...................................................... 4,008,311 4,314,189
Fully diluted................................................ 4,008,311 4,314,189
</TABLE>

See accompanying notes to consolidated financial statements.

F-31
<PAGE>
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JULY 29, 1995 AND JULY 27, 1996
(UNAUDITED)

<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS ENDED SIX MONTHS ENDED
JULY 29, 1995 JULY 27, 1996
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (3,790,000) $ (929,000)
Adjustments to reconcile loss to net cash used in
operating activities:
Depreciation and amortization......................... 1,425,000 2,127,000
Amortization of debt discount......................... 502,000 518,000
Excess (deficiency) of straight-line rent over cash
payments............................................ 83,000 (179,000)
Increase in merchandise inventories................... (6,492,000) (14,942,000)
Increase in accounts receivable-non trade, prepaid
expenses and other assets........................... (975,000) (479,000)
Increase in layaway receivables....................... (565,000) (515,000)
Increase in accounts payable.......................... 4,332,000 2,309,000
Decrease in accrued salaries, wages and bonuses....... (893,000) (792,000)
Increase (decrease) in other accrued expenses and
other current obligations........................... 425,000 (2,534,000)
---------------- ----------------
Net cash used in operations................................. (5,948,000) (15,416,000)
---------------- ----------------
Cash flows used in investing activities:
Purchase of leasehold improvements and equipment.......... (2,688,000) (2,601,000)
Sale of real property..................................... -- 4,500,000
---------------- ----------------
Net cash provided by (used in) investing activities..... (2,688,000) 1,899,000

Cash flows from financing activities:
Borrowings on revolving credit note....................... 82,566,000 150,061,000
Payments on revolving credit note......................... (75,629,000) (138,473,000)
Payments on notes payable and capital lease obligations... (607,000) (3,100,000)
Proceeds from issuance of note payable.................... 1,500,000 3,100,000
Net proceeds from issuance of preferred stock............. -- 2,856,000
Payment of dividends on preferred stock................... (1,520,000) (1,739,000)
---------------- ----------------
Net cash provided by financing activities............. 6,310,000 12,705,000
---------------- ----------------
Net decrease in cash........................................ (2,326,000) (812,000)
Cash at the beginning of the period......................... 2,522,000 1,958,000
---------------- ----------------
Cash at the end of the period............................... $ 196,000 1,146,000
---------------- ----------------
---------------- ----------------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest.................. $ 710,000 $ 1,952,000
</TABLE>

See accompanying notes to consolidated financial statements.

F-32
<PAGE>
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(1) UNAUDITED INTERIM FINANCIAL STATEMENTS

The accompanying unaudited consolidated financial statements do not include
all of the information and footnotes required by generally accepted accounting
principles for financial statements and should be read in conjunction with the
financial statements for the fiscal year ended January 27, 1996 included in the
Family Bargain Corporation and Subsidiaries' (the Company) Form 10-K as filed
with the Securities and Exchange Commission. The unaudited financial statements
include the accounts of Family Bargain Corporation and its subsidiaries. All
significant intercompany transactions have been eliminated in consolidation.

In the opinion of management, the unaudited consolidated financial
statements as of and for the three and six months ended July 27, 1996 reflect
all adjustments (which include normal recurring adjustments) necessary to
present fairly the financial position, results of operations and cash flows for
the periods presented. Due to the seasonal nature of the Company's business, the
results of operations for the interim period may not necessarily be indicative
of the results of operations for a full year.

(2) FINANCING TRANSACTIONS

In March 1996, the Company issued 726,000 shares of its Series A Convertible
Preferred Stock (Preferred Stock) for net proceeds of $2,856,000 and, in
connection therewith, 181,500 five-year warrants to purchase common stock of the
Company at $1.875 per share.

In February 1996, the Company issued 153,846 shares of Preferred Stock (the
Escrowed Shares) to be held in escrow to secure a $1.0 million obligation (the
Obligation) arising from the settlement of the Mandel-Kahn lawsuit. The Company
is permitted to sell these shares under the settlement agreement provided that
the proceeds of the sale are applied to reduce the Obligation. The Escrowed
Shares have not been reflected as outstanding in the accompanying balance sheet
but are treated as treasury shares. Dividends paid on the Escrowed Shares during
the six months ended July 27, 1996 are not reflected as dividends on the
accompanying statements of operations for the three and six months ended July
27, 1996 but are reflected as a reduction in the outstanding principal balance
of the Obligation on the accompanying balance sheet at July 27, 1996. In June
1996, the Company entered into an agreement to sell the Escrowed Shares for
$808,000, before deduction of any applicable sales expenses, by no later than
September 30, 1996.

During the six months ended July 27, 1996, the Company borrowed $1.1 million
under an installment note payable to finance the acquisition of electronic
point-of-sale equipment with interest, accruing at a prime rate of interest plus
2% (10.25% at July 27, 1996), payable $30,556 over 36 months.

In July, 1996 the Company borrowed $2.0 million for working capital purposes
under an installment note payable. The $2.0 million note bears interest, payable
monthly in arrears, at a prime rate plus 3% (11.25% at July 27, 1996) and is
subject to monthly principal payments of $33,333 over 60 months.

In July 1996, the Company extinguished a mortgage note in the amount of
approximately $2.3 million with the proceeds of the sale of certain real
property (Note 3).

F-33
<PAGE>
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)

(3) SALE OF LAND AND BUILDING

In July 1996, the Company sold certain real property (the Nogales Property)
obtained in its acquisition of Factory 2-U, Inc. (Factory 2-U).

In connection with the Company's agreement to purchase Factory 2-U, the
Company is contingently obligated to the former shareholders of Factory 2-U
under a promissory note with a stated principal amount of $600,000 (the
Contingent Note). The principal amount of the note contingent upon the timing
and net proceeds of the sale of the Nogales Property. The carrying value of the
Contingent Note was adjusted as of April 1996 to $600,000, with a corresponding
charge to goodwill, to reflect the resolution of the contingency following the
sale of the Nogales Property. Principal and interest, to accrue at an annual
rate of 8.75%, on the Contingent Note are due October 30, 1998.

(4) PROVISION FOR INCOME TAXES

No provision for income taxes has been reflected in the consolidated
statement of operations for the three and six months ended July 27, 1996 since
the Company generated tax losses during these periods. While losses would
increase the Company's net operating loss carry forwards (NOLs), realization of
such losses is not assured due to limitations on utilization of NOLs and the
Company's history of losses. As a result, a full valuation allowance has been
recognized against the deferred tax assets arising from the NOLs and no benefit
for income taxes is reflected in the accompanying statements of operations for
the three and six months ended July 27, 1996.

(5) PROPOSED CONVERTIBLE SUBORDINATED DEBENTURE OFFERING

In August 1996, the Company filed a registration statement on Form S-2 with
the Securities and Exchange Commission related to the proposed offering (the
Proposed Offering) of $40.0 million principal amount ($46 million if a $6.0
million over allotment option is exercised by the underwriters of the proposed
offering) of convertible subordinated debentures due 2006. The Company
concurrently filed a registration statement on Form S-2 on behalf of the
purchasers of the Escrowed Shares (Note 2).

F-34
<PAGE>
INDEPENDENT AUDITORS' REPORT

To the Board of Directors
Capin Mercantile Corporation

We have audited the accompanying balance sheet of Capin Mercantile
Corporation (the "Company") as of December 31, 1994, and the related statements
of operations, stockholders' equity (deficiency), and cash flows for the year
then ended. 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 audit.

We conducted our audit 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 audit provides a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1994, and the
results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's loss from operations, difficulties in
meeting its loan agreement covenants, and net working capital deficiency raise
substantial doubt about its ability to continue as a going concern. Management's
plans concerning these matters are also described in Note 1. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

Deloitte & Touche LLP

Tucson, Arizona
April 20, 1995
(May 1, 1995 as to paragraph 4 of Note 6)

F-35
<PAGE>
CAPIN MERCANTILE CORPORTATION
BALANCE SHEET
DECEMBER 31, 1994

<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 1,471,313
Receivables (note 6):
Trade accounts, less allowance for doubtful accounts and sales returns of
$58,000................................................................. 950,571
Other..................................................................... 562,716
Nonoperating affiliates (note 3).......................................... 11,281
-----------
Total receivables....................................................... 1,524,568
-----------
Merchandise inventories (note 6)............................................ 12,087,327
Prepaid expenses and supplies............................................... 486,628
-----------
Total current assets.................................................... 15,569,836
-----------
Land held for sale (note 4)................................................... 531,210
Property and equipment, net (notes 4 and 6)................................... 8,906,864
Other assets.................................................................. 298,959
-----------
Total................................................................... $25,306,869
-----------
-----------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Trade accounts payable...................................................... $13,933,547
Accrued expenses (note 5)................................................... 2,614,179
Due to nonoperating affiliates (note 3)..................................... 183,889
Current portion of notes payable to related parties (note 3)................ 434,188
Long-term debt reclassified as current (note 6)............................. 2,716,241
-----------
Total current liabilities............................................... 19,882,044
-----------
Deferred income and liabilities (note 9)...................................... 783,455
Long-term debt, net of current portion (note 6)............................... 315,854
Notes payable to related parties, net of current portion (note 3)............. 1,943,016
Subordinated notes payable to stockholders (note 7)........................... 2,726,000
-----------
Total liabilities....................................................... 25,650,369
-----------
Commitments and contingencies (notes 3, 6, 9 and 10)
Stockholders' deficiency (note 8):
Common stock, $.01 par value, 1,000,000 shares authorized, 168,399 shares
issued and outstanding.................................................... 1,684
Additional paid-in capital.................................................. 4,803,015
Deficit..................................................................... (5,148,199)
-----------
Total stockholders' deficiency.......................................... (343,500)
-----------
Total................................................................... $25,306,869
-----------
-----------
</TABLE>

See notes to financial statements.

F-36
<PAGE>
CAPIN MERCANTILE CORPORATION
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994

<TABLE>
<CAPTION>
<S> <C>
Net sales..................................................................... $93,875,685
Cost of sales................................................................. 69,055,122
-----------
Gross margin............................................................ 24,820,563
-----------
Operating expenses:
General and administrative expenses (Notes 3 and 9)......................... 13,935,074
Selling expenses (Note 9)................................................... 17,239,128
Restructuring expenses (Notes 1, 5 and 11).................................. 300,000
-----------
Total operating expenses................................................ 31,474,202
-----------
Loss from operations.......................................................... (6,653,639)
-----------
Other income (expense):
Interest income............................................................. 38,730
Interest expense............................................................ (661,663)
Gain on sale of assets...................................................... 407,644
Gain on foreign currency transactions....................................... 62,721
Net rental operations....................................................... 52,489
Miscellaneous............................................................... 106,801
-----------
Total other income...................................................... 6,722
-----------
Net loss...................................................................... $(6,646,917)
-----------
-----------
</TABLE>

See notes to financial statements.

F-37
<PAGE>
CAPIN MERCANTILE CORPORATION
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
YEAR ENDED DECEMBER 31, 1994

<TABLE>
<CAPTION>
TOTAL
ADDITIONAL RETAINED STOCKHOLDERS'
COMMON PAID-IN EARNINGS EQUITY
STOCK CAPITAL (DEFICIT) (DEFICIENCY)
------ ---------- ----------- -------------
<S> <C> <C> <C> <C>
Balances, January 1, 1994.................... $1,684 $4,400,901 $ 1,723,718 $ 6,126,303
Distributions................................ -- -- (225,000) (225,000)
Contributions................................ -- 402,114 -- 402,114
Net loss..................................... -- -- (6,646,917) (6,646,917)
------ ---------- ----------- -------------
Balances, December 31, 1994.................. $1,684 $4,803,015 $(5,148,199) $ (343,500)
------ ---------- ----------- -------------
------ ---------- ----------- -------------
</TABLE>

See notes to financial statements.

F-38
<PAGE>
CAPIN MERCANTILE CORPORATION
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1994

<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss..................................................................... $(6,646,917)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization.............................................. 669,303
Gain on sale of assets..................................................... (407,644)
Changes in assets and liabilities:
Increase in receivables.................................................. (488,028)
Increase in other receivables............................................ (317,199)
Decrease in merchandise inventories...................................... 716,912
Increase in prepaid expenses and supplies................................ (319,217)
Decrease in other assets................................................. 14,464
Increase in trade accounts payable....................................... 6,609,669
Increase in accrued expenses............................................. 496,771
Decrease in due to nonoperating affiliates............................... (36,616)
Decrease in deferred income and liabilities.............................. (132,195)
-----------
Net cash provided by operating activities.............................. 159,303
-----------
Cash flows from investing activities:
Proceeds from sale of property and equipment................................. 573,660
Increase in notes receivable from nonoperating affiliates.................... (4,259)
Collections of notes receivable.............................................. 28,858
Additions to property, plant and equipment................................... (936,145)
Decrease in cash value of officers' life insurance........................... 125,745
-----------
Net cash used in investing activities.................................. (212,141)
-----------
Cash flows from financing activities:
Decrease in cash surrender value policy loans................................ (32,676)
Borrowings on line of credit................................................. 19,335,000
Repayments of line of credit................................................. (19,335,000)
Net payments of long-term debt............................................... (171,966)
Net payments on notes payable to related parties............................. (177,809)
Cash contributions........................................................... 402,114
Cash distributions........................................................... (225,000)
-----------
Net cash used in financing activities.................................. (205,337)
-----------
Net decrease in cash........................................................... (258,175)
Cash and cash equivalents, beginning of year................................... 1,729,488
-----------
Cash and cash equivalents, end of year......................................... $ 1,471,313
-----------
-----------
</TABLE>

See notes to financial statements.

F-39
<PAGE>
CAPIN MERCANTILE CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1994

(1) ORGANIZATION AND BASIS OF PRESENTATION

Capin Mercantile Corporation (the "Company") operated 38 retail stores
during 1994 in the Southwest United States located in Arizona, New Mexico and
Texas. The Company operates stores under the following trade names: Factory 2-U,
Capin's, Parisian and Robinson's True Value Hardware. The majority of stores are
Factory 2-U locations.

The accompanying financial statements have been prepared on a going concern
basis which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements, the Company incurred a net loss for the year ended December 31, 1994
of approximately $6,600,000 and at December 31, 1994 the Company's current
liabilities exceeded its current assets by approximately $4,300,000. As a
result, the Company is in technical default of loan agreements with a bank (Note
6). These factors among others may indicate that the Company will be unable to
continue as a going concern for a reasonable period of time.

The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classifications of liabilities that might be necessary should the Company be
unable to continue as a going concern. The Company's continuation as a going
concern is dependent upon its ability to generate sufficient cash flow to meet
its obligations on a timely basis, to comply with the terms and covenants of its
debt agreements and to obtain additional financing or refinancing as necessary.
Management is continuing to negotiate the terms of its indebtedness and has
established a restructuring plan to generate cash to help relieve current cash
constraints. These plans include:

. Generating cash through the sale of non-essential assets.

. Reducing headcount, thus reducing wages and payroll taxes.

. Reducing average inventory levels and restructuring distribution center
operations.

. Geographically centralizing the chain and closing marginally profitable
stores. At December 31, 1994, the Company has recorded $300,000 of
restructuring charges in connection with the closing of stores (Note 11).

Although the results of these actions cannot be predicted, the Company
believes that these steps are appropriate and will help the Company effectively
reorganize its operations and ultimately to return to profitability.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash and Cash Equivalents and Supplementary Cash Flow Information--The
Company considers all short-term investments purchased with an original maturity
of three months or less to be cash equivalents. At December 31, 1994, cash
equivalents include cash on hand and checking accounts held in banks.

Interest paid during 1994 was $661,663.

(Continued)
F-40
<PAGE>
CAPIN MERCANTILE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEAR ENDED DECEMBER 31, 1994

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Trade Accounts Receivable--Trade accounts receivable are recorded net of the
allowance for doubtful accounts and sales returns. The Company uses the
allowance method for recording bad debts for financial reporting purposes.

Merchandise Inventories--Inventories are stated at the lower of cost or
market (net realizable value). Cost is generally determined using the first-in,
first-out (FIFO) method for inventory held in the distribution center. Cost is
generally determined using the retail inventory method for inventory at the
retail stores.

Land Held for Sale--Land held for sale is recorded at the lower of cost or
estimated net realizable value. Costs incurred and capitalized in connection
with development include architectural, engineering and legal fees.

Property and Equipment--Property and equipment are stated at cost.
Depreciation of property and equipment is calculated using the straight-line and
declining-balance methods over the estimated useful lives of the respective
assets. Leasehold improvements are amortized using the straight-line method over
the lesser of the lease terms or the estimated useful lives of the related
improvements.

The estimated useful lives of the property and equipment follow:

<TABLE>
<CAPTION>
LIVES
------------
<S> <C>
Buildings and improvements.................................... 19-40 years
Store fixtures and equipment.................................. 10-20 years
Office furniture and equipment................................ 10-20 years
Transportation equipment...................................... 2-10 years
Computer equipment............................................ 4-7 years
Leasehold improvements........................................ 5-15 years
</TABLE>

Income Taxes--With the consent of its stockholders, the Company has elected
S Corporation status. No provision for income taxes is made as S Corporations
are not generally subject to income taxes. All earnings or loss and income tax
credits flow through to the individual stockholders who are to report the
earnings or loss and income tax credits on their personal income tax returns.

Allocation of Profits and Losses--The profits and losses of the Company are
allocated to the stockholders based on their respective ownership percentages.

Deferred Lease Obligation--Rent expense is generally recognized on a
straight-line basis over the terms of the related leases. Deferred lease
obligation represents rent expense recognized in excess of scheduled cash
payments and is included in Deferred Income and Liabilities in the accompanying
balance sheet.

(3) TRANSACTIONS WITH AFFILIATES

The Company is a member of a group of affiliated, nonoperating entities by
virtue of common ownership. These entities primarily engage in the rental of
property. The Company incurred rent expense, included in selling expenses, from
rentals with affiliated, nonoperating entities of $447,920 during the year ended
December 31, 1994 (Note 9). Amounts payable, primarily for rent obligations, to

(Continued)
F-41
<PAGE>
CAPIN MERCANTILE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEAR ENDED DECEMBER 31, 1994

(3) TRANSACTIONS WITH AFFILIATES--(CONTINUED)
nonoperating affiliates at December 31, 1994 totaled $183,889. Amounts
receivable from nonoperating affiliates arising in the ordinary course of
operations totaled $11,281 at December 31, 1994.

The Company has unsecured notes payable to stockholders and related parties
for advances to the Company. The Company is currently paying interest quarterly
at 6.88% on the notes payable. Interest payments associated with these notes
totaled $132,382 for the year ended December 31, 1994. The notes payable to
related parties totaled $2,377,204 of which $434,188 is classified as current at
December 31, 1994.

The Company as guarantor is contingently liable with respect to a mortgage
note held by a nonoperating affiliate. The mortgage note balance was $471,688 at
December 31, 1994.

Certain stockholders of the Company have personally guaranteed the
provisions of certain long-term debt and lease agreements (Notes 6 and 9).

(4) PROPERTY AND EQUIPMENT AND LAND HELD FOR SALE

During 1991, management subdivided its new headquarters and distribution
center land into two parcels with the intent of developing and selling the
parcel adjacent to the new building. At December 31, 1994, $531,210 was
classified as land held for sale and consists of the following:

<TABLE>
<S> <C>
Land............................................................ $432,389
Land development costs.......................................... 98,821
--------
$531,210
--------
--------
</TABLE>

Property and equipment at December 31, 1994 consists of the following:

<TABLE>
<S> <C>
Land and improvements......................................... $ 383,901
Buildings and improvements.................................... 6,761,137
Furniture, fixtures and equipment............................. 4,521,541
Transportation equipment...................................... 539,799
Computer equipment............................................ 1,282,102
Leasehold improvements........................................ 1,160,434
Construction in progress...................................... 282,808
-----------
Total..................................................... 14,931,722
Less accumulated depreciation and amortization................ 6,024,858
-----------
Property and equipment, net............................... $ 8,906,864
-----------
-----------
</TABLE>

(Continued)
F-42
<PAGE>
CAPIN MERCANTILE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEAR ENDED DECEMBER 31, 1994

(5) ACCRUED EXPENSES

Accrued expenses at December 31, 1994 consists of the following:

<TABLE>
<S> <C>
Taxes other than income taxes.................................. $1,031,612
Salaries and related benefits.................................. 563,963
Advertising.................................................... 158,085
Freight........................................................ 179,457
Rent and utilities............................................. 108,259
Interest....................................................... 25,090
Restructuring.................................................. 300,000
Other.......................................................... 247,713
----------
$2,614,179
----------
----------
</TABLE>

(6) LINES OF CREDIT AND LONG-TERM DEBT

The Company's $5,500,000 general line of credit is subject to renewal on
July 30, 1995. This line of credit bears interest at the bank's prime rate (8.5%
at December 31, 1994) and is payable monthly. The balance outstanding under this
line of credit was zero at December 31, 1994.

The Company's $2,000,000 seasonal line of credit is available between May
31, 1994 and December 31, 1994, and then between May 31, 1995 and July 30, 1995.
This line of credit bears interest at the bank's prime rate (8.5% at December
31, 1994) and is payable monthly. The balance outstanding under this line of
credit was zero at December 31, 1994.

The lines of credit are collateralized by accounts receivable and
inventories and are personally guaranteed by the Company's stockholders.

At December 31, 1994, the balance outstanding on the Company's installment
note payable to a bank was $2,475,000. This loan agreement as well as the
Company's general line of credit contain certain restrictive debt covenants. At
December 31, 1994, the Company was not in compliance with certain of such
covenants (current ratio, tangible net worth ratio, total liabilities to
tangible net worth and cash flow ratio); however, on May 1, 1995, the Company
received a forbearance letter from the bank through June 15, 1995. Management
has prepared projections that indicate that upon the expiration of the
forbearance letter described above and through December 31, 1995, the Company
may not be in compliance with their debt covenants. Consequently, approximately
$2,300,000 of such debt that would have been classified as long-term has been
classified as current in the December 31, 1994 balance sheet. The Company
intends to seek appropriate financial covenant waivers or amendments, although
no assurance can be given that such waivers or amendments will be obtained. Any
such failure to obtain covenant relief would result in a default under the
Company's credit agreement and the bank will be entitled to accelerate the
indebtedness owed by the Company.

(Continued)
F-43
<PAGE>
CAPIN MERCANTILE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEAR ENDED DECEMBER 31, 1994

(6) LINES OF CREDIT AND LONG-TERM DEBT--(CONTINUED)
Long-term debt at December 31, 1994 consists of the following:

<TABLE>
<S> <C>
Installment note payable to the Commerce and Economic
Development Commission of Arizona maturing December 2000,
bearing interest at 6%, payable in monthly installments of
$3,652, personally guaranteed by certain stockholders........ $ 188,909
Prime plus 1/2% installment note payable to a bank; payable in
monthly installments of $11,250 plus interest through March
1998 when a balloon payment of approximately $2,000,000 is
due, collateralized by substantially all land, buildings and
improvements and personally guaranteed by certain
stockholders................................................. 2,475,000
Installment note payable to the Economic Development
Administration of Arizona, maturing April 1998, bearing
interest at 5%, payable in monthly installments of $1,376
with a balloon payment of approximately $32,000,
collateralized by certain equipment and personally guaranteed
by certain stockholders...................................... 76,086
Unsecured noninterest-bearing installment note payable to
Arizona Public Service Company maturing August 1996, payable
in monthly installments of $4,765............................ 142,941
Other notes payable to unrelated parties, payable in monthly
installments through January 1999............................ 149,159
----------
Total long-term debt....................................... 3,032,095
Less current portion........................................... 2,716,241
----------
Long-term debt................................................. $ 315,854
----------
----------
</TABLE>

A summary of long-term debt maturities for the years ending December 31 are
as follows:

(7) SUBORDINATED NOTES PAYABLE TO STOCKHOLDERS

The Company has unsecured notes payable to certain stockholders. The notes
payable are subordinate to the lines of credit and note payable to a bank (Note
6). The notes require interest payments monthly at 6.88%. Subordinated notes
payable to stockholders totaled $2,726,000 at December 31, 1994.

(Continued)
F-44
<PAGE>
CAPIN MERCANTILE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEAR ENDED DECEMBER 31, 1994

(8) STOCK PURCHASE AGREEMENT

The Company is obligated to repurchase the stock, equal to the book value at
the end of the preceding fiscal year, of any stockholder upon the stockholder's
resignation, termination or death. The Company, alternatively, may assign the
rights to repurchase the stock to other eligible stockholders, but the Company
remains contingently liable for payment of the purchase price of the stock.

(9) COMMITMENTS

The Company occupies various properties and operates an airplane under
operating lease agreements with affiliated, nonoperating entities and unrelated
parties. Existing lease agreements expire at various dates through 2014 and
include renewal options. The Company is responsible in most cases for occupancy
and maintenance costs including real estate taxes, insurance and utility costs.
Rent expense for the year ended December 31, 1994 totaled $3,524,217, of which
$447,920 was paid to affiliated, nonoperating entities. Rent expense is included
in general and administrative and selling expenses in the accompanying statement
of operations. Included in rent expense for the year ended December 31, 1994 are
rentals, contingent upon store revenues, of $529,391.

In February 1995, the Company decided to terminate the airplane lease and
ceased making lease payments. The airplane is currently for sale by the leasing
company. The Company will be responsible for any difference between the selling
price of the airplane and the remaining lease payments. The Company anticipates
that any shortfall will be offset by deferred income recognized on the sale-
leaseback of the airplane of approximately $540,000.

A summary of future minimum lease payments, excluding contingent rentals and
the terminated airplane lease, required under operating leases that have
remaining noncancelable lease terms in excess of one year follows:

<TABLE>
<CAPTION>
YEARS
ENDING TOTAL RELATED ENTITY
DECEMBER 31 RENTALS RENTALS
----------- ----------- --------------
<S> <C> <C>
1995............................................................. $ 2,548,371 $ 231,444
1996............................................................. 2,443,941 233,844
1997............................................................. 2,104,716 236,244
1998............................................................. 1,894,602 238,644
1999............................................................. 1,593,306 119,392
Thereafter....................................................... 5,581,174 --
----------- --------------
$16,166,110 $1,059,568
----------- --------------
----------- --------------
</TABLE>

The leases expire through 2014. It is expected that in the normal course of
business, leases that expire will be renewed or replaced by leases on other
properties; thus, it is anticipated that rent expense will be greater than the
future minimum lease payments shown above. Included in the above amounts is
$2,543,821 of total rentals related to 1995 store closures, a portion of which
the Company has accrued as of December 31, 1994 (see Notes 1 and 11).

(Continued)
F-45
<PAGE>
CAPIN MERCANTILE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEAR ENDED DECEMBER 31, 1994

(10) LITIGATION

Several former employees of the Company have filed claims against the
Company pertaining to termination of employment. The claims generally do not
state specific damage amounts. While the Company is unable to predict with
certainty the outcome of this litigation, it is management's opinion, that the
ultimate outcome will not have a material adverse effect on the financial
position or results of operations of the Company.

(11) RESTRUCTURING

As part of its restructuring plan, the Company closed four of its 38 stores
in 1995. Costs related to these store closures consisting primarily of committed
lease obligations, net of any estimated sublease revenue, and non-recoverable
fixtures and leasehold improvements were provided for in restructuring expenses
at December 31, 1994.

(12) SUBSEQUENT EVENT (UNAUDITED)

On November 13, 1995, Family Bargain Corporation, an unrelated company,
acquired all of the outstanding shares of common stock of the Company.

F-46
<PAGE>

CAPIN MERCANTILE CORPORATION
(AN S CORPORATION)

FINANCIAL STATEMENTS
DECEMBER 31, 1992 AND 1993
(WITH INDEPENDENT AUDITORS' REPORT THEREON)

F-47
<PAGE>
INDEPENDENT AUDITORS' REPORT

The Board of Directors
Capin Mercantile Corporation:

We have audited the accompanying balance sheets of Capin Mercantile
Corporation as of December 31, 1992 and 1993, and the related statements of
earnings, changes in stockholders' equity and cash flows for the years then
ended. 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.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Capin Mercantile Corporation
as of December 31, 1992 and 1993, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.

KPMG Peat Marwick LLP

Phoenix, Arizona
March 29, 1994

F-48
<PAGE>
CAPIN MERCANTILE CORPORATION
(AN S CORPORATION)
BALANCE SHEETS
DECEMBER 31, 1992 AND 1993

<TABLE>
<CAPTION>
1992 1993
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 3,091,613 1,729,488
Receivables (notes 7 and 11):
Trade accounts, less allowance for doubtful accounts and
sales returns of $58,000 in 1992 and 1993.................. 443,445 675,463
Nonoperating affiliates (note 3)............................. 25,479 7,022
Current installments of note from nonoperating affiliate
(note 4)................................................... 12,697 --
Current installments of notes receivable..................... 30,858 32,597
----------- -----------
Total receivables.......................................... 512,479 715,082
----------- -----------
Merchandise inventories (note 7)............................... 14,065,929 12,804,239
Prepaid expenses and supplies.................................. 92,146 167,411
Refundable income taxes........................................ 23,218 --
----------- -----------
Total current assets....................................... 17,785,385 15,416,220
----------- -----------
Note from nonoperating affiliate, excluding current installments
(note 4)......................................................... 18,262 --
Notes receivable, excluding current installments................. 97,208 72,686
Land held for development and sale (note 5)...................... 503,721 531,210
Property, plant and equipment, at cost (notes 5 and 7)........... 13,747,296 14,439,421
Less accumulated depreciation and amortization................. 5,246,206 5,697,419
----------- -----------
Net property, plant and equipment.......................... 8,501,090 8,742,002
----------- -----------
Other assets:
Cash value of officers' life insurance, net of policy loans of
$62,713 in 1992 and $579,140 in 1993......................... 626,799 244,321
Deposits....................................................... 39,233 47,010
Others, at cost................................................ 84,887 71,332
----------- -----------
Total other assets......................................... 750,919 362,663
----------- -----------
$27,656,585 25,124,781
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable......................................... $ 8,357,673 7,323,878
Accrued expenses (note 6)...................................... 2,522,557 2,117,408
Current installments of long-term debt (note 7)................ 494,138 262,440
Due to nonoperating affiliates (note 3)........................ 634,793 220,505
Income tax payable (note 10)................................... 96,744 --
Demand notes payable to related parties (note 3)............... 828,460 2,647,264
----------- -----------
Total current liabilities.................................. 12,934,365 12,571,495
Deferred payables.............................................. 890,876 915,650
Construction contract payable (note 5)......................... 535,098 --
Long-term debt, excluding current installments (note 7)........ 3,688,366 2,885,333
Subordinated notes payable to stockholders (note 8)............ 2,300,000 2,626,000
----------- -----------
Total liabilities.......................................... 20,348,705 18,998,478
----------- -----------
Stockholders' equity (note 9):
Common stock, $.01 par value; 1,000,000 shares authorized;
issued and outstanding 165,652 shares in 1992 and 168,399 in
1993............................................................. 1,656 1,684
Additional paid-in capital..................................... 4,224,003 4,400,901
Retained earnings.............................................. 3,082,221 1,723,718
----------- -----------
Total stockholders' equity................................. 7,307,880 6,126,303
Commitments and contingent liabilities (notes 3, 7 and 12).......
----------- -----------
$27,656,585 25,124,781
----------- -----------
----------- -----------
</TABLE>

See accompanying notes to financial statements.

F-49
<PAGE>
CAPIN MERCANTILE CORPORATION
(AN S CORPORATION)
STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1992 AND 1993

<TABLE>
<CAPTION>
1992 1993
------------ ----------
<S> <C> <C>
Net sales (note 11).............................................. $100,500,270 95,912,368
Cost of sales.................................................... 68,381,642 65,801,990
------------ ----------
Gross margin............................................... 32,118,628 30,110,378
------------ ----------
General and administrative expenses (notes 3, 6 and 12).......... 16,309,428 15,046,403
Selling expenses................................................. 15,173,242 14,651,498
------------ ----------
31,482,670 29,697,901
------------ ----------
Operating income........................................... 635,958 412,477
Other income (deductions):
Interest income................................................ 73,088 69,465
Interest expense (note 3)...................................... (312,665) (604,816)
Net rental operations.......................................... 288,772 178,409
Miscellaneous.................................................. 397,248 37,023
------------ ----------
446,443 (319,919)
------------ ----------
Earnings before income tax expense......................... 1,082,401 92,558
Income tax expense (note 10)..................................... 77,669 --
------------ ----------
Net earnings............................................... $ 1,004,732 92,558
------------ ----------
------------ ----------
</TABLE>

See accompanying notes to financial statements.

F-50
<PAGE>
CAPIN MERCANTILE CORPORATION
(AN S CORPORATION)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1992 AND 1993

<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Balances, December 31, 1991................. $38,600 3,834,312 4,739,808 8,612,720
Issuance of 5,620 shares of common stock as
a stock bonus............................. 56 389,691 -- 389,747
Cash dividends paid......................... -- -- (927,676) (927,676)
Distribution of investment in trading
association (note 1)........................ -- -- (1,496,681) (1,496,681)
Cash distributions from liquidation of stock
in non-operating affiliates (note 1)...... (37,000) -- (237,962) (274,962)
Net earnings................................ -- -- 1,004,732 1,004,732
------- ---------- ----------- -------------
Balances, December 31, 1992................. 1,656 4,224,003 3,082,221 7,307,880
Issuance of 2,747 shares of common stock as
a stock bonus............................. 28 176,898 -- 176,926
Cash distributions paid..................... -- -- (1,451,061) (1,451,061)
Net earnings................................ -- -- 92,558 92,558
------- ---------- ----------- -------------
Balances, December 31, 1993................. $ 1,684 4,400,901 1,723,718 6,126,303
------- ---------- ----------- -------------
------- ---------- ----------- -------------
</TABLE>

See accompanying notes to financial statements.

F-51
<PAGE>
CAPIN MERCANTILE CORPORATION
(AN S CORPORATION)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1992 AND 1993

<TABLE>
<CAPTION>
1992 1993
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings.................................................. $ 1,004,732 92,558
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization of property, plant and
equipment................................................. 483,965 605,857
(Gain) loss on disposal of property, plant and equipment.... (296,190) 21,970
Common stock bonus charged to general and administrative
expense................................................... 389,747 176,926
Changes in assets and liabilities:
Decrease (increase) in receivables........................ 143,366 (213,561)
Decrease in merchandise inventories....................... 26,939 1,261,690
Increase in prepaid expenses and supplies................. (3,873) (75,265)
Decrease in refundable income taxes....................... 27,988 23,218
Decrease (increase) in deposits........................... 286,715 (7,777)
(Increase) decrease in other assets....................... (29,316) 13,555
Decrease in trade accounts payable........................ (1,376,679) (1,116,366)
(Decrease) increase in accrued expenses................... (207,595) 106,265
Decrease in due to nonoperating affiliates................ (83,938) (414,288)
Decrease in income taxes payable.......................... (455,780) (96,744)
Increase (decrease) in deferred payables.................. 890,876 (109,533)
------------ -----------
Net cash provided by operating activities............... 800,957 268,505
------------ -----------
Cash flows from investing activities:
Decrease in unexpended construction funds..................... 211,301 --
Collections of notes receivable from nonoperating affiliate... 1,155 30,959
Collections of notes receivable............................... 4,980 22,783
Increase in notes receivable.................................. (133,046) --
Additions to land held for development and sale............... -- (27,489)
Additions to property, plant and equipment.................... (1,384,841) (668,880)
Proceeds from sale of property, plant and equipment........... 466,981 --
Increase in cash value of officers' life insurance............ (247,439) (133,949)
------------ -----------
Net cash used in investing activities................... (1,080,909) (776,576)
------------ -----------
Cash flows from financing activities:
Increase in cash surrender value policy loans................. -- 516,427
Borrowings on line of credit.................................. 26,180,000 19,934,944
Repayments on line of credit.................................. (26,180,000) (19,934,944)
Principal repayment of long-term debt......................... (31,875) (1,917,708)
Borrowings of demand notes payable to related parties......... 14,404,301 7,206,673
Repayment of demand notes payable to related parties.......... (13,575,841) (5,061,869)
Principal repayments of advance from related party............ -- (146,516)
Increase in notes payable to stockholders..................... 2,300,000 --
Cash distributions............................................ (1,202,638) (1,451,061)
------------ -----------
Net cash provided by (used in) financing activities..... 1,893,947 (854,054)
------------ -----------
Net increase (decrease) in cash and cash equivalents............ 1,613,995 (1,362,125)
Cash and cash equivalents at beginning of year.................. 1,477,618 3,091,613
------------ -----------
Cash and cash equivalents at end of year........................ $ 3,091,613 1,729,488
------------ -----------
------------ -----------
</TABLE>

See accompanying notes to financial statements.

F-52
<PAGE>
CAPIN MERCANTILE CORPORATION
(AN S CORPORATION)
NOTES TO FINANCIAL STATEMENTS

(1) ORGANIZATION AND PURPOSE

Capin Mercantile Corporation (Corporation) currently operates 36 retail
stores in the Southwest United States located in Arizona, New Mexico, and Texas.
The Corporation operates stores under the following trade names: Factory 2-U,
Capin's, Parisian, La Ville de Paris, and Robinson's True Value Hardware. The
majority of stores are Factory 2-U locations.

In March 1992, Capin's Duty-Free Warehouse, Inc. (CDFW) and the company in
which it had a 10.89% common stock ownership interest (UETA, Inc.) entered into
definitive Plans of Merger and Reorganization agreement with Duty-Free
International, Inc. (DFI), an unrelated party. Under the terms of the agreement,
DFI acquired substantially all of the net assets of UETA, Inc. solely in
exchange for DFI voting common stock. CDFW then distributed to its shareholders
the common stock of DFI with a cost of $1,496,681 along with its remaining
assets and liabilities in a tax-free reorganization.

During 1992, three nonoperating affiliates (Capin's Duty-Free Warehouse,
Inc., San Luis Imports-Exports, Inc., and Capin's Free Port, Inc.) were
dissolved resulting in the reduction of $37,000 of common stock, a reduction of
retained earnings of $237,962, and a distribution of $274,962 in cash to the
stockholders.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash and Cash Equivalents and Supplementary Cash Flow Information

The Corporation considers all short-term investments purchased with an
original maturity of three months or less to be cash equivalents. At December
31, 1992 and 1993, cash equivalents include cash on hand, checking accounts held
in banks, overnight investments and commercial paper.

Interest paid was $366,390 in 1992 and income taxes paid were $533,449 in
1992. Income taxes paid in 1992 represent tax liabilities existing as of
December 31, 1991 from certain companies prior to their conversion from a C
corporation to an S corporation (note 10). During 1992, the Corporation
distributed its investment in a trading association to its stockholders in a
noncash transaction. During 1992, the Corporation sold a building in exchange
for cash and the buyer assuming a note payable with a remaining balance of
$552,500. Additionally, the Corporation constructed a new warehouse facility
primarily by executing two notes payable to a bank totaling $3,932,504 and
recording a construction contract payable of $535,098 relating to the accrual of
the final construction draw request and retention obligation in noncash
transactions.

Interest paid was $615,508 in 1993. During 1993 the Corporation purchased
certain equipment primarily by executing notes payable of $117,288 and
increasing accounts payable by $82,571. Income taxes paid in 1993 totaled
$96,744 related to built-in gains taxes accrued in 1992.

Trade Accounts Receivable

Trade accounts receivable are reflected net of the allowance for doubtful
accounts and sales returns. The Corporation uses the allowance method for
recording bad debts for financial reporting purposes and the direct write-off
method for income tax reporting purposes.

(Continued)
F-53
<PAGE>
CAPIN MERCANTILE CORPORATION
(AN S CORPORATION)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Merchandise Inventories

Merchandise inventories are stated at the lower of cost or market (net
realizable value). Cost is generally determined using the first-in, first-out
(FIFO) method for inventory held in the warehouse. Cost is generally determined
using the retail inventory method for inventory at the retail stores.

Land Held for Development and Sale

Land held for development and sale is recorded at the lower of cost or
estimated net realizable value. Costs incurred in connection with development
are capitalized and include architectural, engineering, legal fees, real
property taxes and interest.

Property, Plant and Equipment

Property, plant and equipment are stated at cost. Depreciation of property,
plant and equipment is calculated using the straight-line and declining-balance
methods for financial reporting purposes over the estimated useful lives of the
respective assets. Leasehold improvements are amortized using the straight-line
method over the lesser of the lease terms or the estimated useful lives of the
related improvements. The estimated useful lives of the property, plant and
equipment follow:

Income Taxes

With the consent of its stockholders, the Corporation has elected subchapter
S status. No provision for income taxes is made as S corporations are not
generally subject to income taxes. All earnings or loss and income tax credits
"flow-through" to the individual stockholders who are to report the earnings or
loss and income tax credits on their personal income tax returns.

Allocation of Profits and Losses

The profits and losses of the Corporation are allocated to the stockholders
based on their respective ownership percentages.

Deferred Rent Payable

Rent expense is generally recognized on a straight-line basis over the terms
of the related leases. Deferred rent payable represents rent expense recognized
in excess of scheduled cash payments.

(Continued)
F-54
<PAGE>
CAPIN MERCANTILE CORPORATION
(AN S CORPORATION)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(3) TRANSACTIONS WITH AFFILIATES

The Corporation is a member of a group of affiliated, nonoperating entities
by virtue of common ownership. These entities primarily engage in the rental of
property. The Corporation incurred rent expense, included in general and
administrative expenses, from rentals with affiliated, nonoperating entities of
$1,005,530 and $719,659 during the years ended December 31, 1992 and 1993,
respectively (note 12). Amounts payable, primarily for rent obligations, to
nonoperating affiliates as of December 31, 1992 and 1993 totaled $634,793 and
$220,505, respectively. Amounts receivable from nonoperating affiliates arising
in the ordinary course of operations totaled $25,479 and $7,022 as of December
31, 1992 and 1993, respectively.

The Corporation executed unsecured demand notes payable to stockholders and
related parties for short-term advances to the Corporation. The Corporation is
currently paying interest quarterly at 5.0% on the notes payable. In 1992, the
Corporation paid quarterly interest payments at 1/4% over the prevailing prime
lending rate. Interest payments associated with these notes totaled $200,505 and
$163,829 for the years ended December 31, 1992 and 1993, respectively. The
demand notes payable to related parties totaled $828,460 and $2,647,264 at
December 31, 1992 and 1993, respectively.

The Corporation as guarantor is contingently liable with respect to a
mortgage note held by a nonoperating affiliate. The mortgage note balance was
$622,206 and $499,865 at December 31, 1992 and 1993, respectively.

Certain stockholders of the Corporation have personally guaranteed the
provisions of certain long-term debt and lease agreements (notes 7 and 12).

(4) NOTES RECEIVABLE FROM NONOPERATING AFFILIATE

During 1987, the Corporation received an $83,751 unsecured note receivable
from Potrero Realty, a nonoperating affiliate. The note bears interest at 8% and
is to be repaid in 94 monthly principal and interest installments of $1,202. The
balance outstanding on the note receivable was $30,959 at December 31, 1992. The
note was repaid in 1993.

(5) LAND HELD FOR DEVELOPMENT AND SALE AND PROPERTY, PLANT AND EQUIPMENT

During 1991, management subdivided its new headquarters and distribution
center land into two parcels with the intent of developing and selling the
parcel adjacent to the new building. At December 31, 1992 and 1993, $503,721 and
$531,210, respectively, were classified as land held for development and sale. A
summary of land held for development and sale follows:

<TABLE>
<CAPTION>
1992 1993
-------- --------
<S> <C> <C>
Land.................................................. $432,389 432,389
Land development costs................................ 71,332 98,821
-------- --------
$503,721 531,210
-------- --------
-------- --------
</TABLE>

(Continued)
F-55
<PAGE>
CAPIN MERCANTILE CORPORATION
(AN S CORPORATION)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(5) LAND HELD FOR DEVELOPMENT AND SALE AND PROPERTY, PLANT AND
EQUIPMENT--(CONTINUED)
A summary of property, plant and equipment follows:

<TABLE>
<CAPTION>
1992 1993
----------- -----------
<S> <C> <C>
Land and improvements........................... $ 212,617 309,334
Buildings and improvements...................... 7,082,903 7,091,670
Furniture, fixtures and equipment............... 3,691,334 4,127,719
Transportation equipment........................ 676,166 599,526
Computer equipment.............................. 1,015,147 1,077,555
Leasehold improvements.......................... 991,974 1,031,051
Construction in progress........................ 77,155 202,566
----------- -----------
$13,747,296 14,439,421
----------- -----------
----------- -----------
</TABLE>

The Corporation had a final construction balance of $535,098 on the new
headquarters and distribution center at December 31, 1992. The Corporation's
banking institution has committed to finance this balance on a long-term basis
and, therefore, the liability has been classified long-term on the accompanying
balance sheet at December 31, 1992.

Interest costs capitalized during 1992 totalled $193,969. There was no
interest capitalized during 1993, and no commitments have been executed with
respect to the construction in progress at December 31, 1993.

(6) ACCRUED EXPENSES

A summary of accrued expenses follows:

<TABLE>
<CAPTION>
1992 1993
---------- ----------
<S> <C> <C>
Taxes other than income taxes..................... $ 842,807 1,039,257
Vacation.......................................... 309,019 --
Salaries and related benefits..................... 204,099 236,259
Advertising....................................... 178,444 187,611
Freight........................................... 51,196 121,670
Rent and utilities................................ 310,482 115,267
Interest.......................................... 25,319 14,627
Other............................................. 601,191 402,717
---------- ----------
$2,522,557 2,117,408
---------- ----------
---------- ----------
</TABLE>

During 1993, the Corporation's Board of Directors amended its corporate
policy related to the accumulation of earned vacation. Under the new policy,
earned vacation not used by employees in the current fiscal year-end is
forfeited. Accordingly, the Company's accrued vacation in the amount of $309,019
was recorded as a reduction of general and administrative expenses in 1993.

(Continued)
F-56
<PAGE>
CAPIN MERCANTILE CORPORATION
(AN S CORPORATION)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(7) LINES OF CREDIT AND LONG-TERM DEBT

The Corporation's $5,500,000 general line of credit is subject to renewal on
July 30, 1995. This line of credit bears interest at the bank's prime rate which
is payable monthly. The balance outstanding under this line of credit was zero
at December 31, 1992 and 1993.

The Corporation's $2,000,000 seasonal line of credit is available between
May 31, 1994 and December 31, 1994, and then between May 31, 1995 and July 30,
1995. This line of credit bears interest at the bank's prime rate and is payable
monthly. The balance outstanding under this line of credit was zero at December
31, 1993.

The lines of credit are secured by accounts receivable, inventory, and the
personal guarantees of the Corporation's stockholders. The Corporation's loan
agreement contains certain restrictive debt covenants. The Corporation was in
compliance with the restrictive debt covenants at December 31, 1992 and 1993.

A summary of long-term debt follows:

<TABLE>
<CAPTION>
1992 1993
---------- ----------
<S> <C> <C>
6% installment note payable to the Commerce and Economic
Development Commission of Arizona due in December 2000, monthly
principal and interest payments of $3,652; personally guaranteed
by certain stockholders.......................................... $ 250,000 220,368

Prime plus 1/2% installment note payable to a bank; payable in
monthly installments of $11,250 plus interest through March 1998
when a balloon payment of approximately $2,000,000 is due,
secured by substantially all land, buildings and improvements and
the personal guarantee of certain stockholders................... 2,161,077 2,610,000

Price plus 1/2% installment note payable to a bank; payable in
monthly installments of $12,438 including interest through March
1998 when a balloon payment of approximately $1,652,000 is due;
secured by substantially all land and buildings and improvements.
This note was repaid in 1993..................................... 1,771,427 --

5% installment note payable to the Economic Development
Administration of Arizona, monthly principal and interest
payments of $1,376, due in April 1998 when a balloon payment of
approximately $32,000 is due; secured by certain equipment and
with a depreciated cost of $96,519 and the personal guarantee of
certain stockholders............................................. -- 88,452

Unsecured noninterest-bearing installment note payable to Arizona
Public Service Company due August 1996, payable in monthly
payments of $4,765............................................... -- 200,118

12.5% installment note payable to an unrelated party, payable in
monthly installments of $2,581 including interest, through
January 1995; secured by certain vehicles with a depreciated cost
of $32,637....................................................... -- 28,835
---------- ----------
Total long-term debt........................................... 4,182,504 3,147,773
Less current installments of long-term debt........................ 494,138 262,440
---------- ----------
Long-term debt, excluding current installments..................... $3,688,366 2,885,333
---------- ----------
---------- ----------
</TABLE>

(Continued)
F-57
<PAGE>
CAPIN MERCANTILE CORPORATION
(AN S CORPORATION)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(7) LINES OF CREDIT AND LONG-TERM DEBT--(CONTINUED)
A summary of long-term debt maturities after December 31, 1993 follows:

<TABLE>
<CAPTION>
LONG-TERM
DEBT
YEARS ENDING DECEMBER 31 MATURITIES
- ------------------------ ----------
<S> <C>
1994.............................................................. $ 262,440
1995.............................................................. 240,973
1996.............................................................. 241,300
1997.............................................................. 215,598
1998.............................................................. 2,145,029
Thereafter........................................................ 42,433
----------
$3,147,773
----------
----------
</TABLE>

(8) SUBORDINATED NOTES PAYABLE TO STOCKHOLDERS

During 1992, the Corporation executed unsecured notes payable to certain
stockholders. The notes payable are subordinate to the lines of credit and notes
payable to a bank (note 7). The notes require interest payments quarterly at
1/4% over the prevailing prime lending rate through December 1997 when the
entire balance is due in full. Notes payable to stockholders totaled $2,300,000
and $2,626,000 at December 31, 1992 and 1993, respectively.

(9) STOCK REPURCHASE AGREEMENT

The Corporation is obligated to repurchase the stock, equal to the book
value at the end of the preceding fiscal year, of any stockholder upon the
stockholder's resignation, termination, or death. The Corporation,
alternatively, may assign the rights to repurchase the stock to other eligible
stockholders, but the Corporation remains contingently liable for payment of the
purchase price of the stock.

(10) INCOME TAXES

Income taxes in 1992 represent built-in gains taxes for the excess fair
market value over the book value of the Corporation's assets, computed as of the
date of conversion by the Corporation to an S corporation. Built-in gains taxes
are assessed upon disposal of the respective assets; however, payment of
built-in gains taxes is limited by the Corporation's taxable income during its
reporting periods. During 1992, the Corporation recognized $77,669 of built-in
gains taxes related to the disposal of a building and had remaining estimated
built-in gains taxes payable of $96,744 at December 31, 1992.

(11) BUSINESS AND CREDIT CONCENTRATIONS

The Corporation has 36 retail stores located in Arizona, New Mexico, and
Texas with customers residing in Arizona, New Mexico, Texas, and Mexico. No
account receivable from any customer exceeded 5% of the Corporation's total
stockholders' equity at December 31, 1992 and 1993.

(Continued)
F-58
<PAGE>
CAPIN MERCANTILE CORPORATION
(AN S CORPORATION)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(12) COMMITMENTS AND CONTINGENT LIABILITIES

The Corporation occupies various properties and operates an airplane under
operating lease agreements with affiliated, nonoperating entities and unrelated
parties. Existing lease agreements expire at various dates through 2014 and
include renewal options. The Corporation is responsible in most cases for
occupancy and maintenance costs including real estate taxes, insurance and
utility costs. Rent expense for the year ended December 31, 1992 totaled
$3,715,469 of which $1,005,530 was paid to affiliated, nonoperating entities.
Rent expense for the year ended December 31, 1993, totaled $3,504,687 of which
$719,659 was paid to affiliated, nonoperating entities. Rent expense is included
in general and administrative and selling expenses on the accompanying
statements of earnings. Included in rent expense for the years ended December
31, 1992 and 1993 is contingent rentals of $606,838 and $888,842, respectively.

A summary of future minimum lease payments, excluding contingent rentals,
required under operating leases that have remaining noncancelable lease terms in
excess of one year follows:

YEAR
ENDING TOTAL RELATED ENTITY
DECEMBER 31 RENTALS RENTALS
- ----------- ----------- --------------
<S> <C> <C>
1994............................................................. $ 2,585,326 229,044
1995............................................................. 2,607,520 231,444
1996............................................................. 2,329,184 233,844
1997............................................................. 1,965,783 236,244
1998............................................................. 1,839,199 238,644
Thereafter....................................................... 7,510,686 119,329
----------- --------------
Total future minimum lease payments required..................... $18,837,698 1,288,549
----------- --------------
----------- --------------
</TABLE>

All leases expire through 2014. It is expected that in the normal course of
business, leases that expire will be renewed or replaced by leases on other
properties; thus, it is anticipated that rent expense will be greater than the
future minimum lease payments shown for 1994.

The Corporation is liable with respect to claims incidental to the ordinary
course of its operations. In the opinion of management, based on consultation
with legal counsel, the ultimate outcome of such matters will not have a
materially adverse effect on the financial position of the Corporation.

F-59

<PAGE>

No dealer, salesman or any other
person has been authorized to give any
information or to make any
representation, other than those
contained in this Prospectus, in FAMILY BARGAIN
connection with the offering described CORPORATION
herein, and, if given or made, such
information or representations must
not be relied upon as having been 153,846 Shares of Series A
authorized by the Company. The 9 1/2% Cumulative Convertible
delivery of this Prospectus at any Preferred Stock
time does not imply that there has not
been any change in the information set
forth herein or 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 security other than
the securities offered hereby, or an
offer to sell or solicitation of an
offer to buy such securities 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 any person to whom such offer or
solicitation would be unlawful.

TABLE OF CONTENTS

Page
----

Concurrent Registration Statement . 2
Available Information . . . . . . . 2
Summary . . . . . . . . . . . . . . 3
Summary Consolidated Financial
and Other Data . . . . . . . . . 6
Risk Factors . . . . . . . . . . . 11 --------------
Price Range of Common Stock . . . . 15 PROSPECTUS
Capitalization . . . . . . . . . . 16 --------------
Dividend Policy . . . . . . . . . . 17
Selected Consolidated
Historical and Pro Forma
Financial Data . . . . . . . . . 18
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations . . . . . . . . . . . 23
Business . . . . . . . . . . . . . 31
Management . . . . . . . . . . . . 38
Description of Capital Stock . . . 42
Selling Shareholders . . . . . . . 48
Plan of Distribution . . . . . . . 49
Certain Federal Income Tax
Considerations. . . . . . . . . . 50
Legal Matters . . . . . . . . . . . 53
Experts . . . . . . . . . . . . . . 53
Index to Consolidated
Financial Statements. . . . . . .F-1

, 1996

<PAGE>
PART II

Item 14. Other Expenses of Issuance and Distribution

The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than
underwriting discounts and commissions. All amounts are estimated except the
SEC Registration Fee and NASD Filing Fee.

SEC Registration Fee . . . . . . . . . . . . . . . . . . $378

NASD Filing Fee . . . . . . . . . . . . . . . . . . . . . $ 0

Listing Fee . . . . . . . . . . . . . . . . . . . . . . . $7,500

Printing and Engraving Expenses . . . . . . . . . . . . . $10,000

Legal Fees and Expenses . . . . . . . . . . . . . . . . . $25,000

Blue Sky Fees and Expenses . . . . . . . . . . . . . . . $0

Accounting Fees and Expenses . . . . . . . . . . . . . . $10,000

Transfer Agent Fees . . . . . . . . . . . . . . . . . . . $0

Miscellaneous . . . . . . . . . . . . . . . . . . . . . . $10,000
-----
Total . . . . . . . . . . . . . . . . . . . . . . . . . . $62,878

* To be filed by amendment

Item 15. Indemnification of Directors and Officers.

As permitted by the Delaware General Corporation Law, the Company's
Restated Certificate of Incorporation provides that Directors of the Company
will not be personally liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a Director, except for liability (i) for
any breach of the Director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the
Delaware General Corporation Law, relating to prohibited dividends or
distributions or the repurchase of redemption of stock, or (iv) for any
transaction from which the Director derives an improper personal benefit.

Article Eight of the Restated Certificate of Incorporation provides in part
that:

(a) Each person who was or is made a party or is threatened to be made a
party or is involved in any action, suit or proceeding, whether civil, criminal,
administrative or investigative (hereinafter a "proceeding"), by reason of the
fact that he or she, or a person of whom he or she is the legal representative,
is or was a director or officer, of the Company or is or was serving at the
request of the Company as a director, officer, employee or agent of another
Company or of a partnership, joint venture, trust or other enterprise, including
service with respect to employee benefit plans, whether the basis of such
proceeding is alleged action in an official capacity as a director, officer,
employee or agent or in any other capacity while serving as a director, officer,
employee or agent, shall be indemnified and held harmless by the Company to the
fullest extent authorized by the Delaware General Corporation Law, as the same
exists or may hereafter be amended (but, in the case of any such amendment, only
to the extent that such amendment permits the Company to provide broader
indemnification rights than said law permitted the Company to provide prior to
such amendment), against all expense, liability and loss (including attorneys'
fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to
be paid in settlement) reasonably incurred or suffered by such person in
connection therewith and such indemnification shall continue as to a person who
has ceased to be a director, officer, employee or agent and shall inure to the
benefit of his or her heirs, executors and administrators; provided, however,
that, except as provided in paragraph (b) hereof, the Company shall indemnify
any such person seeking indemnification

II-1

<PAGE>
in connection with a proceeding (or part thereof) initiated by such person only
if such proceeding (or part thereof) was authorized by the Board of Directors of
the Company. The right to indemnification conferred in this Section shall be a
contract right and shall include the right to be paid by the Company the
expenses incurred in defending any such proceeding in advance of its final
disposition: provided, however, that, if the Delaware General Corporation Law
requires, the payment of such expenses incurred by a director or officer in his
or her capacity as a director or officer (and not in any other capacity in which
service was or is rendered by such person while a director or officer,
including, without limitation, service to an employee benefit plan) in advance
of the final disposition of a proceeding, shall be made only upon delivery to
the Company of an undertaking, by or on behalf of such director or officer, to
repay all amounts so advanced if it shall ultimately be determined that such
director or officer is not entitled to be indemnified under this Section or
otherwise. the Company may, by action of its Board of Directors, provide
indemnification to employees and agents of the Company with the same scope and
effect as the foregoing indemnification of directors and officers.

(b) Notwithstanding any limitation to the contrary contained in paragraph
(a), the Company shall, to the fullest extent permitted by Section 145 of the
General Corporation Law of the State of Delaware, as the same may be amended and
supplemented, indemnify any and all persons whom it shall have power to
indemnify under said section from and against any and all of the expenses,
liabilities or other matters referred to in or covered by said section, and the
indemnification provided for herein shall not be deemed exclusive of any other
rights to which those indemnified may be entitled under any By-law, agreement,
vote of stockholders or disinterested Directors or otherwise, both as to action
in his official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.

(c) the Company may maintain insurance, at its expense, to protect itself
and any director, officer, employee or agent of the Company or another
corporation, partnership, joint venture, trust or other enterprise against any
such expense, liability or loss, whether or not the Company would have the power
to indemnify such person against such expense, liability or loss under the
Delaware General Corporation Law.

The Underwriting Agreement related to the Debenture Offering also contains
provisions under which the Company and the Underwriters have agreed to indemnify
each other (including officers and directors of the Company and the
Underwriters), and any person who may be deemed to control any Underwriter or
Company against certain liabilities under the Securities Act of 1933, as
amended.

Section 174 of the Delaware General Corporation Law provides that in case
of any willful or negligent violation of Section 160 or 173 of the Delaware
General Corporation Law, the directors under whose administration the same may
happen shall be jointly and severally liable, at any time within 6 years after
paying such unlawful dividend or after such unlawful stock purchase or
redemption, to the corporation, and to its creditors in the event of its
dissolution or insolvency, to the full amount of the dividend unlawfully paid,
or to the full amount unlawfully paid for the purchase or redemption of the
corporation's stock, with interest from the time such liability accrued. Any
director who may have been absent when the same was done, or who may have
dissented from the act or resolution by which the same was done, may exonerate
himself from such liability by causing his dissent to be entered on the books
containing the minutes of the proceedings of the directors at the time the same
was done, or immediately after he has notice of the same.

Any director against whom a claim is successfully asserted under
Section 174 of the Delaware General Corporation Law shall be entitled to
contribution from the other directors who voted for or concurred in the unlawful
dividend, stock purchase or stock redemption.

Any director against whom a claim is successfully asserted under
Section 174 of the Delaware General Corporation Law shall be entitled, to the
extent of the amount paid by him as a result of such claim, to be subrogated to
the rights of the corporation against stockholders who received the dividend on,
or assets for the sale or redemption of, their stock with knowledge of facts
indicating that such dividend, stock purchase or redemption was unlawful under
this chapter, in proportion to the amounts received by such stockholders
respectively.

II-2

<PAGE>
Item 16. Exhibits and Financial Statement Schedules.

(a)

Exhibit
No. Description
------- -----------

<S> <C>
1.1 Form of Underwriting Agreement in connection with Debenture Offering (7-Exhibit 1.1)

2.1 Joint Plan of Reorganization Under Chapter 11 of the United States Bankruptcy Code of FBS Holdings, Inc.
and General Textiles, d/b/a Family Bargain Centers ("Family Bargain") included in First Amended
Disclosure Statement (2-Exhibit 2.1)

3.1 Restated Certificate of Incorporation of the Registrant (1-Exhibit 3.1)

3.2 Amendments to the Restated Certificate of Incorporation of the Registrant (3-Exhibit 3.2)

3.3 Amended and Restated By-Laws of the Registrant (3-Exhibit 3.4)

4.1 Indenture, dated as of May 1993, between General Textiles and IBJ Schroder Bank & Trust Company
(included in Exhibit 2.1 above)

4.2 General Textiles Subordinated Notes Due 2003 (included in Exhibit 2.1 above)

4.3 Subordinated Reorganization Note Agreement, dated as of May 28, 1993, among General Textiles, Berkeley
Atlantic Income Limited, Govett American Endeavor Fund Limited and London Pacific Life & Annuity Company
(included in Exhibit 2.1 above)

4.4 Junior Subordinated Reorganization Note Agreement, dated as of May 1993, among General Textiles,
Berkeley Atlantic Income Limited, Govett American Endeavor Fund Limited and London Pacific Life &
Annuity Company (included in Exhibit 2.1 above)

4.5 Rights Agreement dated as of November 27, 1995 between the Registrant and Corporate Stock Transfer, Inc.
(5-Exhibit 1)

4.6 Certificate of Designations of the Series A Junior Participating Preferred Stock (included in
Exhibit 4.5 above)

4.7 Form of Indenture between the Registrant and American Stock Transfer & Trust Company (7-Exhibit 4.7)

4.8 Form of Debenture (included in 4.7 above)

*5.1 Opinion of Baer Marks & Upham LLP (re: legality)

10.1 Consulting Agreement, dated January 1, 1996, between Joel Mandel and General Textiles (6-Exhibit 10.6)

10.2 Employment Agreement, dated August 1, 1995, between General Textiles and William Mowbray (6-Exhibit
10.7)

10.3 Employment Agreement, dated August 21, 1995, between General Textiles and Kevin P. Frabotta (6-Exhibit
10.8)

10.4 Advisory Agreement dated as of November 1, 1995 between the Registrant and H. Jurgen Schlichting (6-
Exhibit 10.8(a))

10.5 Management Agreement, dated May 28, 1993, among DRS Apparel, Inc., General Textiles and Transnational
Capital Ventures, Inc. (3-Exhibit 10.9 (a))

</TABLE>

II-3

<PAGE>
<TABLE>
<S> <C>
10.6 Assignment (of Management Agreement), dated January 28, 1994, among DRS Apparel, Inc., General Textiles
and Transnational Capital Ventures, Inc. (3-Exhibit 10.9(b))

10.7 Loan and Security Agreement, dated as of October 14, 1993, between General Textiles and Greyhound
Financial Capital Corporation (currently known as Finova Capital Corporation) (3-Exhibit 10.15)

10.8 Amendment No. 1 to Loan and Security Agreement, dated as of July 14, between General Textiles and Finova
Capital Corporation (4-Exhibit 10.15(3))

10.9 Amendment No. 2 to Loan and Security Agreement, dated as of March 31, 1995, between General Textiles and
Finova Capital Corporation (7-Exhibit 10.9)

10.10 Amendment No. 3 to Loan and Security Agreement, dated as of July 27, 1995, between General Textiles and
Finova Capital Corporation (7-Exhibit 10.10)

10.11 Amendment No. 4 to Loan and Security Agreement dated as of November 10, 1995, between General textiles
and Finova Capital Corporation (7-Exhibit 10.11)

10.12 Amendment No. 5 to Loan and Security Agreement, dated as of April 18, 1996 between General Textiles and
Finova Capital Corporation (6-Exhibit 10.15(b))

10.13 Amendment No. 6 to Loan and Security Agreement, dated as of July 10, 1996, between General Textiles and
Finova Capital Corporation (7-Exhibit 10.13)

10.14 Second Amended and Restated Senior Secured Term Note (3-Exhibit 10.16)

10.15 Intercreditor, Standstill and Subordination Agreement, dated as of October 14, 1993, among Greyhound
Financial Capital Corporation, Westinghouse Electric Corporation, Guilford Investments Inc. and General
Textiles (3-Exhibit 10.18)

10.16 Purchase and Sale Agreement, dated as of December 28, 1993, between Guilford Investments, Inc. and
Westinghouse Electric Corporation (3-Exhibit 10.20)

10.17 Assignment and Assumption Agreement, dated December 29, 1993, between Guilford Investments, Inc. and
Westinghouse Electric Corporation (3-Exhibit 10.21)

10.18 Stock Purchase Agreement, dated as of August 29, 1995, among the Registrant, certain shareholders of
Capin Mercantile Corporation and Sellers Agent ("Factory 2-U Sellers") (5-Exhibit 10.1)

10.19 Amendment to Stock Purchase Agreement, dated November 10, 1995, between the Registrant and Factory 2-U
Sellers (5-Exhibit 10.2)

10.20 Loan and Security Agreement dated as of November 13, 1995 between Factory 2-U and Finova Capital
Corporation (6-Exhibit 10.30(a))

10.21 Amendment No. 1 to Loan and Security Agreement, dated April 18, 1996, between Factory 2-U and Finova
Capital Corporation (6-Exhibit 10.30(b))

10.22 Amendment No. 2 to Loan and Security Agreement, dated April 22, 1996, between Factory 2-U and Finova
Capital Corporation (7-Exhibit 10.22)

10.23 Amendment No. 3 to Loan and Security Agreement dated as of July 10, 1996 between Factory 2-U and Finova
Capital Corporation (7-Exhibit 10.23)

10.24 Stock Purchase Agreement dated as of June 28, 1996 among the Registrant, Morgana Holdings Inc. and
L'Ancresse Holdings Ltd. (7-Exhibit 10.24)

10.25 Purchase and Sale Agreement dated as of May 24, 1996 between Factory 2-U and Nogales Property
Management, L.L.C. (7-Exhibit 10.25)

10.26 Amendment, dated as of September 27, 1996, to Stock Purchase Agreement, dated as of June 28, 1996
among the Registrant, Morgana Holdings Inc. and L'Ancresse Holdings Ltd.
</TABLE>

II-4

<PAGE>

<TABLE>

<S> <C>
12.1 Computation of Ratio of earnings to fixed charges (7-Exhibit 12.1)

21.1 Subsidiaries of the Registrant (7-Exhibit 12.1)

*23.1 Consent of KPMG Peat Marwick LLP (Phoenix, Arizona)

*23.2 Consent of KPMG Peat Marwick LLP (San Diego, California)

*23.3 Consent of Deloitte and Touche LLP

23.4 Consent of Baer Marks & Upham LLP (included in Exhibit 5.1)

24.1 Power of Attorney (included on the signature pages to the Registration Statement)

25.1 Statement of Eligibility and Qualification of Trustee on Form T-1 (7-Exhibit 25.1)
</TABLE>

___________________________

* Filed with this amendment

(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-1, No. 33-47645 filed with the Commission on September 16, 1992.

(2) Incorporated by reference to the Registrant's Form 10-K for the fiscal year
ended April 30, 1993.

(3) Incorporated by reference to the Registrant's Registration Statement on
Form S-1, No. 33-77488 filed with the Commission on April 7, 1994.

(4) Incorporated by reference to General Textiles' Registration Statement on
Form S-4, No. 33-92176 filed with the Commission on May 11, 1995.

(5) Incorporated by reference to the Registrant's Form 8-K and 8-K/A dated
November 28, 1995.

(6) Incorporated by reference to the Registrant's Form 10-K/A for the fiscal
year ended January 27, 1996.

(7) Incorporated by reference to the Registrant's Registration Statement on
Form S-2, No. 333-09853 filed with the Commission on August 9, 1996.

II-5

<PAGE>
Item 16(b). Schedules

None

Item 17. Undertakings

(a) The undersigned registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement;

(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;

(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate, represent
a fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high and of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.

(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.

(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.

(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.

(4) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of an action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.

(5) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.

II-6

<PAGE>

(6) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.

II-7

<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-2 and has duly caused this Amendment to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of New York, State of New York, on the 30th day of
September, 1996.

FAMILY BARGAIN CORPORATION

By: /s/ John A. Selzer
-----------------------------------------
John A. Selzer
President and Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment to Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated below.

Signature Title Date
- --------- ----- ----

<S> <C> <C>
/s/ John A. Selzer
- ------------------------- Chief Executive Officer, September 30, 1996
John A. Selzer President and Director
(Principal Executive Officer)

/s/ Benson A. Selzer
- ------------------------- Chairman and Director September 30, 1996
Benson A. Selzer

/s/ Joseph Eiger
- ------------------------- Vice Chairman, Executive Vice September 30, 1996
Joseph Eiger President and Director

/s/ William W. Mowbray
- ------------------------- Chief Operating Officer and September 30, 1996
William W. Mowbray Director; President
and Chief Executive Officer of
General Textiles and Factory 2-U, Inc.

/s/ Jeffrey C. Gerstel
- ------------------------- Executive Vice President, Finance September 30, 1996
Jeffrey C. Gerstel (Principal Financial and
Accounting Officer)

*
- ------------------------- Director September __, 1996
Francis G. Warburton

</TABLE>

II-8

<PAGE>

<TABLE>

<S> <C> <C>
* Director September __, 1996
- -------------------------
John J. Borer III

* Director September __, 1996
- -------------------------
Edwin C. Nevis

* Director September __, 1996
- -------------------------
Barton P. Ferris, Jr.

*By: /s/ John A. Selzer September 30, 1996
---------------------
John A. Selzer, Attorney-in-Fact

II-9

</TABLE>

EXHIBIT 5.1

October 10, 1996
Family Bargain Corporation
315 East 62nd Street
New York, New York 10021

Re: Registration Statement on Form S-2,
File No. 333-10877
---------------------------------------

Gentlemen:

We have acted as counsel to Family Bargain Corporation, a Delaware
corporation (the "Company"), in connection with the filing of the Company's
Registration Statement on Form S-2, File No. 333-10877 (the "Registration
Statement"), relating to the registration under the Securities Act of 1933, as
amended (the "Act"), of 153,846 shares of Series A 9 1/2% Cumulative Convertible
Preferred Stock, par value $.01 per share ("Series A Preferred Stock"). The
offering of the Series A Preferred Stock is to be effected pursuant to a stock
purchase agreement (the "Stock Purchase Agreement") by and among the Company and
selling shareholders named therein.

In arriving at this opinion, we have examined and relied upon
originals or copies, certified or otherwise identified to our satisfaction, of
the following:

1. The Registration Statement, as amended to date;

2. The Restated Certificate of Incorporation of the Company, as
amended, including the Certificate of Designations of the Series A 9 1/2%
Cumulative Convertible Preferred Stock (the "Certificate of Designations");

3. Amended and Restated By-Laws of the Company;

4. Copies of certain corporate records of the Company;

5. Resolutions of the Board of Directors and shareholders of the
Company; and

<PAGE>

Family Bargain Corporation
October 10, 1996
Page 2

6. The Stock Purchase Agreement, as amended, in the form filed as
Exhibits 10.24 and 10.26 to the Registration Statement.

We have assumed the genuineness of all signatures and the authenticity
of all documents submitted to us as originals, the conformity to original
documents of all the documents submitted to us as certified or photostatic
copies, and the authenticity of the originals of such latter documents.

Based upon the foregoing, we are of the opinion that:

A. The Company is duly incorporated and validly existing as a
corporation under the laws of the State of Delaware; and

B. The Preferred Stock when sold by the selling shareholders will be
legally issued, fully paid and non-assessable securities of the Company.

We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. As counsel to the Company, we hereby consent to the
reference to our firm in the Prospectus included in the Registration Statement
under "Legal Matters".

Very truly yours,

/s/ Baer Marks & Upham LLP

EXHIBIT 10.26

AMENDMENT TO STOCK PURCHASE AGREEMENT

Dated: September 27, 1996

AMENDMENT TO STOCK PURCHASE AGREEMENT (the "Agreement") dated June 1996 by
---------
and among FAMILY BARGAIN CORPORATION (the "Seller") and MORGANA HOLDINGS INC.
------
and L'ANCRESSE HOLDINGS LTD. (collectively, the "Buyers").
------

1. Seller and Buyers agree that Section 1.3 of the Agreement be and the
same is hereby modified to delete the date September 30, 1996 and to substitute
therefore the date November 30, 1996.

In all other respects the Agreement continues in full force and effect.

IN WITNESS WHEREOF, the undersigned have executed this Amendment to the
Agreement as of date set forth above.

SELLER:

FAMILY BARGAIN CORPORATION

By:
---------------------------
Name:
Title:

BUYERS:

MORGANA HOLDINGS INC.

By:
---------------------------
Name:
Title:

L'ANCRESSE HOLDINGS LTD.

By:
---------------------------
Name:
Title:

EXHIBIT 23.1

[PEAT MARWICK LLP LOGO]

CONSENT OF INDEPENDENT AUDITORS

The Board of Directors
Family Bargain Corporation:

We consent to the inclusion in Amendment No. 1 to the Registration
Statement (No. 333-10877) and to the reference to our firm under the
heading "Experts" in the prospectus on Form S-2 of Family Bargain
Corporation of our report dated March 29, 1994, with respect to the
balance sheet of Capin Mercantile Corporation as of December 31, 1993,
and the related statements of earnings, changes in stockholders' equity,
and cash flows for each of the years in the two-year period ended December
31, 1993, which report is included herein.

KPMG PEAT MARWICK LLP

Phoenix, Arizona
October 3, 1996

EXHIBIT 23.2

[LOGO PEAT MARWICK LLP]

CONSENT OF INDEPENDENT AUDITORS

The Board of Directors
Family Bargain Corporation:

We consent to the use of our reports included herein The Amendment No. 1
to the Form S-2 (Registration Statement 333-10877) and to the reference
to our firm under the heading "Experts" in the prospectus.

KPMG PEAT MARWICK LLP

San Diego, California
October 3, 1996

EXHIBIT 23.3

INDEPENDENT AUDITORS' CONSENT

We consent to the use in this Amendment No. 1 to Registration Statement No.
333-10877 of Family Bargain Corporation of our report dated April 20, 1995 (May
1, 1995 as to paragraph 4 of Note 6) relating to the financial statements of
Capin Mercantile Corporation (which report expresses an unqualified opinion and
includes an explanatory paragraph concerning the entity's ability to continue as
a going concern) appearing in the Prospectus, which is part of such Registration
Statement, and to the reference to us under the heading "Expert" in such
Prospectus.

/s/ Deloitte & Touche LLP

DELOITTE & TOUCHE LLP
Tucson, Arizona

October 3, 1996