FAMILY BARGAIN CORP, S-2/A, 1996-09-30

FAMILY BARGAIN CORP
S-2/A, 1996-09-30
FAMILY CLOTHING STORES

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 30, 1996

REGISTRATION NO. 333-09853
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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)

<TABLE>
<S> <C> <C>
DELAWARE 5651 51-0299573
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>

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

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:

<TABLE>
<S> <C>
JOEL M. HANDEL, ESQ. DAVID W. BERNSTEIN, ESQ.
BAER MARKS & UPHAM LLP ROGERS & WELLS
805 THIRD AVENUE 200 PARK AVENUE
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10166
(212) 702-5700 (212) 878-8000
</TABLE>

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

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement is declared 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, check the following box. X

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

<TABLE>
<CAPTION>
ITEM NUMBER
IN FORM S-2 ITEM CAPTION IN FORM S-2 LOCATION IN PROSPECTUS
- ----------- --------------------------------------- ---------------------------------------
<C> <S> <C>
1 Forepart of the Registration Statement
and Outside Front Cover Page of
Prospectus............................. Facing Page; Outside Front Cover Page
2 Inside Front and Outside Back Cover
Pages of Prospectus.................... Inside Front Cover Page; Incorporation
of Certain Documents by Reference;
Available Information; 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........................ Use of Proceeds
5 Determination of Offering Price........ Outside Front Cover Page; Underwriting
6 Dilution............................... Inapplicable
7 Selling Security Holders............... Inapplicable
8 Plan of Distribution................... Outside Front Cover Page; Underwriting
9 Description of Securities to be
Registered............................. Summary; Price Range of Common Stock;
Dividend Policy; Description of
Debentures; Description of Capital
Stock
10 Interests of Named Experts and Counsel Inapplicable
11 Information With Respect to the
Registrant............................. Outside Front Cover Page; Summary; Risk
Factors; Use of Proceeds; Price Range
of Common Stock; 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 SEPTEMBER 30, 1996

PRELIMINARY PROSPECTUS
$40,000,000

[FACTORY 2-U LOGO] [FAMILY BARGAIN LOGO]

FAMILY BARGAIN CORPORATION
% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2006
-------------------

The % Convertible Subordinated Debentures due 2006 (the "Debentures")
being offered (the "Offering") by Family Bargain Corporation, a Delaware
corporation (the "Company"), 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. See "Description of Debentures--Conversion." The Company
has applied to have the Debentures quoted on the Nasdaq SmallCap Market under
the symbol "FBARG." The Common Stock is quoted on the Nasdaq SmallCap Market
under the Symbol "FBAR" and on the Chicago Stock Exchange under the Symbol
"FBA." On September 24, 1996, the closing sale price of the Common Stock as
reported on the Nasdaq SmallCap Market was $1.94 per share.

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 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 redemption
prices set forth under "Description of Debentures." 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" and "Description of Debentures."

AN INVESTMENT IN THE DEBENTURES INVOLVES SIGNIFICANT RISKS. FOR A
DISCUSSION OF CERTAIN MATERIAL FACTORS THAT SHOULD BE CONSIDERED IN
CONNECTION WITH AN INVESTMENT IN THE DEBENTURES, SEE "RISK FACTORS"
COMMENCING ON PAGE 11 HEREOF.

-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE><CAPTION>
PRICE TO PUBLIC UNDERWRITING PROCEEDS TO
(1) DISCOUNT (2) COMPANY (1)(3)
<S> <C> <C> <C>
Per Debenture............................... % 6.0% %
Total(4).................................... $ $ $
</TABLE>

(1) Plus accrued interest, if any, from .

(2) The Company has agreed to indemnify the several Underwriters against certain
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."

(3) Before deducting expenses payable by the Company estimated at $1.1 million,
including the Representatives' non-accountable expense allowance of $400,000
or $460,000 if the Underwriters' over-allotment option is exercised in full,
all of which are payable by the Company. See "Underwriting."

(4) The Company has granted the several Underwriters an option, exercisable
within 30 days after the date of this Prospectus, to purchase up to an
additional $6,000,000 aggregate principal amount of Debentures on the terms
set forth above to cover over-allotments, if any. If such option is
exercised in full, the total Price to Public, Underwriting Discount, and
Proceeds to the Company will be $ , $ and $ ,
respectively. See "Underwriting."

The Debentures are offered by the several Underwriters, subject to prior
sale, when, as and if issued to and accepted by them, subject to approval of
certain legal matters by counsel for the Underwriters and certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part. It is expected that
delivery of the Debentures will be made at the offices of Rodman & Renshaw,
Inc., New York, New York on or about October , 1996.

-------------------
RODMAN & RENSHAW, INC. CRUTTENDEN ROTH
INCORPORATED
-------------------
THE DATE OF THIS PROSPECTUS IS , 1996
<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>

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMPANY'S
COMMON STOCK AND/OR DEBENTURES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ
SMALLCAP MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.

CONCURRENT REGISTRATION STATEMENT

On August 27, 1996, the Company filed a Registration Statement (No.
333-10877) on Form S-2 (the "Concurrent Registration Statement") covering an
aggregate of 153,846 shares of Series A Preferred Stock (including shares of
Common Stock issuable upon conversion of such shares). The Company filed the
Concurrent Registration Statement on behalf of 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 of 1933, as amended (the "Securities Act").
See "Description of Capital Stock-- Preferred Stock."

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents, which have heretofore been filed by the Company
with the Commission pursuant to the Exchange Act, are incorporated by reference
into this Prospectus and shall be deemed to be a part hereof as of their
respective dates:

1. The annual report of the Company on Form 10-K and, as amended in
part, on Form 10-K/A for the fiscal year ended January 27, 1996.

2. The quarterly reports of the Company on Form 10-Q for the fiscal
quarters ended April 27, 1996 and July 27, 1996.

In addition, all reports and other documents filed by the Company pursuant
to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date
of this Prospectus and prior to the termination of this Offering shall be deemed
to be incorporated herein by reference and to be a part hereof from the date of
filing of such reports and documents.

Any statement contained in a document incorporated by reference herein or
deemed to be incorporated by reference shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any subsequently filed document which is deemed to be
incorporated herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.

The Company will provide, without charge, to each person, including any
beneficial owner, to whom this Prospectus is delivered, upon the written request
of any such person, a copy of any or all documents incorporated by reference
into this Prospectus (other than exhibits to such documents). Requests should be
directed to: John A. Selzer, Chief Executive Officer and President, Family
Bargain Corporation, 315 East 62nd Street, New York, New York 10021; Telephone
(212) 980-9670; Facsimile (212) 593-4586.

3
<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 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, 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 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 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 add to the appearance, accessibility and quantity of
merchandise displayed to its customers.

4
<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 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.

5
<PAGE>
THE OFFERING

<TABLE>
<CAPTION>
<S> <C>
The Debentures............... $40,000,000 aggregate principal amount of % Convertible
Subordinated Debentures ($46,000,000 aggregate principal
amount if the Underwriters' over-allotment option is
exercised in full).

Maturity Date................ , 2006

Payment of Interest.......... The Debentures will bear interest at the rate of % per
annum. Interest will be payable semi-annually in arrears on
February 15 and August 15 of each year, commencing February
15, 1997. See "Description of Debentures."

Conversion Rights............ The Debentures are convertible, at the option of the holder,
at any time on or prior to maturity, unless previously
redeemed, into shares of 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 anti-dilution adjustments (the "Conversion
Price"). See "Description of Debentures--Conversion."

Optional Redemption by the
Company...................... The Company may redeem all, but not less than all, of the
Debentures upon 30 days written notice at % of their
principal amount, plus accrued and unpaid interest, at any
time after October , 1998, provided the closing price of
the Common Stock on at least 20 out of 30 consecutive
trading days ending not more than 10 days prior to the date
the notice of redemption is given is at least 137.5% of the
Conversion Price then in effect. In addition, the Company
may redeem all or any portion of the Debentures on or after
October , 1999 upon 30 days written notice at the
following prices (expressed as percentages of the principal
amount plus accrued and unpaid interest to the date fixed
for redemption):
</TABLE>

<TABLE>
<CAPTION>
TWELVE MONTHS
BEGINNING OCTOBER , PERCENTAGE
------------------------------------------- ----------
<S> <C>
1999 107%
2000 105%
2001 103%
2002-thereafter 100%
</TABLE>

<TABLE>
<S> <C>
See "Description of Debentures--Optional Redemption."

Subordination................ The Debentures 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 its subsidiaries. At July 27, 1996, the
aggregate principal amount of Senior Indebtedness was $2.0
million and liabilities of the Operating Subsidiaries
totalled $67.8 million. The Indenture (as defined) will not
restrict the incurrence of Senior Indebtedness by the
Company, or the incurrence of other indebtedness or
liabilities by the Company or its subsidiaries. See
"Capitalization," "Management's Discussion and Analysis of
Financial Condition and Results of Operations--
</TABLE>

6
<PAGE>

<TABLE>
<S> <C>
Liquidity and Capital Resources" and "Description of
Debentures--General" and "--Subordination."

Use of Proceeds.............. The net proceeds of the Offering will be used as follows:
(i) approximately $28.0 million will be provided by the
Company to the Operating Subsidiaries and will be used by
them as working capital, including repayment of the
outstanding indebtedness under the Revolving Credit
Facilities (as defined) and the purchase of up to $4.0
million of new fixtures for existing stores, and (ii) 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. See "Use of Proceeds."

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

Risk Factors................. The Offering involves substantial risks. See "Risk Factors."
</TABLE>

7
<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."

<TABLE>
<CAPTION>
HISTORICAL RESULTS
---------------------------------------------------------------------
MOST RECENT TWELVE MOST RECENT SIX
MOST RECENT FISCAL MONTH PERIOD MONTH PERIOD PRO FORMA
YEAR END RESULTS UNAUDITED RESULTS UNAUDITED RESULTS UNAUDITED RESULTS
------------------------- ------------------- ------------------- ----------------------
TWELVE TWELVE TWELVE TWELVE SIX SIX TWELVE SIX
MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
JANUARY 28, JANUARY 27, JULY 29, JULY 27, JULY 29, JULY 27, JANUARY 27, JULY 27,
1995 1996(1) 1995 1996(1) 1995 1996 1996(2) 1996(2)
----------- ----------- -------- -------- -------- -------- ----------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Net Sales........................... $ 146,520 $ 179,820 154,848 218,804 68,350 107,334 179,820 107,334
Gross Profit........................ 49,435 62,632 51,660 78,801 22,565 38,734 62,632 38,734
Operating Income (Loss)............. 2,608 5,153 533 8,874 (2,340) 1,381 5,153 1,381
Income (Loss) from Continuing
Operations.......................... (354) 1,478 (2,245) 4,339 (3,790) (929) (607) (1,555)
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) (607) (1,555)
Dividends on Preferred Stock........ 2,030 3,040 3,137 3,259 1,520 1,739 3,040 1,739
Net Income (Loss) Applicable to
Common Stock....................... 626 (2,062) (7,366) 580 (5,310) (2,668) (3,647) (3,294)
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) (0.91) (0.76)
Net Income (Loss) Applicable to
Common Stock Per Common
Share:(3)
Primary............................ 0.16 (0.51) (1.84) 0.13 (1.32) (0.62) (0.91) (0.76)
Fully Diluted...................... 0.16 (0.51) (1.84) 0.13 (1.32) (0.62) (0.91) (0.76)
OPERATING DATA
EBITDA(4).......................... 4,837 8,438 3,144 12,861 (915) 3,508 8,438 3,508
No. of Stores at End of Period..... 97 131 102 140 102 140 131 140
Gross Profit Percentage............ 33.7% 34.8% 33.4% 36.0% 33.0% 36.1% 34.8% 36.1%
Ratio of EBITDA to Combined Cash
Fixed Charges and Preferred Stock
Dividends(5)........................ 1.3x 1.6x -- 2.1x -- -- 1.2x --
Ratio of Earnings to Combined Fixed
Charges and Preferred Stock
Dividends(6)........................ -- -- -- 1.1x -- -- -- --
</TABLE>

<TABLE>
<CAPTION>
PRO FORMA
-----------------------
JANUARY 27, JULY 27, JANUARY 27, JULY 27,
1996 1996 1996(8) 1996(8)
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA
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 28,238
Common Stockholders' Equity.................................. 736 26 736 26
Common Stockholders' Equity per Share(7)..................... 0.18 0.01 0.18 0.01
</TABLE>

8
<PAGE>
NOTES TO SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA

<TABLE>
<C> <S>
(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
hereby 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 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 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, 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.
</TABLE>

9
<PAGE>

<TABLE>
<C> <S>
(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.

(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 hereby 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
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).
</TABLE>

10
<PAGE>
RISK FACTORS

An investment in the Debentures 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 Debentures. 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 Debenture
Interest 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 an 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 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 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, 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."

11
<PAGE>

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 should reduce the possibility of a 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."

Subordination of Debentures. The Debentures will be unsecured and
subordinated obligations of the Company and will be subordinate to the prior
payment in full of all existing and future Senior Indebtedness (as defined in
the Indenture) of the Company. In addition, they may, as discussed below (see
"--Holding Company Structure; Possible Equitable Subordination"), effectively be
subordinated to all indebtedness and other liabilities of the Company's
subsidiaries. At July 27, 1996, the Company's Senior Indebtedness totaled
approximately $2.0 million and the liabilities of its Operating Subsidiaries
aggregated approximately $67.8 million. The Debentures are obligations
exclusively of the Company and not of any of its subsidiaries. The Indenture
will not restrict the incurrence of any other indebtedness or liabilities by the
Company or its subsidiaries.

Holding Company Structure; Possible Equitable Subordination. The Company is
a holding company, and all its businesses are conducted by its Operating
Subsidiaries, General Textiles and Factory 2-U. If an Operating Subsidiary were
to become insolvent, the Company, as the shareholder, would not receive any
distributions in a resulting insolvency proceeding until all the subsidiary's
creditors were paid. However, the Company owns $15.0 million face value of
subordinated debt and $3.0 million face value of secured term debt of General
Textiles as of both July 27, 1996 and September 1, 1996. In addition, the
Company expects to 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. Therefore, in addition to being the sole shareholder of the
Operating Subsidiaries, the Company is a significant creditor of General
Textiles and will be a significant creditor of Factory 2-U. This could entitle
the Company to participate in the same manner as other creditors with similar
priorities in any distributions of assets of either of those subsidiaries if
they became insolvent. However, if it were determined that the Company was
responsible for the insolvency of a subsidiary, the Bankruptcy Court or other
court overseeing the insolvency proceeding might direct that some or all of the
subsidiary's indebtedness to the Company be subordinated to some or all of the
subsidiary's obligations to other creditors. If this occurred, it would
essentially have the effect of subordinating the Debentures to the debts and
other obligations of the subsidiary.

Market for the Debentures. Prior to the Offering, there has been no public
market for the Debentures. Although the Company has applied to have the
Debentures quoted on the Nasdaq SmallCap Market, there can be no assurance that
an active trading market will develop for the Debentures or that, if such market
develops, the market price will equal or exceed the public offering price set
forth on the cover page of this Prospectus. The Representatives of the
Underwriters have advised the Company that they currently intend to make a
market in the Debentures. However, the Representatives are not obligated to do
so and any market making may be discontinued at any time without notice. The
initial public offering price of the Debentures will be determined by
negotiation between the Company and the Representatives of the Underwriters and
may not be indicative of the future market price of the Debentures. See
"Underwriting."

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

12
<PAGE>
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."

Broad Discretion as to Use of Proceeds. Approximately 23.2% ($8.5 million)
of the net proceeds of the Offering have been allocated to general working
capital purposes and will be used for such purposes as management may determine.
In addition, the Operating Subsidiaries may reborrow under their revolving
credit facilities. Accordingly, management will have broad discretion over the
use of a substantial portion of the proceeds and purchasers of Debentures will
be entrusting management as to the use of these funds. See "Use of Proceeds."

Use of Portion of Proceeds to Repay Revolving Credit
Indebtedness. Approximately $24.0 million of the net proceeds of the Offering
will be provided by the Company to the Operating Subsidiaries for use by them to
repay indebtedness under their respective revolving credit facilities. Although
the Operating Subsidiaries may reborrow under these facilities, until such
reborrowing occurs this portion of the proceeds will not be available for other
purposes, such as expansion. See "Use of Proceeds."

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 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, 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

13
<PAGE>

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. 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% 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, 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.

14
<PAGE>
USE OF PROCEEDS

The net proceeds to be received by the Company from the issuance and sale of
the Debentures offered hereby are estimated to be $36.5 million ($42.1 million
if the Underwriters' over-allotment option is exercised in full). The net
proceeds of the Offering will be used as follows: (i) approximately $28.0
million will be provided by the Company to the Operating Subsidiaries and will
be 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) and the purchase of up to $4.0 million of new fixtures for existing
stores, and (ii) 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 GT Revolving Credit Facility is a $25.0 million facility which bears
interest at between prime plus 2% and prime plus 3%, which expires in November
1998, and under which General Textiles may borrow up to varying percentages of
the value of its eligible inventory. The Factory 2-U Revolving Credit Facility
is a $10.0 million facility which bears interest at prime plus 2%, which expires
in November 1998, and under which Factory 2-U may borrow up to varying
percentages of the value of its eligible inventory. The Operating Subsidiaries
may reborrow funds under the Revolving Credit Facilities. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

The following table sets forth (in millions) the estimated uses of the net
proceeds of the Offering:

<TABLE>
<CAPTION>
<S> <C> <C> <C>
FUNDS PROVIDED TO THE OPERATING SUBSIDIARIES
Uses by the Operating Subsidiaries: %
-----
Repayment of General Textiles Revolving Credit Facility........... $14.0 38.4%
Repayment of F2U Revolving Credit Facility........................ 10.0 27.4%
Purchase of Store Fixtures (1).................................... 4.0 11.0%
-----
Subtotal........................................................ $28.0
GENERAL WORKING CAPITAL............................................... 8.5 23.2%
----- -----
Total Uses of Net Proceeds.......................................... $36.5 100.0%
</TABLE>

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

<TABLE>
<S> <S>
(1) Until store fixtures are purchased, this portion of the proceeds will be used to reduce
borrowings under the revolving credit facilities of the Operating Subsidiaries. These
funds will subsequently be reborrowed under the facilities to fund such purchases.
</TABLE>

15
<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.

<TABLE>
<CAPTION>
HIGH LOW
------ -----
<S> <C> <C>
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 September 24, 1996)............... $ 2.44 $1.88
</TABLE>

The closing bid price of the Common Stock on September 24, 1996 as reported
on the Nasdaq SmallCap Market was $1.94 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."

16
<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 hereby and the application of a portion of the estimated net
proceeds 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.

<TABLE>
<CAPTION>
AS
ACTUAL ADJUSTED(1)
------- ---------------------
(IN THOUSANDS)
<S> <C> <C>
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 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)......................................... 28,238 28,238
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%
</TABLE>

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

(1) As adjusted for the sale of $40.0 million of Debentures in the 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.

17
<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."

18
<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."

<TABLE>
<CAPTION>
MOST RECENT
TWELVE MONTH MOST RECENT
SIX MONTH PERIOD
PERIOD
HISTORICAL RESULTS UNAUDITED RESULTS UNAUDITED RESULTS
-----------------------------------------------------
TWELVE FOUR TWELVE NINE TWELVE TWELVE ------------------ ------------------
MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS TWELVE TWELVE SIX SIX
ENDED ENDED ENDED ENDED ENDED ENDED MONTHS MONTHS MONTHS MONTHS
DECEMBER APRIL APRIL JANUARY JANUARY JANUARY ENDED ENDED ENDED ENDED
31, 30, 30, 29, 28, 27, JULY 29, JULY 27, JULY 29, JULY 27,
1991 1992 1993 1994(1) 1995 1996(1) 1995 1996(1) 1995 1996
-------- ------ ------- ------- -------- ------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Net Sales.......................... $-- $-- $ -- $96,496 $146,520 179,820 154,848 218,804 68,350 107,334
Gross Profit....................... -- -- -- 32,582 49,435 62,632 51,660 78,801 22,565 38,734
Operating Income (Loss)............ -- (55 ) (2,139) 4,547 2,608 5,153 533 8,874 (2,340) 1,381
Income (Loss) from Continuing
Operations......................... -- (111 ) (3,239) 1,113 (354) 1,478 (2,245 ) 4,339 (3,790) (929)
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 (3,790) (929)
Dividends on Preferred Stock....... -- -- 25 200 2,030 3,040 3,137 3,259 1,520 1,739
Net Income (Loss) Applicable to
Common Stock....................... (294) 131 (19,411) 1,682 626 (2,062) (7,366 ) 580 (5,310) (2,668)
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 (1.32) (0.62)
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 (1.32) (0.62)
Fully Diluted..................... (0.53) 0.14 (12.07) 0.55 0.16 (0.51) (1.84 ) 0.13 (1.32) (0.62)
OPERATING DATA
EBITDA(4).......................... -- (55 ) (2,519) 5,732 4,837 8,438 3,144 12,861 (915) 3,508
No. of Stores at End of Period..... -- -- -- 81 97 131 102 140 102 140
Gross Profit Percentage............ -- -- -- 33.8% 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)....................... -- -- -- 2.4x 1.3x 1.6x -- 2.1x -- --
Ratio of Earnings to Combined Fixed
Charges and Preferred Stock
Dividends(6)....................... -- -- -- 1.3x -- -- -- 1.1x -- --

PRO FORMA
UNAUDITED RESULTS
-----------------
TWELVE
MONTHS SIX
ENDED MONTHS
JANUARY ENDED
27, JULY 27,
1996(2) 1996(2)
------- --------

<S> <C> <C>
INCOME STATEMENT DATA
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 )
Income (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>

<TABLE>
<CAPTION>
PRO FORMA
------------------------
JANUARY 27, JULY 27, JANUARY 27, JULY 27,
1996 1996 1996(8) 1996(8)
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA
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>

19
<PAGE>
NOTES TO SELECTED CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL DATA

<TABLE>
<C> <S>
(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
hereby 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 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 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 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.
</TABLE>

20
<PAGE>

<TABLE>
<C> <S>
(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.

(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 hereby 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 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).
</TABLE>

21
<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 19 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.

22
<PAGE>
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 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 sales 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 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.

23
<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 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 $862,000. 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.

24
<PAGE>
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%.

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, but had net income for the quarter ended
July 27, 1996.

25
<PAGE>
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.
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------
JULY OCT. JAN. APRIL JULY OCT. JAN. APRIL JULY
1994 1994 1995 1995 1995 1995 1996 1996 1996
------ ------ ------ ------ ------ ------ ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
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 October 31, 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

26
<PAGE>
fiscal 1997, $24,000 per month during fiscal 1998 and, thereafter, monthly
amounts declining over time to $5,000 in fiscal 2009). During the quarter ended
July 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 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 an quarterly basis, the Company
evaluates the carrying values of the Subordinated Notes, the Subordinated
Reorganization Notes and the Junior 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.

27
<PAGE>

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 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, respectively.

The Company will lend at least $10.0 million of the proceeds of the 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 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.

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, monitoring and controlling
expenses, and increasing prices to the extent permitted by competitive factors.

28
<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.

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.

29
<PAGE>
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 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 implemented, will
result in either higher gross margins or increased pricing flexibility, or
both. See "Use of Proceeds."

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
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 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.

30
<PAGE>
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
manager, 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.

Following completion of the 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

31
<PAGE>
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 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."

32
<PAGE>
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:

<TABLE>
<CAPTION>
STRIP
STATE CENTER DOWNTOWN OTHER
----- ------ -------- -----
<S> <C> <C> <C> <C>
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
----- ------ -- -----
----- ------ -- -----
</TABLE>

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 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

33
<PAGE>
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.

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 employers 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 its retail
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.

34
<PAGE>

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.

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.

35
<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 eight 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 eight directors were for less
than three years.

<TABLE>
<CAPTION>
DIRECTOR'S
NAME AGE PRINCIPAL POSITION TERM EXPIRES(1)
- --------------------------------- --- --------------------------------- ---------------
<S> <C> <C> <C>
John A. Selzer................... 41 Chief Executive Officer, 1996
President, Assistant Secretary
and Director
William W. Mowbray............... 57 Chief Operating Officer and 1997
Director; 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
Francis G. Warburton............. 67 Director 1996
Barton P. Ferris, Jr. ........... 56 Director 1996
Mary McNabb...................... 47 Senior Vice President and General
Merchandising Manager of General
Textiles and Factory 2-U
Richard G. Lange................. 53 Senior Vice President of Store
Operations of GT and Factory 2-U
William F. Cass.................. 47 Senior 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 reelection at the 1997 Annual
Meeting and that Messrs. Mowbray, B. Selzer and Borer, whose terms expire in
1997, will be subject to reelection at the 1998 Annual Meeting.

36
<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 Operating Officer and Director of the Company and
President and Chief Executive Officer of General Textiles and Factory 2-U. Mr.
Mowbray 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 1995. 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 joined
the Company in September 1992 and

37
<PAGE>

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 investment banking firm.

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 this 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, joined General Textiles in 1990 and before
then was employed by One Price Clothing. Ms. McNabb has over 26 years of
experience in retail 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

38
<PAGE>

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.

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.

39
<PAGE>
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 on 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.

40
<PAGE>
DESCRIPTION OF DEBENTURES

GENERAL

The Debentures will be general obligations of the Company issued under an
Indenture (the "Indenture") between the Company and American Stock Transfer &
Trust Company, as trustee (the "Trustee").

The Company will pay interest on the Debentures at the rate per annum shown
on the cover page of this Prospectus to the persons who are registered holders
of Debentures at the close of business on the or next
preceding each interest payment date. Interest will initially accrue from
, 1996 and the first interest payment date will be February 15, 1997.
Thereafter, interest will be payable semiannually in arrears on February 15 and
August 15 of each year. The Company may pay principal and interest by its check
and may mail an interest check to a holder's registered address. The Debentures
mature on , 2006 and will be issued only in registered form, without
coupons, in the aggregate principal amount of not more than $40,000,000
($46,000,000 if the Underwriters' overallotment option is exercised in full) in
denominations of $1,000 and integral multiples thereof. Debentureholders must
surrender Debentures to the Paying Agent to collect principal payments.

The Debentures are subordinate in right of payment to Senior Indebtedness of
the Company, as described under "--Subordination," are convertible into Common
Stock, as described under "--Conversion" and are redeemable, as described under
"--Optional Redemption." The Indenture does not limit Senior Indebtedness or any
other Indebtedness, secured or unsecured.

The terms of the Debentures include those stated in the Indenture and those
made part of the Indenture by reference to the Trust Indenture Act of 1939 (the
"Act") as in effect on the date of the Indenture. The Debentures are subject to
all such terms, and Debentureholders are referred to the Indenture and the Act
for statement of them. This summary makes use of terms defined in the Indenture
and is qualified in its entirety by reference to the Indenture. All references
to "Section," "Article" or "Paragraph" in this section refer to the applicable
Section or Article of the Indenture or the applicable Paragraph in the form of
Debenture included in the Indenture, as the case may be. A copy of the Indenture
is filed as an exhibit to the Registration Statement of which this Prospectus is
a part.

The Company will enter into an appropriate agency agreement with any Paying
Agent or Registrar not a party to the Indenture; initially, American Stock
Transfer & Trust Company will act as Paying Agent and Registrar (Section 2.03).
The Company may change the Paying Agent or Registrar without notice to the
Debentureholders (Section 2.03).

CONVERSION

The holder of any Debenture will be entitled at any time prior to the close
of business on the business day immediately preceding the maturity date of the
Debentures, to convert the Debenture, or portions thereof which are in
denominations of at least $1,000 or integral multiples thereof, into shares of
Common Stock, at the Conversion Price set forth on the cover page of this
Prospectus, subject to adjustment as described below. No payment or adjustment
will be made on conversion of any Debenture for interest accrued thereon or
dividends on any Common Stock issued on conversion (Section 11.01). The Company
is not required to issue fractional shares of Common Stock upon conversion of
Debentures and, in lieu thereof, will pay a cash adjustment based upon the
market price of the Common Stock on the day next preceding the day the Debenture
is submitted for conversion (Section 11.03). In the case of Debentures called
for redemption, conversion rights will expire at the close of business on the
fifth business day prior to the redemption date (Section 11.01). The Company
will at all times keep

41
<PAGE>
available the maximum number of shares of Common Stock needed to effect
conversion of the Debentures (Section 11.05).

The Conversion Price may be adjusted from time to time if any of the events
described below occur after . If the Company (i) pays a dividend or makes
a distribution on its Common Stock in shares of its Common Stock, (ii)
subdivides its outstanding Common Stock or (iii) combines its outstanding Common
Stock, the Conversion Price will be adjusted so that the holder of a Debenture
surrendered for conversion receives the number of shares of Common Stock which
the holder would have owned if the Debenture had been converted prior to the
first such event. If the Company issues rights or warrants to the holders of
Common Stock to purchase Common Stock within 60 days at less than the Conversion
Price at the record date for such rights or warrants, the Conversion Price will
be reduced to give effect to the issuance of the shares subject to the rights or
warrants (but will be readjusted to the extent that rights or warrants are not
exercised). If the Company distributes to the holders of its Common Stock any
shares of capital stock of the Company other than Common Stock, any assets,
securities, rights or warrants (other than rights or warrants which must be
exercised within 60 days), the Conversion Price will be reduced to take account
of the fair market value of the assets, securities, rights or warrants. If the
Company issues any equity or debt securities (other than upon exercise of
warrants and options existing on the date of this Prospectus and shares issued
pursuant to Management stock options) which are convertible into or exchangeable
for shares of Common Stock ("Convertible Securities") at less than the
Conversion Price when the Convertible Securities are issued, the Company will be
deemed to have issued the maximum number of shares of Common Stock into which
the Convertible Securities may be converted and no further adjustment to the
Conversion Price will be made when the Convertible Securities are converted. If
the Company issues or sells any Common Stock (other than upon exercise of
warrants and options existing on the date of this Prospectus and shares issued
pursuant to management stock options) at a price per share less than the
Conversion Price, the Conversion Price will be adjusted. If the outstanding
shares of Common Stock are reclassified or as a result of a merger, the
Debentures will become convertible into the kind and amount of securities, cash
or other assets which the holders of the Debentures would have owned immediately
after the transaction if the holders had converted the Debentures immediately
before the effective date of the transaction (Section 11.04).

REDEMPTION

The Debentures are not entitled to be redeemed out of a sinking fund and
there is no other requirement of mandatory redemption before the Debentures
mature. The Company, at its option, may redeem all, but not less than all, of
the Debentures upon 30 days written notice at % of their principal amount,
plus accrued and unpaid interest, at any time after October , 1998, provided
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 the notice of redemption is given
is at least 137.5% of the Conversion Price then in effect. In addition, the
Company may redeem all or any portion of the Debentures on or after October ,
1999 upon 30 days written notice at the following prices (expressed as
percentages of the principal amount):

<TABLE>
<CAPTION>
TWELVE MONTHS
BEGINNING OCTOBER , PERCENTAGE
-------------------- ----------
<S> <C>
1999............................................................. 107%
2000............................................................. 105%
2001............................................................. 103%
2002-thereafter.................................................. 100%
</TABLE>

Selection. In the event of redemption of less than all of the Debentures,
selection of the Debentures for redemption will be made by the Trustee by a
method the Trustee considers fair and appropriate (Section 3.02).

42
<PAGE>
SUBORDINATION

The payment of the principal of, premium, if any, and interest on, the
Debentures, is subordinated in right of payment, as set forth in the Indenture,
to the prior payment when due of the principal of and premium, if any, and
interest on all Senior Indebtedness. Upon maturity of any Senior Indebtedness,
payment in full must be made on such Senior Indebtedness before any payment is
made on or in respect of the Debentures (Section 10.02). During the continuance
of any event of default with respect to Senior Indebtedness entitling the
holders thereof to accelerate the maturity thereof, no payment may be made by
the Company upon or in respect of the Debentures, unless the holders of the
Senior Indebtedness fail to accelerate its maturity within 120 days after the
event of default occurs (Section 10.03). Upon any distribution of the assets of
the Company as a result of dissolution or liquidation, all Senior Indebtedness
will be paid before any payment is made or any assets distributed to the
Debentureholders. If the Trustee or the Debentureholders receive any such
distribution before all Senior Indebtedness is paid, that payment will be held
in trust and paid over to the holders of Senior Indebtedness (Section 10.04).

"Senior Indebtedness" of the Company means the principal of, premium, if
any, and unpaid interest and additional amounts due on (a) all indebtedness of
the Company for borrowed money (including any indebtedness secured by a mortgage
or other lien which is (i) given to secure all or part of the purchase price of
the property which is subject to the mortgage or lien, whether given to the
vendor of that property or to another, or (ii) existing on property at the time
it is acquired by the Company); (b) all indebtedness of the Company evidenced by
notes, debentures, bonds or other securities sold by the Company for money or
issued by the Company in exchange for Senior Indebtedness; (c) all lease
obligations of the Company which are capitalized on the books of the Company in
accordance with generally accepted accounting principles; (d) all indebtedness
of others of the kinds described in either clauses (a) or (b) and all lease
obligations of the kind described in clause (c) assumed or guaranteed in any
manner by the Company or in effect guaranteed by the Company through an
agreement to purchase (which may be contingent); and (e) all renewals,
extensions, refundings, deferrals, amendments or modifications of indebtedness
of the kinds described in clauses (a), (b) and (d) and all renewals or
extensions of lease obligations of the kinds described in clauses (c) or (d);
unless, the applicable instrument or lease, or document by which the Company
assumes or guarantees a particular indebtedness or lease obligation, expressly
states that the indebtedness or lease obligation is not Senior Indebtedness with
regard to the Debentures. Notwithstanding the foregoing, Senior Indebtedness
will not include any Indebtedness or lease obligations of the Company to a
subsidiary (Section 10.01).

Because the Company is a holding company that conducts business through the
Operating Subsidiaries, the Debentures are effectively subordinated to all
existing and future obligations of the Operating Subsidiaries. Any right of the
Company to participate in any distribution of the assets of any of the Operating
Subsidiaries upon liquidation, reorganization or insolvency of such subsidiary
(and the consequent right of the holders of the Debentures to participate in
those assets) will be subject to the claims of the creditors (including trade
creditors) of such subsidiary, except to the extent that claims of the Company
itself as a creditor of such subsidiary may be recognized, in which case the
claims of the Company would still be subordinate to any indebtedness of such
subsidiary which is secured by a prior lien, or otherwise is senior to, that
held by the Company. On July 27, 1996, approximately $67.8 million of
indebtedness, leases and other obligations (including trade payables) of the
Operating Subsidiaries (not including obligations held by the Company) was
outstanding.

Because the Company is a holding company, the Company's cash flow and
consequent ability to meet its debt obligations are primarily dependent upon the
earnings of the Operating Subsidiaries, and on payments from them to the
Company. The Operating Subsidiaries are not obligated to the Debentureholders to
pay any amounts due pursuant to the Debentures or to make funds available
therefor in the form of dividends or advances to the Company. The Operating
Subsidiaries do, however, have obligations with regard to that portion of their
indebtedness which is held by the Company.

43
<PAGE>
SATISFACTION AND DISCHARGE OF THE INDENTURE

The Company at any time may terminate its obligations under the Indenture to
pay an installment of principal or interest if it deposits with the Trustee
money or U.S. Government Obligations sufficient to pay the installment when due.
The Company at any time may terminate all of its obligations (other than with
regard to conversion into Common Stock of the Debentures which have not been
redeemed or matured) under the Debentures and the Indenture if it deposits with
the Trustee money or U.S. Government Obligations sufficient to pay principal and
interest on the Debentures to redemption or maturity. "U.S. Government
Obligations" means (i) direct obligations of the United States for the payment
of which its full faith and credit is pledged, or (ii) obligations of a person
controlled or supervised by and acting as an agency or instrumentality of the
United States the payment of which is unconditionally guaranteed as a full faith
and credit obligation by the United States. (Article 8).

MERGER, CONSOLIDATION, OR SALE OF ASSETS

The Company may not consolidate or merge with, or transfer all or
substantially all of its assets to, another corporation, person or entity unless
the successor assumes all the obligations of the Company under the Debentures
and the Indenture and unless certain other conditions are met, including the
requirements that, after giving effect thereto, the resulting corporation shall
have a consolidated net worth which is not less than that of the Company
immediately prior to such merger, consolidation, or sale of assets. (Article 5).

CERTAIN OTHER COVENANTS

Subject to certain exceptions, the Company may not declare or pay any
dividend or make any distribution to the holders of its capital stock or redeem
or purchase any of its capital stock, warrants or options if an Event of Default
(as defined below) has occurred and is continuing, or if the dividend,
redemption or purchase would result in the total sum being expended since July
31, 1996 exceeding (a) 50% of the net income of the Company and its subsidiaries
since July 31, 1996, plus (b) the net proceeds from the sale of capital stock
and the principal amount of debt securities (including Debentures) converted
into capital stock of the Company after July 31, 1996 (Section 4.07); provided,
however that this provision will not restrict the Company from (i) paying
required dividends on its Series A Preferred Stock or (ii) using up to $5.0
million to redeem or purchase shares of Series A Preferred Stock from time to
time for not more than the redemption price of the Series A Preferred Stock (or,
before the Series A Preferred Stock becomes redeemable, its liquidation value).

The Company will not, and will not permit any subsidiary (including the
Operating Subsidiaries) to, enter into any agreement which precludes the
subsidiary from paying dividends, making distributions, making payments with
regard to taxes or paying reasonable management or other fees to the Company
(collectively, the "Payments"), other than (i) agreements (including securities
or debt instruments) which existed on the date on which the Registration
Statement filed in connection with the Offering is declared effective (the
"Effective Date"), (ii) agreements regarding extensions, refinancings, renewals
or replacements of indebtedness which existed on the Effective Date, provided
the terms of those agreements with respect to Payments are not less favorable to
the Debentureholders than the provisions of the agreements in effect on the
Effective Date relating to the indebtedness which is being extended, refinanced,
renewed or replaced, or (iii) agreements relating to subsidiaries acquired after
the Effective Date which are in effect when those subsidiaries are acquired by
the Company (or a subsidiary) and were not entered into in anticipation of such
acquisition ("New Subsidiary Agreements") or (iv) agreements regarding
extensions, refinancings, renewals or replacements of such agreements, or new
agreements, provided the terms of those agreements with respect to Payments are
not less favorable to the Debentureholders than the least favorable of terms
contained in any of the agreements referred to in (i) or (ii) above, or in any
New Subsidiary Agreement.

44
<PAGE>
EVENTS OF DEFAULT AND REMEDIES

An Event of Default is defined as (i) a default for 30 days in payment of
interest on the Debentures, (ii) a default in payment when due of principal and
premium, if any, (iii) failure by the Company for 90 days after notice to comply
with any of its other agreements in the Indenture or the Debentures, (iv)
certain events of bankruptcy or insolvency (Section 6.01). If an Event of
Default occurs and is continuing, the Trustee or the holders of at least 25% in
principal amount of the then outstanding Debentures may declare all the
Debentures to be due and payable immediately. Subject to certain limitations,
holders of a majority in principal amount of the outstanding Debentures may
waive an Event of Default and its consequences. (Section 6.04 and Section 9.02)
Holders of the Debentures may not enforce the Indenture or the Debentures except
as provided in the Indenture. Subject to certain limitations, holders of a
majority in principal amount of the then outstanding Debentures may direct the
Trustee in its exercise of any trust or power (Article 6). The Trustee may
refuse to take any action requested by the Debentureholders unless the Trustee
receives indemnity satisfactory to it (Section 7.01(e)).

AMENDMENTS, SUPPLEMENTS AND WAIVERS

The Indenture or the Debentures may be amended or supplemented by the
Company and such amendment or supplement may be signed by the Trustee, and
compliance with any provision of the Indenture or the Debentures may be waived
by the Trustee, without notice to or consent of any holder of Debentures if such
change or waiver would not adversely affect the rights of any holder (Section
9.01 and Section 9.06). In addition, the Indenture or the Debentures may be
amended or supplemented, and compliance with any provision of the Indenture or
the Debentures may be waived, without notice to any holder of Debentures if the
holders of a majority in principal amount of the outstanding Debentures consent
or waive compliance. Without the consent of each holder affected, however, an
amendment, supplement or waiver, may not: (i) reduce the amount of Debentures
whose holders must consent to an amendment, supplement or waiver; (ii) reduce
the rate or extend the time for payment of interest on any Debenture; (iii)
reduce the principal of or extend the fixed maturity of any Debenture; (iv)
reduce the redemption price; (v) make any Debenture payable in money other than
that stated in the Debenture; or (vi) impair the right to convert any Debenture
into Common Stock (Section 9.01).

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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 October 31, 1996 for an
aggregate purchase price of $807,690. The proceeds of this sale will be used to
satisfy the obligation which they secure.

Holders of shares of Series A Preferred Stock are not entitled to vote
except (i) with respect to the creation, authorization or issuance of capital
stock ranking senior to or in parity with the Series A Preferred Stock (on which
they vote separately as a single class), (ii) in the event that the Company
shall have failed to pay any four quarterly dividend payments in full, (iii) on
certain mergers and sales of assets and (iv) as otherwise required by law. The
holders of the Series A 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 April 30, July 31, October 31 and the last Friday of January of
each year, to the holders of record. Each share of Series A Preferred Stock is
convertible at any time prior to redemption, into that number of shares equal to
the liquidation preference of the share of Series A Preferred Stock ($10.00)
divided by the adjusted conversion price ($3.6396 as of the date of this
Prospectus, so that each share of Series A Preferred Stock is convertible into
2.748 shares of Common Stock). If the conversion price of the Debentures is less
than the current conversion price of the Series A Preferred Stock ($3.6396), the
issuance of the Debentures will result in a reduction of the conversion price of
the Series A Preferred Stock and a corresponding increase in the number of
shares of Common Stock issuable upon such conversions. The Company may, at its
option, redeem all, but not less than all, of the shares of Series A 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 that for 20 consecutive trading days ending not more than 10 days prior
to the date of the notice of redemption, the closing sale price of the Common
Stock 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 Preferred Stock at

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per share prices commencing at $10.70 from July 21, 1998 to July 20, 1999 and
declining over time to $10.00 commencing July 21, 2003.

Shares of Preferred Stock issued in the future could have conversion rights
which may result in the issuance of additional shares of Common Stock which
could dilute the interests of the holders of Common Stock, Series A Preferred
Stock and Debentures. Such shares could also have voting rights and liquidation
preferences which are senior to the rights and preferences of the Series A
Preferred Stock and Common Stock. Additionally, such shares could have dividend
rates and redemption or other provisions which could adversely affect the
Company's ability to pay dividends on the Series A Preferred Stock and Common
Stock or prohibit payment of such dividends. Such shares could also be issued,
under certain circumstances, in an attempt to prevent a takeover of the Company,
and such issuance could adversely impact holders of Common Stock, Series A
Preferred Stock and Debentures who might convert and vote in favor of a proposed
merger, tender offer or similar transaction.

WARRANTS AND OPTIONS

As of the date of this Prospectus, there are outstanding 243,717 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) 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

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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

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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 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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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS

The following is a general summary of certain material United States federal
income tax considerations relevant to the purchase, ownership, disposition and
conversion of Debentures to the purchasers thereof and the ownership and
disposition of the Common Stock received upon the conversion of the Debentures.
This summary is based on the Internal Revenue Code of 1986, as amended (the
"Code"), final, temporary and proposed United States Treasury regulations
promulgated thereunder, Internal Revenue Service ("IRS") rulings, official
pronouncements and judicial decisions, all as in effect on the date hereof and
all of which are subject to change, possibly with retroactive effect, or
different interpretations. This summary does not address the considerations that
may be applicable to particular classes of holders, including financial
institutions, broker-dealers, tax-exempt organizations, banks and insurance
companies. In addition, this summary is limited to persons that will hold the
Debentures and the Common Stock as "capital assets" within the meaning of
Section 1221 of the Code. In addition, this summary does not address any state,
local or foreign tax considerations that may be relevant to a holder's decision
to purchase the Debentures.

ALL POTENTIAL PURCHASERS OF DEBENTURES ARE ADVISED TO CONSULT THEIR OWN TAX
ADVISORS REGARDING THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE
PURCHASE OF DEBENTURES, OF THE OWNERSHIP, CONVERSION AND DISPOSITION OF
DEBENTURES AND THE OWNERSHIP AND DISPOSITION OF COMMON STOCK RECEIVED UPON THE
CONVERSION OF THE DEBENTURES IN LIGHT OF THEIR OWN PARTICULAR CIRCUMSTANCES.

U.S. HOLDERS

Interest and Original Issue Discount On Debentures. Payments of interest on
the Debentures will be taxable to holders thereof at the time that such payments
are accrued or received, depending on whether the holder uses the accrual or
cash method of accounting for federal income tax purposes.

In accordance with Sections 1271 through 1275 of the Code and the final
Treasury Regulations promulgated thereunder, a debt instrument bears original
issue discount ("OID") if its "stated redemption price at maturity" exceeds its
"issue price" by more than a de minimis amount. The "issue price" of the
Debentures for federal income tax purposes will be the first price at which a
substantial amount of the Debentures are sold for money. The Company believes
that the issue price of the Debentures will not be less than its "stated
redemption price at maturity" and thus there should be no OID with respect to
the Debentures.

Premium and Market Discount. A U.S. Holder of a Debenture purchased at a
premium (i.e., a cost greater than its principal amount), excluding any amount
attributable to the conversion privilege, may amortize such premium. Special
rules may require the amount of premium and the amortization thereof to be
determined with reference to the optional redemption price and date.

If a U.S. Holder of a Debenture purchases the Debenture at an amount that is
less than its principal amount, the Debenture generally will be considered to
bear "market discount" in the hands of such U.S. Holder. In such case, gain
realized by the U.S. Holder on the sale, exchange, or retirement, and unrealized
appreciation on certain nontaxable dispositions, of the Debenture generally will
be treated as ordinary interest income to the extent of the market discount that
accrued on the Debenture while held by such U.S. Holder and to the extent it has
not previously been included in income (pursuant to an election by the U.S.
Holder to include such market discount in income as it accrues). In general
terms, market discount on a Debenture will be treated as accruing on a
straight-line basis over the term of such Debenture, or, at the election of the
U.S. Holder, under a constant yield method. However, market discount is deemed
not to exist if the market discount is less than a statutorily defined de
minimis amount.

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Conversion of Debentures. A U.S. Holder of a Debenture will not recognize
gain on the conversion of Debentures into Common Stock except to the extent cash
is received in lieu of a fractional share. The tax basis for the Common Stock
received upon such conversion will be equal to the tax basis of the Debentures
converted (reduced by the portion of such basis allocable to any fractional
Common Stock interest paid in cash). A holder generally will recognize gain (or
loss) upon a conversion to the extent that any cash paid in lieu of a fractional
share of Common Stock exceeds (or is less than) its tax basis in such fractional
share. The holding period for the Common Stock generally will include the
holding period of the Debentures converted.

If a Debenture as to which there is accrued market discount is converted
into shares of Common Stock, such accrued market discount will carry over to the
shares of Common Stock (to the extent that such accrued market discount has not
been included in income), and any gain realized upon the subsequent disposition
of such shares of Common Stock will, to the extent of such accrued market
discount, be taxable as ordinary interest income.

Dividends on Shares of Common Stock. Distributions with respect to the
shares of Common 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 nontaxable return of
capital reducing the holder's adjusted tax basis in the shares of Common 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 shares of the Common Stock. However,
complex rules apply which may cause disallowance or limitation of the dividends
received deduction under circumstances described in the Code.

In addition, because the Company presently has a deficit in accumulated
earnings and profits for United States federal income tax purposes, in general,
unless the Company generates earnings and profits each year in an amount at
least equal to the amount of dividends payable on the shares of Common Stock
(and all other stock ranking senior thereto or pari passu therewith), all or
part of the distributions made by the Company on the shares of Common Stock will
be treated as returns of capital rather than dividends eligible for the
dividends-received deduction available to corporations. Moreover, 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, including recent proposed legislation which, if
enacted, could reduce the dividend received deduction to 50% and modify certain
other requirements.

Sale or Exchange of Debentures or Shares of Common Stock. In general, the
U.S. Holder of a Debenture (or the shares of Common Stock into which it was
converted) will recognize gain or loss upon the sale, redemption, retirement or
other disposition of the Debenture or on the sale or other disposition of shares
of Common Stock measured by the difference between the amount realized and the
U.S. Holder's tax basis in the Debenture or shares of Common Stock. A U.S.
Holder's tax basis in a Debenture generally will equal the cost of the Debenture
to the U.S. Holder increased by the amount of market discount, if any,
previously taken into income by the U.S. Holder or decreased by any premium
theretofore amortized by the U.S. Holder with respect to the Debenture. For the
basis and holding period of shares of Common Stock, see "U.S.
Holders--Conversion of Debentures." Except to the extent treated as ordinary
income under the market discount rules, the gain or loss on such disposition of
the Debentures or shares of Common Stock will be capital gain or loss; the
capital gain or loss will be

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long-term capital gain or loss if the holding period of the Debentures or shares
of Common Stock is more than one year at the time of such disposition.

Adjustment of Conversion Price. Pursuant to Treasury Regulations promulgated
under section 305 of the Code, a holder of a Debenture will be treated as having
received a constructive distribution from the Company upon an adjustment in the
conversion price of the Debentures if (i) as a result of such adjustment, the
proportionate interest of such holder in the assets or earnings and profits of
the Company were increased and (ii) the adjustment was not made pursuant to a
bona fide, reasonable antidilution formula. An adjustment in the conversion
price would not be considered made pursuant to such a formula if the adjustment
was made to compensate for certain taxable distributions with respect to the
stock into which the Debentures are convertible. Thus, under certain
circumstances, a decrease in the conversion price for the Debentures may be
taxable to a holder as a dividend to the extent of the current or accumulated
earnings and profits of the Company. In addition, the failure to adjust fully
the conversion price of the Debentures to reflect distributions of stock
dividends with respect to the Common Stock (or rights to acquire Common Stock)
may result in a taxable dividend to the holders of the Common Stock and holders
of rights to acquire Common Stock.

Backup Withholding. A holder of a Debenture or Common Stock issued upon
conversion of a Debenture may be subject to backup withholding at a rate of 31%
with respect to dividends or interest on, or the proceeds of a sale, exchange,
or redemption of, such Debenture or Common Stock, as the case may be, unless (i)
such holder is a corporation or comes within certain other exempt categories
and, when required, demonstrates this fact or (ii) provides a taxpayer
identification number, certifies as to no loss of exemption from backup
withholding, and otherwise complies with applicable backup withholding rules.

FOREIGN HOLDERS

As used herein, "Foreign Holders" means persons who are not, for U.S.
federal income tax purposes, citizens or residents of the United States or who,
as to the United States, are foreign corporations, foreign partnerships or
foreign estates or trusts.

ALL FOREIGN HOLDERS ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS REGARDING
THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE PURCHASE OF
DEBENTURES, OF THE OWNERSHIP, CONVERSION AND DISPOSITION OF THE DEBENTURES AND
THE OWNERSHIP AND DISPOSITION OF COMMON STOCK RECEIVED UPON THE CONVERSION OF
THE DEBENTURES IN LIGHT OF THEIR OWN PARTICULAR CIRCUMSTANCES.

Payments on Debentures. Subject to the discussion of backup withholding
below, payments of principal and interest on a Debenture by the Company or its
agent (in its capacity as such) to a beneficial owner that is a Foreign Holder
will not be subject to United States federal withholding tax; provided that (a)
such person does not actually or constructively own 10% or more of the total
combined voting power of all classes of stock of the Company entitled to vote,
(b) such person is not a controlled foreign corporation that is related to the
Company actually or constructively through stock ownership, (c) such person is
not a bank that acquired its Debenture in consideration of an extension of
credit made pursuant to a loan agreement entered into in the ordinary course of
business and (d) either (i) the beneficial owner certifies to the Company or its
agent, under penalties of perjury, in a suitable form that it is a Foreign
Holder and provides its name and address or (ii) a qualifying securities
clearing organization, bank or other financial institution that holds customers'
securities in the ordinary course of its trade or business and that holds the
Debenture certifies to the Company or its agent under penalties of perjury that
such statement has been received from the beneficial owner in a suitable form by
it or by a qualifying intermediary and furnishes the payor with a copy thereof.

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If a beneficial owner of a Debenture who is a Foreign Holder is engaged in a
trade or business within the United States and interest on the Debenture is
effectively connected with the conduct of such trade or business, such
beneficial owner may be subject to United States federal income tax on such
interest at ordinary federal income tax rates on a net basis (in which case the
branch profits tax may also apply if the holder is a foreign corporation).

Conversion of Debentures. A Foreign Holder will generally receive the
treatment described above under "U.S. Holders--Conversion of Debentures". To the
extent such a holder receives cash in lieu of fractional shares of Common Stock,
such payment may be subject to the rules described below under "Sale or Exchange
of Debentures or Shares of Common Stock".

Dividends on Shares of Common Stock. Generally, any dividends paid on shares
of Common Stock received upon the conversion of a Debenture (including any
constructive dividends, if any, as a result of an adjustment of the conversion
price, see the "U.S. Holders--Adjustment of Conversion Price") will be subject
to United States federal withholding tax at a rate of 30% of the amount of the
dividend, or at a lower rate provided in an applicable treaty. However, if the
dividend is effectively connected with a United States trade or business of a
Foreign Holder, it will be subject to United States income tax at ordinary rates
on a net basis (in which case the branch profits tax may also apply if such
holder is a foreign corporation), rather than the 30% withholding tax.

Under current Treasury Regulations, a holder's status as a Foreign Holder
and eligibility for a tax treaty reduced rate of withholding will be determined
by reference to the holder's address and to any outstanding certificates or
statements concerning eligibility for a reduced rate of withholding, unless
facts and circumstances indicate that reliance is not warranted.

Sale or Exchange of Debentures or Shares of Common Stock. Subject to the
discussion of backup withholding below, any capital gain realized upon a sale or
exchange of a Debenture (including upon retirement of a Debenture) or Common
Stock issued upon conversion of a Debenture by a beneficial owner who is a
Foreign Holder ordinarily will not be subject to United States federal income
tax unless (i) such gain is effectively connected with a trade or business
conducted by such Foreign Holder within the United States (in which case the
branch profits tax may also apply if the holder is a foreign corporation), (ii)
in the case of a Foreign Holder that is an individual, such holder is present in
the United States for a period or periods aggregating 183 days or more in the
taxable year of the sale or exchange and certain other conditions are met or
(iii) the Company is or has been a "United States real property holding
corporation" for federal income tax purposes (which the Company does not believe
it has been or is currently) and such Foreign Holder has held, directly or
constructively, more than 5% of the outstanding Common Stock within the
five-year period ending on the date of the sale or exchange, and no treaty
exception is applicable.

Adjustment of Conversion Price. A Foreign Holder of a Debenture will be
treated as having received a constructive distribution from the Company upon an
adjustment in the conversion price of the Debentures if (i) as a result of such
adjustment, the proportionate interest of such holder in the assets or earnings
and profits of the Company were increased and (ii) the adjustment was not made
pursuant to a bona fide, reasonable antidilution formula. An adjustment in the
conversion price would not be considered made pursuant to such formula if the
adjustment was made to compensate for certain taxable distribution with respect
to the stock into which the Debentures are convertible. Thus, under certain
circumstances, a decrease in the conversion price for the Debentures may be
taxable to a holder as a dividend to the extent of the current or accumulated
earnings and profits of the Company. In addition, the failure to adjust fully
the conversion price of the Debentures to reflect distributions of stock
dividends with respect to the Common Stock (or rights to acquire Common Stock)
may result in a taxable dividend to the holders of the Common Stock and holders
of rights to acquire Common Stock. Any constructive distribution to a Foreign
Holder of a Debenture or shares of Common Stock may be

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subject to the U.S. withholding tax provisions discussed above with respect to
payments of dividends on Shares of Common Stock.

Federal Estate Taxes. Debentures beneficially owned by an individual who at
the time of death is neither a citizen nor a resident of the United States will
not be subject to United States federal estate tax as a result of such
individual's death, provided that at the time of death the income from the
Debentures was not or would not have been effectively connected with the conduct
by such individual of a trade or business within the United States and that such
individual qualified for the exemption from United States federal withholding
tax (without regard to the certification requirements) interest that is
described above under "Payments on Debentures."

Common Stock that is beneficially owned by an individual who is neither a
citizen nor a resident of the United States at the time of death will be
included in such holder's gross estate for United States federal estate tax
purposes, unless an applicable estate tax treaty provides otherwise.

Backup Withholding and Information Reporting. Information reporting on IRS
Form 1099 and backup withholding at a rate of 31% will not apply to payments of
principal and interest made by the Company or a paying agent to a Foreign Holder
on a Debenture if the certification described in clause (d) under "--Payments on
Debentures" above is received, provided that the payor does not have actual
knowledge that the holder is a United States person. However, interest on a
Debenture owned by a holder that is a non-United States person may be required
to be reported annually on IRS Form 1042S.

Payments of the proceeds from the sale by a Foreign Holder of a Debenture or
Common Stock issued upon conversion of a Debenture made to or through a foreign
office of a broker will not be subject
to information reporting or backup withholding, except that if the broker is a
United States person, a controlled foreign corporation for United States tax
purposes or a foreign person 50% or more of whose gross income is effectively
connected with a United States trade or business for a specified three-year
period, information reporting may apply to such payments. Payments of the
proceeds from the sale of a Debenture or Common Stock to or through the United
States office of a broker is subject to information reporting and backup
withholding unless the holder certifies as to its non-United States status or
otherwise establishes an exemption from information reporting and backup
withholding.

54
<PAGE>
UNDERWRITING

The underwriters named below (the "Underwriters"), represented by Rodman &
Renshaw, Inc. and Cruttenden Roth Incorporated, the representatives of the
Underwriters (the "Representatives"), have severally, and not jointly, agreed,
subject to the terms and conditions of the underwriting agreement (the
"Underwriting Agreement"), between the Company and the Underwriters, to purchase
from the Company, and the Company has agreed to sell to each underwriter, the
respective principal amount of Debentures set forth opposite their names below.

<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
UNDERWRITERS OF DEBENTURES
------------ ----------------
<S> <C>
Rodman & Renshaw, Inc....................................... $
Cruttenden Roth Incorporated................................ $

----------------
TOTAL................................................... $ 40,000,000
----------------
----------------
</TABLE>

The Underwriting Agreement provides that the obligations of the several
Underwriters are subject to certain conditions and the approval of certain legal
matters by their counsel and various other conditions. The nature of the
Underwriters' obligations are such that they are committed to purchase all of
the Debentures if any are purchased.

The Underwriters have advised the Company that they propose initially to
offer the Debentures directly to the public at the offering price set forth on
the cover page of this Prospectus, and to certain dealers at such price less a
concession not in excess of % of the principal amount. The Underwriters may
allow, and such dealers may reallow, a concession not in excess of % of the
principal amount of the Debentures to certain other dealers. After the initial
public offering, the offering price concession and reallowance may be changed by
the Representatives. The Debentures are offered subject to receipt and
acceptance by the Underwriters and to certain other conditions, including the
right to reject orders in whole or in part.

The Company has granted the Underwriters an option, exercisable for 30 days
after the date of this Prospectus, to purchase up to an additional $6,000,000
principal amount of Debentures to cover over-allotments, if any, at the initial
public offering price less the underwriting discount set forth on the cover page
of this Prospectus.

The Representatives of the Underwriters have advised the Company that they
currently intend to make a market in the Debentures; however, they are not
obligated to do so. Any market making may be discontinued at any time without
notice. The Underwriters will not sell Debentures to customers for whose
accounts they exercise discretionary authority.

The Company has agreed to pay to the Representatives a non-accountable
expense allowance equal to 1% of the gross proceeds of the sale of the
Debentures ($400,000, or $460,000 if the Underwriters' over-allotment option is
exercised in full). Rodman & Renshaw, Inc. will apply a $100,000 retainer
previously received from the Company to this amount.

The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments the Underwriters may be required to make in respect thereof.

55
<PAGE>
Prior to this Offering, there has been no public trading market for the
Debentures. The initial public offering price will be determined through
negotiations between the Company and the Representatives. Among the factors to
be considered in such negotiations will be the Company's products, results of
operations, financial condition and future prospects, the experience of
management, the prevailing market conditions, the market prices of securities
for companies in businesses similar to that of the Company and other relevant
factors. The Company has applied to have the Debentures quoted on the Nasdaq
SmallCap Market under the symbol "FBARG." There can be no assurance that an
active trading market will develop for the Debentures or that the Debentures
will trade in the public market subsequent to this Offering at or above the
initial public offering price. See "Risk Factors--Market for the Debentures."

Rodman & Renshaw, Inc., one of the Representatives, acted as the
representative of the underwriters of the Company's 1994 public offering of
Series A Preferred Stock and has acted as a financial advisor to the Company.
John J. Borer III, a Director of the Company, is a Managing Director of Rodman &
Renshaw, Inc. See "Management." In his capacity as a Director of the Company,
Mr. Borer has received options entitling him to purchase up to a total of 72,500
shares of the Company's Common Stock at prices ranging from $1.375 to $3.64 per
share. See "Management--Recent Developments in Management
Compensation--Management Options."

56
<PAGE>
LEGAL MATTERS

The validity of the issuance of the Debentures offered hereby and certain
legal matters with respect to United States federal income tax considerations
will be passed upon for the Company by Baer Marks & Upham LLP, New York, New
York. Rogers & Wells, New York, New York, will act as counsel to the
Underwriters.

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.

AVAILABLE INFORMATION

The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (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 in the United States 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.

The Company has filed with the Commission a Registration Statement on Form
S-2 (the "Registration Statement") under the Securities Act, with respect to the
securities offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and such
securities, reference is hereby made to such Registration Statement, exhibits
and schedules which are available for inspection without charge at the principal
office of the Commission at Washington, D.C. Copies of the material containing
this information may be obtained from the Commission upon payment of the
prescribed fee. Statements contained in this Prospectus concerning the
provisions of any document are not necessarily complete, and, in each instance,
reference is made to the copy of such document filed in an exhibit to the
Registration Statement or otherwise filed with the Commission. Each such
statement is qualified in its entirety by such reference.

57
<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 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, SALESPERSON OR ANY OTHER
PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY
REPRESENTATION, OTHER THAN THOSE CON $40,000,000
TAINED IN THIS PROSPECTUS, IN
CONNECTION WITH THE OFFERING DESCRIBED
HEREIN, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THE DELIVERY FAMILY BARGAIN
OF THIS PROSPECTUS AT ANY TIME DOES NOT
IMPLY THAT THERE HAS NOT BEEN ANY CORPORATION
CHANGE IN THE INFORMATION SET FORTH
HEREIN OR IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF. THIS PROSPECTUS % CONVERTIBLE
DOES NOT CONSTITUTE AN OFFER TO SELL OR SUBORDINATED DEBENTURES
A SOLICITATION OF AN OFFER TO BUY ANY DUE 2006
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 [FAMILY BARGAIN LOGO]

PAGE
----
Incorporation of Certain
Documents by Reference......... 3
Summary.......................... 4 [FACTORY 2-U LOGO]
Summary Consolidated
Financial and Other Data....... 8
Risk Factors..................... 11
Use of Proceeds.................. 15
Price Range of Common Stock...... 16
Capitalization................... 17 ----------------
Dividend Policy.................. 18 PROSPECTUS
Selected Consolidated ----------------
Historical and Pro
Forma Financial Data........... 19
Management's Discussion
and Analysis of Financial
Condition and Results
of Operations.................. 22
Business......................... 29
Management....................... 36
Description of Debentures........ 41 RODMAN & RENSHAW, INC.
Description of Capital Stock..... 46
Certain Federal Income Tax
Considerations................... 50 CRUTTENDEN ROTH
Underwriting..................... 55 INCORPORATED
Legal Matters.................... 57
Experts.......................... 57
Available Information............ 57
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.

<TABLE>
<CAPTION>
<S> <C>
SEC Registration Fee........................................... $ 15,862
NASD Filing Fee................................................ $ 5,100
NASDAQ Fee..................................................... $ 7,300
Printing and Engraving Expenses................................ $ 100,000
Legal Fees and Expenses........................................ $ 350,000
Blue Sky Fees and Expenses..................................... $ 25,000
Accounting Fees and Expenses................................... $ 170,000
Trustee's Fees and Expenses.................................... $ 15,000
Underwriters' Non-accountable Expense Allowance................ $ 400,000
Miscellaneous.................................................. $ 86,734
----------
Total.......................................................... $1,100,000
</TABLE>

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 Eighth 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 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

II-1
<PAGE>
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 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

II-2
<PAGE>
dividend, stock purchase or redemption was unlawful under this chapter, in
proportion to the amounts received by such stockholders respectively.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a)

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>

1.1 Form of Underwriting Agreement

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 IBJ Schroder Bank & Trust Company with
respect to the Debentures

4.8 Form of Debenture (included in 4.7 above)

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

*8.1 Opinion of Baer Marks & Upham LLP (re: tax matters) (included in 5.1 above)

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)

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

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 (4-10.15(3))
</TABLE>

II-3
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
10.9 Amendment No. 2 to Loan and Security Agreement, dated as of March 31, 1995, between
General Textiles and Finova Capital Corporation

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

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

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

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

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

10.24 Stock Purchase Agreement dated as of June , 1996 among the Registrant, Morgana
Holdings Inc. and L'Ancresse Holdings Ltd.

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

12.1 Computation of Ratio of earnings to fixed charges

21.1 Subsidiaries of the Registrant

*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
</TABLE>

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

* Filed with this Amendment.

II-4
<PAGE>
(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.

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

II-5
<PAGE>
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.

(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-6
<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 day of
September, 1996.

FAMILY BARGAIN CORPORATION

By: /s/ JOHN A. SELZER

..................................

John A. Selzer
President and Chief Executive
Officer

POWER OF ATTORNEY

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.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----

<S> <C> <C>
/s/ JOHN A. SELZER Chief Executive Officer, September , 1996
...................................... President and Director
John A. Selzer (Principal Executive
Officer)

/s/ BENSON A. SELZER Chairman and Director September , 1996
......................................
Benson A. Selzer

/s/ JOSEPH EIGER Vice Chairman, Executive Vice September , 1996
...................................... President and Director
Joseph Eiger

/s/ JEFFREY C. GERSTEL Executive Vice President, September , 1996
...................................... Finance (Principal
Jeffrey C. Gerstel Financial and Accounting
Officer)

* Director September , 1996
......................................
Francis G. Warburton

/s/ WILLIAM W. MOWBRAY Chief Financial Officer and September , 1996
...................................... Director; President and
William W. Mowbray Chief Executive Officer of
General Textiles and
Factory 2-U, Inc.

* Director September , 1996
......................................
H. Jurgen Schlichting
</TABLE>

II-7
<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 , 1996
......................................
John A. Selzer,
Attorney-in-Fact
</TABLE>

II-8

EXHIBIT 4.7

DRAFT DATED
September 16, 1996
FAMILY BARGAIN CORPORATION

and

AMERICAN STOCK TRANSFER AND TRUST COMPANY

TRUSTEE

_________________

Indenture

DATED AS OF , 1996

_________________

% CONVERTIBLE SUBORDINATED

DEBENTURES

Due ___________________, 2006

____________________________________________________________________
____________________________________________________________________

<PAGE>

CROSS-REFERENCE TABLE

TIA SECTION INDENTURE SECTION
- ----------- -----------------

310(a)(1) 7.10
(a)(2) 7.10
(a)(3) N.A.
(a)(4) N.A.
(b) 7.08; 7.10; 12.02
(c) N.A.
311(a) 7.11
(b) 7.11
(c) N.A.
312(a) 2.05
(b) 12.03
(c) 12.03
313(a) 7.06
(b)(1) N.A.
(b)(2) 7.06
(c) 12.02
(d) 7.06
314(a) 4.05; 12.02
(b) N.A.
(c)(1) 12.04
(c)(2) 12.04
(c)(3) N.A.
(d) N.A.
(e) 12.05
(f) 4.04
315(a) 7.01(b)
(b) 7.05; 12.02
(c) 7.01(a)
(d) 7.01(c)
(e) 6.11
316(a)(last sentence) 12.06
(a)(1)(A) 6.05
(a)(1)(B) 6.04
(a)(2) N.A.
(b) 6.07
317(a)(1) 6.08
(a)(2) 6.09
(b) 2.04
318(a) 12.01
_____________________

<PAGE>

N.A. means Not Applicable.

<PAGE>

ARTICLE ONE.

DEFINITIONS AND INCORPORATION BY REFERENCE

SECTION 1.01. DEFINITIONS.............................................. 1
SECTION 1.02. OTHER DEFINITIONS........................................ 2
SECTION 1.03. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT........ 2
SECTION 1.04. RULES OF CONSTRUCTION.................................... 3

ARTICLE TWO.

THE DEBENTURES

SECTION 2.01. FORM AND DATING.......................................... 3
SECTION 2.02. EXECUTION AND AUTHENTICATION............................. 3
SECTION 2.03. REGISTRAR AND PAYING AGENT............................... 4
SECTION 2.04. PAYING AGENT TO HOLD MONEY IN TRUST...................... 4
SECTION 2.05. DEBENTUREHOLDER LISTS.................................... 4
SECTION 2.06. TRANSFER AND EXCHANGE.................................... 5
SECTION 2.07. REPLACEMENT DEBENTURES................................... 5
SECTION 2.08. OUTSTANDING DEBENTURES................................... 5
SECTION 2.09. TEMPORARY DEBENTURES..................................... 5
SECTION 2.10. CANCELLATION............................................. 6
SECTION 2.11. DEFAULTED INTEREST....................................... 6
SECTION 2.12. DEPOSIT OF MONEY......................................... 6

ARTICLE THREE.

REDEMPTION

SECTION 3.01. NOTICES TO TRUSTEE....................................... 6
SECTION 3.02. SELECTION OF DEBENTURES TO BE REDEEMED................... 6
SECTION 3.03. NOTICE OF REDEMPTION..................................... 7
SECTION 3.04. DEPOSIT OF REDEMPTION PRICE.............................. 7
SECTION 3.05. EFFECT OF NOTICE OF REDEMPTION........................... 7
SECTION 3.06. DEBENTURES REDEEMED IN PART.............................. 7

ARTICLE FOUR.

COVENANTS

SECTION 4.01. PAYMENT OF DEBENTURES.................................... 8
SECTION 4.02. CORPORATE EXISTENCE...................................... 8
SECTION 4.03. MAINTENANCE OF PROPERTIES................................ 8
SECTION 4.04. COMPLIANCE CERTIFICATE................................... 8

<PAGE>

SECTION 4.05. SEC REPORTS.............................................. 9
SECTION 4.06. NO LIEN CREATED.......................................... 9
SECTION 4.07. RESTRICTIONS ON SHAREHOLDER PAYMENTS..................... 9
SECTION 4.08. NO RESTRICTIONS ON SUBSIDIARY DIVIDENDS.................. 9

ARTICLE SIX.

DEFAULTS AND REMEDIES

SECTION 6.01. EVENTS OF DEFAULT........................................ 10
SECTION 6.02. ACCELERATION............................................. 11
SECTION 6.03. OTHER REMEDIES........................................... 12
SECTION 6.04. WAIVER OF PAST DEFAULTS.................................. 12
SECTION 6.05. CONTROL BY MAJORITY...................................... 12
SECTION 6.06. LIMITATION ON SUITS...................................... 12
SECTION 6.07. RIGHTS OF HOLDERS TO RECEIVE PAYMENT..................... 13
SECTION 6.08. COLLECTION SUIT BY TRUSTEE............................... 13
SECTION 6.09. TRUSTEE MAY FILE PROOFS OF CLAIM......................... 13
SECTION 6.10. PRIORITIES............................................... 13
SECTION 6.11. UNDERTAKING FOR COSTS.................................... 14

ARTICLE SEVEN.

TRUSTEE

SECTION 7.01. DUTIES OF TRUSTEE........................................ 14
SECTION 7.02. RIGHTS OF TRUSTEE........................................ 15
SECTION 7.03. TRUSTEE'S DISCLAIMER..................................... 15
SECTION 7.04. INDIVIDUAL RIGHTS OF TRUSTEE, ETC........................ 16
SECTION 7.05. NOTICE OF DEFAULTS....................................... 16
SECTION 7.06. REPORTS BY TRUSTEE TO HOLDERS............................ 16
SECTION 7.07. COMPENSATION AND INDEMNITY............................... 16
SECTION 7.08. REPLACEMENT OF TRUSTEE................................... 17
SECTION 7.09. SUCCESSOR TRUSTEE BY MERGER, ETC......................... 17
SECTION 7.10. ELIGIBILITY; DISQUALIFICATION............................ 18
SECTION 7.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST CORPORATION.... 18

ARTICLE EIGHT.

DISCHARGE OF INDENTURE

SECTION 8.01. TERMINATION OF CORPORATION'S OBLIGATIONS................. 18
SECTION 8.02. APPLICATION OF TRUST MONEY............................... 20
SECTION 8.03. REPAYMENT TO CORPORATION................................. 20

<PAGE>

ARTICLE NINE.

AMENDMENTS, SUPPLEMENTS AND WAIVERS
SECTION 9.01. WITHOUT CONSENT OF HOLDERS............................... 21
SECTION 9.02. WITH CONSENT OF HOLDERS.................................. 21
SECTION 9.03. COMPLIANCE WITH TRUST INDENTURE ACT...................... 22
SECTION 9.04. REVOCATION AND EFFECT OF CONSENTS........................ 22
SECTION 9.05. NOTATION ON OR EXCHANGE OF DEBENTURES.................... 22
SECTION 9.06. TRUSTEE TO SIGN AMENDMENTS, ETC.......................... 22

ARTICLE TEN.

SUBORDINATION OF DEBENTURES

SECTION 10.01. SUBORDINATION TO SENIOR INDEBTEDNESS..................... 23
SECTION 10.02. PRIORITY OF SENIOR INDEBTEDNESS UPON MATURITY............ 24
SECTION 10.03. EFFECT OF DEFAULT IN PAYMENT OF SENIOR INDEBTEDNESS...... 24
SECTION 10.04. PRIORITY OF SENIOR INDEBTEDNESS UPON DISTRIBUTION OR
LIQUIDATION.............................................. 24
SECTION 10.05. SUBROGATION OF DEBENTUREHOLDERS TO RIGHTS OF SENIOR
INDEBTEDNESS............................................. 25
SECTION 10.06. CORPORATION OBLIGATION TO PAY UNCONDITIONAL.............. 26
SECTION 10.07. RELIANCE BY TRUSTEE UPON CERTIFICATE..................... 26
SECTION 10.08. AUTHORIZATION OF TRUSTEE TO EFFECT SUBORDINATION......... 26
SECTION 10.09. NOTICE TO TRUSTEE OF SENIOR INDEBTEDNESS................. 26
SECTION 10.10. INDENTURE PROVISIONS SUBJECT TO THIS ARTICLE............. 27
SECTION 10.11. TRUSTEE'S RELATION TO SENIOR INDEBTEDNESS................ 27

ARTICLE ELEVEN.

CONVERSION OF DEBENTURES

SECTION 11.01. CONVERSION PRIVILEGE AND CONVERSION PRICE................ 27
SECTION 11.02. ISSUANCE OF COMMON STOCK ON CONVERSION................... 28
SECTION 11.03. NO FRACTIONAL SHARES TO BE ISSUED. ...................... 28
SECTION 11.04. CONVERSION PRICE......................................... 29
SECTION 11.05. RESERVATION OF SHARES FOR CONVERSION; LEGALITY OF
SHARES................................................... 34
SECTION 11.06. ISSUE AND TRANSFER TAXES................................. 34
SECTION 11.07. NOTICE OF ADJUSTMENT OF CONVERSION....................... 35
SECTION 11.08. TRUSTEE UNDER NO RESPONSIBILITY FOR DUTIES OF
CORPORATION.............................................. 35

<PAGE>

ARTICLE TWELVE.

MISCELLANEOUS

SECTION 12.01. TRUST INDENTURE ACT CONTROLS............................. 35
SECTION 12.02. NOTICES.................................................. 35
SECTION 12.03. COMMUNICATION BY HOLDERS WITH OTHER HOLDERS.............. 36
SECTION 12.04. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT....... 36
SECTION 12.05. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION............ 37
SECTION 12.06. WHEN TREASURY DEBENTURES DISREGARDED..................... 37
SECTION 12.07. RULES BY TRUSTEE, PAYING AGENT, REGISTRAR................ 37
SECTION 12.08. LEGAL HOLIDAYS........................................... 37
SECTION 12.09. GOVERNING LAW............................................ 38
SECTION 12.10. NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS............ 38
SECTION 12.11. NO RECOURSE AGAINST OTHERS............................... 38
SECTION 12.12. SUCCESSORS............................................... 38
SECTION 12.13. DUPLICATE ORIGINALS...................................... 38

EXHIBIT A - FORM OF DEBENTURE

EXHIBIT B - FORM OF CONVERSION NOTICE

<PAGE>

INDENTURE dated as of , 1996 between FAMILY BARGAIN CORPORATION, a
Delaware corporation ("Corporation"), and AMERICAN STOCK TRANSFER & TRUST
COMPANY, a New York banking corporation ("Trustee").

Each party agrees as follows for the benefit of the other party and for the
equal and ratable benefit of the Holders of the Corporation's % Convertible
Subordinated Debentures Due ("Debentures"):

ARTICLE ONE.

DEFINITIONS AND INCORPORATION BY REFERENCE

SECTION 1.01. DEFINITIONS.

"CORPORATION" means the party named as such in this Indenture until a
successor replaces it and thereafter means the successor.

"COMMON STOCK" means the common stock, par value $.01 per share, of the
Corporation, as that common stock may be reconstituted from time to time.

"BOARD OF DIRECTORS" means the Board of Directors of the Corporation or any
committee of the Board.

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

"HOLDER" or "DEBENTUREHOLDER" means the person in whose name a Debenture is
registered on the Registrar's books.

"INDENTURE" means this Indenture as amended or supplemented from time to
time.

"OFFICER" means the Chairman of the Board, the President, any
Vice-President, the Treasurer or the Secretary of the Corporation.

"OFFICERS' CERTIFICATE" means a certificate signed by two Officers or by an
Officer and an Assistant Treasurer or Assistant Secretary of the Corporation.

"OVER-ALLOTMENT OPTION" means the option of the underwriters to purchase
additional Debentures in the aggregate principal amount of up to $46,000,000 as
provided in Section 2.02.

"PRINCIPAL" of a Debenture means the amount stated as principal on the face
of the Debenture plus, when appropriate, the premium, if any, on the Debenture.

"SEC" means the Securities and Exchange Commission.

<PAGE>

"DEBENTURES" means the Debentures as amended or supplemented from time to
time.

"SUBSIDIARY" means a corporation of which a majority of the outstanding
stock entitled to vote with regard to election of a majority of the directors is
owned by the Corporation and its Subsidiaries.

"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. Sections 77aaa ET
SEQ.) as in effect on the date of this Indenture.

"TRUSTEE" means the party named as such in this Indenture until a successor
replaces it and thereafter means the successor.

"TRUST OFFICER" means the Chairman of the Board, the President or any other
officer or assistant officer of the Trustee assigned by the Trustee to
administer its corporate trust matters.

SECTION 1.02. OTHER DEFINITIONS.

TERM DEFINED IN SECTION
---- ------------------

"BANKRUPTCY LAW".............................. 6.01
"CUSTODIAN"................................... 6.01
"DEBENTURE REGISTER".......................... 2.03
"EVENT OF DEFAULT"............................ 6.01
"LEGAL HOLIDAY"............................... 12.08
"PAYING AGENT"................................ 2.03
"REGISTRAR"................................... 2.03
"SENIOR INDEBTEDNESS"......................... 10.01
"U.S. GOVERNMENT OBLIGATIONS"................. 8.01

SECTION 1.03. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT.

Whenever this Indenture refers to a provision of the TIA, the provision is
incorporated by reference in and made a part of this Indenture. In addition,
the provisions of Sections 3.10 to and including 3.17 of the TIA that impose
duties on any person are incorporated in and made a part of this Indenture.

The following TIA terms used in this Indenture have the following meanings:

"COMMISSION" means the SEC.

"INDENTURE SECURITIES" means the Debentures.

"INDENTURE SECURITYHOLDER" means a Debentureholder.

"INDENTURE TO BE QUALIFIED" means this Indenture.

<PAGE>

"INDENTURE TRUSTEE" or "INSTITUTIONAL TRUSTEE" means the Trustee.

"OBLIGOR" on the indenture securities means the Corporation or a
successor.

All other TIA terms used in this Indenture that are defined in the TIA,
defined in the TIA by reference to another statute or defined in an SEC rule
under the TIA have the meanings assigned to them.

SECTION 1.04. RULES OF CONSTRUCTION.

Unless the context otherwise requires:

(1) a term has the meaning assigned to it;

(2) an accounting term not otherwise defined has the meaning assigned
to it in accordance with generally accepted accounting principles;

(3) "OR" is not exclusive; and

(4) words in the singular include the plural, and in the plural
include the singular.

ARTICLE TWO.

THE DEBENTURES

SECTION 2.01. FORM AND DATING.

The Debentures and the Trustee's certificate of authentication will be
substantially in the form of Exhibit A. The Debentures may have notations,
legends or endorsements required by law, stock exchange rule or usage. The
Corporation will approve the form of the Debentures and any notation, legend or
endorsement on them. Each Debenture will be dated the date of its
authentication.

SECTION 2.02. EXECUTION AND AUTHENTICATION.

Two Officers will sign the Debentures for the Corporation by facsimile
signature. The Corporation's seal will be reproduced on the Debentures.

If an officer who signed a Debenture no longer holds that office at the
time the Trustee authenticates the Debenture, the Debenture will be valid
nevertheless.

A Debenture will not be valid until the Trustee manually signs the
certificate of authentication on the Debenture. The Trustee's signature will be
conclusive evidence that the Debenture has been authenticated under this
Indenture.

<PAGE>

The Trustee will authenticate Debentures for original issue in the
aggregate principal amount of up to $40,000,000 (or up to $46,000,000 if the
Over-Allotment Option is exercised) upon a written order or orders of the
Corporation signed by two Officers or by an Officer and an Assistant Treasurer
or Assistant Secretary of the Corporation. The aggregate principal amount of
Debentures outstanding at any time may not exceed that amount, except as
provided in Section 2.07. The Trustee may appoint an authenticating agent to
authenticate Debentures. An authenticating agent may authenticate Debentures
whenever the Trustee may do so. Each reference in this Indenture to
authentication by the Trustee includes authentication by such agent.

SECTION 2.03. REGISTRAR AND PAYING AGENT.

The Corporation will maintain an office or agency where Debentures may be
presented for registration of transfer or for exchange, an agent (which may be
the Corporation) to effect and record exchanges ("Registrar"), an office or
agency where Debentures may be presented for payment, and an agent (which may be
the Corporation) to make payments ("Paying Agent"). The Registrar will keep a
register ("Debenture Register") of the Debentures and of their transfer and
exchange. The Corporation may have one or more co-registrars and one or more
additional paying agents. The term "Paying Agent" includes any additional
paying agent.

The Corporation will enter into an appropriate agency agreement with any
Registrar, Paying Agent or co-registrar not a party to this Indenture. The
agreement will implement the provisions of this Indenture which relate to that
agent. The Corporation will notify the Trustee of the name and address of any
such agent. The Corporation may change the Registrar or Paying Agent without
notice to the Debentureholders. If the Corporation fails to maintain a
Registrar or Paying Agent, the Trustee will act as such. The Registrar or
Paying Agent may resign upon 30 days notice to the Corporation.

The Corporation initially appoints the Trustee as Registrar and Paying
Agent.

SECTION 2.04. PAYING AGENT TO HOLD MONEY IN TRUST.

Each Paying Agent will hold in trust for the benefit of Debentureholders or
the Trustee all money received by the Paying Agent for the payment of principal
or interest on the Debentures, and will promptly notify the Trustee of any
default by the Corporation in making any such payment. If the Corporation or a
Subsidiary acts as Paying Agent, it will segregate the money and hold it as a
separate trust fund. The Corporation at any time may require a Paying Agent to
pay all money held by it to the Trustee together with a complete accounting of
such sums. Upon doing so, the Paying Agent will have no further liability for
the money.

SECTION 2.05. DEBENTUREHOLDER LISTS.

The Trustee will preserve in as current a form as is reasonably practicable
the most recent list available to it of the names and addresses of the
Debentureholders. If the Trustee is not the Registrar, the Corporation will
furnish to the Trustee on or before each semiannual interest payment date and at
such other times as the Trustee may request in writing a list in such

<PAGE>

form and as of such date as the Trustee may reasonably require of the names and
addresses of the Debentureholders.

SECTION 2.06. TRANSFER AND EXCHANGE.

When Debentures are presented to the Registrar or a co-registrar with a
request to register the transfer or to exchange them for an equal principal
amount of Debentures of other denominations, the Registrar will register the
transfer or make the exchange as requested. To permit transfers and exchanges,
the Trustee will authenticate Debentures at the Registrar's request. The
Corporation may charge a reasonable fee for any transfer or exchange, but not
for any exchange pursuant to Section 2.09, 3.06 or 9.05.

SECTION 2.07. REPLACEMENT DEBENTURES.

If the Holder of a Debenture claims that the Debenture has been lost,
destroyed or wrongfully taken, the Corporation will issue and the Trustee will
authenticate a replacement Debenture if the requirements of Section 8.405 of the
New York Uniform Commercial Code are met. An indemnity bond must be sufficient
in the judgment of the Corporation and the Trustee to protect the Corporation,
the Trustee, the Paying Agent, the Registrar or any co-registrar from any loss
which any of them may suffer if a Debenture is replaced. The Corporation may
charge the Debentureholders for its expenses in replacing a Debenture.

SECTION 2.08. OUTSTANDING DEBENTURES.

The Debentures treated as outstanding at any time are all the Debentures
authenticated by the Trustee which have not been cancelled by the Trustee,
except those described in this Section. Except as provided in Section 12.06,
the outstanding Debentures include those held by the Corporation or its
affiliates.

If a Debenture is replaced pursuant to Section 2.07, it ceases to be
outstanding unless the Trustee receives proof satisfactory to it that the
replaced Debenture is held by a bona fide purchaser.

If the Paying Agent holds on a redemption date or maturity date money
sufficient to pay the Debentures which are payable on that date, then on and
after that date those Debentures will cease to be outstanding and interest on
them will cease to accrue. Those Debentures will carry no rights except the
right to receive payment.

SECTION 2.09. TEMPORARY DEBENTURES.

Until definitive Debentures are ready for delivery, the Corporation may
prepare and the Trustee will authenticate temporary Debentures. Temporary
Debentures will be substantially in the form of definitive Debentures, but may
have variations that the Corporation considers appropriate for temporary
Debentures. Without unreasonable delay, the Corporation will prepare and the
Trustee will authenticate definitive Debentures in exchange for temporary
Debentures.

<PAGE>

SECTION 2.10. CANCELLATION.

The Corporation at any time may deliver Debentures to the Trustee for
cancellation. The Registrar and the Paying Agent will forward to the Trustee
any Debentures surrendered to them for transfer, exchange or payment. The
Trustee and no one else will cancel and destroy all Debentures surrendered for
transfer, exchange, payment or cancellation. The Corporation may not issue new
Debentures to replace Debentures it has paid or delivered to the Trustee for
cancellation.

SECTION 2.11. DEFAULTED INTEREST.

If and to the extent the Corporation defaults in a payment of interest on
the Debentures, it will pay the defaulted interest to the persons who are
Debentureholders on a subsequent special record date. The Corporation will fix
the special record date and payment date. At least 15 days before the special
record date, the Corporation will mail to each Debentureholder a notice that
states the special record date, the payment date, and the amount of defaulted
interest to be paid. The Corporation may also pay defaulted interest in any
other lawful manner.

SECTION 2.12. DEPOSIT OF MONEY.

One day prior to each interest payment date, maturity date or other date on
which a payment is due pursuant to this Indenture, the Corporation shall deposit
with the Paying Agent in immediately available funds sufficient to make the cash
payments, if any, due on such interest payment date, maturity date or other
payment date, as the case may be, which permits the Paying Agent to remit
payment to the Debentureholders on such date.

ARTICLE THREE.

REDEMPTION

SECTION 3.01. NOTICES TO TRUSTEE.

If the Corporation wants to redeem Debentures pursuant to paragraph 5 of
the Debentures, it will notify the Trustee of the redemption date, the
redemption price, and the principal amount of Debentures to be redeemed at least
45 days prior to the redemption date unless a shorter period of time is
satisfactory to the Trustee.

SECTION 3.02. SELECTION OF DEBENTURES TO BE REDEEMED.

If less than all the Debentures are to be redeemed, the Trustee will select
the Debentures to be redeemed by a method the Trustee considers fair and
appropriate. The Trustee will make the selection from the Debentures which have
not previously been called for redemption. The Trustee may select for
redemption portions of the principal of Debentures that have a denomination
larger than $1000. Portions of Debentures the Trustee selects will be in an
amount of $1000 or an integral multiple of $1000. Provisions of this Indenture
that apply to Debentures called for redemption also apply to portions of
Debentures called for redemption.

<PAGE>

SECTION 3.03. NOTICE OF REDEMPTION.

At least 30 days but not more than 60 days before a redemption date, the
Corporation will mail a notice of redemption by first class mail to each Holder
of Debentures to be redeemed.

The notice will identify the Debentures to be redeemed and will state :

(1) the redemption date;

(2) the redemption price as specified in the Debentures;

(3) the name and address of the Paying Agent;

(4) that Debentures called for redemption must be surrendered to the
Paying Agent to collect the redemption price; and

(5) that interest on Debentures called for redemption ceases to
accrue on and after the redemption date.

At the Corporation's request, the Trustee will give the notice of
redemption in the Corporation's name and at its expense.

SECTION 3.04. DEPOSIT OF REDEMPTION PRICE.

Prior to the redemption date, the Corporation will deposit with the Paying
Agent money sufficient to pay the redemption price of and accrued interest on
all Debentures to be redeemed on that date.

SECTION 3.05. EFFECT OF NOTICE OF REDEMPTION.

Once notice of redemption is mailed, the Debentures called for redemption
become due and payable on the redemption date and at the redemption price
specified in the Debentures plus accrued interest to the redemption date. Upon
surrender to the Paying Agent, those Debentures will be paid at the redemption
prices specified in the Debentures, plus accrued interest to the redemption
date.

SECTION 3.06. DEBENTURES REDEEMED IN PART.

Upon surrender of a Debenture that is redeemed in part only, the
Corporation will execute and the Trustee will authenticate a new Debenture equal
in principal amount to the unredeemed portion of the Debenture which is
surrendered.

<PAGE>

ARTICLE FOUR.

COVENANTS

SECTION 4.01. PAYMENT OF DEBENTURES.

The Corporation will promptly pay the principal of and interest on the
Debentures on the dates and in the manner provided in the Debentures and this
Indenture.

The Corporation will pay interest on overdue principal at the rate borne by
the Debentures; it will pay interest on overdue installments of interest at the
same rate to the extent lawful.

SECTION 4.02. CORPORATE EXISTENCE.

Subject to Article 5, the Corporation will do or cause to be done all
things necessary to preserve and keep in full force and effect its corporate
existence, rights and franchises; provided, however, that the Corporation will
not be required to preserve any right or franchise if it determines that the
preservation is no longer desirable in the conduct of the Corporation's business
and that the loss will not be disadvantageous in any material respect to the
Debentureholders.

SECTION 4.03. MAINTENANCE OF PROPERTIES.

The Corporation will cause all properties material to the business of the
Corporation and its Subsidiaries taken as a whole to be maintained and kept in
good condition, repair and working order and will cause to be made all necessary
repairs, renewals, replacements, betterments and improvements regarding them,
all as in the judgment of the Corporation may be necessary so that the business
carried on in connection with them may be properly and advantageously conducted
at all times; provided, however, that neither the Corporation nor any Subsidiary
will be prevented from discontinuing the operation and maintenance of any of its
properties or from omitting to make any repairs, renewals, replacements,
betterments or improvements if the discontinuance or omission is, in the
judgment of the Corporation, desirable in the conduct of the businesses of the
Corporation and its Subsidiaries taken as a whole and not disadvantageous in any
material respect to the Debentureholders.

SECTION 4.04. COMPLIANCE CERTIFICATE.

The Corporation will deliver to the Trustee within 120 days after the end
of each fiscal year of the Corporation an Officers' Certificate stating whether
or not the signers know of any default by the Corporation in performing its
covenants contained in this Article 4. If they do know of such a default, the
certificate will describe the default, its status, and what action the
Corporation is taking or proposes to take with respect thereto. The certificate
shall comply with Section 12.05. The first certificate will be delivered to
the Trustee by MAY 31, 1997.

<PAGE>

SECTION 4.05. SEC REPORTS.

The Corporation will file with the Trustee within 15 days after it files
them with the SEC copies of the annual reports and of the information,
documents, and other reports (or copies of such portions of any of them as the
SEC may by rules and regulations prescribe) which the Corporation is required to
file with the SEC pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934. The Corporation also will comply with the other provisions of TIA
Section 314(a).

SECTION 4.06. NO LIEN CREATED.

Neither this Indenture nor the Debentures create a lien, charge or
encumbrance on any property of the Corporation or any Subsidiary.

SECTION 4.07. RESTRICTIONS ON SHAREHOLDER PAYMENTS.

The Corporation will not declare or pay any dividend or make any
distribution (other than a dividend or distribution payable solely in capital
stock of the Corporation) to the holders of any class of its capital stock, or
redeem or purchase (or permit any Subsidiary to purchase) any of its capital
stock or any warrants or options to acquire any of its capital stock, (a) at a
time when an Event of Default has occurred and is continuing, or (b) if, after
giving effect to the dividend, distribution, redemption or purchase, the total
sum expended since July 31, 1996 for all those purposes would exceed (i) 50% of
the cumulative consolidated net income of the Corporation and its subsidiaries
since July 31, 1996, plus (ii) the aggregate net proceeds received by the
Corporation from the sale of capital stock, and the aggregate principal amount
of convertible debt securities (including Debentures) converted into capital
stock of the Corporation, after July 31, 1996, except that this Section will not
prevent the Corporation from (A) paying the regularly scheduled dividend on its
Series A Stock at a time when no Event of Default has occurred and is
continuing, (B) paying a dividend within 60 days after it is declared if it
could have been paid on the date when it was declared or (C) paying a total of
up to $5,000,000 after July 31, 1996, to redeem or purchase Series A Stock at a
redemption or purchase price not in excess of (i) the price per share at which,
by the terms of the Series A Stock, the Corporation from time to time has the
option to redeem the Series A Stock without regard to the price of its Common
Stock or (ii) before the Corporation has the option to redeem the Series A Stock
without regard to the price of its Common Stock, the liquidation preference of
the Series A Stock.

SECTION 4.08. NO RESTRICTIONS ON SUBSIDIARY DIVIDENDS.

The Corporation will not, and will not permit any Subsidiary to, enter into
any agreement which precludes the Subsidiary from paying dividends, making
distributions, making payments with regard to taxes, paying reasonable
management or other fees to the Corporation or paying principal or interest on
indebtedness to the Corporation, other than (i) agreements (including debt
instruments) which existed on the date on which the Registration Statement filed
in connection with the offering is declared effective (the "Effective Date"),
(ii) agreements regarding extensions or refinancings of indebtedness which
existed on the Effective Date, provided the terms of those agreements are not
less favorable to the Debentureholders than the provisions of the agreements in
effect on the Effective Date,

<PAGE>

relating to the indebtedness which is being extended or refinanced, or (iii)
agreements relating to Subsidiaries acquired after the Effective Date which are
in effect when those Subsidiaries are acquired by the Corporation and were not
entered into in anticipation of the Subsidiaries' being acquired by the
Corporation ("New Subsidiary Agreements"), or (iv) agreements regarding
extensions or refinancings of indebtedness, or new agreements, provided that the
terms of those agreements with respect to making any payments are not less
favorable to the Debentureholders than the least favorable terms contained in
any of the agreements referred to in (i) or (ii) above, or in any New Subsidiary
Agreement.

ARTICLE FIVE.

SUCCESSOR CORPORATION

SECTION 5.01. WHEN CORPORATION MAY MERGE, ETC.

The Corporation will not consolidate with or merge into, or transfer all or
substantially all of its assets to, another corporation unless (a) the
resulting, surviving or transferee corporation assumes by supplemental indenture
in form and substance satisfactory to the Trustee all the obligations of the
Corporation under the Debentures and this Indenture, (b) the consolidated net
worth of the resulting, surviving or transferee corporation and its subsidiaries
immediately after the consolidation, merger or transfer will be at least as
great as the consolidated net worth of the Corporation and its subsidiaries
immediately before the consolidation, merger or transfer and (c) there is not
Event of Default at the time of the consolidation, merger or transfer and there
will not be one immediately following the consolidation, merger or transfer. At
the time of any such assumption, all the obligations of the predecessor
corporation will terminate. In connection with any consolidation, merger or
transfer contemplated by this Section 5.01, the Corporation shall deliver or
cause to be delivered to the Trustee, in form and substance satisfactory to the
Trustee, an Officer's Certificate and an opinion of counsel, each stating that
such consolidation, merger or transfer and the supplemental indenture in respect
thereto comply with this Section 5.01 and that all conditions precedent herein
provided for relating to such transaction have been complied with.

ARTICLE SIX.

DEFAULTS AND REMEDIES

SECTION 6.01. EVENTS OF DEFAULT.

An "Event of Default" occurs if:

(1) the Corporation defaults in the payment of interest on any
Debenture when it becomes due and payable and the default continues for a
period of 30 days;

(2) the Corporation defaults in the payment of the principal of any
Debenture when it becomes due and payable at maturity, upon redemption or
otherwise;

(3) the Corporation fails to comply with any of its other agreements
in the Debentures or this Indenture and the default continues for the
period and after the notice specified below;

<PAGE>

(4) the Corporation pursuant to or within the meaning of any
Bankruptcy Law:

(A) commences a voluntary case,

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

(D) makes a general assignment for the benefit of its creditors;

(5) a court of competent jurisdiction enters an order or decree under
any Bankruptcy Law that:

(A) grants relief against the Corporation in an involuntary case
brought against it,

(B) appoints a Custodian of the Corporation or for any
substantial part of its property, or

(6) the Corporation defaults under any instrument relating to Senior
Indebtedness beyond any period of grace which is not cured or waived.

The term "Bankruptcy Law" means Title 11, United States Code, or any
similar Federal or state law for the relief of debtors. The term "Custodian"
means any receiver, trustee, assignee, liquidator or similar official under any
Bankruptcy Law.

A default under clause (3) is not an Event of Default until the Trustee or
the Holders of at least 25% in principal amount of the Debentures notify the
Corporation of the default and the Corporation does not cure the default within
90 days after receipt of the notice. The notice must specify the default,
demand that it be remedied and state that the notice is a "Notice of Default".

SECTION 6.02. ACCELERATION.

If an Event of Default occurs, while it is continuing the Trustee or the
Holders of at least 25% in principal amount of the outstanding Debentures by
notice to the Corporation may declare the principal of and accrued interest on
all the Debentures to be due and payable immediately. The Holders of a majority
in principal amount of the Debentures by notice to the Trustee may rescind an
acceleration and its consequences if all existing Events of Default have been
cured or waived and if the rescission would not conflict with any judgment or
decree.

<PAGE>

SECTION 6.03. OTHER REMEDIES.

If an Event of Default occurs, while it is continuing the Trustee may
pursue any available remedy by proceeding at law or in equity to collect any
overdue payment of principal or interest on the Debentures or to enforce the
performance of whatever other defaulted provision of the Debentures or this
Indenture led to the Event of Default.

The Trustee may maintain a proceeding even if the Trustee does not possess
any of the Debentures or does not produce any of them in the proceeding. A
delay or omission by the Trustee or any Debentureholder in exercising any right
or remedy accruing by reason of an Event of Default will not impair the right or
remedy or constitute a waiver of or acquiescence in the Event of Default. No
remedy is exclusive of any other remedy. All available remedies are cumulative.

SECTION 6.04. WAIVER OF PAST DEFAULTS.

Subject to Section 9.02, the Holders of a majority in principal amount of
the outstanding Debentures may waive an existing Default or Event of Default and
its consequences. When a Default or Event of Default is waived, it is cured and
stops continuing.

SECTION 6.05. CONTROL BY MAJORITY.

The Holders of a majority in principal amount of the outstanding Debentures
may direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee or exercising any trust or power conferred on
it. However, the Trustee may refuse to follow any direction that conflicts with
law or this Indenture, that is unduly prejudicial to the rights of other
Debentureholders, or that may involve the Trustee in personal liability.

SECTION 6.06. LIMITATION ON SUITS.

A Debentureholder may not pursue any remedy with respect to this Indenture
or the Debentures unless:

(1) the Holder gives the Trustee written notice of a continuing Event
of Default;

(2) the Holders of at least 25% in principal amount of the Debentures
make a written request to the Trustee to pursue the remedy;

(3) the Holders offer to the Trustee indemnity satisfactory to the
Trustee against any loss, liability or expense; and

(4) the Trustee does not comply with the request within 60 days after
receipt of the request and the offer of indemnity.

<PAGE>

A Debentureholder may not use this Indenture to prejudice the right of
another Debentureholder or to obtain a preference or priority over another
Debentureholder.

SECTION 6.07. RIGHTS OF HOLDERS TO RECEIVE PAYMENT.

Notwithstanding any other provision of this Indenture, the right of any
Debentureholder to receive payment of principal and interest on the Debenture,
on or after the respective due dates expressed in the Debenture, or to bring
suit for the enforcement of any such payment on or after those respective dates,
will not be impaired or affected without the consent of the Debentureholder.

SECTION 6.08. COLLECTION SUIT BY TRUSTEE.

If an Event of Default in payment of interest or principal specified in
Section 6.01(l) or (2) occurs and is continuing, the Trustee may recover
judgment in its own name and as trustee of an express trust against the
Corporation for any principal or interest which is due but unpaid and such
further amounts as shall be sufficient to cover the costs and expenses of
collection, including the compensation, expenses, disbursements and allowances
of the Trustee, its agents and counsel.

SECTION 6.09. TRUSTEE MAY FILE PROOFS OF CLAIM.

The Trustee may file such proofs of claim and other papers or documents as
may be necessary or advisable in order to have the claims of the Trustee and the
Debentureholders allowed in any judicial proceedings relative to the
Corporation, its including the compensation, expenses, disbursements and
advances of the Trustee its agents and counsel, creditors or its property and
shall be entitled and empowered to collect and receive any monies or other
property payable or deliverable on any such claims and to distribute the same,
and the custodian in any such judicial proceedings is hereby authorized by each
Debentureholder to make such payments to the Trustee and, in the event that the
Trustee shall consent to the making of such payments directly to the
Debentureholders, to pay to the Trustee any amount due to it for the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agent and
counsel, and any other amounts due the Trustee under Section 7.07.

SECTION 6.10. PRIORITIES.

If the Trustee collects any money pursuant to this Article, it will pay out
the money in the following order:

First: to the Trustee for amounts due under Section 7.07;

Second: to Debentureholders for amounts due and unpaid on the
Debentures for principal and interest, ratably, without preference or
priority of any kind, according to the amounts due and payable on the
Debentures for principal and interest, respectively; and

<PAGE>

Third: to the Corporation.

The Trustee may fix a record date and payment date for any payment to
Debentureholders.

SECTION 6.11. UNDERTAKING FOR COSTS.

In any suit for the enforcement of any right or remedy under this Indenture
or in any suit against the Trustee for any action taken or omitted by it as
Trustee, a court in its discretion may require the filing by any party litigant
in the suit of an undertaking to pay the costs of the suit; and the court in its
discretion may assess reasonable costs, including reasonable attorneys' fees,
against any party litigant in the suit, having due regard to the merits and good
faith of the claims or defenses made by the party litigant. This Section does
not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 6.07,
or a suit by Holders of more than 10% in principal amount of the Debentures.

ARTICLE SEVEN.

TRUSTEE

SECTION 7.01. DUTIES OF TRUSTEE.

(a) If an Event of Default actually known to the Trustee has occurred and
is continuing, the Trustee will exercise its rights and powers and use the same
degree of care and skill in their exercise as a prudent person would exercise or
use under the circumstances in the conduct of his or her own affairs.

(b) Except during the continuance of an Event of Default:

(1) The Trustee need perform only those duties that are specifically
set forth in this Indenture and no others.

(2) In the absence of bad faith on its part, the Trustee may
conclusively rely upon certificates or opinions furnished to the Trustee
and conforming to the requirements of this Indenture as to the truth of the
statements and the correctness of the opinions expressed in them. The
Trustee, however, will examine the certificates and opinions to determine
whether or not they conform to the requirements of this Indenture.

(c) The Trustee will not be relieved from liability for its own negligent
action, its own negligent failure to act, or its own willful misconduct,except
that:

(1) This paragraph does not limit the effect of paragraph (b) of this
Section.

<PAGE>

(2) The Trustee will not be liable for any error of judgment made in
good faith by a Trust Officer, unless it is proved that the Trustee was
negligent in ascertaining the pertinent facts.

(3) The Trustee will not be liable with respect to any action it
takes or omits to take in good faith in accordance with a direction
received by it pursuant to Section 6.05.

(d) Every provision of this Indenture that in any way relates to the
Trustee is subject to paragraphs (a), (b) and (c) of this Section.

(e) The Trustee may refuse to perform any duty or exercise any right or
power unless it receives indemnity satisfactory to it against any loss,
liability or expense.

(f) The Trustee will not be liable for interest on any money received by
it, except as the Trustee may otherwise agree with the Corporation.

SECTION 7.02. RIGHTS OF TRUSTEE.

(a) The Trustee may conclusively rely on any document believed by it to be
genuine and to have been signed or presented by the proper person. The Trustee
need not investigate any fact or matter stated in the document.

(b) Before the Trustee acts or refrains from acting, it may require an
Officers' Certificate and/or an opinion of counsel of the Corporation. The
Trustee will not be liable for any action it takes or omits to take in good
faith in reliance on the Certificate or opinion.

(c) The Trustee may act through agents and will not be responsible for the
misconduct or negligence of any agent appointed with due care.

(d) The Trustee will not be liable for any action it takes or omits to
take in good faith which it believes to be authorized or within its rights or
powers.

SECTION 7.03. TRUSTEE'S DISCLAIMER.

The Trustee makes no representation as to the validity or adequacy of this
Indenture or the Debentures, it will not be accountable for the Corporation's
use of the proceeds from the Debentures or any money paid to the Corporation or
upon the Corporation's direction under any provision hereof, it will not be
responsible for the use or application of any monies received by any Paying
Agent other than the Trustee and it will not be responsible for any statement in
the Debentures, in this Indenture, or in any prospectus used in the sale of the
Debentures, other than its certificate of authentication.

<PAGE>

SECTION 7.04. INDIVIDUAL RIGHTS OF TRUSTEE, ETC.

The Trustee in its individual or any other capacity may become the owner or
pledgee of securities and may otherwise deal with the Corporation with the same
rights it would have if it were not Trustee. Any Paying Agent, Registrar or
co-registrar may do the same with like rights. However, the Trustee must comply
with Sections 7.10 and 7.11.

SECTION 7.05. NOTICE OF DEFAULTS.

If a Default occurs and is continuing and if it is known to the Trustee,
the Trustee will mail to each Debentureholder notice of the Default within 90
days after it occurs. Except in the case of a default in payment on any
Debenture, the Trustee may withhold the notice if and so long as a committee of
its Trust Officers in good faith determines that withholding the notice is in
the interests of Debentureholders.

SECTION 7.06. REPORTS BY TRUSTEE TO HOLDERS.

To the extent required by the TIA, within 60 days after each [ ]
beginning with the [ ] following the date of this Indenture, the Trustee will
mail to each Debentureholder a brief report dated as of the [ ] that complies
with TIA Section 313(a). The Trustee also will comply with TIA Section 313(b)
and 313(c).

At the time each report is mailed to Debentureholders, the Trustee will
file a copy of it with the SEC and each stock exchange on which the Debentures
are listed.

SECTION 7.07. COMPENSATION AND INDEMNITY.

The Corporation will pay to the Trustee from time to time reasonable
compensation for its services. The Corporation will reimburse the Trustee upon
request for all reasonable out-of-pocket expenses incurred by it, including the
costs and expenses of defending itself against any claim or liability in
connection with the exercise or performance of any of its powers or duties
hereunder (including, without limitation, settlement costs). Those expenses may
include the reasonable compensation and expenses of the Trustee's agents and
attorneys. The Corporation will indemnify the Trustee against any loss or
liability incurred by it. The Trustee will notify the Corporation promptly of
any claim for which it may seek indemnity. The Corporation need not reimburse
any expense or indemnify against any loss or liability incurred by the Trustee
as a result of its negligence or bad faith.

To secure the Corporation's payment obligations in this Section, the
Trustee will have a lien prior to the Debentures on all money or property held
or collected by the Trustee, except money or property held in trust to pay
principal and interest on particular Debentures.

When the Trustee incurs expenses or renders services after an Event of
Default specified in Section 6.01(4) or (5) hereof occurs, the expenses and the
compensation for the services are intended to constitute expenses of
administration under any Bankruptcy Law.

<PAGE>

SECTION 7.08. REPLACEMENT OF TRUSTEE.

The Trustee may resign by so notifying the Corporation. The Holders of a
majority in principal amount of the outstanding Debentures may remove the
Trustee by so notifying the removed Trustee and may appoint a successor Trustee
with the Corporation's consent. The Corporation may remove the Trustee if:

(1) the Trustee fails to comply with Section 7.10;

(2) the Trustee is adjudged a bankrupt or an insolvent;

(3) a receiver or other public officer takes charge of the Trustee or
its property;

(4) the Trustee otherwise becomes incapable of acting; or

(5) the Trustee fails to perform its duties, obligations and
responsibilities under this Indenture in any material respect.

If the Trustee resigns or is removed or if a vacancy exists in the office
of Trustee for any reason, the Corporation will promptly appoint a successor
Trustee.

A successor Trustee will deliver a written acceptance of its appointment to
the retiring Trustee and to the Corporation. Immediately after that, the
retiring Trustee will transfer all property held by it as Trustee to the
successor Trustee, the resignation or removal of the retiring Trustee will
become effective, and the successor Trustee will have all the rights, powers and
duties of the Trustee under this Indenture. A successor Trustee will mail
notice of its succession to each Debentureholder.

If a successor Trustee does not take office within 60 days after the
retiring Trustee resigns or is removed, the retiring Trustee, the Corporation or
the Holders of a majority in outstanding principal amount of the Debentures may
petition any court of competent jurisdiction for the appointment of a successor
Trustee.

If the Trustee fails to comply with Section 7.10, any Debentureholder may
petition any court of competent jurisdiction for the removal of the Trustee and
the appointment of a successor Trustee.

Notwithstanding replacement of the Trustee pursuant to this Section 7.08,
the Corporation's obligations under Section 7.07 hereof shall continue for the
benefit of the retiring Trustee.

<PAGE>

SECTION 7.09. SUCCESSOR TRUSTEE BY MERGER, ETC.

If the Trustee consolidates with, merges or converts into, or transfers all
or substantially all of its corporate trust assets to, another corporation, the
resulting, surviving or transferee corporation without any further act will be
the successor Trustee.

SECTION 7.10. ELIGIBILITY; DISQUALIFICATION.

This Indenture will always have a Trustee who satisfies the requirements of
TIA Section 310(a)(1). The Trustee will have a combined capital and surplus of
at least $10,000,000 as set forth in its most recent published annual report of
condition. The Trustee will comply with TIA Section 310(b), including the
optional provision permitted by the second sentence of TIA Section 310(b)(9).

SECTION 7.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST CORPORATION.

The Trustee will comply with TIA Section 311(a), excluding any creditor
relationship listed in TIA Section 311(b). A Trustee who has resigned or been
removed will be subject to TIA Section 311(a) to the extent indicated.

ARTICLE EIGHT.

DISCHARGE OF INDENTURE

SECTION 8.01. TERMINATION OF CORPORATION'S OBLIGATIONS.

The Corporation at any time may terminate its obligation to pay an
instalment of principal or interest if it deposits with the Trustee money or
U.S. Government Obligations sufficient to pay the instalment when due. The
Corporation will designate the instalment.

The Corporation at any time may terminate all of its obligations under the
Debentures and this Indenture if:

(1) The Corporation irrevocably deposits with the Trustee, in trust,
for the benefit of the Holders, money or U.S. Government Obligations, or a
combination thereof, in such amounts as will be sufficient, in the opinion of a
nationally recognized firm of independent public accountants, to pay the
principal of and interest on the Debentures on the stated date for payment
thereof or on the applicable redemption date, as the case may be PROVIDED that
the Trustee shall have received an irrevocable written order from the Company
instructing the Trustee to apply such money or the proceeds of such U.S.
Government Obligations to said payments with respect to the Debentures.

(2) No Default or Event of Default with respect to the Debentures
shall have occurred and be continuing on the date of such deposit or insofar as
Sections 6.01(4) and 6.01(5) hereof are concerned, at any time in the period
ending on the 91st day after the date of such deposit.

<PAGE>

(3) Such deposit shall not result in a breach or violation of or
constitute a default under this Indenture or any other material agreement or
instrument to which the Corporation or any of its Subsidiaries is a party or by
which the Corporation or any of its Subsidiaries is bound.
(4) The Corporation shall have delivered to the Trustee an Officers'
Certificate stating that the deposit was not made by the Corporation with the
intent of preferring the Holders over any other creditors of the Corporation or
with the intent of defeating, hindering, delaying or defrauding any other
creditors of the Corporation.

(5) The Corporation shall be delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent provided for or relating to the deposit have been complied with.

(6) The Corporation shall have delivered to the Trustee an Opinion of
Counsel to the effect that (i) the trust funds will not be subject to any rights
of any holders of Senior Indebtedness ofthe Corporation, and (ii) assuming no
intervening bankruptcy or insolvency of the Company between the date of deposit
and the 91st day following the deposit and that no Holder is an insider of the
Corporation, after the 91st day following the deposit, the trust funds will not
be subject to the effect of any applicable Bankruptcy Law.

(7) The Corporation shall have paid or duly provided for payment under
terms satisfactory to the Trustee all amounts otherwise due to the Trustee
pursuant to Section 7.07.

The Corporation's obligations, however, in paragraph 9 of the Debentures,
in Sections 2.03, 2.04, 2.05, 2.06, 2.07, and 7.07, and in Article 11 will
survive until the Debentures are no longer outstanding. Thereafter, the
Corporation's obligations in paragraph 9 of the Debentures and in Section 7.07
of the Indenture will survive.

Before or after a deposit the Corporation may make arrangements
satisfactory to the Trustee for the redemption of Debentures at a future date in
accordance with Article 3.

An instalment of principal or interest will be considered paid on the date
it is due if the Trustee or Paying Agent holds on that date money sufficient to
pay the instalment.

In order to have money available on payment dates to pay principal or
interest on the Debentures, all U.S. Government Obligations will be payable as
to principal or interest at least one day before the payment dates in amounts
sufficient to provide the necessary money. U.S. Government Obligations will not
be callable at the issuer's option.

"U.S. Government Obligations" means

(a) direct obligations of the United States for the payment of which
its full faith and credit is pledged, or

<PAGE>

(b) obligations of a person controlled or supervised by and acting as an
agency or instrumentality of the United States the payment of which is
unconditionally guaranteed as a full faith and credit obligation by the
United States.

SECTION 8.02. APPLICATION OF TRUST MONEY.

The Trustee will hold in trust money or U.S. Government Obligations
deposited with it pursuant to Section 8.01. It will apply the deposited money
and the money from U.S. Government Obligations through the Paving Agent and in
accordance with this Indenture to the payment of principal and interest on the
Debentures. The Trustee shall be under no obligation to invest said money or
proceeds of U.S. Government Obligations except as it may agree with the
Corporation.

The Corporation shall pay and indemnify the Trustee against any tax, fee or
other charge imposed on or assessed against the money or U.S. Government
Obligations deposited pursuant to Section 8.01 hereof or the principal and
interest received in respect thereof.

SECTION 8.03. REPAYMENT TO CORPORATION.

The Trustee and the Paying Agent will promptly pay to the Corporation, upon
receipt by the Trustee or the Paying Agent, as the case may be, of an Officer's
Certificate, any excess money or Debentures held by them at any time. The
Trustee and the Paying Agent will pay to the Corporation any money held by them
for the payment of principal or interest that remains unclaimed for two years.
After payment to the Corporation, Debentureholders entitled to such money must
look to the Corporation for payment as general creditors unless an applicable
law specifies otherwise.

If the Trustee or Paying Agent is unable to apply any money or proceeds of
U.S. Government Obligations in accordance with this Article 8 by reason of any
legal proceeding or by reason of any order or judgment of any court or
governmental authority enjoining, restraining or otherwise prohibiting such
application, the Corporations's obligations under this Indenture and the
Debentures shall be revived and reinstated as though no deposit had occurred
pursuant to this Article 8 until such time as the Trustee or Paying Agent is
permitted to apply all such money or U.S. Government Obligations in accordance
with this Article 8; PROVIDED that if the Corporation has made any payment of
interest on or principal of any Debentures because of the reinstatement of its
obligations, the Corporation shall be subrogated to the rights of the
Debentureholders to receive such payment from the money or U.S. Government
Obligations held by the Trustee or Paying Agent.

<PAGE>

ARTICLE NINE.

AMENDMENTS, SUPPLEMENTS AND WAIVERS

SECTION 9.01. WITHOUT CONSENT OF HOLDERS.

The Corporation may amend or supplement this Indenture or the Debentures
without notice to or consent of any Debentureholder:

(1) to cure any ambiguity, omission, defect or inconsistency;

(2) to comply with Article 3;

(3) to provide for uncertificated Debentures in addition to or in
place of certificated Debentures;

(4) to make any change that does not adversely affect the rights of
any Debentureholder; or

(5) to comply with the TIA.

The Trustee may waive compliance by the Corporation with any provision of
this Indenture or the Debentures without notice to or consent of any
Debentureholder if the waiver does not adversely affect the rights of any
Debentureholder.

SECTION 9.02. WITH CONSENT OF HOLDERS.

The Corporation may amend or supplement this Indenture or the Debentures
without notice to any Debentureholder upon the written consent of the Holders of
a majority in principal amount of the outstanding Debentures. The Holders of a
majority in principal amount of the outstanding Debentures may waive compliance
by the Corporation with any provision of this Indenture or the Debentures
without notice to any Debentureholder. Without the consent of each
Debentureholder affected, however, an amendment, supplement or waiver, including
a waiver pursuant to Section 6.04, may not:

(1) reduce the amount of Debentures whose Holders must consent to an
amendment, supplement or waiver;

(2) reduce the rate or extend the time for payment of interest on any
Debenture;

(3) reduce the principal of or extend the fixed maturity of any
Debenture;

(4) reduce the redemption price stated in any Debenture;

<PAGE>

(5) make any Debenture payable in money other than that stated in the
Debenture; or

(6) impair the right to convert any Debenture into Common Stock.

SECTION 9.03. COMPLIANCE WITH TRUST INDENTURE ACT.

Every amendment to or supplement of this Indenture or the Debentures must
comply with the TIA as then in effect.

SECTION 9.04. REVOCATION AND EFFECT OF CONSENTS.

A consent to an amendment, supplement or waiver by a Holder of a Debenture
will bind the Holder and every subsequent Holder of a Debenture or portion of a
Debenture that evidences the same debt as the consenting Holder's Debenture,
even if notation of the consent is not made on any Debenture. Any such Holder
or subsequent Holder, however, may revoke the consent as to his or her Debenture
or portion of a Debenture. The Trustee must receive the notice of revocation
before the date the amendment, supplement or waiver becomes effective.

After an amendment, supplement or waiver becomes effective, it will bind
every Debentureholder unless it makes a change described in clause (2), (3),
(4), (5) or (6) of Section 9.02. In that case the amendment, supplement or
waiver will bind each Holder of a Debenture who has consented to it and every
subsequent Holder of a Debenture or portion of a Debenture that evidences the
same debt as the consenting Holder's Debenture.

SECTION 9.05. NOTATION ON OR EXCHANGE OF DEBENTURES.

If an amendment, supplement or waiver changes the terms of a Debenture, the
Trustee may require the Holder of the Debenture to deliver it to the Trustee.
The Trustee, as instructed in writing by the Corporation, may place an
appropriate notation on the Debenture about the changed terms and return it to
the Holder. Alternatively, if the Corporation or the Trustee so determines, the
Corporation will issue in exchange for the Debenture and the Trustee will
authenticate a new Debenture that reflects the changed terms. Failure to make
the appropriate notation or issue a new Debenture shall not affect the validity
and effect of such amendment, supplement or waiver.

SECTION 9.06. TRUSTEE TO SIGN AMENDMENTS, ETC.

The Trustee will sign any amendment, supplement or waiver authorized
pursuant to this Article if the amendment, supplement or waiver does not
adversely affect the rights, duties, liabilities, or immunities of the Trustee.
If it does, the Trustee may, but need not, sign it. In signing or refusing to
sign such amendment, supplement or waiver, the Trustee shall be entitled to
receive, if requested, an indemnity satisfactory to it in its sole discretion
and to receive, and shall be fully protected in relying upon, an Officers'
Certificate and Opinion of Counsel stating that such amendment, supplement or
waiver is authorized and permitted by this Indenture. The

<PAGE>

Corporation may not sign an amendment or supplement until the Board of Directors
of the Corporation approves it.

ARTICLE TEN.

SUBORDINATION OF DEBENTURES

SECTION 10.01. SUBORDINATION TO SENIOR INDEBTEDNESS.

The indebtedness evidenced by the Debentures, including their principal,
premium, and the interest on them, will be subordinate and subject in right of
payment, to the extent and in the manner set forth in this Article, to the prior
payment in full of all Senior Indebtedness, and each Debentureholder by
accepting the Debentures agrees to and will be bound by the provisions of this
Article 10.

"Senior Indebtedness" means the principal of, premium, if any, and interest
on, and any other payment due with regard to, any of the following:

(a) all indebtedness of the Corporation for borrowed money (including
any indebtedness secured by a mortgage or other lien which is (i) given to
secure all or part of the purchase price of the property which is subject
to the mortgage or lien, whether given to the vendor of that property or to
another, or (ii) existing on property at the time it is acquired by the
Corporation);

(b) all indebtedness of the Corporation evidenced by notes,
debentures, bonds or other securities sold by the Corporation for money
or issued by the Corporation in exchange for Senior Indebtedness;

(c) all lease obligations of the Corporation which are capitalized on
the books of the Corporation in accordance with generally accepted
accounting principles;

(d) all indebtedness of others of the kinds described in either
clauses (a) or (b) and all lease obligations of the kind described in
clause (c) assumed or guaranteed in any manner by the Corporation or in
effect guaranteed by the Corporation through an agreement to purchase
(which may be contingent); and

(e) all renewals, extensions, refundings, deferrals, amendments or
modifications of indebtedness of the kinds described in clauses (a), (b)
and (d) and all renewals or extensions of lease obligations of the kinds
described in clauses (c) or (d);

unless, in the case of any particular indebtedness or lease obligation, the
applicable instrument or lease, or document by which the Corporation assumes or
guarantees the indebtedness or lease obligation, expressly states that the
indebtedness or lease obligation is not Senior Indebtedness

<PAGE>

with regard to the Debentures. Notwithstanding the foregoing, Senior
Indebtedness will not include any indebtedness or lease obligations of the
Corporation to a Subsidiary.

SECTION 10.02. PRIORITY OF SENIOR INDEBTEDNESS UPON MATURITY.

Upon the maturity of Senior Indebtedness by lapse of time, acceleration or
otherwise, all Senior Indebtedness which has matured will be paid in full in
cash, or provision made for its payment, before any payment is made on account
of the principal of, premium, if any, or interest on the indebtedness evidenced
by the Debentures.

SECTION 10.03. EFFECT OF DEFAULT IN PAYMENT OF SENIOR INDEBTEDNESS.

Subject to the provisions of Section 10.09, (a) no payment on account of
principal or interest on the Debentures will be made unless full payment of
amounts then due for principal, sinking funds, and interest on all Senior
Indebtedness has been made or duly provided for in money, and (b) no payment on
account of principal or interest on the Debentures will be made if, at the time
of the payment or immediately after giving effect to it (i) there will exist a
default in the payment of principal, sinking funds or interest with respect to
any Senior Indebtedness, or (ii) there will have occurred an event of default
(other than a default in the payment of principal, sinking funds or interest)
with respect to any Senior Indebtedness, as defined in the instrument under
which the Senior Indebtedness is outstanding, permitting the holders of the
Senior Indebtedness to accelerate its maturity, and that event of default will
not have been cured or waived or ceased to exist, and (iii) the holders of the
Senior Indebtedness will not have failed to accelerate the maturity of the
Senior Indebtedness because of the event of default within 120 days after the
event of default occurs.

SECTION 10.04. PRIORITY OF SENIOR INDEBTEDNESS UPON DISTRIBUTION OR LIQUIDATION.

Upon any distribution of the assets of the Corporation as a result of any
dissolution, winding up, liquidation or reorganization of the Corporation
(whether in bankruptcy, insolvency, reorganization or receivership proceedings,
or in connection with an assignment for the benefit of creditors, or any other
marshalling of the assets and liabilities of the Corporation, or otherwise),

(a) all Senior Indebtedness will first be paid in full in cash, or
provision made for its payment, before any payment is made on account of
the principal of and premium, if any, or interest on the indebtedness
evidenced by the Debentures;

(b) any payment or distribution of assets of the Corporation of any
kind or character, whether in cash, property or securities, to which the
Debentureholders or the Trustee would be entitled except for the provisions
of this Article 10, will be paid or delivered by the Corporation or by any
trustee in bankruptcy, receiver, assignee for benefit of creditors, or
other liquidating agent making the payment or distribution, directly to the
holders of Senior Indebtedness or their representative or representatives,
or to the trustee or trustees under any indenture pursuant to which any
instruments evidencing any Senior Indebtedness may have been issued,
ratably according to the

<PAGE>

aggregate amounts remaining unpaid on account of the Senior Indebtedness held or
represented by each, to the extent necessary to pay all Senior Indebtedness in
full after giving effect to any concurrent payment or distribution to the
holders of such Senior Indebtedness, or provision for payment or distribution to
them; and

(c) if, notwithstanding the foregoing, any payment or distribution of
assets of the Corporation of any kind or character, whether in cash, property or
securities, is received by the Trustee or the Debentureholders before all Senior
Indebtedness is paid in full, or provision made for its payment, that payment or
distribution will be held in trust for the benefit of, and will be paid over or
delivered to, the holders of the Senior Indebtedness or their representative or
representatives, or to the trustee or trustees under any indenture pursuant to
which any instruments evidencing any Senior Indebtedness may have been issued,
ratably as described above, for application to the payment of all Senior
Indebtedness remaining unpaid to the extent necessary to pay all Senior
Indebtedness after giving effect to any concurrent payment or distribution to
the holders of such Senior Indebtedness, or provision, for payment or
distribution to them. For purposes of Sections 10.02 and 10.04, the words
"cash, property or securities" will not be deemed to include shares of stock of
the Corporation as reorganized or readjusted, or securities of the Corporation
or any other corporation provided for by a plan of reorganization or
readjustment, the payment of which is subordinated at least to the extent
provided in this Article 10 with respect to the Debentures to the payment of all
Senior Indebtedness which may at the time be outstanding, provided that (i) the
Senior Indebtedness is assumed by the new corporation, if any, resulting from
any such reorganization or readjustment, and (ii) the rights of the holders of
the Senior Indebtedness are not, without their consent, altered by the
reorganization or readjustment.

(d) The provisions of this Section will not apply to any payment by the
Corporation to the Trustee under any of the provisions of Section 7.07.

SECTION 10.05. SUBROGATION OF DEBENTUREHOLDERS TO RIGHTS OF SENIOR INDEBTEDNESS.

Subject to the payment in full of all Senior Indebtedness, the
Debentureholders will be subrogated to the rights of the holders of Senior
Indebtedness to receive payments or distributions of assets of the Corporation
made on the Senior Indebtedness until the principal of, premium, if any, and
interest on the Debentures is paid in full. For purposes of that subrogation,
no payments or distributions to the holders of Senior Indebtedness of cash,
property or securities which, except for the provisions of this Article 10 would
be payable or distributable to the Debentureholders, will, as between the
Corporation, its creditors other than the holders of Senior Indebtedness, and
the Debentureholders, be deemed to be payments by the Corporation to or on
account of the Senior Indebtedness, it being understood that the provisions of
this Article 10 are and are intended solely for the purpose of defining the
relative rights of the Debentureholders, on the one hand, and the holders of
Senior Indebtedness, on the other.

<PAGE>

SECTION 10.06. CORPORATION'S OBLIGATION TO PAY UNCONDITIONAL.

Nothing contained in this Article 10 or elsewhere in this Indenture, or in
the Debentures, is intended to or will impair, as between the Corporation, its
creditors other than the holders of Senior Indebtedness, and the
Debentureholders, the obligation of the Corporation, which is absolute and
unconditional, to pay to the Debentureholders the principal of (premium, if any,
on) and interest on the Debentures, as and when they become due and payable in
accordance with their terms, or to affect the relative rights of the
Debentureholders and creditors of the Corporation other than the holders of the
Senior Indebtedness, nor will anything in this Article 10 or elsewhere in this
Indenture prevent the Trustee or any Debentureholder from exercising all
remedies otherwise permitted by applicable law upon default under this
Indenture, subject to the rights, if any, under this Article 10 of the holders
of Senior Indebtedness in respect of cash, property or securities of the
Corporation received upon the exercise of any such remedy.

SECTION 10.07. RELIANCE BY TRUSTEE UPON CERTIFICATE.

Upon any payment or distribution of assets of the Corporation referred to
in this Article 10, the Trustee, subject to the provisions of Section 7.01, will
be entitled to rely upon a certificate of the receiver, trustee in bankruptcy,
liquidating trustee, agent or other person making the payment or distribution,
delivered to the Trustee, for the purpose of ascertaining the persons entitled
to participate in such distribution, the holders of the Senior Indebtedness and
other indebtedness of the Corporation, the amount of that indebtedness or
payable with regard to it, the amount or amounts paid or distributed with regard
to it and all other facts pertinent to it or to this Article 10.

SECTION 10.08. AUTHORIZATION OF TRUSTEE TO EFFECT SUBORDINATION.

Each Debentureholder by his or her acceptance of the Debentures authorizes
the Trustee in his or her behalf to take whatever action may be necessary or
appropriate to effectuate the subordination provided in this Article 10 and
appoints the Trustee his or her attorney-in-fact for any and all such purposes.
See Section 10.11.

SECTION 10.09. NOTICE TO TRUSTEE OF SENIOR INDEBTEDNESS.

The Corporation will give prompt written notice to the Trustee of any
dissolution, winding up, liquidation or reorganization of the Corporation and of
any fact known to the Corporation which could prohibit the making of any payment
to or by the Trustee in respect of the Debentures pursuant to the provisions of
this Indenture. The Trustee, subject to the provisions of Section 7.01, will be
entitled to assume that no such event has occurred unless the Corporation, or
any one or more holders of Senior Indebtedness or any trustee for them has given
that notice to the Trustee at its principal corporate trust office.
Notwithstanding any of the provisions of this Article 10 or any other provision
of this Indenture, the Trustee will not at any time be charged with knowledge of
the existence of any facts which would prohibit the making of any payment of
moneys to or by the Trustee, unless and until the Trustee has received written
notice of them at its principal corporate trust office from the Corporation or
from one or more holders of Senior Indebtedness or from any trustee for them;
and, prior to the receipt

<PAGE>

of any such written notice, the Trustee, subject to the provisions of Section
7.01, will be entitled in all respects to assume that no such facts exist;
provided, that, if on the earlier of (i) the date on which notice of redemption
of any Debentures is given in accordance with Article 3 or (ii) a date not less
than three business days prior to the date upon which moneys may become payable
under this Indenture or the Debentures for any purpose (including, without
limitation, the payment of the principal, premium, if any, or interest on any
Debenture) the Trustee has not received the notice described in this Section
10.09, then, anything in this Indenture to the contrary notwithstanding, the
Trustee will have full power and authority to receive the moneys and to apply
them to the purpose for which they were received, and will not be affected by
any notice to the contrary which may subsequently be received by it.

SECTION 10.10. INDENTURE PROVISIONS SUBJECT TO THIS ARTICLE.

All the provisions of this Indenture are subject to the provisions of this
Article 10.

SECTION 10.11. TRUSTEE'S RELATION TO SENIOR INDEBTEDNESS.

The Trustee will be entitled to all the rights set forth in this Article 10
in respect of any Senior Indebtedness at any time held by it in its individual
capacity to the same extent as any other holder of Senior Indebtedness and
nothing in this Indenture will affect the right of the Trustee to retain for its
own account payments made on Senior Indebtedness held by the Trustee for its own
account. The Trustee will not have any duty to the holders of Senior
Indebtedness, and will not be liable to any of them, if the Trustee will pay
over or distribute to Debentureholders or the Corporation or any other person
moneys or assets or securities to which any holder of Senior Indebtedness is
entitled by virtue of this Article 10 or otherwise. The Trustee shall not be
deemed to have any fiduciary duty to any holder of Senior Debt. No implied
covenant, or obligation, with respect to any holder of Senior Debt shall be read
into this Indenture.

ARTICLE ELEVEN.

CONVERSION OF DEBENTURES

SECTION 11.01. CONVERSION PRIVILEGE.

Any Debentureholder will have the right, at his or her option, at any time
prior to the maturity of the Debentures (except that, with respect to any
Debentures called for redemption, the right will terminate at the close of
business on the fifth business day prior to the redemption date of Debentures
unless the Corporation defaults in the payment due upon the redemption), to
convert the principal amount of the Debentures, or any portion of the principal
amount which is $1000 or any integral multiple of that amount, into shares of
Common Stock at the conversion price in effect at the time of conversion.

The number of shares of Common Stock issuable upon a conversion will be
equal to the result of dividing the principal amount of the Debenture to be
converted by the conversion price. The Corporation will make no payment or
adjustment on account of accrued interest on

<PAGE>

Debentures surrendered for conversion or on account of dividends on Common Stock
issued on conversion.

SECTION 11.02. ISSUANCE OF COMMON STOCK ON CONVERSION.

(a) In order to exercise the conversion privilege with regard to a
Debenture, the Debentureholder must surrender the Debenture to the Trustee with
the conversion notice completed and executed. If the shares issuable on
conversion are to be issued in a name other than that of the Debentureholder,
the Debenture must be accompanied by an instrument of transfer in form
satisfactory to the Corporation duly executed by the Debentureholder. In
addition, if a Debenture is surrendered for conversion between the close of
business on the record date for a payment of interest and the opening of
business on the day the interest is to be paid (unless the redemption date as to
the Debenture is during that period), the Debenture must be accompanied by a
payment equal to the interest which will be payable on the interest payment date
with regard to the principal amount of the Debenture being exchanged.

(b) As promptly as practicable after the surrender of a Debenture for
conversion, the Corporation will issue and will deliver to the Debentureholder
at the address shown on the Debenture Register, or such other address as the
Debentureholder may specify when the Debenture is surrendered, a certificate or
certificates for the number of full shares of Common Stock issuable upon the
conversion. Any fractional interest in respect of a share of Common Stock
arising upon a conversion will be settled as provided in Section 11.03.

(c) Each conversion will be deemed to have been effected immediately prior
to the close of business on the date on which all the conditions specified in
Section 11.02(a) have been satisfied, and the person in whose name a certificate
for shares of Common Stock is to be issued upon a conversion will be deemed to
have become the holder of record of the shares of Common Stock represented by
that certificate at that time. All shares of Common Stock delivered upon
conversion of Debentures will upon delivery be duly and validly issued and fully
paid and nonassessable, free of all liens and charges and not subject to any
preemptive rights. Upon the surrender of Debentures for conversion and
compliance with all the other requirements of Section 11.02(a), the Debenture
will no longer be deemed to be outstanding and all rights of the Debentureholder
with respect to the Debenture will immediately terminate, except the right to
receive the Common Stock or other securities, cash or other assets to be issued
or distributed as a result of the conversion.

SECTION 11.03. NO FRACTIONAL SHARES TO BE ISSUED.

No fractional shares of Common Stock will be issued upon conversion of
Debentures. Any fractional interest in a share of Common Stock resulting from
conversion of a Debenture will be paid in cash (computed to the nearest cent)
based on the Current Market Price (as defined in Section 11.04(h)) of the Common
Stock on the Trading Day (as defined in Section 11.04(h)) next preceding the day
of conversion. If more than one Debenture is surrendered for conversion at
substantially the same time by the same Debentureholder, the number of full
shares of Common Stock issuable upon the conversion will be computed on the
basis of all the Debentures surrendered at that time by that Debentureholder.

<PAGE>

SECTION 11.04. CONVERSION PRICE.

The "Conversion Price" per share of Common will initially be $ , and
------
will be adjusted as follows from time to time if any of the events described
below occurs after .
-------
(a) If the Corporation (A) pays a dividend or makes a distribution on its
Common Stock in shares of its Common Stock, (B) subdivides its outstanding
Common Stock into a greater number of shares, or (C) combines its outstanding
Common Stock into a smaller number of shares, the Conversion Price in effect
immediately prior to that event will be adjusted so that the holder of a
Debenture surrendered for conversion after that event will receive the number of
shares of Common Stock of the Corporation which the holder would have owned if
the Debenture had been converted immediately before the happening of the event
(or, if there is more than one such event, if the Debenture had been converted
immediately before the first of those events and the holder had retained all the
Common Stock or other securities or assets received after the conversion). An
adjustment made pursuant to this Section 11.04(a) will become effective
immediately after the record date in the case of a dividend or distribution,
except as provided in Section 11.04(k), and will become effective immediately
after the effective date in the case of a subdivision or combination. If a
dividend or distribution is declared but is not paid or made, the Conversion
Price then in effect will be appropriately readjusted. However, a readjustment
of the Conversion Price will not affect any conversion which takes place before
the readjustment.

(b) If the Corporation issues rights or warrants to the holders of its
Common Stock as a class entitling them (for a period expiring within 60 days
after the record date for issuance of the rights or warrants) to subscribe for
or purchase Common Stock at a price per share less than the Conversion Price at
the record date for the determination of stockholders entitled to receive the
rights or warrants (other than pursuant to a dividend reinvestment plan), the
Conversion Price in effect immediately before the issuance of the rights or
warrants will be reduced so that it will be the amount determined by multiplying
the Conversion Price in effect immediately before the record date for the
issuance of the rights or warrants by a fraction of which the numerator is the
number of shares of Common Stock outstanding on the record date for the issuance
of the rights or warrants plus the number of shares of Common Stock which the
aggregate exercise price of all the rights or warrants would purchase at the
Conversion Price at that record date, and of which the denominator is the number
of shares of Common Stock outstanding on the record date for the issuance of the
rights or warrants plus the number of additional shares of Common Stock issuable
on exercise of all the rights or warrants. The adjustment provided for in this
Section 11.04(b) will be made successively whenever any rights or warrants are
issued, and will become effective immediately, except as provided in Section
11.04(j) after each record date. In determining whether any rights or warrants
entitle the holders of the Common Stock to subscribe for or purchase shares of
Common Stock at less than the Conversion Price, and in determining the aggregate
sale price of the shares of Common Stock issuable on the exercise of the rights
or warrants, there will be taken into account any consideration received by the
Corporation for the rights or warrants, with the value of that consideration, if
other than cash, to be determined by the Board of Directors of the Corporation
(whose determination, if made in good faith, will be conclusive). If any rights
or warrants which lead to an adjustment of the Conversion Price expire or
terminate without having been

<PAGE>

exercised, the Conversion Price then in effect will be appropriately readjusted.
However, a readjustment of the Conversion Price will not affect any conversions
which take place before the readjustment.

(c) If the Corporation distributes to the holders of its Common Stock as a
class any shares of capital stock of the Corporation (other than Common Stock)
or evidences of indebtedness or assets (other than cash dividends or
distributions of cash paid from retained earnings of the Corporation) or rights
or warrants (other than those referred to in Section 11.04(b) to subscribe for
or purchase any of its securities, then, in each such case, the Conversion Price
will be reduced so that it will equal the price determined by multiplying the
Conversion Price in effect immediately prior to the record date for the
distribution by a fraction of which the numerator is the Current Market Price of
the Common Stock on the record date for the distribution less the then fair
market value (as determined by the Board of Directors, whose determination, if
made in good faith, will be conclusive) of the capital stock, evidences of
indebtedness, assets, rights or warrants which are distributed with respect to
one share of Common Stock, and of which the denominator is the Current Market
Price of the Common Stock on that record date. Each adjustment will, except as
provided in Subparagraph 5(d)(x), become effective immediately after the record
date for the determination of the stockholders entitled to receive the
distribution. If any distribution is declared but not made, or if any rights or
warrants expire or terminate without having been exercised, effective
immediately after the decision is made not to make the distribution or the
rights or warrants expire or terminate, the Conversion Price then in effect will
be appropriately readjusted. However, a readjustment will not affect any
conversions which take place before the readjustment.

(d) If the Corporation issues or sells any equity or debt securities which
are convertible into or exchangeable for shares of Common Stock ("Convertible
Securities") or any rights, options (other than stock options issued to
employees or directors of the Corporation or its subsidiaries under a plan
approved by the Corporation's stockholders) or warrants to purchase Common Stock
at a conversion, exchange or exercise price per share which is less than the
Conversion Price, unless the provisions of Section 11.04(b) or (c) are
applicable, the Corporation will be deemed to have issued or sold, on the later
of the date on which the Convertible Securities, rights, options or warrants are
issued or the date on which they first may be converted, exchanged or exercised,
the maximum number of shares of Common Stock into or for which the Convertible
Securities may be converted or exchanged or which are issuable upon the exercise
of the rights, options or warrants immediately prior to the close of business on
the later of the date on which the Convertible Securities, rights, options or
warrants are issued or the date on which they may first be converted, exchanged
or exercised, and no further adjustment of the Conversion Price will be made as
a result of the actual issuance of shares of Common Stock upon conversion,
exchange or exercise of the Convertible Securities, rights, options or warrants.
If any Convertible Securities, rights, options or warrants to which this
paragraph applies are redeemed, retired or otherwise extinguished or expire
without any shares of Common Stock having been issued upon conversion, exchange
or exercise of them, effective immediately after the Convertible Securities,
rights, options or warrants expire, the Conversion Price then in effect will be
readjusted to what it would have been if those Convertible Securities, rights,
options or warrants had not been issued. However, a readjustment will not
affect any conversion, exchange or exercise which takes place before the
readjustment.

<PAGE>

(e) For the purposes of this Section, (i) the price of shares of Common
Stock issued or sold upon conversion or exchange of Convertible Securities or
upon exercise of rights, options or warrants will be (A) the consideration paid
to the Corporation for the Convertible Securities, rights, options or warrants,
plus (B) the consideration paid to the Corporation upon conversion, exchange or
exercise of the Convertible Securities, rights, options or warrants, with the
value of the consideration, if other than cash, to be determined by the Board of
Directors of the Corporation (whose determination, if made in good faith, will
be conclusive) and (y) any change in the conversion or exchange price of
Convertible Securities or the exercise price of rights, options or warrants will
be treated as an extinguishment, when the change becomes effective, of the
Convertible Securities, rights, options or warrants which had the old
conversion, exchange or exercise price and an immediate issuance of new
Convertible Securities, rights, options or warrants with the new conversion,
exchange or exercise price.

(f) If the Corporation issues or sells any Common Stock (other than (i) on
conversion or exchange of Convertible Securities or exercise of rights, options
or warrants to which Section 11.04(b), (c) or (d) applies), (ii) on exercise of
warrants which are outstanding on July 31, 1996, or (iii) on exercise of stock
options issued to employees or directors of the Corporation or its subsidiaries
under a plan approved by the Corporation's stockholders) for a consideration per
share less than the Conversion Price on the date of the issuance or sale (or on
exercise of options or warrants, for less than the Conversion Price on the day
the options or warrants are issued), upon consummation of the issuance or sale,
the Conversion Price in effect immediately prior to the issuance or sale will be
adjusted so it will equal the amount determined by multiplying that Conversion
Price by a fraction of which the numerator is the number of shares of Common
Stock outstanding immediately prior to the issuance or sale plus the number of
shares of Common Stock which the aggregate consideration received by the
Corporation as a result of the issuance or sale could have purchased at the
Conversion Price in effect on the date of the issuance or sale, and of which the
denominator is the number of shares of Common Stock outstanding immediately
prior to the issuance or sale plus the number of additional shares of Common
Stock issued or sold.

(g) If there is a reclassification or change of outstanding shares of
Common Stock (other than a change in par value, or as a result of a subdivision
or combination), or a merger or consolidation of the Corporation with any other
entity that results in a reclassification, change, conversion, exchange or
cancellation of outstanding shares of Common Stock, or a sale or transfer of all
or substantially all of the assets of the Corporation, upon any subsequent
conversion of a Debenture, the Debentureholder will be entitled to receive the
kind and amount of securities, cash and other property which the Debentureholder
would have received if the Debentureholder had converted the Debenture into
Common Stock immediately before the first of those events and had retained all
the securities, cash and other assets received as a result of all those events.

(h) For the purpose of any computation under this Section 11.04, the
"Current Market Price" of the Common Stock on a date will be the average of the
last reported sale prices per share of the Common Stock each a of the twenty
consecutive Trading Days (as defined below) preceding the date of the
computation. The last reported sale price of the Common Stock on a day will be
(i) the last reported sale price of the Common Stock on the principal stock

<PAGE>

exchange on which the Common Stock is listed, or (ii) if the Common Stock is not
listed on a stock exchange, the last reported sale price of the Common Stock on
the principal automated securities price quotation system on which sale prices
of the Common Stock are reported, or (iii) if the Common Stock is not listed on
a stock exchange and sale prices of the Common Stock are not reported on an
automated quotation system, the mean of the high bid and low asked price
quotations for the Common Stock as reported by National Quotation Bureau
Incorporated if at least two securities dealers have inserted both bid and asked
quotations for the Common Stock on at least five of the ten preceding Trading
Days. If the Common Stock is not traded or quoted as described in any of
clause (i), (ii) or (iii), the Current Market Price of the Common Stock on a day
will be the fair market value of the Common Stock on that day as determined by a
member firm of the New York Stock Exchange, Inc. selected by the Board of
Directors. As used with regard to the Debentures, the term "Trading Day" means
(x) if the Common Stock is listed on at least one stock exchange, a day on which
there is trading on the principal stock exchange on which the Common Stock is
listed, (y) if the Common Stock is not listed on a stock exchange, but sale
prices of the Common Stock are reported on an automated quotation system, a day
on which trading is reported on the principal automated quotation system on
which sales of the Common Stock are reported, or (z) if the Common Stock is not
listed on a stock exchange and sale prices of the Common Stock are not reported
on an automated quotation system, a day on which quotations are reported by
National Quotation Bureau Incorporated.

(i) No adjustment in the Conversion Price will be required unless the
adjustment would require a change of at least 3% in the Conversion Price;
PROVIDED, HOWEVER, that any adjustments which are not made because of this
paragraph will be carried forward and taken into account in any subsequent
adjustment; and PROVIDED, FURTHER, that any adjustment must be made in
accordance with this Section 11.04 (without regard to this paragraph not later
than the time the adjustment may be required in order to preserve the tax-free
nature of a distribution to the holders of shares of Common Stock. All
calculations under this Section 11.04 will be made to the nearest cent or to the
nearest one hundredth of a share, as the case may be.

(j) Whenever the Conversion Price is adjusted, the Corporation will
promptly send each Debentureholder a notice of the adjustment of the Conversion
Price setting forth the adjusted Conversion Price, and the date on which the
adjustment becomes effective and containing a brief description of the events
which caused the adjustment.

(k) In any case in which this Section 11.04 provides that an adjustment
will become effective immediately after a record date for an event, the
Corporation may defer until the occurrence of the event (i) issuing to the
holder of any Debenture converted after the record date and before the
occurrence of the event the additional shares of Common Stock issuable upon the
conversion by reason of the adjustment over and above the Common Stock issuable
upon the conversion before giving effect to the adjustment and (ii) paying to
the Debentureholder any cash in lieu of a fractional share pursuant to Section
11.03.

(l) If:

(i) the Corporation declares a dividend (or any other distribution)
on the Common Stock (other than in cash out of retained earnings); or

<PAGE>

(ii) the Corporation authorizes the granting to the holders of the
Common Stock of rights or warrants to subscribe for or purchase any shares of
any class or any other rights or warrants; or

(iii) the Corporation issues, or changes the conversion, exchange or
exercise price of, any Convertible Securities, rights, options (other than stock
options issued to employees or directors of the Corporation or its subsidiaries
under a plan approved by the Corporation's stockholders) or warrants; or

(iv) the Corporation sells any Common Stock for less than the
Conversion Price on the date of the sale; or

(v) there is any reclassification of the Common Stock (other than a
subdivision or combination of the outstanding Common Stock and other than a
change in the par value, or from par value to no par value, or from no par value
to par value), or any consolidation, merger, or statutory share exchange to
which the Corporation is a party and for which approval of any stockholders of
the Corporation is required, or any sale or transfer of all or substantially all
the assets of the Corporation; or

(vi) there is a voluntary or an involuntary dissolution, liquidation
or winding up of the Corporation; then the Corporation will mail to the
Debentureholders with a copy to the Trustee at least 15 days before the
applicable date specified below, a notice stating the applicable one of (A) the
date on which a record is to be taken for the purpose of the dividend,
distribution or grant of rights or warrants, or, if no record is to be taken,
the date as of which the holders of Common Stock of record who will be entitled
to the dividend, distribution or rights or warrants will be determined, (B) the
date on which it is expected the Convertible Securities will be issued or the
date on which the change in the conversion, exchange or exercise price of the
Convertible Securities, rights, options or warrants will be effective, (C) the
date on which the Corporation anticipates selling Common Stock for less than the
Conversion Price on the date of the sale (except that no notice need be given of
the anticipated date of sale of Common Stock upon exercise of options or
warrants which have been described in a notice to the Debentureholders given at
least 15 days before the options or warrants are exercised), or (D) the date on
which the reclassification, consolidation, merger, share exchange, sale,
transfer, dissolution, liquidation or winding up is expected to become
effective, and the date as of which it is expected that holders of record of
Common Stock will be entitled to exchange their shares of Common Stock for
securities or other property deliverable upon the reclassification,
consolidation, merger, share exchange, sale, transfer, dissolution, liquidation
or winding up. Failure to give any such notice or any defect in the notice will
not affect the legality or validity of the reclassification, consolidation,
merger, share exchange, sale, transfer, dissolution, liquidation or winding up.

SECTION 11.05. RESERVATION OF SHARES FOR CONVERSION; LEGALITY OF SHARES.

(a) The Corporation will at all times reserve and keep available, free
from preemptive rights, out of the authorized but unissued shares of Common
Stock or the issued shares of Common Stock held in its treasury, or both, for
the purpose of effecting conversion of the

<PAGE>

Debentures the maximum number of shares of Common Stock which the Corporation
would be required to deliver upon the conversion of all the outstanding
Debentures. For the purposes of this Section 11.05 the number of shares of
Common Stock which the Corporation would be required to deliver upon the
conversion of all the outstanding Debentures will be computed as if at the time
of the computation all the outstanding Debentures were held by a single
Debentureholder.

(b) Before taking any action which would cause an adjustment reducing the
Conversion Price below the then par value (if any) of the shares of Common Stock
deliverable upon conversion of the Debentures the Corporation will take all
corporate action which may, in the opinion of its counsel, be necessary in order
that the Corporation may validly and legally issue fully paid and non-assessable
shares of Common Stock at the adjusted Conversion Price.

(c) The Corporation will endeavor to list the shares of Common Stock
required to be delivered upon conversion of the Debentures, prior to the
delivery, upon each national securities exchange, if any, upon which the
outstanding Common Stock is listed at the time of delivery.

(d) Prior to the delivery of any securities which the Corporation will be
obligated to deliver upon conversion of the Debentures the Corporation will
endeavor, in good faith and as expeditiously as possible, to comply with all
federal and state laws and regulations requiring the registration of those
securities with, or any approval of or consent to the delivery of those
securities by, any governmental authority.

SECTION 11.06. ISSUE AND TRANSFER TAXES.

The Corporation will pay any documentary stamp or similar issue or transfer
taxes payable in respect of the issue or delivery of shares of Common Stock on
conversion of Debentures, PROVIDED, HOWEVER, that the Corporation will not be
required to pay any tax which may be payable in respect of any transfer involved
in the issue or delivery of shares of Common Stock in a name other than that of
the converting Debentureholder and no such issue or delivery will be made unless
and until the person requesting the issue or delivery has paid to the
Corporation the amount of any such tax or has established, to the satisfaction
of the Corporation, that the tax has been paid.

SECTION 11.07. NOTICE OF ADJUSTMENT OF CONVERSION.

Whenever by reason of Section 11.02 there is a change in what the
Corporation will deliver on conversion of Debentures, the Corporation will
promptly (a) file with the Trustee an Officers' Certificate stating what a
Debentureholder will receive in conversion for each $1000 principal amount of
Debentures, and (b) cause a notice containing that information to be mailed to
each Debentureholder.

SECTION 11.08. TRUSTEE UNDER NO RESPONSIBILITY FOR DUTIES OF CORPORATION.

<PAGE>

Neither the Trustee nor any other conversion agent will at any time (a) be
under any duty to determine the correctness of the Corporation's determination,
expressed in an Officers' Certificate delivered in accordance with Section
11.07, as to the Common Stock or other securities or assets to be delivered on a
conversion, (b) be responsible for the Corporation's title to the Common Stock
or other securities or assets delivered on a conversion or the effectiveness of
the transfer of that title, or (c) any failure of the Corporation to fulfill its
obligations with regard to a conversion.

ARTICLE TWELVE.

MISCELLANEOUS

SECTION 12.01. TRUST INDENTURE ACT CONTROLS.

If any provision of this Indenture limits, qualifies, or conflicts with
another provision which is required to be included in this Indenture by the TIA,
the required provision will control.

SECTION 12.02. NOTICES.

Any and all notices, requests or communications required to be made under
this Indenture must be given in writing and will be sufficiently given if
delivered in person, by telex, by facsimile or mailed by first-class mail
addressed as follows:

if to the Corporation:

Family Bargain Corporation
315 East 62nd Street
New York, New York 10021
Attention: Chief Executive Officer

if to the Trustee:

American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
Attention: Corporate Trust Department
(718) 921-8200
Fax: (718) 236-4558

Such notices, requests and communications shall be effective only when
received and shall be sufficiently given if so given within the time prescribed
in this Indenture.

The Corporation or the Trustee by notice to the other may designate
additional or different addresses for subsequent notices or communications.

<PAGE>

Any notice or communication mailed to a Debentureholder will be mailed to
the address which appears on the registration books of the Registrar and will be
sufficiently given if so mailed within the time prescribed.

Failure to mail a notice or communication to a Debentureholder or any
defect in it will not affect its sufficiency with respect to other
Debentureholders. If a notice or communication is mailed in the manner provided
above, it is duly given, whether or not the addressee receives it.

SECTION 12.03. COMMUNICATION BY HOLDERS WITH OTHER HOLDERS.

Debentureholders may communicate pursuant to TIA Section 312(b) with other
Debentureholders with respect to their rights under this Indenture or the
Debentures. The Corporation, the Trustee, the Registrar and anyone else will
have the protection of TIA Section 312(c).

SECTION 12.04. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT.

In order to make any request or application to the Trustee to take any
action under this Indenture, the Corporation will furnish to the Trustee:

(1) an Officers' Certificate stating that, in the opinion of the
signers, all conditions precedent, if any, provided for in this Indenture
relating to the proposed action have been complied with; and

(2) an opinion of counsel stating that, in the opinion of such
counsel, all such conditions precedent have been complied with.

Each opinion of counsel will be in writing. The legal counsel who tenders
it may be an employee of or counsel to the Corporation. The legal counsel will
be acceptable to the Trustee.

SECTION 12.05. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION.

Each certificate or opinion with respect to compliance with a condition or
covenant provided for in this Indenture will include:

(1) a statement that the person making the certificate or opinion has
read the covenant or condition;

(2) a brief statement as to the nature and scope of the examination
or investigation upon which the statements or opinions contained in the
certificate or opinion are based;

(3) a statement that, in the opinion of the person, he has made the
examination or investigation which is necessary to enable him to express an
informed opinion as to whether or not the covenant or condition has been
complied with; and

<PAGE>

(4) a statement as to whether or not, in the opinion of the person,
the condition or covenant has been complied with.

SECTION 12.06. WHEN TREASURY DEBENTURES DISREGARDED.

In determining whether the Holders of the required principal amount of
Debentures have concurred in any direction or consent, Debentures owned by the
Corporation or by any person directly or indirectly controlled by the
Corporation will be disregarded, except that for the purpose of determining
whether the Trustee will be protected in relying on any such direction or
consent, only Debentures which the Trustee knows are so owned will be
disregarded. Debentures which are to be disregarded because of this Section
will not be treated as outstanding in determining the principal amount of
Debentures which are required to concur in a direction or consent.

SECTION 12.07. RULES BY TRUSTEE, PAYING AGENT, REGISTRAR.

The Trustee may make reasonable rules for the administration of this
Indenture. Those rules may cover matters relating to action by, or a meeting of
Debentureholders. The Paying Agent or Registrar may make reasonable rules for
its functions.

SECTION 12.08. LEGAL HOLIDAYS.

A "Legal Holiday" is a Saturday, a Sunday, a legal holiday or a day on
which banking institutions are not required to be open in New York State. If a
payment date is a Legal Holiday at a place of payment, payment may be made at
that place on the next succeeding day that is not a Legal Holiday, and no
interest will accrue for the intervening period.

SECTION 12.09. GOVERNING LAW.

This Indenture and the Debentures will be governed by the laws of the State
of New York. The Corporation hereby consents to the jurisdiction of the courts
of the State of New York, and of any Federal Court, sitting in the Borough of
Manhattan, City and State of New York, in any suit to enforce rights under this
Indenture or the Debentures, and the Corporation agrees that process in any such
action may be served in the manner provided by New York law for service on
foreign corporations.

SECTION 12.10. NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS.

This Indenture may not be used to interpret another indenture, loan or debt
agreement of the Corporation or a Subsidiary. No other indenture, loan or debt
agreement may be used to interpret this Indenture.

SECTION 12.11. NO RECOURSE AGAINST OTHERS.

As described in paragraph 16 of the Debentures, all liability of any
director, officer, employee or stockholder, as such, of the Corporation is
waived and released.

<PAGE>

SECTION 12.12. SUCCESSORS.

All agreements of the Corporation in this Indenture and the Debentures will
bind its successors. All agreements of the Trustee in this Indenture will bind
its successors.

SECTION 12.13. DUPLICATE ORIGINALS.

The parties may sign any number of copies of this Indenture. Each signed
copy will be an original, but all of them together represent the same agreement.

<PAGE>
SIGNATURES

Dated: FAMILY BARGAIN CORPORATION

Attest:

Secretary (SEAL)

Dated:

Attest:

Corporate Trust Officer (SEAL)

<PAGE>

EXHIBIT A
No. $

FAMILY BARGAIN CORPORATION

promises to pay to

or registered assigns,
the principal sum of

Dollars on

% CONVERTIBLE SUBORDINATED DEBENTURE DUE

INTEREST Payment Dates:
Record Dates:

Dated:
FAMILY BARGAIN CORPORATION

as Trustee, certifies that
this is one of the Debentures
referred to in the Indenture. By

(SEAL)

By By

Authorized Officer President

A-1

<PAGE>

FAMILY BARGAIN CORPORATION

% CONVERTIBLE SUBORDINATED DEBENTURE DUE

1. INTEREST.

FAMILY BARGAIN CORPORATION ("Corporation"), a Delaware corporation,
promises to pay interest on the principal amount of this Debenture at the rate
per annum shown above. The Corporation will pay interest semiannually on
February 15 and August 15 of each year. Interest on the Debentures will accrue
from the most recent date to which interest has been paid or if no interest has
been paid from .

2. METHOD OF PAYMENT.

The Corporation will pay interest on the Debentures (except defaulted
interest) to the persons who are registered holders of Debentures at the close
of business on the or next preceding the interest payment
date. Holders must surrender Debentures to a Paying Agent to collect principal
payments. The Corporation will pay principal and interest in money of the
United States that at the time of payment is legal tender for payment of public
and private debts. However, the Corporation may pay principal and interest by
its check payable in such money by mailing such check to a holder's registered
address.

3. PAYING AGENT AND REGISTRAR.

Initially, American Stock Transfer & Trust Company ("Trustee"), will
act as Paying Agent and Registrar. The Corporation may change any Paying Agent,
Registrar or co-registrar without notice. The Corporation or any of its
Subsidiaries may act as Paying Agent, Registrar or co-registrar.

4. INDENTURE.

The Corporation issued the Debentures under an Indenture dated as of
, 1996 ("Indenture"), between the Corporation and the Trustee. The
terms of the Debentures include those stated in the Indenture and those made
part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C.
77aaa ET SEQ.) as in effect on the date of the Indenture. The Debentures are
subject to all those terms, and Debentureholders are referred to the Indenture
and the Act for a statement of them. Debentureholders may inspect the Indenture
at the principal executive office of the Corporation. They may obtain copies of
the Indenture upon written request to the Corporation.

5. REDEMPTION.

After October ____, 1998, the Corporation may redeem all, but not less
than all, of the Debentures upon 30 days written notice at 100% of their
principal amount, plus accrued and unpaid interest, provided the closing price
of the Common Stock for a consecutive 20-day

A-2

<PAGE>

trading period ending not more than 10 days prior to the date the notice of
redemption is given is at least 137.5% of the Conversion Price at the time the
notice of redemption is given.

On or after October____, 1999, the Corporation may redeem all the
Debentures at any time, or some of them from time to time, upon 30 days written
notice at the following redemption prices (expressed in percentages of principal
amount), plus accrued interest to the redemption date:

If redeemed during the 12-month period beginning October __:

Year Percentage Year Percentage
---- ---------- ---- ----------
1999 107% 2001 103%
2000 105% 2002 102%

and thereafter at 100%.

6. NOTICE OF REDEMPTION.

Notice of redemption will be mailed at least 30 days but not more than 60
days before the redemption date to each holder of Debentures to be redeemed at
his registered address. Debentures in a denomination larger than $1000 may be
redeemed in part. On and after the redemption date interest ceases to accrue on
Debentures or portions of them called for redemption.

7. DENOMINATIONS; TRANSFER; EXCHANGE.

The Debentures are in registered form without coupons in denominations of
$1000 and any integral multiple of $1000. A holder may transfer or convert
Debentures in accordance with the Indenture. The Registrar may require a
holder, among other things, to furnish appropriate endorsements and transfer
documents and to pay any taxes and fees required by law or permitted by the
Indenture. The Registrar need not transfer or convert any Debenture selected
for redemption. Also, it need not transfer or convert any Debentures for a
period of 15 days before a selection of Debentures to be redeemed.

8. PERSONS DEEMED OWNERS.

The registered holder of a Debenture may be treated as the owner of it for
all purposes.

9. UNCLAIMED MONEY.

If money for the payment of principal or interest remains unclaimed for two
years, the Trustee or Paying Agent will pay the money back to the Corporation.
After that, holders entitled to the money must look to the Corporation for
payment unless an abandoned property law designates another person.

10. DISCHARGE PRIOR TO REDEMPTION OR MATURITY.

A-3

<PAGE>

If the Corporation at any time deposits with the Trustee money or U.S.
Government Obligations sufficient to pay principal and interest on the
Debentures to redemption or maturity, the Corporation will be discharged from
the Indenture and the Debentures (other than with regard to conversion of the
into Common Stock Debentures which have not been redeemed or matured), and
Debentureholders must look only to the deposited money and securities for
payment. U.S. Government Obligations are securities backed by the full faith
and credit of the United States.

11. AMENDMENT, SUPPLEMENT, WAIVER.

Subject to certain exceptions, the Indenture or the Debentures may be
amended or supplemented with the consent of the holders of at least a majority
in principal amount of the Debentures, and any past default or compliance with
any provision may be waived with the consent of the holders of a majority in
principal amount of the Debentures. Without the consent of any Debentureholder,
the Corporation may amend or supplement the Indenture or the Debentures to cure
any ambiguity, omission, defect or inconsistency, to provide for uncertificated
Debentures in addition to or in place of certificated Debentures, to make this
Indenture and the Debentures comply with the Trust Indenture Act of 1939, as
amended, or to make any other change that does not adversely affect the rights
of any Debentureholder. Without the consent of any Debentureholder, the Trustee
may waive compliance with any provision of the Indenture or the Debentures if
the waiver does not adversely affect the rights of any Debentureholder.

12. SUBORDINATION OF DEBENTURES.

Payment of principal on (and premium, if any) and interest on the
Debentures is subordinate and subject to the prior payment in full of
indebtedness of the Corporation which constitutes Senior Indebtedness. By
accepting this Debenture, the holder agrees to that subordination.

13. CONVERSION RIGHTS.

This Debenture may be converted into common stock of the Corporation (or
other securities or assets issued with regard to that common stock) at the rate
of $ principal amount of Debentures per share, subject to adjustment in
certain events.

14. SUCCESSOR CORPORATION.

When a successor corporation assumes all the obligations of its predecessor
under the Debentures and the Indenture, the predecessor corporation will be
released from those obligations.

15. DEFAULTS AND REMEDIES.

Events of Default include: default for 30 days in payment of any interest
on the Debentures; default in payment of any principal on them; failure by the
Corporation for 90 days after notice to it to comply with any of its other
agreements in the Indenture or the Debentures;

A-4

<PAGE>

default by the Corporation under any instrument relating to Senior Indebtedness
beyond any period of grace which is not cured or waived; and certain events of
bankruptcy or insolvency. If an Event of Default occurs and is continuing, the
Trustee or the holders of at least 25% in principal amount of the Debentures may
declare the principal of all the Debentures to be due and payable immediately.
Debentureholders may not enforce the Indenture or the Debentures except as
provided in the Indenture. The Trustee may refuse to enforce the Indenture or
the Debentures unless it receives indemnity satisfactory to it. Subject to
certain limitations, holders of a majority in principal amount of the Debentures
may direct the Trustee in its exercise of any trust or power. The Trustee may
withhold from Debentureholders notice of any continuing default (except a
default in payment of principal or interest) if it determines that withholding
notice is in their interests.

16. NO RECOURSE AGAINST OTHERS.

A director, officer, employee or stockholder, as such, of the Corporation
will not have any liability for any obligations of the Corporation under the
Debentures or the Indenture or for any claim based on, in respect of or by
reason of those obligations or their creation. Each Debentureholder by
accepting a Debenture waives and releases all such liability. The waiver and
release are part of the consideration for the issue of the Debentures.

17. AUTHENTICATION.

This Debenture will not be valid until the Trustee signs the certificate of
authentication on the other side of this Debenture.

18. ABBREVIATIONS.

Customary abbreviations may be used in the name of a Debentureholder or an
assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the
entirety), JT TEN (= joint tenants with right of survivorship and not as tenants
in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act).

The Corporation will furnish to any Debentureholder upon written request and
without charge a copy of the Indenture. It also will furnish the text of this
Debenture in larger type. Requests may be made to: [ ].

A-5

<PAGE>

I or we assign and transfer to

Insert social security or other
identifying number of assignee

- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
(print or type name, address and zip code of assignee)

this Debenture and irrevocably appoint
--------------------------------------

- -------------------------------------------agent to transfer this Debenture on
the books of the Corporation.

The agent may substitute another to act for him.

Dated:
-------------------------------------------------

Signed:
------------------------------------------------

(Sign exactly as name appears on the other side of this Debenture)

A-6

<PAGE>

CONVERSION NOTICE

To convert this Debenture into shares of common stock, par value $.01
per share, of the Corporation, check the box: / /

To convert only part of this Debenture, state the principal amount you
want to be converted (which must be a minimum of $1,000 or any multiple
thereof): $
-------------

If you want the certificate made out in another person's name, fill in
the form below:

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

- --------------------------------------------------------------------------------
(Print or type other person's name, address and zip code)

Dated:
----------------------------------------------------------------

Signed:
---------------------------------------------------------------

(Sign exactly as name appears on the other side of this Debenture)

A-7

EXHIBIT 5.1

September 30, 1996

Family Bargain Corporation
315 East 62nd Street
New York, NY 10021

Ladies and Gentlemen:

We have acted as counsel to Family Bargain Corporation, a Delaware
corporation (the "Company"), in connection with the Registration Statement on
Form S-2 (No. 333-09853) initially filed with the Securities and Exchange
Commission on August 9, 1996 (the "Registration Statement"), relating to
$46,000,000 principal amount of Convertible Subordinated Debentures Due 2006
(the "Debentures"), including the shares of Common Stock issuable upon
conversion thereof (the "Shares") at the initial Conversion Price defined in the
form of Indenture included as Exhibit 4.7 to the Registration Statement (the
"Indenture"), all as disclosed in the Registration Statement.

We have assumed the authenticity of all records, documents and
instruments submitted to us as originals, the genuineness of all signatures, the
legal capacity of all natural persons and the conformity to the originals of all
records, documents and instruments submitted to us as copies. We have based our
opinion upon the following records, documents, instruments and certificates and
such additional certificates relating to factual matters as we have deemed
necessary or appropriate for our opinion:

(a) The Restated Certificate of Incorporation of the Company, as
amended, certified by the Secretary of State of the State of Delaware as of
September 27, 1996 and certified to us by an officer of the Company as being
complete and in full force and effect as of the date of this opinion;

(b) The Bylaws of the Company certified to us by an officer of the
Company as being complete and in full force and effect as of the date of this
opinion;

(c) Certifications by officers of the Company (i) as to all of the
proceedings and actions of the Board of Directors of the Company relating to the
Debentures and the Shares, and (ii) as to certain other factual matters;

(d) The Registration Statement;

(e) The Indenture; and

<PAGE>

(f) Certification by an officer of American Stock Transfer & Trust
Company, transfer agent for the Company's Common Stock, as to certain factual
matters.

We have assumed that the number of Shares issuable upon exercise of
the Debentures at the initial Conversion Price is less than 60,000,000, and that
this number of shares of Common Stock will be available for issuance at the time
of conversion.

This opinion is limited to the Federal laws of the United States and
General Corporation Law of the State of Delaware, and we disclaim any opinion as
to the laws of any other jurisdiction. We further disclaim any opinion as to
any statute, rule, regulation, ordinance, order or other promulgation of any
regional or local governmental body or as to any related judicial or
administrative opinion.

Based upon the foregoing and our examination of such questions of law
as we have deemed necessary or appropriate for the purpose of this opinion, and
assuming (i) that the full consideration for each Debenture and each Share as
stated in the Indenture and the Registration Statement is paid, and (ii) that
all applicable securities laws are complied with, it is our opinion that, when
issued and sold by the Company, the Debentures and the Shares will be legally
issued, fully paid and nonassessable.

This opinion is rendered to you in connection with the Registration
Statement and is solely for your benefit. This opinion may not be relied upon
by any other person, firm, corporation or other entity without our prior written
consent. We disclaim any obligation to advise you of any change of law that
occurs, or any facts of which we become aware, after the date of this opinion.

We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and further consent to the reference to our firm under
the caption "Legal Matters" in the Registration Statement and the Prospectus
which forms a part thereof.

Very truly yours,

/S/ BAER MARKS & UPHAM LLP
--------------------------

EXHIBIT 8.1

September 30, 1996

Family Bargain Corporation
315 East 62nd Street
New York, NY 10021

Ladies and Gentlemen:

We have acted as United States federal income tax counsel to Family
Bargain Corporation, a Delaware corporation (the "Company"), in connection with
the registration under the Securities Act of 1933, as amended, of $40,000,000
aggregate principal amount ($46,000,000 aggregate principal amount if the
Underwriter's over-allotment option is exercised) of Convertible Subordinated
Debentures Due 2006 (the "Debentures"). In that capacity, we have examined the
Registration Statement on Form S-2 (No. 333-09853) initially filed with the
Securities and Exchange Commission on August 9, 1996 in connection with the
proposed public offering of the Debentures (the "Registration Statement").

We are of the opinion that the information in the Registration
Statement under the caption "Certain Federal Income Tax Considerations," while
not purporting to discuss all tax consequences to persons acquiring the
Debentures, is correct in all material respects.

The foregoing is based on the Internal Revenue Code of 1986, as
amended (the "Code"), Treasury Regulations (including proposed Treasury
Regulations) promulgated thereunder, rulings, official pronouncements and
judicial decisions, all as in effect on the date hereof and all of which are
subject to change or different interpretations by the Internal Revenue Service
or the courts, which change may have retroactive effect. We disclaim any
undertaking to advise you of any change in the law that may affect this opinion.
We express no opinion as to the laws of any jurisdictions other than the federal
income tax laws of the United States of America.

Very truly yours,

/S/ BAER MARKS & UPHAM LLP
--------------------------

EXHIBIT 23.1

[PEAT MARWICK LLP LOGO]

CONSENT OF INDEPENDENT AUDITORS

The Board of Directors
Family Bargain Corporation:

We consent to the inclusion in the registration statement (No. 333-09853)
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
September 26, 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 Form S-2
(Registration Statement 333-09853) and to the reference to our firm
under the heading "Experts" in the prospectus,

KPMG PEAT MARWICK LLP

San Diego, California
September 26, 1996

EXHIBIT 23.3

INDEPENDENT AUDITORS' CONSENT

We consent to the use in this Registration Statement of Family Bargain
Corporation on Form S-1 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 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 this Registration
Statement.

We also consent to the reference to us under the heading "Experts" in such
Prospectus.

/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Tucson, Arizona

September 26, 1996

Exhibit 25.1

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

FORM T-1

STATEMENT OF ELIGIBILITY AND QUALIFICATION
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE

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

AMERICAN STOCK TRANSFER & TRUST COMPANY
(Exact name of trustee as specified in its charter)

New York 13-3439945
(State of incorporation (I.R.S. employer
if not a national bank) identification No.)

40 Wall Street 10005
New York, New York (Zip Code)
(Address of trustee's
principal executive offices)

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

FAMILY BARGAIN CORPORATION

(Exact name of obligor as specified in its charter)

Delaware 51-0299573

(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)

315 East 62nd Street
New York, New York 10021

(Address of principal executive (Zip Code)
offices)

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

% Convertible Subordinated Debentures due 2006

(Title of the Indenture Securities)

<PAGE>

-2-

GENERAL

1. General Information.
-------------------

Furnish the following information as to the trustee:

(a) Name and address of each examining or supervising authority to which
it is subject.

New York State Banking Department, Albany, New York

(b) Whether it is authorized to exercise corporate trust powers.

The Trustee is authorized to exercise corporate trust powers.

2. Affiliations with Obligor and Underwriters.
-------------------------------------------

If the obligor or any underwriter for the obligor is an
affiliate of the trustee, describe each such affiliation.

None.

3. Voting Securities of the Trustee.
---------------------------------

Furnish the following information as to each class of voting securities of
the trustee:

As of August 31, 1996

- ---------------------------------------------------------------------------
COL. A COL. B

- ---------------------------------------------------------------------------
Title of Class Amount Outstanding

- ---------------------------------------------------------------------------
Common Shares - par value $600 per share. 1,000 shares

4. Trusteeships under Other Indentures.
------------------------------------

None.

5. Interlocking Directorates and Similar Relationships with the
------------------------------------------------------------
Obligor or Underwriters.
------------------------

None.

<PAGE>

-3-

6. Voting Securities of the Trustee Owned by the Obligor or its
------------------------------------------------------------
Officials.
----------

None.

7. Voting Securities of the Trustee Owned by Underwriters or their Officials.
--------------------------------------------------------------------------

None.

8. Securities of the Obligor Owned or Held by the Trustee.
-------------------------------------------------------

None.

9. Securities of Underwriters Owned or Held by the Trustee.
--------------------------------------------------------

None.

10. Ownership or Holdings by the Trustee of Voting Securities of
------------------------------------------------------------
Certain Affiliates or Security Holders of the Obligor.
------------------------------------------------------

None.

11. Ownership or Holdings by the Trustee of any Securities of
----------------------------------------------------------
a Person Owning 50 Percent or More of the Voting Securities
-----------------------------------------------------------
of the Obligor.
---------------

None.

12. Indebtedness of the Obligor to the Trustee.
-------------------------------------------

None.

13. Defaults by the Obligor.
-----------------------

None.

14. Affiliations with the Underwriters.
-----------------------------------

None.

15. Foreign Trustee.
---------------

Not applicable.

<PAGE>

-4-

16. List of Exhibits.
-----------------

T-1.1 - A copy of the Organization Certificate of American
Stock Transfer & Trust Company, as amended to date
including authority to commence business and
exercise trust powers was filed in connection with the
Registration Statement of Live Entertainment, Inc., File No. 33-
54654, and is incorporated herein by reference.

T-1.4 - A copy of the By-Laws of American Stock Transfer
& Trust Company, as amended to date was filed in connection with
the Registration Statement of Live Entertainment, Inc., File No.
33-54654, and is incorporated herein by reference.

T-1.6 - The consent of the Trustee required by Section
312(b) of the Trust Indenture Act of 1939. - Exhibit A.

T-1.7 - A copy of the latest report of condition of the
Trustee published pursuant to law or the
requirements of its supervising or examining
authority. - Exhibit B.

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

SIGNATURE

Pursuant to the requirements of the Trust Indenture Act of 1939 the Trustee,
American Stock Transfer and Trust Company, a corporation organized and existing
under the laws of the State of New York, has duly caused this statement of
eligibility and qualification to be signed on its behalf by the undersigned,
thereunto duly authorized, all in the City of New York, and State of New York,
on the 5th day of September 1996.

AMERICAN STOCK TRANSFER
AND TRUST COMPANY
Trustee

By: /s/ illegible
------------------
Vice President

<PAGE>

EXHIBIT A
---------

Securities and Exchange Commission
Washington, DC 20549

Gentlemen:

Pursuant to the provisions of Section 321 (b) of the Trust Indenture Act of
1939, and subject to the limitations therein contained, American Stock Transfer
& Trust Company hereby consents that reports of examinations of said corporation
by Federal, State, Territorial or District authorities may be furnished by such
authorities to you upon request therefor.

Very truly yours,

AMERICAN STOCK TRANSFER
& TRUST COMPANY

By /s/ illegible
---------------------
Vice President

<S> <C> <C>
Affix the address label in this space. FFIEC 034
Page RC-1
EXHIBIT B
American Stock Transfer & Trust Co. 9
- -----------------------------------------------
Legal Title of Bank

New York
- -----------------------------------------------
City

New York 10005
- -----------------------------------------------
State Zip Code
</TABLE>

FDIC Certificate Number | | | | |
---------

Consolidated Report of Condition for Insured Commercial
and State-Chartered Savings Banks for June 30, 1996

All schedules are to be reported in thousands of dollars. Unless otherwise
indicated, report the amount outstanding as of the last business day of the
quarter.

Schedule RC--Balance Sheet

<S> <C> <C> <C>
C100
Dollar Amounts in Thousands Mil Thou
- --------------------------------------------------------------------------------------------------------------------------------
ASSETS
1. Cash and balances due from depository institutions:
RCON
a. Noninterest-bearing balances and currency and coin1,2 0081 216 1.a.
RCON
b. Interest-bearing balances3 0071 1.b.
2. Securities:
RCON
a. Held-to-maturity securities (from Schedule RC-B, column A) 1754 2.a.
RCON
b. Available-for-sale securities (from Schedule RC-B, column D) 1773 5 073 2.b.
3. Federal funds sold and securities purchased under agreements to resell:
RCON
a. Federal funds sold4 0276 3.a.
RCON
b. Securities purchased under agreements to resell5 0277 3.b.
4. Loans and lease financing receivables:
RCON
a. Loans and leases, net of unearned income (from Schedule RC-C) 2122 4.a.
RCON
b. LESS: Allowance for loan and lease losses 3123 4.b.
RCON
c. LESS: Allocated transfer risk reserve 3128 4.c.

d. Loans and leases, net of unearned income, allowance, and reserve (item 4.a.
RCON
minus 4.b and 4.c) 2125 4.d.
RCON
5. Trading assets 3545 5.
RCON
6. Premises and fixed assets (including capitalized leases) 2145 2 950 6.
RCON
7. Other real estate owned (from Schedule RC-M) 2150 7.
RCON
8. Investments in unconsolidated subsidiaries and associated companies (from Schedule RC-M) 2130 8.
RCON
9. Customers' liability to this bank on acceptances outstanding 2155 9.
RCON
10. Intangible assets (from Schedule RC-M) 2143 5 711 10.
RCON
11. Other assets (from Schedule RC-F) 2160 5 711 11.
RCON
12. a. Total assets (sum of items 1 through 11) 2170 12.a.
RCON
b. Losses deferred pursuant to 12 U.S.C. 1823(j) 0306 12.b.
RCON
c. Total assets and losses deferred pursuant to 12 U.S.C. 1823(j)(sum of items 12.a and 12.b) 0307 13 950 12.c.
</TABLE>

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

1 Includes cash items in process of collection and unposted debits.

2 The amount reported in this item must be greater than or equal to
the sum of Schedule RC-M, items 3.a and 3.b.

3 Includes time certificates of deposit not held for trading.

4 Report "term federal funds sold" in Schedule RC, item 4.a, "Loans
and leases, net of unearned income," and in Schedule RC-C, part
I.

5 Report securities purchased under agreements to resell that
involve the receipt of immediately available funds and mature in
one business day or roll over under a continuing contract in
Schedule RC, item 3.a., "Federal funds sold."

<S> <C> <C> <C>
FFIEC 034
Page RC-2
Schedule RC--Continued 10

Dollar Amounts in Thousands Mil Thou
- ---------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
13. Deposits:
RCON
a. In domestic offices (sum of totals of columns A and C from Schedule RC-E) 2200 13.a.
RCON
(1) Noninterest-bearing1 6631 13.a.(1)
RCON
(2) Interest-bearing 6636 13.a.(2)

b. In foreign offices, Edge and Agreement subsidiaries, and IBFs

(1) Noninterest-bearing

(2) Interest-bearing
14. Federal funds purchased and securities sold under agreements to repurchase:
RCON
a. Federal funds purchased2 0278 14.a.
RCON
b. Securities sold under agreements to repurchase3 0279 14.b.
RCON
15. a. Demand notes issued to the U.S. Treasury 2840 15.a.
RCON
b. Trading liabilities 3548 15.b.

16. Other borrowed money:

RCON
a. WITH A REMAINING MATURITY OF ONE YEAR OR LESS 2332 16.a.
RCON
b. WITH A REMAINING MATURITY OF MORE THAN ONE YEAR 2333 16.b.
RCON
17. Mortgage indebtedness and obligations under capitalized leases 2910 17.
RCON
18. Bank's liability on acceptances executed and outstanding 2920 18.
RCON
19. Subordinated notes and debentures 3200 19.
RCON
20. Other liabilities (from Schedule RC-G) 2930 1 977 20.
RCON
21. Total liabilities (sum of items 13 through 20) 2948 1 977 21.

RCON
22. Limited-life preferred stock and related surplus 3282 22.
EQUITY CAPITAL
RCON
23. Perpetual preferred stock and related surplus 3838 23.
RCON
24. Common stock 3230 600 24.
RCON
25. Surplus (exclude all surplus related to preferred stock) 3839 7 590 25.
RCON
26. a. Undivided profits and capital reserves 3632 3 617 26.a.
RCON
b. Net unrealized holding gains (losses) on available-for-sale securities 8434 166 26.b.

27. Cumulative foreign currency translation adjustments
RCON
28. a. Total equity capital (sum of items 23 through 27) 3210 11 973 28.a.
RCON
b. Losses deferred pursuant to 12 U.S.C. 1823(j) 0306 28.b.

c. Total equity capital and losses deferred pursuant to 12 U.S.C. 1823(j)(sum
RCON
of items 28.a and 28.b) 3559 11 973 28.c.

29. Total liabilities, limited-life preferred stock, equity capital, and losses
RCON
deferred pursuant TO 12 U.S.C. 1823(j)(sum of items 21, 22, and 28.c) 2257 13 950 29.

Memorandum
To be reported only with the March Report of Condition.
1. Indicate in the box at the right the number of the statement below that
best describes the most comprehensive level of auditing work performed for
the bank by independent external auditors as of any date during 1995 Number
RCON
6724 M.1.
</TABLE>

1 = Independent audit of the bank conducted in accordance with generally
accepted auditing standards by a certified public accounting firm
which submits a report on the bank
2 = Independent audit of the bank's parent holding company conducted in
accordance with generally accepted auditing standards by a certified
public accounting firm which submits a report on the consolidated
holding company (but not on the bank separately)
3 = Directors' examination of the bank conducted in accordance with
generally accepted auditing standards by a certified public accounting
firm (may be required by state chartering authority)
4 = Directors' examination of the bank performed by other external
auditors (may be required by state chartering authority)
5 = Review of the bank's financial statements by external auditors
6 = Compilation of the bank's financial statements by external auditors
7 = Other audit procedures (excluding tax preparation work)
8 = No external audit work

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

1 Includes total demand deposits and noninterest-bearing time and
savings deposits.

2 Report "term federal funds purchased" in Schedule RC, item 16,
"Other borrowed money."

3 Report securities sold under agreements to repurchase that
involve the receipt of immediately available funds and mature in
one business day or roll over under a continuing contract in
Schedule RC, item 14.a., "Federal funds purchased."