FAMILY BARGAIN CORP, S-2/A, 1996-11-06

FAMILY BARGAIN CORP
S-2/A, 1996-11-06
FAMILY CLOTHING STORES

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 6, 1996

REGISTRATION NO. 333-09853
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------

AMENDMENT NO. 2 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 NOVEMBER 6, 1996

PRELIMINARY PROSPECTUS

$25,000,000

[FACTORY 2-U LOGO]
[FAMILY BARGAIN CENTER]
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 November 4, 1996, the closing sale price of the Common Stock as
reported on the Nasdaq SmallCap Market was $1.75 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
November , 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 November , 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 $1.0 million,
including the Underwriters' non-accountable expense allowance of $250,000
or $287,500 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 $3,750,000 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 November , 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). Pre-effective
Amendment No. 1 to that Registration Statement was filed on October 10, 1996.
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 147 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.

The Company's 117 Family Bargain Center stores and 30 Factory 2-U stores
Novemver 5sell 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. In addition to clothing, the Company's stores sell
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.

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 17 have been
opened as of November 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 November 1, 1996, five 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 6.9% for
October 1996, and by 7.3% for the year to date through the end of October 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 estimates that its net sales for the quarter ended October
26, 1996 were substantially higher than its net sales for the same period of
the prior year, but that, because of costs of increasing overhead to support
the substantial increase in sales, higher interest costs due to debt incurred
in the acquisition of Factory 2-U, increased amortization of goodwill, higher
preferred stock dividends because of a greater number of shares outstanding
and expenses incurred in connection with the Company's expansion plans, net
income applicable to common stock in the 1996 quarter was below that for the
same period of 1995. Despite this, the estimated net loss for the nine months
ended October 26, 1996 was substantially less than the net loss for the
comparable nine month period of 1995.

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............... $25,000,000 aggregate principal amount of % Convertible
Subordinated Debentures ($28,750,000 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 November , 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
November , 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 NOVEMBER , 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 of approximately
$22.5 million will be provided by the Company to the
Operating Subsidiaries and will be used by them as working
capital, including repayment of a substantial portion 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. The Operating
Subsidiaries may reborrow funds under the Revolving Credit
Facilities. Uses of additional borrowing availability
under the Revolving Credit Facilities 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 any
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) 523 (1,065)
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) 523 (1,065)
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) (2,517) (2,804)
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) (0.63) (0.65)
Fully Diluted...................... 0.16 (0.51) (1.84) 0.13 (1.32) (0.62) (0.63) (0.65)
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 -- -- 1.4x --
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 7,394 16,454
Total Assets................................................. 87,152 99,241 96,993 101,753
Long-Term Debt, Less Current Portion......................... 25,023 39,621 34,864 42,133
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 $25.0 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 $1.2 million for the twelve months ended
January 27, 1996 and the six months ended July 27, 1996, respectively), which are
assumed to be substantially 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 $2.4 million and $1.2 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 $251,000 and $126,000 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 $159,000 for the six months ended July
27, 1996. 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 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.
</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 $2.5 million and $2.8 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 $25.0 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 ($251,000 at both January 27, 1996 and July 27, 1996), the net
increase in cash following the payment of the revolving credit facilities ($7.3 million
and zero at January 27, 1996 and July 27, 1996, respectively), the estimated long-term
portion of debt issuance costs added to noncurrent assets ($2.3 million at both January
27, 1996 and July 27, 1996), the principal amount of the Debentures ($25.0 million at
both January 27, 1996 and July 27, 1996) and the use of the Offering proceeds ($15.2
million and $22.5 million at January 27, 1996 and July 27, 1996, respectively) to repay
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 $2.5 million (a ratio of earnings to fixed charges
of 0.7 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
$2.3 million (a ratio of 1.4 to 1). In addition, the Operating Subsidiaries may
reborrow under the Revolving Credit Facilities, resulting in additional interest
expense. To the extent dividends on the then outstanding shares of Series A
Preferred Stock were paid out of cash flow in excess of earnings the dividends
reduced the Company's additional paid-in capital. It is possible that a portion
of future interest and dividends also will be paid out of cash flow in excess of
earnings and therefore will further reduce additional paid-in capital. See
"Dividend Policy", "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources" and "Description of
Capital Stock."

Restrictions on Payments by Operating Subsidiaries to the Company. The
Company is a holding company and relies on its cash reserves and payments
from General Textiles and Factory 2-U to finance its ongoing operating
expenses, to pay its outstanding indebtedness, to pay dividends on the Series
A Preferred Stock and, in the future, to pay its principal and interest
obligations on the Debentures. The Company receives payments from General
Textiles pursuant to a tax sharing agreement, a management agreement and from
subordinated debt and secured term debt of General Textiles held by the
Company. The Company receives payments from Factory 2-U pursuant to a
management agreement and a guaranty fee agreement. The General Textiles Plan
of Reorganization (the "GT Reorganization Plan") and certain of General
Textiles' outstanding debt instruments (including the GT Revolving Credit
Facility (as defined)) restrict General Textiles from paying dividends or
making other distributions to the Company without the consent of certain
holders of indebtedness. In addition, payments by Factory 2-U to the Company
are limited under the Factory 2-U Revolving Credit Facility (as defined) to
payments pursuant to a management agreement, a guarantee fee agreement and
payments with regard to a loan of a portion of the proceeds of the sale of
the Debentures. Of the $22.5 million of net proceeds of the Offering to be
provided by the Company to the Operating Subsidiaries, the Company will lend
at least $8.0 million to General Textiles and at least $8.0 million 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, of the $22.5 million of net proceeds of the Offering to be
provided by the Company to the operating Subsidiaries, the Company will lend at
least $8.0 million to General Textiles and at least $8.0 million 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
Underwriters have advised the Company that they currently intend to make a
market in the Debentures. However, the Underwriters 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 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

12
<PAGE>
members of their families are beneficiaries, "Selzer/Eiger") have been active in
acquiring and restructuring financially and operationally troubled companies
since 1973. Companies controlled by Selzer/Eiger have sometimes commenced
Chapter 11 proceedings pursuant to U.S. bankruptcy laws, under which holders of
subordinated debt of the companies involved were required to renegotiate their
debt, sometimes resulting in the full or partial loss of their investment. Since
1991, five companies affiliated with Selzer/Eiger have filed for bankruptcy (the
most recent being in February 1996) or have been liquidated, including General
Textiles, Mandel-Kahn Industries and C-B Murray Corporation, Inc., which are
former subsidiaries of the Company. Selzer/Eiger controls less than 30% of the
fully-diluted equity of the Company and does not control a majority of the Board
of Directors of the Company. However, Benson A. Selzer, Joseph Eiger and John A.
Selzer are the sole members of the executive committee of the Company's Board of
Directors. See "Management."

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

Broad Discretion as to Use of Proceeds. Approximately $18.5 million
of the net proceeds of the Offering will be used to repay a substantial
portion of the outstanding indebtedness under the revolving credit
facilities. 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 $18.5 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 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

13
<PAGE>
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 $22.5 million
($26.0 million if the Underwriters' over-allotment option is exercised in
full). The net proceeds of the Offering of approximately $22.5 million will
be provided by the Company to the Operating Subsidiaries and will be used by
them as working capital, including repayment of a substantial portion 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. The Operating Subsidiaries may reborrow funds
under the Revolving Credit Facilities. Uses of additional borrowing
availability 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 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>
FUNDS PROVIDED TO THE OPERATING SUBSIDIARIES
Uses by the Operating Subsidiaries: %
-----
Repayment of General Textiles Revolving Credit Facility........... $10.5 46.7%
Repayment of F2U Revolving Credit Facility........................ 8.0 35.5%
Purchase of Store Fixtures (1).................................... 4.0 17.8%
----- -----
Total Uses of Net Proceeds...................................... $22.5 100.0%
</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 ........................................... $ 2.44 $1.37
Fourth Quarter (through November 4, 1996)................ $ 1.75 $1.31
</TABLE>

The closing sale price of the Common Stock on November 4, 1996 as reported
on the Nasdaq SmallCap Market was $1.75 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 $25.0 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 25,000
------- --------
Total.................................................. 2,020 27,020
------- --------

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 3,027
Factory 2-U revolving credit facility................ 7,735 1,232
Installment notes payable............................ 3,452 3,452
Subordinated notes................................... 8,547 8,547
------- --------
Total Operating Subsidiary debt.................... 40,870 18,382
------- --------
Total consolidated debt............................ $42,890 $45,402
------- --------
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 $73,666
Total debt to consolidated capitalization.......... 60% 62%
</TABLE>

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

(1) As adjusted for the sale of $25.0 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" and "Description of Debentures."

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......................... 523 (1,065 )
Income (Loss) from Discontinued
Operations......................... -- --
Extraordinary Gain................. -- --
Net Income (Loss).................. 523 (1,065 )
Dividends on Preferred Stock....... 3,040 1,739
Net Income (Loss) Applicable to
Common Stock....................... (2,517) (2,804 )
Net Income (Loss) from Continuing
Operations Applicable to Common
Stock per Common Share............. (0.63) (0.65 )
Net Income (Loss) Applicable to
Common Stock per Common Share(3)
Primary........................... (0.63) (0.65 )
Fully Diluted..................... (0.63) (0.65 )
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)....................... 1.4x --
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 7,394 16,454
Total Assets..................................................... 87,152 99,241 96,993 101,753
Long-Term Debt, Less Current Portion............................. 25,023 39,621 34,864 42,133
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>

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 $25.0 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 $1.2 million for the twelve months ended
January 27, 1996 and the six months ended July 27, 1996, respectively), which are
assumed to be substantially 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 $2.4 million and $1.2 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 $251,000 and $126,000 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 $159,000 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.
</TABLE>

<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 $2.5 million and $2.8 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 $25.0 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 ($251,000 at both January 27, 1996 and July 27, 1996), the net
increase in cash following the payment of the revolving credit facilities ($7.3 million
and zero at January 27, 1996 and July 27, 1996, respectively), the estimated long-term
portion of debt issuance costs added to noncurrent assets ($2.3 million at both January
27, 1996 and July 27, 1996), the principal amount of the Debentures ($25.0 million at
both January 27, 1996 and July 27, 1996) and the use of the Debenture proceeds ($15.2
million and $22.5 million at January 27, 1996 and July 27, 1996, respectively) 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 147 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 117 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
17 have been opened as of November 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 November 1, 1996, five 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>

The Company estimates that its net sales for the quarter ended October
26, 1996 were substantially higher than its net sales for the same period of
the prior year, but that, because of costs of increasing overhead to support
the substantial increase in sales, higher interest costs due to debt incurred
in the acquisition of Factory 2-U, increased amortization of goodwill, higher
preferred stock dividends because of a greater number of shares outstanding
and expenses incurred in connection with the Company's expansion plans, net
income applicable to common stock in the 1996 quarter was below that for the
same period of 1995. Despite this, the estimated net loss for the comparable
nine months ended October 26, 1996 was substantially less than the net loss
for the nine month period of 1995.

LIQUIDITY AND CAPITAL RESOURCES
THE COMPANY

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

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

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

26
<PAGE>
(providing for a fee of $26,000 per month during fiscal 1997, $24,000 per month
during fiscal 1998 and, thereafter, monthly amounts declining over time to
$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 147 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 17 have been opened as of November 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 November 1, 1996, five 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 147 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 147 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 November 1,
1996, store locations were as follows:

<TABLE>
<CAPTION>
STRIP
STATE CENTER DOWNTOWN OTHER
----- ------ -------- -----
<S> <C> <C> <C> <C>
California................................... 81 62 12 7
Arizona...................................... 34 30 4 0
Washington................................... 8 4 3 1
New Mexico................................... 9 8 0 1
Nevada....................................... 4 4 0 0
Oregon....................................... 8 7 0 1
Texas........................................ 3 2 1 0
--
----- ------ -----
147 117 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 147 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 147 stores is approximately $13.2 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. The Company has agreed to eliminate its New York
office and the associated expenses by December 31, 1998.

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.

The Company has agreed to nominate one additional independent director to
its Board of Directors. The selection of this director will be subject to
the reasonable approval of Rodman & Renshaw, Inc., one of the underwriters
of the Offering.

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
and common stock equivalents 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 $25,000,000
($28,750,000 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 November , 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 November ,
1999 upon 30 days written notice at the following prices (expressed as
percentages of the principal amount):

<TABLE>
<CAPTION>
TWELVE MONTHS
BEGINNING NOVEMBER , 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.

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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 November 1, 1996, there were 4,692,637 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 November 1, 1996
were 3,881,261 shares of Series A Preferred Stock, not including 153,846 shares
of Series A Preferred Stock which have been pledged by the Company to secure
certain obligations of the Company under the Mandel-Kahn Settlement and which
the Company has agreed to sell to non-affiliates by November 30, 1996 for an
aggregate purchase price of $807,690. The proceeds of this sale will be used to
satisfy the obligation which they secure.

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 405,772 warrants
(the "Warrants") of the Company expiring between September 1997 and March
2001 at exercise prices ranging from $1.875 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 November 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

53
<PAGE>
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"), 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................................................... $ 25,000,000
----------------
----------------
</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 Underwriters. 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 $3,750,000
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 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 Underwriters a non-accountable
expense allowance equal to 1% of the gross proceeds of the sale of the
Debentures ($250,000, or $287,500 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 Underwriters. 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 Underwriters, 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."

The Company has agreed to nominate one additional independent director to
its Board of Directors. The selection of this director will be subject to the
reasonable approval of Rodman & Renshaw, Inc.

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
----------- -----------
<S> <C> <C>
ASSETS
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
----------- -----------
<S> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
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

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:

<TABLE>
<CAPTION>
YEARS 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 CONTAINED IN THIS $25,000,000
PROSPECTUS, IN CONNECTION WITH THE
OFFERING DESCRIBED HEREIN, AND, IF GIVEN FAMILY BARGAIN
OR MADE, SUCH INFORMATION OR CORPORATION
REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY. THE % CONVERTIBLE
DELIVERY OF THIS PROSPECTUS AT ANY TIME SUBORDINATED DEBENTURES
DOES NOT IMPLY THAT THERE HAS NOT BEEN ANY DUE 2006
CHANGE IN THE INFORMATION SET FORTH HEREIN
OR IN THE AFFAIRS OF THE COMPANY SINCE THE [FAMILY BARGAIN CENTER
DATE HEREOF. THIS PROSPECTUS DOES NOT LOGO]
CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECUR [FACTORY 2-U LOGO]
ITY 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 PROSPECTUS
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. RODMAN & RENSHAW, INC.

----------------- CRUTTENDEN ROTH
TABLE OF CONTENTS INCORPORATED

PAGE
----
Incorporation of Certain Documents by
Reference............................. 3
Summary............................... 4 , 1996
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
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
Description of Capital Stock.......... 46
Certain Federal Income Tax
Considerations........................ 50
Underwriting.......................... 55
Legal Matters......................... 57
Experts............................... 57
Available Information................. 57
Index to Consolidated Financial
Statements............................ F-1

============================================ ===============================

<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................ $ 250,000
Miscellaneous.................................................. $ 61,738
----------
Total.......................................................... $1,000,000

</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

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 5th day of
November, 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, November 5, 1996
...................................... President and Director
John A. Selzer (Principal Executive
Officer)

/s/ BENSON A. SELZER Chairman and Director November 5, 1996
......................................
Benson A. Selzer

/s/ JOSEPH EIGER Vice Chairman, Executive Vice November 5, 1996
...................................... President and Director
Joseph Eiger

/s/ JEFFREY C. GERSTEL Executive Vice President, November 5, 1996
...................................... Finance (Principal
Jeffrey C. Gerstel Financial and Accounting
Officer)

* Director November 5, 1996
......................................
Francis G. Warburton

/s/ WILLIAM W. MOWBRAY Chief Operating Officer and November 5, 1996
...................................... Director; President and
William W. Mowbray Chief Executive Officer of
General Textiles and
Factory 2-U, Inc.

</TABLE>

II-7
<PAGE>

<TABLE>
<S> <C> <C>
* Director November 5, 1996
......................................
John J. Borer III

* Director November 5, 1996
......................................
Edwin C. Nevis

* Director November 5, 1996
......................................
Barton P. Ferris, Jr.

*By: /s/ JOHN A. SELZER November 5, 1996
......................................
John A. Selzer,
Attorney-in-Fact
</TABLE>

II-8
<PAGE>

INDEX TO EXHIBITS
-----------------

EXHIBITS DESCRIPTION
- -------- -----------

3.3 Amended and Restated By-Laws of the Registrant

23.1 Consent of KPMG Peat Marwick LLP (Phoenix, AZ)

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

23.3 Consent of Deloitte and Touche LLP

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

<PAGE>

REVISED AMENDED AND RESTATED BY-LAWS OF

FAMILY BARGAIN CORPORATION

(FORMERLY DRS INDUSTRIES, INC.)

(A DELAWARE CORPORATION)
<PAGE>
TABLE OF CONTENTS
PAGE

ARTICLE I - OFFICES ......................................................1

Section 1. Registered Office. .......................................1
Section 2. Other Offices. ............................................1

ARTICLE II - SEAL ...........................................................1

ARTICLE III - MEETINGS OF STOCKHOLDERS .......................................1

Section 1. Place of Meetings. .......................................1
Section 2. Annual Meeting. .......................................1
Section 3. Election of Directors. ..................................2
Section 4. Special Meetings. .......................................2
Section 5. Notice of Meetings. .......................................2
Section 6. Quorum. .................................................2
Section 7. Proxies. .................................................3
Section 8. Organization. ............................................3
Section 9. Order of Business. .......................................3
Section 10. Consent in Lieu of Meetings. .............................3
Section 11. List of Stockholders. ..................................4
Section 12. Notice of Stockholder Proposals and Nominations. .........4

ARTICLE IV - BOARD OF DIRECTORS ............................................6

Section 1. General Powers, Number, Election, Term of Office
and Vacancies. ............................................6
Section 2. Regular Meetings. .......................................7
Section 3. Special Meetings. .......................................7
Section 4. Quorum, Voting. .......................................7
Section 5. Consent in Lieu of Meeting. .............................8
Section 6. Telephonic Meeting. .......................................8
Section 7. Compensation. ............................................8
Section 8. Removal. .................................................8
Section 9. Executive and Other Committees. ........................9
Section 10. Certain Transactions. .................................10

- i -

<PAGE>

ARTICLE V - OFFICERS .....................................................11

Section 1. Number and Qualifications. ............................11
Section 2. Term of Office. ......................................11
Section 3. Removal. ................................................11
Section 4. Salaries. ................................................12
Section 5. Chairman of the Board. .................................12
Section 6. Chief Executive Officer. .................................12
Section 7. President. ...........................................12
Section 8. Secretary. ...........................................12
Section 9. Treasurer. ...........................................12

ARTICLE VI - VACANCIES AND RESIGNATIONS .................................13

Section 1. Vacancies. ...........................................13
Section 2. Resignations. ...........................................13
Section 3. Resignations Effective at Future Date. ..................13

ARTICLE VII - STOCK CERTIFICATES, DIVIDENDS, ETC. .......................14

Section 1. Stock Certificates. ......................................14
Section 2. Record Holders. ......................................14
Section 3. Transfers of Stock. ......................................14
Section 4. Lost Certificate. ......................................15
Section 5. Record Date. ...........................................15
Section 6. Dividends. ...........................................17

ARTICLE VIII - MISCELLANEOUS PROVISIONS .................................17

Section 1. Checks. ................................................17
Section 2. Fiscal Year. ...........................................17
Section 3. Notice. ................................................18
Section 4. Waiver of Notice. ......................................18
Section 5. Corporate Records. ......................................18

ARTICLE IX - ANNUAL STATEMENT ...........................................19

ARTICLE X - AMENDMENTS .....................................................19

ARTICLE XI - INDEMNIFICATION ................................................20

Section 1. General. ................................................20

- ii -

<PAGE>

Section 2. Derivative Actions. ......................................20
Section 3. Indemnification in Certain Cases. .......................21
Section 4. Procedure. ...........................................21
Section 5. Advances for Expenses. .................................22
Section 6. Rights Not Exclusive. .................................22
Section 7. Survival of Rights. ......................................22
Section 8. Insurance. ...........................................22
Section 9. Definition of Corporation. ............................23
Section 10. Definition of Other Enterprises. .......................23
Section 11. Retroactivity of Article XI. ............................24

- iii -

<PAGE>

REVISED AMENDED AND RESTATED BY-LAWS OF

FAMILY BARGAIN CORPORATION

(formerly DRS INDUSTRIES, INC.)

(A Delaware Corporation)

ARTICLE I - OFFICES

SECTION 1. REGISTERED OFFICE. The registered office of the

Corporation in the State of Delaware shall be at 11th Floor, Rodney Square

North, 11th and Market Streets, Wilmington, Delaware 19899. The registered

agent in charge thereof shall be Corporation Guarantee and Trust Company.

SECTION 2. OTHER OFFICES. The Corporation may also have offices

at such other places as the Board of Directors may from time to time appoint or

the business of the Corporation may require.

ARTICLE II - SEAL

The seal of the Corporation shall have inscribed thereon the name of

the Corporation, the year of its organization and the words "Corporate Seal,

Delaware."

ARTICLE III - MEETINGS OF STOCKHOLDERS

SECTION 1. PLACE OF MEETINGS. Meetings of the stockholders shall

be held at the registered office of the Corporation in the State of Delaware or

at such place, either within or without the State of Delaware, as may be

selected from time to time by the Board of Directors.

SECTION 2. ANNUAL MEETING. The annual meeting of the stockholders

shall be held on the first (1st) day of May in each year if not a legal holiday,

and if a legal holiday, then on the next succeeding day not a legal holiday, at

1:00 P.M. At the annual meeting, the stockholders shall elect a Board of

Directors and transact such other business as may properly be brought before the

meeting. If the annual meeting for election of

<PAGE>

directors is not held on the date designated therefor, the directors shall cause

the meeting to be held as soon thereafter as convenient.

SECTION 3. ELECTION OF DIRECTORS. Elections of the directors of

the Corporation need not be by written ballot.

SECTION 4. SPECIAL MEETINGS. Except as provided by Article VI,

Section 1 of these By-Laws, special meetings of the stockholders may be called

at any time only by the Chief Executive Officer or the Board of Directors. At

any time, upon written request of any person or persons who have called a

special meeting, it shall be the duty of the Secretary to fix the date of such

meeting, to be held not more than sixty (60) days after receipt of such request,

and to give due notice thereof as provided herein. If the Secretary shall

neglect or refuse to fix the date of such meeting and give notice thereof, the

person or persons calling such meeting may do so.

Business transacted at any special meeting shall be confined to the

objects stated in the notice, and matters germane thereto, as determined by the

presiding officer of the meeting in his sole discretion.

SECTION 5. NOTICE OF MEETINGS. Whenever stockholders are required

or permitted to take any action at a meeting, a written notice of the meeting

shall be given which shall state the place, date and hour of the meeting, and,

in the case of a special meeting, the purpose or purposes for which the meeting

is called.

Unless otherwise provided by law, written notice of any meeting shall

be given not less than ten (10) nor more than sixty (60) days before the date of

the meeting to each stockholder entitled to vote at such meeting.

SECTION 6. QUORUM. A majority of the outstanding shares of the

Corporation entitled to vote, represented in person or by proxy, shall

constitute a quorum at a meeting of stockholders. If less than a majority of

the outstanding shares entitled to vote is represented at a meeting, a majority

of the shares so represented may adjourn the meeting from time to time without

further notice. At any adjourned meeting at which a

2
<PAGE>

quorum shall be present or represented, any business may be transacted which

might have been transacted at the meeting as originally noticed. The

stockholders present at a duly organized meeting may continue to transact

business until adjournment notwithstanding the withdrawal of sufficient

stockholders to reduce the remaining number below that which constitutes a

quorum.

SECTION 7. PROXIES. Each stockholder entitled to vote at a

meeting of stockholders or to express consent or dissent to corporate action in

writing without a meeting may authorize another person or persons to act for him

by proxy, but no such proxy shall be voted or acted upon after three (3) years

from its date, unless the proxy provides for a longer period.

A duly executed proxy shall be irrevocable if it states that it is

irrevocable and if, and only as long as, it is coupled with an interest

sufficient in law to support an irrevocable power. A proxy may be made

irrevocable regardless of whether the interest with which it is coupled is an

interest in the stock itself or an interest in the Corporation generally. All

proxies shall be filed with the secretary of the meeting before being voted

upon.

SECTION 8. ORGANIZATION. At each meeting of stockholders, the

Chairman of the Board, if one shall have been elected, or, in his absence or if

one shall not have been elected, the President, shall act as the presiding

officer of the meeting. The Secretary or, in his absence or inability to act,

the person whom the presiding officer of the meeting shall appoint, shall act as

secretary of the meeting and keep the minutes thereof.

SECTION 9. ORDER OF BUSINESS. The order of business at all

meetings of the stockholders shall be determined by the presiding officer of the

meeting.

SECTION 10. CONSENT IN LIEU OF MEETINGS. Any action required to be

taken at any annual or special meeting of stockholders of the Corporation, or

any action which may be taken at any annual or special meeting of such

stockholders, may be taken without

3
<PAGE>

a meeting and without a vote, in accordance with Article VII, Section 5(b) of

these By-Laws, if a consent in writing, setting forth the action so taken, shall

be signed by the holders of outstanding stock having not less than the minimum

number of votes that would be necessary to authorize or take such action at a

meeting at which all shares entitled to vote thereon were present and voted.

Prompt notice of the taking of the corporate action without a meeting by less

than unanimous written consent shall be given to those stockholders who have not

consented in writing.

SECTION 11. LIST OF STOCKHOLDERS. The officer who has charge of

the stock ledger of the Corporation shall prepare and make, at least ten (10)

days before every meeting of stockholders, a complete list of the stockholders

entitled to vote at the meeting, arranged in alphabetical order, and showing the

address of each stockholder and the number of shares registered in the name of

each stockholder. No share of stock upon which any installment is due and

unpaid shall be voted at any meeting. The list shall be open to the examination

of any stockholder, for any purpose germane to the meeting, during ordinary

business hours, for a period of not less than ten (10) days prior to the

meeting, either at a place within the city where the meeting is to be held,

which place shall be specified in the notice of the meeting, or if not so

specified, at the place where the meeting is to be held. The list shall also be

produced and kept at the time and place of the meeting during the entire

duration of the meeting, and may be inspected by any stockholder who is present

thereat.

SECTION 12. NOTICE OF STOCKHOLDER PROPOSALS AND NOMINATIONS. (a)

At any annual meeting, only such business shall be conducted, and only such

proposals shall be acted upon, including, without limitation, the nomination

of persons for election to the Board of Directors, as shall have been

brought before the annual meeting (I) by, or at the direction of, the Board of

Directors or (II) by any stockholder of the Corporation who properly complies

with the notice procedures set forth in paragraph (b) of this Section 12.

4
<PAGE>

(b) For a nomination or proposal to be properly brought before an

annual meeting by a stockholder, the stockholder must have given timely notice

thereof in writing to the Secretary. To be timely, such stockholder's notice

must be delivered to, or mailed to and received at, the principal executive

offices of the Corporation not less than sixty (60) days and not more than

ninety (90) days prior to the scheduled annual meeting, regardless of any

postponements, deferrals or adjournments of that meeting to a later date;

PROVIDED, HOWEVER, that if less than seventy (70) days' notice or prior public

disclosure of the date of the scheduled annual meeting is given or made, notice

by the stockholder, to be timely, must be so delivered or received not later

than the close of business on the tenth (10th) day following the earlier of the

day on which such notice of the date of the scheduled annual meeting was mailed

or the day on which such public disclosure was made. A stockholder's notice to

the Secretary shall set forth (I) as to each person whom the stockholder

proposes to nominate for election to the Board of Directors all information

relating to such person that is required to be disclosed in solicitations of

proxies for election of directors in an election contest, or is otherwise

required, in each case pursuant to Regulation 14A under the Securities Exchange

Act of 1934, as amended, and Rule 14a-11 thereunder, including, without

limitation, such person's written consent to being named in the proxy statement

as a nominee and to serving as a director if elected; and (II) as to any other

matter the stockholder proposes to bring before the annual meeting (A) a brief

description of the proposal desired to be brought before the annual meeting and

the reasons for conducting such business at the annual meeting, (B) the name and

address, as they appear on the Corporation's books, of the stockholder proposing

such business and any other stockholders known by such stockholder to be

supporting such proposal, (C) the class and number of shares of the

Corporation's stock which are beneficially owned by the stockholder on the date

of such stockholder's notice and by any other stockholders known by such

stockholder to be supporting such proposal on the date

5
<PAGE>

of such stockholder's notice, and (D) any financial interest of the stockholder

in such proposal.

and duty to determine whether a stockholder proposal or nomination, as the case

may be, was made in accordance with the terms of this Section 12 and, if a

stockholder proposal or nomination was not made in accordance with such terms,

to declare that such proposal or nomination shall be disregarded.

(d) Nothing in this Section 12 shall prevent the consideration and

approval or disapproval at the annual meeting of reports of officers, directors

and committees of the Board of Directors; but, in connection with such reports,

no business shall be acted upon at such annual meeting unless stated, filed and

received as herein provided.

ARTICLE IV - BOARD OF DIRECTORS

Section 1. GENERAL POWERS, NUMBER, ELECTION, TERM OF OFFICE AND

VACANCIES. The business and affairs of the Corporation shall be managed by or

under the direction of a Board of Directors consisting of not less than three

(3) directors nor more than fifteen (15) directors, the exact number of

directors to be determined from time to time by resolution adopted by

affirmative vote of a majority of the entire Board of Directors. The directors

shall be divided into three (3) classes, designated Class I, Class II and Class

III. Each class shall consist, as nearly as may be possible, of one-third (1/3)

of the total number of directors constituting the entire Board of Directors. At

the 1992 annual meeting of stockholders, Class I directors shall be elected for

a one-year term, Class II directors for a two-year term and Class III directors

for a three-year term. At each succeeding annual meeting of the stockholders,

successors to the class of directors whose term expires at that annual meeting

shall be elected for a three-year term. If the number of directors is changed,

any increase or decrease shall be apportioned among the classes so as to

maintain the number of directors in each class as nearly equal as possible,

6
<PAGE>

and any additional director of any class elected to fill a vacancy resulting

from an increase in such class shall hold office for a term that shall coincide

with the remaining term of that class, but in no case will a decrease in the

number of directors shorten the term of any incumbent director. A director

shall hold office until the annual meeting for the year in which his term

expires and until his successor shall be elected and shall qualify, subject,

however, to prior death, resignation, retirement, disqualification or removal

from office. Any vacancy on the Board of Directors that results from an

increase in the number of directors may be filled by a majority of the directors

then in office, although less than a quorum, or by a sole remaining director.

Any director elected to fill a vacancy not resulting from an increase in the

number of directors shall have the same remaining term as that of his

predecessor.

SECTION 2. REGULAR MEETINGS. Regular meetings of the Board of

Directors shall be held without notice on a quarterly basis at the registered

office of the Corporation, or at such other time and place as shall be

determined by the Board of Directors.

SECTION 3. SPECIAL MEETINGS. Special meetings of the Board of

Directors may be called by the Chief Executive Officer on three (3) days notice

to each director, either personally, by mail, by facsimile, or by telegram.

Such notice shall specify the place, day and hour of the meeting. Special

meetings shall be called by the Chief Executive Officer or the Secretary in like

manner and on like notice on the written request of any two directors in office.

SECTION 4. QUORUM, VOTING. A majority of the total number of

directors shall constitute a quorum for the transaction of business, but in the

absence of a quorum a majority of those present (or if only one be present, then

that one) may adjourn the meeting, without notice other than announcement at the

meeting, until such time as a quorum is present. Except as otherwise required

by law, the Certificate of Incorporation of the Corporation or these By-Laws,

the vote of a majority of the directors present at a

7
<PAGE>

meeting at which a quorum is present shall be the act of the Board of Directors

and the vote of a majority of the members of any committee of the Board of

Directors shall be the act of such committee. With respect to matters described

in Sections 9 and 10 of this Article IV requiring an approval, consent or

recommendation from the Audit Committee or Compensation Committee, the Board of

Directors shall not act with respect to such matters until after any necessary

approval, consent or recommendation is obtained.

SECTION 5. CONSENT IN LIEU OF MEETING. Any action required or

permitted to be taken at any meeting of the Board of Directors, or of any

committee thereof, may be taken without a meeting if all members of the Board of

Directors or committee, as the case may be, consent thereto in writing, and the

writing or writings are filed with the minutes of proceedings of the Board of

Directors or committee, as appropriate. The Board of Directors may hold its

meetings, and have an office or offices outside of the State of Delaware.

SECTION 6. TELEPHONIC MEETING. Any one or more directors may

participate in a meeting of the Board of Directors, or of a committee of the

Board of Directors, by means of conference telephone or similar communications

equipment by means of which all persons participating in the meeting can hear

each other, and participation in this manner shall constitute presence in person

at such meeting.

SECTION 7. COMPENSATION. The Board of Directors may determine the

compensation of directors who are not also officers or employees of the

Corporation. In addition, as determined by the Board of Directors, directors

may be reimbursed by the Corporation for travel expenses, if any, incurred by

them in attending any meetings of the Board of Directors or committees thereof.

No such compensation or reimbursement shall preclude any director from serving

the Corporation in any other capacity and receiving compensation therefor.

SECTION 8. REMOVAL. Any director or the entire Board of Directors

may be removed, with or without cause, by the holders of a majority of the

shares then entitled
8

<PAGE>

to vote at an election of directors, except that when cumulative voting is

permitted, if less than the entire Board of Directors is to be removed, no

director may be removed without cause if the votes cast against his removal

would be sufficient to elect him if then cumulatively voted at an election of

the entire Board of Directors, or, if there be classes of directors, at an

election of the class of directors of which he is a part.

SECTION 9. EXECUTIVE AND OTHER COMMITTEES. The Board of Directors

shall have three (3) committees, an Executive Committee, an Audit Committee and

a Compensation Committee, and may designate other committees by resolution

passed by a majority of the whole Board of Directors.

The Executive Committee shall have and may exercise all the powers and

authority of the Board of Directors in the management of the business and

affairs of the Corporation, and may authorize the Seal of the Corporation to be

affixed to all papers which may require it. The Executive Committee will

require prior approval of the Audit Committee or Compensation Committee to act

on those matters which are included within those committees' areas of

responsibility as set forth herein.

The Compensation Committee shall review and recommend to the Board of

Directors compensation arrangements for senior management of the Corporation and

employee compensation programs and shall administer the Corporation's stock

option plans. The Board of Directors shall determine the compensation of all of

the Corporation's executive officers based on recommendations from the

Compensation Committee. The Compensation Committee shall consist of no fewer

than three (3) directors of which a majority shall be Independent Directors.

"Independent Directors" for purposes of these By-Laws shall mean directors

independent of management and free from any relationship that, in the opinion of

the Board of Directors, would interfere with the exercise of independent

judgment, and shall not include directors who are affiliates of the Corporation

or its subsidiaries. If designees of the Representatives of the Underwriters of

the Corporation's 1994 public offering of Series A 9-1/2% Cumulative

9
<PAGE>

Convertible Preferred Stock (the "Representatives") serve as directors of the

Corporation, such directors shall serve as members of the Compensation

Committee.

The Audit Committee shall review and evaluate the results and scope of

the audit and other services provided by the Company's independent accountants,

as well as the Corporation's accounting principles and system of internal

accounting controls. The Audit Committee shall also review and vote upon

related party transactions and certain proposed acquisitions as described in

Section 10 of this Article IV. The Audit Committee shall consist of no fewer

than three (3) directors of which a majority shall be Independent Directors. If

designees of the Representatives serve as directors of the Corporation, such

directors shall serve as members of the Audit Committee.

SECTION 10. CERTAIN TRANSACTIONS. The unanimous approval of the

Audit Committee and the approval of a majority of the Board of Directors shall

be required for the following actions to be taken by the Corporation:

(a) any transaction with any of the directors or officers of the

Corporation or with any stockholder of the Corporation who owns, directly or

indirectly, 5% of the then outstanding shares of the Common Stock of the

Corporation; and

(b) any acquisition by the Corporation of any business not within the

following Standard Industrial Classification Codes ("SICC"):

5130 Apparel, piece goods and notions

5311 Department stores

5331 Variety stores

5611 Men's and boy's clothing and accessory stores

5621 Women's clothing stores

5632 Women's accessory and specialty stores

5641 Children's and infants' wear stores

5651 Family clothing stores

5661 Shoe stores

10
<PAGE>
5699 Miscellaneous apparel and accessory stores, including

uniform, T-shirt, and wig stores

5934 Flea market vendors

PROVIDED, HOWEVER, that notwithstanding the foregoing (I) if at any time there

is less than a majority of Independent Directors designated or approved by the

Representatives serving as members of the Audit Committee as required under

Section 9 of this Article IV, such transactions shall require the unanimous

consent of all Independent Directors on the Board of Directors, and (II) if at

any time there are no remaining shares of Series A 9-1/2% Cumulative Convertible

Preferred Stock outstanding, acquisition by the Corporation of businesses not

within the above-listed SICC codes will require approval by only a majority of

the members of the Audit Committee.

ARTICLE V - OFFICERS

Section 1. NUMBER AND QUALIFICATIONS. The executive officers of

the Corporation shall be chosen by the Board of Directors and shall be a Chief

Executive Officer, a President, a Secretary and a Treasurer. The Board of

Directors, in its discretion, may also choose a Chairman of the Board (who must

be a member of the Board of Directors), one or more Vice-Presidents and such

other officers as it shall deem advisable and in the interests of the

Corporation. Any two or more offices may be held by the same person, and no

officer except the Chairman of the Board need be a director.

SECTION 2. TERM OF OFFICE. Each officer of the Corporation shall

hold office for one year and until his successor shall have been duly chosen and

shall have qualified, or until his death, or until he shall have resigned or

have been removed or disqualified, as hereinafter provided in these By-Laws.

SECTION 3. REMOVAL. Any officer of the Corporation may be

removed, with or without cause, at any time, by the Board of Directors.

11
<PAGE>

SECTION 4. SALARIES. The salaries of all officers of the

Corporation shall be fixed by the Board of Directors; PROVIDED, HOWEVER, that

compensation of all executive officers of the Corporation shall be fixed by the

Board of Directors based upon the recommendations of the Compensation Committee.

SECTION 5. CHAIRMAN OF THE BOARD. The Chairman of the Board shall

have the overall general power and duties of supervision and management usually

vested in the office of Chairman of a Corporation.

SECTION 6. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer

shall have the overall general power and duties of supervision and management of

the Corporation including responsibility for the establishment and supervision

of all policies of the Corporation subject to the control of the Board of

Directors.

SECTION 7. PRESIDENT. The President shall have responsibility for

the day-to-day management of the business of the Corporation subject to the

control of the Board of Directors, and shall ensure that all orders and

resolutions of the Board of Directors are carried into effect, subject, however,

to the right of the Board of Directors to delegate any specific powers to any

other officer or officers of the Corporation. The President shall be directly

answerable to the Chief Executive Officer.

SECTION 8. SECRETARY. The Secretary shall attend all sessions of

the Board of Directors and all meetings of the stockholders and act as clerk

thereof, and record all the votes of the Corporation and the minutes of all of

its transactions in a book to be kept for that purpose, and shall perform like

duties for all committees of the Board of Directors, and shall perform such

other duties as may be prescribed by the Board of Directors or Chief Executive

Officer, under each of whose supervision he shall be. The Secretary shall keep

in safe custody the Seal of the Corporation, and when authorized by the Board of

Directors, shall affix the same to any instrument requiring it.

SECTION 9. TREASURER. The Treasurer shall have custody of the

corporate funds and securities and shall keep full and accurate accounts of

receipts and

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disbursements in books belonging to the Corporation, and shall keep the moneys

of the Corporation in a separate account to the credit of the Corporation. He

shall disburse the funds of the Corporation as may be ordered by the Board of

Directors, taking proper vouchers for such disbursements, and shall render to

the President and Board of Directors, at the regular meetings of the Board of

Directors, or whenever they may require it, an account of all his transactions

as Treasurer and of the financial condition of the Corporation.

ARTICLE VI - VACANCIES AND RESIGNATIONS

Section 1. VACANCIES. Any vacancy occurring in any office of the

Corporation by death, resignation, removal or otherwise, shall be filled by the

Board of Directors. Vacancies and newly created directorships resulting from

any increase in the authorized number of directors may be filled by a majority

of the directors then in office, although less than a quorum, or by a sole

remaining director. If at any time, by reasons of death or resignation or other

cause, the Corporation should have no directors in office, then any officer or

any stockholder or an executor, administrator, trustee or guardian of a

stockholder, or other fiduciary entrusted with like responsibility for the

person or estate of a stockholder, may call a special meeting of stockholders in

accordance with the provisions of these By-Laws.

SECTION 2. RESIGNATIONS. Any director or other officer of the

Corporation may resign at any time, such resignation to be in writing, and to

take effect from the time of its receipt by the Corporation, unless some time be

fixed in the resignation and then from that date. The acceptance of a

resignation shall not be required to make it effective.

SECTION 3. RESIGNATIONS EFFECTIVE AT FUTURE DATE. When one or

more directors shall resign from the Board of Directors effective at a future

date, a majority of the directors then in office, including those who have

resigned from the Board of Directors effective at a future date, shall have the

power to fill such vacancy or vacancies,

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the vote thereon to take effect when such resignation or resignations shall

become effective.

ARTICLE VII - STOCK CERTIFICATES, DIVIDENDS, ETC.

Section 1. STOCK CERTIFICATES. Shares of stock of the Corporation

shall be represented by certificates. The stock certificates of the Corporation

shall be numbered and registered in the share ledger and transfer books of the

Corporation as they are issued. They shall bear the Seal of the Corporation and

shall be signed by the Chairman of the Board, the President or Vice-President

and by the Treasurer, Assistant Treasurer, Secretary or Assistant Secretary of

the Corporation.

SECTION 2. RECORD HOLDERS. The Corporation shall for all purposes

be entitled to treat a person registered on its books as the owner of shares, as

the owner of those shares, with the exclusive right, among other things, to

receive dividends and to vote with regard to those shares. The Corporation

shall be entitled to hold a person registered on its books as the owner of

shares liable for calls and assessments, if any may legally be made, and shall

not be bound to recognize any equitable or other claim to, or interest in,

shares of its stock on the part of any other person, whether or not the

Corporation shall have express or other notice of the claim or interest of the

other person, except as otherwise provided by the laws of the State of Delaware.

SECTION 3. TRANSFERS OF STOCK. Shares of stock of the Corporation

shall be transferable on the books of the Corporation by the holder of record

thereof or by his attorney, pursuant to applicable law and such rules and

regulations as the Board of Directors shall from time to time prescribe. Any

shares represented by a certificate shall be transferable only upon surrender of

the certificate therefor with an assignment endorsed thereon or attached thereto

and duly executed and with such proof of authenticity of signatures as the

Corporation may reasonably require.

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SECTION 4. LOST CERTIFICATE. The Corporation may issue a new

certificate of stock in the place of any certificate theretofore signed by it,

alleged to have been lost, stolen, mutilated or destroyed, and the Corporation

may require the owner of the lost, stolen or destroyed certificate, or his legal

representative to give the Corporation a bond sufficient to indemnify it against

any claim that may be made against it on account of the alleged loss, theft or

destruction of any such certificate or the issuance of such new certificate.

SECTION 5. RECORD DATE. (a) In order that the Corporation may

determine the stockholders entitled to notice of or to vote at any meeting of

stockholders or any adjournment thereof, or entitled to receive payment of any

dividend or other distribution or allotment of any rights, or entitled to

exercise any rights in respect of any change, conversion or exchange of stock or

for the purpose of any other lawful action, the Board of Directors may fix, in

advance, a record date, which shall not be more than sixty (60) nor less than

ten (10) days before the date of such meeting, nor more than sixty (60) days

prior to any other action.

If no record date is fixed:

1. The record date for determining stockholders entitled to

notice of, or to vote at, a meeting of stockholders shall be at the close

of business on the day next preceding the day on which notice is given, or,

if notice is waived, at the close of business on the day next preceding the

day on which the meeting is held.

2. Except as provided in (b) below with respect to stockholders'

written consents, the record date for determining stockholders for any

other purpose shall be at the close of business on the day on which the

Board of Directors adopts the resolution relating thereto.

3. A determination of stockholders of record entitled to notice

of, or to vote at, a meeting of stockholders shall apply to any adjournment

of the

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meeting; PROVIDED, HOWEVER, that the Board of Directors may fix a new

record date for the adjourned meeting.

(b) In order that the Corporation may determine the stockholders

entitled to consent to corporate action in writing without a meeting, the Board

of Directors may fix a record date, which record date shall not precede the date

upon which the resolution fixing the record date is adopted by the Board of

Directors, and which date shall not be more than ten (10) days after the date

upon which the resolution fixing the record date is adopted by the Board of

Directors. Any stockholder of record seeking to have the stockholders authorize

or take corporate action by written consent shall, by written notice to the

Secretary, request the Board of Directors to fix a record date. Such notice

shall specify the action proposed to be consented to by stockholders. The Board

of Directors shall promptly, but in all events within ten (10) days after the

date on which such a request is received, adopt a resolution fixing the record

date. If no record date has been fixed by the Board of Directors within ten

(10) days after the date on which such a request is received, the record date

for determining stockholders entitled to consent to corporate action in writing

without a meeting, when no prior action by the Board of Directors is required by

applicable law, shall be the first date on which a signed written consent

setting forth the action taken or proposed to be taken is delivered to the

Corporation. Such delivery to the Corporation shall be made to its registered

office in the State of Delaware, its principal place of business, or any officer

or agent of the Corporation having custody of the book in which proceedings of

meetings of stockholders are recorded, to the attention of the Secretary of the

Corporation. Such delivery shall be by hand or by certified or registered mail,

return receipt requested. If no record date has been fixed by the Board of

Directors and prior action by the Board of Directors is required by applicable

law, the record date for determining stockholders entitled to consent to

corporate action in writing without a meeting shall be at the close of business

on the date on which the Board of Directors adopts the resolution taking such

prior action.

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In the event of delivery of a written consent or written consents

purporting to authorize or take corporate action, and/or related revocations

(each such written consent and related revocation, individually and

collectively, a "Consent"), the Secretary shall provide for the safekeeping of

such Consent and shall immediately appoint duly qualified and objective

inspectors to conduct, as promptly as practical, such reasonable ministerial

review as they deem necessary or appropriate for the purpose of ascertaining the

sufficiency and validity of such Consent and all matters incident thereto,

including, without limitation, whether holders of a requisite number of shares

having the requisite voting power to authorize or take the action specified in

the Consent have given consent. If after such investigation the Secretary shall

determine that the Consent is sufficient and valid, that fact shall be certified

on the records of the Corporation kept for the purpose of recording the

proceedings of meetings of the stockholders, and the Consent shall be filed in

such records, at which time the Consent shall become effective as stockholder

action.

SECTION 6. DIVIDENDS. The Board of Directors may declare and pay

dividends upon the outstanding shares of the Corporation, from time to time and

to such extent as they deem advisable, in the manner and upon the terms and

conditions provided by statute and the Certificate of Incorporation.

ARTICLE VIII - MISCELLANEOUS PROVISIONS

SECTION 1. CHECKS. All checks or demands for money and notes of

the Corporation shall be signed by such officer or officers as the Board of

Directors may from time to time designate.

SECTION 2. FISCAL YEAR. The fiscal year of the Corporation shall

end on the Saturday closest to January 31.

SECTION 3. NOTICE. Whenever written notice is required to be

given to any person under these By-Laws, it may be given to such person, either

personally or by sending a copy thereof through the mail, by telegram, or by

facsimile transmission,

<PAGE>

charges prepaid, to his address appearing on the books of the Corporation, or

supplied by him to the Corporation for the purpose of notice. If the notice is

sent by mail or by telegraph, it shall be deemed to have been given to the

person entitled thereto when deposited in the United States mail or with a

telegraph office for transmission to such person designated. If the notice is

sent by facsimile transmission, it shall be deemed to have been given to the

person entitled thereto when transmitted with confirmation postmarked on the

same day.

SECTION 4. WAIVER OF NOTICE. Whenever any written notice is

required by statute, or by the Certificate of Incorporation or these By-Laws, a

waiver thereof in writing, signed by the person or persons entitled to such

notice, whether before or after the time stated therein, shall be deemed

equivalent to the giving of such notice. Except in the case of a special

meeting of stockholders, neither the business to be transacted at nor the

purpose of the meeting need be specified in the waiver of notice of such

meeting. Attendance of a person, either in person or by proxy, at any meeting

shall constitute a waiver of notice of such meeting, except where a person

attends a meeting for the express purpose of objecting to the transaction of any

business because the meeting was not lawfully called or convened.

SECTION 5. CORPORATE RECORDS. Any stockholder of record, in

person or by attorney or other agent, shall, upon written demand under oath

stating the purpose thereof, have the right during the usual hours for business

to inspect for any proper purpose the Corporation's stock ledger, a list of its

stockholders and its other books and records, and to make copies of extracts

therefrom. A proper purpose shall mean a purpose reasonably related to such

person's interest as a stockholder. In every instance where an attorney or

other agent shall be the person who seeks the right to inspection, the demand

under oath shall be accompanied by a power of attorney or such other writing

which authorizes the attorney or other agent to so act on behalf of the

stockholder. The

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<PAGE>

demand under oath shall be directed to the Corporation at its registered office

in the State of Delaware or at its principal place of business.

ARTICLE IX - ANNUAL STATEMENT

The President and Board of Directors shall present at each annual

meeting a full and complete statement of the business and affairs of the

Corporation for the preceding year. Such statement shall be prepared and

presented in whatever manner the Board of Directors shall deem advisable and

need not be verified by a certified public accountant.

ARTICLE X - AMENDMENTS

These By-Laws may be amended or repealed or new By-Laws may be adopted

at an annual or special meeting of the stockholders at which a quorum is present

or represented, by the vote of the holders of a majority of the outstanding

shares of capital stock entitled to vote thereon, provided that notice of the

proposed amendment or repeal or adoption of the new By-Laws is contained in the

notice of such meeting. These By-Laws may also be amended or repealed or new

By-Laws may be adopted by the Board of Directors at any regular or special

meeting of the Board of Directors. Notwithstanding the above provisions of this

Article X, Sections 9 and 10 of Article IV, as well as this sentence and the

next succeeding sentence of this Article X, may only be amended or repealed, or

new By-Laws adopted, which have the effect of amending or repealing such

sections, by the vote or written consent of the holders of a majority of the

outstanding shares of capital stock entitled to vote thereon which are held by

Disinterested Stockholders. As used herein, the term "Disinterested

Stockholders" includes all stockholders of the Corporation other than: (I) an

officer, director or employee, or former officer, director or employee, of the

Corporation or any subsidiary or affiliate (as that term is defined in the

Securities Act of 1933, as amended, and the regulations promulgated thereunder)

of the Corporation; (II) an affiliate of any such present or former

19
<PAGE>

officer, director or employee of the Corporation; or (III) a holder, directly or

indirectly, of five percent (5%) or more of any class or series of voting

securities of the Corporation or any affiliate thereof.

ARTICLE XI - INDEMNIFICATION

SECTION 1. GENERAL. The Corporation shall indemnify any person

who was or is made a party or is threatened to be made a party to any

threatened, pending or completed action, suit or proceeding, whether civil,

criminal, administrative or investigative (other than an action by or in the

right of the Corporation) by reason of the fact that the person is or was a

director, officer, employee or agent of the Corporation, or is or was serving at

the request of the Corporation as a director, officer, employee or agent of

another corporation, partnership, joint venture, trust or other enterprise,

against expenses (including attorneys' fees), judgments, fines and amounts paid

in settlement actually and reasonably incurred by him in connection with such

action, suit or proceeding if the person acted in good faith and in a manner the

person reasonably believed to be in or not opposed to the best interests of the

Corporation, and, with respect to any criminal action or proceeding, had no

reasonable cause to believe the conduct was unlawful. The termination of any

action, suit or proceeding by judgment, order, settlement, conviction, or upon a

plea of NOLO CONTENDERE or its equivalent, will not, of itself, create a

presumption that the person did not act in good faith and in a manner which the

person reasonably believed to be in or not opposed to the best interests of the

Corporation, or, with respect to any criminal action or proceeding, had

reasonable cause to believe that the conduct was unlawful.

SECTION 2. DERIVATIVE ACTIONS. The Corporation shall indemnify

any person who was or is a party or is threatened to be made a party to any

threatened, pending or completed action or suit by or in the right of the

Corporation to procure a judgment in its favor by reason of the fact that the

person is or was a director, officer,

20
<PAGE>

employee or agent of the Corporation, or is or was serving at the request of the

Corporation as a director, officer, employee or agent of another corporation,

partnership, joint venture, trust or other enterprise, against expenses

(including attorneys' fees) actually and reasonably incurred by the person in

connection with the defense or settlement of such action or suit if the person

acted in good faith and in a manner the person reasonably believed to be in or

not opposed to the best interests of the Corporation, except that no

indemnification shall be made in respect of any claim, issue or matter as to

which such person shall have been adjudged to be liable to the Corporation

unless and only to the extent that the Delaware Court of Chancery or the court

in which such action or such suit was brought shall determine upon application

that, despite the adjudication of liability but in view of all the circumstances

of the case, such person is fairly and reasonably entitled to indemnity for such

expenses which the Delaware Court of Chancery or such other court shall deem

proper.

SECTION 3. INDEMNIFICATION IN CERTAIN CASES. To the extent that a

director, officer, employee or agent of the Corporation has been successful on

the merits or otherwise in defense of any action, suit or proceeding referred to

in Sections 1 and 2 of this Article XI, or in defense of any claim, issue or

matter therein, the person shall be indemnified against expenses (including

attorneys' fees) actually and reasonably incurred by the person in connection

therewith.

SECTION 4. PROCEDURE. Any indemnification under Sections 1 and 2

of this Article XI (unless ordered by a court) shall be made by the Corporation

only as authorized in the specific case upon a determination that

indemnification of the director, officer, employee or agent is proper in the

circumstances because he has met the applicable standard of conduct set forth in

Sections 1 and 2 of this Article XI. Such determination shall be made (I) by the

Board of Directors by a majority vote of a quorum consisting of directors who

were not parties to such action, suit or proceeding, or (II) if such a quorum is

not obtainable, or, even if obtainable and a quorum of disinterested

<PAGE>

directors so directs, by independent legal counsel (compensated by the

Corporation) in a written opinion, or (III) by the stockholders.

SECTION 5. ADVANCES FOR EXPENSES. Expenses incurred by a

director, officer, employee or agent in defending a civil, criminal,

administrative or investigative action, suit or proceeding, or threat thereof,

may be paid by the Corporation in advance of the final disposition of such

action, suit or proceeding upon receipt of an undertaking by or on behalf of the

director, officer, employee or agent to repay such amount if it shall ultimately

be determined that the person is not entitled to be indemnified by the

Corporation as authorized in this Article XI.

SECTION 6. RIGHTS NOT EXCLUSIVE. The indemnification and

advancement of expenses provided by, or granted pursuant to, the other Sections

of this Article XI shall not be deemed exclusive of any other rights to which

those seeking indemnification or advancement of expenses may be entitled under

any 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.

SECTION 7. SURVIVAL OF RIGHTS. The indemnification and

advancement of expenses provided by, or granted pursuant to, this Article XI

shall, unless otherwise provided when authorized or ratified, continue as to a

person who has ceased to be a director, officer, employee or agent and shall

inure to the benefit of the heirs, executors and administrators of such person.

SECTION 8. INSURANCE. The Corporation may purchase and maintain

insurance on behalf of any person who is or was a director, officer, employee or

agent of the Corporation, or is or was serving at the request of the Corporation

as a director, officer, employee or agent of another corporation, partnership,

joint venture, trust or other enterprise, against any liability asserted against

the person and incurred by him in any such capacity, or arising out of the

person's status as such, whether or not the Corporation

<PAGE>

would have the power to indemnify him against such liability under the

provisions of this Article XI.

SECTION 9. DEFINITION OF CORPORATION. References in this Article

to "the Corporation" will include, in addition to the resulting corporation, any

constituent corporation (including any constituent of a constituent) absorbed in

a consolidation or merger which, if its separate existence had continued, would

have had power and authority to indemnify its directors, officers, employees or

agents so that any person who is or was a director, officer, employee or agent

of such constituent corporation, or is or was serving at the request of such

constituent corporation as a director, officer, employee or agent of another

corporation, partnership, joint venture, trust or other enterprise, will stand

in the same position under the provisions of this Article XI with respect to the

resulting or surviving corporation as he would have with respect to the

constituent corporation if its separate existence had continued.

SECTION 10. DEFINITION OF OTHER ENTERPRISES. For purposes of this

Article XI, references to "other enterprises" will include employee benefit

plans, references to "fines" will include any excise taxes assessed on a person

with respect to an employee benefit plan, and references to "serving at the

request of the Corporation" will include any service as a director, officer,

employee or agent of a subsidiary of the Corporation and any service as a

director, officer, employee or agent of the Corporation which imposes duties on,

or involves services by, such director, officer, employee or agent with respect

to an employee benefit plan, its participants, or beneficiaries; and a person

who acted in good faith and in a manner he reasonably believed to be in the

interest of the participants and beneficiaries of an employee benefit plan will

be deemed to have acted in a manner "not opposed to the best interests of the

Corporation" as referred to in this Article XI.

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<PAGE>

SECTION 11. RETROACTIVITY OF ARTICLE XI. The provisions of this

Article XI will be deemed retroactive and will include all acts of the directors

and officers of the Corporation since the date of incorporation.

<PAGE>

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
October 31, 1996

<PAGE>

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
October 31, 1996

<PAGE>

Exhibit 23.3

INDEPENDENT AUDITORS' CONSENT

We consent to the use in this Amendment No. 2 to Registration Statement No.
333-09853 of Family Bargain Corporation of our report dated April 20, 1995
(May 1, 1995 as to paragraph 4 of Note 6) relating to the financial
statements of Capin Mercantile Corporation (which report expresses an
unqualified opinion and includes an explanatory paragraph concerning the
entity's ability to continue as a going concern) appearing in the Prospectus,
which is a part of such Registration Statement, and to the reference to us
under the heading "Experts" in such Prospectus.

/s/ Deloitte & Touche LLP

DELOITTE & TOUCHE LLP
Tucson, Arizona

November 5, 1996