BRAUNS FASHIONS CORP, 10-K405, 1998-05-29

BRAUNS FASHIONS CORP
10-K405, 1998-05-29
WOMEN'S CLOTHING STORES

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
(Mark One) ----------------------------
FORM 10-K

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1998

/X/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM ____________ TO ____________.
COMMISSION FILE NO. 0-19972

BRAUN'S FASHIONS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 06 - 1195422
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)

2400 XENIUM LANE NORTH, PLYMOUTH, MINNESOTA 55441
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

Registrant's telephone number, including area code: (612) 551-5000
-------------------------------------
Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.01 per
share
12% Senior Notes
due 2005

-------------------------------------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/

Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
------- -------

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES X NO
------- -------

As of May 15, 1998, 4,523,393 shares of common stock were outstanding and
the aggregate value of the common stock held by non-affiliates of the Registrant
on that date was approximately $51,574,665 based upon the last reported sale
price of the common stock at that date by The NASDAQ Stock Market.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held July 22, 1998 (the "Proxy Statement") are incorporated
by reference into Part III.

<PAGE>

BRAUN'S FASHIONS CORPORATION

1998 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

Page
----
<S> <C>
PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . 5
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . 5
Item 4a. Executive Officers of the Registrant . . . . . . . . . . . . . . . 6

PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Item 6. Selected Consolidated Financial Data . . . . . . . . . . . . . . . 8
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations. . . . . . . . . . . . . . . . . . . . . . . 9
Item 7a. Quantitative and Qualitative Disclosures About Market Risk . . . .14
Item 8. Consolidated Financial Statements. . . . . . . . . . . . . . . . .15
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . .33

PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . .33
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . .33
Item 12. Security Ownership of Certain Beneficial Owners and Management . .33
Item 13. Certain Relationships and Related Transactions . . . . . . . . . .34

PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. .34
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . .36

</TABLE>

<PAGE>

PART I
ITEM 1.
BUSINESS

GENERAL
Braun's Fashions Corporation ("BFC"), is a Minneapolis-based regional
retailer of women's specialty apparel which operates through its wholly owned
subsidiary, Braun's Fashions, Inc. ("BFI") (collectively referred to as
"Braun's" or the "Company"). As of May 15, 1998, the Company operated a chain
of 185 stores in 20 states, primarily in the Midwest. Most stores are mall
based, average 3,400 square feet and are located in mid-sized markets.

BUSINESS STRATEGY
The Company's business strategy is to provide its target customer with high
quality, value-priced, coordinated ensembles that are interchangeable between
work and leisure activities; to differentiate itself from its competitors
through its focused merchandising approach, including an emphasis on private
label merchandise manufactured exclusively for the Company under its proprietary
brand name, CHRISTOPHER & BANKS; to utilize management information systems to
effectively manage its merchandise inventories; and to expand its store network
and maintain updated, attractive store facilities.

The key elements of the Company's strategy are as follows:

- Focus on a target customer and meet her needs
- Deliver a well defined merchandising approach
- Use information systems to drive decision making and maintain tight
inventory control
- Expand store base in existing and new markets

FOCUS ON A TARGET CUSTOMER AND MEET HER NEEDS. Braun's target customer is
a 35-to-55 year old working woman with an annual family income of $35,000 to
$75,000, who lives in mid-sized cities of the upper Midwest. Management
believes this target customer leads a busy life so she shops in regional malls
and purchases mainstream popular fashion which is suitable for both work and
leisure activities.

The Company conducts ongoing research, customer surveys and utilizes
point-of-sale inventory tracking to analyze the needs of its customers in its
market niche. Braun's also uses a product testing program to identify consumer
demand for clothing styles, patterns and colors. The Company's objective is to
be recognized by its target customer as offering quality fashion at value
prices. Braun's differentiates itself from other fashion retailers through
offering clothing that is characterized by a novelty flair with distinctive
patterns, textures and colors.

DELIVER A WELL DEFINED MERCHANDISING APPROACH. In fiscal 1998, Braun's
lines of merchandise included four principal categories: sportswear, sweaters,
dresses and accessories. During fiscal 1998, the Company increased its
merchandise emphasis on sweaters and discontinued the sale of coats in its
stores. The following table sets forth the approximate percentage of net sales
attributable to each merchandise group for the past three fiscal years:

<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
------------------------------------
1998 1997 1996
------ ------ ------
MERCHANDISE GROUP
- -----------------
<S> <C> <C> <C>
Sportswear 57.7% 59.5% 60.2%
Sweaters 26.5 21.5 17.5
Dresses 10.1 10.9 14.7
Accessories 5.7 5.3 5.3
Coats and jackets 0.0 2.8 2.3
------ ------ ------
Total 100.0% 100.0% 100.0%
------ ------ ------
------ ------ ------
</TABLE>

The Company has developed a variety of strategies and programs to
distinguish itself from its competitors and build customer loyalty. Major
elements of its merchandising strategy include:

1
<PAGE>

STRONG VISUAL MERCHANDISE PRESENTATION. The Company's stores rely heavily
on attracting mall traffic through stimulating visual presentation.
Braun's uses carefully designed front-of-store displays to draw customers
into the store. The visual program emphasizes attractive windows and
store-entrance areas, as well as graphics and other collateral materials
that "romance" the clothing. To keep its fashions fresh, Braun's
introduces a new "color story" every 10 to 12 weeks. After a period of
time, new fashion is displayed in the front of the stores, with older or
less-actively selling merchandise moved to the back for promotion and
liquidation in the current season.

DIRECT IMPORT PROGRAM. During fiscal 1998, the Company directly imported
approximately 50% of its total merchandise purchases. The Company
anticipates that direct imports, as a percent of total purchases, will be
approximately 50% again in fiscal 1999. Management believes that direct
imports allow the Company to obtain high quality merchandise at a lower
cost. This in turn provides the Company with the ability to sell garments,
comparable in quality to those sold in department stores, at a lower price.

PRIVATE LABEL CLOTHING. The use of private label clothing produced
exclusively for Braun's creates a unique store identity and establishes a
competitive "point of difference", while resulting in higher-than-average
gross profit margins. For its private label clothing, the Company primarily
uses its proprietary brand name, CHRISTOPHER & BANKS. The Company estimates
that sales of Braun's private label clothing comprised approximately 80% of
its sales in fiscal 1998 compared to 67% in fiscal 1997. The Company
anticipates that private label clothing will account for approximately 80%
percent of its sales again in fiscal 1999. The Company's merchandising
staff works closely with its vendors in selecting and developing designs
for the Company's private label merchandise.

KEY VENDOR RELATIONSHIPS. The Company's ongoing relationships with key
vendors has enabled it to: (i) expand its private label offerings in order
to project a merchandising point of difference; (ii) execute a timely
product testing and reorder program designed to gauge consumer demand and
maximize sales; and (iii) offer the customer "opportunistic" purchases
through planned promotional programs.

QUALITY ASSURANCE. The Company uses a variety of quality control measures
prior to and at warehouse receipt including color, fabric and construction
analysis and sizing verification, to ensure that all merchandise meets the
Company's quality standards.

LOYALTY BUILDING PROGRAMS. Braun's has frequent shopper and preferred
customer programs which the Company believes encourage repeat sales and
customer loyalty. Features include: a frequent shopper program where
customers, after reaching certain cumulative purchase levels, are awarded a
coupon redeemable toward future purchases; and a preferred customer program
which offers additional customer benefits including invitations to private
sales, informational phone calls and notices on upcoming sales. The
customer automatically becomes a preferred customer after receiving the
first frequent shopper award coupon. As of February 28, 1998, there were
approximately 225,000 active frequent customers and 50,000 active preferred
customers.

In August 1995, the Company introduced a Braun's credit card for the
purpose of increasing sales, strengthening customer loyalty and facilitating
more frequent communication with core customers. In fiscal 1998, sales on the
Braun's card accounted for approximately 11% of the Company's total sales. The
Braun's card is offered through a third party finance company with no recourse
or credit risk to Braun's.

USE INFORMATION SYSTEMS TO DRIVE DECISION MAKING AND MAINTAIN TIGHT
INVENTORY CONTROL. The Company has an integrated on-line management information
system. This information system, which includes point-of-sale registers in all
stores, provides support for merchandising, inventory management, marketing, and
financial and management reporting. The on-line access to information allows
management to monitor sales trends by style, vendor and merchandising
classification. The Company's POS registers expedite consumer checkout and
provide for an efficient flow of information to and from the stores.

The Company utilizes a computerized planning and allocation system to
consistently deliver appropriate merchandise assortments to its stores. The
Company utilizes a cost effective program to deliver merchandise on a daily
basis from the Company's distribution center to all stores. As a result of these
programs, inventories can be maintained at an efficient level throughout the
year which ensures a consistent flow of fresh merchandise to the stores.
Inventory turnover increased from 3.2 turns in fiscal 1997 to 3.7 turns in
fiscal 1998.

2
<PAGE>

In fiscal 1999, the Company plans to upgrade its merchandise software
packages. Management expects that the upgraded merchandise systems will allow
for improved merchandise planning, sales tracking and trend analysis. Further,
the Company also expects these systems will allow for improved distribution
center processing and more flexible allocation of merchandise to the Company's
stores.

EXPAND STORE BASE IN EXISTING AND NEW MARKETS. The Company plans to pursue
a strategy of controlled expansion with 10-15% annual growth in net store count.
Twenty-three new stores are planned for fiscal 1999. New stores will be opened
in regional malls in states where the Company already has a market presence or
in adjoining states. In fiscal 1999, the Company intends to seek new store
locations in the Northeast, particularly in Pennsylvania and upstate New York.

The Company continually evaluates store design and layout. The Company
developed a new prototype in fiscal 1997 and believes that this prototype
highlights visual merchandise presentation and improves the customer's shopping
experience through enhanced decor, fixturing and store layout. The Company
typically effects a major or a minor remodeling of a store following renewal of
the store's lease. However, during the interim, improvements such as carpet
replacement, painting and similar improvements are made as needed. The Company
completed a total of five major store remodelings in fiscal 1998, five in fiscal
1997, and seven in fiscal 1996. The Company plans to complete nine major store
remodelings in fiscal 1999.

STORE OPERATIONS
The Company operates its stores in a manner that encourages operational
management participation in planning, execution and evaluation of the Company's
business and operational policies at all functional levels. Each store has a
manager who executes Company policy and is responsible for day-to-day operations
of the store. Store managers complete a management training program and are
eligible for Company incentive awards based upon store sales volume and expense
control.

PURCHASING/SOURCES OF SUPPLY
Direct imports accounted for approximately 50% of total purchases in fiscal
1998. The Company purchased nearly all of its merchandise from approximately
200 vendors in fiscal 1998. In fiscal 1998, the Company's ten largest vendors
represented approximately 50% of the Company's purchases. Further, purchases
from the Company's largest overseas supplier accounted for 18% of total
purchases in fiscal 1998 compared to 17% in fiscal 1997. The Company's main
suppliers are established, quality apparel manufacturers who have worked with
the Company over many years and are familiar with the Company's marketing and
merchandising approach. The Company believes it has good working relationships
with its vendors. A disruption in supply from vendors could have a negative
impact on the Company's business. The Company intends to continue to directly
import approximately 50% of its merchandise purchases during fiscal 1999. Direct
imports enable the Company to purchase quality merchandise at significantly
reduced costs and enable the Company to offer its customers a distinct styling
and value point of difference.

The Company's purchasing staff negotiates price, terms and allowances in an
effort to give customers good value. The Company's merchandising staff also
develops programs suited to the strength of each individual supplier. This
involves a range of purchasing arrangements and covers the spectrum from buying
vendor merchandise to designing merchandise with the vendor's assistance.

ADVERTISING AND PROMOTION
The Company believes that most of its locations depend on mall traffic. To
attract customers into its stores, the Company emphasizes front-of-store
displays, entryway fixturing and in-store visual presentation. The merchandise
presentation is further enhanced by the use of photographic visual merchandising
images including signs and graphics. Additionally, the Company uses direct mail
in connection with the frequent shopper and preferred customer programs. The
Company also uses newspaper and radio media advertising in targeted markets to
promote special sales events.

SEASONALITY
The Company's sales show seasonal variation as sales in the third and
fourth quarters, which include the fall and holiday season, generally have been
higher than sales in the first and second quarters. Sales generated during the
fall and holiday season have a significant impact on the Company's annual
results of operations.

3
<PAGE>

COMPETITION
The women's retail apparel business is highly competitive. The Company
believes that the principal bases upon which it competes are merchandise
selection, price, fashion, quality, store location, store environment and
service. The Company competes with a broad range of national and regional
retail chains that sell similar merchandise, including department stores,
specialty stores and discount stores. The increased focus of department stores,
mass merchandisers and discount operators on this moderate priced segment have
made this industry increasingly competitive in recent years. Many of these
competitors are larger and have greater financial resources than the Company.
The Company believes that its focused merchandise selection and presentation,
competitive prices, product quality, loyalty building programs and customer
service enable the Company to compete effectively.

EMPLOYEES
At May 15, 1998, the Company had approximately 450 full-time and
approximately 1,100 part-time employees. The number of part-time employees
increases during peak selling periods. None of the Company's employees are
represented by a labor union or is subject to a collective bargaining agreement.
The Company has never experienced a work stoppage and considers its relationship
with its employees to be satisfactory.

TRADEMARKS AND SERVICE MARKS
The Company is the owner of the federally registered trademark and
service mark "BRAUNS" with respect to articles of apparel and "CHRISTOPHER &
BANKS", which is its predominant private label. The Company also has common
law rights in other trademarks and service marks which it considers to be of
lesser importance. The Company believes its primary marks are important to
its business and are recognized in the women's retail apparel industry.
Accordingly, the Company intends to maintain its marks and the related
registrations. The Company is not aware of any pending claims of infringement
or other challenges to the Company's right to use its marks in the United
States.

ITEM 2.
PROPERTIES
STORE LOCATIONS
The Company's stores are located predominantly in regional shopping malls
in mid-sized cities and suburban areas, which offer high-traffic by potential
walk-in customers. The typical Braun's store is in a visible and accessible
location in an enclosed regional mall that has numerous specialty stores and two
or more general merchandise chains or department stores as anchor tenants.
Fewer than 10% of the Company's stores are located in strip shopping centers.
The Company attempts to locate its stores strategically within the mall or
shopping center to attract walk-in customers through stimulating visual
displays. At May 15, 1998, Braun's stores averaged approximately 3,400 gross
square feet.

At May 15, 1998, the Company operated 185 Brauns stores in the following
states:

Number Number
State of Stores State of Stores
----- --------- ----- ---------
<S> <C> <S> <C>
Minnesota. . . . . . 43 Utah. . . . . . . . 6
Iowa . . . . . . . . 24 Missouri. . . . . . 5
Wisconsin. . . . . . 24 Idaho . . . . . . . 4
Michigan . . . . . . 15 Ohio. . . . . . . . 4
Illinois . . . . . . 9 Oklahoma. . . . . . 4
Kansas . . . . . . . 8 Arkansas. . . . . . 3
Nebraska . . . . . . 7 Colorado. . . . . . 3
North Dakota . . . . 7 Indiana . . . . . . 3
Montana. . . . . . . 6 Washington. . . . . 2
South Dakota . . . . 6 Wyoming . . . . . . 2
</TABLE>

4
<PAGE>

STORE LEASES
All of the Company's stores are leased. Management believes that the
current commercial real estate market, combined with the Company's relationship
with nationally-recognized developers, established operating history and status
as a middle-market retailer, makes the Company an attractive tenant when
negotiating terms with shopping center developers or owners.

Lease terms typically are for 10 years and may contain a renewal option.
Leases generally provide for a fixed minimum rental and a percentage rent if
sales are above a specified level. This percentage override is typically 5%.
The following table, which covers all of the stores operated by the Company at
May 15, 1998, indicates the number of leases expiring during the fiscal year
indicated and the number of such leases with renewal options.

<TABLE>
<CAPTION>
Number of Number with
Fiscal Year Leases Expiring Renewal Options
----------- --------------- ---------------
<S> <C> <C>
1999. . . . . . . . . . . . . . . . 26 4
2000. . . . . . . . . . . . . . . . 16 3
2001. . . . . . . . . . . . . . . . 10 4
2002. . . . . . . . . . . . . . . . 19 6
2003. . . . . . . . . . . . . . . . 26 2
2004 - 2008 . . . . . . . . . . . . 84 10
2009 - 2013 . . . . . . . . . . . . 4 0
</TABLE>

The Company currently plans to negotiate new leases in most of the
locations which do not have renewal options.

HEADQUARTERS FACILITY
The Company occupies a 210,000 square foot headquarters and merchandise
distribution center facility located in Plymouth, Minnesota. Of this
facility, the Company uses approximately 100,000 square feet for its own
office and distribution facility and subleases the balance to third parties.
The Company leases this facility under an agreement which expires on June 14,
2005. Under the agreement, the Company will pay minimum rent of approximately
$688,000 per year through June 14, 1999, and $746,000 per year from June 15,
1999, until the end of the lease term. The Company is also required to
reimburse the landlord for property taxes and pay for utilities and other
operating costs of the facility.

The Company subleases 80,000 square feet of warehouse space in its
distribution center to a third party under an agreement which commenced October
1, 1997. Under the agreement, the Company will receive minimum rent of:
$14,667 per month from October 1, 1997 through August 31, 1998; $21,667 per
month from September 1, 1998 through August 31, 1999 and $24,667 per month from
September 1, 1999 through August 31, 2000. The subtenant may extend the lease
for two option periods. Rent for the first three year option period would be
$26,480 per month. Rent for the second option period of one year and nine
months would be $29,790 per month. The subtenant is also required to reimburse
the Company for property taxes, utilities and other operating costs of the
subleased portion of the facility.

Under a second sublease, effective September 1, 1997 and expiring on
May 31, 2005, the Company subleased 33,000 square feet of warehouse and office
space to a third party. Under the agreement the Company will receive annual
minimum rent of $132,000. The subtenant is also required to reimburse the
Company for property taxes, utilities and other operating costs of the subleased
portion of the facility.

ITEM 3.
LEGAL PROCEEDINGS

There are no material legal proceedings pending against the Company.

ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of security holders during the
fourth quarter of fiscal 1998.

5
<PAGE>

ITEM 4a.
EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth certain information regarding the executive
officers of the Company as of May 15, 1998.

<TABLE>
<CAPTION>
NAME AGE POSITIONS AND OFFICES

<S> <C> <C>
William J. Prange 44 President and Chief Executive Officer
Joseph E. Pennington 52 Executive Vice President and Chief Operating Officer
Ralph C. Neal 51 Executive Vice President/Store Operations
Kathryn R. Gangstee 48 Senior Vice President and General Merchandising Manager
Andrew K. Moller 39 Vice President Finance and Chief Financial Officer
Nancy C. Scott 49 Vice President of Real Estate and Construction
</TABLE>

WILLIAM J. PRANGE has served as President and Chief Executive Officer since
March 1998. From July 1997 through February 1998, Mr. Prange was President and
Chief Merchandising Officer. From April 1995 through June 1997, he was Senior
Vice President and General Merchandising Manager. From April 1994 through March
1995, Mr. Prange was Vice President and General Merchandising Manager. From
1989 to 1994, he was President and General Merchandise Manager of id Stores.
From 1987 to 1989, he was Vice President and General Merchandise Manager of id
stores. From 1985 to 1987, Mr. Prange was Vice President and General
Merchandise Manager of Prange Department Stores.

JOSEPH E. PENNINGTON has served as Executive Vice President and Chief
Operating Officer since March 1998. Mr. Pennington was Senior Vice President of
Merchandise Planning and Distribution from July 1997 through February 1998.
From February 1997 through June 1997, Mr. Pennington was Vice President of
Merchandise Planning and Distribution and Management Information Systems. From
April 1996 through January 1997, Mr. Pennington was self-employed, providing
consulting services to retail companies including Braun's. Mr. Pennington was
President and Chief Executive Officer of American Specialty Stores (dba the id)
from June 1994 through March 1996. From October 1993 through May 1994, Mr.
Pennington was Senior Vice President of Merchandise and Operations for the id,
and from January 1990 through October 1993, Mr. Pennington was Vice President of
Operations. From 1976 through 1989, Mr. Pennington held various positions with
Foxmoor Stores, including Vice President of Planning from 1984 through 1989.

RALPH C. NEAL has served as Executive Vice President/Store Operations
since March 1998. Mr. Neal was Senior Vice President of Store Operations
from July 1997 through February 1998. From September 1996 through June 1997,
Mr. Neal was Vice President of Store Operations. From 1989 to 1996, Mr. Neal
was Vice President of Store Operations for the id stores. From 1986 to 1989,
Mr. Neal was a Senior Vice President of Brooks Fashions. From 1982 to 1986,
Mr. Neal was Vice President of Operations for the id stores. Prior to 1982
Mr. Neal served in various managerial capacities for other women's apparel
retailers.

KATHRYN R. GANGSTEE has served as Senior Vice President and General
Merchandise Manager since March 1998. From September 1997 through February 1998,
Ms. Gangstee was Vice President and Divisional Merchandise Manager. Ms.
Gangstee was a Divisional Merchandise Manager from March 1986 through August
1997. From January 1984 through February 1986, Ms. Gangstee held other
positions with the Company.

ANDREW K. MOLLER has served as Vice President Finance and Chief Financial
Officer since March 1998. From January 1995 through February 1998, Mr. Moller
was Controller. From September 1992 through December 1994, Mr. Moller was
Assistant Controller. Prior to joining the Company, Mr. Moller held managerial
accounting positions with Ladbroke Racing Canterbury, Inc., a subsidiary of
Ladbroke Group and with B Dalton Bookstores. Mr. Moller also has previous
experience with Arthur Andersen LLP and is a Certified Public Accountant.

NANCY C. SCOTT has served as Vice President of Real Estate and Construction
since March 1998. From May 1997 through February 1998, Ms. Scott was a Regional
Director of Leasing for Pacific Sunwear of California. Ms. Scott was employed
by Frederick's of Hollywood Stores, Inc. from March 1987 through April 1997.
She held the position of Vice President Real Estate/Leasing from February 1989
to April 1997. From 1979 through 1986, Ms. Scott held leasing positions with
other companies.

Messrs. Prange, Pennington and Neal were all previously affiliated with
American Specialty Stores (dba the id) which filed a voluntary petition for
Chapter 11 Bankruptcy protection in September 1994. American Specialty Stores
plan of reorganization was confirmed by the Bankruptcy Court in September 1995.

6
<PAGE>

PART II
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's common stock has traded on The NASDAQ Stock Market under the
symbol "BFCI" since March 31, 1992. Prior to that date there was no public
market for the Company's common stock.

The quarterly high and low closing bid quotations of the Company's common
stock for fiscal 1998 and fiscal 1997 are presented in Note 10 of the
Consolidated Financial Statements and are included herein. The quotations
represent inter-dealer quotations without retail mark-up, mark-down or
commission, and do not necessarily represent actual transactions.

The number of holders of record of the Company's common stock as of May 15,
1998 was 77. Based upon information received from the record holders, the
Company believes there are more than 1,500 beneficial owners. The last reported
sales price of the Company's common stock on May 15, 1998 was 12 5/8.

The Company has never paid dividends on its common stock. The Company
presently intends to retain all future earnings, if any, for the operation of
its business and does not expect to pay cash dividends on its common stock in
the foreseeable future. Currently, dividends are restricted by the terms of (i)
the Company's revolving credit facility and (ii) the indenture under which the
12% Senior Notes (the "Senior Notes") were issued. See Item 7 of this Form 10-K.
The Company may also enter into bank or other lending agreements in the future
that contain similar restrictions on payment of dividends or other
distributions. Any future determination as to the payment of dividends on common
stock will depend upon future earnings, results of operations, capital
requirements, compliance with financial covenants, the financial condition of
the Company and any other factors the Board of Directors may consider.

In fiscal 1998, the Company did not sell any equity securities in a
transaction that was exempt from the registration provisions of the Securities
Act of 1933, as amended. During fiscal 1997, in connection with the Company's
Chapter 11 proceedings and in accordance with its Second Amended Plan of
Reorganization (the "Plan"), the Company issued an aggregate of 617,516 shares
of common stock in the Company and $10,300,200 principal face amount of Senior
Notes to holders of certain claims. By issuing these securities the Company
discharged $13,201,075 of claims pursuant to the Plan. In connection with the
distribution of securities, the Company relied upon the exemption provided under
Section 3(a)(7) of the Securities Act of 1933 as amended.

7
<PAGE>

ITEM 6.
SELECTED CONSOLIDATED FINANCIAL DATA

The following selected financial data have been derived from the audited
consolidated financial statements of the Company and should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and related
notes appearing elsewhere herein.

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS AND SELECTED OPERATING DATA)
FEB. 28, MARCH 1, MARCH 2, FEB. 25, FEB. 26,
1998 1997(1) 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales . . . . . . . . . . . . . . . . . . . . $ 99,536 $ 95,946 $ 97,296 $ 93,961 $ 89,050
Cost of sales(2). . . . . . . . . . . . . . . . . 65,111 65,445 70,386 68,108 62,395
---------- ---------- ---------- ---------- ----------
Gross profit. . . . . . . . . . . . . . . . . . . 34,425 30,501 26,910 25,853 26,655
Selling, general and
administrative expenses. . . . . . . . . . . . 23,390 22,854 24,897 22,565 20,962
Depreciation and amortization . . . . . . . . . . 2,534 2,649 3,154 2,690 2,351
Reorganization expense(3) . . . . . . . . . . . . -- 7,830 -- -- --
Nonrecurring expense(4) . . . . . . . . . . . . . 775 -- -- -- --
---------- ---------- ---------- ---------- ----------
Operating income (loss) . . . . . . . . . . . . . 7,726 (2,832) (1,141) 598 3,342
Interest, net . . . . . . . . . . . . . . . . . . 691 684 1,388 993 502
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes . . . . . . . . 7,035 (3,516) (2,529) (395) 2,840
Income tax provision (benefit)(5) . . . . . . . . 2,750 (2,895) 929 (150) 1,079
---------- ---------- ---------- ---------- ----------
Income (loss) before change in
accounting principle and
extraordinary gain. . . . . . . . . . . . . . 4,285 (621) (3,458) (245) 1,761
Cumulative effect of change in
accounting principle. . . . . . . . . . . . . -- -- -- -- 1,100
Extraordinary gain. . . . . . . . . . . . . . . . 116 -- -- -- --
---------- ---------- ---------- ---------- ----------
Net income (loss) . . . . . . . . . . . . . . . . $ 4,401 $ (621) $ (3,458) $ (245) $ 2,861
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------

Basic earnings per common share:
Income (loss) before
change in accounting principle
and extraordinary gain. . . . . . . . . . . . $ 0.96 $ (0.15) $ (0.91) $ (0.06) $ 0.47
Cumulative effect of change in
accounting principle. . . . . . . . . . . . . -- -- -- -- 0.29
Extraordinary gain(6) . . . . . . . . . . . . . . 0.02 -- -- -- --
---------- ---------- ---------- ---------- ----------
Net income (loss) . . . . . . . . . . . . . . . . $ 0.98 $ (0.15) $ (0.91) $ (0.06) $ 0.76
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Weighted average number of shares
outstanding . . . . . . . . . . . . . . . . . 4,482 4,029 3,792 3,785 3,771
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------

Diluted earnings per common share:
Income (loss) before change in
accounting principal and
extraordinary gain. . . . . . . . . . . . . . $ 0.89 $ (0.15) $ (0.91) $ (0.06) $ 0.45
Cumulative effect of change in
accounting principle. . . . . . . . . . . . . -- -- -- -- 0.28
Extraordinary gain(6) . . . . . . . . . . . . . . 0.02 -- -- -- --
---------- ---------- ---------- ---------- ----------
Net income (loss) . . . . . . . . . . . . . . . . $ 0.91 $ (0.15) $ (0.91) $ (0.06) $ 0.73
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Weighted average common and common
equivalent shares outstanding . . . . . . . . 4,812 4,029 3,792 3,785 3,910
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>

(1) From July 2, 1996 until December 3, 1996, the Company operated its business
as a debtor-in-possession under Chapter 11 of the United States Bankruptcy
Code. The Company emerged from bankruptcy upon the confirmation of its
Second Amended Plan of Reorganization.
(2) Cost of sales includes cost of merchandise and buying expenses and store
and distribution center occupancy costs, but excludes all depreciation and
amortization.
(3) In fiscal 1997, the Company recorded $7,830,000 of reorganization expense
as a result of the Company's July 2, 1996 Chapter 11 bankruptcy filing.
(4) In fiscal 1998, the Company recorded a one time pre-tax charge of $775,000
or $0.13 per diluted share related to the implementation of its management
succession plan. The majority of this expense was non-cash, related to
accelerated vesting of previously issued options.
(5) In fiscal 1996, the Company recorded a valuation allowance of $1.8 million,
or $0.47 per share, equal to the full amount of its deferred tax assets,
due to the uncertainty of realizing the value of these assets in future
years. In fiscal 1997, the Company reversed the valuation allowance as
improved operating performance made the future realization of these assets
more likely than not.
(6) In fiscal 1998, the Company recorded an extraordinary gain of $116,000 on
the purchase at a discount from par of $1,033,000 principal face amount of
its 12% Senior Notes due 2005.

8
<PAGE>

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
FEB. 28, MARCH 1, MARCH 2, FEB. 25, FEB. 26,
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Same store sales increase (decrease)(1) . . . 10% 10% (3)% (9)% (5)%
Stores at end of period . . . . . . . . . . . 179 170 221 224 188
Net sales per gross square foot(1). . . . . . $ 166 $ 148 $ 129 $ 128 $ 141

BALANCE SHEET DATA (AT END OF PERIOD)
Working capital(2). . . . . . . . . . . . . . $ 19,172 $ 14,746 $ 248 $ 10,900 $ 13,204
Total assets. . . . . . . . . . . . . . . . . 40,590 34,637 32,304 36,179 37,187
Long-term debt(2) . . . . . . . . . . . . . . 9,616 10,374 952 11,170 10,000
Stockholders' equity. . . . . . . . . . . . . 20,959 15,573 13,662 17,118 17,329
</TABLE>

(1) Based on net sales for stores open longer than 12 months. Fiscal 1997
excludes stores closed as part of the Company's Chapter 11 reorganization.
(2) In fiscal 1996, $10.4 million of long-term debt potentially subject to
acceleration was reclassified to current liabilities.

ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL
The Company was incorporated in Delaware in 1986 to acquire BFI, which had
operated as a family-owned business since 1956. As of May 15, 1998, the Company
operated a chain of 185 stores in 20 states, primarily in the Midwest. In
fiscal 1998, the Company opened 16 new stores and closed seven stores when their
leases expired. In fiscal 1999, the Company intends to open 23 new stores and
close five stores as their leases expire.

REORGANIZATION
As a result of an extremely competitive retail environment and in response
to the deteriorating liquidity position brought on by losses at approximately 50
of its store locations and to facilitate restructuring of its obligations, the
Company filed for protection from its creditors under Chapter 11 of the United
States Bankruptcy Code on July 2, 1996. Under the protection of Chapter 11, the
Company managed its affairs and operated its business as a debtor-in-possession
while developing a plan of reorganization. The Company filed its Second Amended
Plan of Reorganization on October 22, 1996 (the "Plan"), along with its
Disclosure Statement. The Plan was approved by 99.6% of the voting shareholders
and by a majority of each class of the creditors that voted. On November 22,
1996, the Bankruptcy Court confirmed the Plan, which became effective on
December 3, 1996.

After emergence from Chapter 11 the Company has benefited from actions
implemented during the reorganization. During the reorganization the Company
rejected 50 unprofitable store leases, which in fiscal 1996 generated operating
losses of $2.3 million and re-negotiated more favorable lease terms for an
additional 46 stores. The Company disposed of its old inventory during
liquidation sales and strengthened its inventory control thereby increasing
inventory turnover from 2.6 turns in 1996, to 3.2 turns in fiscal 1997, to 3.7
turns in fiscal 1998. Through hiring highly qualified individuals in the key
areas of store operations and merchandise planning and distribution, the Company
strengthened its management team. Further, the Company reconfigured its
distribution center and subsequently leased 33,000 square feet of space to a
subtenant. The Company also negotiated a $10 million working capital line of
credit with a new lender.

MANAGEMENT SUCCESSION
In February 1998, the Company completed the implementation of its
management succession plan. As a result of the plan, William J. Prange who has
led the Company's merchandising operations since 1994, became President and
Chief Executive Officer. He replaced Nicholas H. Cook, who will continue as
Chairman of the Company's Board of Directors. The new management team was
completed with the promotions of Joseph E. Pennington to Executive Vice
President and Chief Operating Officer, Ralph C. Neal to Executive Vice
President/Store Operations, Kathryn R. Gangstee to Senior Vice President and
General Merchandising Manager and Andrew K. Moller to Vice President Finance and
Chief Financial Officer.

9
<PAGE>

The Company also hired Nancy C. Scott as Vice President Real Estate and
Construction. Herbert D. Froemming, the Company's Vice Chairman, elected to
take early retirement. In connection with its management succession plan, the
Company recorded a one-time pre-tax charge of $775,000 or $0.13 per diluted
share. The majority of this expense was non-cash, related to the accelerated
vesting of previously issued options.

RESULTS OF OPERATIONS
The following table sets forth operating statement data expressed as a
percentage of net sales for the last three fiscal years and should be read in
conjunction with "Selected Consolidated Financial Data."

FISCAL YEAR ENDED
------------------------------------------
FEBRUARY 28, MARCH 1, MARCH 2,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0%
Cost of sales . . . . . . . . . . . . . . . . 65.4 68.2 72.4
------------ ------------ ------------
Gross profit. . . . . . . . . . . . . . . . . 34.6 31.8 27.6

Selling, general and administrative expenses. 23.5 23.8 25.6
Depreciation and amortization . . . . . . . . 2.6 2.8 3.2
Reorganization expense(1) . . . . . . . . . . -- 8.2 --
Nonrecurring expense(2) . . . . . . . . . . . 0.8 -- --
------------ ------------ ------------
Operating income (loss) . . . . . . . . . . . 7.7 (3.0) (1.2)
Interest, net . . . . . . . . . . . . . . . . 0.7 0.7 1.4
------------ ------------ ------------
Income (loss) before income taxes . . . . . . 7.0 (3.7) (2.6)
Income tax provision (benefit)(3) . . . . . . 2.7 (3.1) 0.9
------------ ------------ ------------
Net income (loss) before extraordinary gain . 4.3 (0.6) (3.5)
Extraordinary gain(4) . . . . . . . . . . . . 0.1 -- --
------------ ------------ ------------

Net income (loss) . . . . . . . . . . . . . . 4.4% (0.6)% (3.5)%
------------ ------------ ------------
------------ ------------ ------------
</TABLE>

(1) In fiscal 1997, the Company recorded $7,830,000 of reorganization expense
as a result of the Company's July 2, 1996 Chapter 11 bankruptcy filing.

(2) In fiscal 1998, the Company recorded a one time pre-tax charge of $775,000
or $0.13 per diluted share related to the implementation of its management
succession plan. The majority of this expense was non-cash, related to
accelerated vesting of previously issued options.

(3) In fiscal 1996, the Company recorded a valuation allowance of $1.8 million,
or $0.47 per share, equal to the full amount of its deferred tax assets,
due to the uncertainty of realizing the value of these assets in future
years. In fiscal 1997, the Company reversed the valuation allowance as
improved operating performance made the future realization of these assets
more likely than not.

(4) In fiscal 1998, the Company recorded an extraordinary gain of $116,000 on
the purchase at a discount from par of $1,033,000 principal face amount of
its 12% Senior Notes due 2005.

FISCAL 1998 COMPARED TO FISCAL 1997

NET SALES. Net sales for the fiscal year ended February 28, 1998, were
$99.5 million, an increase of 4% from sales of $95.9 million in fiscal 1997,
which included sales from 50 stores closed during the reorganization. Same
store sales increased 10%.

GROSS PROFIT. Gross profit (which is net sales less cost of merchandise and
buying and occupancy expenses) was $34.4 million or 34.6% of net sales in fiscal
1998, compared to $30.5 million or 31.8% of net sales in fiscal 1997. The
percentage increase in gross profit was primarily due to closing 50 unprofitable
stores whose gross margins were unusually low, particularly during the second
quarter fiscal 1997 liquidation sales, and lower occupancy costs as a percent of
net sales in the continuing stores.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $23.4 million or 23.5% of net sales in fiscal 1998
compared to $22.9 million or 23.8% of net sales in fiscal 1997. Selling,
general and administrative expenses as a percent of net sales decreased due to
leveraging associated with increased sales.

REORGANIZATION EXPENSE. No reorganization expense was incurred in fiscal
1998. In fiscal 1997, the Company recorded approximately $7.8 million of
reorganization expense. This reorganization expense included $2.6 million of
professional fees and services; a $2.5 million loss on disposal of fixed assets;
$1.0 million of lease rejection claims; $570,000 related to inventory
impairment; $210,000 of severance pay; and $945,000 in other bankruptcy related
expenses.

10
<PAGE>

NONRECURRING EXPENSE. In fiscal 1998, the Company incurred a one-time
pre-tax expense of $775,451 or $0.13 per diluted share related to the
implementation of its management succession plan. This expense was primarily
non-cash, reflecting the accelerated vesting of previously issued stock
options.

OPERATING INCOME. As a result of the foregoing, operating income was $7.7
million or 7.7% of net sales in fiscal 1998 compared to an operating loss of
$2.8 million or 3.0% of net sales in fiscal 1997.

INTEREST, NET. Net interest expense in fiscal 1998 increased to $690,589
from $684,330 in fiscal 1997. In fiscal 1997, the Company was not required to
accrue interest on its prepetition debt after the July 2, 1996 bankruptcy
filing. If the Company had been required to pay interest on its prepetition
debt, contractual interest in fiscal 1997 would have totaled $1.2 million. The
decrease in net interest expense is due to the Company's improved cash flow in
fiscal 1998 which resulted in no advances on the line of credit and increased
income from short-term investments.

INCOME TAXES. Provision for income taxes was $2.7 million in fiscal 1998
with an effective tax rate of 39.1%. The Company had an income tax benefit of
$2.9 million in fiscal 1997. In fiscal 1997, the Company reversed a $1.8
million valuation allowance against its deferred tax assets and recorded an
additional $255,000 of deferred tax assets as improved operating performance
made the future realization of these assets more likely then not. The remainder
of the tax benefit resulted from recording an income tax refund receivable of
$851,000 related to the Company's net operating loss carryback.

EXTRAORDINARY GAIN. In fiscal 1998, the Company purchased a total of
$1,033,000 principal face amount of its 12% Senior Notes due 2005 at a discount
from par. These purchases resulted in a gain of $115,872 net of tax.

NET INCOME (LOSS). Net income for fiscal 1998 was $4.4 million or 4.4% of
net sales as compared to a net loss of $621,000 or 0.6% of net sales in fiscal
1997.

FISCAL 1997 COMPARED TO FISCAL 1996

NET SALES. Net sales for the fiscal year ended March 1, 1997, a fifty-two
week year, were $95.9 million, a decrease of 1% from sales of $97.3 million in
fiscal 1996, a fifty-three week year. The decrease in sales is attributed to
the closing of approximately 50 unprofitable stores during the year and one less
week of sales reported in fiscal 1997. The effect of these factors was
substantially offset by a 10% same store sales increase in the Company's 170
continuing stores.

GROSS PROFIT. Gross profit (which is net sales less cost of merchandise
and buying and occupancy expenses) increased from $26.9 million in fiscal 1996
to $30.5 million in fiscal 1997. The increase in gross profit as a percent of
sales was due to the Company purchasing merchandise with a lower cost through
the Company's strategy of expanded direct import purchases. Gross margins were
also favorably impacted by lower occupancy costs due to closing approximately 50
unprofitable stores during the year and negotiating reduced rents at a number of
continuing stores.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased to $22.9 million or 23.8% of net sales from
$24.9 million or 25.6% of net sales in fiscal 1996. This decrease resulted
primarily from the Company operating approximately 50 fewer stores during the
fiscal year. The decrease as a percentage of sales resulted primarily from
achieving a 10 percent same store sales increase in the Company's 170 continuing
stores.

REORGANIZATION EXPENSE. The Company recorded approximately $7.8 million of
reorganization expense during fiscal 1997. This reorganization expense included
$2.6 million of professional fees and services; a $2.5 million loss on disposal
of fixed assets; $1.0 million of lease rejection claims; $570,000 related to
inventory impairment; $210,000 of severance pay; and $945,000 in other
bankruptcy related expenses.

OPERATING INCOME (LOSS). As a result of the foregoing, the operating loss
for fiscal 1997 was $2.8 million or 3.0% of net sales compared to an operating
loss of $1.1 million or 1.2% of net sales in fiscal 1996.

INTEREST, NET. Net interest decreased from $1.4 million in fiscal 1996 to
$684,330 in fiscal 1997. This decrease was primarily due to the Company not
being required to pay interest on its prepetition debt while it operated as a
debtor-in-possession during its Chapter 11 proceedings. Further, as a result of
the Company's improved cash flow, no advances were made on the line of credit
during the second half of the year and increased income from investments was
generated. If the Company had been required to pay interest on its prepetition
debt during its bankruptcy proceedings, interest expense, net of interest
income, would have totaled approximately $1.2 million.

INCOME TAXES. Income tax benefit in fiscal 1997 was $2.9 million compared
to income tax expense of $929,121 in fiscal 1996. In fiscal 1996, the Company
recorded a valuation allowance of $1.8 million, or $.47 per diluted share, equal
to the full amount of its deferred tax assets due to the uncertainty of
realizing the value of these assets in future years. In fiscal 1997, the
Company reversed the valuation allowance as improved operating performance made
the future realization of these assets more likely than not.

11
<PAGE>

NET LOSS. The net loss for fiscal 1997 was $620,994 or 0.6% of net sales
compared to a net loss of $3.5 million or 3.5% of net sales in fiscal 1996.

LIQUIDITY AND CAPITAL RESOURCES

The Company's principal on-going needs for liquidity are to finance the
purchase of merchandise inventories and other working capital requirements.
Merchandise purchases vary on a seasonal basis, peaking in the fall. As a
result, the Company's cash requirements historically reach their peak in October
and November. Conversely, cash balances reach their peak in January, after the
holiday season is completed.

Net cash generated by operating activities totaled $7.9 million in fiscal
1998. Cash was used to finance $2.7 million of capital expenditures to open
sixteen new stores and for the completion of the major remodeling of five
stores. The Company used a net of $331,230 in financing activities. As a
result of the foregoing, cash increased by $4.9 million in fiscal 1998. In
fiscal 1999, the Company expects to spend approximately $6 million on capital
expenditures to open twenty-three new stores, complete nine major remodels and
install new computer software packages. Management expects its cash on hand
combined with cash flow from operations to be sufficient to meet its capital
expenditure and working capital requirements and its other needs for liquidity
during the upcoming year.

On December 2, 1996, the Company entered into a borrowing agreement with
Norwest Bank Minnesota, National Association (the "Norwest Revolver") expiring
April 1, 1999. The Norwest Revolver provides the Company with revolving credit
loans and letters of credit up to $10 million, subject to a borrowing base
formula tied to inventory levels.

Loans under the Norwest Revolver bear interest at Norwest's base rate plus
3/4%, subject to a rate reduction provision based on the financial performance
of the Company (as described in the Norwest Revolver). Due to the Company's
financial performance the interest rate at May 15, 1998 was Norwest's base rate
plus 1/4% or 8-3/4%. Interest is payable monthly in arrears.

The Norwest Revolver carries commitment fees of 1/4% of the difference
between $5 million and the average amount outstanding under the facility
(including letters of credit). If the average amount outstanding under the
facility (including letters of credit) is between $5 million and $7.5 million,
the commitment fee is based on the difference between $7.5 million and the
average amount outstanding under the facility (including letters of credit) and
if the average amount outstanding (including letters of credit) is in excess of
$7.5 million, the commitment fee is on the difference between $10 million and
the average amount outstanding under the facility (including letters of credit).
This facility is secured by substantially all of the Company's assets. The
borrowing base at May 15, 1998, was $7.7 million. As of May 15, 1998, the
Company had no borrowings and outstanding letters of credit in the amount of
$1.7 million under the Norwest Revolver. Accordingly, the availability of
revolving credit loans under the Norwest Revolver was $6.0 million at that date.

The Norwest Revolver contains certain restrictive covenants, including a
limitation on capital expenditures, restrictions on incurring additional
indebtedness, limitations on certain types of investments and prohibitions on
paying dividends, as well as requiring the maintenance of certain financial
ratios.

The Company plans to initiate discussions in the first quarter of fiscal
1999 with Norwest regarding a new revolving credit facility to replace the
existing Norwest Revolver which expires on April 1, 1999.

In January 1997, the Company issued $10,300,200 of debt in the form of 12%
Senior Notes (the "Senior Notes") due January 2005. The Senior Notes were
issued, pursuant to an Indenture dated as of December 2, 1996, to (i) the
holders of the 9% Senior Notes due January 2001 where each holder received, for
each $1,000 principal face amount, (a) 48 shares of common stock in the Company
and (b) Senior Notes in original principal face amount of $800 and (ii) the
Company's prepetition banks who received a total of (a) 138,284 shares of common
stock in the Company and (b) $2,313,000 in original principal face amount of the
Senior Notes.

The principal amount of the Senior Notes bears interest at the rate of 12%
per annum. Interest at the rate of 9% per annum on the outstanding principal
amount is due monthly. Interest at the rate of 3% per annum on the outstanding
principal amount accrues monthly and upon accrual is treated as principal for
all purposes, including without limitation, the calculation of all interest
payments due thereafter, and is payable in full on January 1, 2005.

Principal repayments on the 12% Senior Notes occur annually on the first of
every calendar year. Minimum principal payments, including interest added to
principal which is due in 2005, are as follows: 1999 - $431,938; 2000 -
$803,902; 2001 - $875,752; 2002 - $958,207; 2003 - $1,040,074; 2004 - $1,133,443
and 2005 - $6,031,476.

The Senior Notes are general unsecured senior obligations of the Company.
The Indenture for the Senior Notes contains certain covenants which, among other
things, limit the ability of the Company to incur liens, incur additional
indebtedness, and restrict the Company's ability to declare dividends.

12
<PAGE>

During fiscal 1998, the Company purchased $1,033,000 principal face amount
of its Senior Notes at a discount from par. The purchase resulted in an
extraordinary gain of $115,872, net of tax, and satisfied all of the January 1,
1998, and a portion of the January 1, 1999 redemption requirement.

The Company's Board of Directors has approved the repurchase of up to $1
million of Senior Notes at a price of par (100% of original principal face
amount) or less.

The Company is unaware of any environmental liability that would have a
material adverse effect on the financial position or the results of operations
of the Company.

NEW ACCOUNTING STANDARDS

Statement of Financial Accounting Standards Statement No. 130, "Reporting
Comprehensive Income" ("FASB No. 130"), effective in fiscal 1999, establishes
standards of disclosure and financial statement display for reporting total
comprehensive income and the individual components thereof. Management believes
the adoption of FASB No. 130 will not have a material impact on the Company's
financial position or results of operations.

In addition, FASB No 131, "Disclosures About Segments of an Enterprise and
Related Information" ("FASB No. 131"), effective in fiscal 1999, establishes new
standards for determining reportable segments and for disclosing information
regarding each such segment. Management does not believe that the Company has
reportable segments and as such will not be required to disclose segment
information.

QUARTERLY RESULTS AND SEASONALITY

The Company's sales show seasonal variation as sales in the third and
fourth quarters, which include the fall and holiday season, generally have been
higher than sales in the first and second quarters. Sales generated during the
fall and holiday season have a significant impact on the Company's annual
results of operations. Quarterly results may fluctuate significantly depending
on a number of factors including adverse weather conditions, shifts in the
timing of certain holidays and customer response to the Company's seasonal
merchandise mix.

The Company's unaudited quarterly operating results for each quarter of
fiscal 1998 and 1997 are presented in Note 10 of the Consolidated Financial
Statements.

INFLATION

The Company does not believe that inflation has had a material effect on
the results of operations during the past three fiscal years.

INFORMATION SYSTEMS AND THE YEAR 2000

The year 2000 problem results from computer programs being written using
two digits rather than four to define the applicable year. Certain of the
Company's computer programs may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in system failures or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, or to engage in similar
normal business activities.

As is the case with most other companies using computers in their
operations, the Company is in the process of addressing the year 2000 issue. In
connection with a general upgrade of its information systems, the Company had
previously planned to install new merchandise and financial system software
packages in fiscal 1999. These new systems are guaranteed by the Company's
software supplier to be year 2000 compliant. In fiscal 1998, the Company began
reviewing software applications it intends to retain. The Company has already
made program modifications to make certain of its computer applications year
2000 compliant and will continue to review its computer applications in fiscal
1999.

Management estimates that new software packages and related hardware
improvements will cost from $700,000 to $1 million. In addition to being year
2000 compliant, management expects that new merchandise systems will allow for
improved merchandise planning, sales tracking and trend analysis. Further, the
Company also expects these systems will allow for improved distribution center
processing and more flexible allocation of merchandise to the Company's stores.

The Company expects to implement the changes necessary to address the year
2000 issue. The Company presently believes that, with conversions to new
software and modifications to existing software, the year 2000 issue will not
pose significant operational problems for the Company's computer systems as so
converted and modified. However, if unforeseen difficulties arise or such
conversions and modifications are not completed timely, or if the Company's
vendors' or suppliers' systems are not modified to become year 2000 compliant,
the year 2000 issue may potentially have a material impact on the operations of
the Company. The Company has also made inquiries to certain of its key vendors
with respect to how these vendors are handling their year 2000 issues.

13
<PAGE>

FORWARD LOOKING INFORMATION

Information contained in this Form 10-K contains "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, which can be identified by the use of forward-looking terminology such
as "may", "will", "expect", "plan", "anticipate", "estimate" or "continue" or
the negative thereof or other variations thereon or comparable terminology.
There are certain important factors that could cause results to differ
materially from those anticipated by some of these forward-looking statements.
Investors are cautioned that all forward-looking statements involve risks and
uncertainty. The factors, among others, that could cause actual results to
differ materially include: consumers' spending and debt levels; the Company's
ability to execute its business plan; the acceptance of the Company's
merchandising strategies by its target customers; the ability of the Company to
anticipate marketing trends and consumer needs; continuity of a relationship
with or purchases from major vendors, particularly those from whom the Company
imports merchandise; competitive pressures on sales and pricing; increases in
other costs which cannot be recovered through improved pricing of merchandise;
and the adverse effect of weather conditions from time to time on consumers'
ability or desire to purchase new clothing. The Company currently purchases
most of its import merchandise from suppliers in Hong Kong, whose currency is
pegged to the U.S. dollar. Therefore, the Company does not expect foreign
currency fluctuations to materially affect its business. However, to the extent
the Company begins purchasing larger amounts of merchandise from other
countries, currency fluctuations could affect the Company's business.

ITEM 7a.
QUANTITATIVE AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISK
Not applicable.

14
<PAGE>

ITEM 8.
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

PAGE
----
<S> <C>
Index to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Financial Statements:
Report of Independent Accountants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Consolidated Balance Sheet at February 28, 1998 and March 1, 1997. . . . . . . . . . . . . . . . . 17
Consolidated Statement of Operations for the three years ended February 28, 1998 . . . . . . . . . 18
Consolidated Statement of Stockholders' Equity for the three years ended February 28, 1998 . . . . 19
Consolidated Statement of Cash Flows for the three years ended February 28, 1998 . . . . . . . . . 20
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
</TABLE>

15
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders
of Braun's Fashions Corporation

In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Braun's Fashions Corporation and its subsidiary at February 28, 1998
and March 1, 1997, and the results of their operations and their cash flows for
each of the three years in the period ended February 28, 1998 in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

Price Waterhouse LLP
Minneapolis, Minnesota
April 3, 1998

16
<PAGE>

BRAUN'S FASHIONS CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>

ASSETS FEBRUARY 28, MARCH 1,
------ 1998 1997
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . $ 15,848,439 $ 10,913,716
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . 847,746 532,331
Merchandise inventory . . . . . . . . . . . . . . . . . . . . . . . 10,735,681 9,253,896
Income tax refund receivable. . . . . . . . . . . . . . . . . . . . -- 870,498
Prepaid expenses. . . . . . . . . . . . . . . . . . . . . . . . . . 414,341 169,668
Current deferred tax asset. . . . . . . . . . . . . . . . . . . . . 322,570 799,952
------------ ------------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . 28,168,777 22,540,061

Equipment and improvements:
Leasehold improvements. . . . . . . . . . . . . . . . . . . . . . . 11,817,695 10,761,611
Furniture and fixtures. . . . . . . . . . . . . . . . . . . . . . . 8,296,459 7,301,931
Other equipment . . . . . . . . . . . . . . . . . . . . . . . . . . 3,337,479 3,315,656
Construction in progress. . . . . . . . . . . . . . . . . . . . . . 312,585 169,987
------------ ------------
23,764,218 21,549,185

Less accumulated depreciation and amortization. . . . . . . . . . . 12,821,164 10,763,888
------------ ------------
Net equipment and improvements. . . . . . . . . . . . . . . . . . 10,943,054 10,785,297

Other assets:
Long-term deferred tax asset. . . . . . . . . . . . . . . . . . . . 1,414,789 1,198,151
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63,424 113,630
------------ ------------
Total other assets . . . . . . . . . . . . . . . . . . . . . . . 1,478,213 1,311,781
------------ ------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . $ 40,590,044 $ 34,637,139
------------ ------------
------------ ------------

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,666,921 $ 2,433,652
Accrued salaries, wages and related expenses. . . . . . . . . . . . 2,014,996 1,222,203
Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . 2,446,536 3,229,640
Current maturities of long-term debt. . . . . . . . . . . . . . . . 681,424 908,957
Income taxes payable. . . . . . . . . . . . . . . . . . . . . . . . 186,982 --
------------ ------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . 8,996,859 7,794,452

Long-term obligations:
Long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . 9,616,311 10,373,662
Accrued rent obligation . . . . . . . . . . . . . . . . . . . . . . 1,017,556 896,253
------------ ------------
Total long-term obligations . . . . . . . . . . . . . . . . . . . 10,633,867 11,269,915

Stockholders' equity:
Preferred stock - $0.01 par value, 1,000,000 shares authorized,
none outstanding. . . . . . . . . . . . . . . . . . . . . . . . . -- --
Common stock - $0.01 par value, 9,000,000 shares authorized,
4,523,393 and 4,432,588 shares issued and outstanding in 1998
and 1997, respectively. . . . . . . . . . . . . . . . . . . . . . 45,234 44,326
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . 28,588,350 27,604,043
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . (7,674,266) (12,075,597)
------------ ------------
Total stockholders' equity. . . . . . . . . . . . . . . . . . . . 20,959,318 15,572,772
------------ ------------
Total liabilities and stockholders' equity. . . . . . . . . . . . $ 40,590,044 $ 34,637,139
------------ ------------
------------ ------------
</TABLE>

See accompanying notes to consolidated financial statements.

17
<PAGE>

BRAUN'S FASHIONS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS

Cost of sales:
Merchandise, buying and occupancy
(exclusive of depreciation and amortization shown below) . 65,110,994 65,445,103 70,385,844
------------ ------------ ------------
Gross profit . . . . . . . . . . . . . . . . . . . . . . 34,424,779 30,500,943 26,910,134

Selling, general and administrative. . . . . . . . . . . . . 23,390,027 22,854,266 24,897,287
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . 2,533,282 2,648,563 3,154,266
Reorganization expense . . . . . . . . . . . . . . . . . . . -- 7,829,924 --
Nonrecurring expense . . . . . . . . . . . . . . . . . . . . 775,451 -- --
------------ ------------ ------------
Operating income (loss). . . . . . . . . . . . . . . . . 7,726,019 (2,831,810) (1,141,419)

Interest, net. . . . . . . . . . . . . . . . . . . . . . . . 690,589 684,330 1,387,623
------------ ------------ ------------

Income (loss) before income taxes. . . . . . . . . . . . . . 7,035,430 (3,516,140) (2,529,042)

Income tax provision (benefit) . . . . . . . . . . . . . . 2,749,971 (2,895,146) 929,121
------------ ------------ ------------

Net income (loss) before extraordinary gain. . . . . . . 4,285,459 (620,994) (3,458,163)

Extraordinary gain . . . . . . . . . . . . . . . . . . . . . 115,872 -- --
------------ ------------ ------------

Net income (loss). . . . . . . . . . . . . . . . . . . . . . $ 4,401,331 $ (620,994) $ (3,458,163)
------------ ------------ ------------
------------ ------------ ------------
Basic earnings per common share:
Net income (loss) before extraordinary gain. . . . . . . . $ 0.96 $ (0.15) $ (0.91)
Extraordinary gain . . . . . . . . . . . . . . . . . . . . 0.02 -- --
------------ ------------ ------------
Net income (loss). . . . . . . . . . . . . . . . . . . . . $ 0.98 $ (0.15) $ (0.91)
------------ ------------ ------------
------------ ------------ ------------

Weighted average common shares outstanding . . . . . . . . 4,482,119 4,029,041 3,791,612
------------ ------------ ------------
------------ ------------ ------------
Diluted earnings per common share:
Net income (loss) before extraordinary gain. . . . . . . . $ 0.89 $ (0.15) $ (0.91)
Extraordinary gain . . . . . . . . . . . . . . . . . . . . 0.02 -- --
------------ ------------ ------------

Net income (loss). . . . . . . . . . . . . . . . . . . . . $ 0.91 $ (0.15) $ (0.91)
------------ ------------ ------------
------------ ------------ ------------
Weighted average common and common
equivalent shares outstanding. . . . . . . . . . . . . . 4,812,482 4,029,041 3,791,612
------------ ------------ ------------
------------ ------------ ------------
</TABLE>

See accompanying notes to consolidated financial statements.

18
<PAGE>

BRAUN'S FASHIONS CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

COMMON STOCK
------------------------
ADDITIONAL
NUMBER PAID-IN ACCUMULATED
OF SHARES AMOUNT CAPITAL DEFICIT
--------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at February 25, 1995 . . . . . . . . . . . 3,791,272 $ 37,913 $ 25,076,122 $ (7,996,440)
Stock issued on exercise of options. . . . . . . . 2,040 20 2,930 --
Net loss . . . . . . . . . . . . . . . . . . . . . -- -- -- (3,458,163)
--------- ------------ ------------ ------------
Balance at March 2, 1996 . . . . . . . . . . . . . 3,793,312 37,933 25,079,052 (11,454,603)
Stock issued pursuant to plan of reorganization. . 617,516 6,175 2,475,006 --
Stock issued on exercise of options. . . . . . . . 21,760 218 49,985 --
Net loss . . . . . . . . . . . . . . . . . . . . . -- -- -- (620,994)
--------- ------------ ------------ ------------
Balance at March 1, 1997 . . . . . . . . . . . . . 4,432,588 44,326 27,604,043 (12,075,597)
Stock issued on exercise of options. . . . . . . . 90,805 908 300,507 --
Tax benefit on exercise of stock options . . . . . -- -- 165,349 --
Accelerated vesting of stock options . . . . . . . -- -- 518,451 --
Net income . . . . . . . . . . . . . . . . . . . . -- -- -- 4,401,331
--------- ------------ ------------ ------------
Balance at February 28, 1998 . . . . . . . . . . . 4,523,393 $ 45,234 $ 28,588,350 $ (7,674,266)
--------- ------------ ------------ ------------
--------- ------------ ------------ ------------
</TABLE>

See accompanying notes to consolidated financial statements.

19
<PAGE>

BRAUN'S FASHIONS CORPORATION
CONSOLIDATED STATEMENT OF CASHFLOWS

FISCAL YEAR ENDED
------------------------------------------
FEBRUARY 28, MARCH 1, MARCH 2,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . . . $ 4,401,331 $ (620,994) $ (3,458,163)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization. . . . . . . . . . . . . . 2,533,282 2,678,963 3,245,466
Accelerated vesting of stock options . . . . . . . . . . 518,451 -- --
Extraordinary gain from early extinguishment of debt . . (186,890) -- --
(Increase) decrease in deferred tax assets . . . . . . . 260,744 (1,998,103) 1,743,957
(Gain) loss on disposal of property and equipment. . . . (5,810) 2,469,940 23,278
Increase (decrease) in accrued rent obligation . . . . . 121,303 (185,448) 81,480
Changes in operating assets and liabilities:
(Increase) decrease in merchandise inventory,
prepaid expenses, receivables and other. . . . . . . . (1,991,667) 4,456,747 1,329,032
Increase (decrease) in accounts payable and
accrued liabilities . . . . . . . . . . . . . . . . . 1,242,958 2,214,825 (2,011,287)
Increase in income taxes payable/receivable . . . . . . 1,057,480 -- --
------------ ------------ ------------
Net cash provided by operating activities . . . . . . . 7,951,182 9,015,930 953,763

Cash flows from investing activities:
Purchase of equipment and improvements. . . . . . . . . (2,720,178) (1,042,622) (1,553,026)
Proceeds from sale of fixtures and furniture. . . . . . 34,949 53,270 --
------------ ------------ ------------
Net cash used in investing activities . . . . . . . . (2,685,229) (989,352) (1,553,026)

Cash flows from financing activities:
Net borrowings on line of credit. . . . . . . . . . . . -- -- 400,000
Principal payments on debt agreements . . . . . . . . . (1,090,754) (250,060) (225,741)
Borrowings under debt agreements. . . . . . . . . . . . -- 2,878,952 --
Interest on 12% Senior Notes added to principal . . . . 292,760 -- --
Exercise of stock options . . . . . . . . . . . . . . . 466,764 50,203 2,950
Checks issued, not yet presented for payment. . . . . . -- (1,335,088) 1,335,088
------------ ------------ ------------
Net cash provided by (used in) financing activities . . (331,230) 1,344,007 1,512,297

Net increase in cash and cash equivalents. . . . . . . . . . 4,934,723 9,370,585 913,034
Cash and cash equivalents at beginning of year . . . . . . . 10,913,716 1,543,131 630,097
------------ ------------ ------------
Cash and cash equivalents at end of year . . . . . . . . . . $ 15,848,439 $ 10,913,716 $ 1,543,131
------------ ------------ ------------
------------ ------------ ------------
Supplemental cash flow information:
Interest paid during the year . . . . . . . . . . . . . $ $958,627 $ 644,198 $ 1,388,060
Income taxes paid (refunded) during the year. . . . . . $ 1,276,893 $ (903,958) $ (79,300)
Debt for equity exchange. . . . . . . . . . . . . . . . $ -- $ 2,900,000 $ --
Write-off of deferred financing costs . . . . . . . . . $ -- $ 418,818 $ --
</TABLE>

See accompanying notes to consolidated financial statements.

20
<PAGE>

BRAUN'S FASHIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Braun's Fashions Corporation (BFC), through its wholly-owned subsidiary,
Braun's Fashions, Inc. (BFI) (collectively referred to as the "Company"),
operates retail specialty stores selling women's clothing and related
accessories, primarily in the Midwest. The Company operated 179, 170 and 221
stores at the end of fiscal 1998, 1997, and 1996, respectively.

FISCAL YEAR AND BASIS OF PRESENTATION
The Company's fiscal year ends on the Saturday nearest February 28. The
fiscal years ending February 28, 1998 and March 1, 1997 consisted of 52 weeks
each. The fiscal year ending March 2, 1996 consisted of 53 weeks. The
consolidated financial statements include the accounts of BFC and its
wholly-owned subsidiary, BFI. All significant intercompany accounts have been
eliminated in consolidation. Certain reclassifications have been made in the
fiscal 1997 and 1996 financial statements to conform to the fiscal 1998
presentation. These changes had no impact on previously reported results of
operations or stockholder's equity.

CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand and on deposit, and
investments purchased with an original maturity of three months or less.

MERCHANDISE INVENTORIES
Merchandise inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out retail inventory method.

INVENTORY MARKDOWNS
Permanent markdowns are recorded to reflect expected adjustments to retail
prices in accordance with the retail inventory method. Markdowns are recorded
monthly on the basis of an evaluation of inventory by merchandising management.
In the Company's judgement, all markdowns necessary to record inventory at the
lower of cost or market under the retail inventory method have been provided for
all periods presented.

EQUIPMENT AND IMPROVEMENTS
Equipment and improvements are stated at cost. Equipment is depreciated
over its estimated useful life and improvements are amortized over the term of
the related leases. Repairs and maintenance which do not extend an asset's
useful life are expensed as incurred. When assets are retired or otherwise
disposed of, the cost and related accumulated depreciation or amortization are
removed from the accounts, and any resulting gain or loss is reflected in income
for that period. The Company evaluates its long-lived assets in accordance with
the provisions of SFAS No. 121, "Accounting for Impairment of Long-Lived Assets
and Long-Lived Assets to Be Disposed Of". This statement requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. As of February 28, 1998,
the Company has determined that no adjustment to the financial statements is
necessary under SFAS No. 121.

RENT EXPENSE
Many of the Company's lease agreements for retail space include escalation
clauses in minimum base rent. The Company recognizes minimum base rent expense
for the lease term in equal annual amounts over the lease term.

ADVERTISING
The Company expenses advertising costs as incurred. Advertising costs for
the fiscal years ended 1998, 1997 and 1996 were $671,000, $793,000 and
$1,167,000, respectively.

FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash, receivables and
payables for which current carrying amounts approximate fair market value.
Additionally, interest rates on outstanding debt are at rates which approximate
market rates for debt with similar terms and maturities.

21
<PAGE>

BRAUN'S FASHIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1 -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

STOCK BASED EMPLOYEE COMPENSATION
The Company has elected to recognize compensation cost for its stock based
compensation plans in accordance with Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees". Generally, no compensation
expense is recognized for stock options with exercise prices equal to the market
value of the underlying shares of stock at the date of grant. The Company has
adopted the disclosure-only provisions of Statement of Financial Accounting
Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation".

INCOME TAXES
Income taxes are provided following the provisions of Statement of
Financial Accounting Standards No. 109 ("SFAS No. 109"),"Accounting for Income
Taxes."Under the provisions of SFAS No. 109, deferred tax assets and liabilities
result from the expected future tax consequences of differences between the
carrying value and the tax basis of assets and liabilities.

NET INCOME (LOSS) PER COMMON SHARE
In fiscal 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("FASB No. 128").
Under FASB No. 128, basic earnings per share ("EPS") is computed based on the
weighted average number of shares of common stock outstanding during the
applicable periods while diluted EPS is computed based on the weighted average
number of shares of common and common equivalent shares (dilutive stock options)
outstanding. EPS for all periods presented have been restated to reflect the
adoption of SFAS 128.

The following is a reconciliation of the number of shares (denominator)
used in the basic and diluted EPS computations:

EFFECT OF
BASIC DILUTIVE STOCK DILUTED
EPS OPTIONS EPS
1998 --------- -------------- ---------
<S> <C> <C> <C>
Shares. . . . . . . . . . . . . . . . 4,482,119 330,363 4,812,482
Amount before extraordinary gain. . . $0.96 $(0.07) $0.89
Amount including extraordinary gain . $0.98 $(0.07) $0.91

1997
Shares. . . . . . . . . . . . . . . . 4,029,041 -- 4,029,041
Amount. . . . . . . . . . . . . . . . $(0.15) -- $(0.15)

1996. . . . . . . . . . . . . . . . . .
Shares. . . . . . . . . . . . . . . . 3,791,612 -- 3,791,612
Amount. . . . . . . . . . . . . . . . $(0.91) -- $(0.91)
</TABLE>

USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that may affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expenses during a reporting
period. As a result, actual results could differ because of the use of these
estimates and assumptions.

22
<PAGE>

BRAUN'S FASHIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2 -- CHAPTER 11 REORGANIZATION

On July 2, 1996, the Company filed in the United States Bankruptcy Court in
the District of Delaware a petition for reorganization under Chapter 11 of Title
11 of the United States Bankruptcy Code, case number 96-1030(HSB). Under the
protection of Chapter 11, the Company managed its affairs and operated its
business as a debtor-in-possession while developing a plan of reorganization.
The Company filed its Second Amended Plan of Reorganization on October 22, 1996
(the "Plan"), along with its Disclosure Statement. The Plan was approved by
99.6% of the voting shareholders and by a majority of each class of creditors
that voted. On November 22, 1996, the Bankruptcy Court confirmed the Plan,
which became effective on December 3, 1996.

As of the effective date, December 3, 1996, the Company had 3,796,512
shares of common stock issued and outstanding. Under the terms of the Plan, the
Company issued 617,516 shares of common stock on January 2, 1997 to certain
creditors in respect to their filed and allowed claims and interests. The
Company also issued approximately $10.3 million in aggregate principal amount of
12% Senior Notes (the "Senior Notes") to these classes of creditors pursuant to
the Plan. The common stock and Senior Notes were issued to these creditors in
exchange for outstanding debt of $13,201,075 previously held by these creditors.
The fair value of the common stock and Senior Notes approximated the carrying
value of the outstanding obligations, and accordingly, no gain or loss was
recorded on the exchange.

The Company incurred the following expenses during fiscal 1997 in
connection with its Chapter 11 reorganization proceedings:

<TABLE>
<CAPTION>
<S> <C>
Professional fees and services $2,610,000
Loss on disposal of property, fixtures and equipment 2,453,000
Lease rejection claims 1,042,000
Inventory impairment 570,000
Severance 210,000
Other 945,000
----------
Total $7,830,000
----------
----------
</TABLE>

NOTE 3 -- LONG-TERM DEBT

As part of the Plan, the Company issued $10,300,200 of debt in the form of
12% Senior Notes (the "Senior Notes") due January 2005. The Senior Notes were
issued, pursuant to an Indenture dated as of December 2, 1996, to (i) the
holders of the 9% Senior Notes due January 2001 where each holder received, for
each $1,000 principal face amount, (a) 48 shares of common stock in the Company
and (b) Senior Notes in original principal amount of $800 and (ii) the Company's
prepetition banks who received a total of (a) 138,284 shares of common stock in
the Company and (b) $2,313,000 in original principal face amount of the Senior
Notes.

The principal amount of the Senior Notes bears interest at the rate of 12%
per annum from and after December 17, 1996. Interest at the rate of 9% per
annum on the outstanding principal amount is paid monthly. Interest at the rate
of 3% per annum on the outstanding principal amount is accrued monthly and upon
accrual is treated as principal for all purposes, including without limitation,
the calculation of all interest payments due thereafter, and is payable in full
on January 1, 2005.

As part of the Plan, the Company entered into a borrowing agreement with
Norwest Bank Minnesota, National Association (the "Norwest Revolver"), expiring
April 1, 1999. The Norwest Revolver provides the Company with revolving credit
loans and letters of credit up to $10 million, subject to a borrowing base
formula tied to inventory levels.

23
<PAGE>

BRAUN'S FASHIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3 -- LONG-TERM DEBT (CONTINUED)

Loans under the Norwest Revolver bear interest at Norwest's base rate plus
3/4%, subject to a rate reduction provision based on the Company's performance
(as described in the Norwest Revolver). Due to the Company's financial
performance, the interest rate at February 28, 1998 was Norwest's base rate plus
1/4% or 8-3/4%. Interest is payable monthly in arrears. The Norwest Revolver
carries commitment fees of 1/4% of the difference between $5 million and the
average amount outstanding under the facility (including letters of credit). If
the average amount outstanding under the facility (including letters of credit)
is between $5 million and $7.5 million, the commitment fee is based on the
difference between $7.5 million and the average amount outstanding under the
facility (including letters of credit) and if the average amount outstanding
(including of letters of credit) is in excess of $7.5 million, the commitment
fee is based on the difference between $10 million and the average amount
outstanding under the facility (including letters of credit). This facility is
secured by substantially all of the Company's assets. The borrowing base at
February 28, 1998, was $6.5 million. As of February 28, 1998, the Company had
no borrowings and outstanding letters of credit in the amount of $1.9 million
under the Norwest Revolver. Accordingly, the availability of revolving credit
loans under the Norwest Revolver was $4.6 million at that date.

The Norwest Revolver contains certain restrictive covenants, including
limitations on capital expenditures, restrictions on incurring additional
indebtedness, limitations on certain types of investments and prohibitions on
paying dividends. The Norwest Revolver also requires the Company to maintain
certain financial ratios.

Outstanding debt consists of the following:

FEBRUARY 28, MARCH 1,
1998 1997
------------ ------------
<S> <C> <C>
12% Senior Notes . . . . . . . . . . . . . . . . . $ 9,607,247 $ 10,362,952
Obligation under capital lease . . . . . . . . . . 690,488 919,667
------------ ------------
10,297,735 11,282,619
Less:
Current maturities of 12% Senior Notes. . . . . 431,938 679,778
Current maturities of capital lease obligation 249,486 229,179
------------ ------------
Long-term debt . . . . . . . . . . . . . . . . . . $ 9,616,311 $ 10,373,662
------------ ------------
------------ ------------
</TABLE>

Principal repayments on the 12% Senior Notes occur annually on the first of
every calendar year. Minimum principal payments, including interest added to
principal which is due in 2005, are as follows: 1999 - $431,938, 2000 -
$803,902, 2001 - $875,752, 2002 - $958,207, 2003 - $1,040,074, 2004 - $1,133,443
and 2005 - $6,031,476.

The Company was not required to pay interest on its prepetition debt during
its Chapter 11 Bankruptcy proceedings. If the Company had been required to pay
interest on its prepetition debt, contractual interest expense net of interest
income for the year ended March 1, 1997, would have totaled approximately $1.2
million.

24
<PAGE>

BRAUN'S FASHIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4 -- STOCK OPTION PLANS
In 1987, the Company adopted the 1987 Stock Incentive Plan which, as
amended, provided for the granting of options to purchase up to 710,000 shares
of common stock. Option grants include qualified and non-qualified grants
vesting over zero to 4 years. Options are exercisable up to ten years from the
date of grant and are granted at a price not less than 100% of the fair market
value of the shares on the date of grant. In June 1996, the Company repriced
previously granted employee options to purchase up to 358,200 shares of the
Company's common stock. The initial exercise price of these options was $7.00
per share and was reset to $2.00, $3.00, or $4.00 per share. The closing price
of the Company's common stock at the date of the repricing was $1.56 per share.
The 1987 Stock Incentive Plan terminated on September 11, 1997 and no new
options may be granted under that plan after that date.

In July 1997, the Company's shareholders approved the Company's 1997 Stock
Incentive Plan to replace the 1987 incentive plan. Under the 1997 Stock
Incentive Plan options to purchase up to 300,000 shares of common stock are
available for grant. No options had been granted under the 1997 Inventive Plan,
as of February 28, 1998. The 1997 Incentive Plan permits the granting of
qualified incentive stock options meeting the requirements of Section 422 of the
Internal Revenue Code and non-qualified stock options. Options are to be
granted at a price not less than 100% of the fair market value of the Company's
common stock on the option grant date.

The Company established the 1992 Director Stock Option Plan, effective
March 1992. This plan provides for options to purchase 40,000 shares of common
stock, all of which shares have been granted. In June 1996, the Company
repriced previously granted director options to purchase up to 40,000 shares of
the Company's common stock. The initial exercise price of these options was
$6.00 or $7.00 per share and was reset to $3.00. The closing price of the
Company's common stock at the date of the repricing was $1.56 per share. The
options vested one-third upon issuance and one-third over the next two years in
annual installments of one-third per year. Vested options are exercisable for
ten years from the date of grant.

In fiscal 1998, the Company granted to non-employee members of its Board of
Directors, subject to shareholder approval, options to purchase 60,000 shares of
the Company's common stock. The exercise price of these options is $8.75, equal
to the fair market value of the common stock on the date of the grant.
Accordingly, no compensation expense was recognized on the issuance of these
options. The options vest over three years and are exercisable for ten years
from the grant date.

During fiscal 1998, compensation expense of $518,000 was recognized
relating to the accelerated vesting of 166,000 options in connection with the
implementation of the Company's management succession plan. The compensation
expense was calculated as the difference between the exercise price and the fair
market value of the Company's common stock on the date on which the vesting of
options were accelerated.

The Company has elected to recognize compensation cost for its stock based
compensation plans in accordance with Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees". Generally, no compensation
expense is recognized for stock options with exercise prices equal to the market
value of the underlying shares of stock at the date of grant. The Company has
adopted the disclosure-only provisions of Statement of Financial Accounting
Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation."
If compensation cost for these plans had been determined based on the fair value
methodology prescribed by SFAS No. 123, the Company's net earnings and earnings
per share in fiscal 1998 and 1997 would have been reduced to the pro forma
amounts indicated below. Pro forma amounts of net income and earnings per share
reflecting compensation cost under SFAS No. 123 have not been presented for
fiscal 1996 because the compensation cost is not material.

25
<PAGE>

BRAUN'S FASHIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1998 1997
---------------------------------------------------------------------------------
<S> <C> <C>
Net income (loss) - as reported $4,401,331 $ (620,994)
Net income (loss) - pro forma $4,239,092 $ (686,827)
Net income (loss) per diluted share - as reported $ 0.91 $ (0.15)
Net income (loss) per diluted share - pro forma $ 0.88 $ (0.17)
</TABLE>

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model. The model was developed for use in
estimating the fair value of traded options which have no vesting registration
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

The following weighted-average assumptions were used for grants in 1998 and
1997:

1998 1997
--------------------------------------------------------------------------------
<S> <C> <C>
Dividend yield 0.00% 0.00%
Expected volatility 42.85% 57.32%
Risk-free interest rate 5.99% - 6.11% 5.99% - 6.50%
Expected lives 4.31 Years 3 Years
</TABLE>

26
<PAGE>

BRAUN'S FASHIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4 -- STOCK OPTION PLANS AND WARRANTS (CONTINUED)
The following summarizes stock option transactions:

YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY 28, 1998 MARCH 1, 1997 MARCH 2, 1996
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------- -------------- ------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of period 519,400 $3.26 408,320 $6.52 399,560 $6.51
Granted 175,000 8.75 176,000 3.83 35,000 7.00
Reissued -- -- 358,200 3.00 -- --
Exercised (84,139) 3.15 (21,760) 0.91 (2,040) 1.45
Cancelled (50,733) 4.13 (401,360) 6.85 (24,200) 7.00
-------- -------- -------- -------- -------- --------
Outstanding, end of period 559,528 $4.92 519,400 $3.26 408,320 $6.52
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Exercisable, end of period 204,501 $3.21 23,914 $2.60 267,880 $6.31
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Available for grant, end of period 300,000 184,320 117,160
-------- -------- --------
-------- -------- --------
Weighted average fair value
of options granted $8.75 $2.80 $3.23
-------- -------- --------
-------- -------- --------
</TABLE>

The following summarizes stock options outstanding and options exercisable at
February 28, 1998:

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- -------------------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF NUMBER AVERAGE REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ----------- ----------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$1.25 - $3.75 254,028 8.34 $2.54 109,001 $2.20
$3.76 - $8.75 305,500 8.95 6.90 95,500 $4.36
----------- ----------------- -------------- ----------- --------------
559,528 8.67 $4.92 204,501 $3.21
----------- ----------------- -------------- ----------- --------------
----------- ----------------- -------------- ----------- --------------
</TABLE>

NOTE 5 -- INCOME TAXES
The provision (benefit) for income taxes for the fiscal years ended
February 28, 1998, March 1, 1997 and March 2,
1996 consisted of:

1998 1997 1996
------------ ------------ ------------
Current
<S> <C> <C> <C>
Federal . . . . . . . . . . . . . . . . . . $ 2,389,227 $ (917,043) $ (791,836)
State . . . . . . . . . . . . . . . . . . . 100,000 20,000 (23,000)
------------ ------------ ------------
Current tax expense (benefit) . . . . . . . . 2,489,227 (897,043) (814,836)
Deferred. . . . . . . . . . . . . . . . . . . 260,744 (1,998,103) 1,743,957
------------ ------------ ------------
Provision (benefit) for income tax . . . . . $ 2,749,971 $ (2,895,146) $ 929,121
------------ ------------ ------------
------------ ------------ ------------
</TABLE>

27
<PAGE>

BRAUN'S FASHIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company's effective income tax rate for fiscal years ended February 28,
1998, March 1, 1997, and March 2, 1996 , differs from the federal income tax
rate due to the following:

<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Federal income tax at statutory rate. . . . . 34.0% (34.0)% (34.0)%
State income tax (net of federal benefit) . . 0.9 0.4 (0.6)
Valuation allowance . . . . . . . . . . . . . -- (50.9) 70.7
Accelerated vesting of stock options. . . . . 2.0 -- --
Other . . . . . . . . . . . . . . . . . . . . 2.2 2.2 0.6
------ ------ ------
39.1% (82.3)% 36.7%
</TABLE>

The net deferred tax assets included in the consolidated balance sheet as
of February 28, 1998 and March 1, 1997 are as follows:

<TABLE>
<CAPTION>
FEBRUARY 28, MARCH 1,
1998 1997
------------ ------------
<S> <C> <C>
NOL carryforward. . . . . . . . . . . . . . . $ -- $ 285,998
Vacation accrual. . . . . . . . . . . . . . . 180,200 143,726
Inventory . . . . . . . . . . . . . . . . . . 136,438 117,785
Other . . . . . . . . . . . . . . . . . . . . 5,932 252,443
------------ ------------
Current deferred tax assets . . . . . . . 322,570 799,952
------------ ------------

Depreciation. . . . . . . . . . . . . . . . . 615,784 509,793
Accrued rent obligation . . . . . . . . . . . 345,969 304,726
Other . . . . . . . . . . . . . . . . . . . . 453,036 383,632
------------ ------------
Long-term deferred tax assets. . . . . . . 1,414,789 1,198,151
------------ ------------
Total deferred tax assets. . . . . . . . . $ 1,737,359 $ 1,998,103
------------ ------------
------------ ------------
</TABLE>

Deferred income tax assets represent potential future income tax benefits.
Realization of these assets is ultimately dependent upon future taxable income.

NOTE 6 -- EMPLOYEE BENEFIT PLANS
Effective March 3, 1991, the Company established a defined contribution
plan qualified under Section 401(k) of the Internal Revenue Code for the benefit
of all employees who meet certain eligibility requirements, primarily age and
length of service. The plan allows eligible employees to invest from 1% to 16%
of their compensation. Annually, the Company's Board of Directors approves a
discretionary matching contribution up to a maximum of 25% of the first 6% of
the participants' pre-tax contributions. Such contributions are based
principally on Company performance. Company contributions made for the fiscal
years ended February 28, 1998, March 1, 1997 and March 2, 1996 were $55,954,
$56,993, and $28,188, respectively.

The Company does not offer any other post-retirement, post-employment or
pension benefits to directors or employees.

28
<PAGE>

BRAUN'S FASHIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7 -- LEASE COMMITMENTS
The Company leases its computer equipment, office and warehouse facility,
vehicles and each of its store locations, all of which are accounted for as
operating leases. The store lease terms, including rental period, renewal
options, escalation clauses and rent as a percentage of sales, vary among the
leases. Most store leases require the Company to pay real estate taxes and
common area maintenance charges.

Total rental expense for all leases was as follows: FISCAL YEAR ENDED
------------------------------------------
FEBRUARY 28, MARCH 1, MARCH 2,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Minimum rent. . . . . . . . . . . . . . . . . . . . . . $ 4,726,654 $ 6,219,379 $ 7,745,859
Contingent rent -- based on a percentage of sales . . . 2,109,262 1,443,340 580,350
Maintenance, taxes and insurance. . . . . . . . . . . . 2,667,097 3,367,817 4,368,948
------------ ------------ ------------
$ 9,503,013 $ 11,030,536 $ 12,695,157
------------ ------------ ------------
------------ ------------ ------------
</TABLE>

In addition, the Company leases its point-of-sale (POS) registers. This
lease agreement has been capitalized at the present value of the future minimum
lease payments.

The Company leases its office and warehouse facility under an agreement
which commenced on June 15, 1994, and expires on June 14, 2005. The Company is
required to pay property taxes, insurance, utilities and other operating costs
of the facility.

The Company subleases 80,000 square feet of warehouse space in its
distribution center to a third party under an agreement which commenced October
1, 1997. Under the agreement, the Company will receive minimum rent of; 14,667
per month from October 1, 1997 through August 31, 1998; $21,667 per month from
September 1, 1998 to August 31, 1999 and $24,667 per month from September 1,
1999 to August 31, 2000. The subtenant may extend the lease for two options
periods. Rent for the first three year option period would be $26,480 per
month. Rent for the second option period of one year and nine months would be
$29,790 per month. The subtenant was also required to reimburse the Company for
property taxes, utilities and other operating costs of the subleased portion of
the facility.

Under a second sublease effective September 1, 1997 and expiring on May 31,
2005, the Company subleases 33,000 square feet of warehouse and office space to
a third party. Under the agreement the Company will receive annual minimum rent
of $132,000. The subtenant is also required to reimburse the Company for
property taxes, utilities and other operating costs of the subleased portion of
the facility.

Future minimum rental commitments for all leases are as follows:

CAPITAL
LEASE OPERATING LEASES
---------- ---------------------------------------------------------
POS RETAIL OFFICE/
REGISTER STORE WAREHOUSE
FISCAL YEAR EQUIPMENT FACILITIES FACILITIES OTHER TOTAL
---------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
1999 . . . . . . . . . . . . . . . . . . $ 298,723 $ 4,671,414 $ 224,570 $ 104,270 $ 5,000,254
2000 . . . . . . . . . . . . . . . . . . 298,723 4,587,069 201,029 97,725 4,885,823
2001 . . . . . . . . . . . . . . . . . . 174,255 4,432,998 321,187 12,523 4,766,708
2002 . . . . . . . . . . . . . . . . . . -- 4,324,971 493,854 -- 4,818,825
2003 . . . . . . . . . . . . . . . . . . -- 3,647,388 520,971 -- 4,168,359
Thereafter . . . . . . . . . . . . . . . -- 7,479,196 1,274,855 -- 8,754,051
---------- ------------ ----------- ----------- ------------
Total minimum lease payments. . . . . $ 771,701 $29,143,036 $3,036,466 $214,518 $32,394,020
---------- ------------ ----------- ----------- ------------
---------- ------------ ----------- ----------- ------------

Less: Amount representing interest . . . 81,213
----------
Present value of minimum capital
lease payments . . . . . . . . . . . . 690,488
----------

Less: Current maturities . . . . . . . . 249,486
----------

Obligation under capital lease,
less current maturities. . . . . . . . . $ 441,002
----------
----------
</TABLE>

29
<PAGE>

BRAUN'S FASHIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 8 -- NONRECURRING EXPENSE

In February 1998, the Company completed the implementation of its
management succession plan. As a result of the plan, Nicholas H. Cook, the
Company's Chairman and Chief Executive Officer ("CEO") since 1990, relinquished
his CEO responsibilities but will continue to serve as Chairman of the Company's
Board of Directors. Herbert D. Froemming, the Company's Vice Chairman, elected
to take early retirement. As part of the management succession plan, the
Company incurred a one-time, pre-tax expense of $775,000, or $0.13 per diluted
share. This charge was primarily non-cash, reflecting the accelerated vesting
of previously issued stock options.

NOTE 9 -- RELATED PARTY TRANSACTIONS

The Company's previous general office and warehouse facility was leased
under a 28-year lease commencing June 1, 1981 from a partnership whose partners
are current stockholders and former officers of the Company. On September 30,
1996, the Company rejected this lease and a related sublease in the United
States Bankruptcy Court. In May 1997, the Company settled the related lease
rejection claim for $89,768.

In previous fiscal years, the Company had consulting agreements with
Pennwood Capital Corporation and James J. Fuld, Jr. Corp. These agreements
expired on September 1, 1995. These entities are affiliated with two directors
who were formerly majority owners of the Company. Under the agreements as
amended, the Company received strategic development, management advisory and
financial consulting services for an annual fee.

Total expenses related to transactions with related parties are as follows:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------
FEBRUARY 28, MARCH 1, MARCH 2,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cost of sales:
Rental expense. . . . . . . . . . $ -- $ 143,111 $ 245,333
Selling and administrative:
Advisory fees and expenses. . . . -- -- 97,632
------------ ------------ ------------

Rental expense. . . . . . . . . . -- 71,556 122,667
------------ ------------ ------------

$ -- $ 214,667 $ 465,632
------------ ------------ ------------
------------ ------------ ------------
</TABLE>

30
<PAGE>

BRAUN'S FASHIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10 -- QUARTERLY FINANCIAL DATA (UNAUDITED):

(IN THOUSANDS, EXCEPT PER SHARE DATA) FISCAL 1998 QUARTERS
--------------------------------------------------------
1ST 2ND 3RD 4TH
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales(1). . . . . . . . . . . . . . . . . . . . . . $ 21,842 $ 20,939 $ 29,466 $ 27,289
Gross profit. . . . . . . . . . . . . . . . . . . . . . 7,659 6,761 11,028 8,977
Nonrecurring expense(2) . . . . . . . . . . . . . . . . -- -- -- 775
Operating income (loss) . . . . . . . . . . . . . . . . 1,580 684 4,120 1,342
Net income (loss) before extraordinary gain . . . . . . 855 300 2,420 710
Extraordinary gain(3) . . . . . . . . . . . . . . . . . 105 8 -- 3
----------- ----------- ----------- -----------
Net income . . . . . . . . . . . . . . . . . . . . . . $ 960 $ 308 $ 2,420 $ 713
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------

Basic per share data:
Net earnings before extraordinary gain. . . . . . . . . $ 0.20 $ 0.07 $ 0.54 $ 0.15
Extraordinary gain. . . . . . . . . . . . . . . . . . . 0.02 0.00 -- 0.00
----------- ----------- ----------- -----------
Net earnings. . . . . . . . . . . . . . . . . . . . . . $ 0.22 $ 0.07 $ 0.54 $ 0.15
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Diluted per share data:
Net earnings before extraordinary gain. . . . . . . . . $ 0.18 $ 0.06 $ 0.50 $ 0.15
Extraordinary gain. . . . . . . . . . . . . . . . . . . 0.02 0.00 -- 0.00
----------- ----------- ----------- -----------
Net earnings . . . . . . . . . . . . . . . . . . . . . $ 0.20 $ 0.06 $ 0.50 $ 0.15
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Market price -- high(5) . . . . . . . . . . . . . . . . 10 13 1/4 16 1/8 11 3/4
-- low(5). . . . . . . . . . . . . . . . . 6 3/8 7 3/8 7 1/4 7 7/8
</TABLE>

<TABLE>
<CAPTION>
FISCAL 1997 QUARTERS
--------------------------------------------------------
1ST 2ND 3RD 4TH
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales(1). . . . . . . . . . . . . . . . . . . . . . $ 21,504 $ 22,777 $ 27,154 $ 24,511
Gross profit. . . . . . . . . . . . . . . . . . . . . . 6,706 5,486 10,113 8,196
Reorganization expense. . . . . . . . . . . . . . . . . -- 9,070 (899) (341)
Operating income (loss) . . . . . . . . . . . . . . . . 7 (10,107) 4,856 2,412
Net income (loss)(4). . . . . . . . . . . . . . . . . . $ (218) $ (9,537) $ 4,830 $ 4,304
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Per share data:
Basic net earnings (loss) . . . . . . . . . . . . . . . $ (0.06) $ (2.51) $ 1.18 $ 0.97
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Diluted net earnings (loss) . . . . . . . . . . . . . . $ (0.06) $ (2.51) $ 1.12 $ 0.90
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Market price -- high(5). . . . . . . . . . . . . . . . 1 7/8 3 7 1/8 10
-- low(5) . . . . . . . . . . . . . . . . 1 1 1/16 2 3/4 5 5/8
</TABLE>

(1) The Company's quarterly net sales show seasonal variation, as sales in the
third and fourth quarters, which include the fall and holiday seasons,
generally have been higher than sales in the first and second quarters.
(2) In fiscal 1998, the Company recorded a one-time, pre-tax charge of $775,000
or $0.13 per diluted share, related to the implementation of its management
succession plan. The majority of this expense was non-cash, related to
acceleration of previously issued options.
(3) In fiscal 1998, the Company recorded an extraordinary gain of $116,000
on the purchase at a discount from par of $1,033,000 principal face
amount of 12% Senior Notes due 2005.
(4) In the fourth quarter of fiscal 1997, the Company reversed a deferred
tax valuation allowance of $1,789,000 as improved operating
performance made the future realization of deferred tax assets more
likely than not.
(5) The market prices presented above represent the quarterly high and low
closing bid quotations of the Company's common stock.

31
<PAGE>

BRAUN'S FASHIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 11 -- RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In addition, FASB No. 131, "Disclosures About Segments of an Enterprise and
Related Information" ("FASB No. 131"), effective in fiscal 1999, establishes new
standards for determining reportable segments and for disclosing information
regarding each such segment. Management does not believe that the Company has
reportable segments and as such will not be required to disclose segment
information.

32
<PAGE>

ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE

There are no matters which are required to be reported under Item 9.

PART III

ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information regarding the Company's directors required by Item 10 is
incorporated herein by reference to the section entitled, "Item 1 - Election of
Directors," in the Company's proxy statement for its 1998 Annual Meeting of
Shareholders which will be filed with the Securities and Exchange Commission
pursuant to Regulation 14A within 120 days of the Company's fiscal year ended
February 28, 1998. Information regarding the Company's executive officers
required by Item 10 is included in Part I of this Annual Report on Form 10-K as
permitted by General Instruction G(3) to Form 10-K. Information required by
this Item concerning compliance with Section 16(a) of the Securities Act of 1934
is included in the proxy statement under the section entitled "Security
Ownership of Certain Beneficial Owners and Management," and such information is
incorporated herein by reference.

ITEM 11.
EXECUTIVE COMPENSATION

The information required by Item 11 is incorporated herein by reference to
the section entitled "Compensation of Executive Officers and Directors" in the
Company's proxy statement for its 1998 Annual Meeting of Shareholders which will
be filed with the Securities and Exchange Commission pursuant to Regulation 14A
within 120 days of the Company's fiscal year ended February 28, 1998.

ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by Item 12 is incorporated herein by reference to
the section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the Company's proxy statement for its 1998 Annual Meeting of
Shareholders which will be filed with the Securities and Exchange Commission
pursuant to Regulations 14A within 120 days of the Company's fiscal year ended
February 28, 1998.

33
<PAGE>

ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by Item 13 is incorporated herein by reference to
the section entitled "Certain Relationships and Related Transactions" in the
Company's proxy statement for its 1998 Annual Meeting of Shareholders which will
be filed with the Securities and Exchange Commission pursuant to Regulation 14A
within 120 days of the Company's fiscal year ended February 28, 1998.

PART IV

ITEM 14
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) THE FOLLOWING DOCUMENTS ARE FILED AS A PART OF THIS REPORT:

<TABLE>
<CAPTION>
(1) FINANCIAL STATEMENTS: PAGE
----
<S> <C>
Report of Independent Accountants. . . . . . . . . 16
Consolidated Balance Sheet . . . . . . . . . . . . 17
Consolidated Statement of Operations . . . . . . . 18
Consolidated Statement of Stockholders' Equity . . 19
Consolidated Statement of Cash Flows . . . . . . . 20
Notes to Consolidated Financial Statements . . . . 21
</TABLE>

(2) FINANCIAL STATEMENT SCHEDULES:

All schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.

(3) EXHIBITS

<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBITS PAGE NO.
----------
<S> <C>
+3.1 Restated Certificate of Incorporation of the Company. . .

+3.2 By-Laws of the Company, as amended. . . . . . . . . . . .

+3.3 Articles of Incorporation of BFI. . . . . . . . . . . . .

+3.4 By-laws of BFI. . . . . . . . . . . . . . . . . . . . . .

+10.1 1987 Stock Incentive Plan . . . . . . . . . . . . . . . .

+10.2 Amendment No. 1 to 1987 Stock Incentive Plan. . . . . . .

+10.3 Amendment No. 2 to 1987 Stock Incentive Plan. . . . . . .

+10.4 1992 Director Stock Option Plan . . . . . . . . . . . . .

+10.5 Braun's Fashions, Inc. Retirement Savings Plan. . . . . .

+10.6 Term Lease Master Agreement dated February 28,
1991 between IBM Credit Corporation and the Company . . .

+10.7 IBM Customer Agreement, dated February 28, 1991
between International Business Machines Corporation
and the Company . . . . . . . . . . . . . . . . . . . . .

+10.8 Annual Support Agreement Plan, dated February 27,
1991 between Retail Interact Software and the
Company . . . . . . . . . . . . . . . . . . . . . . . . .

+10.9 Sublease Agreement by and between Westburne Supply,
Inc., United Westburne, Inc. and Braun's Fashions,
Inc., dated February 16, 1994 . . . . . . . . . . . . . .

+10.10 Side Agreement between Braun's Fashions, Inc.,
Westburne Supply, Inc. and United Westburne, Inc.
regarding moving expenses dated February 16, 1994 . . . .

</TABLE>

34
<PAGE>

<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBITS PAGE NO.
- -------- ----------
<S> <C>
+10.11 Tax Sharing Agreement between Braun's Fashions Corporation
and Braun's Fashions, Inc. . . . . . . . . . . . . . . .

+10.12 Registrant's press release dated July 2, 1996 relating to
the filing of the Registrant's plan of reorganization. .

+10.13 Second Amended Plan of Reorganization dated October 22,
1996 (the "Plan of Reorganization"). . . . . . . . . . .

+10.14 Motion to Approve Technical Amendment to the Plan of
Reorganization dated November 19, 1996 . . . . . . . . .

+10.15 Revolving Credit and Security Agreement dated as of
December 2, 1996 between Norwest Bank Minnesota, National
Association and Braun's Fashions, Inc. and Braun's
Fashions Corporation . . . . . . . . . . . . . . . . . .

+10.16 Indenture dated as of December 2, 1996 by and among
Braun's Fashions Corporation, Braun's Fashions, Inc. and
Schroder Bank & Trust Company. . . . . . . . . . . . . .

+10.17 1997 Stock Incentive Plan. . . . . . . . . . . . . . . .

*10.18 Management Succession and Separation Agreement by and
between Braun's Fashions Corporation and Nicholas H. Cook
dated as of February 26, 1998. . . . . . . . . . . . . .

*10.19 Management Succession and Separation Agreement by and
between Braun's Fashions Corporation and Herbert D.
Froemming dated as of February 26, 1998. . . . . . . . .

+22.1 Subsidiaries of Company. . . . . . . . . . . . . . . . .

*27.1 Financial Data Schedule for Fiscal 1998 (submitted for
SEC use only). . . . . . . . . . . . . . . . . . . . . .

*27.2 Restated Financial Data Schedules for first, second and
third quarters of Fiscal 1998 (submitted for SEC use
only). . . . . . . . . . . . . . . . . . . . . . . . . .

*27.3 Restated Financial Data Schedule for third quarter of
Fiscal 1997 (submitted for SEC use only) . . . . . . . .
</TABLE>

- --------------------
+ Previously filed

* Filed with this report

(b) REPORTS ON FORM 8-K
On February 27, 1998, the Company filed a Form 8-K with respect to the
implementation of its management succession plan.

35
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized on May 22, 1998.

BRAUN'S FASHIONS CORPORATION

By: /S/ WILLIAM J. PRANGE
------------------------------
William J. Prange
PRESIDENT AND
CHIEF EXECUTIVE OFFICER

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/S/ NICHOLAS H. COOK Chairman of the Board and Director May 22, 1998
- ------------------------------
Nicholas H. Cook

/S/ HERBERT D. FROEMMING Vice Chairman and Director May 22, 1998
- ------------------------------
Herbert D. Froemming

/S/ WILLIAM J. PRANGE President and Chief Executive Officer May 22, 1998
- ------------------------------ (Principal Executive Officer)
William J. Prange

/S/ ANDREW K. MOLLER Vice President Finance, and May 22, 1998
- ------------------------------ Chief Financial Officer (Principal
Andrew K. Moller Financial and Accounting Officer)

/S/ MARC C. OSTROW Director May 22, 1998
- ------------------------------
Marc C. Ostrow

/S/ JAMES J. FULD, JR. Director May 22, 1998
- ------------------------------
James J. Fuld, Jr.

/S/ DONALD D.BEELER Director May 22, 1998
- ------------------------------
Donald D. Beeler

/S/ LARRY C. BARENBAUM Director May 22, 1998
- ------------------------------
Larry C. Barenbaum

</TABLE>

<PAGE>

CONFIDENTIAL

MANAGEMENT SUCCESSION AND SEPARATION AGREEMENT

This Management Succession and Separation Agreement ("Agreement") is made
as of February 26, 1998, by and between Nicholas H. Cook (the "Executive")
and Braun's Fashions Corporation (the "Company").

WHEREAS, the Executive is currently Chief Executive Officer, Chairman of
the Board and a director of the Company, and

WHEREAS, the Executive and the Company, through its wholly owned
subsidiary, Brauns Fashions, Inc., are parties to an Executive Employment
Agreement dated as of December 19, 1991 ("Employment Agreement"), and

WHEREAS, the Company, with the cooperation of the Executive, is preparing
for an orderly management succession plan, and

WHEREAS, in furtherance of the succession plan, the Company has agreed,
among other things, to pay the Executive for his services during a transitional
period to assist in the succession strategy and for the full and complete
satisfaction of all of the Company's obligations under the Employment
Agreement.

NOW THEREFORE, the parties hereto agree and promise as follows:

1. The Executive shall serve as the Company's Chairman for an eighteen
month (18) month period (the "Initial Period") commencing on the date of this
Agreement and ending on August 31, 1999. During the Initial Period, the
Executive shall continue to serve as the Company's Chairman for one (1) month at
his current salary and for seventeen (17) months at an annual salary of
$175,000, payable at those intervals that the Executive is currently paid and
continue to report to the Board of Directors. The Executive is expected to
devote his services on a full time basis for the initial six (6) months of the
Interim Period except for customary vacation as currently provided to the
Executive. During the balance of the Initial Period, the Executive shall devote
such time to the Company's business and affairs as may be required by the Board
of Directors; provided, however, the parties acknowledge that the Executive will
spend less time and effort on the daily management of the business and affairs
of the Company and more on assisting the Board of Directors with strategic
planning. Accordingly, it is understood that during the last twelve (12) months
of the Initial Period, the Executive will be entitled to increased vacation time
to be mutually agreed by the parties.

2. After the Initial Period, the Executive shall serve, on a part-time
basis, as an employee of the Company for an additional twenty-four (24) month
period (the "Second Period," and together

<PAGE>

with the Initial Period, the "Interim Period") ending on August 31, 2001 (the
"Separation Date"). During the Second Period, the Executive shall receive an
annual salary of $100,000, payable at those intervals that the Executive is
currently paid and continue to report to the Board of Directors. The
Executive shall devote such time to the Company's business and affairs during
the Second Period as may be requested from time to time by the Board of
Directors. The Executive may perform the foregoing services during the Second
Period at locations other than the Company's headquarters and as may be
determined by the Executive provided that the Executive inform the Board of
Directors in advance of such location(s).

3. During the Initial Period, the Executive shall be considered an
employee and shall be eligible for such fringe benefits as the Executive
currently receives, including but not limited to, a car allowance of $1000 per
month, life insurance and medical and disability benefits. During the Second
Period, the Executive shall be eligible for a continuation of life insurance and
medical and disability benefits but shall not receive a car allowance. The
Executive shall be eligible to receive a bonus in accordance with the Company's
fiscal 1998 Bonus Plan but it is the intention of the Board of Directors that
the Executive shall thereafter not be eligible for any bonuses under the
Company's bonus or incentive plans, now existing or hereafter established, nor
be eligible for any stock option grants under the Company's 1997 Stock Option
Plan. Any accounting costs which the Company may incur as a result of any
management succession or separation agreements for the fiscal year ending
February 28, 1998 shall be considered extraordinary nonrecurring costs and
excluded from the calculation required for computing bonuses to the Executive
under the fiscal 1998 Bonus Plan.

4. In further consideration for the full and complete discharge of all of
the Company's obligations to the Executive under the Employment Agreement, the
Company agrees to the following:

(a) All of the Executive's unvested stock options to acquire common
stock of the Company granted to the Executive on June 24, 1996 under the
Company's 1987 Stock Option Plan (73,000 options in the aggregate) as well
as his unvested stock option to acquire 10,000 shares of common stock
granted to Executive on July 17, 1997 at an exercise price of $8.75 per
share shall vest on the date of this Agreement and the Executive shall have
three (3) months from the end of the Initial Period such date in which to
exercise such stock options; after which time such stock options, together
with the option to acquire 14,600 shares which have previously vested (the
97,600 collective options are hereafter referred to as the "Shares"), shall
terminate.

(b) At such time as the Executive exercises the options in paragraph
4(a), the Company shall provide the Executive with a loan in the principal
amount of up to $200,000 (the "Note"), the proceeds of which are to be used
to assist the Executive in paying the exercise price for the Shares under
paragraph 4(a). Providing the Executive with the Note is subject to, and
contingent upon, approval from the Company's lender. The Note shall have a
term of three years and bear interest at a rate of 7% per annum, payable
semiannually in arrears. The Note shall contain a mandatory prepayment
provision which provides that if the Executive sells any of the Shares
during the term of the Note, thirty-five percent (35%) of the

2
<PAGE>

gross proceeds from such sale, net of commissions, shall be applied to the
then outstanding obligations under the Note.

(d) After the Separation Date, the Executive and Executive's spouse
shall be entitled to continue to be covered by the Company's group health
insurance coverage subject to the terms of such policy as presently
maintained, or as maintained in the future, as a member of the group, the
cost of which shall be paid by the Executive or the Executive's spouse,
which coverage shall be continued until eligibility for Medicare exists for
the Executive and the Executive's spouse.

(e) At the end of twelve months from the Separation Date, the Company
shall assign the Executive's $500,000 life insurance policy at no cost to
the Executive. Any cash surrender value which accrues under such policy
shall be for the benefit of the Executive.

5. In consideration for the payments and benefits provided to the
Executive in paragraphs 1 through 4 above, the Executive acknowledges that the
Company has fulfilled its obligations in full under the Employment Agreement.

The Executive further agrees to formally resign and relinquish his
position as Chief Executive Officer of the Company and Braun's Fashions, Inc. as
of the date of this Agreement and as Chairman of the Company as of the end of
the Initial Period. The parties shall mutually prepare and approve the press
releases announcing the foregoing resignations.

6. The Executive shall not disclose the terms of this Agreement to anyone
other than his immediate family and any accounting and legal advisors solely for
the purposes of obtaining advice about the agreements with the Company
hereunder.

7. Upon execution of this Agreement by both parties, the Executive and
his successors and assigns and the Company and its directors, officers,
employees, agents and insurers and their respective successors and assigns,
covenant not to sue each other and release and forever discharge each other from
any and all causes of action, claims, suits and demands, whether known or
unknown, for or by reason of any transaction, cause, matter or thing whatsoever
up to the date hereof, including but not limited to, all claims of breach of
contract, wrongful discharge and promissory estoppel, all claims for payment of
deferred compensation, and all claims of discrimination based on religion,
national origin, age (including the Age Discrimination in Employment Act of
1976, 29 U.S.C. Section 621), disability, sexual preference, marital status and
retaliation and all claims based upon any federal, state or municipal statute or
ordinance relating to discrimination in employment. The foregoing release and
covenant not to sue is not intended to release either party from its obligations
under this Agreement and either party may have a cause of action against the
other for any breach of this Agreement.

3
<PAGE>

8. The Executive shall have fifteen (15) calendar days from the date of
this Agreement to rescind this Agreement in its entirety. If the Executive
wishes to rescind this Agreement, he must do so in writing and must deliver a
Notice of Rescission, if by hand, within fifteen (15) calendar days after the
Agreement is executed or, if mailed, by having the Notice of Rescission
postmarked within fifteen (15) calendar days after the Agreement is executed and
sent by certified mail, return receipt requested. Notice of Rescission must be
sent to Braun's Fashions Corporation, 2400 Xenium Lane North, Plymouth,
Minnesota 55441, attention: William Prange.

9. The Executive also acknowledges that he has at least twenty-one (21)
days in which to consider whether to enter into this Agreement, although he is
free to execute this Agreement at any time before the twenty-one (21) day period
has expired.

10. Both parties have read the terms and provisions of this Agreement and
understand them.

11. This Agreement shall inure to the benefit of the Executive, his heirs,
administrators, representatives, executors, successors and assigns.

12. This Agreement supersedes and replaces the Employment Agreement which
hereafter has no further force or effect; provided, however, the Executive and
the Company acknowledge and agree that paragraphs 21 and 22 of the Employment
Agreement with respect to noncompetition and confidentiality, respectively,
shall survive and are hereby incorporated in their entirety into this Agreement.

13. This Agreement constitutes the entire agreement between the parties
regarding the subject matter hereof and no agreements or representations, oral
or otherwise, express or implied, with respect to the subject matter hereof have
been made by either party which are not expressly set forth in this Agreement;
No provision of this Agreement may be modified, waived or discharged unless such
waiver, modification or discharge is agreed to in writing and signed by the
parties. Failure by either party to enforce any provision of this Agreement
shall not constitute a waiver of such party's rights to subsequently enforce
such provision or any other provision of this Agreement, unless such rights are
waived in writing. No waiver by either party hereto at any time of any breach
by the other party to this Agreement or of any condition or provision of this
Agreement, shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or similar time. In the event of any
conflict between this Agreement and any other agreement entered into by and
between the Company and the Executive, this Agreement shall control. The
invalidity or unenforceability of any provision of this Agreement shall not
affect the validity or enforceability of any other provision of this Agreement,
which shall remain in full force and effect. The validity, interpretation,
construction and performance of this Agreement shall be governed by the laws of
the State of Minnesota.

4
<PAGE>

IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
in duplicate originals as of the date first stated above.

/s/ Nicholas H. Cook
-----------------------------------
Nicholas H. Cook

BRAUN'S FASHIONS CORPORATION

By: /s/ William J. Prange
-------------------------------
Its: President and CEO
-------------------------

<PAGE>

CONFIDENTIAL

MANAGEMENT SUCCESSION AND SEPARATION AGREEMENT

This Management Succession and Separation Agreement ("Agreement") is made
as of February 26, 1998, by and between Herbert D. Froemming (the "Executive")
and Braun's Fashions Corporation (the "Company").

WHEREAS, the Executive is currently Vice Chairman, Chief Financial Officer
and Chief Administrative Officer and a director of the Company, and

WHEREAS, the Company, with the cooperation of the Executive, is preparing
for an orderly management succession plan, and

WHEREAS, in furtherance of the succession plan, the Company has agreed,
among other things, to pay the Executive (i) for his services during a
transitional period to assist in the succession strategy and (ii) a lump sum
severance payment for the full and complete satisfaction of all of the
Company's obligations under the Employment Agreement.

NOW THEREFORE, the parties hereto agree and promise as follows:

1. The Executive shall serve as the Company's Vice Chairman for an
interim period (the "Interim Period") commencing on the date of this Agreement
and ending on June 30, 1998 (the "Separation Date"). During the Interim Period,
the Executive shall continue to serve as the Company's Vice Chairman, at a
salary equivalent to his current salary, payable at those intervals that the
Executive is currently paid and continue to report to the Board of Directors.
The Executive shall devote full time to the Company's business and affairs
during the Interim Period including assisting the Company's successor Chief
Financial Officer. The Executive shall be considered an employee and shall be
eligible for such fringe benefits as the Executive currently receives during the
Interim Period, including but not limited to, a car allowance of $1000 per
month, vacation, life insurance and medical and disability benefits
(collectively, the "Fringe Benefits") during the Interim Period. The Executive
shall be eligible to receive a bonus in accordance with the Company's fiscal
1998 Bonus Plan but shall thereafter not be eligible for any bonuses under the
Company's bonus or incentive plans, now existing or hereafter established, nor
be eligible for any stock option grants under the Company's 1997 Stock Option
Plan. Any accounting costs which the Company may incur as a result of any
management succession or separation agreements for the fiscal year ending
February 28, 1998

<PAGE>

shall be considered extraordinary nonrecurring costs and excluded from the
calculation required for computing bonuses to the Executive under the fiscal
1998 Bonus Plan.

2. In further consideration for the full and complete discharge of all of
the Company's obligations to the Executive under the Employment Agreement, the
Company agrees to the following:

(a) On the Separation Date, the Company shall in one installment pay
the Executive $210,000. This payment shall be reported to the IRS on a
Form 1099.

(b) All of the Executive's unvested stock options to acquire common
stock of the Company granted to the Executive on June 24, 1996 under the
Company's 1987 Stock Option Plan (73,000 options in the aggregate) as well
as the stock option to acquire 10,000 shares of common stock granted to
Executive on July 17, 1997 at an exercise price of $8.75 per share shall
vest on the date of this Agreement and the Executive shall have three (3)
months from the Separation Date in which to exercise such stock options;
after which time such stock options (the 83,000 collective options are
hereafter referred to as the "Shares") shall terminate.

(c) At such time as the Executive exercises the options in paragraph
2(b), the Company shall provide the Executive with a loan in the principal
amount of up to $200,000 (the "Note"), the proceeds of which are to be used
to assist the Executive in paying the exercise price for the Shares under
paragraph 2(b). Providing the Executive with the Note is subject to, and
contingent upon, approval from the Company's lender. The Note shall have a
term of three years and bear interest at a rate of 7% per annum, payable
semiannually in arrears. The Note shall contain a mandatory prepayment
provision which provides that if the Executive sells any of the Shares
during the term of the Note, thirty-five percent (35%) of the gross
proceeds from such sale, net of commissions, shall be applied to the then
outstanding obligations under the Note.

(d) The Executive shall continue to receive the Fringe Benefits for
twelve (12) months commencing on the Separation Date.

(e) The Executive shall be entitled to receive for unrestricted
expenses incurred with respect to outplacement $1,000 per month commencing
on the Separation Date and continuing until the earlier of the Executive
accepting new employment or 12 months from the Separation Date.

(f) After the Separation Date, the Executive and the Executive's
spouse shall be entitled to continue to be covered by the Company's group
health insurance coverage subject to the terms of such policy as presently
maintained, or as maintained in the future, as a member of the group, the
cost of which shall be paid by the Company, which coverage shall be
continued until the earlier of five (5) years from the Separation Date or
the Executive's satisfying the age qualifications to be eligible for
Medicare. The coverage for Executive's

2
<PAGE>

spouse shall terminate also at the earlier of five (5) years from the
Separation Date or the Executive's satisfying the age qualifications to be
eligible for Medicare or the death of the Executive. To the extent the
Executive receives coverage for Medicare with another company during the
five (5) years, the benefits under the foregoing two sentences shall
terminate.

(g) At the end of twelve months from the Separation Date, the Company
shall assign the Executive's $500,000 life insurance policy at no cost to
the Executive. Any cash surrender value which accrues under such policy
shall be for the benefit of the Executive.

(h) The Company shall, for a six-month period commencing on June 30,
1998, pay the Executive an aggregate of $30,000, payable in monthly
installments, in connection with providing consulting services by
telephone, including assisting the successor Chief Financial Officer
during this transitional period and the Executive agrees to provide the
foregoing services.

(i) The Company will reimburse the Executive up to $2,500 for legal
services rendered to Executive by his personal counsel in connection with this
Agreement.

3. In consideration for the payments and benefits provided to the
Executive in paragraphs 1 and 2 above, the Executive acknowledges that the
Company has fulfilled its obligations in full under the Employment Agreement.

The Executive further agrees to formally resign and relinquish his
positions as Chief Financial Officer and Chief Administrative Officer of the
Company and Braun's Fashions, Inc. as of the date of this Agreement and as Vice
Chairman and a director of the Company and Braun's Fashions, Inc. as of the
Separation Date. The parties shall mutually prepare and approve the press
release announcing the foregoing resignations.

4. The Executive shall not disclose the terms of this Agreement to anyone
other than his immediate family and any accounting and legal advisors solely for
the purposes of obtaining advice about the agreements with the Company
hereunder.

5. Upon execution of this Agreement by both parties, the Executive and
his successors and assigns and the Company and its directors, officers,
employees, agents and insurers and their respective successors and assigns,
covenant not to sue each other and release and forever discharge each other from
any and all causes of action, claims, suits and demands, whether known or
unknown, for or by reason of any transaction, cause, matter or thing whatsoever
up to the date hereof, including but not limited to, all claims of breach of
contract, wrongful discharge and promissory estoppel, all claims for payment of
deferred compensation, and all claims of discrimination based on religion,
national origin, age (including the Age Discrimination in Employment Act of
1976, 29 U.S.C. Section 621), disability, sexual preference, marital status and
retaliation and all claims based upon any federal, state or municipal statute or
ordinance relating to discrimination in employment. The foregoing release

3
<PAGE>

and covenant not to sue is not intended to release either party from its
obligations under this Agreement and either party may have a cause of action
against the other for any breach of this Agreement.

6. The Executive shall have fifteen (15) calendar days from the date of
this Agreement to rescind this Agreement in its entirety. If the Executive
wishes to rescind this Agreement, he must do so in writing and must deliver a
Notice of Rescission, if by hand, within fifteen (15) calendar days after the
Agreement is executed or, if mailed, by having the Notice of Rescission
postmarked within fifteen (15) calendar days after the Agreement is executed and
sent by certified mail, return receipt requested. Notice of Rescission must be
sent to Braun's Fashions Corporation, 2400 Xenium Lane North, Plymouth,
Minnesota 55441, attention: William Prange.

7. The Executive also acknowledges that he has at least twenty-one (21)
days in which to consider whether to enter into this Agreement, although he is
free to execute this Agreement at any time before the twenty-one (21) day period
has expired.

8. Both parties have read the terms and provisions of this Agreement and
understand them.

9. This Agreement shall inure to the benefit of the Executive, his heirs,
administrators, representatives, executors, successors and assigns.

10. This Agreement supersedes and replaces the Employment Agreement which
hereafter has no further force or effect.

11. In consideration for the benefits and payments provided to the
Executive under this Agreement, the Executive agrees that:

(a) for a period of one (1) year after the Separation Date, the
Executive will not in any way, directly or indirectly, engage or invest in,
own, manage, operate, control, or participate in the ownership, management,
operation or control of, be employed by, associated with, or in any manner
connected with or render services or advice to, any women's retail business
headquartered or having significant business operations in Minnesota.

(b) for a period of two (2) years after the Separation Date:

(i) the Executive will not, directly or indirectly, either for
himself or any other person, (1) induce or attempt to induce any
employee of the Company to leave the employ of the Company, (2) in any
way interfere with the relationship between the Company and any
employee of the Company, or (3) induce or attempt to induce any
vendor, supplier, landlord or business relation of the Company to
cease doing business

4
<PAGE>

with the Company or in any way interfere with the Company's
relationships with vendors, suppliers, landlords or other business
relations;

(ii) the Executive will not, directly or indirectly, either for
himself or any other person, solicit the business of any vendor or
supplier with which the Company presently imports merchandise or
provide the identity of any vendor or supplier as identified on
Exhibit A attached hereto;

(iii) the Executive will not, directly or indirectly, either for
himself or any other person, negotiate or otherwise be involved in any
way with respect to the real estate locations presently contemplated
by the Company in connection with its expansion as identified on
Exhibit A attached hereto.

The Executive agrees that the foregoing covenants in this paragraph 11 are
reasonable with respect to duration, geographical area and scope.

12. (a) The Executive will not divulge to others or use for the
Executive's own benefit any confidential information obtained during the
Executive's employment relating to the Company's business and operations or
its affiliates involving strategy, customer lists, lists of prospective
customers, potential store locations, employee lists, number and location
of sales representatives, new and existing programs and services, prices
and terms, and any other proprietary information as may exist or be
developed from time to time.

The Executive will not divulge "Trade Secrets" as that term is defined
in Minnesota Statutes Chapter 325.C.

(b) Upon termination of employment services, the Executive will
return to the Company all documents, copies, papers, printouts, diskettes,
or other media which contain any such proprietary, confidential, or trade
secret information.

13. This Agreement constitutes the entire agreement between the parties
regarding the subject matter hereof and no agreements or representations, oral
or otherwise, express or implied, with respect to the subject matter hereof have
been made by either party which are not expressly set forth in this Agreement.
No provision of this Agreement may be modified, waived or discharged unless such
waiver, modification or discharge is agreed to in writing and signed by the
parties. Failure by either party to enforce any provision of this Agreement
shall not constitute a waiver of such party's rights to subsequently enforce
such provision or any other provision of this Agreement, unless such rights are
waived in writing. No waiver by either party hereto at any time of any breach
by the other party to this Agreement or of any condition or provision of this
Agreement, shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or similar time. In the event of any
conflict between this Agreement and any other agreement entered into by and
between the Company and the Executive, this Agreement shall control. The
invalidity or unenforceability of any provision of this Agreement shall not
affect the validity or enforceability of

5
<PAGE>

any other provision of this Agreement, which shall remain in full force and
effect. The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of Minnesota.

IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
in duplicate originals as of the date first stated above.

/s/ Herbert D. Froemming
-----------------------------------
Herbert D. Froemming

BRAUN'S FASHIONS CORPORATION

By: /s/ William J. Prange
-------------------------------
Its: President and CEO
-------------------------

<PAGE>

EXHIBIT A

FOREIGN VENDORS

1. Pressfield, Hong Kong

2. Tun-Tex, Tung Mong

3. D-Chow, Singapore

APPLICABLE BRAUN'S LOCATIONS WITHIN FOLLOWING MALLS

MALL CITY
---- ----

Hayes Hayes, Kansas

Chapel Hill Akron, Ohio

Northtown Mall Spokane, Washington

Westroads Omaha, Nebraska

White Oaks Springfield, Illinois

Wahpeton Wahpeton, North Dakota

Williston Williston, North Dakota

Tri-County Cincinnati, Ohio

Markland Mall Kokomo, Indiana

Mounds Mall Anderson, Indiana

Richmond Square Richmond, Indiana

Twin Peaks Longmount, Colorado

Provo Provo, Utah

Westwood Jackson, Michigan

Eastland Columbus, Ohio

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S 10K FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> MAR-02-1997
<PERIOD-END> FEB-28-1998
<CASH> 15,848,439
<SECURITIES> 0
<RECEIVABLES> 847,746
<ALLOWANCES> 0
<INVENTORY> 10,735,681
<CURRENT-ASSETS> 28,168,777
<PP&E> 23,764,218
<DEPRECIATION> 12,821,164
<TOTAL-ASSETS> 40,590,044
<CURRENT-LIABILITIES> 8,996,859
<BONDS> 9,616,311
0
0
<COMMON> 45,234
<OTHER-SE> 20,914,084
<TOTAL-LIABILITY-AND-EQUITY> 40,590,044
<SALES> 99,535,773
<TOTAL-REVENUES> 99,535,773
<CGS> 65,110,994
<TOTAL-COSTS> 65,110,994
<OTHER-EXPENSES> 26,698,760<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 690,589
<INCOME-PRETAX> 7,035,430
<INCOME-TAX> 2,749,971
<INCOME-CONTINUING> 4,285,459
<DISCONTINUED> 0
<EXTRAORDINARY> 115,872<F2>
<CHANGES> 0
<NET-INCOME> 4,401,331<F2>
<EPS-PRIMARY> 0.98<F2>
<EPS-DILUTED> 0.91<F2>
<FN>
<F1>RESULTS INCLUDE A ONE-TIME PRETAX CHARGE OF $775,451, OR $0.13 PER DILUTED
SHARE, RELATED TO THE IMPLEMENTATION OF THE COMPANY'S MANAGEMENT SUCCESSION
PLAN. THE MAJORITY OR THIS EXPENSE WAS NON-CASH, RELATED TO ACCELERATION OF
PREVIOUSLY ISSUED OPTIONS.
<F2>RESULTS INCLUDE AN EXTRAORDINARY GAIN OF $115,872, OR $0.02 PER SHARE, RELATED
TO THE PURCHASE AT A DISCOUNT FROM PAR OF $1,033,000 PRINCIPAL FACE AMOUNT OF
THE COMPANY'S 12% SENIOR NOTES DUE 2005.
</FN>

</TABLE>

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S RELATED 10QS FOR THE QUARTERS ENDING MAY 31, 1997, AUGUST 30, 1997 AND
NOVEMBER 30, 1997 OF THE FISCAL YEAR ENDED FEBRUARY 28, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>

<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> FEB-28-1998 FEB-28-1998 FEB-28-1998
<PERIOD-START> MAR-02-1997 MAR-02-1997 MAR-02-1997
<PERIOD-END> MAR-31-1997 AUG-30-1997 NOV-29-1997
<CASH> 9,756,586 7,348,664 9,396,239
<SECURITIES> 0 0 0
<RECEIVABLES> 455,205 631,023 1,914,715
<ALLOWANCES> 0 0 0
<INVENTORY> 10,616,724 12,319,075 14,045,820
<CURRENT-ASSETS> 22,453,501 21,981,126 26,238,066
<PP&E> 21,753,645 23,093,904 23,512,133
<DEPRECIATION> 10,983,874 11,555,916 12,212,129
<TOTAL-ASSETS> 34,485,885 34,781,882 38,799,558
<CURRENT-LIABILITIES> 6,731,037 6,530,067 7,879,118
<BONDS> 10,260,031 10,160,443 10,169,544
0 0 0
0 0 0
<COMMON> 44,326 44,829 45,161
<OTHER-SE> 16,488,713 17,005,771 19,654,437
<TOTAL-LIABILITY-AND-EQUITY> 34,485,885 34,781,882 38,799,558
<SALES> 21,841,691 42,780,733 72,246,914
<TOTAL-REVENUES> 21,841,691 42,780,733 72,246,914
<CGS> 14,182,902 28,361,288 46,798,996
<TOTAL-COSTS> 14,182,902 28,361,288 46,798,996
<OTHER-EXPENSES> 6,078,377 12,154,849 19,062,969
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 200,498 401,669 618,130
<INCOME-PRETAX> 1,379,914 1,862,927 5,766,819
<INCOME-TAX> 524,367 707,912 2,191,391
<INCOME-CONTINUING> 855,547 1,155,015 3,575,428
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 104,720<F1> 112,841<F2> 112,841<F2>
<CHANGES> 0 0 0
<NET-INCOME> 960,267<F1> 1,267,856<F2> 3,688,269<F2>
<EPS-PRIMARY> 0.22<F1> 0.29<F2> 0.83<F2>
<EPS-DILUTED> 0.20<F1> 0.26<F2> 0.76<F2>
<FN>
<F1>RESULTS INCLUDE AN EXTRAORDINARY GAIN OF $104,720, OR $0.02 PER SHARE, RELATED
TO THE PURCHASE AT A DISCOUNT FROM PAR OF $800,000 PRINCIPAL FACE AMOUNT OF THE
COMPANY'S 12% SENIOR NOTES DUE 2005.
<F2>RESULTS INCLUDE AN EXTRAORDINARY GAIN OF $112,841, OR $0.02 PER SHARE, RELATED
TO THE PURCHASE AT A DISCOUNT FROM PAR OF $908,000 PRINCIPAL FACE AMOUNT OF THE
COMPANY'S 12% SENIOR NOTES DUE 2005.
</FN>

</TABLE>

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S 10Q FOR THE QUARTER ENDED NOVEMBER 30, 1996 OF THE FISCAL YEAR ENDED
MARCH 1, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATMENTS.
</LEGEND>
<RESTATED>

<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-01-1997
<PERIOD-START> MAR-03-1996
<PERIOD-END> NOV-30-1996
<CASH> 6,822,862
<SECURITIES> 0
<RECEIVABLES> 1,332,364
<ALLOWANCES> 139,300
<INVENTORY> 11,145,045
<CURRENT-ASSETS> 20,680,790
<PP&E> 21,322,908
<DEPRECIATION> 10,142,953
<TOTAL-ASSETS> 31,974,800
<CURRENT-LIABILITIES> 8,894,307
<BONDS> 11,076,082
0
0
<COMMON> 44,140
<OTHER-SE> 11,178,943
<TOTAL-LIABILITY-AND-EQUITY> 31,974,800
<SALES> 71,435,506
<TOTAL-REVENUES> 71,435,506
<CGS> 49,130,199
<TOTAL-COSTS> 49,130,199
<OTHER-EXPENSES> 27,519,197<F1>
<LOSS-PROVISION> 30,000
<INTEREST-EXPENSE> 532,588
<INCOME-PRETAX> (5,776,478)<F1>
<INCOME-TAX> (850,998)
<INCOME-CONTINUING> (4,925,480)<F1>
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,925,480)<F1>
<EPS-PRIMARY> (1.26)<F1>
<EPS-DILUTED> (1.26)<F1>
<FN>
<F1>INCLUDES $8,170,766 OF REORGANIZATION EXPENSE RELATED TO THE COMPANY'S JULY 2,
1996 CHAPTER 11 BANKRUPTCY FILING.
</FN>

</TABLE>