UNITED MERCHANDISING CORP, S-1/A, 1997-04-30

UNITED MERCHANDISING CORP
S-1/A, 1997-04-30
MISCELLANEOUS SHOPPING GOODS STORES

Previous: ECCS INC, DEF 14A, 1997-04-30

Next: GABELLI CAPITAL SERIES FUNDS INC, 485BPOS, 1997-04-30

<PAGE> 1

As filed with the Securities and Exchange Commission on April 30, 1997

Registration No. 33-61300-01

________________________________________________________________________________

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

POST-EFFECTIVE AMENDMENT NO. 7

FORM S-1

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

UNITED MERCHANDISING CORP.
(Exact name of registrant as specified in its charter)

California
(State of Incorporation)

5941
(Primary standard industrial classification code number)

95-1854273
(I.R.S. employer identification number)

2525 EAST EL SEGUNDO BOULEVARD
EL SEGUNDO, CALIFORNIA 90245
(310) 536-0611
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)

ROBERT W. MILLER
KATHLEEN REID-SEIDNER, ESQ.
UNITED MERCHANDISING CORP.
2525 EAST EL SEGUNDO BOULEVARD
EL SEGUNDO, CALIFORNIA 90245
(310) 536-0611
(Name, address, including zip code, and telephone number, including area code,
of agents for service)

COPY TO:
EDMUND M. KAUFMAN, ESQ.
IRELL & MANELLA LLP
333 SOUTH HOPE STREET, SUITE 3300
LOS ANGELES, CALIFORNIA 90071
(213) 620-1555

Approximate date of commencement of proposed sale to the public: From
time to time following the effective date.

If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, as amended (the "Securities Act"), check the following
box. [X]

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

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

If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]

<PAGE> 2
EXPLANATORY NOTE

This Registration Statement contains a Prospectus relating to the
offer of up to $500,000 aggregate principal amount of Senior Subordinated Notes
due 2002 of United Merchandising Corp., a California corporation (the "Company"
or "Big 5") (the "Notes"). The holders of the Notes may sell the Notes from
time to time, either directly or through agents, dealers or underwriters to be
designated from time to time, on terms determined at the time of sale. The
purpose of this Post-Effective Amendment No. 7 to the Registration Statement is
to revise the Prospectus contained herein to reflect the Company's results of
operations for, and other material events that occurred during, the period
subsequent to the date on which the Registration Statement became effective
(June 29, 1993).

On April 15, 1993, the Company and its former parent, Big 5 Holdings,
Inc. ("Big 5 Holdings"), which was merged into the Company on August 10, 1993,
also filed a registration statement (the "Exchange Registration Statement") on
Form S-4 under the Securities Act of 1933, as amended, relating to the offer to
exchange up to $54,500,000 aggregate principal amount of the Company's Series B
Senior Subordinated Notes due 2002 (the "New Notes"), for a like principal
amount of the Notes. The Exchange Registration Statement was filed in order to
satisfy certain requirements under the Registration Rights Agreement dated as
of September 25, 1992 among the Company, Big 5 Holdings, and the original
purchasers of the Notes. The Company believed that the holders of Notes
covered by this Registration Statement were ineligible to participate in the
exchange offer described in the Exchange Registration Statement. Accordingly,
this Registration Statement was filed in order to provide the holders of the
Notes covered by this Registration Statement with increased liquidity relative
to that which would otherwise have been available to them.

-ii-
<PAGE> 3
CROSS-REFERENCE SHEET

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

The following information sets forth the location in the Prospectus
of the answers to the items in Part I of Form S-1

<TABLE>
<CAPTION>
FORM S-1 ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS
-------------------------------- ----------------------
<S> <C> <C>
1. Forepart of the Registration Statement and Outside Cover Page of Registration
Front Cover Page of Prospectus Statement; Outside Front Cover
Page of Prospectus

2. Inside Front and Outside Back Cover Pages of Inside Front and Outside Back Cover Pages
Prospectus of Prospectus

3. Summary Information, Risk Factors and Ratio of Prospectus Summary; Risk Factors; Selected
Earnings to Fixed Charges Historical and Pro Forma Financial Data

4. Use of Proceeds Use of Proceeds

5. Determination of Offering Price Not Applicable

6. Dilution Not Applicable

7. Selling Security Holders Plan of Distribution; Certain Transactions

8. Plan of Distribution Front Cover Page of Prospectus; Plan of
Distribution

9. Description of Securities to be Registered Description of Securities to be Registered

10. Interests of Named Experts and Counsel Legal Matters; Experts

11. Information with Respect to the Registrant Cover Page of Registration Statement;
Prospectus Summary; Risk Factors;
Capitalization; Selected Historical and
Pro Forma Financial Data; Pro Forma
Financial Data; Management's Discussion
and Analysis of Financial Condition and
Results of Operations; Business; Financing
Arrangements; Management; Principal
Stockholders; Certain Transactions; Legal
Matters; Experts

12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities Not Applicable
</TABLE>

-iii-
<PAGE> 4
PROSPECTUS

UNITED MERCHANDISING CORP.

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

SENIOR SUBORDINATED NOTES DUE 2002
(INTEREST RATE 13-5/8% PER ANNUM;
REDEEMABLE COMMENCING SEPTEMBER 15, 1997)

This Prospectus relates to the offer (the "Offer") of up to $500,000
aggregate principal amount of the Senior Subordinated Notes due 2002 (the
"Notes") of United Merchandising Corp., a California corporation (the "Company"
or "Big 5"), which Notes were issued through a private placement in reliance on
Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act"),
and Regulation D promulgated thereunder. The holders of the Notes listed
herein (the "Selling Noteholders") may sell the Notes from time to time, either
directly or through agents, dealers or underwriters to be designated from time
to time, on terms determined at the time of sale. To the extent required, the
specific Notes to be sold, the names of the Selling Noteholders, the respective
purchase prices and public offering prices, the names of any such agent, dealer
or underwriter, and applicable commissions or discounts with respect to a
particular offer will be set forth in a Prospectus Supplement or, if
appropriate, a post-effective amendment to the registration statement filed
with respect to the Notes. See "Plan of Distribution." This Prospectus forms
a part of a Registration Statement on Form S-1 (including all amendments
thereto, the "Registration Statement") filed with the Securities and Exchange
Commission (the "Commission") under the Securities Act that originally became
effective on June 29, 1993.

The Notes will mature on September 15, 2002. Interest on the Notes is
payable semiannually at the rate of 13-5/8% per annum on each March 15 and
September 15, until maturity. The Notes are entitled to the benefits of that
certain Indenture dated as of September 25, 1992 (the "Indenture") among the
Company, the Company's former parent, Big 5 Holdings, Inc. ("Big 5 Holdings"),
which was merged into the Company on August 10, 1993, and First Trust National
Association, a national association, as trustee (the "Trustee"). Prior to the
merger of Big 5 Holdings into the Company, Big 5 Holdings was the issuer, and
the Company was the guarantor, of the Notes.

The Notes are unsecured and are subordinate and subject in priority
and right of payment to the prior payment in full of the principal and interest
on all present and future Senior Indebtedness of the Company (as defined in the
Indenture and summarized under "Description of Securities to be Registered --
Certain Definitions"). Such senior financing currently includes, but is not
limited to, a revolving credit facility of the Company in a principal amount of
up to $100,000,000 (the "Revolving Credit Facility") under that certain
Financing Agreement dated as of March 8, 1996 (as amended to date, the "Credit
Agreement") between the Company and the CIT Group/Business Credit, Inc.
("CIT"). As of December 29, 1996, there were borrowings of $50.0 million and
letter of credit commitments of $4.3 million outstanding under the Revolving
Credit Facility. The Revolving Credit Facility is secured by trade accounts
receivable, merchandise inventories and general intangible assets. See
"Financing Arrangements."

The Notes are not redeemable prior to September 15, 1997, and are
redeemable thereafter, in whole or in part, at the option of the Company at the
redemption prices described herein. See

<PAGE> 5
"Description of Securities to be Registered -- Optional Redemption." In
addition, the Notes are subject to a sinking fund. See "Description of
Securities to be Registered -- Sinking Fund."

On April 15, 1993, the Company and Big 5 Holdings also filed a
registration statement (the "Exchange Registration Statement") on Form S-4
under the Securities Act relating to the offer (the "Exchange Offer") to
exchange up to $54,500,000 aggregate principal amount of the Company's Series B
Senior Subordinated Notes due 2002 (the "New Notes") for a like principal
amount of the Notes. The Exchange Registration Statement was filed in order to
satisfy certain obligations of the Company under that certain Registration
Rights Agreement dated as of September 25, 1992 among the Company, Big 5
Holdings and the original purchasers of the Notes (the "Registration Rights
Agreement"). The Company believed that the holders of Notes covered by this
Prospectus were ineligible to participate in the exchange offer described in
the Exchange Registration Statement. Accordingly, the Registration Statement
which includes this Prospectus was filed in order to provide the holders of the
Notes covered by this Prospectus with increased liquidity relative to that
which would otherwise have been available to them.

The terms of the New Notes are identical in all material respects to
the terms of the Notes. The New Notes evidence the same class of debt
obligation as the Notes and are entitled to the benefits of the Indenture. The
Notes and the New Notes are hereinafter referred to collectively as the
"Securities."

No public market for the Securities exists at present. No assurance
can be given that an active public market will develop for the Securities or
that the Notes and the New Notes will trade as one class or as to the extent of
liquidity available through any trading market for the Securities. If a public
market for the Notes or the New Notes should develop, such securities could
trade at a discount from their principal amount. The absence or discontinuance
of a public market for the Securities may adversely affect the price and
liquidity of the Securities. The Company does not currently intend to list the
Securities on any securities exchange or to seek approval for quotation of the
Securities through any automated quotation system. The Company has not
obtained and has no plans to obtain a market maker for the Securities.

The aggregate proceeds to the Selling Noteholders from the sale of the
Notes will be the selling price of the Notes, less the aggregate agents'
commissions and underwriters' discounts, if any, and other expenses of issuance
and distribution not borne by the Company. The Company will pay substantially
all of the expenses of the Offer (estimated to be $28,000) other than
commissions and discounts of underwriters, dealers or agents. See "Plan of
Distribution" herein for a description of indemnification arrangements among
the Company and the Selling Noteholders and possible indemnification
arrangements for agents, dealers and underwriters. The Company will not
receive any proceeds from the Offer.

The Selling Noteholders and any dealers, agents or underwriters that
participate with the Selling Noteholders in the distribution of the Notes may
be deemed to be "underwriters" within the meaning of the Securities Act, and
any commissions received by them and any profit on the resale of the Notes
purchased by them may be deemed underwriting commissions or discounts under the
Securities Act.

SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN MATERIAL CONSIDERATIONS
RELATING TO AN INVESTMENT IN THE SECURITIES OFFERED HEREBY.

-2-
<PAGE> 6
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

THE DATE OF THIS PROSPECTUS IS APRIL 30, 1997.

-3-
<PAGE> 7
AVAILABLE INFORMATION

The Company has filed the Registration Statement with the Commission
with respect to the securities offered by this Prospectus. On April 15, 1993,
the Company also filed the Exchange Registration Statement. This Prospectus
does not contain all the information set forth in the Registration Statement
and the exhibits and schedules thereto, to which reference is hereby made.
Each statement made in this Prospectus referring to a document filed as an
exhibit or schedule to the Registration Statement is qualified in its entirety
by reference to the exhibit or schedule for a complete statement of its terms
and conditions. In addition, the Company is subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith the Company files periodic reports and other
information with the Commission relating to its business, financial statements
and other matters. Any interested parties may inspect and/or copy the
Registration Statement and/or the Exchange Registration Statement, their
schedules and exhibits, and the periodic reports and other information filed in
connection therewith, at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the Commission's regional offices located at Citicorp Center,
500 W. Madison Street, 14th Floor, Chicago, Illinois 60661-2511, and 7 World
Trade Center, Suite 1300, New York, New York 10048. Copies of such materials
can be obtained at prescribed rates by addressing written requests for such
copies to the Public Reference Section of the Commission at its principal
office at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C.
20549. The Commission maintains a Web site that contains reports and other
information filed electronically by the Company with the Commission which can
be accessed over the Internet at http://www.sec.gov.

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MAY NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR
SOLICITATION WITH RESPECT TO ANY SECURITY OTHER THAN THE SECURITIES OFFERED
HEREBY OR AN OFFER TO OR SOLICITATION OF ANY PERSON IN ANY JURISDICTION IN
WHICH SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO
CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF.

-4-
<PAGE> 8
TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
PROSPECTUS SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA . . . . . . . . . . . . . . 19
PRO FORMA FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . 24
BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
FINANCING ARRANGEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
PRINCIPAL STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
CERTAIN TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
DESCRIPTION OF SECURITIES TO BE REGISTERED . . . . . . . . . . . . . . . . . 46
FEES AND EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
OTHER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
ASSISTANCE AND COPIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES . . . . . . . . . . . . . . . . . F-1
</TABLE>

-5-
<PAGE> 9
================================================================================

PROSPECTUS SUMMARY

The following is a summary of certain information contained elsewhere
in this Prospectus and is qualified in its entirety by the more detailed
information and financial statements contained elsewhere in this Prospectus.
Prospective investors are urged to read this Prospectus in its entirety. See
"Risk Factors" for a discussion of certain factors to be considered in
evaluating an investment in the securities offered hereby.

THE COMPANY

Big 5 Holdings, Inc., a Delaware corporation ("Big 5 Holdings"), and
its parent, Big 5 Corporation, a Delaware corporation ("Parent"), were formed
in 1992 for the purpose of acquiring United Merchandising Corp., a California
corporation (the "Company" or "Big 5"). The acquisition took place on
September 25, 1992, when Big 5 Holdings purchased all of the Company's
outstanding capital stock from Thrifty Corporation, a California corporation
("Thrifty"). On August 10, 1993, Big 5 Holdings was merged into the Company,
which was the surviving entity following the merger.

The Company was founded in 1955 and currently operates a chain of
retail stores under the trade name "Big 5 Sporting Goods." Big 5 is one of the
leading sporting goods chains in the United States based on revenues, operating
196 stores as of December 29, 1996 located in eight western states, including
California, Washington, Arizona, New Mexico, Nevada, Oregon, Texas and Idaho.
According to industry sources, Big 5's fiscal 1996 revenues were the fourth
highest among full-line sporting goods retailers in the United States,
totalling $404.3 million for an increase of 9.2% versus comparable 1995
revenues. Big 5's marketing strategy is directed at the general sporting goods
consumer, with product offerings including a wide selection of sporting goods
in a broad range of prices.

The principal executive offices of the Company are located at 2525
East El Segundo Boulevard, El Segundo, California 90245. The telephone number
for the principal executive offices is (310) 536-0611.

THE ACQUISITION

Prior to September 25, 1992, the Company was a wholly owned subsidiary
of Thrifty, which was in turn a wholly owned subsidiary of Pacific Enterprises,
a California corporation ("PE"). On September 25, 1992, all of the Company's
outstanding capital stock was acquired by Big 5 Holdings (the "Acquisition")
for a purchase price of $135,000,000 pursuant to a Purchase and Sale Agreement
dated as of May 22, 1992 among Big 5 Holdings, PE and Thrifty (as amended to
the date of closing, the "Purchase Agreement"). Big 5 Holdings and Parent were
each formed in 1992 by Green Equity Investors, L.P., a Delaware limited
partnership ("GEI"), for the sole purpose of consummating the Acquisition.

In connection with the consummation of the Acquisition, among other
things, the Company issued the Securities in the aggregate principal amount of
$55,000,000. The Securities were purchased by a total of 28 institutional and
private investors in amounts ranging from $25,000 to $9,000,000 through a
private placement in reliance on Section 4(2) of the Securities Act and
Regulation D promulgated thereunder. The Securities are unsecured and
subordinate in priority and right of payment to Senior Indebtedness of the
Company (as defined in the Indenture and summarized

-6-
<PAGE> 10

under "Descriptions of Securities to be Registered -- Certain Definitions"),
including the Revolving Credit Facility. As of December 29, 1996, $36,450,000
in principal amount of the Securities remained outstanding.

RISK FACTORS

Holders of Notes should carefully consider the matters described under
"Risk Factors."

USE OF PROCEEDS

There will be no cash or other proceeds to the Company from the Offer.
See "Use of Proceeds."

PLAN OF DISTRIBUTION

The Selling Noteholders may sell the Notes from time to time, either
directly or through agents, dealers or underwriters to be designated from time
to time, on terms determined at the time of sale. To the extent required, the
specific Notes to be sold, the names of the Selling Noteholders, the respective
purchase prices and public offering prices, the names of any such agent, dealer
or underwriter, and applicable commissions or discounts with respect to a
particular offer will be set forth in a Prospectus Supplement or, if
appropriate, a post- effective amendment to the registration statement filed
with respect to the Notes. See "Plan of Distribution."

TERMS OF THE SECURITIES

<TABLE>
<S> <C>
Interest Rate . . . . . . . . . . 13-5/8% per annum.

Interest Payment Dates . . . . . Each March 15 and September 15, which commenced on March 15, 1993.

Maturity . . . . . . . . . . . . September 15, 2002.

Mandatory Redemption . . . . . . The Securities are subject to mandatory redemption through the
operation of a sinking fund to redeem, on each of September 15,
2000 and September 15, 2001 (each a "Mandatory Redemption Date"),
25% of the aggregate principal amount of the Securities outstanding
on September 25, 1992, at a redemption price equal to the principal
amount, together with accrued and unpaid interest to the date of
such redemption. The Company is required to make sinking fund
payments to the Trustee on or prior to 12:00 noon, New York City
time, on each Mandatory Redemption Date, subject to the right of
the Company to satisfy mandatory sinking fund requirements, in
whole or in part, by the delivery of outstanding Securities by the
Company or through delivery of Securities previously redeemed at
the option of the Company. As of the date hereof, the Company has
not made any sinking fund payments or reserves therefor and is not
required to do so until September 15, 2000.
</TABLE>

-7-
<PAGE> 11
<TABLE>
<S> <C>
Optional Redemption . . . . . . . The Securities may be redeemed at the Company's option, in whole or
in part, beginning September 15, 1997, at the redemption prices
(expressed as percentages of the principal amount) set forth below
together with accrued interest to the date of redemption:

Redemption Date
Occurring in the 12 Months
Beginning September 15, Redemption Price
----------------------- ----------------

1997 105.839
1998 103.893
1999 101.946
2000 and thereafter 100.000

Restrictive Covenants . . . . . . The Indenture contains certain covenants which, among other things,
limit the Company's ability to make certain payments, engage in
transactions with certain shareholders and affiliates, incur
indebtedness, issue capital stock, consummate an asset sale, sell
or issue a subsidiary's capital stock, or merge or consolidate with
or transfer all or substantially all of its properties and assets.

Subordination; The Securities are subordinated in right and priority of payment in
Anti-Layering . . . . . . . . . . full to Senior Indebtedness of the Company (as defined in the
Indenture and summarized under "Description of Securities to be
Registered -- Certain Definitions"), including the Revolving Credit
Facility. As of December 29, 1996, the aggregate principal amount
of Senior Indebtedness outstanding was $54.3 million. The Company
may not incur additional indebtedness that is subordinate to Senior
Indebtedness of the Company (as defined) and senior in right of
payment to the Securities. There is no limitation in the Indenture
relating to the Securities specifically applicable to the amount of
Senior Indebtedness; however, any such Senior Indebtedness is
precluded unless permitted by one or more of the provisions of
Section 5.11 of the Indenture. Among other provisions, Section
5.11 permits the incurrence of Indebtedness under the Revolving
Credit Facility plus additional Indebtedness (including Senior
Indebtedness) in the amount (net of specified fees and expenses) of
up to $25,000,000 (of which $10,000,000 has been utilized in
connection with the establishment of the Revolving Credit
Facility).

Change in Control . . . . . . . . Upon a Change in Control (as defined in "Description of Securities
to be Registered -- Change in Control") of the Company, the Company
shall make an offer to all holders of Securities to purchase all or
any portion of the Securities at a repurchase price equal to 101%
of the principal amount
</TABLE>

-8-
<PAGE> 12
<TABLE>
<S> <C>
thereof, together with accrued and unpaid interest thereon to the
date of repurchase.

Interest Rate . . . . . . . . . . 13-5/8% per annum.

Compared with the New
Notes . . . . . . . . . . . . . . Based on the position of the Commission enunciated in

Morgan Stanley & Co. Incorporated (avail. June 5, 1991) and
other no-action letters to similar effect, the Company believes
that the New Notes will be freely transferable without
compliance with the registration or prospectus delivery
requirements of the Securities Act provided that the holder of
the New Notes is not an affiliate of the Company and acquires
the New Notes in the ordinary course of business with no
agreement or understanding with any person to participate in
the distribution or resale of the New Notes. The New Notes
otherwise will be identical in all material respects to the
Notes. Upon complying with the prospectus delivery
requirements of the Securities Act, the Selling Noteholders
listed herein may sell the Notes from time to time, either
directly or through agents, dealers or underwriters to be
designated from time to time, on terms determined at the time
of sale.

</TABLE>

For more complete information regarding the Securities, see
"Description of Securities to be Registered."

-9-
<PAGE> 13
SUMMARY OF SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA

The summary historical and pro forma financial data set forth below
have been derived from the audited financial statements for the 39 weeks ended
September 25, 1992 and the 14 weeks ended January 3, 1993, the unaudited pro
forma financial information for the fiscal year ended January 3, 1993, and the
audited financial statements for the fiscal years ended January 2, 1994,
January 1, 1995, December 31, 1995 and December 29, 1996. Such data should be
read in conjunction with the financial statements and the related notes thereto
included elsewhere herein. As a consequence of the Acquisition effective
September 25, 1992, the Company is deemed for financial reporting purposes to
have become a new reporting entity ("Successor Company") on that date and
periods subsequent to the September 25, 1992 date reflect the allocation of the
costs of the Acquisition to assets and liabilities based on estimates of fair
values in accordance with the purchase method of accounting. Accordingly, the
results of operations of Successor Company subsequent to September 25, 1992 are
not fully comparable to the results of operations of the Company as constituted
prior to such date ("Predecessor Company"). In particular, operating results
subsequent to September 25, 1992 reflect incremental depreciation and
amortization relating to the purchase method adjustments referred to above and
higher interest charges relating to new indebtedness related to the
Acquisition.

The pro forma statement of earnings gives effect to the Acquisition
and related financing AS IF CONSUMMATED AT THE BEGINNING OF THE 1992 FISCAL
YEAR. As a result, such statement is not fully comparable to statements of
operations for prior fiscal periods. For additional information, see
"Capitalization" and "Pro Forma Financial Data."

-10-
<PAGE> 14
UNITED MERCHANDISING CORP.
(Dollar Amounts in Thousands)

<TABLE>
<CAPTION>
Successor Predecessor
Company Company
------------- --------------
Successor Company 14 Weeks from 39 Weeks from
-------------------------------------------------- September 26, December 30,
Year Ended Pro Forma 1992 1991
-------------------------------------------------- Year Ended through through
December 29, December 31, January 1, January 2, January 3, January 3, September 25,
1996 1995 1995 1994 1993 1993 1992
-------- -------- -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales $404,265 $370,126 $364,109 $321,933 $312,415 $89,616 $222,799
Cost of goods sold, buying
and occupancy 277,116 256,583 244,777 224,094(1) 221,795(2) 64,147(3) 150,660
-------- -------- -------- -------- -------- ------- --------
Gross profit 127,149 113,543 119,332 97,839 90,620 25,469 72,139

Operating expenses:
Selling and administration 101,053 95,158 92,238 80,076 80,076 20,629 59,447
Depreciation and amortization 9,578 11,991 9,180 6,999 6,317(4) 1,684(5) 1,762
-------- -------- -------- -------- -------- ------- --------
Total operating expenses 110,631 107,149 101,418 87,075 86,393 22,313 61,209
-------- -------- -------- -------- -------- ------- --------

Operating income 16,518 6,394 17,914 10,764 4,227 3,156 10,930
Interest expense (income), net 11,482 12,347 11,712 11,793 10,872(6) 3,256(7) (1,059)
-------- -------- -------- -------- -------- ------- --------
Income (loss) before income
taxes and extraordinary loss 5,036 (5,953) 6,202 (1,029) (6,645) (100) 11,989
Income taxes 970 368 1,903 0 0 0 4,964
-------- -------- -------- -------- -------- ------- --------

Income (loss) before
extraordinary loss 4,066 (6,321) 4,299 (1,029) (6,645) (100) 7,025
Extraordinary loss from early
extinguishment of debt,
net of income tax benefit (1,285) 0 (2,855) 0 0 0 0
-------- -------- -------- -------- -------- ------- --------

Net income (loss) $2,781 ($6,321) $1,444 ($1,029) ($6,645) ($100) $7,025
======== ======== ======== ======== ======== ======= ========

OPERATING AND OTHER DATA:
EBITDA (8) $26,096 $18,386 $27,094 $24,094 $24,836 $10,118 $14,718
Ratio of earnings to
fixed charges 1.22 0.69 1.31 0.9 0.6 0.9 4.0
Deficiency in earnings
to fixed charges $ 0 $6,383 $0 $1,668 $7,284 $259 0
Number of stores at end
of period 196 192 175 162 147 147 140
- --------------------------------
</TABLE>

(1) Includes $6,332 increase related to the purchase accounting inventory
revaluation.
(2) Includes $11,080 increase related to the purchase accounting inventory
revaluation. Predecessor Company recorded inventory on a LIFO basis. In
connection with the Acquisition, the Company adopted the FIFO method for
recording inventory.
(3) Includes $4,749 increase related to the purchase accounting inventory
revaluation.
(4) Includes $3,828 increase related to depreciation and amortization of
purchase accounting asset revaluation.
(5) Includes $957 increase related to depreciation and amortization of purchase
accounting asset revaluation.
(6) Includes (i) $11,291 increase in interest expense on debt arising from the
Acquisition, and (ii) $640 increase related to amortization of financing
fees.
(7) Includes (i) $3,096 increase in interest expense on debt arising from the
Acquisition, and (ii) $160 increase related to amortization of financing
fees.
(8) EBITDA represents net income (loss) before taking into consideration
interest expense, income tax expense, depreciation expense, amortization
expense, non-cash rent expense (see footnote 5 to the financial statements),
amortization expense associated with the write-up of assets related to the
Acquisition, expense incurred related to management stock grants related to
the Acquisition, LIFO provision incurred prior to the Acquisition and
extraordinary loss from early extinguishment of debt.

-11-
<PAGE> 15
UNITED MERCHANDISING CORP.
(Dollar Amounts in Thousands)

<TABLE>
<CAPTION>
December 29, December 31, January 1, January 2, January 3,
1996 1995 1995 1994 1993
------------ ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total Assets $197,869 $207,119 $227,707 $214,291 $202,330
-------- -------- -------- -------- --------

Working capital (excluding current
maturities of long-term debt) 70,428 74,994 69,064 67,278 71,799
------ ------ ------ ------ ------

Long-term debt (including current maturities):
Term Loan 0 0 0 44,000 49,000

Revolving Credit Facility 50,000 67,144 60,000 0 0
Senior Subordinated Notes
due 2002 (Notes and New Notes combined) 36,450 36,450 36,450 55,000 55,000
-------- -------- -------- -------- --------

Total long-term debt $86,450 $103,594 $96,450 $99,000 $104,000
======= ======== ======= ======= ========

Stockholder's equity $31,855 $29,074 $35,395 $33,787 $34,790
======= ======= ======= ======= =======
</TABLE>

-12-
<PAGE> 16
RISK FACTORS

In addition to the other matters described in this Prospectus, the
following risk factors should be carefully considered by prospective investors
before deciding to participate in the Offer.

OPERATING LOSSES

When calculated on a pro forma basis to give effect to the Acquisition
and related financing, the results of operations of the Company for the 53
weeks ended January 3, 1993 ("Pro Forma 1992") reflect a net loss of $6.6
million (the "Pro Forma 1992 Results"). See "Pro Forma Financial Data." The
Company believes the Pro Forma 1992 Results are attributable to the following:
(i) an $11.1 million increase in costs of goods sold resulting from the
inventory revaluation occurring in connection with the Acquisition, (ii)
nonrecurring expenses totaling approximately $3.3 million, consisting of the
write-off of the Company's intercompany receivable with Thrifty, compensation
expense related to management's acquisition of Parent's equity securities,
write-offs of excess inventories and miscellaneous write-offs related to
balance sheet accounts, (iii) added depreciation and amortization ($3.8
million) from increases in asset values (other than inventory) related to the
allocation of the costs of the Acquisition to assets, and (iv) the increase in
interest expense from $0.7 million in fiscal 1991 to $10.9 million for Pro
Forma 1992, reflecting additional interest expense related to borrowings under
the Company's bank facility.

For the fiscal year ended January 2, 1994, the Company reported a net
loss of $1.0 million (the "1993 Results"). See "Summary Historical and Pro
Forma Financial Data." The Company believes the 1993 Results are attributable
to the following: (i) a $6.3 million increase in costs of goods sold resulting
from the inventory revaluation occurring in connection with the Acquisition,
(ii) added depreciation and amortization ($3.9 million) from increases in asset
values (other than inventory) related to the allocation of the costs of the
Acquisition to assets, and (iii) an increase in interest expense of $11.8
million, reflecting additional interest expense related to borrowings under the
Company's bank facility and the Securities. The 1993 Results are not
comparable to the Pro Forma 1992 Results because the financial information
contained in this Prospectus for periods after the Acquisition is presented on
a different cost basis than that for the periods before the Acquisition.

For the fiscal year ended December 31, 1995, the Company reported a
net loss of $6.3 million, reflecting an increase in the non-cash portion of
rent expense to $3.3 million as compared with $0.5 million during fiscal 1994,
which non-cash rent expense is expected to decline significantly in 1996 and
thereafter. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Results of Operations -- Fiscal 1995 Versus Fiscal
1994."

The Company continually monitors its store-level personnel and other
variable costs as well as fixed costs and attempt to reduce such costs as a
percentage of sales through improved management information systems and
continued expansion of operations resulting in improved economies of scale.
The Company also monitors and seeks to improve its methods of forecasting
inventory requirements in order to reduce its working capital requirements.
See "Business--Expansion and Store Development; Distribution and Information
Systems." The Company's ability to meet its debt service obligations will
depend upon its future performance, which, in turn, will be subject to general
economic conditions and to financial, business and other factors affecting the
operations of the Company, including factors beyond its control. Accordingly,
there can be no assurance that the Company's business plans will be successful
or that operating cash flow will be sufficient to meet the Company's debt
service obligations, including, without limitation, its interest and principal
payment obligations with respect to the Securities. See "High Leverage" and
"Expansion Program."

-13-
<PAGE> 17
HIGH LEVERAGE

The Company will continue to be highly leveraged following the Offer.
In addition to the obligations evidenced by the $36,450,000 aggregate principal
balance of outstanding Securities, the debt obligations of the Company include
all present and future Senior Indebtedness of the Company (as defined in the
Indenture and summarized under "Description of Securities to be Registered --
Certain Definitions"), including, without limitation, the Revolving Credit
Facility. As of December 29, 1996, there were borrowings of $50.0 million and
letter of credit commitments of $4.3 million outstanding under the Revolving
Credit Facility. The Securities are subordinate in right and priority of
payment in full to all such Senior Indebtedness. See "Description of
Securities To Be Registered -- Subordination" and "Financing Arrangements."
The foregoing leverage will have important consequences to Holders of the
Securities, including the following: (i) the Company's highly leveraged
condition could make the procurement of additional capital resources difficult
if that were to become necessary; (ii) a substantial portion of the Company's
cash flow from operations will be required to be dedicated to the payment of
the Company's interest expense and principal repayment obligations; (iii) the
Company's high degree of leverage will make it more vulnerable in a downturn of
business; and (iv) the Company's principal repayment obligations could limit
the amount of internally generated funds available to fund the Company's
expansion and, therefore, could require a reduction of its expansion plans.

The Company's ability to meet its debt service obligations and to
reduce its total debt will be dependent upon its future performance, which, in
turn, will be subject to general economic conditions and to financial, business
and other factors affecting the operations of the Company, including factors
beyond its control. The Company's earnings were insufficient to cover fixed
charges for the 53 weeks ended January 3, 1993 (on a pro forma basis) and the
fiscal years ended January 2, 1994 and December 31, 1995 by $7.3 million, $1.7
million and $6.4 million, respectively. However, for each of these periods,
the Company's earnings before interest, taxes, depreciation, amortization, LIFO
and non- recurring expenses related to the Acquisition ("EBITDA") exceeded the
minimum amounts of EBITDA required under the terms of the Company's bank
facility for such periods. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

The Credit Agreement and the Indenture impose certain operating and
financial restrictions on the Company, including restrictions on the Company's
ability to make certain payments outside the ordinary course of business,
engage in transactions with certain shareholders and affiliates, incur
indebtedness, issue capital stock, consummate an asset sale, sell or issue a
subsidiary's capital stock, or merge or consolidate with or transfer all or
substantially all of its properties and assets. See "Financing Arrangements"
and "Description of Securities to be Registered -- Covenants."

EXPANSION PROGRAM

The Company's continued growth is dependent to a significant degree
upon its ability to open new stores on a profitable basis and to increase sales
in existing stores. During the fiscal year ended December 29, 1996, the
Company opened a total of four new stores, which represented a temporary
reduction in its store growth from an average of 15 new stores per year during
the four-year period from 1992 through 1995. See "Business -- Expansion and
Store Development." The Company intends to continue opening new stores and
remodeling certain older, existing stores, including plans to open 14 to 16 new
stores in 1997 at an aggregate cost, including working capital, of
approximately $9 million. Historically, the majority of the Company's new
stores have been profitable and have generated positive cash flow beginning
with the commencement of operations, although new stores during the first full
year of operation usually generate profits and cash flow at lower levels than

-14-
<PAGE> 18
mature stores which have been operating for 18 to 36 months. New stores tend
to mature and become more profitable as consumer awareness increases through,
among other things, the Company's marketing and advertising programs.

The Company's ability to expand will depend, in part, on business
conditions and the availability of suitable sites, acceptable lease terms,
qualified managers and sales associates, and sufficient capital. In addition,
a decline in the Company's overall financial performance, increased rents or
any other adverse effects arising from the commercial real estate market in the
Company's markets may adversely impact the Company's current expansion plan.
The Company expects that the net cash generated from operations, together with
borrowings under the Revolving Credit Facility to support working capital
requirements, will enable the Company to finance the expenditures related to
its planned expansion. There can be no assurance that the Company will possess
sufficient funds to finance the expenditures related to its planned expansion,
that new stores can be opened on a timely basis, or that such new stores can be
operated on a profitable basis. In the event net cash generated from
operations together with working capital reserves and borrowings under the
Revolving Credit Facility are insufficient to finance the expenditures related
to the Company's planned expansion, it would be required to reduce its
expansion plans, which could have an adverse impact on the Company's financial
condition and results of operation as a consequence of its inability to take
advantage of the increased sales and improved economies of scale (i.e., the
anticipated reduction in fixed costs as a percentage of sales as the sales base
increases) that the Company anticipates in connection with the growth of its
operations.

COMPETITION

The sporting goods business and the retail environment are highly
competitive, and the Company competes with national, regional and local
sporting goods chains, large retailers, specialty stores and sporting goods
superstores. The principal competitive factors include store location and
image, product selection, quality and price, and customer service. A number of
the Company's competitors are larger and have greater resources than the
Company. See "Business -- Competition."

ABSENCE OF PUBLIC MARKET

No public market for the Securities exists at present. No assurance
can be given that an active public market will develop for the Securities or
that the Notes and the New Notes will trade as one class or as to the extent of
liquidity available through any trading market for the Securities. If a public
market for the Notes or the New Notes should develop, such securities could
trade at a discount from their principal amount. The Company does not
currently intend to list the Securities on any securities exchange or to seek
approval for quotation of the Securities through any automated quotation
system. The Company has not obtained and has no plans to obtain a market maker
for the Securities.

FRAUDULENT TRANSFER CONSIDERATIONS

The Acquisition could become subject to challenge under federal or
state fraudulent transfer laws (to the extent the applicable statute of
limitations thereunder have not previously expired), particularly if Thrifty
becomes a debtor in a case under the United States Bankruptcy Code, if a court
were to determine that Thrifty received less than reasonably equivalent value
for the Company and, at the time of the Acquisition, Thrifty was insolvent, was
rendered insolvent, was engaged in a business or transaction for which its
remaining assets constituted unreasonably small capital, or intended to incur
or believed that it would incur debts beyond its ability to pay as such debts
matured. The

-15-
<PAGE> 19
Company does not believe that any of these tests will be satisfied, based in
part on an opinion of a nationally recognized investment bank delivered prior
to the Acquisition to the effect that the terms of the Acquisition were fair to
Thrifty from a financial point of view, and on an opinion of a nationally
recognized solvency appraisal firm delivered prior to the Acquisition as to
Thrifty's solvency at the time of the Acquisition.

However, if a court were to determine that the Acquisition did
constitute a fraudulent transfer, the court could avoid the transfer of the
Company to Big 5 Holdings or take other action detrimental to the interest of
the Company and its creditors. The Company believes that the most likely
result in such an event could be the entry of a money judgment against the
Company for an amount equal to the difference between the price paid by Big 5
Holdings in the Acquisition and the "reasonably equivalent value," as
determined by the court, of Thrifty's interest in the Company prior to the
Acquisition, although the court could take other action detrimental to the
Company, such as ordering the return of the Company to Thrifty.

DEPENDENCE ON KEY PERSONNEL

The Company's operations depend to a great extent on the management
effort of its officers and other key personnel and on its ability to attract
and retain the existing senior management in the future. The loss of the
services of certain members of the existing senior management team could have a
material adverse effect on the Company's business. The Company currently
maintains key person insurance in the amount of $5 million covering Steven G.
Miller, the President, Chief Operating Officer and a director of the Company.
There can be no assurance that such insurance will be available in the future.

SEASONALITY

The business of the Company is seasonal in nature. Historically, the
Company's revenues and income are highest during its fourth quarter, due to the
holiday season. As a result, the Company's results of operations are likely to
vary substantially during its fiscal year.

-16-
<PAGE> 20
USE OF PROCEEDS

The Company will not receive any proceeds from the Offer. The
proceeds received by the Company from the offer of the Notes were used to
consummate the Acquisition.

PLAN OF DISTRIBUTION

The Notes may be sold from time to time to purchasers directly by any
of the Selling Noteholders. Alternatively, any of the Selling Noteholders may
from time to time offer the Notes through underwriters, dealers or agents. At
the time a particular offer of Notes is made, if required, a Prospectus
Supplement will be distributed which will set forth the aggregate amount of
Notes being offered and the terms of the offering, including the names or names
of any underwriters, dealers or agents, any discounts, commissions and other
terms constituting compensation from the Selling Noteholders, and any
discounts, commissions or concessions allowed or reallowed or paid to dealers.

The Notes may be sold from time to time in one or more transactions at
a fixed offering price, which may be changed, or at varying prices determined
at the time or at negotiated prices. Such prices will be determined by the
Selling Noteholders or by agreement among the Selling Noteholders and
underwriters or dealers.

The Company will pay substantially all of the expenses incident to the
registration, offering and sale of the Notes to the public other than
commissions and discounts of underwriters, dealers or agents. Such expenses
(excluding such commissions and discounts) are estimated to be approximately
$28,000. Under agreements entered into with the Company, the Selling
Noteholders will be, and any underwriter they utilize may be, indemnified by
the Company against certain liabilities, including certain liabilities under
the Securities Act.

The following table sets forth the names of the Selling Noteholders
and the aggregate principal amount of Notes beneficially owned by each Selling
Noteholder as of the date hereof:

<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
OF NOTES
NAME BENEFICIALLY OWNED
---- ------------------
<S> <C>
Leonard I. Green(1) $100,000

Jonathan D. Sokoloff(1) 100,000

Christopher Walker 100,000

Robert W. Miller(2) 50,000

Daniel and Elaine Seigel 50,000

Naomi Bement 25,000

Linda Maslowe 25,000

Philip Maslowe 25,000

William Yingling 25,000
--------
TOTAL $500,000
- -------------------------- ========
</TABLE>

(1) Mr. Green (or an entity controlled by him) and Mr. Sokoloff are
general partners of Leonard Green & Associates ("LGA") and may be
deemed to be beneficial owners of the 3,100,160 shares or 77.5% of
Parent's outstanding common stock, par value $.01 (the "Common
Stock"), owned by GEI, and the

-17-
<PAGE> 21
129,932 shares or 86.6% of Parent's outstanding Series A 9% Cumulative
Redeemable Preferred Stock, par value $.01 (the "Preferred Stock"),
owned by GEI, by reason of their interests in LGA, which is the sole
general partner of GEI. In addition, Messrs. Green and Sokoloff are
directors of the Company.

(2) Mr. Miller is Chairman of the Board of Directors and Chief Executive
Officer of the Company.

<TABLE>
<CAPTION>
Principal Amount of
Principal Amount of Notes Beneficially
Name Notes Offered for Sale Owned After the Offer
---- ---------------------- ---------------------
<S> <C> <C>
* * *
</TABLE>

* To be provided by amendment.

-18-
<PAGE> 22
CAPITALIZATION

The following table sets forth the capitalization of the Company as of
December 29, 1996. Because there will be no cash proceeds to the Company
arising from the Offer, no pro forma financial data are included in the
following table.

<TABLE>
<CAPTION>
AS OF
DECEMBER 29, 1996
-----------------
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
<S> <C>
SHORT-TERM DEBT: (1)
Current installments of long-term debt $ 0

LONG-TERM DEBT: (1)
Revolving Credit Facility 50,000
Senior Subordinated Notes
due 2002 (Notes and New Notes combined) 36,450
--------
Total long-term debt 86,450
--------
STOCKHOLDER'S EQUITY:
Common Stock, no par value. Authorized 2,500
shares; issued and outstanding 1,300 shares 35,080
Accumulated deficit (3,225)
--------
Net stockholder's equity 31,855
--------

Total capitalization $118,305
========
</TABLE>

(1) See "Financing Arrangements" and "Description of Securities to be
Registered -- Subordination."

-19-
<PAGE> 23
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA

The selected historical and pro forma financial data set forth below have
been derived from the audited financial statements for the 39 weeks ended
September 25, 1992 and the 14 weeks ended January 3, 1993, the unaudited pro
forma financial information for the fiscal year ended January 3, 1993, and the
audited financial statements for the fiscal years ended January 2, 1994,
January 1, 1995, December 31, 1995 and December 29, 1996. Such data should be
read in conjunction with the financial statements and the related notes thereto
included elsewhere herein. As a consequence of the Acquisition effective
September 25, 1992, the Company is deemed for financial reporting purposes to
have become a new reporting entity ("Successor Company") on that date and
periods subsequent to the September 25, 1992 date reflect the allocation of the
costs of the Acquisition to assets and liabilities based on estimates of fair
values in accordance with the purchase method of accounting. Accordingly, the
results of operations of Successor Company subsequent to September 25, 1992 are
not fully comparable to the results of operations of the Company as constituted
prior to such date ("Predecessor Company"). In particular, operating results
subsequent to September 25, 1992 reflect incremental depreciation and
amortization relating to the purchase method adjustments referred to above and
higher interest charges relating to new indebtedness related to the
Acquisition.

The pro forma statement of earnings gives effect to the Acquisition and
related financing AS IF CONSUMMATED AT THE BEGINNING OF THE 1992 FISCAL YEAR.
As a result, such statement is not fully comparable to statements of operations
for prior fiscal periods. For additional information, see "Capitalization" and
"Pro Forma Financial Data."

-20-
<PAGE> 24
UNITED MERCHANDISING CORP.
(Dollar Amounts in Thousands)

Net income (loss) $2,781 ($6,321) $1,444 ($1,029) ($6,645) ($100) $7,025
======== ======== ======== ======== ======== ======= ========

-21-
<PAGE> 25
UNITED MERCHANDISING CORP.
(Dollar Amounts in Thousands)

<TABLE>
<CAPTION>
December 29, December 31, January 1, January 2, January 3,
1996 1995 1995 1994 1993
------------ ------------ ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total Assets $197,869 $207,119 $227,707 $214,291 $202,330
-------- -------- -------- -------- --------

Working capital (excluding current
maturities of long-term debt) 70,428 74,994 69,064 67,278 71,799
------ ------ ------ ------ ------

Long-term debt (including current maturities):
Term Loan 0 0 0 44,000 49,000

Revolving Credit Facility 50,000 67,144 60,000 0 0
Senior Subordinated Notes
due 2002 (Notes and New Notes combined) 36,450 36,450 36,450 55,000 55,000
-------- -------- -------- -------- --------

Total long-term debt $86,450 $103,594 $96,450 $99,000 $104,000
======= ======== ======= ======= ========

Stockholder's equity $31,855 $29,074 $35,395 $33,787 $34,790
======= ======= ======= ======= =======
</TABLE>

-22-
<PAGE> 26
PRO FORMA FINANCIAL DATA
(IN THOUSANDS)

Pro Forma Combined
(53 Weeks Ended January 3, 1993 as Adjusted to Give
Effect to the Acquisition)

The following unaudited pro forma statement of operations presents the pro
forma results of operations of the Company for the 53 weeks ended January 3,
1993. The unaudited pro forma statement of operations combines the results of
operations of Predecessor Company for the 39 weeks ended September 25, 1992 and
the results of operations of the Company for the 14 weeks ended January 3, 1993
and gives effect to the Acquisition as though it occurred at the beginning of
the 1992 fiscal year. The unaudited pro forma information does not purport to
represent the results that actually would have occurred if such transactions
had in fact occurred on such date or to project the results that may be
achieved in the future.

-23-
<PAGE> 27
UNITED MERCHANDISING CORP.
(Dollar Amounts in Thousands)

<TABLE>
<CAPTION>
Predecessor Company Successor Company
39 Weeks from 14 Weeks from Pro Forma
December 30, 1991 September 26, 1992 Year Ended
through September 25, 1992 through January 3, 1993 Adjustments January 3, 1993
-------------------------- ----------------------- ----------- ---------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:

Net sales $222,799 $ 89,616 $ 0 $312,415
Cost of goods sold, buying and occupancy 150,660 64,147 6,988(1)(2) 221,795
-------- -------- ------- --------
Gross profit 72,139 25,469 (6,988) 90,620

Operating expenses:
Selling and administration 59,447 20,629 0 80,076
Depreciation and amortization 1,762 1,684 2,8713 6,317
-------- -------- -------- --------
Total operating expenses 61,209 22,313 2,871 86,393
-------- -------- -------- --------

Operating income 10,930 3,156 (9,859) 4,227
Interest expense (income), net (1,059) 3,256 8,675(4) 10,872
-------- -------- -------- --------
Income (loss) before income taxes 11,989 (100) (18,534) (6,645)
Income taxes 4,964 0 (4,964)(5) 0
-------- -------- ------- --------

Net income (loss) $ 7,025 $ (100) $(13,570) $ (6,645)
======== ======== ======== ========
</TABLE>

____________________

(1) Predecessor Company recorded inventory on a LIFO basis. In connection with
the Acquisition, the Company adopted the FIFO method for recording
inventory. As a result, the $657 LIFO benefit recorded in Predecessor
Company is reversed to reflect the FIFO method as of the beginning of the
year.

(2) Reflects $6,331 increase related to purchase accounting inventory
revaluation.

(3) Reflects $2,871 increase in depreciation and amortization expense due to
purchase accounting revaluation of assets.

(4) Reflects (i) $8,195 net increase in interest expense on debt arising from
the Acquisition, and (ii) $480 increase in amortization of financing fees.

(5) Reflects $4,964 decrease in income taxes since Pro Forma results reflect a
pre-tax loss for the year.

-24-
<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

The fiscal years ended January 1, 1995, December 31, 1995 and December
29, 1996 are referred to below as "Fiscal 1994," "Fiscal 1995" and "Fiscal
1996," respectively.

Fiscal 1996 versus Fiscal 1995

(1) Net Sales

Net sales increased 9.2% (or $34.2 million) from $370.1 million in
Fiscal 1995 to $404.3 million in Fiscal 1996, while the number of stores
increased by four (or 2.0%) from 192 in Fiscal 1995 to 196 in Fiscal 1996.
Same store sales increased 3.7% in Fiscal 1996, reflecting improved economic
and weather conditions in the regions in which the Company operates, together
with strong advertising and merchandising programs. Sales generated from new
stores opened in 1995 and 1996 contributed the remainder of the 9.2% sales
increase.

(2) Gross Profit

Gross profit increased 12.0% (or $13.6 million) from $113.5 million in
Fiscal 1995 to $127.1 million in Fiscal 1996, reflecting increased sales and
improved gross profit margin. Gross profit margin increased from 30.6% of
sales in the 1995 period to 31.5% of sales in the 1996 period. The improvement
in gross profit margin in Fiscal 1996 reflected the absence of one-time
clearance sales, which negatively impacted prior year gross profit margins.
Results for Fiscal 1995 reflect lower gross profit margins as the Company
implemented a successful campaign focused on inventory reduction with respect
to certain product categories.

(3) Operating Expenses

Selling and administration expenses increased 6.2% (or $5.9 million)
from $95.2 million in Fiscal 1995 to $101.1 million in Fiscal 1996. This
increase resulted primarily from the annualization of expenses related to the
Company's store growth in 1995 and 1996 as well as rent associated with the
Company's sale/leaseback of its Fontana distribution center and Culver City
store in 1996. When measured as a percentage of sales, selling and
administration expenses decreased from 25.7% of sales in the 1995 period to
25.0% in the 1996 period, reflecting management's continued focus on
controlling expenses and the leveraging of fixed costs due to increased sales.

Depreciation and amortization expense decreased 20.0% (or $2.4
million) from $12.0 million in Fiscal 1995 to $9.6 million in Fiscal 1996.
This decrease resulted primarily from a $2.8 million charge related to the
non-cash portion of rent expense which was recorded in Fiscal 1995. The
decrease is partially offset by expenditures related to the Company's store
growth in 1995 and 1996.

(4) EBITDA

Fiscal 1996 EBITDA totaled $26.1 million, which represented an
increase of 41.8% (or $7.7 million) versus 1995's EBITDA of $18.4 million.
Increases in same-store sales, gross margin and increased operating
efficiencies were the primary factors contributing to the improvement.

-25-
<PAGE> 29
(5) Interest Expense, Net

Interest expense, net for Fiscal 1996 decreased 6.5% (or $0.8 million)
from $12.3 million in Fiscal 1995 to $11.5 million in Fiscal 1996. This
decrease reflects lower average borrowing levels on the Company's Revolving
Credit Facility during Fiscal 1996 as a result of improved earnings, a
continued focus on inventory reduction, and a slowdown in store growth in
Fiscal 1996. The Company's Revolving Credit Facility balance was $50.0 million
at December 29, 1996 versus a balance of $67.1 million at December 31, 1995.

(6) Income Taxes

The Company recorded an income tax provision against operations of
$1.0 million in Fiscal 1996 versus $0.4 million in Fiscal 1995. However, the
$1.0 million provision was offset by a $0.9 million tax benefit against the
extraordinary loss from early extinguishment of debt described below resulting
in a net tax provision of less than $0.1 million for Fiscal 1996.

(7) Extraordinary Loss From Early Extinguishment of Debt

During Fiscal 1996, the Company refinanced its indebtedness under a
prior credit facility with borrowings under the new Revolving Credit Facility
with CIT. In connection with the refinancing, the Company accelerated
amortization of $1.0 million of certain fees and paid $1.2 million in
prepayment premiums and other fees. Accordingly, an after-tax charge of $1.3
million ($2.2 million before taxes) is recorded as an extraordinary loss for
Fiscal 1996. No such event occurred during Fiscal 1995.

(8) Net Income

Fiscal 1996 net income was $2.8 million versus a net loss of $6.3
million for Fiscal 1995. This variance reflects the positive sales and gross
profit results achieved in Fiscal 1996, partially offset by the $1.3 million
extraordinary loss ($2.2 million before taxes) related to the Company's
revolving debt refinancing in Fiscal 1996. Also impacting this variance was
the $2.8 million charge related to the non-cash portion of rent expense
recorded in Fiscal 1995.

Fiscal 1995 Versus Fiscal 1994

(1) Net Sales

Net sales increased 1.6% (or $6.0 million) from $364.1 million in
Fiscal 1994 to $370.1 million in Fiscal 1995, while the number of stores
increased by 17 (or 9.7%) from 175 in Fiscal 1994 to 192 in Fiscal 1995. Same
store sales decreased 4.9% in Fiscal 1995 reflecting a general slow-down in
retail spending by consumers, heavy rains experienced in early 1995, the
short-term positive impact of the Northridge earthquake on 1994's sales, and
the extremely dry and warm November and December 1995 weather's impact on ski
and winter related product sales. Sales generated from new stores opened in
1994 and 1995 offset the decline in same store sales, resulting in the 1.6%
increase in net sales for the year.

(2) Gross Profit

Gross profit decreased 4.9% (or $5.8 million) from $119.3 million in
Fiscal 1994 to $113.5 million in Fiscal 1995. Gross profit margin decreased
from 32.8% of sales in the 1994 period to

-26-
<PAGE> 30
30.6% of sales in the 1995 period. Certain gross profit costs, including
minimum rent and other occupancy and distribution costs, are relatively fixed
in nature or fluctuate primarily based on the number of stores. Accordingly,
the same store sales decrease in Fiscal 1995 negatively impacted the Company's
gross margin. Gross margin was also impacted by a successful campaign focused
on reducing inventory levels for certain product categories. This inventory
reduction plan resulted in lower gross margin as the Company adjusted prices to
achieve its targeted inventory levels.

(3) Operating Expenses

Selling and administration expenses increased 3.3% (or $3.0 million)
from $92.2 million in Fiscal 1994 to $95.2 million in Fiscal 1995. This
increased resulted from the significant store growth achieved by the Company
during Fiscal 1995 and a significant increase in advertising costs. These
increases were partially offset by the Company's focus on other variable
expense categories in reaction to the general weakness in the economy. When
measured as a percentage of sales, selling and administration expenses
increased from 25.4% of sales in the 1994 period to 25.7% in the 1995 period,
reflecting the relatively fixed nature of many of these costs combined with the
same store sales decrease discussed above.

Depreciation and amortization expense increased 30.4% (or $2.8
million) from $9.2 million in Fiscal 1994 to $12.0 million in Fiscal 1995.
This increase reflects the Company's spending on store growth and computer
software and hardware for the Company's new computerized financial and
merchandising systems, along with an increase of $2.8 million related to the
non-cash portion of rent expense. This non-cash rent expense is expected to
decline significantly in 1996 and thereafter.

(4) EBITDA

1995 reflects EBITDA of $18.4 million which is 32.1% (or $8.7 million)
lower than 1994's EBITDA of $27.1 million. Decreases in same- store sales and
gross margin coupled with advertising expense increases were the primary
factors contributing to the decrease. In addition to a difficult retail
environment, sales were impacted by poor weather conditions throughout the
year.

(5) Interest Expense, Net

Interest expense, net for 1995 increased 5.1% (or $0.6 million) from
$11.7 million in Fiscal 1994 to $12.3 million in Fiscal 1995. This variance
results from higher borrowing balances throughout 1995, partially offset by
lower interest rates on the Company's bank facility, and the impact of the
repurchase of a portion of the Securities late in 1994. The decrease in
interest rates resulted from lower interest rates under the Company's bank
facility, coupled with a full year impact on interest expense resulting from
the repurchase of $18.6 million of higher interest Securities, which took place
in the fourth quarter of 1994.

(6) Income Taxes

Income taxes were $0.4 million in Fiscal 1995 versus $1.9 million in
Fiscal 1994. The $0.4 million in Fiscal 1995 represents a change in the
valuation allowance for deferred taxes. Such change was based upon the
Company's determination that a 100% valuation allowance was appropriate
inasmuch as the Company had incurred taxable losses during two consecutive
fiscal years and could not substantiate that it would be able to generate
future taxable income in order to realize its deferred tax assets.

-27-
<PAGE> 31
(7) Net Income (Loss)

Fiscal 1995 net loss was $6.3 million compared to net income of $1.4
million for Fiscal 1994. Approximately $3.3 million of the Fiscal 1995 loss is
related to the non-cash portion of rent expense compared to $0.5 million in
1994. This non-cash rent expense is expected to decline significantly in 1996
and thereafter. Decreases in same-store sales and gross margins and increases
in advertising expense were the other primary factors for the earnings decline
in Fiscal 1995.

IMPACT OF INFLATION

The Company does not believe that inflation has a material impact on
the Company's results of operations. The Company believes that it is generally
able to pass along any inflationary increases in costs to its customers.

LIQUIDITY AND CAPITAL RESOURCES

The Company is highly leveraged as a result of the Securities and the
Senior Indebtedness (as defined in the Indenture and summarized in "Description
of Securities to be Registered -- Certain Definitions"), including, without
limitation, the Revolving Credit Facility. The Revolving Credit Facility
provides the Company with a three-year, non-amortizing, $100 million revolving
debt facility. The Revolving Credit Facility is secured by trade accounts
receivable, merchandise inventories and general intangible assets of the
Company and has a borrowing limit (including advances, outstanding letters of
credit and unreimbursed drawings under letters of credit) at any time equal to
the lesser of $100,000,000 and the Borrowing Base (as defined in the Credit
Agreement). The Borrowing Base is equal to 65% of the aggregate value of
Eligible Inventory (as defined in the Credit Agreement) from time to time. See
"Financing Arrangements."

As a result of borrowings incurred in connection with the Acquisition,
the Company's interest expense increased from $0.7 million in fiscal 1991 to
$10.9 million in fiscal 1992 (on a pro forma basis), $11.8 million in fiscal
1993, $11.7 million in Fiscal 1994, $12.3 million in Fiscal 1995 and $11.5
million in Fiscal 1996. As a result, and taking into account other factors
related to the Acquisition, when calculated on a pro forma basis to give effect
to the Acquisition and related financing, the results of operations of the
Company for fiscal 1992 (on a pro forma basis), fiscal 1993 and Fiscal 1995
include net losses of $6.6 million, $1.0 million and $6.3 million,
respectively. The Company believes that operating cash flow (i.e., income
before interest expense, taxes, depreciation and amortization) will be
sufficient to cover the interest expense arising from the Revolving Credit
Facility and the Securities. However, the Company's ability to meet its debt
service obligations will depend upon its future performance, which, in turn,
will be subject to general economic conditions and to financial, business and
other factors affecting the operations of the Company, including factors beyond
its control. Accordingly, there can be no assurance that operating cash flow
will be sufficient to meet the Company's debt service obligations.

The Credit Agreement includes covenants that, among other things,
limit the Company's ability to incur debt, merge or consolidate with or invest
in other companies, sell or lease or otherwise transfer all or substantially
all of its properties or assets, make certain payments with respect to its
outstanding capital stock, and engage in transactions with affiliates. The
Credit Agreement also contains a financial covenant that requires the Company
to maintain, during each quarter, a Fixed Charge Coverage Ratio (as defined).
The Securities also contain various restrictive covenants similar to (although
generally less restrictive than) those contained in the Credit Agreement. The
Company believes that the restrictive covenants under the Credit Agreement will
not impair its

-28-
<PAGE> 32
ability to accomplish its expansion plans or other business strategies, which
the Company expects to fund through the net cash generated from operations,
together with borrowings under the Revolving Credit Facility. However, the
Company's leveraged condition could make the procurement of additional capital
resources difficult if that were to become necessary. Further, the limitations
on capital expenditures resulting from the Fixed Charge Coverage Ratio
contained in the Revolving Credit Agreement could impair the Company's ability
to undertake the cost of construction of new stores and improvements if that
were to become necessary.

As of December 29, 1996, there were borrowings of $50.0 million and
letter of credit commitments of $4.3 million outstanding under the Revolving
Credit Facility, and the Company's cash and cash equivalents balance was $4.8
million versus a balance of $3.2 million at December 31, 1995.

Net cash provided by operating activities was $19.8 million for Fiscal
1996 versus net cash use of $3.8 million for Fiscal 1995. Improved earnings
combined with continued focus on inventory levels and payables decreases
related to reduced inventory purchases late in Fiscal 1995 were the primary
factors in the improvements in cash provided by operating activities in Fiscal
1996. The Company's year-end inventory levels were 2% (or $2.6 million) lower
than Fiscal 1995 levels. This reduction was accomplished even as the Company
grew its store base from 192 at December 31, 1995 to 196 at December 29, 1996,
and follows the success of the Company's Fiscal 1995 inventory reduction
program where inventories were reduced $13.5 million, or 9.0%, between years
despite a 9.7% (17 stores) increase in store count. Net cash provided by
investing activities was $1.5 million for Fiscal 1996 versus a cash use of $7.4
million for Fiscal 1995, reflecting $5.0 million in net proceeds from the
sale/leaseback of the Company's Fontana distribution center and Culver City,
California store and a reduction in expenditures related to the temporary
planned reduction of the Company's store growth program in Fiscal 1996. The
cumulative effect of net cash used in operating activities and net cash
provided by investing activities resulted in a reduction in the Company's
borrowings of $17.1 million for Fiscal 1996, versus an increase of $7.1 million
for Fiscal 1995, and an increase in cash and cash equivalents of $1.6 million
versus a decrease of $4.5 million for the comparable periods in Fiscal 1996 and
Fiscal 1995, respectively.

The Company believes that net cash provided by operating activities
and borrowings under the Revolving Credit Facility will be sufficient to fund
anticipated capital expenditures and working capital requirements for the
foreseeable future.

IMPACT OF NEW ACCOUNTING STANDARDS

Statement of Financial Accounting Standards No. 121 (FAS 121),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of," issued in March 1995, and effective for fiscal years
beginning after December 15, 1995, establishes accounting standards for the
recognition and measurement of impairment of long-lived assets, certain
identifiable intangibles, and goodwill either to be held or disposed of. The
adoption of FAS 121 did not have a material impact on the Company's financial
position or results of operations during Fiscal 1996.

On January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation," which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income disclosures
for employee stock option grants made in 1995 and future years as if the
fair-value-based method defined in SFAS No. 123 had been applied. The

-29-
<PAGE> 33

Company has elected to continue to apply the provisions of APB Opinion No. 25
and to provide the pro forma disclosure provisions of SFAS No. 123.

-30-
<PAGE> 34
BUSINESS

GENERAL

Big 5 Holdings and Parent were formed in 1992 for the purpose of
acquiring the Company. The acquisition took place on September 25, 1992, when
Big 5 Holdings purchased all of the Company's outstanding capital stock from
Thrifty. On August 10, 1993, Big 5 Holdings was merged into the Company, which
was the surviving entity following the merger.

The Company was founded in 1955 and currently operates a chain of
retail stores under the trade name "Big 5 Sporting Goods." Big 5 is one of the
leading sporting goods chain in the United States based on revenues, operating
196 stores at December 29, 1996 located in eight western states, including
California, Washington, Arizona, New Mexico, Nevada, Oregon, Texas and Idaho.
According to industry sources, Big 5's fiscal 1996 revenues were the fourth
highest among full-line sporting goods retailers in the United States,
totalling $404.3 million for an increase of 9.2% versus comparable 1995
revenues. Big 5's marketing strategy is directed at the general sporting goods
consumer, with product offerings including a wide selection of sporting goods
in a broad range of prices.

During the five fiscal years ending December 29, 1996, Big 5 opened a
total of 63 new stores located throughout California, Washington, Arizona, New
Mexico, Oregon, Nevada, Texas and Idaho. In 1993 and 1994, Big 5 successfully
completed the implementation and installation of new merchandising,
distribution and financial systems. These systems provide the Company with
valuable data in tracking inventories. This information was used to help
accomplish a successful inventory reduction program in 1995. Big 5's 440,000
square feet distribution warehouse is located in Fontana, California.
Substantially all of Big 5's merchandise is distributed from the Fontana
facility to individual stores. Management believes that its distribution
facility is sufficient to service its current store base as well as the
Company's planned store expansion program for the foreseeable future.

EXPANSION AND STORE DEVELOPMENT

Big 5's average annual store growth was 15 new stores per year over
the four-year period from 1992 through 1995; however, the Company temporarily
reduced the rate of its store expansion program in 1996, opening a total of
four new stores. This reduction in store growth was in response to unfavorable
sales trends experienced in 1995. Big 5 plans to increase the number of new
store openings to return to its historical growth pattern by opening
approximately 14 to 16 new stores in 1997 in reaction to the improved retail
environment in the states in which the Company operates. Big 5 intends to
locate new stores principally within, or adjacent to, its existing markets to
take advantage of economies of scale relating to marketing, distribution and
management. Big 5 offers a full-line of sporting goods products in stores of
approximately 10,000 to 15,000 total square feet located primarily in
multi-store strip-centers or as freestanding units. In addition to new store
expansion, Big 5 intends to continue its strategies (through store remodeling,
updated systems, value oriented product mix and promotional advertising) to
increase sales in existing locations.

Big 5's ability to expand will depend, in part, on business conditions
and the availability of suitable sites, acceptable lease terms and sufficient
capital. Generally, the opening of a new store by Big 5 requires expenditures
for additional inventory, furniture, fixtures and equipment (including
point-of-sale equipment and computers), and miscellaneous overhead expenses.
Big 5's leases generally require the lessor, rather than Big 5, to fund all or
a significant portion of the capital expenditures related to new store
construction and costs of improvements. Big 5 expects that the net

-31-
<PAGE> 35
cash generated from operations, together with borrowings under the Revolving
Credit Facility, will enable Big 5 to finance the expenditures related to its
planned expansion, although there can be no assurance in this regard. See
"Risk Factors -- Expansion Program." Big 5's ability to expand or to remodel
existing stores will be subject to successful site acquisition and/or
negotiation of new leases or amendments to existing leases, and may be limited
by zoning, fire and other governmental regulations.

The following table sets forth the number of Big 5 stores for the last
five fiscal years:

<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total at period beginning 137 147 162 175 192

Opened during period 10 15 15 19 4

Closed during period - - (2) (2) -
--- --- --- --- ---
Total at period end 147 162 175 192 196
=== === === === ===
</TABLE>

MERCHANDISE

Big 5's marketing strategy is directed at consumers who seek quality
sporting goods merchandise. Merchandise is offered in a broad range of prices.
The assortment of products sold in Big 5 stores includes, among other things,
athletic shoes and apparel, in-line skates and accessories, equipment for team
sports, tennis, golf, skiing, fitness, camping, hunting and fishing, and other
general athletic products. Big 5 offers a variety of recognized brand name
products, private label merchandise, and products manufactured exclusively for
Big 5 by various manufacturers. Big 5's assortment of products by sports
category has remained relatively consistent during its history as a sporting
goods chain, except that, as a percentage of merchandise mix, the percentage of
total sales related to athletic shoes and clothing has increased in the last
decade, and the percentage of total sales related to in-line skates and
accessories has increased in the last five years.

ADVERTISING AND PROMOTION

Big 5's advertising is conducted principally through print media.
Print advertising consists of inserts in numerous newspapers and direct
mailings made throughout Big 5's geographic markets. These advertisement
inserts typically highlight a broad range of merchandise to maintain consumer
awareness of Big 5's full product line and feature specially priced products to
attract consumers. Big 5 has an in-house advertising staff that designs and
produces its advertising, which enables Big 5 to maintain a timely and flexible
advertising campaign.

PROPERTIES

As of December 29, 1996, Big 5 operated 196 stores in eight western
states. All but one of Big 5's store sites are leased. Only 12 of Big 5's
leases are due to expire by the year 2000, and most of Big 5's leases contain
renewal options. Big 5's stores average approximately 10,000 to 15,000 square
feet in size and are located primarily in multi-store strip centers or as
freestanding units. Specific store locations are selected based on market
demographics, competitive factors and site economics. The Company currently
leases its Fontana warehouse facility from the State of Wisconsin Investment
Board. The lease for the facility has an initial term of ten years commencing
on March 5,

-32-
<PAGE> 36

1996. The Company also has the right to exercise three five-year options
beyond the initial ten-year term.

The chart below sets forth information with respect to Big 5's
geographic markets:

<TABLE>
<CAPTION>
Store Statistics by Region
As of December 29, 1996
-----------------------
Percentage of Total
Number of Stores Number of Stores
---------------- -------------------
<S> <C> <C>
California:
Southern California 79 40%
Central California 21 11
Northern California 43 22
--- --
Total California 143 73
--- --
Washington 25 13
Arizona 10 5
Oregon 6 3
New Mexico 5 3
Nevada 4 2
Texas 2 1
Idaho 1 --
--- ---
Total 196 100%
=== ====
</TABLE>

INDUSTRY AND COMPETITION

Sporting goods are marketed through various retail entities, including
sporting goods stores, department stores, discount retailers, specialty stores
and mail order. The industry is highly fragmented; according to the National
Sporting Goods Association, total U.S. retail sales of sporting goods were
approximately $37.6 billion in 1996. In general, Big 5's competitors tend to
fall into four basic categories: traditional sporting goods stores, mass
merchandisers, specialty sporting goods stores and sporting goods superstores.
Certain of Big 5's competitors are larger and have greater capital resources
than Big 5.

Traditional Sporting Goods Stores. This category consists of
traditional sporting goods chains, including Big 5. These stores range in size
from 5,000 to 20,000 square feet and are frequently located in regional malls
and multi-store strip-centers. The traditional chains typically carry a varied
assortment of merchandise and are often viewed by their customers as convenient
neighborhood stores. Sporting goods retailers operating stores within this
category include Oshman's and Copeland's.

Mass Merchandisers. This category includes discount retailers such as
Wal-Mart and Kmart and department stores such as JC Penney and Sears. These
stores range in size from approximately 50,000 to 200,000 square feet and are
primarily located in regional malls, strip shopping centers or freestanding
sites. Sporting goods merchandise and apparel represent a small portion of the
total merchandise in these stores and the selection is often more limited than
in other sporting goods retailers. Although generally price competitive,
discount and department stores typically have limited customer service in their
sporting goods departments.

-33-
<PAGE> 37

Specialty Sporting Goods Stores. This category consists of two
groups. The first group generally includes athletic footwear specialty stores,
which are typically 2,000 to 20,000 square feet in size and are located in
shopping malls. Examples include such retail chains as Foot Locker, Lady
Footlocker and Just for Feet. These retailers are highly focused, with most of
their sales coming from athletic footwear and team licensed apparel. The
second group consists of pro shops and stores specializing in a particular
sport or recreation. This group includes backpacking and mountaineering
specialty stores and specialty skate shops and golf shops. Typically, prices
at specialty stores tend to be higher than prices at the sporting goods
superstores and traditional sporting goods stores.

Sporting Goods Superstores. Stores in this category typically are
larger than 30,000 square feet and tend to be freestanding locations. These
stores emphasize high volume sales and a large number of SKU's. Examples
include Oshman's Super Sports, The Sports Authority, Jumbo Sports (formerly
Sports & Recreation), Sport Chalet and Sportmart.

Big 5 believes that it competes successfully with each of the
competitors discussed above by focusing on what the Company believes are the
primary factors of competition in the sporting goods industry. These factors
include experienced and knowledgeable personnel, personal attention given to
customers, breadth, depth, price and quality of merchandise offered, purchasing
and pricing policies, effective sales techniques, direct involvement of senior
officers in monitoring store operations, superior management information
systems and store location and design. However, the competitive environment is
often affected by factors beyond a particular retailer's control, such as
shifts in consumer preferences, economic conditions, and population and traffic
patterns.

DISTRIBUTION AND INFORMATION SYSTEMS

The majority of Big 5's merchandise is warehoused in an approximately
440,000 square foot facility located in Fontana, California and transported by
trucks to Big 5 stores. The distribution center was opened in February 1990.
On March 5, 1996, the Company purchased the Fontana facility building and
improvements from MLTC Funding, Inc. ("MLTC"), which previously owned and
leased such property to the Company, then entered into a sale and leaseback
agreement with regard to the Fontana facility with the State of Wisconsin
Investment Board. Prior to this transaction, the Company owned the land
associated with the facility and leased the buildings and improvements. See
"Certain Transactions - Subleases".

In 1993 and 1994, the Company implemented a new data processing system
called the COACH (Customer Oriented Approach for Continued High- Performance)
system, which is a low maintenance data processing environment capable of
supporting the Company's future growth. The COACH system provides the Company
with valuable inventory tracking information through the implementation of
store-level perpetual inventories. Each store now has a unique inventory model
that allows the Company to maximize inventory mix at the store level. The
COACH system also includes a local area network that connects all corporate
users to electronic mail, scheduling and the host AS/400 system. The host
system and the Company's stores are linked in a network that provides satellite
communications for credit card, in-house tender authorization, and daily
polling of sales at the store level. In the Company's distribution center,
radio frequency terminals are used in the areas of receiving, stock putaway,
stock movement, order filling, cycle counting and inventory management. Store
processes have been streamlined by implementing radio frequency, hand-held
terminals to assist in store ordering, receiving, transfers and perpetual
inventories. In 1989, the Company converted all of its stores to a
computerized, point-of-sale system. This system allows the

-34-
<PAGE> 38

Company to capture data at the point of sale and communicate with headquarters
through its satellite communications network.

DESCRIPTION OF SERVICE MARKS AND TRADEMARKS

The Company uses the "Big 5 Sporting Goods" name as a service mark in
connection with its business operations and has registered this name as a
federal service mark. The Company has also registered federally and/or locally
as trademarks and service marks certain private labels under which it sells a
variety of merchandise, including apparel.

EMPLOYEES

As of December 29, 1996, Big 5 had approximately 4,550 employees. Of
these, the Teamsters Union currently represents 369 employees (or approximately
8.1%), who are primarily employees in the Company's distribution center and
non-management employees in certain stores. In 1994, the Company signed a
contract with the Teamsters Union, which expires in August 1997. The Company
has not had a strike or work stoppage in the last fifteen years. The Company
believes that it provides working conditions and wages that compare favorably
with those offered by other retailers in the industry and that its employee
relations are good.

EMPLOYEE TRAINING

Big 5 has developed an extensive training program for all store
employees, including salespeople, cashiers and management trainees. An
introductory program for all full-time, permanent, retail employees stresses
excellence in customer service as well as effective selling skills. Big 5's
InfoWindow, an interactive, multimedia training system, provides a
cost-effective, consistent method of training employees, which is designed to
improve performance, customer service and on-the-job safety. Store employees
gain hands-on practice using a touch-screen monitor and simulated keyboard to
learn how to provide high quality customer service and use Big 5's in-store
systems. Every Big 5 store employee must complete the training program before
commencing work on the sales floor. In addition, cashiers receive additional
training relating to Big 5's point-of-sale system and cash handling, and
management trainees receive additional training throughout their careers,
including seminars that focus on advanced management and sales skills and store
specific information relating to loss prevention, scheduling and merchandising
strategy.

LITIGATION

The Company is from time to time involved in ordinary routine
litigation incidental to the conduct of its business. The Company regularly
reviews all pending litigation matters in which it is involved and establishes
reserves deemed appropriate by management for such litigation matters. The
Company believes that no litigation currently pending against it will have a
material adverse effect on its financial position or results of operations.

-35-
<PAGE> 39
FINANCING ARRANGEMENTS

The Company's principal senior financing arrangement consists of the
Revolving Credit Facility in the principal amount of up to $100,000,000, issued
pursuant to the Credit Agreement. The payment of principal and interest of and
on the Securities is subordinated in the manner provided in the Indenture to
the prior payment of the Revolving Credit Facility. As of December 29, 1996,
there were borrowings of $50.0 million and letter of credit commitments of $4.3
million outstanding under the Revolving Credit Facility.

Subject to the terms and conditions of the Credit Agreement, the
Revolving Credit Facility permits the Company to obtain revolving loans up to a
maximum aggregate principal amount that, together with the aggregate undrawn
amount of all outstanding letters of credit and of all unreimbursed amounts
drawn under letters of credit, does not exceed the lesser of $100,000,000 and
the Borrowing Base, which is generally equal to 65% of the Company's Eligible
Inventory. The value of the Company's Eligible Inventory as of December 29,
1996 was approximately $126.4 million. At the Company's election (provided it
is not in default), loans under the Revolving Credit Facility bear interest at
a rate of LIBOR plus 2.5% or the Chemical Bank prime lending rate plus 0.75%,
payable monthly at the end of each month. While an Event of Default is
continuing, interest is payable at a rate per annum equal to 2% in excess of
the otherwise applicable rate.

The Revolving Credit Facility requires a monthly payment of an unused
line of credit fee equal to 0.375% per annum on the average daily amount by
which the $100,000,000 line of credit exceeds the sum of the average daily
outstanding revolving loans and the average daily undrawn face amount of
outstanding letters of credit. In addition, upon entering into the Credit
Agreement, the Company was required to pay a loan facility fee, a loan
syndication fee and a collateral management fee equal to $500,000, $250,000 and
$100,000, respectively. The collateral management fee is also payable on each
anniversary of the Credit Agreement. The Credit Agreement also requires the
Company to pay certain other customary fees and expenses.

Subject to the terms and conditions of the Credit Agreement, the
Company may request that CIT and the other lenders party to the Credit
Agreement assist the Company in obtaining letters of credit in amounts not
exceeding $15,000,000 in the aggregate. With respect to letters of credit, in
addition to customary fees and charges by the issuing bank, the Company is
required to pay a letter of credit guaranty fee to the agent on the undrawn
amount of such letter of credit at a rate equal to 1.25% per annum (3.25% per
annum while any Event of Default is continuing).

The Credit Agreement has an initial term of three years expiring on
March 8, 1999, after which it is renewed for successive one-year periods unless
terminated by either party. Revolving loans under the Credit Agreement are
non-amortizing during the term thereof and become due and payable upon
termination. Subject to certain limitations set forth in the Credit Agreement,
the Company may borrow, repay and re- borrow the revolving loans throughout the
term of the Credit Agreement. Upon notice, the Company may at any time reduce
the line of credit available under the Credit Agreement, without penalty,
provided that each such reduction is for a minimum of $5.0 million and is
permanent and irrevocable. The Company is obligated to pay an early
termination fee if the Company terminates the Revolving Credit Facility and
Credit Agreement in full prior to the end of the initial three-year term.

The Credit Agreement is secured by trade accounts receivable,
merchandise inventories and general intangible assets (including trademarks and
tradenames) of the Company and is also guaranteed by Parent. The Credit
Agreement contains covenants restricting the ability of the

-36-
<PAGE> 40
Company to, among other things, incur debt, merge or consolidate with or invest
in other companies, sell or lease or otherwise transfer all or substantially
all of its properties or assets, make certain payments with respect to its
outstanding capital stock, and engage in certain transactions with affiliates.
In addition, the Credit Agreement contains certain customary representations,
warranties and covenants found in credit agreements of this nature.

-37-
<PAGE> 41
MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth certain information regarding the
executive officers and directors of the Company. The Company's directors are
elected at each annual meeting of stockholders to serve for a period of one
year or until their successors are duly elected and qualified. The Company's
executive offices serve at the pleasure of the Company's Board of Directors.

<TABLE>
<CAPTION>
Name Age Positions
---- --- ---------
<S> <C> <C>
Robert W. Miller 73 Chief Executive Officer and Chairman of the Board

Steven G. Miller 44 President, Chief Operating Officer and Director

Charles P. Kirk 41 Senior Vice President and Chief Financial Officer

Kathleen Reid-Seidner 41 Secretary, Vice President and General Counsel

Richard A. Johnson 51 Senior Vice President, Store Operations

Thomas J. Schlauch 52 Senior Vice President, Buying

Steven J. Pechter 38 Senior Vice President, Management Information Systems

Leonard I. Green 63 Director

Jonathan D. Sokoloff 39 Director

Jennifer Holden Dunbar 34 Director
</TABLE>

ROBERT W. MILLER became Chairman of the Company in September 1992.
Mr. Miller had been the Company's Chief Executive Officer and President since
1973.

STEVEN G. MILLER became President, Chief Operating Officer and a
Director of the Company in September 1992. Mr. Miller, Robert Miller's son,
had been the Company's Executive Vice President, Administration, since 1988.

CHARLES P. KIRK became Senior Vice President and Chief Financial
Officer of the Company in September 1992. Mr. Kirk had been Thrifty's Director
of Planning and Vice President of Planning and Treasury since October 1990.
Prior to joining Thrifty, Mr. Kirk had held various financial positions with
Thrifty's former parent, PE, since 1981.

KATHLEEN REID-SEIDNER became Secretary, Vice President and General
Counsel of the Company in September 1992. Ms. Reid-Seidner had been Thrifty's
Vice President and Corporate Counsel since 1990 and Thrifty's Corporate Counsel
since 1987.

RICHARD A. JOHNSON became Senior Vice President, Store Operations, for
the Company in July 1992. Mr. Johnson had been the Company's Vice President,
Store Operations, since 1986.

-38-
<PAGE> 42
THOMAS J. SCHLAUCH became Senior Vice President, Buying, for the
Company in July 1992. Mr. Schlauch had been the Company's Head of Buying since
1990 and Vice President, Buying, since 1982.

STEVEN J. PECHTER became Senior Vice President, Management Information
Systems, for the Company in July 1992. Mr. Pechter had been the Company's Vice
President, Management Information Systems, since 1990 and a member of the
Operations Department since 1983.

LEONARD I. GREEN became a Director of the Company in September 1992.
Since 1989, Mr. Green has been, individually or through a corporation, a
partner of LGA, a merchant banking firm that is the general partner of GEI.
Before forming LGA in 1989, Mr. Green had been a partner of the merchant
banking firm of Gibbons, Green, van Amerongen for more than five years. Mr.
Green is also a director of Carr-Gottstein Foods Co., Rite Aid Corporation and
several private companies.

JONATHAN D. SOKOLOFF became a Director of the Company in September
1992. Mr. Sokoloff joined LGA as a partner in 1990. Mr. Sokoloff was
previously a Managing Director at Drexel Burnham Lambert Incorporated. Mr.
Sokoloff is also a director of TwinLab Corporation, Carr- Gottstein Foods Co.,
and several private companies.

JENNIFER HOLDEN DUNBAR became a Director of the Company in September
1992. She joined LGA as an associate in 1989, became a principal in 1993, and
through a corporation became a partner in 1994. Ms. Holden Dunbar was
previously an associate with the merchant banking firm of Gibbons, Green, van
Amerongen and a financial analyst in mergers and acquisitions with Morgan
Stanley & Co. Ms. Holden Dunbar is also a director of TwinLab Corporation and
several private companies.

-39-
<PAGE> 43
EXECUTIVE COMPENSATION

(1) Summary Compensation Table

The following table sets forth the annual and long-term compensation
of the Company's Chief Executive Officer and four additional most highly
compensated executive officers whose annual salaries and bonus exceeded
$100,000 in total during the fiscal year ended December 29, 1996.

<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
-----------------------------------------------------------------------------------------------------------------------------
Securities
Other Underlying
Annual Restricted Stock
Compen- Stock Options/ LTIP All Other
Name and Principal Year Salary Bonus sation Awards SARs Payouts Compensation
Position ($) ($) ($) ($) (#)(1) ($) ($)
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert W. Miller, 1996 $290,000 $275,000 $-0- $-0- 6,400 $ -0- $ -0-
Chief Executive Officer 1995 290,000 -0- -0- -0- -0- -0- -0-
1994 276,000 240,000 -0- -0- 10,000 -0- -0-
-----------------------------------------------------------------------------------------------------------------------------

Steven G. Miller, 1996 210,000 175,000 -0- -0- 6,400 -0- -0-
President and Chief 1995 210,000 -0- -0- -0- -0- -0- -0-
Operating Officer 1994 200,000 100,000 -0- -0- 10,000 -0- -0-
-----------------------------------------------------------------------------------------------------------------------------

Thomas J. Schlauch, 1996 150,000 60,000 -0- -0- 3,600 -0- -0-
Senior Vice President, 1995 150,000 25,000 -0- -0- -0- -0- -0-
Buying 1994 142,000 50,000 -0- -0- 6,000 -0- -0-
-----------------------------------------------------------------------------------------------------------------------------

Richard A. Johnson, 1996 117,000 45,000 -0- -0- 3,600 -0- -0-
Senior Vice-President, 1995 117,000 20,000 -0- -0- -0- -0- -0-
Store Operations 1994 112,000 36,000 -0- -0- 6,000 -0- -0-
-----------------------------------------------------------------------------------------------------------------------------

Charles P. Kirk, 1996 130,000 35,000 -0- -0- 3,600 -0- -0-
Senior Vice President & 1995 130,000 12,000 -0- -0- -0- -0- -0-
Chief Financial Officer 1994 124,000 24,000 -0- -0- 6,000 -0- -0-
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>

____________________
(1) Represents stock options issued under the Big 5 Corporation 1992
Management Equity Plan. See Note (1) to the "Options/SAR Grants in Fiscal 1996"
table for a description of the plan.

-40-
<PAGE> 44

(2) Option/SAR Grants in Fiscal 1996

<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of
Number of % of Total Stock Appreciation
Securities Options/SARs for
Underlying Granted to Exercise Option Term
Options/SARs Employees in or Expiration ---------------------
Name Granted (1) Fiscal Year Base Price (2) Date 5%(3) 10%(3)
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Robert W. Miller 6,400 11.7% $12.00 9/25/02 $24,894 $56,164
--------------------------------------------------------------------------------------------------------------
Steven G. Miller 6,400 11.7 12.00 9/25/02 24,894 56,164
--------------------------------------------------------------------------------------------------------------
Thomas J. Schlauch 3,600 6.6 12.00 9/25/02 14,003 31,592
--------------------------------------------------------------------------------------------------------------
Richard A. Johnson 3,600 6.6 12.00 9/25/02 14,003 31,592
--------------------------------------------------------------------------------------------------------------
Charles P. Kirk 3,600 6.6 12.00 9/25/02 14,003 31,592
--------------------------------------------------------------------------------------------------------------
</TABLE>

(1) The non-qualified stock options to purchase Common Stock were
issued under the Big 5 Corporation 1992 Management Equity Plan
(the "Plan"). Options granted under the Plan have an exercise
price equal to the fair market value of the Common Stock at
the date of the grant as determined by Parent's Board of
Directors. The options vest and become exercisable in
cumulative 20% installments commencing one year from the date
of grant, with full vesting on the fifth anniversary. Shares
of Common Stock acquired pursuant to the exercise of options
are generally subject to terms and conditions comparable to
those contained in various Management Subscription and
Stockholders Agreements pursuant to which members of
management have previously acquired Common Stock. See
"Principal Stockholders." The Plan terminates on September
25, 2002, unless extended. The Plan is administered by the
Board of Directors of Parent or a committee consisting of
three or more directors of Parent to whom administration of
the Plan has been duly delegated by the Board of Directors
(the Board of Directors and the Committee are hereinafter
referred to as the "Committee"). The Committee designates the
class of employees who will be granted options and the number
of shares subject to such options. Members of the Committee
are not eligible to receive options. A total of 276,000
shares of Common Stock are reserved for purchase pursuant to
options authorized under the Plan, of which 271,200 were
subject to issued and outstanding options as of December 31,
1996.

(2) Exercise price is equal to the fair market value of a share of
Common Stock at the date of grant as determined by Parent's
Board of Directors.

(3) The potential realizable value of each grant of options
(exclusive of the exercise price) is calculated based on
assumed annualized appreciation rates during the terms of the
options of 5% and 10% on the value of the Common Stock at the
date the options were granted.

-41-
<PAGE> 45

(3) Aggregated Option/SAR Exercises in Fiscal 1996 and 1996 Fiscal
Year-End Option Value

<TABLE>
<CAPTION>
Number of
Securities Underlying
Unexercised Value of Unexercised in the
Shares Options Held at Fiscal Money Options
Acquired on Value Year End at Fiscal Year End
Name Exercise (#) Realized Exercisable/Unexercisable Exercisable/Unexercisable(1)
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Robert W. Miller -0- -0- 14,500/31,400 $83,700/$130,500
----------------------------------------------------------------------------------------------------------
Steven G. Miller -0- -0- 14,500/31,400 83,700/130,500
----------------------------------------------------------------------------------------------------------
Thomas J. Schlauch -0- -0- 9,400/19,600 55,175/85,438
----------------------------------------------------------------------------------------------------------
Richard A. Johnson -0- -0- 9,400/19,600 55,175/85,438
----------------------------------------------------------------------------------------------------------
Charles P. Kirk -0- -0- 5,500/14,100 27,875/46,938
----------------------------------------------------------------------------------------------------------
</TABLE>

(1) Represents the difference between the fair market value of the Common
Stock at the end of Fiscal 1996 as determined by the Company's Board
of Directors and the exercise price of the options.

(4) Employment Contracts and Change in Control Arrangements

The Company and each of Steven G. Miller and Robert W. Miller
(collectively, the "Executives") have entered into employment agreements, dated
as of January 1, 1993, whereby Steven Miller is to continue to serve as
President and Chief Operating Officer and Robert Miller as Chairman of the
Board of Directors (the "Board") and Chief Executive Officer of the Company
until December 31, 1994 and for additional successive one-year periods
thereafter, unless any party gives timely notice to the other that the
employment term shall not be so extended. The agreements require the Company
to provide the Executives with a base salary and those benefits generally
available to the Company's senior executive officers, including health
insurance, sick leave, and profit sharing plan participation, and require the
Board to make an annual determination as to whether each is entitled to receive
a bonus for such year and an increase in base salary for the next year. Robert
Miller's agreement also provides for supplemental annual retirement benefits
and health insurance benefits for himself and his surviving spouse upon his
retirement.

Employment under both agreements is terminable by the Company at any
time, with or without cause, and, under Robert Miller's agreement, by him, if
for good reason (as defined in his employment agreement). If Steven Miller or
Robert Miller is terminated without cause or, in the case of Robert Miller, by
him for good reason, each is entitled to receive as severance pay his base
salary through the remainder of the employment term as then in effect. The
agreement of either Executive may be terminated if the Executive becomes unable
to render full services during certain prescribed periods of time. The
agreements contain covenants precluding the Executives from engaging in certain
competition with the Company and from soliciting certain employees of the
Company and its affiliates for a specified period following the termination of
employment, the basis of which depends upon the reason for the termination.

COMPENSATION OF DIRECTORS

Directors of the Company, as such, do not receive any compensation.
However, during the fiscal year ended December 29, 1996, LGA, with respect to
which Messrs. Green and Sokoloff and

-42-
<PAGE> 46

Ms. Holden Dunbar (or entities controlled by them) are general partners,
received as compensation for certain financial advisory services an annual fee
of $567,880 plus out-of-pocket expenses. The Company also paid LGA an
additional $500,000 in fees for work performed in securing the Company's bank
facility in 1994 and 1996. The Company believes that the terms of its oral
agreement with LGA are comparable to what could be obtained from an unrelated,
but equally qualified, third party.

-43-
<PAGE> 47
PRINCIPAL STOCKHOLDERS

The Company's outstanding capital stock is wholly owned by Parent.
Parent's outstanding equity securities consist of Parent's Common Stock, par
value $.01 (the "Common Stock"), and Parent's Series A 9% Cumulative Redeemable
Preferred Stock, par value $.01 (the "Preferred Stock"). The following table
sets forth the ownership of each class of the Parent's equity securities by any
person known to the Company to be the beneficial owner of more than 5% of
either class of the Parent's securities, the Company's directors, executive
officers named in the Summary Compensation Table above, and all executive
officers and directors of the Company as a group.

<TABLE>
<CAPTION>
Common Stock Preferred Stock
Name and Address (1) ------------------------------------- ------------------------------------
of Beneficial Owner Number of Shares Percent of Class Number of Shares Percent of Class
- -------------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Green Equity Investors, L.P. 3,100,160 77.5% 129,932 86.6%
Robert W. Miller 100,000 2.5 -0- -0-
Steven G. Miller 50,000 1.3 -0- -0-
Thomas J. Schlauch 20,000 (2) -0- -0-
Richard A. Johnson 20,000 (2) -0- -0-
Charles P. Kirk 14,000 (2) -0- -0-
Leonard I. Green (3) (3) (3) (3)
Jonathan D. Sokoloff (3) (3) (3) (3)
Jennifer Holden Dunbar (3) (3) (3) (3)
All Executive Officers and
Directors as a Group 3,357,160(4) 84.0% 129,932(4) 86.6%
</TABLE>

(1) The address for each stockholder is 2525 East El Segundo Boulevard, El
Segundo, California 90245, except Green Equity Investors, L.P., for
which the address is 11111 Santa Monica Boulevard, Suite 2000, Los
Angeles, California 90025.
(2) Less than one percent.
(3) Messrs. Green and Sokoloff and Ms. Holden Dunbar (or entities
controlled by them) are general partners of LGA and may be deemed to
be beneficial owners of the shares of Common Stock and Preferred Stock
owned by GEI by reason of their interests in LGA, which is the sole
general partner of GEI.
(4) Includes the shares identified in note (3) above.

TERMS OF THE COMMON STOCK AND PREFERRED STOCK

Common Stock held by executives of the Company was issued pursuant to
Management Subscription and Stockholders Agreements (collectively, the
"Agreements") dated as of September 25, 1992 among Parent, GEI, and the
respective members of the Company's management (collectively, the "Investors").
The Agreements prohibit the transfer of such Common Stock until the fifth
anniversary of the issuance thereof or the occurrence of any earlier specified
event that terminates such prohibition, with an exception for transfers to
"related transferees" (as defined therein). Thereafter, such shares of Common
Stock are transferrable subject to a right of first refusal in favor of Parent.
The Agreements also contain certain "put" and "call" options exercisable,
generally, upon termination of an Investor's employment with the Company,
certain registration rights, and "tag-along" and "drag-along" sale rights in
the event GEI proposes to sell a majority of its shares of Common Stock.
Common Stock and Preferred Stock held by GEI was issued pursuant to that
certain Stock Subscription Agreement dated as of September 25, 1992 by and
between Parent and GEI, which grants GEI certain registration and other rights.

-44-
<PAGE> 48
CERTAIN TRANSACTIONS

RELATIONSHIP WITH THRIFTY PAYLESS AND RITE AID CORPORATION

Prior to September 1992, the Company was a wholly owned subsidiary of
Thrifty, which was in turn a wholly owned subsidiary of PE. On September 25,
1992, the Company was acquired by Parent and Big 5 Holdings, both of which had
been formed by GEI for purposes of the Acquisition, pursuant to a Purchase and
Sale Agreement dated as of May 22, 1992 among Big 5 Holdings, PE and Thrifty
(as amended, the "Purchase Agreement"). Concurrently, in a related
transaction, Thrifty was acquired by Thrifty PayLess, Inc. ("Thrifty PayLess")
and Thrifty PayLess Holdings, Inc. ("TPH") pursuant to a Purchase and Sale
Agreement dated as of May 22, 1992 between PE and TPH (as amended, the "Thrifty
Purchase Agreement"). In December 1996, TPH was acquired by Rite Aid
Corporation by way of a merger. References herein to "Rite Aid" include Rite
Aid Corporation and its subsidiaries, including Thrifty PayLess and Thrifty.

As a result of the Company's prior relationship with the Thrifty
PayLess entities and various provisions of the Purchase Agreement and the
Thrifty Purchase Agreement, the Company continues to maintain certain
relationships with Rite Aid, Thrifty PayLess and PE. These relationships are
described below.

(1) Purchase Agreement.

Pursuant to the Purchase Agreement, PE continues to have certain
indemnification obligations to the Company with respect to breaches of
representations and warranties contained in the Purchase Agreement with respect
to environmental matters. The Purchase Agreement specifies a $2.5 million
minimum dollar limit and a $25 million maximum dollar limit, though the maximum
dollar limit may increase under certain circumstances up to an absolute
limitation of $40 million. The period during which environmental
indemnification claims may be asserted ends on September 25, 2012. The
Purchase Agreement also provides that, with certain exceptions, such
indemnification rights constitute the sole remedies of the parties thereto.
Pursuant to an Amended and Restated Indemnification Implementation Agreement
dated as of April 20, 1994, the Company may only pursue its indemnification
claims against PE through Rite Aid as its agent.

(2) The Tax Indemnity Agreement.

In connection with the closings of the Acquisition and the Thrifty
Acquisition, PE, TPH, Thrifty and the Company entered into a Tax Indemnity
Agreement dated as of September 25, 1992. Such agreement sets forth the
parties' agreements with respect to various tax matters and obligations under
ERISA, including the allocation of various tax obligations relating to the
inclusion of the Company and each member of the affiliated group of which the
Company is the common parent in certain consolidated and/or unitary tax returns
of PE.

(3) Subleases.

The Company previously subleased the building and improvements of its
Fontana, California distribution center from Thrifty Realty Company, a
California corporation and a wholly-owned subsidiary of Thrifty. See "Business
- - Distribution and Information Systems". However, on March 5, 1996, as
permitted by the terms of such sublease, the Company purchased the facility
from MLTC for a purchase price of $8.9 million, thereby terminating such
sublease. Concurrently with

-45-
<PAGE> 49
such purchase, the Company entered into a sale/leaseback transaction with
respect to the distribution center with the State of Wisconsin Investment
Board.

The Company subleases certain business equipment and other personal
property from Thrifty, including the Company's "Point of Sale" system (the
"Equipment"), pursuant to a Sublease (the "Sublease") dated as of September 25,
1992 between the Company and Thrifty, as subsequently amended. Thrifty
currently holds a leasehold interest in the Equipment pursuant to an Amended
and Restated Master Lease Agreement dated as of April 20, 1994 between MLTC, as
lessor, and Thrifty, as lessee (the "Master Lease"). The Master Lease contains
a non-disturbance and attornment agreement pursuant to which the Company's use
and enjoyment of the Equipment will not be disturbed as a result of any default
under the Master Lease provided that the Company is not in default under the
Sublease.

The Master Lease provides Thrifty with an option to purchase the
Equipment, and the Sublease provides the Company with the same option. The
Company's option to purchase is exercisable notwithstanding any default under
the Master Lease provided the Company is not otherwise in default under the
Sublease; however, in the event a default exists under the Master Lease, the
Company's exercise of its purchase option requires the payment by the Company
of all amounts due and payable under the Master Lease at the time of the
consummation of the purchase pursuant to the exercise of such option. Such
amounts may include rent, fees and other expenses that are not allocable to the
Equipment (the "Excess Fees") if the same are due and payable but have not
otherwise been paid by Thrifty. To the extent the Company is required to pay
such Excess Fees, Thrifty is obligated under the Sublease to reimburse the
Company for the full amount of such Excess Fees.

The Company believes that all other material terms of the Sublease,
including rent payments, are comparable to what could be obtained from an
unrelated third party.

OWNERSHIP OF NOTES BY AFFILIATES

A portion of the Notes are owned by affiliates of the Company: Robert
Miller ($150,000); Steven Miller ($25,000); Jonathan Sokoloff ($100,000); and
Leonard Green ($100,000). Robert Miller is Chairman of the Board of Directors
and Chief Executive Officer of the Company. Steven Miller is President and
Chief Operating Officer of the Company and a Director. Mr. Sokoloff and Mr.
Green are members of the Board of Directors of the Company. Additionally,
Messrs. Green and Sokoloff may be deemed to be beneficial owners of the
3,100,160 shares or approximately 77.5% of the outstanding Common Stock owned
by GEI, and the 129,932 shares or 86.6% of the outstanding Preferred Stock
owned by GEI, by reason of their interests in LGA, which is the sole general
partner of GEI. By virtue of its ownership of Parent's Common Stock, GEI has
the ability to elect all of the directors of Parent and the Company thereby
control each of their respective management and policies. The foregoing Note
purchases were made on the same terms as all other purchases of the Notes.

CONSULTING FEES

As consideration for the provision of ongoing financial advisory
services, the Company has agreed pursuant to an oral arrangement to pay an
annual fee of $567,880, plus out-of-pocket expenses, to LGA, the general
partner of GEI. The Company also paid LGA an additional $500,000 in fees for
work performed in securing the Company's bank facility in 1994 and 1996. The
Company

-46-
<PAGE> 50

believes that the terms of its oral agreement with LGA are comparable to what
could be obtained from an unrelated, but equally qualified, third party.

-47-
<PAGE> 51
DESCRIPTION OF SECURITIES TO BE REGISTERED

The Notes were issued pursuant to an Indenture (the "Indenture"),
dated as of September 25, 1992, by and among the Company, Big 5 Holdings and
First Trust National Association, a national association, as "Trustee." The
New Notes offered in exchange for the Notes pursuant to the Exchange Offer will
be issued under, and the New Notes and the Notes remaining after the Exchange
Offer will both be governed by, the Indenture. The New Notes and the Notes are
hereinafter referred to collectively as the "Securities." The Securities were
issued in an aggregate principal amount of $55,000,000.

The terms of the Securities include those stated in the Indenture and
those made part of the Indenture by reference to the Trust Indenture Act of
1939, as amended (the "Trust Indenture Act"). The Securities are subject to
all such terms, and reference is made to the Indenture and the Trust Indenture
Act for a statement thereof. The definitions of certain capitalized terms are
set forth below under "Certain Definitions" or within the summary of certain
provisions. The section numbers in the summary refer to sections in the
Indenture. The Indenture has been qualified under the Trust Indenture Act.

GENERAL

As of December 29, 1996, there were $36,450,000 aggregate principal
amount of Securities outstanding. The Securities are unsecured obligations of
the Company and payment of principal and interest on such Securities is
subordinated, to the extent and in the manner provided in the Indenture, to the
prior payment in full of all Senior Indebtedness (see "Subordination").

Interest on the Securities is payable semi-annually on each March 15
and September 15 to the registered holders of such Securities at an interest
rate per annum of 13-5/8%. Interest on the Securities will accrue from the
most recent date to which interest has been paid or, if no interest has been
paid, from the date of issuance of the Securities. Interest will be computed
on the basis of a 360-day year for the actual number of days elapsed. The
Securities mature on September 15, 2002 ("Stated Maturity").

The Company will maintain an office or agency where the Securities may
be presented for registration for transfer or for exchange (the "Registrar")
and an office or agency where the Securities may be presented for payment (the
"Paying Agent"). The Registrar will keep a register of the Securities and of
their transfer and exchange. The Company may appoint one or more co-Registrars
and one or more additional Paying Agents. As of September 25, 1992, the
Trustee has been appointed by the Company as Registrar and Paying Agent.

CERTAIN DEFINITIONS

Certain capitalized terms used herein are defined as follows:

"Affiliate" of any specified person means any other person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified person. For the purposes of this definition,
"control" when used with respect to any person means the power to direct the
management and policies of such person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise.

-48-
<PAGE> 52
"Asset Sale" means any sale, assignment, transfer or other disposition
of any property (whether now owned or hereafter acquired) by the Company or any
Restricted Subsidiary to any person other than the Company or a wholly owned
Subsidiary, excluding (i) any sale, assignment, transfer or other disposition
of any property sold or disposed of in the ordinary course of business, (ii)
any sale/leaseback of real and/or personal property acquired subsequent to the
Issue Date, (iii) sales of damaged, worn out or obsolete property or property
that is otherwise no longer necessary for the proper conduct of business
(including motor vehicles and inventory) in the ordinary course of business,
and (iv) the abandonment of any assets and properties of the Company or any
Restricted Subsidiary which are no longer useful in its business and cannot be
sold.

"Average Life" means, as of the date of determination, with reference
to any security or instrument, the quotient obtained by dividing (i) the sum of
the products of the number of years from the date of determination to the dates
of each successive scheduled principal (or redemption) payment of such
security or instrument multiplied by the amount of such principal (or
redemption) payment (ii) the sum of all such principal (or redemption)
payments.

"Bank Facility" means the Credit Agreement, as amended, modified or
supplemented from time to time, or any agreement, as amended, modified or
supplemented from time to time, pursuant to which Refinancing Indebtedness is
incurred with respect thereto.

"Bankruptcy Law" means Title 11, U.S. Code or any similar federal,
state or foreign law for the relief of debtors.

"Capital Stock" means, with respect to any person, any and all shares,
interests, participations or other equivalents (however designated) of
corporate stock, or other equity interest, including, without limitation, each
class of common stock and preferred stock of such person.

"Capitalized Lease Obligation" means obligations under a lease that is
required to be capitalized for financial reporting purposes in accordance with
generally accepted accounting principles ("GAAP"), and the amount of
Indebtedness represented by such obligations shall be the capitalized amount of
such obligations determined in accordance with GAAP.

"Change of Control" means, at any time, the beneficial ownership
(within the meaning of Rule 13d-3 under the Exchange Act whether or not such
provision is applicable) by LGA and its Affiliates as a group (within the
meaning of section 13(d)(3) of the Exchange Act whether or not such provision
is applicable) of securities constituting less than a majority (or, after any
public offering of any shares of Capital Stock of the Company entitling the
holders thereof to vote on a regular basis for members of the Board of
Directors of the Company, less than 30%) of the Company's then outstanding
voting securities entitling the holders thereof to vote on a regular basis for
members of the Board of Directors of the Company.

"Consolidated Interest Coverage Ratio" of any person means, for any
period, the ratio, on a pro forma basis, of (a) EBDAIT of such person for such
period plus 33-1/3% of Consolidated Rental Expense of such person for such
period to (b) Consolidated Interest Expense of such person for such period plus
33-1/3% of Consolidated Rental Expense of such person for such period;
provided, that in making such computation, in calculating EBDAIT and
Consolidated Interest Expense, (a) acquisitions which occurred during the
Reference Period or subsequent to the Reference Period and on or prior to the
date of the transaction giving rise to the need to calculate the Consolidated
Interest Coverage Rate (the "Transaction Date") shall be assumed to have
occurred on the first day of the Reference Period, (b) the incurrence of any
Indebtedness or Disqualified Capital Stock during the Reference Period or

-49-
<PAGE> 53
subsequent to the Reference Period and on or prior to the Transaction Date and
the application of the proceeds therefrom shall be assumed to have occurred on
the first day of such Reference Period, (c) the Consolidated Interest Expense
of such person attributable to interest (or dividends) on any Indebtedness or
Disqualified Capital Stock computed on a pro forma basis and bearing a floating
interest (or dividend) rate shall be computed as if the highest rate in effect
from the beginning of the Reference Period to the Transaction Date had been the
applicable rate for the entire period, and (d) in the cases as described in the
summary below under "Limitation on Incurrence of Additional
Indebtedness/Issuances of Disqualified Capital Stock," the incurrence of
Indebtedness or Disqualified Capital Stock giving rise to the need to calculate
the Consolidated Interest Coverage Ratio shall be assumed to have occurred on
the first day of the Reference Period.

"Consolidated Interest Expense" of any person means for any period,
the aggregate amount (without duplication) of (a) interest of such person and
its consolidated subsidiaries, whether expenses or capitalized (including, in
accordance with the following sentence, interest attributable to Capitalized
Lease Obligations), paid, accrued, or scheduled to be paid or accrued during
such period, in respect of all Indebtedness of such person and its consolidated
subsidiaries (including (i) the interest portion of all deferred payment
obligations, calculated in accordance with the effective interest method, and
(ii) all commissions, discounts and other fees and charges owed with respect to
letters of credit and bankers' acceptance financings and costs associated with
currency and interest rate swap arrangements, in each case to the extent
attributable to such period, and (b) dividend requirements of such person and
its consolidated subsidiaries with respect to Disqualified Capital Stock
(whether in cash or otherwise (except dividends payable solely in shares of
Qualified Capital Stock)) paid, accrued or scheduled to be paid or accrued
during such period, in each case to the extent attributable to such period and
excluding items eliminated in consolidation. For purposes of this definition,
(a) interest on a Capitalized Lease Obligation shall be deemed to accrue at an
interest rate reasonably determined by the Board of Directors of such person
(as evidenced by a board resolution based upon advice of independent public
accountants) to be the rate of interest implicit in such Capitalized Lease
Obligation in accordance with GAAP, and (b) interest expense attributable to
any Indebtedness represented by the guaranty by such person or a subsidiary of
such person of an obligation of a person other than such person shall be deemed
to be the interest expense attributable to the items guaranteed.

"Consolidated Net Income" means, with respect to any person for any
period, the net income (or loss) of such person and its consolidated
subsidiaries (determined in accordance with GAAP) for such period, adjusted to
exclude (only to the extent included in computing such net income (or loss) and
without duplication): (a) all extraordinary, unusual and non-recurring gains
or losses or other gains or losses from the sale of assets (other than the sale
of Inventory in the ordinary course of business), (b) the net income, if
positive, of any person, other than a consolidated subsidiary in which such
person or any of its consolidated subsidiaries has an interest, except to the
extent of the amount of any dividends or distributions actually paid in cash to
such person or a consolidated subsidiary of such person during such period, but
not in excess of such person's pro rata share of such person's net income
during such period, (c) the net income of any person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition, and
(d) the net income, if positive, of any of such person's subsidiaries to the
extent that the declaration or payment of dividends or similar distributions is
not at the time permitted by operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to such subsidiary.

"Consolidated Net Worth" of any person means the consolidated
stockholders' equity of such person and its consolidated subsidiaries, as
determined in accordance with GAAP (calculating the assets of such person on a
first-in, first-out basis), adjusted to exclude (to the extent included in

-50-
<PAGE> 54
calculating such equity), (a) the amount of equity attributable to any
Disqualified Capital Stock, and (b) all revaluations and other write-ups in the
book value of any asset of such person or consolidated subsidiary of such
person subsequent to the Issue Date (other than write-ups in the book value of
assets (i) in connection with the acquisition thereof (whether by asset
purchase, stock purchase, merger or otherwise) during the twelve-month period
immediately following such acquisition and (ii) in connection with the
Acquisition).

"Consolidated Rental Expense" of any person means the rental expense
attributable to operating leases of such person and its consolidated
subsidiaries, determined in accordance with GAAP.

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

"Determination Date" means the first day of the fiscal quarter of the
Company immediately following the first fiscal quarter of the Company at the
end of which the Consolidated Net Worth of the Company exceeds $45,000,000.

"Disqualified Capital Stock" means, with respect to any person,
Capital Stock of such person that, by its terms or by the terms of any security
into which it is convertible or exchangeable, is, or upon the happening of an
event or the passage of time would be, required to be redeemed or repurchased
(other than at the option of the holder) by such person or any of its
subsidiaries, in whole or in part, on or prior to the Maturity Date of the
Securities.

"EBDAIT" means, with respect to any person, for any period, the
Consolidated Net Income of such person for such period adjusted to exclude (in
each case without duplication and only to the extent included in computing such
Consolidated Net Income), (i) consolidated tax expense, (ii) depreciation and
amortization expense (but only to the extent not included in Consolidated
Interest Expense), (iii) Consolidated Interest Expense, and (iv) non-cash items
which increased or decreased Consolidated Net Income, in each case determined
for such period on a consolidated basis for such person and its consolidated
subsidiaries in accordance with GAAP, except as specifically otherwise provided
in the Indenture.

"Holder" means the person in whose name a Security is registered on
the Registrar's books.

"Indebtedness" means, without duplication, with respect to any person,
(i) all liabilities, contingent or otherwise, of such person (a) for borrowed
money (whether or not the recourse of the lender is to the whole of the assets
of such person or only to a portion thereof), (b) evidenced by bonds, notes,
debentures or similar instruments or letters of credit, (c) representing the
balance deferred and unpaid of the purchase price of any property or services
(other than accounts payable or other obligations to trade creditors arising in
the ordinary course of business), (d) evidenced by bankers' acceptances or
similar instruments issued or accepted by banks, or (e) for the payment of
money relating to a Capitalized Lease Obligation; (ii) reimbursement
obligations of such person with respect to letters of credit; (iii) all
liabilities of others of the kind described in the preceding clause (i) or (ii)
that such person has guaranteed or that is otherwise its legal liability; (iv)
all obligations secured by a Lien to which the property or assets (including,
without limitation, leasehold interests and any other tangible or intangible
property rights) of such person are subject, whether or not the obligations
secured thereby shall have been assumed by or shall otherwise be such person's
legal liability; and (v) any and all deferrals, renewals, extensions,
refinancings and refundings (whether direct or indirect) of, or amendments,
modifications or supplements to, any liability of the kind

-51-
<PAGE> 55
described in any of the preceding clauses (i), (ii), (iii) or (iv), or this
clause (v), whether or not between or among the same parties.

"Intercompany Agreements" means the Services Agreement and the
Implementation Agreement.

"Inventory" of any person means any and all inventory, raw materials,
work-in-process and finished products of such person, now or hereafter
acquired, intended for sale or lease or to be furnished under contracts of
service in the ordinary course of business of such person, of every kind and
description, in the custody or possession, actual or constructive, of such
person including such inventory as is temporarily out of the custody or
possession of such person.

"Investment" by any person in any other person means (a) the
acquisition (whether for cash, property, services, securities or otherwise) of
capital stock, bonds, notes, debentures, partnership or other ownership
interests or other securities of such other person or any agreement to make any
such acquisition (including, without limitation, any "short sale" or any sale
of any securities of such person at a time when such securities are not owned
by the person entering into such short sale); (b) the making of any deposit
with, or advance, loan or other extension of credit to or on behalf of, such
other person (including the purchase of property from another person subject to
an understanding or agreement, contingent or otherwise, to resell such property
to or on behalf of such person) and (without duplication) any amount committed
to be advanced, lent or extended to such other person; or (c) the entering into
any guaranty of, or other contingent obligation with respect to, Indebtedness
or other liability of such other person. For purposes of the provision in the
Indenture summarized below as "Limitation on Restricted Payments," (i)
"Investment" shall include the fair market value of the net assets of any
Restricted Subsidiary at the time that such Restricted Subsidiary is designated
an Unrestricted Subsidiary and shall exclude the fair market value of the net
assets of any Unrestricted Subsidiary at the time that such Unrestricted
Subsidiary is designated a Restricted Subsidiary, and (ii) any property
transferred to or from an Unrestricted Subsidiary shall be valued at its fair
market value at the time of such transfer; in each case the fair market value
of net assets shall be determined by the Board of Directors of the Company, and
such determination shall be evidenced by a board resolution.

"Issue Date" means the date of first issuance of the Securities under
this Indenture.

"Lien" means any mortgage, pledge, lien, encumbrance, charge, interest
or adverse claim affecting title or resulting in an encumbrance against real or
personal property, or a security interest of any kind (including any
conditional sale or other title retention agreement, any lease in the nature
thereof, any option or other agreement to sell and any filing of or agreement
to give any financing statement in respect of any of the foregoing under the
Uniform Commercial Code ("UCC") (or equivalent statutes) of any jurisdiction).

"Management Investors" means all officers of the Company (who are
full-time employees of the Company) and any other employees of the Company.

"Marketable Securities" means, in the case of debt securities,
securities that are Investment Grade (a currently effective rating by S&P of
BBB- or higher and by Moody's of Baa3 or higher) and are traded on either the
New York Stock Exchange, the American Stock Exchange or the NASDAQ National
Market System and, in the case of equity securities, securities that are traded
on either the New York Stock Exchange, the American Stock Exchange or the
NASDAQ National Market System.

-52-
<PAGE> 56
"Maturity Date," when used with respect to any Security, means the
date on which the principal of such Security becomes due and payable as therein
or herein provided, whether at the Stated Maturity, Change of Control Payment
Date, Purchase Date, or by declaration of acceleration, call for redemption,
mandatory redemption or otherwise.

"Net Proceeds" means in the case of any sale by the Company of
Qualified Capital Stock, the aggregate net cash proceeds and fair market value
of Marketable Securities (valued at the fair market value thereof at the time
of receipt, as determined in good faith by the Board of Directors of the
Company, which determination shall be evidenced by a board resolution), other
than securities of the Company or any of its subsidiaries, received by the
Company after payment of expenses, commissions, discounts and the like incurred
in connection therewith.

"Payment Restriction" means any encumbrance, restriction or limitation
on the ability of (i) any Restricted Subsidiary to (a) pay dividends or make
other distributions on its Capital Stock owned by, or make payments on any
obligation, liability or Indebtedness owed to, the Company or any Restricted
Subsidiary, (b) make loans or advances to the Company or any Restricted
Subsidiary, or (c) transfer any of its properties or assets to the Company or
any Restricted Subsidiary, or (ii) the Company or any Restricted Subsidiary to
receive or retain any such amounts set forth in clause (i)(a), (i)(b), or
(i)(c), above.

"Proceeds" means, with respect to any Asset Sale, the proceeds of such
Asset Sale in the form of cash or cash equivalents or Marketable Securities,
including payments in respect of deferred payment obligations when received in
the form of cash or cash equivalents or Marketable Securities (to the extent
corresponding to the principal, but not interest, component thereof, except to
the extent such obligations are financed or sold with recourse to the Company
or any Subsidiary), net of (a) any amounts actually applied by the Company and
its Subsidiaries to repay Indebtedness outstanding at the time of such Asset
Sale that is either (i) secured by a Lien on the property or assets sold or
(ii) accelerated as a result of such sale, (b) income, sales, transfer and
similar taxes paid or actually payable by the Company and its Subsidiaries as a
result thereof, (c) the direct, out-of-pocket expenses of the Company and its
Subsidiaries, including, without limitation, reasonable brokerage fees,
investment banking fees, and fees and expenses of counsel, accountants and
appraisers, incurred in connection with any such sale, (d) in the case of bulk
sales of Inventory not in the ordinary course of business, any amounts actually
applied substantially concurrently with such Asset Sale to repay accounts
payable of the Company and its Subsidiaries incurred in connection with the
acquisition of such inventory, which accounts payable are existing at the time
of such Asset Sale, and (e) appropriate amounts to be provided by the Company
or any Subsidiary thereof, as the case may be, as a reserve, in accordance with
GAAP, against any liabilities associated with such assets and retained by the
Company or any Subsidiary thereof, as the case may be, after such sale or other
disposition of such assets (provided, that any reduction in any such reserve in
compliance with GAAP shall be deemed to constitute the receipt by the Company
or any Subsidiary which effected such Asset Sale of Proceeds from an Asset Sale
in the amount of such reduction).

"Qualified Capital Stock" means any Capital Stock of the Company that
is not Disqualified Capital Stock.

"Reference Period," with regard to any person, means the four full
fiscal quarters ended on the last day of the fiscal quarter immediately
preceding any date upon which any determination is to be made pursuant to the
terms of the Securities or the Indenture.

-53-
<PAGE> 57
"Refinancing Indebtedness" means Indebtedness or Disqualified Capital
Stock (a) issued in exchange for, or the proceeds from the issuance and sale of
which are used to substantially concurrently repay, redeem, refund, refinance,
discharge or otherwise retire for value, in whole or in part, or (b) except in
the case of Indebtedness under the Bank Facility, constituting an amendment,
modification or supplement to, or a deferral or renewal of (each of (a) and
(b), constituting a "Refinancing"), any Indebtedness or Disqualified Capital
Stock in a principal amount or liquidation preference (or, if such Refinancing
Indebtedness is issued at less than its principal amount, with an original
issue price, as determined in accordance with GAAP) not to exceed (after
deduction of the fees and expenses incurred in connection with the refinancing)
the lesser of (i) the principal amount or liquidation preference of the
Indebtedness or Disqualified Capital Stock so Refinanced (or, in the case of
the Bank Facility, the principal amount of term loans plus the total revolving
loan and letter of credit commitments (used and unused) outstanding thereunder
on the date of the Indenture (after giving effect to the initial advance of
term and revolving loans under the Bank Facility) to the extent that the
incurrence of such Indebtedness is permitted under "Limitation on Incurrences
of Additional Indebtedness/Issuances of Disqualified Stock" summarized below)
and (ii) if such Indebtedness being Refinanced was issued with an original
issue discount, the accredit value thereof (as determined in accordance with
GAAP) at the time of such Refinancing; provided, that (A) Refinancing
Indebtedness of any Restricted Subsidiary shall only be used to refinance
outstanding Indebtedness of such Restricted Subsidiary, and (B) Refinancing
Indebtedness shall (x) not have an Average Life less than the Indebtedness to
be so Refinanced at the time of such Refinancing and (y) in all respects, be no
less subordinated, if applicable, to the rights of Holders under the Securities
than was the Indebtedness or Disqualified Capital Stock to be Refinanced.

"Restricted Debt Prepayment" means any purchase, redemption, or other
acquisition or retirement for value of, or any payment in respect of any
amendment (in anticipation of or in connection with any retirement,
acquisition, or defeasance of such Indebtedness) of the terms of, or any
defeasance of, any Subordinated Indebtedness, directly or indirectly, by the
Company or a Restricted Subsidiary prior to the scheduled maturity, or prior to
any scheduled repayment of principal or sinking fund payment, as the case may
be, of such Subordinated Indebtedness, other than (x) in exchange for Qualified
Capital Stock or (y) in exchange for Subordinated Indebtedness in a principal
amount (or, if such Indebtedness is issued at less than its principal amount,
with an original issue price, as determined in accordance with GAAP) not to
exceed the lesser of (i) the principal amount of such Subordinated Indebtedness
being acquired in exchange therefor and (ii) if such Subordinated Indebtedness
being acquired was issued with an original issue discount, the accredit value
thereof (as determined in accordance with GAAP) at the time of the exchange.

"Restricted Investment" means any direct or indirect Investment
(including by way of redesignation of subsidiaries as set forth in the
definition of "Investment") by the Company or any Restricted Subsidiary in any
Affiliate of the Company or any Subsidiary.

"Restricted Payment" means any (i) Stock Payment, (ii) Restricted
Investment or (iii) Restricted Debt Prepayment, except that the following shall
not be deemed to be Restricted Payments: (a) the payment of dividends on, the
making of any distributions with respect to, or the acquisition of any shares
of Capital Stock of the Company in exchange for, up to an aggregate amount
equal to the Net Proceeds (not previously so expended) from the sale (other
than to a Subsidiary) of shares of Qualified Capital Stock subsequent to the
Issue Date; (b) payments between the Company and its wholly owned Restricted
Subsidiaries; (c) loans to Management Investors for the purpose of their
acquiring shares of Capital Stock of Parent; provided that the aggregate
principal amount of such loans outstanding at any one time pursuant to this
clause (c) in excess of $1.5 million shall be Restricted Payments; (d) payments
by the Company to Parent in amounts sufficient to allow it to

-54-
<PAGE> 58
acquire shares of Capital Stock of Parent, or options, warrants or rights to
acquire shares of Capital Stock of Parent or other Capital Stock- equivalent of
Parent, that are held by Management Investors; provided that the aggregate
amount of such payments made pursuant to this clause (d) in excess of
$1,000,000 (net of cash received from sales of Capital Stock of Parent by the
Company to Management Investors in the same fiscal year) in any fiscal year
shall be Restricted Payments; (e) the payment of dividends to Parent in an
amount sufficient to permit it to (i) eliminate fractional shares; or (ii)
collect or compromise in good faith a debt, claim or controversy with any
shareholder at a price not in excess of the fair market value thereof; provided
that the aggregate amount of such payments made pursuant to this clause (e) in
excess of $1,000,000 shall be Restricted Payments; and (f) the payment of
dividends to Parent in an amount sufficient to enable Parent to pay its
overhead and operating expenses; provided, that the aggregate amount of such
payments made pursuant to this clause (f) in excess of $250,000 in any fiscal
year shall be Restricted Payments.

"Restricted Subsidiary" means each Subsidiary that is not an
Unrestricted Subsidiary.

"Senior Indebtedness" means the principal of, and interest on, any
Indebtedness of the Company, whether outstanding on the date of the Indenture
or hereafter created, incurred, assumed, guaranteed or in effect guaranteed by
the Company unless, in the case of any particular Indebtedness, the instrument
creating or evidencing the same or the assumption or guarantee thereof
expressly provides that such Indebtedness shall be pari passu or subordinate in
right of payment to the Securities; provided, however, that Senior Indebtedness
shall not include (a) in the case of the obligation of the Company in respect
of each Security, the obligation of the Company in respect of other Securities,
(b) Indebtedness of the Company to a Subsidiary or an Affiliate of the Company,
(c) Indebtedness to, or guaranteed on behalf of, any individual shareholder,
director, officer or employee of the Company or of any Subsidiary (including,
without limitation, amounts owed for compensation), (d) Indebtedness
represented by Capitalized Lease Obligations, (e) Indebtedness and other
amounts incurred in connection with obtaining goods, materials or services, and
(f) Indebtedness incurred in violation of the provisions of the Indenture
summarized in "Limitation on Incurrence of Additional Indebtedness/Issuances of
Disqualified Capital Stock" and "Limitation on Ranking of Future Indebtedness"
below; provided, however, that, notwithstanding the foregoing, all obligations,
whether for principal, interest (including, without limitation, interest
accruing after the commencement of a proceeding under Bankruptcy Law as to the
Company, whether or not a claim for such interest is an allowed claim in such
proceeding), costs, fees, expenses, indemnities or otherwise, of the Company,
now existing or hereafter incurred under the Bank Facility (excluding principal
amounts in excess of the principal amount of term loans plus the total
revolving loan and letter of credit commitments (used and unused) outstanding
under the Bank Facility on the date of this Indenture (after giving effect to
the initial advance of term and revolving loans under the Bank Facility), which
such excess amounts shall not constitute Senior Indebtedness) or any guaranty
executed and delivered by the Company thereunder or pursuant thereto shall in
any event constitute Senior Indebtedness.

"Stock Payment" means, with respect to any person, (a) the declaration
or payment by such person, either in cash or in property, of any dividend on,
or the making by such person or any of its subsidiaries of any other
distribution in respect of, such person's Capital Stock or any warrants,
options, or rights (other than exchangeable or convertible Indebtedness of such
person) to purchase or acquire any shares of any class of such Capital Stock
except, in the case of the Company, dividends or other distributions payable
solely in shares of Qualified Capital Stock, or (b) the redemption, repurchase,
retirement or other acquisition for value, or any payment with respect to any
redemption, repurchase, retirement or other acquisition for value, by such
person or any of its subsidiaries, directly or indirectly, of such person's
Capital Stock or any warrants, options or rights (other than exchangeable or
convertible Indebtedness of such person) to purchase or acquire shares of any
class

-55-
<PAGE> 59
of such Capital Stock; provided, however, that in the case of a Subsidiary, the
term "Stock Payment" shall not include any such payment with respect to its
Capital Stock or warrants, rights or options to purchase or acquire shares of
any class of its Capital Stock that are owned by the Company or a wholly owned
Subsidiary.

"Subordinated Indebtedness" means Indebtedness of the Company that (i)
has a maturity and Average Life longer than those of the Securities and (ii) is
subordinated in right of payment to the Securities.

"Subsidiary" means each direct or indirect subsidiary of the Company.

"Unrestricted Subsidiary" shall mean (i) any Subsidiary that, at the
time of determination, shall be an Unrestricted Subsidiary (as designated by
the Board of Directors of the Company, as provided below) and (ii) any
subsidiary of an Unrestricted Subsidiary. The Board of Directors of the
Company may designate any Subsidiary (including any newly acquired or newly
formed subsidiary at or prior to the time it is so formed or acquired) to be an
Unrestricted Subsidiary unless such Subsidiary owns any Capital Stock of, or
owns or holds any Lien on any property of, any Subsidiary that is not an
Unrestricted Subsidiary. The Board of Directors of the Company may designate
any Unrestricted Subsidiary to be a Restricted Subsidiary. Any such
designation shall be evidenced by filing with the Trustee a certified copy of
the resolution giving effect to such designation and an officers' certificate
certifying that such designation complied with the foregoing applicable
conditions.

"U.S. Government Obligations" means direct non-callable obligations
of, or non-callable obligations guaranteed by, the United States of America for
the payment of which obligation or guarantee the full faith and credit of the
United States of America is pledged.

"U.S. Legal Tender" means such coin or currency of the United States
of America as at the time of payment shall be legal tender for the payment of
public and private debts.

OPTIONAL REDEMPTION

The Securities may be redeemed in whole or from time to time in part
at any time on and after September 15, 1997, at the option of the Company, at
the redemption price (expressed as a percentage of the principal amount (the
"Redemption Price")) set forth below with respect to the indicated redemption
date ("Redemption Date"), together with any accrued but unpaid interest to such
Redemption Date. The Securities may not be so redeemed before September 15,
1997.

If redeemed during the 12-month period beginning September 15:

<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
1997 105.839
1998 103.893
1999 101.946
2000 and thereafter 100.000
</TABLE>

If less than all of the Securities are to be redeemed, the Trustee
shall, if applicable, first allocate the principal amount of Securities to be
redeemed pro rata between the Notes and the New Notes and then select the
Securities to be redeemed by lot or by such other method (other than pro rata)
as the Trustee shall determine to be fair and appropriate. The Trustee shall
make the selection

-56-
<PAGE> 60
from the Securities outstanding and not previously called for redemption.
Securities in denominations of $1,000 may be redeemed only in whole. At least
30 days but not more than 60 days before the Redemption Date, the Company shall
mail a notice of redemption to each Holder whose Securities are to be redeemed
at such Holder's address as it appears in the register maintained by the
Registrar. Once notice of redemption is mailed, Securities called for
redemption become due and payable together with accrued and unpaid interest on
the Redemption Date and at the Redemption Price and shall cease to bear
interest from and after the Redemption Date.

SINKING FUND

The Securities are subject to a mandatory sinking fund pursuant to
which the Company will redeem 25% of the aggregate principal amount of
Securities outstanding on the Issue Date on each of September 15, 2000 and
September 15, 2001 at the principal amount plus accrued and unpaid interest to
the date of such redemption.

The Company (a) may deliver Securities outstanding (other than any
previously called for redemption) and (b) may apply as a credit Securities
which have been redeemed at the election of the Company, in each case in
satisfaction of all or any part of either sinking fund payment required to be
made. Before August 1, 2000 and August 1, 2001 the Trustee shall select the
Securities to be redeemed on September 15, 2000 and September 15, 2001,
respectively, in the manner specified under "Optional Redemption" above.

SUBORDINATION

The Securities are subordinate to Senior Indebtedness. As of December
29, 1996, the aggregate principal amount of Senior Indebtedness outstanding was
approximately $54.3 million.

The Indenture provides that no payment shall be made by the Company on
account of principal of or interest on the Securities or to redeem, defease, or
acquire any of the Securities (i) upon the maturity of any Senior Indebtedness
by lapse of time, acceleration, demand, or otherwise, unless and until all
principal thereof, interest thereon and other obligations constituting such
Senior Indebtedness shall first be paid in full or (ii) upon any default in
payment of any principal of or interest on any Senior Indebtedness when due and
payable, unless and until such default shall have been cured or waived or shall
have ceased to exist.

Upon the happening of an event of default with respect to any Senior
Indebtedness permitting the holders thereof to accelerate the maturity thereof
or demand payment (other than a default in payment of the principal of or
interest on such Senior Indebtedness), upon written notice thereof given to the
Company and the Trustee by any holders of such Senior Indebtedness ("Payment
Notice"), then, unless and until such event of default shall have been cured or
waived or shall have ceased to exist, no payment shall be made by the Company
with respect to the principal of or interest on the Securities or to redeem (or
make a deposit in redemption of), defease or acquire any of the Securities;
provided, however, that this paragraph shall not prevent the making of any
payment for more than 179 days after the Payment Notice shall have been given.
Notwithstanding the foregoing, (i) not more than one Payment Notice shall be
given within a period of 360 consecutive days, (ii) no event of default which
existed or was continuing on the date of any Payment Notice (whether or not
such event of default is on the same issue of Senior Indebtedness) shall be
made the basis for the giving of a subsequent Payment Notice, (iii) if the
Company or the Trustee receives any Payment Notice, a similar notice relating
to or arising out of the same default or facts giving rise to such default
(whether or not such default is on the same issue of Senior Indebtedness) shall
not be effective and

-57-
<PAGE> 61
(iv) no Payment Notice may be given by a holder or holders (or the
representative of holders) (1) of any Senior Indebtedness other than Senior
Indebtedness under the Bank Facility while the Bank Facility is in effect or
any Senior Indebtedness thereunder is outstanding or (2) of less than the
lesser of (x) one half of the principal amount then outstanding and having been
drawn under the Bank Facility (while any such amount is still outstanding) and
(y) $10,000,000 principal amount of Senior Indebtedness.

Upon any distribution of assets of the Company upon any dissolution,
winding up, liquidation or reorganization of the Company (including, without
limitation, in bankruptcy, insolvency, receivership proceedings or upon any
assignment for the benefit of creditors), holders of all Senior Indebtedness
shall first be entitled to receive payments in full of the obligations payable
in respect thereof, before the Holders are entitled to receive any payment.
Any payment or distribution of assets of the Company shall be paid by the
liquidating trustee or agent or such other person directly to the holders of
Senior Indebtedness to the extent necessary to make payment in full of all
Senior Indebtedness remaining unpaid after giving effect to all concurrent
payments and distributions to or for the holders of such Senior Indebtedness.

Subject to the payment in full to the holders of Senior Indebtedness
of all Senior Indebtedness, the holders of Securities shall be subrogated to
the rights of the holders of Senior Indebtedness to receive payments or
distributions of assets of the Company applicable to the Senior Indebtedness
until all amounts owing on the Securities shall be paid in full.

CERTAIN COVENANTS

The Indenture contains, among others, the following covenants:

(1) Limitation on Restricted Payments

The Company may not, nor may it permit any of its Restricted
Subsidiaries to, directly or indirectly, make any Restricted Payment if, at the
time of such Restricted Payment, or on a pro forma basis after giving effect
thereto, (a) a Default or an Event of Default shall have occurred and be
continuing or (b) the Company's Consolidated Net Worth shall not exceed
$45,000,000, or (c) the Company's Consolidated Interest Coverage Ratio for its
four full fiscal quarters ended on the last day of the fiscal quarter
immediately preceding the date upon which such Restricted Payment is made would
be less than 3.0 to 1.0, or (d) the aggregate amount of all Restricted Payments
expended, including such Restricted Payment (the amount of any Restricted
Payment, if other than cash, to be the fair market value thereof at the date of
payment, as determined in good faith by the Board of Directors of the Company
and evidenced by a board resolution), subsequent to the Determination Date,
shall exceed 50% of the aggregate Consolidated Net Income of the Company earned
during the period beginning on the Determination Date and ending with the last
day of the fiscal quarter immediately preceding the date of such Restricted
Payment.

Notwithstanding the foregoing, if no other Default or Event of Default
shall have occurred and be continuing, or on a pro forma basis after giving
effect to such Restricted Payment would occur, the preceding paragraph shall
not prevent the payment of any dividend within 60 days after the date of its
declaration if such dividend would have been permitted on the date of its
declaration; provided, however, that the payment of each dividend paid in
accordance with this clause shall be counted for purposes of computing the
aggregate amount of Restricted Payments expended for purposes of clause (d) in
the preceding paragraph.

-58-
<PAGE> 62
(2) Limitation on Transactions with Shareholders and Affiliates

None of the Company or any of the Restricted Subsidiaries may (i)
sell, lease, transfer or otherwise dispose of any of its properties, assets or
securities to, (ii) purchase or lease any property, assets or securities from,
(iii) make any Investment in, or (iv) enter into or amend any contract or
agreement with or for the benefit of, either (A) an Affiliate of any of them
(other than, in each twelve-month period, Affiliate Transactions in the
ordinary course of business involving less than, in the aggregate, $500,000) or
(B) any person or person who is a member of a group (as such term is used for
purposes of Sections 13(d) and 14(d) of the Exchange Act) that, directly or
indirectly, is the beneficial holder of 10% or more of any class of equity
securities of the Company or (C) any person who is an Affiliate of any such
holder (each case, an "Affiliate Transaction"), unless, in each case, prior to
entering into any transaction or any series of related transactions to which
this provision applies involving or having a value (in the case of clause (A),
in such twelve-month period) of more than $500,000, the Company delivers to the
Trustee an officers' certificate stating that, in the good faith determination
of the Board of Directors of the Company (as evidenced by a board resolution),
the transaction, or series of Affiliate Transactions, is on terms in the
aggregate no less favorable to the Company or such Restricted Subsidiary, as
the case may be, than could be obtained from an unaffiliated third party. In
addition, neither the Company nor any of its Restricted Subsidiaries may enter
into an Affiliate Transaction or series of related Affiliate Transactions
involving more than $5,000,000 (other than (i) the performance by the Company
of its obligations hereunder, under the Securities, or under the Intercompany
Agreements and (ii) transactions pursuant to any of the Intercompany
Agreements), unless the Company or such Restricted Subsidiary, as the case may
be, has received an opinion from an Independent Financial Advisor (as defined
in the Indenture) to the effect that such Affiliate Transaction, or series of
Affiliate Transactions, is fair to the Company or such Restricted Subsidiary,
as the case may be, from a financial point of view. Notwithstanding the
foregoing, the following do not constitute "Affiliate Transactions": (x) the
payment of reasonable expenses and reasonable and customary management fees
from the Company or any Restricted Subsidiary to LGA, and (y) transactions
exclusively between or among the Company and any of its wholly owned Restricted
Subsidiaries.

(3) Limitation on Incurrences of Additional Indebtedness/Issuances
of Disqualified Capital Stock

(a) Except as set forth below, the Company may not, and the
Company may not permit any Restricted Subsidiary to, directly or indirectly,
issue, incur, assume, guarantee, become directly or indirectly liable, with
respect to (including as a result of an acquisition), extend the maturity of,
or otherwise become responsible for, contingently or otherwise any Indebtedness
or any Disqualified Capital Stock from and after the Issue Date. Indebtedness
and Disqualified Capital Stock incurred by any person that is not a Restricted
Subsidiary, which Indebtedness is outstanding at the time such person becomes a
Restricted Subsidiary, or is merged or consolidated with, the Company or a
Restricted Subsidiary is not (subject to the provisions set forth in the
definition of Consolidated Interest Coverage Ratio) deemed to have been
incurred or issued, as the case may be, at the time such person becomes a
Restricted Subsidiary or is merged or consolidated with the Company or a
Restricted Subsidiary.

(b) The Company may incur Indebtedness or Disqualified Capital
Stock if (i) no Default or Event of Default shall have occurred and be
continuing at the time of, or would occur after giving effect, on a pro forma
basis, to, such incurrence of such Indebtedness of Disqualified Capital Stock
and (ii) on the date of the incurrence of such Indebtedness or Disqualified
Capital Stock (the "Incurrence Date"), the Consolidated Interest Coverage Ratio
of the Company for the Reference

-59-
<PAGE> 63
Period immediately preceding the Incurrence Date would have been at least the
following respective ratios for the following respective fiscal years
corresponding to such Incurrence Date:

<TABLE>
<CAPTION>
The Consolidated
If the Incurrence Date Interest Coverage
is during the Ratio must be
fiscal year ending at least
- ---------------------- -----------------
<S> <C>
December 31, 1993 2.00 to 1
December 31, 1994 2.25 to 1
December 31, 1995 and thereafter 2.50 to 1
</TABLE>

(provided, that such ratio shall be 2.00 to 1 for all fiscal years with respect
solely to incurrences by the Company of Subordinated Indebtedness).

(d) The Company may incur Indebtedness pursuant to the terms of
the Bank Facility (including any guarantees thereof and letters of credit
issued thereunder); provided that the aggregate principal amount incurred and
outstanding pursuant to this clause (d), including any Refinancing Indebtedness
issued with respect to such Indebtedness, shall not at any time exceed the
principal amount of term loans plus the total revolving loan and letter of
credit commitments (used and unused) outstanding under the Bank Facility on the
date of the Indenture after giving effect to the initial advance of term and
revolving loans under the Bank Facility plus fees and expenses incurred in
connection with such refinancing.

(e) Subject to the provisions of clauses (d), (f), (h), and (i),
the Company or any Restricted Subsidiary may incur Refinancing Indebtedness,
provided that any Refinancing Indebtedness issued in exchange for or to
refinance Subordinated Indebtedness shall also satisfy the definition of
Subordinated Indebtedness.

(f) The Company or any Restricted Subsidiary may incur
Indebtedness to the Company or to a wholly owned Restricted Subsidiary of the
Company; provided that no Restricted Subsidiary shall become liable to any
person other than the Company or another Restricted Subsidiary that is a wholly
owned Subsidiary in respect of Indebtedness permitted by this clause (f),
including, pursuant to any Refinancing Indebtedness issued in exchange for or
to refinance any such Indebtedness incurred pursuant to this clause (f).

(g) The Company or any Restricted Subsidiary may incur
Indebtedness consisting of Capitalized Lease Obligations or indebtedness the
proceeds of which are applied toward the purchase of assets in the ordinary
course of the Company's business and with respect to which there is created a
security interest in such assets in favor of the seller thereof; provided that
the aggregate principal amount incurred pursuant to this clause (g) shall not
exceed $7,500,000 per fiscal year.

(h) The Company or any Restricted Subsidiary may incur
Indebtedness so long as such Indebtedness, including any Refinancing
Indebtedness used to refinance such Indebtedness, is issued in the ordinary
course of business under Interest Swap Obligations (as defined in the
Indenture) or is (consistent with past practices and in the ordinary course of
business) in the form of performance bonds or letters of credit or
reimbursement obligations in respect thereof, letter of credit obligations

-60-
<PAGE> 64
related to insurance with respect to claims by employees for work-related
injuries, or bank overdrafts that are repaid within three business days.

(i) To the extent that the following shall constitute Indebtedness
solely under clause (iv) of the definition of Indebtedness, the Company or any
Restricted Subsidiary may incur: (A) Liens arising out of judgments or awards
(other than any judgment that could constitute an Event of Default under clause
(6) under "Event of Default" summarized below) in respect of which the Company
or any of the Restricted Subsidiaries shall in good faith be prosecuting an
appeal or proceedings for review and in respect of which it shall have secured
a subsisting stay of execution pending such appeal or proceedings for review,
provided that it shall have set aside on its books adequate reserves, in
accordance with GAAP, with respect to such judgment or award; (B) Liens for
taxes, assessments or governmental charges or levies, provided that payment
thereof shall not at the time be required under the Indenture; (C) Liens to
secure payments of workmen's compensation and other payments, public liability,
unemployment and other insurance, social security obligations, or the
performance of bids, tenders, leases, contracts (other than contracts for the
payment of money), public or statutory obligations, surety, stay or appeal
bonds, or other similar obligations arising in the ordinary course of business;
(D) mechanics', workmen's or other similar liens arising in the ordinary course
of business and securing sums which are not past due or are being contested by
appropriate proceedings and for which adequate reserves have been established
in accordance with GAAP; (E) zoning restrictions, easements, restrictions on
the use of real property or other minor irregularities in title thereto, which
do not materially impair the use of such property in the normal operation of
the business of the Company or any of the Restricted Subsidiaries or the value
of such property; (F) unperfected Liens arising by operation of law under
Article 2 of the UCC in favor of unpaid sellers or prepaying buyers of goods
relating to amounts that are not past due in accordance with their respective
terms of sale; and (G) rights arising as a matter of law or existing as of the
Issue Date, in each case, of the lessor of any premises leased by the Company
with respect to tangible property on the leased premises.

(j) The Company may incur Indebtedness and Disqualified Capital
Stock in addition to Indebtedness and Disqualified Capital Stock incurred
pursuant to clauses (a) through (i); provided that the aggregate principal
amount of Indebtedness and liquidation preference of Disqualified Capital Stock
incurred and outstanding at any time pursuant to this clause, including any
Refinancing Indebtedness issued in exchange for or to refinance any such
Indebtedness incurred (after deduction of fees and expenses incurred in
connection with such refinancing), shall not in the aggregate exceed $25
million.

In the case of any Indebtedness outstanding pursuant to clauses (d) or
(j), the amount deemed to be incurred and outstanding shall include amounts
incurred and outstanding pursuant to clause (e) above that were incurred in
exchange for or to refinance such Indebtedness. Notwithstanding the foregoing
provisions, the aggregate principal amount of Indebtedness that may be
outstanding pursuant to clauses (d) and (j) may not exceed the sum of (x)
$25,000,000 (after the deduction of fees and expenses referred to in clause
(j)), plus (y) the principal amount of term loans plus the total revolving loan
and letter of credit commitments (used and unused) outstanding under the Bank
Facility on the date of the Indenture after giving effect to the initial
advance of term and revolving loans under the Bank Facility plus fees and
expenses referred to in clause (d), minus (z) the aggregate amount of all
Deemed Permanent Reductions (defined in "Sales of Assets" summarized below).

(4) Limitation on Dividend and Other Payment Restrictions Affecting
Subsidiaries

The Company may not, and may not permit any Restricted Subsidiary to,
directly or indirectly, create or suffer to exist or allow to become effective
any Payment Restriction with respect

-61-
<PAGE> 65
to any of its Restricted Subsidiaries, except for (i) restrictions contained in
the Indenture, (ii) restrictions contained in the Bank Facility and (iii)
customary provisions in instruments or agreements relating to the enforcement
of rights under any Liens on assets of such Restricted Subsidiary.

(5) Sales of Assets

(a) Neither the Company nor any Restricted Subsidiary may
consummate any Asset Sale, unless (x) the consideration received by the Company
or such Restricted Subsidiary, as the case may be, is not less than the fair
market value of the property (as determined by the Board of Directors of the
Company or such Restricted Subsidiary, as the case may be, and evidenced by a
board resolution) and (y) at least 80% of the consideration received therefor
by the Company or such Restricted Subsidiary, as the case may be, is in the
form of U.S. Legal Tender or U.S. Government Obligations; provided, however,
that the amount of (i) any liabilities of the Company or any Restricted
Subsidiary (as shown on the most recent balance sheet or in the notes thereto)
that are assumed by the transferee in any Asset Sale and from which the Company
or such Restricted Subsidiary, as the case may be, has been unconditionally and
irrevocably released (other than liabilities that are incurred in connection
with or in anticipation of such Asset Sale) and (ii) any notes or other
obligations received by the Company or any Restricted Subsidiary from such
transferee that are immediately converted by the Company or such Restricted
Subsidiary into U.S. Legal Tender or U.S. Government Obligations shall be
deemed to be U.S. Legal Tender or U.S. Government Obligations.

(b) Except with respect to a permitted sale of all or
substantially all of the Company's assets under the Indenture, if the aggregate
Proceeds of all Asset Sales from and after the Issue Date exceeds $3,000,000,
then the Company may, at its election, use the Proceeds from such Asset Sales
so in excess of $3,000,000 as working capital in the ordinary course of
business or apply such Proceeds to an investment in assets or businesses
consistent with the fundamental nature of the business of the Company or to
expenditures in the business of the Company, provided that such investment or
expenditure occurs within one year of the receipt of such Proceeds from such
Asset Sales that first exceeded $3,000,000 (or, in the case of Proceeds
received subsequent to the date on which Proceeds from Asset Sales first
exceeded $3,000,000, within 12 months of such receipt); provided, however, that
to the extent such Proceeds are not so accordingly used, such remaining
Proceeds shall be applied (A) to repayment or prepayment of Senior
Indebtedness, or (B) to repurchase the Securities pursuant to this provision.
The amount of any payment under clause (A) shall constitute a "Deemed Permanent
Reduction." The Company shall accumulate all Proceeds allocated pursuant to
clause (B) and the aggregate amount of such accumulated Proceeds shall be the
"Accumulated Amount."

(c) If as of the last day of any fiscal quarter of the Company the
Accumulated Amount is at least $5 million, then not later than 45 days
thereafter, the Company is required to make an unconditional offer (a "Section
5.13 Offer") to the Holders to purchase, on a pro rata basis, Securities having
a principal amount (the "Offer Amount") equal to the Accumulated Amount, at a
purchase price (the "Section 5.13 Offer Price") equal to 100% of principal
amount plus accrued but unpaid interest to, and including, the date the
Securities tendered are purchased and paid for (the "Purchase Date"). Notice
of a Section 5.13 Offer shall be sent at least 20 business days prior to the
Final Put Date (as defined below) by the Company to each Holder and to the
Trustee. The notice, which shall govern the terms of the Section 5.13 Offer,
shall state: (1) that the Section 5.13 Offer is being made; (2) the Offer
Amount, the Section 5.13 Offer Price the Final Put Date, and the Purchase Date,
which Purchase Date shall be on or prior to 35 days following the date the
Section 5.13 Offer is first mailed to Holders and, in no event, later than 80
days following the fiscal quarter end on which the Accumulated Amount was at
least $5 million; (3) that any Security not tendered or accepted for

-62-
<PAGE> 66
payment will continue to accrue interest; (4) that, unless the Company defaults
in depositing U.S. Legal Tender with the Paying Agent, any Security accepted
for payment shall cease to accrue interest after the Purchase Date; (5) that
Holders electing to have a Security purchased will be required to surrender the
Security, with the form entitled "Option of Holder to Elect Purchase" on the
reverse of the Security completed, to the Paying Agent at the address specified
prior to the close of business on the third business day prior to the Purchase
Date (the "Final Put Date"); (6) that Holders will be entitled to withdraw
their elections if the Paying Agent receives, up to the close of business on
the Final Put Date, proper notification that such Holder is withdrawing his
election to have such principal amount of Securities purchased; (7) that if
Securities in a principal amount in excess of the principal amount of
Securities to be acquired are tendered and not withdrawn the Company shall
purchase Securities on a pro rata basis; (8) that Holders whose Securities were
purchased only in part will be issued new Securities as to the unpurchased
portion of the Securities surrendered; and (9) the circumstances and relevant
facts regarding such Asset Sales. Any such Section 5.13 Offer must comply with
all applicable provisions of federal and state laws and any provisions of the
Indenture that conflict with such laws shall be deemed to be superseded by the
provisions of such laws.

On or before a Purchase Date, the Company is required to accept for
payment Securities or portions thereof properly tendered on or prior to the
Final Put Date, sufficiently deposit with the Paying Agent U.S. Legal Tender
and deliver to the Trustee Securities so accepted together with an officers'
certificate. The Paying Agent is required to promptly mail or deliver to
Holders of Securities the Section 5.13 Offer Price for such Securities and the
Trustee is required to promptly authenticate and mail or deliver to such
Holders a new Security equal in principal amount to any unpurchased portion of
the Security surrendered. Any Securities not so accepted must be promptly
mailed or delivered by the Company to the Holder thereof. The Company will
publicly announce the results of the Section 5.13 Offer on or as soon as
practicable after the Purchase Date. If the amount required to acquire all
Securities tendered by Holders pursuant to the Section 5.13 Offer (the "Section
5.13 Acceptance Amount") is less than the Offer Amount, the excess of the Offer
Amount over the Section 5.13 Acceptance Amount may be used by the Company for
general corporate purposes and upon consummation of any Section 5.13 Offer the
Accumulated Amount will be reduced to zero.

Whenever Proceeds received by the Company (in excess of the
$3,000,000), and prior to the purchase of Securities or an allocation to the
payment of Senior Indebtedness exceeds $1,500,000, such Proceeds are required
to be set aside by the Company in a separate account pending deposit with the
Paying Agent Offer or delivery by the Company of the Section 5.13 Offer Price
to the Holders of the Securities or allocation of Proceeds to the payment of
Senior Indebtedness or to working capital or investment in assets or businesses
or to expenditures in the business of the Company as set forth above. Such
Proceeds may be invested as prescribed in the Indenture. The Company is
entitled to any interest or dividends accrued, earned or paid on such
investments provided that there is no Event of Default.

(6) Limitation on Change of Control

Not later than 10 days after the occurrence of a Change of Control,
the Company is required to make an unconditional offer (a "Change of Control
Offer") to the Holders to purchase all of the Securities pursuant to the offer
described below, at a purchase price (the "Change of Control Purchase Price")
equal to 101% of the principal amount thereof plus accrued and unpaid interest,
if any, to, and including, the Change of Control Payment Date (as defined
below). Within five days after each date upon which a Change of Control occurs
(the "Change of Control Date"), the Company is required to so notify the
Trustee.

-63-
<PAGE> 67
Notice of a Change of Control Offer must be sent, at least 20 business
days prior to the Final Change of Control Put Date, by the Company to each
Holder and the Trustee. The notice, which will govern the terms of the Offer,
shall state: (1) that the Change of Control Offer is being made and that all
Securities, or portions thereof, tendered will be accepted for payment; (2) the
Change of Control Purchase Price, and the purchase date on which Securities
tendered shall be purchased and on which the Change of Control Purchase Price
shall be paid (which shall be no later than 60 days from the Change of Control
Date) (the "Change of Control Payment Date"), and the Final Change of Control
Put Date (as defined below); (3) that any Security not tendered or accepted for
payment will continue to accrue interest; (4) that, unless the Company defaults
in depositing U.S. Legal Tender with the Paying Agent any Security accepted for
payment shall cease to accrue interest after the Change of Control Payment
Date; (5) that Holders electing to have a Security purchased will be required
to surrender the Security, with the form entitled "Option of Holder to Elect
Purchase" on the reverse of the Security completed, to the Paying Agent at the
address specified in the notice prior to the close of business on the third
business day prior to the Change of Control Payment Date (the "Final Change of
Control Put Date"); (6) that Holders will be entitled to withdraw their
election if the Paying Agent receives, up to the close of business on the
Change of Control Put Date, proper notification that the Holder is withdrawing
and a statement that such Holder is withdrawing his election to have such
principal amount of Securities purchased; and (7) a brief description of the
events resulting in such Change of Control. Any such Change of Control Offer
must comply with all applicable provisions of federal and state laws, and any
provisions of the Indenture which conflict with such laws shall be deemed to be
superseded by the provisions of such laws. On or before the Change of Control
Payment Date, the Company must accept for payment Securities or portions
thereof properly tendered prior to the Final Change of Control Put Date,
sufficiently deposit with the Paying Agent U.S. Legal Tender and deliver to the
Trustee Securities so accepted together with an officers' certificate. The
Paying Agent is required to promptly mail to the Holders of Securities the
Change of Control Purchase Price, and the Trustee is required to promptly
authenticate and mail or deliver to such Holders a new Security equal in
principal amount to any unpurchased portion of the Security surrendered. Any
Securities not so accepted will be promptly mailed or delivered by the Company
to the Holder thereof. The Company will publicly announce the results of the
Change of Control Offer on or as soon as practicable after the Change of
Control Payment Date.

(7) Restriction on Sale and Issuance of Subsidiary Stock

The Company may not permit any Restricted Subsidiary to issue any
shares of Capital Stock, or any options, warrants or rights (including
convertible or exchangeable securities) to acquire shares of Capital Stock, of
any Restricted Subsidiary to any person other than the Company or a Restricted
Subsidiary that is a wholly owned Subsidiary.

(8) Limitation on Ranking of Future Indebtedness

The Company may not, directly or indirectly, incur, create, or suffer
to exist any Indebtedness which is subordinate or junior in right of payment
(to any extent) to any Senior Indebtedness and senior or superior in right of
payment (to any extent) to the Securities.

EVENTS OF DEFAULT

The following are Events of Default under the Indenture: (1) Default
in the payment of interest on any Securities when due and payable that
continues for a period of 30 days; (2) Default in the payment of the principal
and premium of any Securities when due and payable; (3) the Company fails to
comply with any of its other agreements contained in the Securities or the
Indenture and the

-64-
<PAGE> 68
Default continues for the period and after the Trustee or the Holders of at
least 33-1/3% notify the Company of the Default, and the Company does not cure
the Default within 30 days after receipt of the notice; (4) default under any
Indebtedness of the Company or any of its Subsidiaries, if such default either
results from the failure to pay any portion of principal under such
Indebtedness when due at final maturity or results in any Indebtedness becoming
due prior to its stated maturity, and the aggregate principal amount of such
Indebtedness aggregates $5 million or more; (5) certain events of bankruptcy,
insolvency or reorganization of the Company or any Restricted Subsidiaries; or
(6) any writ of attachment issued against the property of the Company or any
Restricted Subsidiaries having a value of at least $5 million, or final
judgments not covered by insurance for the payment of money which in the
aggregate at any one time exceed $5 million rendered against the Company or any
Restricted Subsidiaries by a court of competent jurisdiction and remain
undischarged for a period of 60 days after such judgment becomes final and
nonappealable.

If an Event of Default (other than an Event of Default pursuant to
clause (5) above (except in certain cases of insolvency)) occurs and is
continuing, the Trustee or the Holders of at least 33-1/3% of the Securities
may declare the aggregate principal amount of the Securities outstanding,
together with accrued but unpaid interest, due and payable. If an Event of
Default pursuant to clause (5) above (except in certain cases of insolvency)
occurs, all unpaid principal and accrued interest on the Securities shall ipso
facto be immediately due and payable without any declaration or other act on
the part of the Trustee or any Holder. The Holders of a majority of the
Securities may rescind an acceleration if certain conditions exist.

Holders of a majority of the outstanding Securities may waive an
existing Default or Event of Default and its consequences, except a Default in
the payment of principal of or interest on any Security.

The Company is required to deliver to the Trustee within 90 days after
the end of its fiscal year an officers' certificate regarding knowledge of such
officers with respect to the failure to comply with any conditions or covenants
of the Indenture and a written report of an independent certified public
accounting firm regarding, in connection with their audit examination, any
Default or Event of Default coming to their attention. The Company is required
to deliver an officers' certificate to the Trustee upon any officer becoming
aware of any Default or Event of Default, specifying what action the Company is
taking or proposes to take with respect thereto.

CONSOLIDATION, MERGER AND SALE OF ASSETS

The Indenture provides that the Company may not consolidate with or
merge with or into any other person or transfer all or substantially all of its
properties and assets as an entirety or substantially as an entirety to another
person or group of affiliated persons or adopt a Plan of Liquidation (as
defined in the Indenture), unless, among other things, (1) the Company shall be
the continuing person, or the surviving person (if other than the Company)
shall be a corporation organized and validly existing under the laws of the
United States, any State thereof or the District of Columbia, and shall
expressly assume, by a supplemental indenture, all the obligations of the
Company under the Securities and the Indenture; (2) on a pro forma basis
immediately after giving effect to such transaction and the assumption
contemplated by clause (1) and the incurrence or anticipated incurrence of any
Indebtedness to be incurred in connection therewith, the surviving person has a
Consolidated Net Worth (on a pro forma basis immediately after giving effect to
such transaction) equal to or greater than the Consolidated Net Worth of the
Company, and could incur $1.00 of additional Indebtedness pursuant to
"Limitation of Incurrence of Additional Indebtedness and Issuance of
Disqualified Capital Stock" above; and (3) immediately before and on a pro
forma basis

-65-
<PAGE> 69
immediately after giving effect to such transaction and the assumption of the
obligations as set forth in clause (1) and the incurrence or anticipated
incurrence of any Indebtedness to be incurred, no Default or Event of Default
shall have occurred and be continuing.

SATISFACTION AND DISCHARGE OF THE INDENTURE

The Indenture provides that if the Company irrevocably deposits in
trust with the Trustee certain funds to pay the principal of and interest on
the outstanding Securities on the dates on which any such payments are due and
payable in accordance with the terms of the Indenture and the Securities,
provided that certain other conditions are met, the Company shall be deemed to
have paid and discharged the entire Indebtedness on the Securities and the
provisions of the Indenture (except for certain obligations surviving the
satisfaction and discharge of the Indenture identified in Section 9.03 of the
Indenture).

AMENDMENTS, SUPPLEMENTS AND WAIVERS

The Indenture provides that the Company and the Trustee may from time
to time enter into supplemental indentures for certain specified purposes,
including to cure ambiguities, defects or inconsistencies (provided such
amendment does not adversely affect the rights of any Holder), to provide for a
succession to the obligations of the Company, and to make any other change that
does not adversely affect the rights of any Holder. Other amendments and
supplements to the Indenture may be made by the Company and the Trustee, with
the written consent of the Holders of a majority in aggregate principal amount
of outstanding Securities. In addition, Holders of a majority in aggregate
principal amount of outstanding Securities may waive compliance by the Company
with respect to any provision of the Indenture. However, no such amendment,
supplement or waiver may, without the consent of the Holder of each outstanding
Security affected thereby, (1) change the principal amount of Securities whose
Holders must consent to an amendment, supplement or waiver; (2) reduce the rate
or extend the time for payment of any Security; (3) reduce the principal amount
of any Security, or reduce the Change of Control Purchase Price or the Section
5.13 Offer Price; (4) change the Maturity or the Change of Control Purchase
Date or the Purchase Date of any Security; (5) alter the redemption provisions
or the provisions of the "Sales of Assets" or the "Limitation on Change of
Control" described above, in either case, in a manner adverse to any Holder;
(6) make any changes in the provisions concerning waivers of Defaults or Events
of Default by Holders of the Securities or the rights of Holders to recover the
principal or premium of, interest on, or redemption payment with respect to,
any Security; (7) make the principal of, or the interest on, any Security
payable with anything or in any manner other than as provided for in this
Indenture and the Securities; or (8) make any changes to this provision or the
provisions of Section 7.04 relating to waivers of past defaults or Section 7.07
relating to the right of a Holder to receive payments.

CONCERNING THE TRUSTEE

The Indenture provides that, except during the continuance of a
Default or an Event of Default, the Trustee will perform only such duties as
are specifically set forth in the Indenture. During the occurrence and
continuation of a Default or an Event of Default, the Trustee is required to
exercise such of the rights and powers vested in it by the Indenture and use
the same degree of care and skill in their exercise as a prudent person would
exercise or use under the circumstances in the conduct of his own affairs.

The Indenture and the provisions of the Trust Indenture Act contain
limitations on the rights of the Trustee, should it become a creditor of the
Company, to obtain payment of claims in certain

-66-
<PAGE> 70
cases or to realize on certain property received by it in respect of such
claims, as security or otherwise. The Trustee is permitted to engage in other
transactions; provided, however, that if it acquires any conflict of interest
(as defined in the Trust Indenture Act) it must eliminate such conflict or
resign.

-67-
<PAGE> 71
FEES AND EXPENSES

The Company will pay substantially all of the expenses of the Offer
other than commissions and discounts of underwriters, dealers or agents. The
expenses are estimated in the aggregate to be $28,000.

LEGAL MATTERS

Certain legal matters regarding the legality of the Notes offered
hereby will be passed upon for the Company by Irell & Manella LLP. Certain
partners of the law firm of Irell & Manella LLP own an aggregate of 13,600
shares of Parent's Common Stock and 570 shares of Parent's Preferred Stock.

EXPERTS

The financial statements of the Company as of December 29, 1996 and
December 31, 1995 and for the three fiscal years ended December 29, 1996
included herein and elsewhere in the Registration Statement have been included
herein and elsewhere in the Registration Statement in reliance upon the report
of KPMG Peat Marwick LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.

OTHER MATTERS

No person has been authorized to give any information or to make any
representations, other than those contained in this Prospectus. If given or
made, such information or representation may not be relied upon as having been
authorized by the Company. The Company is not aware of any jurisdiction in
which the Offering is not in compliance with applicable law. If the Company
becomes aware of any jurisdiction in which the Offering would not be in
compliance with applicable law, the Company will make a good faith effort to
comply with such law. If, after such good faith effort, the Company cannot
comply with any such law, the Offering will not be made in such jurisdictions.
Neither the delivery of this Prospectus nor any distribution of securities
hereunder shall under any circumstances create any implication that the
information contained herein is correct as of any time subsequent to the date
hereof or that there has been no change in the information set forth herein or
in the affairs of the Company since the date hereof.

ASSISTANCE AND COPIES

For further information, Holders may contact the Company, Attention:
Kathleen Reid-Seidner, Secretary, at 2525 East El Segundo Boulevard, El
Segundo, California 90245, or by telephone at the following number: (310)
536-0611.

Requests for additional copies of this Prospectus should also be
directed to Kathleen Reid-Seidner, Secretary, at the above address and
telephone number. Holders may also contact their broker, dealer, commercial
bank or trust company for assistance concerning the Offer.

-68-
<PAGE> 72
INDEX TO
FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of KPMG Peat Marwick LLP, Independent F-2
Certified Public Accountants

Balance Sheets of United F-3
Merchandising Corp. as of December 29, 1996
and December 31, 1995

Statements of Operations of F-5
United Merchandising Corp. for the
fiscal years ended December 29, 1996,
December 31, 1995 and January 1, 1995

Statements of Stockholder's F-6
Equity of United Merchandising Corp.
for the fiscal years ended December 29, 1996,
December 31, 1995 and January 1, 1995

Statements of Cash Flows of F-7
United Merchandising Corp. for
the fiscal years ended December 29, 1996,
December 31, 1995 and January 1, 1995

Notes to Financial Statements F-8
December 29, 1996 and December 31, 1995
</TABLE>

F-1

<PAGE> 73
INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholder
United Merchandising Corp.:

We have audited the accompanying balance sheets of United Merchandising Corp. as
of December 29, 1996 and December 31, 1995 and the related statements of
operations, stockholder's equity and cash flows for each of the years ended
December 29, 1996, December 31, 1995 and January 1, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of United Merchandising Corp. as
of December 29, 1996 and December 31, 1995 and the results of its operations and
its cash flows for each of the years ended December 29, 1996, December 31, 1995
and January 1, 1995 in conformity with generally accepted accounting principles.

Los Angeles, California
February 26, 1997

F-2
<PAGE> 74
UNITED MERCHANDISING CORP.

Balance Sheets

(Dollar amounts in thousands)

<TABLE>
<CAPTION>
DECEMBER 29, 1996 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents $ 4,797 3,198
Trade and other receivables, net of allowance for doubtful
accounts of $464 and $267, respectively 4,054 3,377
Merchandise inventories 134,886 137,512
Prepaid expenses 1,031 1,106
--------- --------

Total current assets 144,768 145,193
--------- --------

Property and equipment:
Land 186 3,341
Buildings and improvements 13,776 13,261
Furniture and equipment 30,647 27,937
Less accumulated depreciation and amortization (17,079) (12,023)
--------- --------

Net property and equipment 27,530 32,516
--------- --------

Deferred income taxes, net 1,700 --
Leasehold interest, net of accumulated amortization
of $12,117 and $10,202, respectively
16,375 21,130
Other assets, at cost, less accumulated amortization of
$713 and $652, respectively
1,829 2,365
Goodwill, less accumulated amortization of $878 and $630,
respectively
5,667 5,915
--------- --------

$ 197,869 207,119
========= ========
</TABLE>

See accompanying notes to financial statements.

F-3
<PAGE> 75
UNITED MERCHANDISING CORP.

Balance Sheets (continued)

(Dollar amounts in thousands)

<TABLE>
<CAPTION>
DECEMBER 29, 1996 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>

LIABILITIES AND STOCKHOLDER'S EQUITY

Current liabilities:
Accounts payable $ 44,239 42,812
Accrued expenses 28,368 27,387
Income taxes payable 1,733 --
--------- --------

Total current liabilities 74,340 70,199

Deferred rent 5,224 4,252
Long-term debt 86,450 103,594
--------- --------

Total liabilities 166,014 178,045
--------- --------

Commitments and contingencies

Stockholder's equity:
Common stock, no par value. Authorized 2,500 shares;
issued and outstanding 1,300 shares 35,080 35,080
Accumulated deficit (3,225) (6,006)
--------- --------

Net stockholder's equity 31,855 29,074
--------- --------

$ 197,869 207,119
========= ========
</TABLE>

See accompanying notes to financial statements.

F-4
<PAGE> 76
UNITED MERCHANDISING CORP.

Statements of Operations

(Dollar amounts in thousands)

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 29, DECEMBER 31, JANUARY 1,
1996 1995 1995
------------ ------------ ----------
<S> <C> <C> <C>
Net sales $ 404,265 370,126 364,109

Cost of goods sold, buying and occupancy 277,116 256,583 244,777
--------- -------- --------

Gross profit 127,149 113,543 119,332
--------- -------- --------

Operating expenses:
Selling and administrative 101,053 95,158 92,238
Depreciation and amortization 9,578 11,991 9,180
--------- -------- --------

Total operating expenses 110,631 107,149 101,418
--------- -------- --------

Operating income 16,518 6,394 17,914

Interest expense 11,482 12,347 11,712
--------- -------- --------

Income (loss) before income taxes
and extraordinary loss 5,036 (5,953) 6,202

Income taxes 970 368 1,903
--------- -------- --------

Income (loss) before extraordinary loss
4,066 (6,321) 4,299

Extraordinary loss from early extinguishment of
debt, net of income tax benefit (1,285) -- (2,855)
--------- -------- --------

Net income (loss) $ 2,781 (6,321) 1,444
========= ======== ========
</TABLE>

See accompanying notes to financial statements.

F-5
<PAGE> 77

UNITED MERCHANDISING CORP.

Statements of Stockholder's Equity

Years ended December 29, 1996, December 31, 1995 and January 1, 1995

(Dollar amounts in thousands)

<TABLE>
<CAPTION>
RETAINED EARNINGS
(ACCUMULATED
COMMON STOCK DEFICIT)
------------ -----------------
<S> <C> <C>
Balance at January 2, 1994 $ 34,916 (1,129)

Contribution of capital 185 --

Distribution of capital (21) --

Net income for the year ended January 1, 1995 -- 1,444
-------- ------

Balance at January 1, 1995 35,080 315

Net loss for the year ended December 31, 1995 -- (6,321)
-------- ------

Balance at December 31, 1995 35,080 (6,006)

Net income for the year ended December 29, 1996 -- 2,781
-------- ------

Balance at December 29, 1996 $ 35,080 (3,225)
======== ======
</TABLE>

See accompanying notes to financial statements.

F-6
<PAGE> 78
UNITED MERCHANDISING CORP.

Statements of Cash Flows

(Dollar amounts in thousands)

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 29, DECEMBER 31, JANUARY 1,
1996 1995 1995
------------ ------------ ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2,781 (6,321) 1,444
Adjustments to reconcile net income (loss)
to net cash provided by
(used in) operating activities:
Depreciation and amortization 9,578 11,991 9,180
Amortization of deferred finance charges 621 429 538
Deferred tax provision (benefit) (1,700) 368 (178)
Extraordinary loss from early extinguishment of debt 2,222 -- 4,758
Change in assets and liabilities:
Merchandise inventories 2,626 13,539 (17,972)
Trade accounts receivable, net (677) 803 (912)
Prepaid expenses and other assets 342 122 (198)
Income taxes 1,733 (178) 888
Accounts payable 1,427 (21,165) 17,743
Accrued expenses 845 (3,412) (644)
-------- ------- -------

Net cash provided by (used in)
operating activities 19,798 (3,824) 14,647
-------- ------- -------

Cash flows from investing activities:
Purchases of property and equipment (3,453) (6,822) (9,153)
Purchase of assets pending sale and leaseback (note 12) (8,910) -- --
Proceeds from sale of property and equipment 13,902 -- --
Acquisition of business -- (1,000) --
Other assets -- 448 (189)
-------- ------- -------

Net cash provided by (used in)
investing activities 1,539 (7,374) (9,342)
-------- ------- -------

Cash flows from financing activities:
Net borrowings (repayments) under revolving
credit facilities (17,144) 7,144 60,000
Repayments of term loan -- -- (44,000)
Repayment of long-term debt, net -- -- (18,550)
Debt issuance costs (1,434) (416) (1,060)
Debt prepayment premiums (1,160) -- (1,491)
Contribution of capital -- -- 164
-------- ------- -------

Net cash provided by (used in) financing
activities (19,738) 6,728 (4,937)
-------- ------- -------

Net increase (decrease) in cash and
cash equivalents 1,599 (4,470) 368

Cash and cash equivalents at beginning of year 3,198 7,668 7,300
-------- ------- -------

Cash and cash equivalents at end of year $ 4,797 3,198 7,668
-------- ------- -------

Supplemental disclosures of cash flow information:
Interest paid $ 11,285 12,300 11,817
Income taxes paid -- -- --
======== ======= =======
</TABLE>

See accompanying notes to financial statements.

F-7
<PAGE> 79
UNITED MERCHANDISING CORP.

Notes to Financial Statements

December 29, 1996 and December 31, 1995

(Dollar amounts in thousands)

(1) BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS

The accompanying financial statements represent the financial position
and results of operations of United Merchandising Corp. (the Company).
The Company operates as a specialty sporting goods retailer under the
Big 5 Sporting Goods name carrying a broad range of hardlines, softlines
and footwear, operating 196 stores at December 29, 1996 in California,
Washington, Oregon, New Mexico, Arizona, Nevada, Idaho (Western states)
and Texas.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

REPORTING PERIOD

The Company reports on a 52-53 week fiscal year ending on the Sunday
nearest December 31. All years presented had a 52-week year.

REVENUE RECOGNITION

The Company's revenue is received from retail sales of merchandise
through the Company's stores. Revenue is recognized when merchandise is
received by the customer and is shown net of returns. The costs of
distribution center operations are included in cost of sales, buying and
occupancy.

EARNINGS (LOSS) PER SHARE

Earnings (loss) per share data are not presented as they are not
meaningful to the financial statements.

CASH EQUIVALENTS

The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.

MERCHANDISE INVENTORIES

The Company values its merchandise inventories using the lower of
average cost (which approximates the first-in, first-out cost) or market
method.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost and depreciated over the
estimated useful lives or lease terms, using the straight-line method.

The estimated useful lives are 40 years for buildings, 7 years for
fixtures and equipment and the shorter of the lease term or 10 years for
leasehold improvements. Maintenance and repairs are charged to expense
as incurred.

F-8
<PAGE> 80
UNITED MERCHANDISING CORP.

Notes to Financial Statements, Continued

(Dollar amounts in thousands)

LEASEHOLD INTEREST

Upon acquisition of the Company, certain assets were recorded for the
net fair value of favorable operating lease agreements. The leasehold
interest asset is being amortized over an average of ten years on a
straight-line basis. The unamortized balance attributable to leases
terminated since the acquisition has been reflected as a component of
the gain or loss upon disposition of the underlying properties.

GOODWILL

Goodwill, which represents the excess of purchase price over fair value
of net assets acquired, is amortized on a straight-line basis over
periods ranging from 15 to 30 years.

OTHER ASSETS

Other assets consist principally of deferred financing costs and such
costs are amortized straight line over the terms of the respective debt.

SELF-INSURANCE RESERVES

The Company maintains self-insurance programs for workers' compensation
and general liability risks. The Company is self-insured up to specified
per-occurrence limits and maintains insurance coverage for losses in
excess of specified amounts. Estimated costs under these programs,
including incurred but not reported claims, are recorded as expenses
based upon actuarially determined historical experience and trends of
paid and incurred claims.

PREOPENING EXPENSES

New store preopening expenses are charged against operations as
incurred.

ADVERTISING EXPENSES

The Company recognizes advertising costs the first time the advertising
takes place. Advertising expenses amounted to $23,209 for the year ended
December 29, 1996, $22,621 for the year ended December 31, 1995 and
$20,423 for the year ended January 1, 1995.
Advertising expense is included in selling and administrative.

INCOME TAXES

The Company accounts for income taxes under the asset and liability
method whereby deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes
the enactment date. The realizability of deferred tax assets is assessed
throughout the year and a valuation allowance is established
accordingly.

F-9
<PAGE> 81
UNITED MERCHANDISING CORP.

Notes to Financial Statements, Continued

(Dollar amounts in thousands)

USE OF ESTIMATES

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

CONCENTRATION OF CREDIT RISK

Customer purchases are generally transacted using cash or credit cards.
In certain instances, the Company grants credit to schools and
youth-oriented organizations, under normal trade terms. Trade accounts
receivable were approximately $355 and $200 at December 29, 1996 and
December 31, 1995, respectively. Credit losses have historically been
within management's expectations.

IMPAIRMENT OF LONG-LIVED ASSETS

The Company adopted the provisions of Statement of Financial Accounting
Standards No. 121 (SFAS 121), "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," in the
first quarter of fiscal 1996. The 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. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of
an asset to future net cash flows expected to be generated by the asset.
If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets. Assets to be disposed are
reported at the lower of the carrying amount or fair value less costs to
sell. Adoption of this statement did not have a material impact on the
Company's financial position, results of operations or liquidity.

STOCK COMPENSATION

On January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation," which permits entities to recognize as expense over the
vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to
apply the provisions of APB Opinion No. 25 and provide pro forma net
income disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based method defined in SFAS No. 123
had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and to provide the pro forma disclosure
provisions of SFAS No. 123.

RECLASSIFICATIONS

Certain reclassifications of the prior year financial statements have
been made to conform to the 1996 presentation.

(3) FAIR VALUES OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable
to estimate that value.

F-10
<PAGE> 82
UNITED MERCHANDISING CORP.

Notes to Financial Statements, Continued

(Dollar amounts in thousands)

Cash and cash equivalents, trade and other receivables, trade accounts
payable and accrued expenses: The carrying amounts approximate the fair
values of these instruments due to their short-term nature.

The fair value of the Company's senior subordinated notes at December
29, 1996 approximated $37,540 based on recent market prices. The
carrying amount of the revolving credit facility reflects the fair value
based on current rates available to the Company for debt of the same
remaining maturities. See note 4 for interest rates on outstanding
long-term debt.

(4) LONG-TERM DEBT

Long-term debt consists of the following:

<TABLE>
<CAPTION>
DECEMBER 29, 1996 DECEMBER 31, 1995
----------------- ------------------
<S> <C> <C>
Revolving credit facility $50,000 67,144
Senior subordinated debt 36,450 36,450
------- -------

Total long-term debt $86,450 103,594
======= =======
</TABLE>

Effective March 8, 1996, the Company entered into a credit agreement
(the CIT Credit Agreement) among the Company and the CIT Group, which
provided the Company with a three-year nonamortizing $100,000 revolving
debt facility (the CIT Facility). Proceeds from the initial funding
under the CIT Facility were used to repay in full all of the Company's
outstanding obligations under its then existing revolving credit
facility with General Electric Capital Corporation (the GECC Facility).

Pursuant to the refinancing, the Company incurred a charge of $2,222,
consisting of $1,160 in prepayment penalties and $1,062 related to a
write-off of deferred finance costs related to the GECC Facility. The
total charge is reflected as an extraordinary loss from early
extinguishment of debt, net of income taxes of $937, in the statement of
operations for the year ended December 29, 1996.

Prior to March 8, 1996, the Company operated under a credit agreement
dated October 20, 1994 as amended among the Company, General Electric
Capital Corporation as Agent and Wells Fargo Bank, which provided the
Company with a five-year nonamortizing $100,000 revolving debt facility.
Proceeds from the initial funding under the GECC Facility were used to
repay in full all of the Company's outstanding obligations under its
then existing revolving debt facility and term debt loan with Union Bank
of Switzerland, as agent and lender (the UBS Facility). Additionally,
the GECC Facility allowed the Company to use up to $22,000 to repurchase
the Company's senior subordinated debt (the Senior Debt). In 1994, the
Company had repurchased $18,550 in the principal amount of the Senior
Debt, utilizing $14,550 in borrowings under the GECC Facility. The
Company paid a premium of $1,491 related to the repurchase of Senior
Debt during 1994 and recorded a charge of $3,267 reflecting acceleration
of the financing fees related to the retired UBS Facility and Senior
Debt which were being amortized over the respective terms of the two
facilities. The total charge of $4,758 is reflected as an extraordinary
loss from early extinguishment of debt, net of income taxes of $1,903,
in the statement of operations for the year ended January 1, 1995.

F-11
<PAGE> 83
UNITED MERCHANDISING CORP.

Notes to Financial Statements, Continued

(Dollar amounts in thousands)

The CIT Facility bears interest at various rates based on the adjusted
Eurorate (5.875% at December 29, 1996) plus 2.5% (LIBOR Borrowings) or
the prime lending rate (8.25% at December 29, 1996) plus .75% (Base Rate
Borrowings) and was secured by the trade accounts receivable,
merchandise inventory and general intangible assets (as defined) of the
Company. A fee of 3/8% is assessed on the unused portion of the
facility. On December 29, 1996, the Company had $50,000 in LIBOR
Borrowings and Letters of Credit of $4,368 outstanding. The Company's
maximum eligible borrowing available under the facility is limited to
65% of eligible inventory. Available borrowings on the CIT Facility
amounted to $27,632 at December 29, 1996.

The unsecured senior subordinated debt is due 2002 and bears interest at
13.625%. The notes require mandatory sinking fund payments of 25% at
September 15, 2000 and 2001. The notes may be redeemed in whole or from
time to time in part at any time on and after September 15, 1997, at the
option of the Company, at the redemption price set forth below with
respect to the indicated redemption date, together with any accrued but
unpaid interest to such redemption date.

If redeemed during the 12-month period beginning September 15:

<TABLE>
<CAPTION>
YEAR PERCENTAGE
--------------------------------------- ----------------------
<S> <C>
1997 105.839%
1998 103.893
1999 101.946
2000 and thereafter 100.000
=======
</TABLE>

The various debt agreements contain restrictions on working capital,
acquisition of treasury stock and payment of cash dividends. In
addition, the agreements restrict liens on assets and the acquisition or
sale of subsidiaries.

The aggregate mandatory sinking fund requirements and annual maturities
of long-term debt for each of the five years subsequent to December 29,
1996 are as follows:

<TABLE>
<S> <C>
1997 $ --
1998 --
1999 50,000
2000 9,113
2001 9,113
Thereafter 18,224
=======
</TABLE>

(5) LEASES

The Company currently leases certain stores, distribution facilities,
vehicles and equipment under noncancelable operating leases that expire
through the year 2018. These leases generally contain renewal options
for periods ranging from 5 to 15 years and require the Company to pay
all executory costs such as maintenance and insurance. Certain leases
contain options to purchase the leased assets.

F-12
<PAGE> 84
UNITED MERCHANDISING CORP.

Notes to Financial Statements, Continued

(Dollar amounts in thousands)

Certain leases contain escalation clauses and provide for contingent
rentals based on percentages of sales. The Company recognizes rental
expense on a straight-line basis over the terms of the underlying
leases, without regard to when rentals are paid. The accrual of the
noncash portion of this rental expense has been included in depreciation
and amortization in the accompanying statements of operations and cash
flows and deferred rent in the accompanying balance sheets.

Rental expense for operating leases consisted of the following:

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 29, 1996 DECEMBER 31, 1995 JANUARY 1, 1995
----------------- ----------------- ---------------
<S> <C> <C> <C>
Cash rental payments $23,670 21,003 18,482
Noncash rentals 973 3,344 496
Contingent rentals 1,038 989 1,275
------- ------ ------

Rental expense $25,681 25,336 20,253
======= ====== ======
</TABLE>

Future minimum lease payments (cash rentals) under noncancelable
operating leases (with initial or remaining lease terms in excess of one
year) as of December 29, 1996 are:

<TABLE>
<CAPTION>
Year ending:
<S> <C>
1997 $ 22,811
1998 22,478
1999 21,522
2000 20,370
2001 19,822
Thereafter 155,336
--------

$262,339
========
</TABLE>

(6) ACCRUED EXPENSES

Accrued expenses consist of the following:

<TABLE>
<CAPTION>
DECEMBER 29, 1996 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
Payroll and related expenses $ 8,849 7,545
Self-insurance reserves 4,503 6,011
Sales tax 4,821 4,427
Other 10,195 9,404
------- ------
$28,368 27,387
======= ======
</TABLE>

F-13
<PAGE> 85
UNITED MERCHANDISING CORP.

Notes to Financial Statements, Continued

(Dollar amounts in thousands)

(7) INCOME TAXES

Income tax expense, excluding tax benefit of extraordinary loss,
consists of the following:

<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -----
<S> <C> <C> <C>
1996:
Federal $ 2,273 (1,445) 828
State 397 (255) 142
------- ------ -----
2,670 (1,700) 970
------- ------ -----

1995:
Federal -- 313 313
State -- 55 55
------- ------ -----
-- 368 368
------- ------ -----

1994:
Federal 1,769 (151) 1,618
State 312 (27) 285
------- ------ -----

$ 2,081 (178) 1,903
======= ====== =====
</TABLE>

The extraordinary losses in 1996 and 1994 are reported net of tax
benefits of $937 and $1,903, respectively (note 4). Accordingly, the
1996 tax provision including the tax benefit of the extraordinary loss
is $33. The 1994 tax provision including the tax benefit of the
extraordinary loss is zero.

The provision for income taxes differs from the amounts computed by
applying the Federal statutory tax rate as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER YEAR ENDED DECEMBER YEAR ENDED JANUARY
29, 1996 31, 1995 1, 1995
------------------- ------------------- ------------------

<S> <C> <C> <C>
Tax expense (benefit) at statutory rate $ 1,763 (2,084) 2,171
State taxes, net of Federal benefit 307 (363) 364
Increase (decrease) in valuation allowance, net
of IRS adjustment (1,215) 2,990 433
MIS migration fees -- -- (1,190)
Other 115 (175) 125
------- ------ ------

$ 970 368 1,903
======= ====== ======
</TABLE>

F-14
<PAGE> 86
UNITED MERCHANDISING CORP.

Notes to Financial Statements, Continued

(Dollar amounts in thousands)

Deferred tax assets and liabilities consist of the following
tax-effected temporary differences:

<TABLE>
<CAPTION>
DECEMBER 29, 1996 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
Deferred assets:
Self-insurance reserves $ 1,849 2,050
Employee benefits 1,577 1,167
State taxes 73 1,065
Net operating loss carryforward -- 2,427
Noncash rentals 2,150 1,488
Amortization of tangible and intangible assets 1,292 --
Other 1,103 770
------- ------

Gross deferred tax assets 8,044 8,967

Valuation allowance (4,094) (7,475)
------- ------

Net deferred tax assets $ 3,950 1,492
======= ======

Deferred liabilities:
Basis in fixed assets $ 2,250 1,252
Amortization of tangible and intangible assets -- 240
------- ------

Total deferred tax liabilities $ 2,250 1,492
======= ======
</TABLE>

In 1996, the Company reduced the valuation allowance to reflect
realizability of its deferred tax assets. In doing so, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversals of deferred tax
liabilities, projected future taxable income and tax planning strategies
in making this assessment. At December 29, 1996, management's assessment
indicated that net deferred tax assets of $1,700 were recoverable. The
valuation allowance decrease of $3,381 from the December 31, 1995
balance includes an adjustment for the IRS matter described below.

During 1996, the Company resolved certain audit issues with the IRS
which resulted in the elimination and reclassification of certain
temporary differences. The Company had established a valuation allowance
against such temporary differences in previous years. Accordingly, the
impact of resolving these audit issues was offset in 1996 by a
corresponding decrease in the valuation allowance for those temporary
differences eliminated.

F-15
<PAGE> 87
UNITED MERCHANDISING CORP.

Notes to Financial Statements, Continued

(Dollar amounts in thousands)

For the year ended December 31, 1995, management performed a similar
assessment of the realizability of deferred taxes and concluded that a
valuation allowance for the entire net deferred tax assets was required
given the history of income tax losses experienced by the Company at the
time. Accordingly, the valuation allowance was increased by $2,990 from
the January 1, 1995 balance.

(8) EMPLOYEE BENEFIT PLANS

Effective January 4, 1993, the Company established a 401(k) plan to
cover all eligible employees. All employees' contributions may be
supplemented by Company contributions. The Company contributed $1,017
for the year ended December 29, 1996, $667 for the year ended December
31, 1995 and $1,060 for the year ended January 1, 1995 in employer
matching and profit sharing contributions.

Certain employees of the Company participate in a stock option plan of
the parent company's stock. Options are granted by the Board of
Directors with exercise prices equal to the fair market value of the
parent company's stock, as determined by valuation models prepared by
the Board. There were no stock options granted in 1995. For 1996,
options to purchase 54,700 shares were granted on December 31, 1996 at
an exercise price of $12 per share. The options vest and become
exercisable in cumulative 20% installments commencing one year from the
date of grant, with full vesting on the fifth anniversary. The plan
terminates on September 25, 2002. Pro forma disclosures as defined by
SFAS 123 are not applicable for the options granted in 1996 as vesting
begins in 1997.

The Company has no significant postretirement or postemployment
benefits.

(9) RELATED PARTY TRANSACTIONS

The Company received certain administrative support services from a
related party for which the Company pays a negotiated fee based on
services provided. The services were terminated April 1995. These
charges totaled $61 for the year ended December 31, 1995 and $1,099 for
the year ended January 1, 1995.

In addition, the Company leases certain property and equipment from a
related party who leases this property and equipment from an outside
party. Charges related to these leases totaled $1,008 for the year ended
December 29, 1996, $1,857 for the year ended December 31, 1995 and
$1,738 for the year ended January 1, 1995.

The Company has an agreement to pay $568, plus expenses, annually to an
advisor group of its investor. Certain individuals of the investor
advisor group are members of the Company's Board of Directors. In 1996
and 1994, the Company paid this advisor group an additional $500 for
services related to securing of the CIT and GECC facilities.

Affiliates of the Company own $250 of the senior subordinated notes.

(10) CONTINGENCIES

The Company is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse
effect on the Company's financial position, results of operations or
liquidity.

F-16
<PAGE> 88
UNITED MERCHANDISING CORP.

Notes to Financial Statements, Continued

(Dollar amounts in thousands)

(11) BUSINESS CONCENTRATIONS

The Company operates specialty sporting goods retail stores located
principally in the Western states of the United States. The retail
industry is impacted by the general economy. Changes in the marketplace
may significantly affect management's estimates and the Company's
performance.

(12) SALE LEASEBACK

On March 5, 1996, the Company entered into a sale and leaseback
agreement (the transaction) with regard to its warehouse facility
located in Fontana, California. Prior to this transaction, the Company
owned the land associated with the facility and leased the buildings and
improvements. In contemplation of the transaction, the Company purchased
the building and improvements at a purchase price of $8,910. The
transaction was then completed with the sale of the land, building and
improvements at a sale price of $13,900. The gain on the transaction was
insignificant and will be amortized on a straight-line basis over the
related lease term. The net cash proceeds after expenses totaled $4,728
which was used to repay a portion of the GECC Facility (note 4).

Under the leaseback agreement, the Company has committed to lease the
facility for ten years under a noncancelable operating lease. The future
minimum lease payments are reflected in the future minimum lease
payments under noncancelable operating leases (note 5).

On October 31, 1996, the Company entered into a sale and leaseback
agreement with regard to its store located in Culver City, California.
The sale amount of the property was $817 resulting in a $214 loss for
the Company which is included in the statements of operations. The
Company has committed to lease the property for 15 years under a
noncancelable operating lease. The future minimum lease payments are
reflected in the future minimum lease payments under noncancelable
leases (note 5).

F-17
<PAGE> 89
PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the expenses payable in connection with
the offering of the securities to be registered and offered hereby. All of
such expenses are estimates, other than the registration fee payable to the
Securities and Exchange Commission.

<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee . . . . $156.25

Printing and Engraving Expenses . . . . . . . . . . . . . . 0.00

Legal Fees and Expenses . . . . . . . . . . . . . . . . . . $23,000.00

Accounting Fees and Expenses . . . . . . . . . . . . . . . $5,000.00

Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . 0.00
----------
Total . . . . . . . . . . . . . . . . . . . . . . . $28,156.25
==========
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Subsection (b) of Section 317 of the California Corporations Code
("CCC") empowers a corporation to indemnify any director or officer, or former
director or officer, who was or is a party or is threatened to be made a party
to any proceeding (as defined in Section 317(a)) (other than an action by or in
the right of the corporation), against expenses, judgments, fines, settlements
and other amounts actually and reasonably incurred in connection with such
proceeding, provided that such director or officer acted in good faith in a
manner reasonably believed by such director or officer to be in the best
interests of the corporation, and, with respect to any criminal action or
proceeding, provided that such director or officer had no reasonable cause to
believe his or her conduct was unlawful.

Subsection (c) of Section 317 empowers a corporation to indemnify any
director or officer, or former director or officer, who was or is a party or is
threatened to be made a party to any threatened, pending or completed action by
or in the right of the corporation to procure a judgment in its favor by reason
of the fact that such person acted as a director or officer, against expenses
actually and reasonably incurred in connection with the defense or settlement
of such action, provided that such director or officer acted in good faith and
in a manner reasonably believed by such director or officer to be in the best
interests of the corporation and its shareholders, except that no
indemnification may be made under Subsection (c) of Section 317 in respect of
(i) any claim, issue or matter as to which such director or officer shall have
been adjudged to be liable to the corporation, unless and only to the extent
that the court in which such action was brought shall determine that such
director or officer is fairly and reasonably entitled to indemnity for such
expenses which the court shall deem proper, (ii) amounts paid in settling or
otherwise disposing of a pending action without

II-1

<PAGE> 90
court approval, and (iii) expenses incurred in defending a pending action which
is settled or otherwise disposed of without court approval.

Section 317 further provides that, to the extent a director or officer
of a corporation has been successful on the merits in the defense of any
proceeding referred to in subsections (b) and (c) or in the defense of any
claim, issue or matter therein, such director or officer shall be indemnified
against expenses actually and reasonably incurred by such officer or director
in connection therewith; that indemnification provided for by Section 317 shall
not be deemed exclusive of any other rights to which the indemnified party may
be entitled; and that the corporation shall have the power to purchase and
maintain insurance on behalf of a director or officer of the corporation
against any liability asserted against such officer or director or incurred by
him or her in any such capacity or arising out of his or her status as such,
whether or not the corporation would have the power to indemnify him or her
against such liabilities under Section 317.

Subject to approval of certain of the Company's lenders, the Company's
Board of Directors has approved certain amendments to the Company's Certificate
of Incorporation and By-Laws, which provide, in effect, that to the extent and
under the circumstances permitted by Section 317 of the CCC and subject to
certain conditions, the Company shall indemnify any person who was or is a
party or is threatened to be made a party to or is involved in any action, suit
or proceeding of the type described above by reason of the fact that he or she
is or was a director or officer of the Company, or is or was serving at the
request of the Company as a director, officer, employee or agent of the
Company.

Subject to approval of certain of the Company's lenders, the Company's
Articles of Incorporation, as amended, currently provide that, to the fullest
extent permitted by applicable law, a director of the Company shall not be
personally liable to the Company or its stockholders for monetary damages for
breach of fiduciary duty as a director.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

On September 25, 1992, Big 5 Holdings acquired all of the Company's
outstanding capital stock, consisting of 1,300 shares of common stock, zero par
value, for an aggregate purchase price of $135 million, and Parent acquired all
of Big 5 Holdings' outstanding capital stock, consisting of 1,000 shares of
common stock, par value $.01, for an aggregate purchase price of $35,000,000.
Both of these sales were conducted in connection with the Acquisition.

Exemption from registration with respect to the above-described sales
was claimed under Section 4(2) of the Securities Act regarding transactions not
involving any public offering.

II-2

<PAGE> 91
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) SCHEDULE OF EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
2.1 Purchase and Sale Agreement among Big 5 Holdings, Thrifty
and PE dated as of May 22, 1992 (1)

3.1 Articles of Incorporation of the Company filed with the
California Secretary of State on September 7, 1955 (1)

3.2 Amendment to Articles of Incorporation of the Company filed
with the California Secretary of State on September 21, 1992 (1)

3.3 Bylaws of the Company (1)

4.1 Indenture among the Company, Big 5 Holdings and First Trust
National Association relating to the Notes dated as of
September 25, 1992 (1)

4.2 Form of the Notes (1)

4.3 Purchase Agreement among the Company, Big 5 Holdings and the
original purchasers of the Notes dated as of September 25, 1992 (1)

4.4(a) Registration Rights Agreement among the Company, Big 5 Holdings
and the original purchasers of the Notes dated as of September 25,
1992 (1)

4.4(b) Form of Amendment of Registration Rights Agreement among the
Company, Big 5 Holdings and Holders of the Securities (re:
ongoing registration rights) (2)

4.4(c) Form of Amendment of Registration Rights Agreement among the
Company, Big 5 Holdings and Holders
</TABLE>

II-3

<PAGE> 92

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
of the Securities (re: extension of Effectiveness Date) (2)

5.1 Opinion of Irell & Manella (2)

10.1(a) Financing Agreement dated March 8, 1996 between The CIT
Group/Business Credit, Inc. and the Company(3)

10.1(b) Grant of Security Interest in and Collateral Assignment of
Trademarks and Licenses dated as of March 8, 1996 by the
Company in favor of The CIT Group/Business Credit, Inc.(3)

10.1(c) Guarantee dated March 8, 1996 by Parent in favor of The CIT
Group/Business Credit, Inc.(3)

10.2 Tax Indemnity Agreement by and among PE, TPH, Thrifty and Big 5
Holdings dated as of September 25, 1992 (1)

10.3(a) Amended and Restated Indemnification Implementation Agreement
between the Company and TPH dated as of April 20, 1994 (4)

10.3(b) Agreement and Release among PE, TPH, TPI, Thrifty and the
Company dated as of March 11, 1994 (4)

10.4(a) Big 5 Corporation 1992 Equity Plan (1)

10.4(b) Stock Subscription Agreement between Parent and GEI dated as of
September 25, 1992 (1)

10.5(a) Employment Agreement between the Company and Robert W. Miller
dated as of January 1, 1993 (1)
</TABLE>

II-4

<PAGE> 93

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

10.5(b) Employment Agreement between the Company and Steven G. Miller
dated as of January 1, 1993 (1)

10.5(c) Sublease between the Company and Thrifty dated as of September 25,
1992 (2)

10.6(a) Agreement of Purchase and Sale between the Company and the
State of Wisconsin dated as of February 13, 1996(3)

10.6(b) Lease between the Company (Lessee) and the State of Wisconsin
Investment Board (Lessor) dated as of March 5, 1996(3)

12.1 Computation of Ratio of Earnings to Fixed Charges (5)

22 List of the subsidiaries of the Company: none.

24.1 Consent of Irell & Manella (included in Exhibit 5.1).

24.2 Consent of KPMG Peat Marwick LLP, independent certified public
accountants (5)

26.1 Form T-1 statement of eligibility and qualification under the
Trust Indenture Act of 1939 of First Trust National Association (1)

27 Financial Data Schedule (6)
- ----------------------
</TABLE>

(1) Incorporated by reference herein to the indicated exhibits filed in
response to Item 21 of Part II, "Exhibits," of the Registration
Statement on Form S-4 of the Company and Big 5 Holdings initially
filed on April 15, 1993.

(2) Previously filed.

II-5

<PAGE> 94
(3) Incorporated by reference to the indicated exhibits filed in response
to Item 14 of Part IV of the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995.

(4) Incorporated by reference to the indicated exhibits filed in response
to Item 14 of Part IV of the Company's Annual Report on Form 10-K for
the fiscal year ended January 1, 1995.

(5) Filed herewith.

(6) Incorporated by reference to the indicated exhibits filed in response
to Item 14 of Part IV of the Company's Annual Report on Form 10-K for
the fiscal year ended December 29, 1996.

(B) FINANCIAL STATEMENT SCHEDULES

None.

ITEM 17. UNDERTAKINGS

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

(b) The undersigned registrant hereby undertakes:

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

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

(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective
amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the
information set forth in the registration statement;

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

(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be
deemed to be a new registration statement relating

II-6

<PAGE> 95
to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.

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

II-7

<PAGE> 96
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Post-Effective Amendment No. 7 to Form S-1
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Los Angeles, State of California on April 30,
1997.

UNITED MERCHANDISING CORP.,
a California corporation

By: /s/ ROBERT W. MILLER
----------------------------------
Robert W. Miller,
Chairman of the Board of Directors
Chief Executive Officer

II-8

<PAGE> 97

Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 7 to Form S-1 Registration Statement has been
signed by the following persons in the capacities indicated on April 30, 1997.

<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ ROBERT W. MILLER Chairman of the Board of Directors
----------------------------- and Chief Executive Officer (Principal
Robert W. Miller Executive Officer of the Registrant)

Steven G. Miller* President, Chief
----------------------------- Operating Officer and Director
Steven G. Miller

Charles P. Kirk* Senior Vice President and Chief
----------------------------- Financial Officer (Principal Financial
Charles P. Kirk and Accounting Officer of the Registrant)

Leonard I. Green* Director
-----------------------------
Leonard I. Green

Jonathan D. Sokoloff* Director
-----------------------------
Jonathan D. Sokoloff

Jennifer Holden Dunbar* Director
-----------------------------
Jennifer Holden Dunbar

*By: /s/ ROBERT W. MILLER
----------------------------
Robert W. Miller
Attorney-in-Fact
</TABLE>

II-9

<PAGE> 98
EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
12.1 Computation of Ratio of Earnings to Fixed Charges

24.2 Consent of KPMG Peat Marwick LLP, independent
certified public accountants
</TABLE>

<PAGE> 1

EXHIBIT 12.1

UNITED MERCHANDISING CORP.
RATIO OF EARNINGS TO FIXED CHARGES
CALCULATION
(DOLLAR AMOUNTS IN THOUSAND)

Predecessor Company
------------------------- Successor Company Pro Forma
39 Weeks from -----------------
December 30, 14 Weeks from Combined
1991 through September 26, 1992 Year Ended
September 25, through January 3, January 3,
1992 1993 1993
------------- ------------------ ------------
<S> <C> <C> <C>
I. EARNINGS TO FIXED CHARGES:
Earnings:

Pre-tax income from
continuing operations $11,989 ($100) ($6,645)
Add fixed charges 3,962 4,775 17,412
Subtract capitalized interest in
fixed charges 0 (159) (639)
------- -------- --------
Earnings 15,951 4,516 10,128
------- -------- --------

Fixed charges:
Net interest expense per
financials (1,059) 3,256 10,872
Add:
Interest income 1,059 0 1,059
Rents 3,962 1,519 5,481
------- -------- --------

Fixed charges 3,962 4,775 17,412
Ratio of earnings to fixed charges 4.03 0.95 0.58
Deficiency in earnings to fixed charges 259 7,284
</TABLE>

January 2, January 1, December 31, December 29,
1994 1995 1995 1996
--------- ----------- -------------- -------------
<S> <C> <C> <C> <C>
I. EARNINGS TO FIXED CHARGES:
Earnings:
Pre-tax income from
continuing operations ($1,029) $6,202 ($5,953) $ 5,036

Add fixed charges 17,569 18,298 20,791 20,042
Subtract capitalized interest in
fixed charges (639) (539) (430) (621)
------- ------- ------- -------

Earnings 15,901 23,961 14,408 24,457
------- ------- ------- -------

Fixed charges:
Net interest expense per
financials 11,793 11,712 12,347 11,482
Add:
Interest income 0 0 0 0
Rents 5,776 6,586 8,444 8,560
------- ------- ------- -------

Fixed charges 17,569 18,298 20,791 20,042
Ratio of earnings to fixed charges 0.91 1.31 0.69 1.22
Deficiency in earnings to fixed charges 1,668 0 6,383 0
</TABLE>

<PAGE> 1

EXHIBIT 24.2

The Board of Directors
United Merchandising Corp.:

We consent to the use of our reports included herein and to the reference to
our Firm under the heading "Experts" in the prospectus.

KPMG Peat Marwick LLP

Los Angeles, California
April 29, 1997