FACTORY 2 U STORES INC
AGENCY AGREEMENT FILED ON 043004
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>4
<FILENAME>ex1024043004.txt
<DESCRIPTION>AGENCY AGREEMENT FILED ON 043004
<TEXT>
                                                                   Exhibit 10.24

                                AGENCY AGREEMENT


     This Agency Agreement is made as of this 10th day of February, 2004, by and
between Garcel,  Inc. d/b/a The Great American Group, a California  corporation,
with a  principal  place of  business at 6330  Variel  Avenue,  Woodland  Hills,
California  91367  (the  "Agent")  and  Factory  2-U  Stores,  Inc.,  a Delaware
corporation  with a principal  place of business at 4000 Ruffin Road, San Diego,
CA 92123 (the "Merchant").


                                    RECITALS

     WHEREAS, the Merchant is a debtor and debtor-in-possession under Chapter 11
of  the  United  States  Bankruptcy  Code,  11  U.S.C.  Sections  101-1330  (the
"Bankruptcy  Code"),  pursuant to Chapter 11 Case No. 04-10111 (PJW), filed with
the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy
Court") on January 13, 2004 (the "Petition Date"), and

     WHEREAS,  Merchant desires that Agent act as Merchant's exclusive agent for
the limited purpose of selling all of the  Merchandise (as hereinafter  defined)
located  in  Merchant's   forty-four   (44)  retail  store   location(s)   (each
individually a "Store," and  collectively the "Stores") set forth on Exhibit "A"
attached hereto and made a part hereof,  by means of a store closing,  going out
of business or similar theme sale at the Stores (as further described below, the
"Sale").

     NOW THEREFORE,  in consideration of the mutual covenants and agreements set
forth  herein,  and for other good and valuable  consideration,  the receipt and
sufficiency of which is hereby acknowledged,  Agent and Merchant hereby agree as
follows:

     Section 1.  Defined  Terms.  The terms set forth  below are  defined in the
Sections referenced of this Agreement:

         Defined Term                                          Section Reference
         Agency Accounts                                       Section 7.2
         Agency Documents                                      Section 11.1(b)
         Agent                                                 Preamble
         Agent Claim                                           Section 12.5
         Agent Indemnified Parties                             Section 13.1
         Approval Order                                        Section 2
         Bankruptcy Code                                       Recitals
         Bankruptcy Court                                      Recitals
         Benefits Cap                                          Section 4.1
         Central Service Expenses                              Section 4.1
         Clearance Merchandise                                 Section 5.2(b)
         Defective Merchandise                                 Section 5.2(b)
         Excluded Benefits                                     Section 4.1
         FF&E                                                  Section 5.2(a)
         Guaranteed Amount                                     Section 3.1(a)
         Gross Rings                                           Section 6.3
         Inventory Date                                        Section 5.1
         Inventory Taking                                      Section 5.1
         Layaway, Repair and Special Order
             Merchandise                                       Section 5.2(b)
         Letter of Credit                                      Section 3.4
         Merchandise                                           Section 5.2(a)
         Merchant                                              Preamble
         Merchant Consignment Goods                            Section 5.4
         Occupancy Expenses                                    Section 4.1
         On-Order Merchandise                                  Section 5.2(b)
         Out of Season Merchandise                             Section 5.2(b)
         Proceeds                                              Section 7.1
         Petition Date                                         Recitals
         Retail Price                                          Section 5.3
         Retained Employee                                     Section 9.1
         Retention Bonus                                       Section 9.4
         Returned Merchandise                                  Section 8.5
         Sale                                                  Recitals
         Sale Expenses                                         Section 4.1
         Sale Commencement Date                                Section 6.1
         Sale Guidelines                                       Section 2
         Sale Term                                             Section 6.1
         Sale Termination Date                                 Section 6.1
         Sales Taxes                                           Section 8.3
         Store(s)                                              Recitals
         Supplies                                              Section 8.4
         WARN Act                                              Section 9.1

     Section 2. Appointment of Agent;  Bankruptcy  Court Approval.  The Merchant
hereby  appoints  the  Agent,  and the Agent  hereby  agrees  to  serve,  as the
Merchant's  exclusive  agent for the limited  purpose of conducting  the Sale in
accordance  with the terms and  conditions  of this  Agreement.  Merchant's  and
Agent's  obligations  hereunder are subject to approval of the Bankruptcy  Court
and shall be of no force and effect in the event that it is not so approved.  As
soon as practicable after Merchant's execution of this Agreement, Merchant shall
obtain an order of the Bankruptcy Court approving this Agreement in its entirety
(the "Approval  Order").  The Approval Order shall be in a form  satisfactory to
the Agent.  Attached hereto as Exhibit "B" are Sale Guidelines setting forth the
Agent's conduct at the Sale (the "Sale Guidelines").

     Section 3. Payments to Merchant and Agent.

     3.1 Payments to Merchant.

               (a) (i) As a guaranty of Agent's performance hereunder,  Merchant
shall receive from Agent the sum of 45.55% of the aggregate  Retail Price of the
Merchandise,  less any credits provided for Returned  Merchandise  under Section
8.5 hereof ("Guaranteed Amount"), plus the payment of all Sale Expenses.

               (ii) Agent shall pay to  Merchant  the  Guaranteed  Amount in the
manner and at the times  specified in Section 3.3 below.  The Guaranteed  Amount
will be  calculated  based upon (A) the final report of the  Merchandise  by the
inventory taking service after verification  thereof by Agent and Merchant,  and
(B) the  aggregate  amount of Gross  Rings (as  defined  herein),  adjusted  for
shrinkage as provided in Section 6.3 hereof.

               (iii) The Guaranteed  Amount has been  calculated and agreed upon
based upon Merchant's representation that the aggregate Retail Price (as defined
in section 5.3 hereof) of the Merchandise as of the Sale  Commencement  Date (as
defined herein) will not be less than $12 million (the "Merchandise Threshold"),
that all  such  Merchandise  will  conform  to  Merchant's  representations  and
warranties contained herein, and that no material representations, warranties or
covenants of Merchant  hereunder  have been or shall be  breached.  Merchant and
Agent  agree that in the event  that the final  report of the  inventory  taking
service  indicates  that the aggregate  Retail Price of the  Merchandise is less
than the Merchandise Threshold,  then the Guaranteed Amount shall be reduced pro
rata as follows:  for every $100,000 of Merchandise or pro rata portion  thereof
(at Retail Price) by which the aggregate  Retail Price of the Merchandise  falls
below the  Merchandise  Threshold,  the  Guaranteed  Amount  shall be reduced by
two-tenths of one percent (.2%) or pro rata portion thereof; provided,  however,
in no event shall the aggregate  Retail Price of the Merchandise be less than $9
million.

     3.2 Payments to Agent. Agent shall receive as its compensation for services
rendered to Merchant  all  remaining  Proceeds  (as defined  herein) of the Sale
after  payment of (i) the  Guaranteed  Amount,  and (ii) all Sale  Expenses  (as
defined  herein).  Provided  all  payments  are  made to  Merchant  as  required
hereunder, all Merchandise remaining, if any, at the Sale Termination Date shall
become  the  property  of  Agent,  free  and  clear  of all  liens,  claims  and
encumbrances,  provided  that Agent shall use its best  efforts to sell any such
remaining  Merchandise  in a  commercially  reasonable  manner and any  proceeds
generated  from  the sale of such  remaining  Merchandise  shall  be  considered
Proceeds under this Agreement.

     3.3 Time of  Payments.  The Agent shall pay to Merchant  via wire  transfer
eighty  percent  (80%)  of  the  estimated  Guaranteed  Amount  attributable  to
Merchandise in the Stores as of the Sale  Commencement  Date within one business
day after issuance of the Approval Order, which amount shall be calculated based
upon the net book  value of such  Merchandise  as of such  date as set  forth in
Merchant's books and records. Thereafter, on the earlier of (i) one (1) business
day after the reconciliation by Merchant and Agent of the final inventory report
by the  inventory  taking  service,  and (ii)  thirty  (30) days  after the Sale
Commencement  Date,  Agent shall pay to Merchant  via wire  transfer  the unpaid
balance  of the  Guaranteed  Amount or, to the extent  that  Agent's  payment on
account of the estimated Guaranteed Amount exceeds the actual Guaranteed Amount,
Merchant  shall  reimburse  such excess to Agent;  provided,  however,  that the
Inventory Taking shall be reconciled  within seven (7) days after its completion
(and the  Agent  and  Merchant  shall  use  their  reasonable  best  efforts  to
accomplish such reconciliation);  provided further however, that in the event of
a dispute  with  respect to the final  inventory  report,  Agent  shall pay that
portion of the unpaid balance of the Guaranteed Amount not in dispute.

          All  payments  by Merchant  to Agent  hereunder  shall be made by wire
transfer of immediately available funds. Merchant agrees that any amounts due by
Agent to Merchant pursuant to this Section 3 may in Agent's discretion be offset
by the amount of Proceeds  collected  by Merchant  for Agent's  account (if any)
which have not, as of the applicable date, been transferred by Merchant to Agent
in accordance with Sections 7.2 and 7.3 hereof.

     3.4 Security.  To secure Agent's  obligations to pay Expenses,  Agent shall
deliver to Merchant an irrevocable standby letter of credit in the original face
amount  equal  to  four  (4)  weeks  estimated  Expenses,   naming  Merchant  as
beneficiary,  substantially  in the form of Exhibit  3.4  attached  hereto  (the
"Letter of  Credit").  The Letter of Credit shall be delivered no later than one
(1) business day following the Sale Commencement Date, shall be issued by a bank
selected by Agent and reasonably  acceptable to Agent and Merchant. In the event
that Agent shall fail to pay any Expenses, Merchant shall be entitled to draw on
the Letter of Credit to fund such amount  following five (5) days written notice
to Agent of Merchant's  intention to do so, provided that no material default or
Event of Default has then  occurred on the part of the Merchant  hereunder.  The
Letter of Credit shall expire on May 31, 2004,  provided  that in the event that
Agent  shall  have paid all  Expenses  prior to such  date,  Merchant  agrees to
surrender  the original  Letter of Credit to the issuer  thereof  together  with
written  notification  that the Letter of Credit may be terminated;  and provide
further,  in the event there remain  outstanding  or unpaid  Expenses as of such
date,  Agent shall  cause the term of the Letter of Credit to be extended  for a
period mutually acceptable to Merchant and Agent.

     Section 4. Expenses of the Sale.

     4.1 Expenses.  Agent shall be responsible for all Sale Expenses incurred in
conducting  the Sale. As used herein,  "Sale  Expenses"  shall mean  Store-level
operating  expenses of the Sale which  arise  during the Sale Term at the Stores
limited to the following:

               (a) base payroll for  Retained  Employees  for actual  days/hours
worked in the conduct of the Sale;

               (b)  amounts  actually  payable in respect of FICA,  unemployment
taxes,  worker's  compensation  and health care insurance  benefits for Retained
Employees,  in an amount not to exceed  27% of base  payroll  for each  Retained
Employee (the "Benefits Cap");

               (c) 50% of the fees and costs of the inventory  taking service to
conduct the Inventory Taking;

               (d) Agent's supervision fees, expenses, and bonuses;

               (e)  advertising  and signage  expenses (at  Merchant's  contract
rates, if available, and excluding any allocation of Agent's overhead);

               (f)  telephone  expenses,  including  tie lines,  monthly  access
charges and local and long distance  telephone  expenses incurred in the conduct
of the Sale;

               (g)  utilities at the Stores,  including  but not limited to gas,
electric, water and sewer charges;

               (h) credit card and bank card fees,  chargebacks  and  discounts,
and check guaranty fees, including bank service charges;

               (i) costs of security personnel/loss prevention in the Stores and
armored car services;

               (j)  a  pro-rata   portion  of  Merchant's   insurance   premiums
attributable to the Merchandise and a pro-rata portion of  comprehensive  public
liability insurance attributable to the Stores;

               (k) all costs of transfers of Merchandise, including transfers of
Merchandise from the Warehouse, during the Sale Term;

               (l) Retention Bonuses as described in Section 9.4 below;

               (m) Occupancy Expenses, limited on a per diem per Store basis and
limited to those  amounts and  categories  as  described in Exhibit 4.1 attached
hereto;

               (n) housekeeping  and cleaning  expenses at the Stores during the
Sale Term, and expenses to leave the Stores in "broom clean condition"  pursuant
to section 6.2 hereof;

               (o) Cash overage, cash shortages and theft;

               (p) Store trash removal;

               (q) Agent's cost of capital and letter of credit expenses;

               (r) Intentionally omitted

               (s) Cost of additional supplies;

               (t) Bad checks;

               (u) the costs and expenses of providing such additional goods and
services which the Agent deems appropriate and to which Merchant shall consent;

               (v) costs of any music contracts for the Stores;

               (w) postage,  courier and  overnight  mail charges to and from or
among the Stores and central office (solely to the extent relating to the Sales)
or otherwise relating to the Sale;

               (x) Central Service  Expenses equal to $3,000 per week during the
Sale Term; and

               (y) Agent  and/or  employee  travel in  connection  with the Sale
(including  supervisor  travel  during  the  Sale);   provided,   however,  that
supervisor  travel to and from a Store at the commencement  and/or conclusion of
the Sale shall be excluded from Sale Expenses.

               "Sale Expenses" shall not include:  (i) Excluded  Benefits;  (ii)
Occupancy  Expenses  in excess of the amount  referred to above;  (iii)  Central
Service  Expenses in excess of the amount referred to above;  and (iv) any other
costs,  expenses or liabilities payable by Merchant,  all of which shall be paid
by Merchant promptly when due for and during the Sale Term.

               As used herein, the following terms have the following respective
meanings:

               "Central   Service   Expenses"   means  costs  and  expenses  for
Merchant's central  administrative  services necessary for the Sale,  including,
but  not  limited  to,  MIS  and  POS   services,   payroll   processing,   cash
reconciliation,  inventory  processing  and handling,  and data  processing  and
reporting.

               "Excluded  Benefits"  means  vacation  days or vacation pay, sick
days or sick  leave,  maternity  leave  or other  leaves  of  absence,  Warn Act
termination  or severance  pay,  pension  benefits,  ERISA  coverage and similar
contributions,  and payroll taxes,  worker's  compensation  and health insurance
benefits in excess of the Benefits Cap.

               "Occupancy   Expenses"   means   Merchant's   actually   incurred
Store-level  expenses  limited to those per diem per Store  amounts set forth on
Exhibit 4.1.

     4.2 Payment of Sale Expenses.  All Sale Expenses  incurred during each week
of the  Sale  (i.e.  Sunday  through  Saturday)  shall be paid by Agent to or on
behalf of  Merchant,  or offset  from  Proceeds  held by  Merchant,  immediately
following  the weekly  Sale  reconciliation  by Merchant  and Agent  pursuant to
Section  8.7  below,  based upon  invoices  and other  documentation  reasonably
satisfactory to Agent.

Section 5.        Inventory Valuation; Merchandise.

     5.1 Inventory  Taking.  Merchant and Agent shall cause to be taken a Retail
Price physical  inventory and SKU inventory of the  Merchandise  (the "Inventory
Taking")  commencing  at the close of  business  at each of the Stores on a date
mutually  agreed upon by Agent and Merchant,  but in no event later than two (2)
days after entry of the Approval Order (the date of the Inventory Taking at each
Store  being the  "Inventory  Date" for such  Store).  Merchant  and Agent shall
jointly employ Washington  Inventory Service and/or another mutually  acceptable
inventory  taking  service to  conduct  the  Inventory  Taking.  Agent  shall be
responsible for 50% of the costs and fees of the inventory  taking service as an
Expense  hereunder,  and the  balance  of such  costs and fees  shall be paid by
Merchant. Except as provided in the immediately preceding sentence, Merchant and
Agent shall bear their respective  costs and expenses  relative to the Inventory
Taking.  Merchant and Agent shall each have  representatives  present during the
Inventory Taking, and shall each have the right to review and verify the listing
and tabulation of the inventory taking service.  Merchant agrees that during the
conduct of the Inventory  Taking at each Store such Store shall be closed to the
public and no sales or other transactions shall be conducted.  The procedures to
be used in the conduct of the  Inventory  Taking and its  verifications  are set
forth on Exhibit 5.1 to be mutually agreed upon and attached hereto. In order to
facilitate  the Inventory  Taking,  Merchant  agrees to make its SKU data files,
including retail, UPC to SKU cross-reference, and merchandising rollup data, and
related  computer  hardware  and software  available to Agent and the  inventory
taking service commencing prior to the Inventory Date.

     5.2 Merchandise Subject to this Agreement.

               (a) For purposes of this Agreement, "Merchandise" shall mean: (i)
all finished goods  inventory of first quality,  consistent with Merchant's past
practices,  that is owned by  Merchant  and located at the Stores as of the Sale
Commencement  Date,  including:   (A)  Defective   Merchandise;   (B)  clearance
merchandise, (C) Out of Season Merchandise, and (D) Merchandise subject to Gross
Rings,   as  adjusted   for   shrinkage  as  provided  in  Section  6.3  hereof.
Notwithstanding the foregoing,  "Merchandise" shall not include: (1) goods which
belong to sublessees,  licensees or concessionaires of Merchant;  (2) goods held
by Merchant on memo,  on  consignment,  or as bailee;  (3)  Layaway,  Repair and
Special Order  Merchandise;  (4) Defective  Merchandise  for which  Merchant and
Agent  cannot  agree upon a Retail  Price;  (5)  equipment,  furnishings,  trade
fixtures (the "FF&E") and improvements to real property which are located in the
Stores; and (6) Merchant Consignment Goods;

               (b) As used in this  Agreement,  the  following  terms  have  the
respective meanings set forth below:

               "Defective   Merchandise"  means  Merchandise  that  is  damaged,
defective or  otherwise  not salable at  Merchant's  full retail in the ordinary
course because it or its packaging is damaged,  dented,  ripped,  soiled,  worn,
scratched,  broken, faded, torn, mismatched,  or affected with defects rendering
it not first quality.  Defective  Merchandise shall not include Merchandise that
has minor dents in product  packaging that do not affect the ability to sell the
product  contained  inside the package.  Sample  Merchandise  and Merchandise on
display shall not per se be deemed to be Defective Merchandise.

               "Out  of  Season   Merchandise"   means   items  of   Merchandise
specifically relating to holidays falling outside the Sale Term (e.g., Christmas
and Thanksgiving).

               "Layaway,  Repair, and Special Order Merchandise" means all items
of Merchandise held at the Stores on layaway or for repair, or customer-specific
special orders, in each case pursuant to binding  agreements,  invoices or other
legal  documentation,  where  (A) the  documentation  is clear  as to the  name,
address,  telephone  number,  date of last  payment  and  balance  due  from the
customer,  and (B) the goods  subject  to  layaway  are fully  described  in the
documentation.

               "On-Order  Merchandise"  means  merchandise  currently ordered by
Merchant  but  which  has not  been  received  in the  Stores  prior to the Sale
Commencement Date. Nothing herein shall obligate Merchant to purchase or include
any On-Order Merchandise in the Sale.

     5.3 Valuation.  For purposes of this  Agreement,  "Retail Price" shall mean
for each item of Merchandise  the lower of (a) the lowest ticketed price and (b)
Merchant's PLU, file or scan price (the "Retail Price"), except for:

               (i) Out of Season Merchandise,  where the Retail Price shall mean
the lower of (x) the  lowest  ticketed  price for such  Merchandise  and (y) the
lowest  price  offered by Merchant  for such  Merchandise  by POS  promotion  or
otherwise  at any time during the period 30 days prior to the Sale  Commencement
Date;

               (ii)  Defective  Merchandise,  where the Retail  Price shall mean
such value as to which Agent and Merchant shall mutually agree; and

               (iii)  Returned  Merchandise  where  the  Retail  Price  shall be
determined in Section 8.5 hereof.

               In the event On-Order Merchandise is received in the Stores after
the  Sale  Commencement  Date  but  less  than  fourteen  (14)  days  after  the
Commencement  Date,  the Retail Price shall be as set forth in this section.  If
the On-Order  Merchandise is received  after 14 days from the Sale  Commencement
Date, then the Retail Price shall mean the lower of (i) lowest ticketed price of
such item as of the Sale Commencement  Date and (ii) the lowest marked,  SKU, or
PLU file price for such item of  Merchandise  multiplied,  in either the case of
(i) or (ii), by the inverse of the prevailing discount in place on the date such
On-Order Merchandise is received.

               Except in the case of Out of Season Merchandise, it is the intent
of the parties that in  determining  the Retail Price of any item of Merchandise
the parties shall exclude all temporary promotional activity, including, without
limitation,  point-of-sale  discounting  and  temporary  promoting  or discounts
advertised by any and all methods,  and all Sales Taxes, and Merchant represents
that the ticketed  prices of items of Merchandise at the Stores do not and shall
not include any Sales Taxes. If, at the time of the Inventory Taking, an item of
Merchandise has more than one Retail Price, or if multiple items of the same SKU
are marked at different  prices,  the lowest Retail Price on any such item shall
prevail for such item or for all such items within the same SKU, as the case may
be, unless it is clear that the Retail Price was mismarked.

     5.4 Excluded Goods.  Merchant shall retain all responsibility for any goods
not included as "Merchandise"  hereunder. If Merchant elects at the beginning of
the Sale Term,  Agent shall accept defective goods not included as "Merchandise"
hereunder for sale as "Merchant  Consignment Goods" at prices established by the
Agent.  The Agent  shall  retain 20% of the sale price for all sales of Merchant
Consignment  Goods, and Merchant shall receive 80% of the receipts in respect of
such  sales.  Merchant  shall  receive  its  share of the  receipts  of sales of
Merchant Consignment Goods on a weekly basis,  immediately  following the weekly
Sale  reconciliation  by Merchant  and Agent  pursuant to Section 8.7 below.  If
Merchant  does  not  elect  to have  Agent  sell  such  goods  not  included  as
Merchandise,  then all such items will be removed by Merchant from the Stores at
its expense as soon as  practicable  after the date hereof.  Except as expressly
provided  in  this   Section  5.4,   Agent  shall  have  no  cost,   expense  or
responsibility in connection with any goods not included in Merchandise.

     Section 6. Sale Term.

     6.1 Term. Subject to satisfaction of the conditions  precedent set forth in
Section 10 hereof,  the Sale shall  commence at each Store on the date following
issuance of the Approval Order by the  Bankruptcy  Court (such date with respect
to each Store being the "Sale Commencement  Date"). The Agent shall complete the
Sale at each Store no later than March 31, 2004,  unless the Sale is extended by
mutual written  agreement of Agent and Merchant (the "Sale  Termination  Date"),
the period from the Sale  Commencement  Date to the Sale  Termination Date as to
each Store being the "Sale Term"). Notwithstanding the foregoing, the Agent may,
in its  discretion,  terminate the Sale at any Store at any time within the Sale
Term (i) upon the  occurrence  of an Event of Default by Merchant,  or (ii) upon
not less than seven (7) days' prior written notice to Merchant.

     6.2  Vacating  the Stores.  Agent shall  vacate the Stores on or before the
Sale Termination Date, at which time Agent shall surrender and deliver the Store
premises and Store keys to Merchant.  Agent agrees to leave the Stores in "broom
clean" condition,  ordinary wear and tear excepted.  All assets of Merchant used
by Agent in the  conduct  of the  Sale  (e.g.  FF&E,  supplies,  etc.)  shall be
returned by Agent to Merchant at the end of the Sale Term to the extent the same
have  not been  used in the  conduct  of the  Sale or have  not  been  otherwise
disposed  of  hereunder  or through  no fault of Agent by leaving  such items in
place at the Stores.

     6.3  Gross  Rings.  In the  event  that  the  Sale  commences  prior to the
completion  of the Inventory  Taking at any Store,  then for the period from the
Sale  Commencement  Date  until the  Inventory  Date for such  Store,  Agent and
Merchant shall jointly keep (i) a strict count of gross  register  receipts less
applicable  Sales Taxes ("Gross  Rings"),  and (ii) cash reports of sales within
such Stores.  Register  receipts  shall show for each item sold the Retail Price
for such item and the  markdown or  discount,  if any,  specifically  granted by
Agent in connection  with such Sale.  All such records and reports shall be made
available to Agent and Merchant  during regular  business hours upon  reasonable
notice.  Agent shall pay that portion of the Guaranteed Amount calculated on the
Gross  Rings  basis,  to  account  for  shrinkage,  on the  basis of 102% of the
aggregate  Retail  Price of  Merchandise  sold  during  the Gross  Rings  period
(without  taking  into  account  any  point of sale  discounts  or point of sale
markdowns taken by the Agent.

     Section 7. Sale Proceeds

     7.1 Proceeds.  For purposes of this  Agreement,  "Proceeds"  shall mean the
aggregate  of: (a) the total amount (in United  States  dollars) of all sales of
Merchandise  made under this Agreement,  exclusive of (i) Sales Taxes,  and (ii)
returns,  allowances  and customer  credits;  and (b) all proceeds of Merchant's
insurance for loss or damage to  Merchandise or loss of cash arising from events
occurring  during the Sale Term.  Until 80% of the Guaranteed  Amount is paid in
full,  Merchant shall retain the Proceeds of the Sale from the prior week (which
amount shall be applied to the Guaranteed Amount). Following the payment in full
of the Guaranteed  Amount,  Agent may, in its  discretion,  elect to control the
Sale Proceeds in the manner provided below in this Section 7.

     7.2 Deposit of Proceeds.  Following payment of 80% of the Guaranteed Amount
in full, all cash Proceeds shall be deposited in agency accounts  established by
Agent (the "Agency  Accounts").  Agent may, in its discretion,  designate new or
existing  accounts of Agent or Merchant as the Agency  Accounts,  provided  that
such  accounts  are  dedicated  solely  to  the  deposit  of  Proceeds  and  the
disbursement  of amounts payable by Agent  hereunder.  Agent shall exercise sole
signatory  authority and control with respect to the Agency  Accounts.  Merchant
shall promptly upon Agent's request execute and deliver all necessary  documents
to open and  maintain the Agency  Accounts.  To the extent that  following  full
payment of the Guaranteed Amount,  Agent shall elect to use existing accounts of
Merchant  as the Agency  Accounts,  (i)  commencing  on the first  business  day
following  the Sale  Commencement  Date,  and on each  business day  thereafter,
Merchant  shall  pay to  Agent  by  wire  funds  transfer  all  collected  funds
constituting  Proceeds  deposited  in such  accounts,  and  (ii)  upon  request,
Merchant  shall  deliver  to Agent  copies  of all  bank  statements  and  other
information relating to such accounts. Merchant shall not be responsible for and
Agent shall pay as an Expense  hereunder,  all bank fees and charges,  including
wire transfer charges,  related to the Agency Accounts,  whether received during
or after the Sale Term.

     7.3  Credit  Card  Proceeds.  Agent  shall  have  the  right  (but  not the
obligation)  to use  Merchant's  credit card  facilities  (including  Merchant's
credit card terminals and  processors,  credit card processor  coding,  Merchant
identification  numbers and existing bank accounts) for credit card Proceeds. In
the  event  that  Agent  elects so to use  Merchant's  credit  card  facilities,
Merchant  shall  process  credit  card  transactions  on behalf of Agent and for
Agent's account,  applying customary practices and procedures.  Without limiting
the foregoing,  Merchant  shall  cooperate with Agent to down-load data from all
credit  card  terminals  each day during the Sale Term and to effect  settlement
with  Merchant's  credit  card  processors,  and shall take such  other  actions
necessary  to  process  credit  card  transactions  on  behalf  of  Agent  under
Merchant's  Merchant  identification  numbers.  Following payment in full of the
Guaranteed  Amount, all credit card Proceeds will constitute the property of the
Agent and shall be held by Merchant in trust for Agent.  Merchant  shall deposit
all credit card  Proceeds  into a  designated  account and shall  transfer  such
Proceeds to Agent daily (on the date  received by Merchant if received  prior to
12:00  noon,  or  otherwise  within  one  business  day)  by  wire  transfer  of
immediately  available funds. At Agent's request,  Merchant shall cooperate with
Agent to establish Merchant  identification numbers under Agent's name to enable
Agent to process all credit card Proceeds for Agent's  account.  Merchant  shall
not be responsible for and Agent shall pay as an Expense  hereunder,  all credit
card fees, charges, and chargebacks related to the Sale, whether received during
or after the Sale Term.

     Merchant  makes no  representation  that the credit card  processors  shall
permit  the use of  Merchant's  credit  card  facilities  on the same  terms and
conditions  as they did  prior to the date  hereof  and  Merchant  shall  not be
obligated  to  assure  the   availability   of  such  credit  card   facilities.
Notwithstanding  anything  herein  to  the  contrary,  if  Agent  elects  to use
Merchant's  credit card facilities  during the Sale,  Agent shall be required to
make all arrangements necessary with Merchant's credit card processors regarding
the  establishment  of reserves for credit cards sales during the Sale Term, and
no funds of Merchant shall be used to establish any such reserves.

     Section 8. Conduct of the Sale.

     8.1 Rights of Agent.  Agent shall be permitted to, in its sole  discretion,
conduct the Sale,  as a "store  closing,"  or similar sale  throughout  the Sale
Term,  but not a "going out of business"  sale.  Agent shall conduct the Sale in
the name of and on behalf of Merchant in a commercially reasonable manner and in
compliance with the terms of this Agreement and the Sale Guidelines. In addition
to any other rights granted to Agent hereunder,  in conducting the Sale,  Agent,
in the  exercise  of its sole  discretion,  shall  have the  right  (subject  to
compliance with the Sale Guidelines):

               (a) to establish and implement advertising and promotion programs
consistent with a "store  closing" theme sale,  including  hanging  interior and
exterior signs and banners,  provided,  however, that Agent shall deliver copies
of all advertising materials for the Sale to Merchant, in addition to the notice
required in Section 18.1 hereof,  via  facsimile to Merchant to the attention of
Mel Redman at (858) 637-4180,  who shall have the right, within one (1) business
day of such  delivery,  to approve such materials  (which  approval shall not be
unreasonably withheld or delayed);  and provided further that the failure of the
Merchant to reasonably  respond to any request for approval  within  twenty-four
(24) hours shall be deemed to be approval of the subject materials;

               (b) to establish Sale prices and Store hours which are consistent
with the terms of applicable leases;

               (c)  to use  without  charge  during  the  Sale  Term  all  FF&E,
advertising materials,  bank accounts (consistent with Section 7.2), Store-level
customer  lists and mailing  lists,  computer  hardware and  software,  existing
supplies located at the Stores,  intangible assets  (including  Merchant's name,
logo and tax identification numbers), Store keys, case keys, security codes, and
safe and lock  combinations  required  to gain access to and operate the Stores,
and any other  assets of Merchant  located at the Stores or used in the ordinary
course of business at the Stores (whether owned, leased, or licensed);

               (d) subject to applicable  law, to transfer  Merchandise  between
Stores;

               (e)  subject to Agent's  obligation  to pay for  Central  Service
Expenses  as provided  above,  to use  without  charge  during the Sale Term (i)
Merchant `s central  office  facilities,  central  administrative  services  and
personnel  to process  payroll,  perform MIS and provide  other  central  office
services  necessary for the Sale,  provided  that in no event shall  Merchant be
required  to provide  services  in excess of those it  historically  provided to
support  sales in the  Stores,  and (ii) one (1) office  located  at  Merchant's
central office facility.

     8.2 Terms of Sales to Customers.

               (a) All sales of  Merchandise  will be "final sales" and "as is,"
and all advertisements and sales receipts will reflect the same. Agent shall not
warrant  the  Merchandise  in  any  manner,  but  will,  to the  extent  legally
permissible,  pass on all  manufacturers'  warranties to  customers.  Subject to
Section  8.2(b)  below,  all sales will be made only for cash and by  nationally
recognized bank credit cards.

               (b) For the first  twenty-eight(28)  days of the Sale Term, Agent
shall accept  Merchant's gift certificates and cards issued by Merchant prior to
the  Sale  Commencement  Date.  Merchant  shall  reimburse  Agent in cash in the
aggregate amount of any such gift  certificates and cards during the weekly sale
reconciliation provided for in Section 8.7 hereof.

     8.3 Sales Taxes.  During the Sale Term, all sales,  excise,  gross receipts
and other taxes  attributable to sales of Merchandise  and Merchant  Consignment
Goods  (other  than taxes on income)  payable  to any  taxing  authority  having
jurisdiction (collectively,  "Sales Taxes") shall be added to the sales price of
Merchandise and Merchant Consignment Goods and collected by Agent at the time of
sale.  To the extent that Agent shall  control the Sale  Proceeds as provided in
Section 7 above,  the Agent shall,  at such times and in such manner as directed
by the Merchant,  transfer immediately  available funds from the Agency Accounts
to the Merchant,  the applicable  taxing  authorities  or the applicable  escrow
account  established by the Merchant's  existing secured lender,  as directed by
the Merchant, in the amount so collected in respect of such taxes, together with
the  accompanying  schedules,  for  payment  of taxes when due.  Merchant  shall
promptly  pay all Sales  Taxes and file all  applicable  reports  and  documents
required by the applicable taxing authorities.  Merchant will be given access to
the computation of gross receipts for verification of all such tax collections.

     8.4  Supplies.  Agent  shall  have the right to use,  without  charge,  all
existing supplies located at the Stores including,  without  limitation,  boxes,
bags, paper, twine and similar sales materials  (collectively,  "Supplies").  In
the event that additional  Supplies are required in any of the Stores during the
Sale,  Merchant agrees to promptly provide the same to Agent, if available,  for
which Agent shall reimburse Merchant at Merchant's cost therefor.  Merchant does
not warrant that the existing Supplies in the Stores as of the Sale Commencement
Date are adequate for the purposes of the Sale.  Supplies  shall not be prior to
the Sale Commencement Date,  transferred by Merchant between or among the Stores
so as to alter the mix or quantity of Supplies at the Stores from that  existing
on such date, other than in the ordinary course of business.

     8.5 Returns of Merchandise.  During the first twenty eight (28) days of the
Sale Term,  Agent shall accept returns of Merchandise  sold by Merchant prior to
the Sale  Commencement  Date;  provided that (i) such item was purchased  within
thirty (30) days prior to the date of such  return;  (ii) the  customer  has the
original register receipt;  (iii) such return is not being made in contemplation
of such customer repurchasing the item at the sale price being offered by Agent,
and (iv)  such  return  is  consistent  with  Merchant's  prior  practices  (all
Merchandise meeting the foregoing criteria, the "Returned Merchandise") provided
that any credits for such Returned Merchandise may be used only for the purchase
of  Merchandise  and Agent  shall not be  required to provide any cash refund on
account  of  any  such  credits.  Returned  Merchandise  shall  be  included  in
Merchandise  and valued at the  Retail  Price  applicable  to such item less the
prevailing  Sale  discount at the time of the return and the  Guaranteed  Amount
shall be reduced in the amount of any  credits  provided  by Agent in respect of
the Returned Merchandise. Merchant shall provide Agent with the name and contact
information  for a Merchant  representative  to  coordinate  with any  customers
regarding any Returned Merchandise not accepted by Agent.

     8.6  Layaway,  Repair and Special  Order  Merchandise.  Promptly  after the
execution  of this  Agreement,  Merchant  shall  notify each  customer  for whom
Merchant  holds  Layaway,  Repair and Special Order  Merchandise of the Sale and
request  such  customers  to pick up and pay for the  applicable  item(s)  on or
before  February 7, 2004.  Any  Layaway,  Repair and Special  Order  Merchandise
unclaimed  by customers by such date shall be returned to the Store's sale floor
for sale by Agent.  To the extent that any such Layaway Repair and Special Order
Merchandise  is salable as  first-quality  Merchandise,  it shall be included in
Merchandise  and valued at the Retail Price  applicable to such item at the time
of the return. If such Layaway, Repair and Special Order Merchandise constitutes
Defective  Merchandise it shall be included in Merchandise and assigned a Retail
Price in accordance  with the  applicable  provisions of Section 5.3 above.  The
aggregate Retail Price of the Merchandise shall be increased by the Retail Price
of any Layaway,  Repair and Special Order  Merchandise  included in  Merchandise
(determined  in accordance  with this Section 8.6),  and the  Guaranteed  Amount
shall be  adjusted  accordingly.  To the extent  that Agent is required to issue
refunds to  customers  in  respect of any  Layaway,  Repair  and  Special  Order
Merchandise,  Merchant  shall  reimburse  Agent in cash  for any  such  amounts.
Layaway,  Repair and Special Order Merchandise not included in Merchandise shall
be disposed of by Agent in accordance with  instructions  received from Merchant
or, in the absence of such instructions,  returned to Merchant at the end of the
Sale Term.  Any increases in the Guaranteed  Amount in connection  with Layaway,
Repair and Special Order Merchandise shall be accounted for and paid by Agent on
a weekly basis.

     8.7 Sale  Reconciliation.  On each Wednesday  during the Sale Term (for the
previous week ending  Saturday),  commencing on the second  Wednesday  after the
Sale  Commencement  Date,  Agent and Merchant shall  cooperate to reconcile Sale
Expenses, Gross Rings, if still applicable, Returned Merchandise, and such other
Sale related items as either party shall  reasonably  request,  in each case for
the prior week or partial week (i.e. Sunday through  Saturday),  all pursuant to
procedures agreed upon by Merchant and Agent.  Within thirty (30) days after the
end of the Sale Term,  Agent and Merchant shall complete a final  reconciliation
of the Sale Expenses and the sale of  Merchandise,  the written results of which
shall be certified by  representations  of each of Merchant and Agent as a final
settlement of accounts between Merchant and Agent.

     8.8 Force Majeure.  If any casualty or act of God prevents or substantially
inhibits  the conduct of the Sale at any Store,  such Store and the  Merchandise
located at such Store shall be  eliminated  from the Sale and  considered  to be
deleted from this Agreement as of the date of such event, and Agent and Merchant
shall have no further  rights or  obligations  hereunder  with respect  thereto;
provided,  however, that (i) the proceeds of any insurance  attributable to such
Merchandise or business  interruption shall constitute Proceeds  hereunder,  and
(ii) the  Guaranteed  Amount  shall be reduced to  account  for any  Merchandise
eliminated  from the Sale which is not the subject of  insurance  proceeds,  and
Merchant  shall  reimburse  Agent for the  amount  the  Guaranteed  Amount is so
reduced prior to the end of the Sale Term.

     8.9 Petty Cash,  Etc.  All petty cash funds,  register  funds,  unprocessed
checks and credit card media (including  proceeds of sales of goods) relating to
periods prior to the Sale  Commencement  Date shall  constitute  property of the
Merchant,  and Agent shall have no rights or claims with respect thereto.  Agent
shall purchase from Merchant, on a dollar for dollar basis, all petty cash funds
and register funds in the Stores as of the Inventory Date for each Store.

     Section 9. Employee Matters.

     9.1 Merchant's Employees. Merchant shall permit all of its employees at the
Stores  to be  available  to  Agent  for the  Sale.  Agent  may  use  Merchant's
store-level employees in the conduct of the Sale to the extent Agent in its sole
discretion  deems  expedient,  and Agent may select and  schedule the number and
type of Merchant's  employees  required for the Sale.  Agent shall  identify any
such  store-level  employees to be used in  connection  with the Sale (each such
employee,  a "Retained  Employee") and shall notify  Merchant of the identity of
all Retained Employees prior to the Sale Commencement  Date.  Retained Employees
shall at all times remain employees of Merchant,  and shall not be considered or
deemed to be  employees of Agent.  Merchant and Agent agree that,  except to the
extent that wages and benefits of Retained  Employees  constitute  Sale Expenses
hereunder, nothing contained in this Agreement and none of Agent's actions taken
in respect of the Sale shall be deemed to  constitute  an assumption by Agent of
any of Merchant's obligations relating to any of Merchant's employees including,
without limitation, Excluded Benefits, Worker Adjustment Retraining Notification
Act ("WARN Act") claims and other  termination type claims and  obligations,  or
any other amounts  required to be paid by statute or law; nor shall Agent become
liable under any  collective  bargaining or employment  agreement or be deemed a
joint or successor employer with respect to such employees.  Merchant shall not,
without Agent's prior written consent, raise the salary or wages or increase the
benefits  for, or pay any bonuses or make any other  extraordinary  payments to,
any  of its  employees  in  anticipation  of  the  Sale  or  prior  to the  Sale
Termination Date,  provided that Merchant may provide health insurance  benefits
to newly eligible employees pursuant to Merchant's health insurance plan and may
implement scheduled raises in the ordinary course of business.  Merchant has not
terminated  and shall use its  reasonable  best efforts to continue all employee
benefits and benefit programs during the Sale Term.

     9.2  Termination of Employees.  Agent may in its discretion  stop using any
Retained  Employee  at any  time  during  the  Sale.  Agent  shall  so  notify a
representative  designated  by  Merchant  at least five (5) days prior  thereto,
except "for cause" (such as dishonesty,  fraud or breach of employee duties), in
which event Agent may stop using such employee immediately provided however that
Agent shall  immediately  notify  Merchant of the basis for such "cause" so that
Merchant can arrange for  termination of such  employee.  Upon the expiration of
the applicable  notice period,  all costs associated with the employee shall not
be considered a Sale Expense and Agent shall have no further  responsibility  or
liability for such employees whatsoever.  Merchant shall not transfer or dismiss
employees  of the Stores  without  Agent's  prior  consent,  which  shall not be
unreasonably  withheld,  conditioned  or delayed,  but shall retain the right to
dismiss the employee "for cause."

     9.3 Payroll  Matters.  During the Sale Term Merchant shall process the base
payroll for all Retained Employees.  Beginning on Wednesday,  February 25, 2004,
and every other Wednesday  thereafter during the Sale Term, Agent shall transfer
from the Agency Accounts to Merchant's  payroll  accounts an amount equal to the
base  payroll for  Retained  Employees  plus  related  payroll  taxes,  worker's
compensation   and  benefits  for  such  week  which  constitute  Sale  Expenses
hereunder.

     9.4 Employee Retention Bonuses.  In Agent's reasonable  discretion Proceeds
may be used to pay, as a Sale Expense,  retention bonuses ("Retention  Bonuses")
(which  bonuses  shall be inclusive of payroll  taxes and workers'  compensation
taxes to the extent  assessable but as to which no benefits shall be payable) to
Retained  Employees  who  do  not  voluntarily  leave  employment  and  are  not
terminated  "for cause".  Such Retention  Bonuses shall be payable within thirty
(30) days  after the Sale  Termination  Date,  and  shall be  processed  through
Merchant's payroll system.

     Section 10. Conditions Precedent.  The willingness of Agent and Merchant to
enter into the  transactions  contemplated  under this  Agreement  are  directly
conditioned  upon the  satisfaction  of the following  conditions at the time or
during the time periods indicated,  unless specifically waived in writing by the
applicable party:

               (a) All  representations  and  warranties  of Merchant  and Agent
hereunder  shall be true and correct in all  material  respects  and no Event of
Default  shall have  occurred and be continuing at and as of the date hereof and
as of the Sale Commencement Date.

               (b) The Approval Order shall be entered on or before February 13,
2004.

               (c) Merchant shall have provided Agent  reasonable  access to all
pricing and cost files, computer hardware,  software and data files, inter-Store
transfer logs, markdown schedules,  invoices, style runs and all other documents
relative to the price, mix and quantities of inventory located at the Stores.

     Section 11. Representations, Warranties and Covenants.


     11.1 Merchant's Representations,  Warranties and Covenants. Merchant hereby
represents, warrants and covenants in favor of Agent as follows:

               (a)  Merchant:  (i)  is a  corporation  duly  organized,  validly
existing and in good standing under the laws of the state of Delaware;  (ii) has
all requisite corporate power and authority to own, lease and operate its assets
and properties and to carry on its business as presently conducted; and (iii) is
and during the Sale Term will continue to be duly  authorized and qualified as a
foreign  corporation  to do business and in good  standing in each  jurisdiction
where the nature of its  business or  properties  requires  such  qualification,
including all jurisdictions in which the Stores are located.

               (b) Subject to the issuance of the Approval  Order,  (i) Merchant
has the right,  power and  authority to execute and deliver this  Agreement  and
each other document and agreement  contemplated hereby  (collectively,  together
with  this  Agreement,   the  "Agency  Documents")  and  to  perform  fully  its
obligations  thereunder;  (ii) Merchant has taken all necessary actions required
to authorize the execution,  delivery and  performance of the Agency  Documents,
and no further  consent or approval is required  for  Merchant to enter into and
deliver the Agency  Documents,  to perform its  obligations  thereunder,  and to
consummate the Sale;  (iii) each of the Agency  Documents has been duly executed
and  delivered  by  Merchant  and  constitutes  the  legal,  valid  and  binding
obligation of Merchant  enforceable in accordance with its terms;  (iv) no court
order  or  decree  of any  federal,  state or local  governmental  authority  or
regulatory  body is in effect that would  prevent or impair,  or is required for
Merchant's consummation of, the transactions contemplated by this Agreement, and
no consent of any third party which has not been obtained is required  therefor;
and (v) no contract or other  agreement to which Merchant is a party or by which
the Merchant is otherwise  bound will prevent or impair the  consummation of the
Sale and the other transactions contemplated by this Agreement.

               (c) Except as set forth in Sections  11.1(j) and  11.1(l),  since
January1,  2004, Merchant has operated the Stores, and shall continue to operate
the Stores,  in the  ordinary  course of  business  consistent  with  historical
operations  and  consistent in terms of pricing and  operations in the manner in
which  Merchant has operated the other stores in its chain that are not closing;
provided, however, Merchant has not and shall not prior to the Sale Commencement
Date increase the level of promotions or discounts at the Stores from the levels
currently in place.

               (d) Merchant owns and will own at all times during the Sale Term,
good and marketable title to all of the Merchandise free and clear of all liens,
claims and  encumbrances of any nature except existing  liens,  which,  shall be
released  and  attached  to the  Guaranteed  Amount and  amounts  reimbursed  to
Merchant  on  account  of  Sale  Expenses  or any  other  amounts  due  Merchant
hereunder.

               (e) Merchant  has  maintained  its pricing  files in the ordinary
course of  business,  and  prices  charged  to the  public  for  goods  (whether
in-Store,  by advertisement or otherwise) are the same in all material  respects
as set  forth in such  pricing  files for the  periods  indicated  therein.  All
pricing files and records  relative to the Merchandise  have been made available
to Agent.  All such  pricing  files and  records  are true and  accurate  in all
material  respects as to the actual cost to Merchant  for  purchasing  the goods
referred to therein and as to the selling  price to the public for such goods as
of the dates and for the periods indicated therein.

               (f) As of the date  hereof,  the levels of goods (as to quantity)
and the mix of goods (as to type, category, style, brand and description) at the
Stores are as set forth in the information provided by Merchant to Agent.

               (g) As of the Sale Commencement Date, all normal course permanent
markdowns  on goods  located  at the  Stores  will  have  been  taken on a basis
consistent with Merchant's historical practices and policies.

               (h) Merchant has not since  January 1, 2004,  and shall not up to
the Sale  Commencement  Date,  marked  up or  raised  the  price of any items of
Merchandise,  or removed  or altered  any  tickets or any  indicia of  clearance
merchandise,  except  in  the  ordinary  course  of  business  or as  previously
disclosed to Agent.

               (i) Merchant shall ticket or mark all items of inventory received
at the Stores prior to the Sale  Commencement  Date, in a manner consistent with
similar  inventory  located  at the  Stores and in  accordance  with  Merchant's
historic practices and policies relative to pricing and marking inventory.

               (j)  Merchant  has not  replenished  the  inventory in the Stores
since December 31, 2003. In addition, Merchant has not and shall not purchase or
transfer  to or from the Stores any  inventory  outside the  ordinary  course in
anticipation of the Sale or of the Inventory Taking.

               (k) To the best of Merchant's  knowledge,  except for  Merchant's
Chapter 11  bankruptcy  case pending  before the  Bankruptcy  Court,  no action,
arbitration,  suit, notice, or legal,  administrative or other proceeding before
any court or governmental  body has been instituted by or against  Merchant,  or
has been settled or resolved, or to Merchant's knowledge,  is threatened against
or affects  Merchant,  relative to Merchant's  business or properties,  or which
questions the validity of this Agreement, or that if adversely determined, would
adversely affect the conduct of the Sale.

               (l)  Merchant  covenants to continue to operate the Stores in the
ordinary course of business prior to the Sale Commencement Date.

               (m) To the best of Merchant's  knowledge,  all  Merchandise is in
compliance  with all applicable  federal,  state,  or local product safety laws,
rules and standards.

               (n) Throughout  the Sale Term,  Agent shall have the right to the
uninterrupted  use and occupancy of, and peaceful and quiet  possession of, each
of the Stores,  the assets  currently  located at the Stores,  and the  services
provided at the Stores in order to conduct the Sale as contemplated herein.

               (o) Except as otherwise set forth  herein,  Merchant has paid and
will use its  reasonable  best  efforts to continue to pay  throughout  the Sale
Term, (i) all  post-petition  self-insured or Merchant  funded employee  benefit
programs for employees,  including health and medical benefits and insurance and
all proper claims made or to be made in accordance with such programs,  (ii) all
casualty, liability, workers' compensation and other similar insurance premiums,
and (iii) all applicable taxes.

               (p) Merchant has not and shall not  throughout the Sale Term take
any actions the result of which is to materially  increase the cost of operating
the Sale,  including,  without limitation,  increasing salaries or other amounts
payable to employees.

               (q)  Merchant  is  not  a  party  to  any  collective  bargaining
agreements  with its  employees  at the Stores  and,  to the best of  Merchant's
knowledge, no labor unions represent Merchant's employees at the Stores.

               (r) To the best of Merchant's knowledge, all information provided
by Merchant to Agent in the course of Agent's due diligence and  preparation and
negotiation of this Agreement (including information as to the Store inventories
and  operating  expenses)  is as of the date  hereof  true and  accurate  in all
material respects.

               (s) As of the date of this Agreement,  Merchant is current in the
payment of all post-petition telephone, utilities, taxes and insurance.

     11.2 Agent's  Representations,  Warranties and Covenants.  The Agent hereby
warrants and covenants in favor of Merchant as follows:

               (a) The Agent (i) is a corporation  validly  existing and in good
standing  in its  State of  incorporation;  (ii)  has all  requisite  power  and
authority to consummate the transactions  contemplated  hereby; and (iii) is and
during the Sale Term will  continue to be, duly  authorized  and qualified to do
business  and in good  standing  in each  jurisdiction  where the  nature of its
business or properties requires such qualification.

               (b) Agent has the  right,  power and  authority  to  execute  and
deliver each of the Agency Documents to which it is a party and to perform fully
its obligations  thereunder.  Agent has taken all necessary  actions required to
authorize the execution,  delivery, and performance of the Agency Documents, and
no further  consent or  approval  is  required on the part of Agent for Agent to
enter into and  deliver  the Agency  Documents  and to perform  its  obligations
thereunder. Each of the Agency Documents has been duly executed and delivered by
the Agent and  constitutes  the legal,  valid and  binding  obligation  of Agent
enforceable  in  accordance  with its  terms.  No court  order or  decree of any
federal,  state or local governmental  authority or regulatory body is in effect
that would  prevent or impair or is  required  for Agent's  consummation  of the
transactions  contemplated by this Agreement,  and no consent of any third party
which has not been obtained is required therefor. No contract or other agreement
to which Agent is a party or by which Agent is  otherwise  bound will prevent or
impair the consummation of the transactions contemplated by this Agreement.

               (c) No action, arbitration, suit, notice, or legal administrative
or other proceeding before any court or governmental body has been instituted by
or against Agent, or has been settled or resolved, or to Agent's knowledge,  has
been threatened  against or affects Agent,  which questions the validity of this
Agreement  or any action taken or to be taken by Agent in  connection  with this
Agreement,  or which if  adversely  determined,  would have a  material  adverse
effect upon Agent's ability to perform its obligations under this Agreement.

     Section 12. Insurance.

     12.1 Merchant's  Liability  Insurance.  Merchant shall continue at its cost
and expense (subject to Agent's payment of a pro rata portion as a Sale Expense)
until the Sale Termination  Date, in such amounts as it currently has in effect,
all of its liability insurance policies including,  but not limited to, products
liability, comprehensive public liability, auto liability and umbrella liability
insurance,  covering  injuries to persons and property in, or in connection with
Merchant's  operation  of the  Stores,  and  shall  cause  Agent  to be named an
additional  insured  with  respect  to all  such  policies.  Prior  to the  Sale
Commencement Date, Merchant shall deliver to Agent certificates  evidencing such
insurance  setting forth the duration  thereof and naming Agent as an additional
insured,  in form  reasonably  satisfactory  to Agent.  All such policies  shall
require  at least  thirty  (30)  days  prior  notice  to Agent of  cancellation,
non-renewal or material change.  In the event of a claim under any such policies
Merchant shall be responsible for the payment of all deductibles, retention's or
self-insured amounts thereunder, unless it is determined that liability arose by
reason of the  wrongful  acts or omissions or  negligence  of Agent,  or Agent's
employees, independent contractors or agents (other than Merchant's employees).

     12.2 Merchant's  Casualty Insurance.  Except for flood insurance,  Merchant
will provide  throughout the Sale Term, at Agent's sole cost and expense,  fire,
theft and extended  coverage  casualty  insurance  covering the Merchandise in a
total  amount as it  currently  has in effect  equal to no less than the  Retail
Price  thereof.  From  and  after  the  date of this  Agreement  until  the Sale
Termination  Date, all such policies will name Agent as loss payee. In the event
of a loss to the  Merchandise on or after the entry of the Approval  Order,  the
proceeds  of such  insurance  attributable  to the  Merchandise  plus  any  self
insurance  amounts and the amount of any deductible (which amounts shall be paid
by Merchant),  shall constitute  Proceeds  hereunder and shall be paid to Agent.
Following  the  full  payment  of the  Guaranteed  Amount,  and so  long  as the
applicable  Merchandise is not eliminated from the Sale pursuant to Section 8.8,
in the event of such a loss  Agent  shall have the sole right to adjust the loss
with the insurer. Prior to the Sale Commencement Date, Merchant shall deliver to
Agent certificates  evidencing such insurance setting forth the duration thereof
and naming Agent as loss payee, in form and substance reasonably satisfactory to
Agent. All such policies shall require at least thirty (30) days prior notice to
Agent of cancellation,  non-renewal or material change.  Merchant shall not make
any change in the amount of any  deductibles or self insurance  amounts prior to
the Sale Termination Date without Agent's prior written consent.

     12.3 Agent's  Insurance.  Agent shall  maintain at Agent's cost and expense
throughout  the Sale  Term,  in such  amounts  as it  currently  has in  effect,
comprehensive  public  liability and  automobile  liability  insurance  policies
covering  injuries to persons and  property  in or in  connection  with Agent `s
agency at the Stores, and shall cause Merchant to be named an additional insured
with respect to such policies.  Prior to the Sale Commencement Date, Agent shall
deliver to Merchant  certificates  evidencing  such insurance  policies  setting
forth the duration thereof and naming Merchant as an additional insured, in form
and substance reasonably satisfactory to Merchant. In the event of a claim under
any such policies Agent shall be responsible for the payment of all deductibles,
retention's or  self-insured  amounts  thereunder,  unless it is determined that
liability  arose by reason of the wrongful  acts or omissions or  negligence  of
Merchant or Merchant's employees,  independent contractors or agents (other than
Agent or Agent's employees, agents or independent contractors).

     12.4 Worker's  Compensation  Insurance.  Merchant shall at all times during
the Sale Term maintain in full force and effect worker's compensation  insurance
covering all Retained  Employees in compliance with all statutory  requirements.
Prior  to the  Sale  Commencement  Date,  Merchant  shall  deliver  to  Agent  a
certificate of its insurance broker or carrier evidencing such insurance.

     12.5 Risk of Loss.  Without limiting any other provision of this Agreement,
Merchant  acknowledges  that Agent is conducting  the Sale on behalf of Merchant
solely in the  capacity of an agent,  and that in such  capacity (i) Agent shall
not be deemed to be in possession or control of the Stores or the assets located
therein or  associated  therewith,  or of  Merchant's  employees  located at the
Stores, and (ii) except as expressly provided in this Agreement,  Agent does not
assume any of Merchant's  obligations or liabilities  with respect to any of the
foregoing.  Merchant and Agent agree that Merchant shall bear all responsibility
for  liability  claims of customers,  employees  and other persons  arising from
events  occurring  at the Stores  during and after the Sale Term,  except to the
extent  any such  claim  arises  from the acts or  omissions  of  Agent,  or its
supervisors or employees located at the Stores (an " Agent Claim"). In the event
of any such liability claim other than an Agent Claim, Merchant shall administer
such  claim and shall  present  such  claim to  Merchant's  liability  insurance
carrier in accordance with  Merchant's  historic  policies and  procedures,  and
shall  provide a copy of the  initial  documentation  relating  to such claim to
Agent.  To the extent that Merchant and Agent agree that a claim  constitutes an
Agent Claim,  Agent shall  administer such claim and shall present such claim to
its  liability  insurance  carrier,  and  shall  provide  a copy of the  initial
documentation relating to such claim to Merchant. In the event that Merchant and
Agent cannot agree whether a claim  constitutes an Agent Claim, each party shall
present  the claim to its own  liability  insurance  carrier,  and a copy of the
initial claim documentation shall be delivered to the other party.

     Section 13. Indemnification.

     13.1 Merchant Indemnification.  Merchant shall indemnify and hold Agent and
its  officers,   directors,   employees,   agents  and  independent  contractors
(collectively,  "Agent  Indemnified  Parties")  harmless  from and  against  all
claims, demands,  penalties,  losses,  liability or damage,  including,  without
limitation,  reasonable  attorneys'  fees and  expenses,  directly or indirectly
asserted against, resulting from, or related to:

               (i) Merchant's  material  breach of or failure to comply with any
of its agreements,  covenants,  representations  or warranties  contained in any
Agency Document;

               (ii) Subject to Agent's  compliance  with its  obligations  under
Section 9.3 hereof,  any failure of Merchant to pay to its  employees any wages,
salaries or benefits due to such employees during the Sale Term;

               (iii) Subject to Agent's  compliance with its  obligations  under
Section 8.3 hereof, any failure by Merchant to pay any Sales Taxes to the proper
taxing  authorities or to properly file with any taxing  authorities any reports
or documents required by applicable law to be filed in respect thereof;

               (iv) any consumer warranty or products  liability claims relating
to Merchandise;

               (v) any liability or other claims  asserted by customers,  any of
Merchant's  employees,  or any other person against any Agent  Indemnified Party
(including,  without  limitation,  claims by employees  arising under collective
bargaining agreements,  worker's compensation or under the WARN Act), except for
Agent Claims; and

               (vi) the gross  negligence  or willful  misconduct of Merchant or
any of its officers, directors, employees, agents or representatives.

     13.2 Agent Indemnification. Agent shall indemnify and hold Merchant and its
officers,  directors,  employees,  agents and representatives  harmless from and
against all claims, demands, penalties,  losses, liability or damage, including,
without  limitation,  reasonable  attorneys'  fees  and  expenses,  directly  or
indirectly asserted against, resulting from, or related to:

               (i) Agent's  material  breach of or failure to comply with any of
its agreements, covenants, representations or warranties contained in any Agency
Document;

               (ii) any harassment or any other unlawful,  tortuous or otherwise
actionable  treatment of any  employees or agents of Merchant by Agent or any of
its representatives;

               (iii) any claims by any party  engaged by Agent as an employee or
independent  contractor  arising  out of such  employment  and any  governmental
claims related thereto;

               (iv) any Agent Claims; and

               (v) the gross negligence or willful misconduct of Agent or any of
its officer, directors, employees, agents or representatives.

               (vi) Agent's  failure to pay to Merchant any Sales Taxes when due
under Section 8.3 hereof and any payroll when due under Section 9.3 hereof.

     Section 14. Defaults.  The following shall  constitute  "Events of Default"
hereunder:

               (a)  Merchant's  or  Agent's  failure  to  perform  any of  their
respective material obligations hereunder,  which failure shall continue uncured
seven (7) days after written notice thereof to the defaulting party; or

               (b) Any  representation  or  warranty  made by  Merchant or Agent
proves untrue in any material respect as of the date made; or

               (c) The Sale is terminated or materially interrupted at more than
four (4) Stores for any reason  other than (i) an Event of Default by Agent,  or
(ii) any other breach or action by Agent not authorized hereunder,  or (iii) any
event administered pursuant to Section 8.8 above.

     Section 15. Security  Interest.  In consideration of Agent's payment of the
Guaranteed Amount and the Sale Expenses, and the provision of services hereunder
to  Merchant,  effective  upon the later of (i)  payment by Agent of the initial
eighty percent (80%) of the Guaranteed Amount as provided in Section 3.3 hereof,
and (ii)  Agent's  delivery  of the Letter of Credit as  provided in Section 3.4
hereof,  Merchant hereby grants to Agent a first priority  security  interest in
and lien upon the  Merchandise  and the  Proceeds to secure all  obligations  of
Merchant to Agent hereunder,  junior only to the lien of Lender to the extent of
any unpaid  balance of the  Guaranteed  Amount or the Expenses,  and any and all
valid  and  perfected  pre-petition  liens.  Merchant  shall  execute  all  such
documents and take all such other actions as are reasonably  required to perfect
and maintain such  security  interest as a valid and  perfected  first  priority
security interest.

     Section 16. Furniture,  Fixtures and Equipment. At Merchant's option, Agent
shall  sell the FF&E and be  entitled  to receive a  commission  equal to twenty
(20%) of the  proceeds  from  the sale of such  FF&E,  net of  sales  taxes  and
expenses  incurred in connection  with the disposition of the FF&E in accordance
with a budget to be mutually  agreed upon between  Merchant and Agent;  provided
further however, Merchant may elect to receive (the "FF&E Election"), in lieu of
proceeds net of expenses and Agent's  commission,  a lump sum payment,  on a per
Store basis, in an amount to be agreed upon between Merchant and Agent, in which
case all costs and expenses  associated  with the  disposition  thereof shall be
borne by Agent.  In either event,  as of the Sale  Termination  Date,  Agent may
abandon,  to Merchant,  in place in a neat and orderly manner any unsold FF&E at
the Stores.  In the event that  Merchant  elects to have someone  other than the
Agent dispose of the FF&E, Agent agrees that it shall cooperate with such party,
provided  however,  it is understood  that such third party's  efforts shall not
unreasonably interfere with Agent's conduct of the Sale, and removal of any FF&E
shall be done in coordination with, and the consent of, the Agent, which consent
shall not be unreasonably  withheld. As to any unsold FF&E, Agent shall have the
right to leave such FF&E at the Stores  without  liability  or costs;  provided,
however, the Stores are left in broom clean condition.

     Section 17. Intentionally Omitted.

     Section 18. Miscellaneous.

     18.1 Notices. All notices and communications  provided for pursuant to this
Agreement shall be in writing,  and sent by hand, by facsimile,  or a recognized
overnight delivery service, as follows:

                   If to the Agent:  Garcel, Inc. d/b/a The Great American Group
                                     One Parkway North
                                     Suite 520
                                     Deerfield, Illinois  60015
                                     Attn: Mark Naughton
                                     Telecopy No. (847) 444-1401


<PAGE>



                   If to Merchant:   Factory 2-U Stores, Inc.
                                     4000 Ruffin Road
                                     San Diego, CA  92123
                                     Attn:  Susan M. Skrokov
                                     Secretary
                                     Telecopy No. (858)-637-4180



                   With a copy to:   Hennigan, Bennett & Dorman LLP
                                     601 South Figueroa Street
                                     Suite 3300
                                     Los Angeles, CA  90017
                                     Attn:  Bennett J. Murphy, Esq.
                                     Telecopy No. (213) 694-1234

     18.2  Governing  Law;  Consent to  Jurisdiction.  This  Agreement  shall be
governed and  construed in  accordance  with the laws of the State of California
without regard to conflicts of laws principles thereof, except where governed by
the Bankruptcy  Code.  Agent and Merchant agree that the Bankruptcy  Court shall
retain jurisdiction to resolve any and all disputes arising under this Agreement
and accepts and submits to the jurisdiction of the Bankruptcy Court.

     18.3 Entire Agreement. This Agreement contains the entire agreement between
the parties  hereto with  respect to the  transactions  contemplated  hereby and
supersedes and cancels all prior agreements,  including, but not limited to, all
proposals,  letters of intent or representations,  written or oral, with respect
thereto.

     18.4  Amendments.  This  Agreement may not be modified  except in a written
instrument executed by each of the parties hereto.

     18.5 No Waiver. No consent or waiver by any party,  express or implied,  to
or of any breach or default by the other in the  performance of its  obligations
hereunder  shall be deemed or  construed  to be a consent or waiver to or of any
other  breach or default in the  performance  by such other party of the same or
any other obligation of such party. Failure on the part of any party to complain
of any act or failure to act by the other party or to declare the other party in
default, irrespective of how long such failure continues, shall not constitute a
waiver by such party of its rights hereunder.

     18.6  Successors and Assigns.  This Agreement shall inure to the benefit of
and be binding upon Agent and  Merchant,  and their  respective  successors  and
assigns; provided,  however, that this Agreement may not be assigned by Merchant
or Agent without the prior written consent of the Court.

     18.7 Execution in  Counterparts.  This Agreement may be executed in two (2)
or more counterparts, each of which shall be deemed an original and all of which
together shall  constitute but one agreement.  This Agreement may be executed by
facsimile,  and  such  facsimile  signature  shall  be  treated  as an  original
signature hereunder.

     18.8  Section  Headings.  The  headings of sections of this  Agreement  are
inserted for  convenience  only and shall not be  considered  for the purpose of
determining the meaning or legal effect of any provisions hereof.

     18.9 Survival.  All representations,  warranties,  covenants and agreements
made by the parties hereto shall be continuing, shall be considered to have been
relied  upon  by  the  parties  and  shall  survive  the  execution,   delivery,
performance and/or termination of this Agreement.



<PAGE>


     IN WITNESS  WHEREOF,  Agent and Merchant  hereby  execute this Agreement by
their  duly  authorized  representatives  as of the day and year  first  written
above.

                            Factory 2-U Stores, Inc.

                            By: /s/Norman G. Plotkin
                               ------------------------------------------------
                               Norman G. Plotkin
                               Chief Executive Officer



                             Garcel, Inc. d/b/a The Great American Group

                            By: /s/ Mark Naughton
                               ------------------------------------------------
                               Mark Naughton
                               Vice President and General Counsel






</TEXT>
</DOCUMENT>
